$DMD DEMAND MEDIA INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q and our 2010 Annual Report on Form 10-K.
This Quarterly Report on Form 10-Q contains forward-looking statements. All
statements other than statements of historical facts contained in this Quarterly
Report on Form 10-Q, including statements regarding our future results of
operations and financial position, business strategy and plans and our
objectives for future operations, are forward-looking statements. The words
"believe," "may," "will," "estimate," "continue," "anticipate," "intend,"
"expect" and similar expressions are intended to identify forward-looking
statements. We have based these forward-looking statements largely on our
estimates of our financial results and our current expectations and projections
about future events and financial trends that we believe may affect our
financial condition, results of operations, business strategy, short term and
long-term business operations and objectives, and financial needs. These
forward-looking statements are subject to a number of risks, uncertainties and
assumptions, including those described in the section entitled "Risk Factors" in
Part II Item 1A of this Quarterly Report on Form 10-Q. Moreover, we operate in a
very competitive and rapidly changing environment. New risks emerge from time to
time. It is not possible for our management to predict all risks, nor can we
assess the impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements we may make. In light of
these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this Quarterly Report on Form 10-Q may not occur and
actual results could differ materially and adversely from those anticipated or
implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future
events. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee that the future
results, levels of activity, performance or events and circumstances reflected
in the forward-looking statements will be achieved or occur. Moreover, neither
we nor any other person assumes responsibility for the accuracy and completeness
of the forward-looking statements. We undertake no obligation to update publicly
any forward-looking statements for any reason after the date of this Quarterly
Report on Form 10-Q to conform these statements to actual results or to changes
in our expectations.
You should read this Quarterly Report on Form 10-Q and the documents that we
reference in this Quarterly Report on Form 10-Q and have filed with the
Securities and Exchange Commission (the "SEC") with the understanding that our
actual future results, levels of activity, performance and events and
circumstances may be materially different from what we expect.
As used herein, "Demand Media (DMD)," "the Company," "our," "we," or "us" and similar terms include Demand Media, Inc. and its subsidiaries, unless the context indicates otherwise.
"Demand Media" and other trademarks of ours appearing in this report are our
property. This report contains additional trade names and trademarks of other
companies. We do not intend our use or display of other companies' trade names
or trademarks to imply an endorsement or sponsorship of us by such companies, or
any relationship with any of these companies.
Overview
We are a leader in a new Internet-based model for the professional creation of
high-quality, commercially valuable, long-lived content at scale. Our business
is comprised of two distinct and complementary service offerings: Content &
Media and Registrar. Our Content & Media offering is engaged in creating media
content, primarily consisting of text articles and videos, and delivering it
along with our social media and monetization tools to our owned and operated
websites and to our network of customer websites. Our Content & Media service
offering also includes a number of websites primarily containing advertising
listings, which we refer to as our undeveloped websites. Our Registrar is the
world's largest wholesale registrar of Internet domain names and the world's
second largest registrar overall, based on the number of names under management,
and provides domain name registration and related value-added services.
Our principal operations and decision-making functions are located in the United
States. We report our financial results as one operating segment, with two
distinct service offerings. Our operating results are regularly reviewed by our
chief operating decision maker on a consolidated basis, principally to make
decisions about how we allocate our resources and to measure our consolidated
operating performance. Together, our service offerings provide us with
proprietary data that enable
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commercially valuable, long-lived content production at scale combined with
broad distribution and targeted monetization capabilities. We currently generate
substantially all of our Content & Media revenue through the sale of
advertising, and to a lesser extent through subscriptions to our social media
applications and select content and service offerings. Substantially all of our
Registrar revenue is derived from domain name registration and related
value-added service subscriptions. Our chief operating decision maker regularly
reviews revenue for each of our Content & Media and Registrar service offerings
in order to gain more depth and understanding of the key business metrics
driving our business. Accordingly, we report Content & Media and Registrar
revenue separately.
In January 2011, we completed our initial public offering and received proceeds,
net of underwriters discounts but before deducting offering expenses, of
$81.8 million from the issuance of 5.2 million shares of common stock. As a
result of the initial public offering, all shares of our convertible preferred
stock converted into 61.7 million shares of common stock and warrants to
purchase common stock or convertible preferred stock net exercised into
0.5 million shares of common stock.
