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YELP INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q (the "Quarterly Report"). Forward Looking Information This Quarterly Report contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "look," "may," "might," "plan," "project," "seek," "should," "strategy," "target," "will," "would" and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Company Overview Yelp connects people with great local businesses. Our users have contributed a total of approximately 66.6 million cumulative reviews of almost every type of local business, from restaurants, boutiques and salons to dentists, mechanics, plumbers and more. These reviews are written by people using Yelp to share their everyday local business experiences, giving voice to consumers and bringing "word of mouth" online. The information these reviews provide is valuable for consumers and businesses alike. Approximately 139.4 million unique visitors used our website on a monthly average basis during the quarter ended September 30, 2014 according to Google Analytics, a product that provides digital marketing intelligence. Approximately 73.4 million mobile unique visitors used our mobile website and our mobile application on a monthly average basis during the quarter ended September 30, 2014. Businesses of all sizes use our platform to engage with consumers at the critical moment when they are deciding where to spend their money. Our business revolves around three key constituencies: the communities of contributors who write reviews, the consumers who read them and the local businesses that they describe. Our success is primarily the result of significant investment in our communities, employees, content, brand and technology. We expect to invest in features aimed at both attracting more, and increasing the usage of, users and businesses as we look to leverage our brand and benefit from accelerating network effect dynamics in our existing markets. In addition, we expect to invest further in product development to expand our platform by innovating and introducing new products to our website and mobile applications. For example, during the nine months ended September 30, 2014, we launched Yelp Reservations, a tool that allows businesses in the restaurant and nightlife categories to take online reservations, launched automated mobile review translations and added the ability for consumers to message business owners directly through Yelp. We also plan to continue investing in additional domestic and international markets. As of September 30, 2014, we are active in 61 Yelp markets in the United States and 66 Yelp markets internationally. Our domestic expansion plans include growth in our existing markets as well as expansion into new markets, many of which are smaller than our current markets, as we look to expand our breadth of coverage. Internationally, as we are in the early stages of establishing our footprint, we are targeting a mix of both large and small markets. For the nine months ended September 30, 2014, revenue generated internationally accounted for three percent of our total revenue. While our core local advertising business in the United States has a significant and growing base of revenue, we have invested, and will continue to invest, in initiatives to enhance our monetization opportunities. In particular, we plan to continue to grow and develop advertising and e-commerce products and partner arrangements that provide incremental value to our advertisers and business partners. In 2013, we introduced the Yelp Platform, which allows consumers to transact directly on Yelp through partnerships with third parties. Our current offerings include the ability to complete food delivery transactions, book spa appointments, book hotel rooms and reserve wine tastings. Our overall strategy is to invest for long-term growth. During the remainder of 2014, we expect to continue to invest heavily in our sales and marketing efforts to grow domestically and internationally, and to continue the integration of SeatMe, Inc., the web- and app-based reservation solution for restaurant and nightlife establishments that we acquired in 2013 ("SeatMe"). As of September 30, 2014, we had 2,639 employees, which represents an increase of 46% compared to September 30, 2013. 18 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe that the assumptions and estimates associated with revenue recognition, website and internal-use software development costs, business combinations, income taxes and stock-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2013. Recent Accounting Pronouncements Not Yet Effective In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the consideration expected to be received in exchange for those goods or services. The updated standard will replace most existing GAAP revenue recognition guidance when it becomes effective, and permits the use of either the retrospective or cumulative effect transition method. Early adoption of this accounting standard is not permitted. ASU 2014-09 will become effective for us in the first quarter of the year ending December 31, 2017. We have not yet selected a transition method and are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40)." The new guidance addresses management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. Management's evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We do not expect to early adopt this guidance and do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements. Key Metrics We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions. º Reviews. Number of reviews represents the cumulative number of reviews submitted to Yelp since inception, as of the period end, including reviews that are not recommended or that have been removed from our platform. In addition to the text of the review, each review includes a rating of one to five stars. We include reviews that are not recommended and