TMCnet News
RUBICON PROJECT, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q contains forward-looking statements, including statements based upon or relating to our expectations, assumptions, estimates, and projections. In some cases, you can identify forward-looking statements by terms such as "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "design," "anticipate," "estimate," "predict," "potential," "plan" or the negative of these terms, and similar expressions. Forward-looking statements may include, but are not limited to, statements concerning our anticipated performance, including revenue, margin, cash flow, balance sheet, and profit expectations; development of our technology; introduction of new offerings; scope of client relationships; business mix; sales growth; client utilization of our offerings; market conditions and opportunities; and operational measures including managed revenue, paid impressions, average CPM, and take rate. These statements are not guarantees of future performance; they reflect our current views with respect to future events and are based on assumptions and subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements. These risks include, but are not limited to: • our ability to grow rapidly and to manage our growth effectively; • our ability to develop innovative new technology and remain a market leader; • our ability to attract and retain buyers and sellers and increase our business with them; • our ability to use our solution to purchase and sell higher value advertising and to expand the use of our solution by buyers and sellers utilizing evolving digital media platforms, including mobile and video; • our ability to introduce new solutions and bring them to market in a timely manner; • our ability to maintain a supply of advertising inventory from sellers; • our limited operating history and history of losses; • our ability to continue to expand into new geographic markets; • the effects of increased competition in our market and our ability to compete effectively; • the effects of seasonal trends on our results of operations; • costs associated with defending intellectual property infringement and other claims; • our ability to attract and retain qualified employees and key personnel; • our ability to consummate future acquisitions of or investments in complementary companies or technologies; • our ability to comply with, and the effect on our business of, evolving legal standards and regulations, particularly concerning data protection and consumer privacy; and • our ability to develop and maintain our corporate infrastructure, including our finance and information technology systems and controls. We discuss many of these risks in Part II of this Quarterly Report on Form 10-Q in greater detail under the heading "Risk Factors" and in other filings we make from time to time with the SEC. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Given these uncertainties, investors should not place undue reliance on these forward-looking statements. Investors should read this Quarterly Report on Form 10-Q and the documents that we reference in this report and have filed with the Securities and Exchange Commission completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. 17-------------------------------------------------------------------------------- Table of Contents Overview We are a technology company on a mission to automate the buying and selling of advertising. Our Advertising Automation Cloud is a highly scalable software platform that provides leading user reach and powers and optimizes a marketplace for the real time trading of digital advertising between buyers and sellers of advertising. Through the speed and big data analytics of our algorithm-based solution, we have transformed the cumbersome, complex process of buying and selling digital advertising into a seamless automated process that optimizes results for both buyers and sellers. Buyers of digital advertising use our platform to reach approximately 600 million Internet users globally on some of the world's leading websites and applications. Sellers of digital advertising use our platform to maximize revenue from advertising, decrease costs and protect their brands and user experience, while accessing a global market of buyers representing top advertiser brands around the world. The benefits we provide to both buyers and sellers, and the time and effort spent by both buyers and sellers to integrate with our platform and associated applications, we believe give us a critical position in the digital advertising ecosystem. Our Advertising Automation Cloud incorporates proprietary machine-learning algorithms, sophisticated data processing, high volume storage, detailed analytics capabilities, and a distributed infrastructure. We analyze billions of data points in real time to enable our solution to make approximately 300 data-driven decisions per transaction in milliseconds, and to execute up to 2.5 million peak queries per second, and 4 trillion bid requests per month. Our Advertising Automation Cloud features applications for digital advertising sellers, including websites, applications and other digital media properties, to sell their advertising inventory; applications for buyers, including demand side platforms, or DSPs, ad networks and advertising agencies, to buy advertising inventory; and an exchange over which such transactions are executed. Together, these features power and optimize a comprehensive, transparent, independent advertising marketplace that brings buyers and sellers together and facilitates intelligent decision-making and automated transaction execution for the advertising inventory we manage on our platform. We believe we help increase the volume and effectiveness of advertising, increasing revenue for sellers and improving return on advertising investment for