TMCnet News
MOVE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" is intended to assist the reader in understanding the Company's business and is provided as a supplement to, and should be read in conjunction with, the Company's unaudited Condensed Consolidated Financial Statements and accompanying notes. The Company's results of operations discussed below are presented in conformity with U.S. GAAP. OUR BUSINESS With realtor.com® as our flagship web site and brand, Move, Inc. ("Move", the "Company", "we", "our" or "us") is a leading real estate information marketplace connecting consumers with the information and the expertise they need to make informed home buying, selling, financing and renting decisions. Move's purpose is to help people love where they live. To that end we strive to create the leading marketplace for real estate information and services by connecting people at every stage of the real estate cycle with the content, tools and professional expertise they need to find a perfect home. Through the collection of assets we have developed over 20 years in this business, Move is positioned to address the needs and wants of both consumers and real estate professionals ("customers") throughout the process of home ownership. Although the real estate marketplace has been unquestionably changed by the Internet, and likely will continue to evolve through the growth of mobile devices and social networking, our business continues to be about empowering consumers with timely and reliable information and connecting them to the real estate professionals who have the expertise to help them better understand and succeed in that marketplace. We provide consumers with a powerful combination of breadth, depth and accuracy of information about homes for sale, new construction, homes for rent, multi-family rental properties, senior living communities, home financing, home improvement and moving resources. Through realtor.com®, consumers have access to over 100 million properties across the United States ("U.S.") as well as properties for sale from another 38 countries worldwide. Our for-sale listing content, comprising nearly 4 million properties as of June 30, 2014, and accessible in 11 different languages, represents the most comprehensive, accurate and up-to-date collection of its kind, online or offline. Through realtor.com® and our mobile applications, we display more than 98% of all for-sale properties listed in the U.S. We source this content directly from more than 800 Multiple Listing Services ("MLSs") across the country with whom we have relationships, which represents nearly all MLSs, with approximately 90% of the active listings updated every 15 minutes and the remaining listings updated daily. Realtor.com®'s substantial content advantage has earned us trust with both consumers and real estate professionals. We attract a highly engaged consumer audience and have developed an exceptionally large number of relationships with real estate professionals across the country. Over 27 million users, viewing an average of nearly 450 million pages and spending an average of over 550 million minutes on the realtor.com® web site and mobile applications each month over the last twelve-month period, have exposure to over 400,000 real estate professionals on realtor.com® and our mobile applications. We delivered approximately 13% more connections between consumers and our customers during the twelve months ended June 30, 2014, as compared to the twelve-month period ended June 30, 2013. This illustrates the success of our continued commitment to not only deliver valuable information to consumers, but more importantly, to connect them with real estate professionals who can provide the local expertise consumers want when making home-related decisions. 18 -------------------------------------------------------------------------------- Table of Contents In addition to providing an industry-leading content mix, Move facilitates connections and transactions between consumers and real estate professionals. Although attracting and engaging a large consumer audience is an important part of our business, to succeed we must also focus on winning the hearts and minds of real estate professionals, who are both customers of our business and suppliers of much of our property content. We believe this starts with our commitment to respecting the listing and content rights of the real estate agents, brokers, MLSs and others who work hard to help generate these important data resources. Through our realtor.com® and ListHubTM businesses, we aggregate, syndicate and display real estate listings across the web and on mobile applications. Part of the reason we have become the leading source for real estate listing content is that we work closely with, and respect the rights of, real estate professionals while still maintaining a balance that allows consumers to obtain the information and expertise they expect and need. At the same time, we are committed to delivering valuable connections, advertising systems and productivity and lead management tools to real estate professionals, with the goal of helping to make them more successful. By combining realtor.com® advertising systems with the productivity and lead management tools offered through our Top Producer® and TigerLead® software-as-a-service ("SaaS") customer relationship management ("CRM") products, we are able to help grow and enrich connections between our customers and consumers, and to help our customers better manage those connections in an effort to facilitate transactions and grow their businesses. Our dual focus on both the consumer and the real estate professional has helped us create and maintain realtor.com® as a distinct advantage in the online real estate space. For over 20 years, we have provided consumers with access to a highly accurate and comprehensive set of real estate listing data and, as a result, have built relationships within the real