that have been removed because all of them are either currently accessible on our platform or were accessible at some point in time, providing information that may be useful for users to evaluate businesses and individual reviewers. Because our automated recommendation software continually reassesses which reviews to recommend based on new information, the "recommended" or "not recommended" status of reviews may change over time. Reviews that are not recommended or that have been removed do not factor into a business's overall star rating. By clicking a link on a reviewed business's page on our website, users can access the reviews that are not recommended for the business, as well as the star rating and other information about reviews that we removed for violation of our terms of service. As of September 30, 2014, approximately 62.0 million reviews were available on business profile pages, including approximately 15.3 million reviews that were not recommended, after accounting for 4.6 million reviews that had been removed from our platform, either by us for violation of our terms of service or by the users who contributed them. 19 -------------------------------------------------------------------------------- Table of Contents The following table presents the number of cumulative reviews as of the dates presented: As of September 30, 2014 2013 (in thousands) Reviews 66,592 47,322 º Unique Visitors. Unique visitors represent the average number of monthly unique visitors over a given three-month period. We define monthly unique visitors as the total number of unique visitors who have visited our website at least once in a given month, and we average the number of monthly unique visitors in each month of a given three-month period to calculate average monthly unique visitors. We calculate unique visitors as the number of "users" measured by Google Analytics, based on the use of unique cookie identifiers. Unique visitors do not include users who access our platform solely through our mobile app. Because the number of unique visitors is based on users with unique cookies, an individual who accesses our website from multiple devices with different cookies may be counted as multiple unique visitors, and multiple individuals who access our website from a shared device with a single cookie may be counted as a single unique visitor. The following table presents the average monthly number of unique visitors during the periods presented: Three Months Ended September 30, 2014 2013 (in thousands) Unique Visitors 139,418 117,447 º Mobile Unique Visitors. We define mobile unique visitors for a given three-month period to be the sum of (i) the average number of monthly unique visitors who have visited our mobile website during that period (measured as described above) and (ii) unique mobile devices using our mobile app on a monthly average basis over that period. Under this method of calculation, an individual who accesses both our mobile website and our mobile app, or accesses either our mobile website or our mobile app from multiple mobile devices, will be counted as multiple mobile unique visitors. Multiple individuals who access either our mobile website or mobile app from a shared device will be counted as a single mobile unique visitor. The following table presents the average monthly number of mobile unique visitors during the periods presented: Three Months Ended September 30, 2014 2013 (in thousands) Mobile Unique Visitors 73,440 50,455 º Claimed Local Business Locations. The number of claimed local business locations represents the cumulative number of business locations that have been claimed on Yelp worldwide since 2008, as of a given date. We define a claimed local business location as each business address for which a business representative visits our website and claims the free business listing page for the business located at that address. The following table presents the number of cumulative claimed local business locations as of the dates presented: As of September 30, 2014 2013 (in thousands) Claimed Local Business Locations 1,886 1,344 º Active Local Business Accounts. The number of active local business accounts represents the number of local business accounts from which we recognized revenue in a given three-month period. We treat business accounts that have the same payment and/or user information as a single business account. 20 -------------------------------------------------------------------------------- Table of Contents The following table presents the number of active local business accounts from which we recognized revenue in the three-month periods presented: Three Months Ended September 30, 2014 2013 (in thousands) Active Local Business Accounts 86 57 º Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), adjusted to exclude: provision (benefit) for income taxes; other (income) expense, net; depreciation and amortization; stock-based compensation; and restructuring and integration costs. We believe that adjusted EBITDA provides useful information to investors in understanding and evaluating our operating results in the same manner as our management and our board of directors. This non-GAAP information is not necessarily comparable to non-GAAP information of other companies. Non- GAAP information should not be viewed as a substitute for, or superior to, net income (loss) prepared in accordance with GAAP as a measure of our profitability or liquidity. Users of this financial information should consider the types of events and transactions for which adjustments have been made. The following is a reconciliation of adjusted EBITDA to net income (loss) below for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (inthousands) Reconciliation of Adjusted EBITDA: Net income (loss) $ 3,637 $ (2,322 ) $ 3,745 $ (7,999 ) (Benefit) provision for income taxes 1,107 510 (495 ) 786 Other (income) expense, net (200 ) 31 (183 ) 298 Depreciation and amortization 4,604 