buyers. We have direct relationships built on technical integration with our sellers, including approximately 40% of the U.S. comScore 100. We believe that our direct relationships and integration with sellers, which differentiate us from many other participants in the advertising ecosystem, make us a vital participant in the digital advertising industry. Our integration of sellers into our platform gives sellers the ability to monetize a full variety and volume of inventory. At the same time, buyers leverage our platform to manage their advertising spending, simplify order management and campaign tracking, obtain actionable insights into audiences for their advertising and access impression level purchasing from hundreds of sellers. We believe buyers need our platform because of our powerful solution and our direct relationships and integration with some of the world's largest websites and applications. Our solution is constantly self-optimizing based on our ability to analyze and learn from vast volumes of data. The additional data we obtain from the volume of transactions on our platform help make our machine-learning algorithms more intelligent, leading to higher quality matching between buyers and sellers, better return on investment for buyers and higher revenue for sellers. As a result of that high quality matching, we attract even more sellers which in turn attracts more buyers and vice versa. We believe this self-reinforcing dynamic creates a strong platform for growth. The historical and real time data we derive from seller integrations, 4 trillion bid requests per month, and approximately 600 million Internet users globally that interact with our platform per month inform our machine-learning algorithms and thereby create a size, scale and capability that is difficult to replicate. Since our incorporation in April 2007, we have invested in our solution to meet the complex needs of buyers and sellers of digital advertising. We have achieved significant growth as we have scaled our solution, including the functionality of our Advertising Automation Cloud and its applications for buyers and sellers. During our early stages, our solution helped sellers to automate their existing advertising network relationships to match the right buyer with each impression as well as increase their revenue and decrease their costs. Between 2008 and 2009, we developed direct relationships with buyers and created applications to assist buyers to increase their return on investment. During 2010, we added real time bidding, or "RTB," capabilities, allowing sellers' inventory to be sold in an auction to buyers, specifically, DSPs, creating a real time unified auction where buyers compete to purchase sellers' advertising inventory. During 2012, we launched our private marketplace, which allows sellers to connect directly with pre-approved buyers to execute direct sales of previously unsold advertising inventory. The automation of buying and selling of advertising, and in particular, RTB, has grown significantly and is projected to continue to grow. According to International Data Corporation, RTB spending was $2.7 billion in 2012, $4.5 billion in 2013 and is expected to reach $20.8 billion by 2017. We believe this trend will directly benefit us and our prospects for continued growth. Large agencies, DSPs and ad networks, many of which are already established in size and scale, are responsible for the majority of automated digital advertising spending. Accordingly, we believe our growth will be less affected by an increase in buyers than by increases in the amount of spending per buyer as more advertising shifts from traditional to automated buying and selling. 18-------------------------------------------------------------------------------- Table of Contents Another industry trend is the expansion of automated buying and selling of advertising through new channels, such as mobile and video. We have only recently expanded our solution to include the mobile platform and have not yet expanded our advertising units to include video. If we are unable to effectively expand our offerings in these areas, our competitive position may weaken and our growth may be adversely affected. The growth of automated buying and selling advertising is also expanding into new markets, and in some markets the adoption of automated digital advertising is greater than in the United States. We intend to expand our business in existing territories served and enter new territories. If we are unable to localize our offerings and provide our solution in new territories, our growth may be impeded and our competitive position may weaken. We generate revenue from buyers and sellers who use our solution for the purchase and sale of advertising inventory. Buyers use our solution to reach their intended audiences by purchasing advertising inventory that we make available from sellers through our solution. We recognize revenue upon the completion of a transaction, which is when an impression has been delivered to the consumer viewing a website or application, subject to satisfying all other revenue recognition criteria. We are responsible for the completion of the transaction. We generally bill and collect the full purchase price of impressions from buyers. We report revenue net of amounts we pay sellers for the impressions they provide. In some cases, we generate revenue directly from sellers who maintain the primary relationship with buyers and utilize our solution to transact and optimize their activities. For the three months ended June 30, 2014 and 2013 our revenue was $28.3 million and $19.0 million, respectively, representing a year over year increase of 49%, and our managed revenue was $153.5 million and $112.7 million, respectively, representing a year over year increase of 36%. For the three months ended June 30, 2014 and 2013, our net loss