estate industry that are both broad and deep. We expect this industry to continue to progress as new technologies are embraced and as consumers' needs and wants evolve. We also expect that real estate professionals, to stay relevant, will likewise need to evolve along with technology, consumers and the market. We aim to keep realtor.com® positioned to lead this transformation with consumers and real estate professionals at the forefront, and expect to leverage our collection of advertising systems, productivity tools and other assets to do so. PRODUCTS AND SERVICES Our products and services are broadly defined into two groups: (i) Consumer Advertising and (ii) Software and Services. Consumer Advertising Our Consumer Advertising products are focused on providing real estate consumers with the information, tools and professional expertise they need to make informed home buying, selling, financing and renting decisions through our operation of realtor.com® and other consumer-facing web sites. realtor.com® Realtor.com® is the official web site of the NAR, the largest trade association in the U.S., which represents residential and commercial real estate professionals, including brokers, agents, property managers, appraisers, counselors and others engaged in all aspects of the real estate industry. The NAR had over one million members as of June 30, 2014. Under our exclusive and perpetual agreement with the NAR, we operate realtor.com®, and, as such, we present basic MLS property listings to consumers on our web site and our mobile applications at no charge to real estate professionals, in addition to presenting other property information. Through our realtor.com® web site, mobile applications and business operations, we offer a number of services to real estate franchises, brokers and agents, as well as non-real estate related advertisers, in an effort to connect those advertisers with our consumer audience. We categorize the products and services available through realtor.com® as listing advertisements and non-listing advertisements. Listing Advertisements-Showcase Listing Enhancements, Co-Broke and Featured HomesTM Our listing advertisements product line, which includes Showcase Listing Enhancements, Co-Broke and Featured HomesTM, allows real estate agents, brokers and franchises to enhance, prioritize and connect with consumers searching for for-sale property listings within the realtor.com® web site and mobile applications. Enhancements may include more prominent featuring and prioritization on the search results page, additional photos, virtual tours and video, personalization and branding for the listing agent or broker, and an ability to connect with consumers through web site transfers and phone or email communication. Listing advertisements are typically sold on a subscription basis and are priced based on the size and engagement of our consumer audience in the applicable geographic market and/or an agent or broker's historical listing count for the past twelve months. 19 -------------------------------------------------------------------------------- Table of Contents Non-Listing Advertisements-Display Advertising, Featured CommunityTM and Featured Competitive Market Analysis ("Featured CMATM") Our non-listing advertisements product line allows real estate agents, brokers and franchises, as well as non-real estate related advertisers (such as personal banking and mortgage companies, insurance providers, home improvement retailers, moving service providers and other consumer product and service companies) to connect with our highly engaged and valuable consumer audience in the real estate search process. We offer these advertisers a variety of products and services including sponsorships, graphical display advertisements, text links, directories, Featured CommunityTM and Featured CMATM. Pricing models include cost-per-thousand impressions ("CPM"), cost-per-click ("CPC"), cost-per-unique user and subscription-based sponsorships of specific content areas or specific targeted geographies. Rentals, Senior Housing, Moving.comTM and Doorsteps® We separately operate several other web sites providing single family and multi-family rental listings, senior housing and moving-related content and services to our consumer audience. Through our Rentals and Senior Housing businesses, we aggregate and display rental listings nationwide. We offer a variety of listing-related advertisements that allow rental property owners and managers to promote their listings and connect with consumers through our web sites. Pricing models include monthly subscriptions, CPC and cost-per-acquisition ("CPA"). Through our Moving.comTM business, we provide consumers with quotes from moving companies and truck rental companies. The majority of revenue from Moving.comTM is derived from cost-per-lead pricing models. In addition, through Doorsteps®, we offer homebuyers content, tools and advice along every step of the home buying process and help professionals connect, engage and collaborate with homebuyers during every step of the transaction. Our Consumer Advertising products represented 77% and 78% of our overall revenues for the three and six months ended June 30, 2014 and 2013, respectively. Software and Services Our Software and Services products are designed to deliver valuable connections to real estate professionals by providing them with advertising systems, productivity and lead management tools, and reporting with the goal of helping to make them more successful. SaaS CRM Products By offering both realtor.com® advertising systems and productivity and lead management tools through our Top Producer® and TigerLead® SaaS CRM products, we are able to help grow and enrich connections between our customers and consumers, and help our customers better manage those connections in an effort to facilitate transactions and grow their businesses. Top Producer® and TigerLead® are our SaaS products providing productivity and