2,816 12,299 7,931 Stock-based compensation(1) 10,918 7,015 30,457 17,333 Restructuring and integration - - - 675 Adjusted EBITDA $ 20,066 $ 8,050 $ 45,823 $ 19,024 (1) The stock-based compensation amounts of $7.0 million and $17.3 million for the three and nine months ended September 30, 2013, respectively, exclude approximately zero and $0.6 million of stock-based compensation, respectively, related to the acquisition of Qype GmbH and its subsidiaries (collectively, "Qype") already included in restructuring and integration costs. Adjusted EBITDA To provide investors with additional information regarding our financial results, we have disclosed in the table above and elsewhere in this Quarterly Report adjusted EBITDA, a non-GAAP financial measure. We have provided above a reconciliation above of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure. We have included adjusted EBITDA in this Quarterly Report because it is a key measure used by our management and our board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. 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 as reported under GAAP. Some of these limitations are: º although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; º adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; º adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation; º adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; º adjusted EBITDA does not take into account any restructuring and integration costs associated with our acquisition of Qype; and º other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure. 21 -------------------------------------------------------------------------------- Table of Contents Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. Results of Operations The following table sets forth our results of operations for the periods presented as a percentage of net revenue for those periods (certain items may not foot due to rounding). The period-to-period comparison of financial results is not necessarily indicative of the results of operations to be anticipated for the full year 2014 or any future period. Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (as percentage of net revenue) Consolidated Statements of Operations Data: Net revenue by product: Local advertising 83 % 84 % 84 % 83 % Brand advertising 9 11 10 12 Other services 8 5 6 5 Total net revenue 100 % 100 % 100 % 100 % Costs and expenses: Cost of revenue (exclusive of depreciation and amortization shown separately below) 6 % 7 % 6 % 7 % Sales and marketing 53 56 55 57 Product development 17 18 17 16 General and administrative 15 17 16 18 Depreciation and amortization 4 5 5 5 Restructuring and integration - - - - Total costs and expenses 96 103 99 104 Income (loss) from operations 4 (3 ) 1 (4 ) Other income (expense), net - - - - Income (loss) before income taxes 5 (3 ) 1 (4 ) Benefit (provision) for income taxes (1 ) (1 ) - - Net income (loss) 4 % (4 )% 1 % (5 )% Three and Nine Months Ended September 30, 2014 and 2013 Net Revenue We generate revenue from local advertising, brand advertising and other services, which includes Yelp Deals, Gift Certificates and partner arrangements. The following provides a description of our revenue by product: Local Advertising. We generate revenue from local advertising programs, including enhanced profile pages and performance and impression-based advertising in search results and elsewhere on our website and our mobile app. Brand Advertising. We generate revenue from brand advertising through the sale of advertising solutions for national brands that want to improve their local presence in the form of display advertisements and brand sponsorships. Our national advertisers include leading brands in the automobile, financial services, logistics, consumer goods and health and fitness industries. 22 -------------------------------------------------------------------------------- Table of Contents Other Services. We generate other revenue through partner arrangements, the sale of Yelp Deals and Gift Certificates, and monetization of remnant advertising inventory through third-party ad networks. Our revenue-sharing partner arrangements provide consumers with the ability to complete food delivery transactions and make online reservations through third parties directly on Yelp. Our fixed-fee partner arrangements include allowing third-party data providers to update business listing information on behalf of businesses. Yelp Deals allow merchants to promote themselves and offer discounted goods and services on a real-time basis to consumers directly on our website and mobile app. We earn a fee on Yelp Deals for acting as an agent in these transactions, which we record on a net basis and include in revenue upon a consumer's purchase of the deal. Gift Certificates allow merchants to sell full-priced gift certificates directly to customers through their business profile page. We earn a fee based on the amount of the Gift Certificate sold, which we record on a net basis and include in revenue upon a consumer's purchase of the Gift Certificate. Three Months Ended Nine Months Ended September 30, 2013 to September 30, 2013 to 2014 2013 2014 % 2014 2013 2014 % (dollars in thousands) Change (dollars in thousands) ChangeNet revenue by product: Local advertising $ 85,132 $ 51,167 66 % $ 226,012 $ 134,931 68 % Brand advertising 9,318 6,910 35 25,828 18,716 38 Other services 8,005 3,104 158 15,809 8,690 82 Total net revenue $ 102,455 $ 61,181 67 % $ 267,649 $ 162,337 65 % Net revenue by product: Local advertising 83 % 84 % 84 % 83 % Brand advertising 9 11 10 12 Other services 8 5 6 5 Total net revenue 100 % 100 % 100 % 100 % Total net revenue increased $41.3 million, or 67%, in the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Our local advertising revenue increased $34.0 million, or 66%, primarily due to a significant increase in the number of customers purchasing local advertising plans as we expanded