was $9.4 million and $2.1 million, respectively. For the three months ended June 30, 2014 and 2013 our adjusted EBITDA was $2.7 million and $2.1 million, respectively. For the six months ended June 30, 2014 and 2013 our revenue was $51.3 million and $35.6 million, respectively, representing a year over year increase of 44%, and our managed revenue was $283.1 million and $209.1 million, respectively, representing a year over year increase of 35%. For the six months ended June 30, 2014 and 2013, our net loss was $15.5 million and $4.3 million, respectively. For the six months ended June 30, 2014 and 2013 our adjusted EBITDA was $1.0 million and $4.1 million, respectively. Adjusted EBITDA is a non-GAAP financial measure. For information on how we compute adjusted EBITDA, and a reconciliation of adjusted EBITDA to net loss on a GAAP basis, please refer to "Key Operational and Financial Measures." Our net loss and adjusted EBITDA will be impacted by the rate at which our revenue increases and the timing of our investments in our operations. We expect our net loss to increase and adjusted EBITDA to decrease as a result of increased investments in our business. Substantially all of our revenue is U.S. revenue, determined based on the location of our legal entity that is a party to the relevant transaction. Key Operational and Financial Measures We regularly review our key operational and financial performance measures, including those set forth below, to help us evaluate our business, measure our performance, identify trends affecting our business, establish budgets, measure the effectiveness of investments in our technology and development and sales and marketing, and assess our operational efficiencies. In addition to revenue, we also review managed revenue, and adjusted EBITDA, which are discussed immediately following the table below. Revenue is discussed under the headings "Components of Our Results of Operations" and "Results of Operations." We report our financial results as one operating segment. Our consolidated operating results, together with the following operating and financial measures, are regularly reviewed by our chief operating decision maker, principally to make decisions about how we allocate our resources and to measure our consolidated operating performance. Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Operational Measures: Managed revenue (in thousands) $ 153,540 $ 112,743 $ 283,106 $ 209,102 Take rate 18.4 % 16.9 % 18.1 % 17.0 % Financial Measures: Revenue (in thousands) $ 28,283 $ 19,035 $ 51,298 $ 35,635 Adjusted EBITDA (in thousands) $ 2,661 $ 2,089 $ 1,045 $ 4,065 19 -------------------------------------------------------------------------------- Table of Contents Managed Revenue Managed revenue is an operational measure that represents the advertising spending transacted on our platform, and would represent our revenue if we were to record our revenue on a gross basis instead of a net basis. Managed revenue does not represent revenue reported on a GAAP basis. We review managed revenue for internal management purposes to assess market share and scale. Many companies in our industry record revenue on a gross basis, so tracking our managed revenue allows us to compare our results to the results of those companies. Our managed revenue is influenced by the volume and characteristics of paid impressions and average CPM. Our managed revenue has increased period over period as a result of increased use of our solution by buyers and sellers and increases in average CPM. We expect managed revenue to continue to grow with increases in the pricing or volume of transactions on our platform, which can result from increases in the number of buyers or advertising spending, and improvements in our auction algorithms. This increase may fluctuate due to seasonality and increases or decreases in average CPM and paid impressions. In addition, we generally experience higher managed revenue during the fourth quarter of a given year, resulting from higher advertising spending and more bidding activity, which may drive higher volumes of paid impressions or average CPM. Take Rate Take rate is an operational measure that represents our share of managed revenue. We review take rate for internal management purposes to assess the development of our marketplace with buyers and sellers. Our take rate can be affected by a variety of factors, including the terms of our arrangements with buyers and sellers active on our platform in a particular period, the scale of a buyer's or seller's activity on our platform, product mix, the implementation of new products, platforms and solution features, and the overall development of the digital advertising ecosystem. Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure defined by us as net loss adjusted for stock-based compensation expense, depreciation and amortization, interest income or expense, change in fair value of pre-IPO convertible preferred stock warrant liabilities, and other income or expense, which mainly consists of foreign exchange gains and losses, certain other non-recurring income or expenses such as acquisition and related costs, and provision for income taxes. Adjusted EBITDA should not be considered as an alternative to net income, operating income or any other measure of financial performance calculated and presented in accordance with GAAP. Adjusted EBITDA eliminates the impact of items that we do not consider indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reason we consider them appropriate. We believe adjusted EBITDA is useful to investors in evaluating our operating performance for the following reasons: • adjusted EBITDA is widely used by investors and securities analysts to measure a company's operating performance without regard to items such as stock-based compensation expense, depreciation and amortization, interest income