lead management tools tailored to real estate agents on a subscription basis. These products complement realtor.com® and our mission of connecting consumers and real estate professionals to facilitate transactions by empowering real estate professionals' ability to connect with, cultivate and ultimately convert their relationships with homebuyers and sellers into transactions. Our Top Producer® product offerings include a web- and mobile-based CRM solution, our Market Snapshot® product and a series of template web site products. The TigerLead® SaaS CRM product provides real estate agents and brokers with a sophisticated internet data exchange web site platform to capture and manage leads that are delivered with unique insights such as how many times a user has returned to the site to search particular listings and price ranges. The Top Producer® product line also now includes expanded features offered through technology purchased as part of the FiveStreet, Inc. ("FiveStreet") acquisition in the fourth quarter of 2013. FiveStreet's software consolidates leads from more than 80 lead providers including realtor.com® and other major real estate sites, and automates the process of rapidly responding to, assigning and distributing leads. It provides agents with a single unified dashboard, ensuring leads are not lost or overlooked, and provides web and mobile tools for rapid response. TigerLead® Search Engine Marketing In addition, through our TigerLead® product suite, we are able to provide expertise in real estate search engine marketing through sophisticated key word buying and a platform and model that grades each lead source and lead in order to deliver high quality intelligent leads to the agent or broker. Pricing is based upon a percentage of marketing spend each month. ListHubTM-Listing Syndication and Reporting ListHubTM syndicates for-sale listing information from MLSs and other reliable data sources, such as real estate brokerages, and distributes that content to an array of online web sites. Our ListHubTM product line allows participating web sites to display real property listings, and provides agents, brokers, franchises and MLSs the ability to obtain advanced performance reporting about their listings on the participating web sites. Listing syndication pricing for participating web sites includes 20 -------------------------------------------------------------------------------- Table of Contents fixed- or variable-pricing models based on listing counts. Advanced reporting products are sold on a monthly subscription basis. Our Software and Services products represented 23% and 22% of our overall revenues for the three and six months ended June 30, 2014 and 2013, respectively. MARKET AND ECONOMIC CONDITIONS In recent years, our business has been, and may continue to be, influenced by a number of macroeconomic, industry-wide and product-specific trends and conditions. For a number of years prior to 2006, the U.S. residential real estate market experienced a period of hyper-sales rates and home price appreciation, fueled by the availability of low interest rates and flexible mortgage options for many consumers. During the latter half of 2006 and through 2008, lending standards were tightened, equity markets declined substantially, liquidity in general was impacted, unemployment rates rose and consumer spending declined. The combination of these factors materially impacted the U.S. housing market in the form of fewer home sales, lower home prices and accelerating delinquencies and foreclosures, all of which created a cycle that further exacerbated the housing market downturn. The effects of this downturn on the housing market have persisted for several years but key market indicators suggest that large parts of the housing market may have bottomed out and have entered a recovery mode. The median age of inventory was essentially flat in the second quarter compared to the same period in 2013 suggesting that supply remains relatively tight. However, we are seeing the listing count trend grow at a faster pace than last summer, which would indicate that the inventory is now building and moving to support improvement in the pace of existing home sales in the second half of the year. During the second quarter of 2014, the U.S. saw an increase in the national median list price of more than 7% compared to the same period in the prior year, further indication of improving conditions and a continuation of a broad housing recovery. Mortgage rates have risen from the levels seen in early 2013; however, remain historically low despite these increases. Banks continue to have tighter credit standards for mortgage loans, which have made home purchases more difficult in recent years. Unemployment rates continue to decline. Accordingly, while there are a number of indicators of an improving housing market, homes sales remain sluggish, and we believe that market conditions could continue to adversely impact spending by real estate professionals in the near term. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations is based upon our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these unaudited Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, uncollectible receivables, valuation of investments, intangible and other long-lived assets, stock-based compensation and contingencies. Our estimates are based upon historical experience and on various other assumptions that are believed 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 under different assumptions or conditions. There were no significant changes to our critical accounting policies during the six months ended June 30, 2014, as compared to those policies disclosed in the Annual Report. LEGAL CONTINGENCIES We are currently involved in certain legal proceedings, as discussed within the section "Legal Proceedings" in Note 21, "Commitments and Contingencies," within our Consolidated Financial Statements contained in Item 8 in the Annual Report, and in Note 14, "Commitments and Contingencies," to our unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. Because of the uncertainties related to both the amount and range of potential liability in connection with legal proceedings, we are unable to make a reasonable estimate of the liability that could result from unfavorable outcomes in our remaining pending litigation. As additional information becomes available, we will assess the potential liability related to our pending litigation and determine whether reasonable estimates of the liability can be made. Unfavorable outcomes, or significant estimates of our potential liability, could materially impact our results of operations and financial position. 