For the six months ended June 30, 2010 and 2011, we reported revenue of $114.0
million and $159.0 million, respectively. For the six months ended June 30,
2010 and 2011, our Content & Media offering accounted for 58% and 64% of our
total revenue, respectively, and our Registrar service accounted for 42% and 36%
of our total revenue, respectively.
Key Business Metrics
We regularly review a number of business metrics, including the following key
metrics, to evaluate our business, measure the performance of our business
model, identify trends impacting our business, determine resource allocations,
formulate financial projections and make strategic business decisions. Measures
which we believe are the primary indicators of our performance are as follows:
Content & Media Metrics
" page views: We define page views as the total number of web pages viewed
across our owned and operated websites and/or our network of customer websites,
including web pages viewed by consumers on our customers' websites using our
social media tools. Page views are primarily tracked through internal systems,
such as our Omniture web analytics tool, contain estimates for our customer
websites using our social media tools and may use data compiled from certain
customer websites. We periodically review and refine our methodology for
monitoring, gathering, and counting page views in an effort to improve the
accuracy of our measure.
"RPM: We define RPM as Content & Media revenue per one thousand page views.
Registrar Metrics
"domain: We define a domain as an individual domain name paid for by a third-party customer where the domain name is managed through our Registrar service offering. This metric does not include any of the company's owned and operated websites.
" average revenue per domain: We calculate average revenue per domain by
dividing Registrar revenues for a period by the average number of domains
registered in that period. The average number of domains is the simple average
of the number of domains at the beginning and end of the period. Average revenue
per domain for partial year periods is annualized.
The following table sets forth additional performance highlights of key business metrics for the periods presented:
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Three months ended June 30, Six months ended June 30,
2010 2011 % Change 2010 2011 % Change
Content & Media Metrics (1)
Owned & operated
Page views (in millions)
(2) 1,994 2,573 29 % 3,948 5,155 31 %
RPM (3) $ 12.89 $ 15.19 18 % $ 11.81 $ 15.45 31 %
Network of customer
websites
Page views (in millions) 3,153 3,688 17 % 5,799 7,454 29 %
RPM $ 3.30 $ 2.91 (12 )% $ 3.39 $ 2.96 (13 )%
RPM ex-TAC $ 2.32 $ 2.15 (7 )% $ 2.40 $ 2.15 (10 )%
Registrar Metrics:
End of Period # of Domains
(in millions) 10.1 11.9 18 % 10.1 11.9 18 %
Average Revenue per Domain $ 10.00 $ 10.17 2 % $ 9.96 $ 10.03 1 %
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(1) For a discussion of these period to period changes in the number of
page views, RPM, end of period domains and average revenue per domain and how
they impacted our financial results, see "Results of Operations" below.
(2) During the quarter ended June 30, 2011, owned and operated page views were
positively impacted by a product change associated with certain page
features, including the presentation of picture slide shows, which did not
impact advertising impressions. Excluding the impact of such change, during
the quarter and six months ended June 30, 2011, page views would have
increased approximately 21% and 28%, respectively, compared to the
corresponding prior-year periods.
(3) During the quarter ended June 30, 2011, owned and operated RPMs were
negatively impacted by a product change associated with certain page
features, including the presentation of picture slide shows, which did not
impact advertising impressions. Excluding the impact of such change, during
the quarter and six months ended June 30, 2011, RPMs would have increased
approximately 26% and 33%, respectively, compared to the corresponding
prior-year periods.
Opportunities, Challenges and Risks
To date, we have derived the majority of our revenue through the sale of
advertising in connection with our Content & Media service offering and through
domain name registration subscriptions in our Registrar service offering. Our
advertising revenue is primarily generated by advertising networks, which
include both performance based Internet advertising, such as cost-per-click
where an advertiser pays only when a user clicks on its advertisement, and
display Internet advertising where an advertiser pays when the advertising is
displayed. For the six months ended June 30, 2011, the majority of our
advertising revenue was generated by our relationship with Google. We deliver
online advertisements provided by Google on our owned and operated websites as
well as on certain of our customer websites where we share a portion of the
advertising revenue. For the six months ended June 30, 2010 and 2011,
approximately 27% and 35%, respectively, of our total consolidated revenue was
derived from our advertising arrangements with Google. Google maintains the
direct relationships with the advertisers and provides us with cost-per-click
and display advertising services.