or expense, change in fair value of preferred stock warrant liabilities, foreign exchange gains and losses, certain other non-recurring income or expenses such as acquisition and related costs, and provision for income taxes that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired; • our management uses adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of operating performance and the effectiveness of our business strategies, and in communications with our board of directors concerning our financial performance; • adjusted EBITDA may sometimes be considered by the compensation committee of our board of directors in connection with the determination of compensation for our executive officers; and • adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations, and facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. Although adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. These limitations include: • stock-based compensation is a non-cash charge and is and will remain an element of our long-term incentive compensation package, although we exclude it as an expense when evaluation our ongoing operating performance for a particular period; • depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future; adjusted EBITDA does not reflect any cash requirements for these replacements; • adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs or contractual commitments, and therefore may not reflect periodic increases in capital expenditures; • adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income or expense; and 20-------------------------------------------------------------------------------- Table of Contents • other companies may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Our adjusted EBITDA will be impacted by the rate at which our revenue increases and the timing of our investments in our operations. Please see below for a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP. The following table presents a reconciliation of net loss, the most comparable GAAP measure, to adjusted EBITDA for the three and six months ended June 30, 2014 and June 30, 2013, respectively: Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 (in thousands) Financial Measure: Net loss $ (9,366 ) $ (2,105 ) $ (15,480 ) $ (4,267 ) Add back (deduct): Depreciation and amortization expense 2,678 2,040 5,053 4,101 Stock-based compensation expense 7,099 1,514 9,577 3,018 Acquisition and related items - 125 - 313 Interest expense, net 14 69 71 160 Change in fair value of preferred stock warrant liabilities 1,742 428 732 977 Foreign currency (gain) loss, net 382 (45 ) 930 (350 ) Provision for income taxes 112 63 162 113 Adjusted EBITDA $ 2,661 $ 2,089 $ 1,045 $ 4,065 Components of Our Results of Operations Revenue We generate revenue from buyers and sellers who use our solution for the purchase and sale of advertising inventory. Buyers use our solution to reach their intended audiences by buying advertising inventory that we make available from sellers through our solution. Our solution enables buyers and sellers to purchase and sell advertising inventory, matches buyers and sellers and establishes rules and parameters for open and transparent auctions of advertising inventory. We recognize revenue upon the completion of a transaction, that is, when an impression has been made available to the consumer viewing a website or application, subject to satisfying all other revenue recognition criteria. We are responsible for the completion of the transaction. We generally bill and collect the full purchase price of impressions from buyers. We report revenue net of amounts we pay sellers for the impressions they provide. In some cases, we generate revenue directly from sellers who maintain the primary relationship with buyers and utilize our solution to transact and optimize their activities. Our accounts receivable are recorded at the amount of gross billings to buyers, net of allowances, for the amounts we are responsible to collect, and our accounts payable are recorded at the net amount payable to sellers. Accordingly, both accounts receivable and accounts payable appear large in relation to revenue reported on a net basis. Our revenue, cash flow from operations, operating results and key operational and financial performance may vary from quarter to quarter due to the seasonal nature of advertiser spending, as well as other circumstances that affect advertising activity. For example, many advertisers devote a disproportionate amount of their advertising budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing. Moreover, advertising inventory in the fourth quarter may be more expensive due to increased demand. Historically, the fourth quarter of the year reflects our highest level of revenue, and the first quarter reflects the lowest level of our revenue. For further information on our revenue recognition policies, see the notes to our consolidated financial statements presented in the Company's prospectus filed with the SEC on April 2, 2014 pursuant to Rule 424(b) under the Securities Act of 1933. 