21 -------------------------------------------------------------------------------- Table of Contents BASIS OF PRESENTATION Revenue We derive our revenue primarily from two product groups: (i) Consumer Advertising and (ii) Software and Services. We derive all of our revenue from our operations in North America. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Consumer Advertising. Revenue from our Consumer Advertising products is generated from the sale of online advertising for display on our consumer-facing web sites. Listing advertisements are typically sold on a fixed-fee subscription basis. Fixed-fee subscription revenue is recognized ratably over the period in which the services are provided. Pricing models for non-listing advertisements are impression-based and include CPM, CPC, CPA, cost-per-lead, cost-per-unique user and subscription-based sponsorships of specific content areas or specific targeted geographies. The impression-based agreements range from spot purchases to 12-month contracts. The impression-based revenue is recognized based upon actual impressions delivered and viewed by a user in a period. We measure performance related to advertising obligations on a monthly basis prior to the recording of revenue. Software and Services. Revenue from our Software and Services products is generated from the sale of our SaaS CRM products, search engine marketing and listing syndication and reporting. We license our SaaS CRM products on a monthly subscription basis. Our hosting arrangements require customers to pay a fixed fee and receive service over a period of time, generally one year. Listing syndication pricing includes fixed- or variable-pricing models based on listing counts. Advanced reporting products are sold on a monthly subscription basis. Revenue for these products is recognized ratably over the service period. Pricing for our search engine marketing services is based upon the amount of marketing spend each month and is recognized as revenue at the time services are delivered. Costs and Operating Expenses Cost of Revenue. Cost of revenue consists of expenses related to operating and hosting our web sites and mobile applications and technical support of our SaaS products, including associated headcount expenses, such as salaries, benefits, bonuses, and stock-based compensation expense, as well as licenses and depreciation associated with computer equipment and software. Cost of revenue also includes lead acquisition expenses directly related to fulfilling our marketing services products, credit card processing fees, licensing costs related to our commercial business relationships, including amounts paid to the NAR, hosting costs, ad serving costs paid to third parties and licensed content. Sales and Marketing. Sales and marketing expenses consist of headcount expenses, including salaries, commissions, benefits, bonuses and stock-based compensation expense for sales, customer service, marketing, and public relations employees. Sales and marketing expenses also include advertising costs, licensing costs associated with marketing data, trade show costs, other sales expenses related to promotional and marketing activities, and traffic acquisition costs. Product and Web Site Development. Product and web site development expenses consist of headcount expenses, including salaries, benefits, bonuses and stock-based compensation expense and third-party contractor fees primarily associated with the design, development and testing of our products, web site and mobile applications. Product and web site development also includes amortization expense related to capitalized product and development activities. General and Administrative. General and administrative expenses consist of headcount expenses, including salaries, benefits, bonuses and stock-based compensation expense for executive, finance, accounting, business analytics, back office systems, legal, human resources, recruiting, data warehouse and administrative support personnel. General and administrative expenses also include outside legal, accounting, and other third-party professional service fees, bad debt and other overhead. Amortization of Intangible Assets. Amortization of intangible assets consists of the amortization of definite-lived intangible assets recorded in connection with acquisitions. Interest Income Interest income represents income earned on our cash, cash equivalents, investments and certain amounts due from customers. Interest Expense Interest expense consists of interest on our senior convertible notes, notes payable and capital lease obligations. See Note 6, "Convertible Senior Notes" to our consolidated financial statements in Part I, Item 1, "Condensed Consolidated Financial Statements" of this Quarterly Report on Form 10-Q. 22 -------------------------------------------------------------------------------- Table of Contents Earnings of Unconsolidated Joint Venture Earnings of unconsolidated joint venture consist of our proportionate share of the earnings from our unconsolidated joint venture based on the monthly financial statements of the joint venture, which is recorded one month in arrears. Other Income (Expense) Other income (expense) represents net income and expenses