our sales force to reach more local businesses. Our brand advertising revenue increased $2.4 million, or 35%, primarily due to an increase in the average spend per brand advertiser driven by increased advertising impressions per brand advertiser. In addition, our other services revenue increased by $4.9 million, or 158%, primarily due to an increase in revenue from partnership arrangements. Total net revenue increased $105.3 million, or 65%, in the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013. Our local advertising revenue increased $91.1 million, or 68%, primarily due to a significant increase in the number of customers purchasing local advertising plans as we expanded our sales force to reach more local businesses. Our brand advertising revenue increased $7.1 million, or 38%, primarily due to an increase in the average spend per brand advertiser driven by increased advertising impressions per brand advertiser. In addition, our other services revenue increased by $7.1 million, or 82%, primarily due to an increase in revenue from partnership arrangements. Cost of Revenue Our cost of revenue consists primarily of credit card processing fees, web hosting expenses, Internet services costs and salaries, benefits and stock-based compensation for our infrastructure teams related to operating our website, as well as creative design for brand advertising, video production expenses and allocated facilities costs. We currently expect cost of revenue to increase on an absolute basis and remain relatively flat as a percentage of revenue in the near term as we continue to expand data center capacity and headcount associated with supporting our website and mobile app. Three Months Ended Nine Months Ended September 30, 2013 to September 30, 2013 to 2014 2013 2014 % 2014 2013 2014 % (dollars in thousands) Change (dollars in thousands) Change Cost of revenue $ 6,174 $ 4,277 44 % $ 17,096 $ 11,635 47 % Percentage of net revenue 6 % 7 % 6 % 7 % In the three months ended September 30, 2014, cost of revenue increased $1.9 million, or 44%, compared to the three months ended September 30, 2013. This increase was primarily attributable to an increase of $0.8 million in outside hosting and Internet service fees, which are necessary to support the increase in visitors to our website and transactions completed on our website. We also added personnel to support our website infrastructure resulting in an increase of $0.2 million. In addition, setup costs, including video production, for active local business pages increased by $0.1 million due to increased demand by local businesses for video on their business pages, and expenses related to creative design for brand advertising customers increased $0.3 million. Merchant fees related to credit card transactions also increased $0.5 million. 23 -------------------------------------------------------------------------------- Table of Contents In the nine months ended September 30, 2014, cost of revenue increased $5.5 million, or 47%, compared to the nine months ended September 30, 2013. This increase was primarily attributable to an increase of $2.5 million in outside hosting and Internet service fees, which are necessary to support the increase in visitors to our website and transactions completed on our website. We also added personnel to support our website infrastructure resulting in an increase of $0.3 million. In addition, setup costs, including video production for active local business pages, increased by $0.4 million due to increased demand by local businesses for video on their business pages and expenses related to creative design for brand advertising customers increased $0.6 million. Merchant fees related to credit card transactions also increased $1.7 million. Sales and Marketing Our sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, travel expense and incentive compensation for our sales and marketing employees. In addition, sales and marketing expenses include business acquisition marketing, community management, branding and advertising costs, as well as allocated facilities and other supporting overhead costs. Our Community Managers are responsible for growing and fostering local communities, and coordinating events to raise awareness of our brand. We expect our community management costs to increase as we continue to expand to new markets and within existing markets. We expect our sales and marketing expenses to increase both domestically and internationally as we expand our domestic and international footprint, increase the number of active local business accounts and continue to build our brand. The substantial majority of these expenses will be related to hiring Community Managers and sales employees. We expect sales and marketing expenses to increase and to be our largest expense for the foreseeable future. Three Months Ended Nine Months Ended September 30, 2013 to September 30, 2013 to 2014 2013 2014 % 2014 2013 2014 % (dollars in thousands) Change (dollars in thousands) Change Sales and marketing $ 54,551 $ 34,126 60 % $ 147,470 $ 93,123 58 % Percentage of net revenue 53 % 56 % 55 % 57 % In the three months ended September 30, 2014, sales and marketing expenses increased $20.4 million, or 60%, compared to the three months ended September 30, 2013. The increase was primarily attributable to an increase in headcount and related expenses of $11.7 million, including an increase in stock-based compensation of $1.2 million, as we expanded our sales organization to take advantage of the market opportunity created by increased recognition of the value of our platform and increased use of our free online business accounts. As a result of our increase in net revenue, our commission expenses also increased $0.9 million. In addition, we experienced an increase in facilities and related allocations of $3.2 million and domestic and international marketing and advertising costs of $4.6 million. In the nine months ended September 