21-------------------------------------------------------------------------------- Table of Contents Expenses We classify our expenses into the following four categories: Cost of Revenue. Our cost of revenue consists primarily of data center costs, bandwidth costs, depreciation and maintenance expense of hardware supporting our revenue producing platform, amortization of software costs for the development of our revenue producing platform, amortization expense associated with acquired developed technologies, personnel costs, and facilities-related costs. Personnel costs included in cost of revenue include salaries, bonuses, stock-based compensation, and employee benefit costs, and are primarily attributable to personnel in our network operations group, who support our platform. We capitalize costs associated with software that is developed or obtained for internal use and amortize the costs associated with our revenue producing platform in cost of revenue over their estimated useful lives. Many of these expenses are fixed and do not increase or decrease proportionately with increases or decreases in our revenue. Sales and Marketing. Our sales and marketing expenses consist primarily of personnel costs, including stock-based compensation and the sales bonuses paid to our sales organization, and marketing expenses such as brand marketing, travel expenses, trade shows and marketing materials, professional services, and to a lesser extent, facilities-related costs and depreciation and amortization. Our sales organization focuses on marketing our solution to increase the adoption of our solution by existing and new buyers and sellers. Technology and Development. Our technology and development expenses consist primarily of personnel costs, including stock-based compensation, and professional services, associated with the ongoing development and maintenance of our solution, and to a lesser extent, facilities-related costs, and depreciation and amortization. These expenses include costs incurred in the development, implementation and maintenance of internal use software, including platform and related infrastructure. Technology and development costs are expensed as incurred, except to the extent that such costs are associated with internal use software development that qualifies for capitalization which are then recorded as internal use software development costs, net on our consolidated balance sheet. We amortize internal use software development costs that relate to our revenue producing activities or our platform to cost of revenue and amortize other internal use software development costs to technology and development costs or general and administrative expenses, depending on the nature of the related project. General and Administrative. Our general and administrative expenses consist primarily of personnel costs, including stock-based compensation, associated with our executive, finance, legal, human resources, compliance and other administrative personnel, as well as accounting and legal professional services fees, facilities-related costs and depreciation, and other corporate related expenses. General and administrative expenses also include amortization of internal use software development costs that relate to general and administrative functions. Other Expense, Net Interest Expense, Net. Interest expense is mainly related to our credit facility and capital lease arrangements. Interest income consists of interest earned on our money market accounts and was insignificant for the three and six months ended June 30, 2014 and 2013. Change in Fair Value of Convertible Preferred Stock Warrant Liability. As of December 31, 2013, we had two outstanding warrants to purchase shares of our preferred stock. The convertible preferred stock warrants were subject to re-measurement to fair value at each balance sheet date, and any change in fair value was recognized as a component of other expense, net. In connection with the closing of our IPO in April 2014, one warrant for 845,867 shares of convertible preferred stock was exercised on a net basis, resulting in the issuance of 286,055 shares of common stock, and the remaining warrant for 25,174 shares of convertible preferred stock was automatically converted into a warrant exercisable for 12,587 shares of common stock. Following the closing of our IPO, we are no longer required to re-measure the converted common stock warrants to fair value and record any changes in the fair value of these liabilities in our statement of operations. The common stock warrant was net exercised during June 2014. Foreign Currency Exchange (Gain) Loss, Net. Foreign currency exchange (gain) loss, net consists primarily of gains and losses on foreign currency transactions. We have foreign currency exposure related to our accounts receivable and accounts payable that are denominated in currencies other than the U.S. Dollar, principally the British Pound and Euro. Provision for Income Taxes Provision for income taxes consists primarily of federal, state and foreign income taxes. Due to uncertainty as to the realization of benefits from our domestic deferred tax assets, including net operating loss carryforwards and research and development tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance in the near term. 22-------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth our consolidated results of operations and our consolidated results of operations as a percentage of revenue for the periods presented: Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 (in thousands) Revenue $ 28,283 $ 19,035 $ 51,298 $ 35,635 Expenses: Costs of revenue (1) 4,852 3,594 9,312 7,031 Sales and marketing (1) 10,296 6,167 19,323 12,362 Technology and development (1) 4,598 5,138 9,275 9,249 General and administrative (1) 15,653 5,726 26,973 10,360 Total expenses 35,399 20,625 64,883 39,002 Loss from operations (7,116) (1,590) (13,585) (3,367) Other (income) expense, net 2,138 452 1,733 787 Loss before income taxes (9,254) (2,042) (15,318) (4,154) Provision for income taxes 112 63 162 113 Net loss $ (9,366 ) $ (2,105 ) $ (15,480 ) $ (4,267 ) (1) Stock-based compensation expense included in our expenses was as follows: Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 (in thousands) Costs of revenue $ 57 $ 22 $ 88 $ 40 Sales and marketing 700 223 1,277 563 Technology and development 424 419 727 787 General and administrative 5,918 850 7,485 1,628 Total $ 7,099 $ 1,514 $ 9,577 $ 3,018 Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Revenue 100 % 100 % 100 % 100 % Cost of revenue 17 % 19 % 18 % 20 % Sales and marketing 36 % 32 % 38 % 35 % Technology and development 16 % 27 % 18 % 26 % General and administrative 55 % 30 % 53 % 29 % Total expenses 125 % 108 % 126 % 109 % Loss from operations (25 )% (8 )% (26 )% (9 )% Other (income) expense, net 8 % 2 % 3 % 2 % Loss before income taxes (33 )% (11 )% (30 )% (12 )% Provision for income taxes - % - % - % - % Net loss (33 )% (11 )% (30 )% (12 )% * Certain figures may not sum due to rounding. 