that are not related to our core business operations. Other income (expense) consists of gains or losses on the sale of certain investments, foreign currency gains or losses and gains or losses on the disposition of fixed assets. Income Taxes We are subject to income taxes in the U.S. and Canada. However, due to the NOLs and Canadian tax credits generated for tax purposes, we do not record a current U.S. federal or Canadian tax provision. However, we are subject to income taxes in various state jurisdictions and have recorded a current state tax provision. We have recorded a deferred tax provision due to certain indefinite-lived intangible assets being amortized for tax purposes but not for book purposes. In addition, a deferred tax provision is recorded when there is a change in the valuation allowance resulting from a deferred tax liability established as part of a business combination. At December 31, 2013, we had gross NOLs for federal and state income tax purposes of $910.6 million and $223.1 million, respectively. We have provided a full valuation allowance against our net deferred tax assets because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax asset will not be realized. Therefore, other than the tax provision items described above, no tax liability or expense has been recorded in the financial statements. RESULTS OF OPERATIONS Three Months Ended June 30, 2014 and 2013 The following tables present our results of operations for the three months ended June 30, 2014 and 2013, and as a percentage of total revenue: Three Months Ended June 30, 2014 2013 (In thousands) Consolidated Statement of Operations Data: Revenue Consumer advertising $ 47,405 $ 44,570 Software and services 13,914 12,920 Total revenue 61,319 57,490 Costs and operating expenses: Cost of revenue(1) 12,732 11,790 Sales and marketing(1) 30,047 22,980 Product and web site development 10,342 9,583 General and administrative 12,287 11,985 Amortization of intangible assets 1,199 1,063 Total costs and operating expenses 66,607 57,401 (Loss) income from operations (5,288 ) 89 Interest expense, net (1,647 ) (13 ) Earnings of unconsolidated joint venture 895 463 Other expense, net (51 ) (8 ) (Loss) income before income taxes (6,091 ) 531 Income tax expense 202 65 Net (loss) income $ (6,293 ) $ 466 23 -------------------------------------------------------------------------------- Table of Contents -------------------------------------------------------------------------------- (1) Effective October 1, 2013, the Company elected to change the presentation of certain lead acquisition costs and to reclassify these costs from "Cost of revenue" to "Sales and marketing" within its Consolidated Statements of Operations in order to be more consistent with certain of its peers and to combine all traffic acquisition costs that are not considered directly related to the fulfillment of products into "Sales and marketing." This had the effect of decreasing "Cost of revenue" and increasing "Sales and marketing" expense by $2.0 million, or 4% of revenue, for the three months ended June 30, 2013. Three Months Ended June 30, 2014 2013 As a Percentage of Revenue: Revenue Consumer advertising 77 % 78 % Software and services 23 22 Total revenue 100 100 Costs and operating expenses: Cost of revenue 21 20 Sales and marketing 49 40 Product and web site development 17 17 General and administrative 20 21 Amortization of intangible assets 2 2 Total costs and operating expenses 109 100 (Loss) income from operations (9 ) - Interest expense, net (2 ) - Earnings of unconsolidated joint venture 1 1 Other expense, net - - (Loss) income before income taxes (10 ) 1 Income tax expense - - Net (loss) income (10 )% 1 % Revenue Revenue increased $3.8 million, or 7%, to $61.3 million for the three months ended June 30, 2014, compared to $57.5 million for the three months ended June 30, 2013. Revenue attributable to our Consumer Advertising products increased $2.8 million, or 6%, to $47.4 million for the three months ended June 30, 2014, compared to $44.6 million for the three months ended June 30, 2013. The increase in revenue was primarily due to increases in our Co-BrokeTM and Media advertisement products in our realtor.com® business. These increases were partially offset by revenue decreases from our Showcase and Featured products (i.e. Featured HomesTM, Featured CommunityTM, and Featured CMATM). In addition, there were revenue decreases in the Moving.comTM and rentals businesses. Revenue for our Software and Services products increased $1.0 million, or 8%, to $13.9 million for the three months ended June 30, 2014, compared to $12.9 million for the three months ended June 30, 2013. The increase in revenue was led by growth in our Top Producer® and TigerLead® product offerings. Costs and Operating Expenses Cost of Revenue. Cost of revenue increased $0.9 million, or 8%, to $12.7 million for the three months ended June 30, 2014, compared to $11.8 million for the three months ended June 30, 2013. The increase was primarily due to a $0.4 million increase in lead acquisition costs related to the growth in our TigerLead® business. In addition, there was a $0.2 million increase in consulting costs, a $0.2 million increase in depreciation expense, and a $0.1 million increase in personnel-related costs. Sales and Marketing. Sales and marketing expenses increased $7.1 million, or 31%, to $30.0 million for the three months ended June 30, 2014, compared to $23.0 million for the three months ended June 30, 2013, primarily due to the increased investment in our marketing department and the national media campaign around our realtor.com® brand. This increase was mainly due to an increase in brand and consumer marketing expenses of $5.5 million, increased personnel-related costs of $0.9 million, which include increased sales commission expense of $0.4 million associated with the increase in revenue, an increase in traffic acquisition costs of $0.6 million, and other cost increases of $0.1 million. We expect to continue to incur higher marketing costs through the remainder of 2014 as compared to 2013 as we continue to invest in our marketing campaigns to attract consumers to the realtor.com® brand. 