30, 2014, sales and marketing expenses increased $54.3 million, or 58%, compared to the nine months ended September 30, 2013. The increase was primarily attributable to an increase in headcount and related expenses of $32.3 million, including an increase in stock-based compensation of $4.1 million, as we expanded our sales organization to take advantage of the market opportunity created by increased recognition of the value of our platform and increased use of our free online business accounts. As a result of our increase in net revenue, our commission expenses also increased $5.2 million. In addition, we experienced an increase in facilities and related allocations of $9.7 million and domestic and international marketing and advertising costs of $7.1 million. Product Development Our product development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product management and information technology personnel. In addition, product development expenses include outside services and consulting, allocated facilities and other supporting overhead costs. We believe that continued investment in features, software development tools and code modification is important to attaining our strategic objectives, and, as a result, we expect product development expenses to increase for the foreseeable future. 24 -------------------------------------------------------------------------------- Table of Contents Three Months Ended Nine Months Ended September 30, 2013 to September 30, 2013 to 2014 2013 2014 % 2014 2013 2014 % (dollars in thousands) Change (dollars in thousands) Change Product development $ 17,397 $ 11,208 55 % $ 46,105 $ 26,441 74 % Percentage of net revenue 17 % 18 % 17 % 16 % In the three months ended September 30, 2014, product development expenses increased $6.2 million, or 55%, compared to the three months ended September 30, 2013. The increase was primarily attributable to an increase in headcount and related expenses of $5.8 million, including an increase in stock-based compensation of $2.1 million, and an increase in facilities and related expenses of $0.5 million. The increase was offset by a decrease of $0.1 million in the use of outside consultants as work was transitioned internally. In the nine months ended September 30, 2014, product development expenses increased $19.7 million, or 74%, compared to the nine months ended September 30, 2013. The increase was primarily attributable to an increase in headcount and related expenses of $18.7 million, including an increase in stock-based compensation of $6.7 million, and an increase in facilities and related expenses of $1.7 million. The increase was offset by a decrease of $0.7 million in the use of outside consultants as work was transitioned internally. General and Administrative Our general and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, user operations, legal, human resources and other administrative employees. In addition, general and administrative expenses include outside consulting, legal and accounting services, and facilities and other supporting overhead costs. We expect general and administrative expenses to increase for the foreseeable future as we continue to expand our business and incur ongoing expenses associated with being a publicly traded company. Three Months Ended Nine Months Ended September 30, 2013 to September 30, 2013 to 2014 2013 2014 % 2014 2013 2014 % (dollars in thousands) Change (dollars in thousands) Change General and administrative $ 15,185 $ 10,535 44 % $ 41,612 $ 29,447 41 % Percentage of net revenue 15 % 17 % 16 % 18 % In the three months ended September 30, 2014, general and administrative expenses increased $4.7 million, or 44%, compared to the three months ended September 30, 2013. The increase was primarily attributable to an increase in headcount and related expenses of $2.1 million, including an increase in stock-based compensation of $0.4 million. Additionally, we invested in our systems and support for the growth of the business through the use of outside consultants, which contributed to the increase by $1.4 million, and had an increase in bad debt expense of $0.8 million. We also experienced an increase in facilities and related expenses of $0.3 million. In the nine months ended September 30, 2014, general and administrative expenses increased $12.2 million, or 41%, compared to the nine months ended September 30, 2013. The increase was primarily attributable to an increase in headcount and related expenses of $7.2 million, including an increase in stock-based compensation of $2.0 million. Additionally, we invested in our systems and support for the growth of the business through the use of outside consultants, which contributed to the increase by $1.9 million, and had an increase in bad debt expense of $1.8 million. We also experienced an increase in facilities and related expenses of $1.3 million. Depreciation and Amortization Depreciation and amortization expenses primarily consist of depreciation on computer equipment, software, leasehold improvements, capitalized website and internal-use software development costs and amortization of purchased intangibles. We expect depreciation and amortization expenses to increase for the foreseeable future as we continue to expand our technology infrastructure. Three Months Ended Nine Months Ended September 30, 2013 to September 30, 2013 to 2014 2013 2014 % 2014 2013 2014 % (dollars in thousands) Change (dollars in thousands) Change Depreciation and amortization $ 4,604 $ 2,816 63 % $ 12,299 $ 7,931 55 % Percentage of net revenue 4 % 5 % 5 % 5 % In the three months ended September 30, 2014, depreciation and amortization expense increased $1.8 million, or 63%, compared to the three months ended September 30, 2013. The increase was primarily the result of our investments in expanding our technology infrastructure and capital assets to support our increase in headcount across the organization. Depreciation and amortization related to our fixed assets and capitalized website and software development costs increased $1.2 million and $0.6 million, respectively. 