23-------------------------------------------------------------------------------- Table of Contents Comparison of the Three Months and Six Months Ended June 30, 2014 and 2013 Revenue Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 (in thousands) Revenue $ 28,283 $ 19,035 $ 51,298 $ 35,635 Revenue increased $9.2 million, or 49%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase in revenue was due to an increase in the amount of advertising spending on our platform for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. This increase was primarily attributable to an increase of over 50% in average CPM for the three months ended June 30, 2014 compared to the three months ended June 30, 2013, primarily resulting from more targeted buying. The increase in average CPM was partially offset by a decrease in paid impressions for the three months ended June 30, 2014 compared to the three months ended June 30, 2013, primarily resulting from our traffic quality control initiatives put into place during the last several months of 2013 to maintain a high standard of quality advertising inventory and reduce lower quality traffic. Revenue increased $15.7 million, or 44%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily for the same reasons described above. We expect revenue to continue to grow on an annual basis. Revenue may be impacted by seasonality, the amounts we pay sellers, and other factors such as changes in the market, our execution of the business, and competition. Cost of Revenue Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 (in thousands, except percentages) Costs of revenue $ 4,852 $ 3,594 $ 9,312 $ 7,031 Percent of revenue 17 % 19 % 18 % 20 % Cost of revenue increased by $1.3 million, or 35%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. This increase was primarily due to an increase in data center, hosting, and bandwidth costs of $0.4 million, an increase in amortization expense of capitalized internal use software of $0.4 million, and an increase in personnel costs of $0.2 million. The increases in data center, hosting, and bandwidth costs were primarily attributable to data center locations added subsequent to June 30, 2013 in order to support the increase in the use of our platform and international expansion efforts requiring additional hardware, software, and maintenance expenses. The increase in amortization of capitalized internal use software was due to our continued investment in our revenue producing platform. The increase in personnel costs was primarily driven by increased headcount in order to support our growth. Average headcount attributable to cost of revenue was 40% higher during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Cost of revenue increased by $2.3 million, or 32%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. This increase was primarily due to an increase in data center, hosting, and bandwidth costs of $0.8 million, an increase in amortization expense of capitalized internal use software of $0.7 million, and an increase in personnel costs of $0.4 million. The increases in data center, hosting, and bandwidth costs and the increase in amortization of capitalized internal use software were primarily for the same reasons described above. The amortization of capitalized internal use software reflected in cost of revenue was $1.8 million and $1.1 million for the six months ended June 30, 2014 and 2013, respectively. The increase in personnel costs was primarily due to increased headcount in order to support our growth. Average headcount attributable to cost of revenue was 46% higher during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. We expect cost of revenue to increase in absolute dollars in future periods as we continue to invest additional capital into our data centers, hire additional personnel to continue to build and maintain our systems, and invest in our technology. As a percentage of revenue, cost of revenue may fluctuate based on revenue levels and the timing of these investments. 24-------------------------------------------------------------------------------- Table of Contents Sales and Marketing Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 (in thousands, except percentages) Sales and marketing $ 10,296 $ 6,167 $ 19,323 $ 12,362 Percent of revenue 36 % 32 % 38 % 35 % Sales and marketing expense increased by $4.1 million, or 67.0%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. This increase was primarily due to an increase in personnel costs of $3.2 million. The increase in personnel costs was primarily due to an increase in average sales and marketing headcount of 49% for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Our sales and marketing headcount increased in order to support our sales efforts and continue to develop and maintain relationships with buyers and sellers, as well as to provide information to the market with respect to our solution. Sales and marketing expense increased by $7.0 million, or 56%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. This increase was primarily due to an increase in personnel costs of $5.6 million. The increase in personnel costs was primarily due to an increase in average sales and marketing headcount of 43% for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Our sales and marketing headcount increased primarily for the same reasons described above. Overall sales and marketing expenses increased due to our continued focus on marketing our platform and solution to increase the adoption of our