24 -------------------------------------------------------------------------------- Table of Contents Product and Web Site Development. Product and web site development expenses increased $0.8 million, or 8%, to $10.3 million for the three months ended June 30, 2014, compared to $9.6 million for the three months ended June 30, 2013. This increase was mainly due to increased consulting and personnel-related costs of $0.7 million, increased amortization costs of $0.6 million associated with capitalized development costs and other cost increases of $0.4 million. These increases were partially offset by additional capitalized development costs of $0.9 million during the quarter ended June 30, 2014, related to building and deploying new functionality on our websites and in several product offerings, including our mobile platforms. General and Administrative. General and administrative expenses increased $0.3 million, or 3%, to $12.3 million for the three months ended June 30, 2014, compared to $12.0 million for the three months ended June 30, 2013. The increase was primarily due to an increase in personnel-related costs of $0.3 million and an increase in consulting costs of $0.3 million. These increases were partially offset by a $0.3 million decrease in legal costs primarily due to the recovery of legal costs previously incurred as a result of a favorable arbitration ruling during the quarter. Amortization of Intangible Assets. Amortization of intangible assets increased $0.1 million to $1.2 million for the three months ended June 30, 2014, compared to $1.1 million for the three months ended June 30, 2013. This increase was due to the amortization of intangible assets that were newly acquired in the second and fourth quarters of 2013. Stock-based Compensation and Charges. The following chart summarizes the stock-based compensation and charges that have been included in the following captions for each of the periods presented (in thousands): Three Months Ended June 30, 2014 2013 Cost of revenue $ 111 $ 85 Sales and marketing 703 587 Product and web site development 978 747 General and administrative 1,190 1,457 Total stock-based compensation and charges $ 2,982 $ 2,876 Stock-based compensation and charges increased $0.1 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The increase was primarily attributable to grants of stock options and restricted stock units to key employees, partially offset by decreases in stock-based compensation related to grants of restricted stock units to senior members of newly acquired businesses pursuant to employment agreements that were fully vested as of September 30, 2013. Interest Expense, Net Interest expense, net increased to $1.6 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, primarily due to the issuance of the Notes in August 2013. Earnings of Unconsolidated Joint Venture Earnings of unconsolidated joint venture, which represent our proportionate share of the earnings from our unconsolidated joint venture, increased $0.4 million to $0.9 million for the three months ended June 30, 2014, compared to $0.5 million for the three months ended June 30, 2013. The increase was primarily due to increased revenue growth partially offset by incremental operating costs. Other Expense, Net Other expense, net remained relatively constant for the three months ended June 30, 2014 and 2013. Income Taxes As a result of our historical net operating losses, we have generally not recorded a provision for income taxes. However, we recorded a deferred tax liability related to certain indefinite-lived intangible assets as the amortization is recognized for tax purposes but not for book purposes. For the three months ended June 30, 2014 and 2013, income tax expense was computed at the estimated annual effective rate based on the total estimated annual tax provision and included state income taxes and a deferred tax provision related to amortization of certain indefinite-lived intangible assets. 25 -------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2014 and 2013 The following tables present our results of operations for the six months ended June 30, 2014 and 2013, and as a percentage of total revenue: Six Months Ended June 30, 2014 2013 (In thousands) Consolidated Statement of Operations Data: Revenue Consumer advertising $ 92,180 $ 86,718 Software and services 27,152 25,010 Total revenue 119,332 111,728 Costs and operating expenses: Cost of revenue(1) 24,844 22,653 Sales and marketing(1) 55,440 44,648 Product and web site development 21,469 19,429 General and administrative 24,299 23,523 Amortization of intangible assets 2,496 2,062 Total costs and operating expenses 128,548 112,315 Loss from operations (9,216 ) (587 ) Interest expense, net (3,214 ) (27 ) Earnings of unconsolidated joint venture 1,720 1,065 Other expense, net (57 ) (35 ) (Loss) income before income taxes (10,767 ) 416 Income tax expense 708 50 Net (loss) income $ (11,475 ) $ 366 -------------------------------------------------------------------------------- (1) Effective October 1, 2013, the Company elected to change the presentation of certain lead acquisition costs and to reclassify these costs from "Cost of revenue" to "Sales and marketing" within its Consolidated Statements of Operations in order to be more consistent with certain of its peers and to combine all traffic acquisition costs that are not considered directly related to the fulfillment of products into "Sales and marketing." This had the effect of decreasing "Cost of revenue" and increasing "Sales and marketing" expense by $3.8 million, or 3% of revenue, for the six months ended June 30, 2013. 