25 -------------------------------------------------------------------------------- Table of Contents In the nine months ended September 30, 2014, depreciation and amortization expense increased $4.4 million, or 55%, compared to the nine months ended September 30, 2013. The increase was primarily the result of our investments in expanding our technology infrastructure and capital assets to support our increase in headcount across the organization. Depreciation and amortization related to our fixed assets and capitalized website and internal-use software development costs increased $2.8 million and $1.6 million, respectively. Restructuring and Integration Three Months Ended Nine Months Ended September 30, 2013 to September 30, 2013 to 2014 2013 2014 % 2014 2013 2014 % (dollars in thousands) Change (dollars in thousands) Change Restructuring and Integration Costs $ - $ - N/A $ - $ 675 N/A Percentage of net revenue - % - % - % - % In the quarter ended March 31, 2013, we announced our plan to further reduce the size of the Qype workforce. These actions were made in order to reduce our cost structure, enhance operating efficiencies and strengthen our business to achieve long-term profitable growth. We incurred restructuring and integration costs of $0.7 million in the three months ended March 31, 2013 as a result of this plan. The restructuring was completed during 2013. Other Income (expense), Net Other income (expense), net consists primarily of the interest income earned on our marketable securities, foreign exchange gains and losses and gains and losses on the disposal of assets. Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (in thousands) (in thousands) Interest income $ 222 $ 11 $ 458 $ 41 Transaction gain (loss) on foreign exchange 98 50 (79 ) (173 ) Other non-operating income (loss), net (120 ) (92 ) (196 ) (166 ) Other income (expense), net $ 200 $ (31 ) $ 183 $ (298 ) In the three months ended September 30, 2014, other income (expense), net increased $0.2 million compared to the three months ended September 30, 2013. The increase was largely driven by an increase in interest income related to marketable securities. Additionally, there was an increase in foreign exchange gains due to favorable foreign currency exchange rates during the three months ended September 30, 2014 compared to September 30, 2013. In the nine months ended September 30, 2014, other income (expense), net increased $0.5 million compared to the nine months ended September 30, 2013. The increase was largely attributable to an increase in interest income related to marketable securities. Additionally, there was a decrease in foreign exchange losses due to more favorable foreign currency exchange rates during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. Benefit (Provision) for Income Taxes Benefit (provision) for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions, deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and the realization of net operating loss carryforwards. 26 -------------------------------------------------------------------------------- Table of Contents Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (in thousands) (in thousands) Benefit (Provision) for taxes $ (1,107 ) $ (510 ) $ 495 $ (786 ) Percentage of net revenue (1 )% (1 )% - % - % Liquidity and Capital Resources As of September 30, 2014, we had cash and cash equivalents of $290.6 million. Cash and cash equivalents consist of cash and money market funds. Our cash held internationally as of September 30, 2014 was $6.3 million. We did not have any outstanding bank loans or credit facilities in place as of September 30, 2014. Our investment portfolio is comprised of highly-rated securities, and our investment policy limits the amount of credit exposure to any one issuer. The policy generally requires securities to be investment grade (rated 'A' or higher by bond rating firms) with the objective of minimizing the potential risk of principal loss. To date, we have been able to finance our operations and our acquisitions of Qype and SeatMe through proceeds from private and public financings, including our initial public offering ("IPO") in March 2012, our follow-on offering in October 2013, cash generated from operations and, to a lesser extent, cash provided by the exercise of employee stock options and purchases under our 2012 Employee Stock Purchase Plan ("ESPP"). Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under "Risk Factors" in this Quarterly Report. We believe that our existing cash and cash equivalents, together with any cash generated from operations, will be sufficient to meet our working capital requirements and anticipated purchases of property and equipment for at least the next 12 months. However, this estimate is based on a number of assumptions that may prove to be wrong and we could exhaust our available cash and cash equivalents earlier than presently anticipated. We may require or otherwise seek additional funds in the next 12 months to respond to business challenges, including the need to develop new features and products or enhance existing services, improve our operating infrastructure or acquire complementary businesses and technologies, and, accordingly, we may need to engage in equity or debt financings to secure additional funds. Amounts deposited with third party financial institutions exceed the Federal Deposit Insurance Corporation and Securities Investor Protection Corporation insurance limits, as applicable. These cash and cash equivalents could be impacted if the underlying financial institutions fail or are subjected to other adverse conditions in the financial markets. To date we have experienced no loss or lack of access to our cash and cash equivalents; however, we can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets. |