platform and our solution by existing and new buyers and sellers, and to establish a presence in international markets. We expect sales and marketing expenses to increase in absolute dollars in future periods as we continue to invest in our business, including expanding our domestic and international business. Sales and marketing expense as a percentage of revenue may fluctuate from period to period based on revenue levels, the timing of our investments, and the seasonality in our industry and business. Technology and Development Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 (in thousands, except percentages) Technology and development $ 4,598 $ 5,138 $ 9,275 $ 9,249 Percent of revenue 16 % 27 % 18 % 26 % Technology and development expense decreased by $0.5 million, or 11%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. This decrease was primarily due to an increase in personnel costs being capitalized into internal use software development which reduced the expense for the period, partially offset by an increase in headcount, which reflects our continued hiring of engineers to maintain and support our technology and development efforts. Average technology and development headcount increased by 30% for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Technology and development expense remained largely unchanged for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Personnel costs increased, but were offset by an increase in costs being capitalized into internal use software development. The increase in personnel costs and the increase in personnel costs being capitalized into internal use software development were primarily for the same reasons described above. Average technology and development headcount increased by 31% for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. We expect technology and development expense to increase in absolute dollars in future periods as we continue to invest in our engineering and technology teams to support our technology and development efforts; however, the timing and amount of our capitalized development and enhancement projects may affect the amount of development costs expensed in any given period. Technology and development expense as a percentage of revenue may fluctuate from period to period based on revenue levels, the timing of these investments, and the timing and the rate of the amortization of capitalized projects. 25-------------------------------------------------------------------------------- Table of Contents General and Administrative Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 (in thousands, except percentages) General and administrative $ 15,653 $ 5,726 $ 26,973 $ 10,360 Percent of revenue 55 % 30 % 53 % 29 % General and administrative expense increased by $9.9 million, or 173%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. This increase was primarily due to an increase in personnel costs of $7.8 million and an increase in professional services fees of $1.2 million. The increase in personnel costs included an increase in stock-based compensation of $5.1 million, primarily associated with equity awards granted during the six months ended June 30, 2014, and to a lesser extent, increased headcount to support our growth and transition to a public company. Average general and administrative headcount increased by 77% from June 30, 2013 to June 30, 2014. The increase in third-party professional services fees was related to an increase in the use, as well as a change in the timing of use during the year, of third-party accounting, audit, tax and legal services as we continued to invest in our infrastructure, processes and controls to support our growth and our operation as a public company. General and administrative expense increased by $16.6 million, or 160%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. This increase was primarily due to an increase in personnel costs of $11.5 million and an increase in professional services fees of $3.5 million. The increase in personnel costs was primarily due to an increase in stock-based compensation of $5.9 million, and increased headcount. Increases in stock-based compensation expense, headcount and third-party professional services fees were for the same reasons as described above. Average general and administrative headcount increased by 86% from June 30, 2013 to June 30, 2014. We expect general and administrative expense to increase in absolute dollars as we continue to invest in corporate infrastructure to support our growth and our operation as a public company, including professional services fees, insurance premiums and compliance costs associated with operating as a public company. Other Expense, Net Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 (inthousands,) Interest expense, net $ 14 $ 69 $ 71 $ 160 Change in fair value of convertible preferred stock warrant liabilities 1,742 428 732 977 Foreign exchange (gain) loss, net 382 (45 ) 930 (350 ) Total other (income) expense, net $ 2,138 $ 452 $ 1,733 $ 787 The increase in other expense, net of $1.7 million during the three months ended June 30, 2014 compared to the three months ended June 30, 2013 was primarily related to the increase in the fair value of pre-IPO convertible preferred stock warrant liabilities, and to a lesser extent, an increase in losses of $0.4 million on foreign currency transactions. The fair value of our pre-IPO convertible preferred stock warrant liabilities increased to $6.2 million through the closing of our IPO on April 7, 2014 from $4.4 million at March 31, 2014 driven by an increase in the fair value of the Company's common stock between these dates. In connection with our IPO in April 2014, one warrant was exercised on a net basis and the remaining preferred stock warrant was automatically converted into a warrant exercisable for common stock. Following the closing of our