26 -------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2014 2013 As a Percentage of Revenue: Revenue Consumer advertising 77 % 78 % Software and services 23 22 Total revenue 100 100 Costs and operating expenses: Cost of revenue 21 20 Sales and marketing 47 40 Product and web site development 18 18 General and administrative 20 21 Amortization of intangible assets 2 2 Total costs and operating expenses 108 101 Loss from operations (8 ) (1 ) Interest expense, net (6 ) - Earnings of unconsolidated joint venture 3 1 Other expense, net - - (Loss) income before income taxes (11 ) - Income tax expense 1 - Net (loss) income (12 )% - % Revenue Revenue increased $7.6 million, or 7%, to $119.3 million for the six months ended June 30, 2014, compared to $111.7 million for the six months ended June 30, 2013. Revenue attributable to our Consumer Advertising products increased $5.5 million, or 6%, to $92.2 million for the six months ended June 30, 2014, compared to $86.7 million for the six months ended June 30, 2013. The increase in revenue was primarily due to increases in our Co-BrokeTM and Media advertisement products in our realtor.com® business. These increases were partially offset by revenue decreases from our Showcase and Featured products (i.e. Featured HomesTM, Featured CommunityTM, and Featured CMATM). In addition, there were revenue decreases in the Moving.comTM and rentals businesses. Revenue for our Software and Services products increased $2.1 million, or 9%, to $27.2 million for the six months ended June 30, 2014, compared to $25.0 million for the six months ended June 30, 2013. The increase in revenue was led by growth in our Top Producer® and TigerLead® product offerings. Costs and Operating Expenses Cost of Revenue. Cost of revenue increased $2.2 million, or 10%, to $24.8 million for the six months ended June 30, 2014, compared to $22.7 million for the six months ended June 30, 2013. The increase was primarily due to a $0.8 million increase in lead acquisition costs related to the growth in our TigerLead® business. In addition, there was a $0.4 million increase in personnel-related costs, a $0.4 million increase in depreciation expense, a $0.3 million increase in consulting costs and $0.3 million in other cost increases. Sales and Marketing. Sales and marketing expenses increased $10.8 million, or 24%, to $55.4 million for the six months ended June 30, 2014, compared to $44.6 million for the six months ended June 30, 2013, primarily due to the increased investment in our marketing department and the national media campaign around our realtor.com® brand. This increase was mainly due to an increase in brand and consumer marketing expenses of $8.3 million, increased personnel-related costs of $1.6 million, which includes increased sales commissions of $1.0 million associated with the increase in revenue, and an increase in traffic acquisition costs of $1.0 million. We expect to continue to incur higher marketing costs through the remainder of 2014 as compared to 2013 as we continue to invest in our marketing campaigns to attract consumers to the realtor.com® brand. Product and Web Site Development. Product and web site development expenses increased $2.0 million, or 11%, to $21.5 million for the six months ended June 30, 2014, compared to $19.4 million for the six months ended June 30, 2013. This increase was mainly due to increased stock-based compensation costs of $1.5 million, of which $0.9 million was associated with the acceleration of vesting for outstanding stock options and restricted stock awards due to the departure of one of our executive employees. In addition, there was a $1.0 million increase in amortization costs associated with capitalized development costs, a $0.3 million increase in consulting and personnel-related costs, and $0.3 million in other cost increases. 27 -------------------------------------------------------------------------------- Table of Contents These increases were partially offset by additional capitalized development costs of $1.1 million during the six months ended June 30, 2014, related to building and deploying new functionality on our websites and in several product offerings, including our mobile platforms. General and Administrative. General and administrative expenses increased $0.8 million, or 3%, to $24.3 million for the six months ended June 30, 2014, compared to $23.5 million for the six months ended June 30, 2013. The increase was primarily due to an increase in personnel-related costs of $0.6 million and other cost increases of $0.4 million. These increases were partially offset by a $0.2 million decrease in legal costs primarily due to the recovery of legal costs previously incurred as a result of a favorable arbitration ruling during the quarter. Amortization of Intangible Assets. Amortization of intangible assets increased $0.4 million to $2.5 million for the six months ended June 30, 2014, compared to $2.1 million for the six months ended June 30, 2013. This increase was due to the amortization of intangible assets that were newly acquired in the second and fourth quarters of 2013. Stock-based Compensation and Charges. The following chart summarizes the stock-based compensation and charges that have been included in the following captions for each of the periods presented (in thousands): Six Months Ended June 30, 2014 2013 Cost of revenue $ 223 $ 187 Sales and marketing 1,376 1,098 Product and web site development 2,815 1,327 General and administrative 2,294 2,887 Total stock-based compensation and charges $ 6,708 $ 5,499 Stock-based compensation and charges increased $1.2 million for the six months ended June 30, 2014, compared to the six months ended June 30, 2013. The increase was primarily attributable to $0.9 million associated with the acceleration of vesting for outstanding stock options and restricted stock awards due to the departure of one of our executive employees, as well as grants of stock options and restricted stock units to key employees, partially offset by decreases in stock-based compensation related to grants of restricted stock units to senior members of newly acquired businesses pursuant to employment agreements that were fully vested as of September 30, 2013. Interest Expense, Net Interest expense, net increased to $3.2 million for the six months ended June 30, 2014, compared to the six months ended June 30, 2013, primarily due to the issuance of the Notes in August 2013. Earnings of Unconsolidated Joint Venture Earnings of unconsolidated joint venture, which represent our proportionate share of the earnings from our unconsolidated joint venture, increased $0.7 million to $1.7 million for the six months ended June 30, 2014, compared to $1.1 million for the six months ended June 30, 2013. The increase was primarily due to increased revenue growth partially offset by incremental operating costs. Other Expense, Net Other expense, net remained relatively constant for the six months ended June 30, 2014 and 2013. Income Taxes As a result of our historical net operating losses, we have generally not recorded a provision for income taxes. However, we recorded a deferred tax liability related to certain indefinite-lived intangible assets as the amortization is recognized for tax purposes but not for book purposes. For the six months ended June 30, 2014 and 2013, income tax expense was computed at the estimated annual effective rate based on the total estimated annual tax provision and included state income taxes and a deferred tax provision related to amortization of certain indefinite-lived intangible assets. 28 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities of $5.8 million for the six months ended June 30, 2014, was attributable to a net loss of $11.5 million plus non-cash expenses including depreciation, amortization of intangible assets, amortization of debt discount and issuance costs, provision for doubtful accounts, stock-based compensation and charges, earnings of unconsolidated joint venture and other non-cash items aggregating to $16.0 million, a $0.8 million cash distribution representing a return on our investment in an unconsolidated joint venture, and a $0.4 million change in operating assets and liabilities. Net cash provided by operating activities of $10.3 million for the six months ended June 30, 2013, was attributable to net income of $0.4 million, plus noncash expenses including depreciation, amortization of intangible assets, provision for doubtful accounts, stock-based compensation and charges, earnings of unconsolidated joint venture and other non-cash items aggregating to $11.7 million and a $0.6 million cash distribution representing a return on our investment in an unconsolidated joint venture, partially offset by a $2.4 million change in operating assets and liabilities. Net cash used in investing activities of $9.5 million for the six months ended June 30, 2014, was attributable to capital expenditures. Net cash used in investing activities of $8.1 million for the six months ended June 30, 2013, was primarily attributable to capital expenditures of $6.4 million, and acquisitions, net of cash acquired of $2.3 million, partially offset by a cash distribution representing a return of our investment in an unconsolidated joint venture of $0.6 million. Net cash provided by financing activities of $2.4 million for the six months ended June 30, 2014, was attributable to proceeds from the exercise of stock options of $4.1 million, partially offset by tax withholdings related to net share settlements of equity awards of $1.7 million. Net cash provided by financing activities of $2.7 million for the six months ended June 30, 2013, was primarily attributable to proceeds from the exercise of stock options of $4.3 million, partially offset by repurchases of our common stock of $1.0 million, and tax withholdings related to net share settlements of equity awards of $0.6 million. We have generated positive operating cash flows in each of the last three fiscal years. Our material financial commitments consist of those under our operating lease agreements, our operating agreement with the NAR and various web services and content agreements. In March 2013, our Board of Directors authorized a stock repurchase program (the "Program"). The Program authorizes, in one or more transactions taking place during a two-year period commencing May 2, 2013, the repurchase of our outstanding common stock utilizing surplus cash in an amount of up to $20 million. Under the Program, we are authorized to repurchase shares of our common stock in the open market or in privately negotiated transactions. The timing and amount of any repurchase transaction under the Program are dependent upon market conditions, corporate considerations, and regulatory requirements. Shares repurchased under the Program will be retired to constitute authorized but unissued shares of our common stock. As of June 30, 2014, we have repurchased 84,054 shares of our outstanding common stock in the open market for $1.0 million since the inception of the Program. There were no shares repurchased during the six months ended June 30, 2014. In August 2013, we issued the Notes with a principal amount of $100.0 million. Interest is payable in cash in arrears at a fixed rate of 2.75% on March 1 and September 1 of each year, beginning on March 1, 2014. The Notes mature on September 1, 2018 unless repurchased or converted in accordance with their terms prior to such date. We cannot redeem the Notes prior to maturity. Additionally, in connection with the issuance of the Notes, we purchased 1,798,561 shares of our outstanding common stock in privately negotiated transactions for an aggregate purchase price of $25.0 million. We believe that our existing cash and any cash generated from operations will be sufficient to fund our working capital requirements, capital expenditures and other obligations for the foreseeable future. 29 -------------------------------------------------------------------------------- Table of Contents |