IPO, we were no longer required to re-measure the converted common stock warrants to fair value and record any changes in the fair value of these liabilities in our statement of operations. The common stock warrant was net exercised during June 2014. The increase in losses on foreign currency transactions mainly related to increased volume of foreign denominated transactions and fluctuations in the British Pound in relation to the U.S. Dollar from April 1, 2014 to June 30, 2014 as compared to fluctuations from April 1, 2013 to June 30, 2013. The increase in other expense, net of $0.9 million, during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily relates to an increase in losses of $1.3 million of foreign currency transactions mainly related to increased volume of foreign denominated transactions and fluctuations in the British Pound in relation to the U.S. Dollar from January 1, 2014 to June 30, 2014 as compared to fluctuations from January 1, 2013 to June 30, 2013. 26-------------------------------------------------------------------------------- Table of Contents Provision for Income Taxes Our provision for income taxes of $0.1 million and $0.1 million for the three months ended June 30, 2014 and 2013, respectively, and $0.2 million and $0.1 million for the six months ended June 30, 2014 and 2013, respectively, primarily relates to taxes due in foreign jurisdictions. Liquidity and Capital Resources From our incorporation in April 2007 until our IPO, we financed our operations and capital expenditures primarily through private sales of convertible preferred stock, our use of our credit facilities, and cash generated from operations. Between 2007 and 2010, we raised $52.6 million from the sale of preferred stock. On April 7, 2014, we completed our IPO, whereby 6,432,445 shares of common stock were sold by us (including 1,015,649 shares sold pursuant to the underwriters' exercise or their over-allotment option), and 1,354,199 shares of common stock were sold by selling stockholders. We received proceeds from the offering of approximately $86.2 million after deducting the underwriting discounts and commissions, and offering expenses. We did not receive any proceeds from the sales of shares by the selling stockholders. At June 30, 2014, we had cash and cash equivalents of $105.7 million and restricted cash of $1.6 million. On April 14, 2014, we repaid all of the outstanding debt under the line of credit with Silicon Valley Bank in the amount of $3.8 million. At June 30, 2014, we had no amounts outstanding under our credit facility with Silicon Valley Bank, and $40 million was available for additional borrowings. At our option, loans under the credit facility may bear interest based on either the LIBOR rate or the prime rate plus, in each case, an applicable margin. The applicable margins under the credit facility are (i) 2.00% or 3.50% per annum in the case of LIBOR rate loans, and (ii) 0.00% or 1.50% per annum in the case of prime rate loans (based on Silicon Valley Bank's net exposure to us after giving effect to unrestricted cash held at Silicon Valley Bank and its affiliates plus up to $3.0 million held at other institutions). In addition, an unused revolver fee in the amount of 0.15% per annum of the average unused portion of the credit facility is payable by us to Silicon Valley Bank monthly in arrears. Our credit facility restricts our ability to, among other things, sell assets, make changes to the nature of our business, engage in mergers or acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay dividends, make distributions or redeem or repurchase capital stock or make other investments, engage in transactions with affiliates and make payments in respect of subordinated debt. In addition, in the event that the amount available to be drawn is less than 20% of the maximum line amount of the credit facilities, or if an event of default exists, we are required to satisfy a minimum fixed charge coverage ratio test of 1.10 to 1.00. Currently, we would not satisfy this minimum fixed charge coverage ratio test, which is defined as a ratio of adjusted EBITDA to the sum of interest accrual and principal payments required to be paid during the relevant measurement period. However, we meet the specified excess availability threshold, so we are not currently required to satisfy the fixed charge coverage ratio test. At June 30, 2014, our fixed charge coverage ratio was (3.7) to 1.0. The credit facility also includes customary representations and warranties, affirmative covenants, and events of default, including events of default upon a change of control and material adverse change (as defined in the credit facility). Following an event of default, Silicon Valley Bank would be entitled to, among other things, accelerate payment of amounts due under the credit facility and exercise all rights of a secured creditor. We were in compliance with the covenants under the credit facility at June 30, 2014. We believe our existing cash and cash flow from operations, together with the undrawn balance under our credit facility with Silicon Valley Bank, will be sufficient to meet our working capital requirements for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section of this Quarterly Report on Form 10-Q entitled "Risk Factors." In the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. 27-------------------------------------------------------------------------------- Table of Contents There can be no assurances that we will be able to raise additional capital, which would adversely affect our ability to achieve our business objectives. In addition, if our operating performance during the next twelve months is below our expectations, our liquidity and ability to operate our business could be adversely affected. Cash Flows The following table summarizes our cash flows for the periods presented: |