Our historical growth in Content & Media revenue has principally come from
growth in RPMs and page views due to both the increased volume of commercially
valuable content published on our owned and operated websites as well as
increased numbers of visitors to our existing content. To a lesser extent,
Content & Media revenue growth has resulted from customers from publishing our
content on our network of customer websites, including YouTube and from
utilizing our social media tools on these sites. We believe that, in addition to
opportunities to grow our revenue and our page views by creating and publishing
more content, there is a substantial long term revenue opportunity with respect
to selling online advertisements through our internal sales force, particularly
on our owned and operated websites. During fiscal year 2010 and the six months
ended June 30, 2011, we expanded our internal advertising sales force, including
hiring a chief revenue officer in 2010, to exploit this opportunity.
As we continue to create more content, we may face challenges in finding
effective distribution outlets. To address this challenge, we deploy our content
and related advertising capabilities to certain of our customers, such as the
online versions of the San Francisco Chronicle and the Houston Chronicle. Under
the terms of our customer arrangements, we are entitled to a share of the
underlying revenues generated by the advertisements displayed with our content
on these websites. We believe that expanding this business model across our
network of customer websites presents a potentially large long-term revenue
opportunity. As is the case with our owned and operated websites, under these
arrangements we incur substantially all of our content costs up front. However,
because under the revenue sharing arrangements we are sharing the resulting
revenue, there is
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a risk that these relationships over the long term will not generate sufficient
revenue to meet our financial objectives, including recovering our content
creation costs. In addition, the growing presence of other companies that
produce online content, including AOL's Seed.com and Yahoo's Associated Content,
may create increased competition for available distribution opportunities, which
would limit our ability to reach a wider audience of consumers.
From February 2011 through June 2011, Google deployed at least three significant
changes to its global English language search engine algorithms. The Company has
experienced a substantial reduction in the total number of search referrals to
its owned and operated websites primarily as a result of these Google algorithm
changes. While the changes impacted traffic to many of the Company's Content &
Media websites, the vast majority of the negative effect on the Company's
revenues is attributable to the impact on eHow.com. We estimate that the effect
of the changes on eHow.com alone will be a decrease of approximately 6% in the
consolidated fiscal year 2011 revenue that the Company would have otherwise
achieved in the absence of the changes. Given that at least one of the
significant search engine algorithm changes occurred in mid-June, we anticipate
that the majority of the adverse impact on eHow.com full-year revenue will be
concentrated in the second half of 2011. To date, these recent search engine
changes have not had a material adverse impact on the carrying value or intended
use of our long-lived assets, including media content. However, there can be no
assurance that these changes or any future changes that may be made by search
engines to their algorithms and search methodologies might not adversely affect
our business or could adversely impact the carrying value, estimated useful life
or intended use of our long-lived assets. The Company will continue to monitor
these changes as well as any future changes and emerging trends in search engine
algorithms and methodologies, including the resulting impact that these changes
may have on the economic performance of the Company's long-lived assets and in
its assessment as to whether significant changes in circumstances might provide
an indication of potential impairment of its long-lived assets including its
media content and goodwill arising from acquisitions.
Our content studio identifies and creates online text articles and videos
through a community of freelance creative professionals and is core to our
business strategy and long term growth initiatives. Historically, we have made
substantial investments in our platform to support our expanding community of
freelance creative professionals and the growth of our content production and
distribution, and expect to continue to make such investments. We also
experience competition from large Internet companies such as AOL and Yahoo!.
Although these competitive offerings are not directly comparable to all aspects
of our content offering, increased competition for freelance creative
professionals could increase our costs with our creative professionals and
adversely impact our ability to attract and retain content creators.
Registrar revenue growth historically has been driven by growth in the number of
domains and growth in average revenue per domain due to an increase in the
amounts we charge for registration and related value-added services. From
January1, 2009 to March 31, 2010, our Registrar experienced stable growth in
both domains and average revenue per domain. Growth in average revenue per
domain was due in part to an increase in our registration pricing in response to
price increases from registries which control the rights of large top level
domains, or TLDs (such as VeriSign which is the registry for the .com TLD).
Beginning in the first quarter of 2010 and extending through the first quarter
of 2011, we typically experienced modest declines in average revenue per domain
as a result of adding certain customers with large volumes of domains, from
which we have recognized revenue on a portion of these names while deferring
revenue recognition on the remainder, and as a result of lower pricing. In the
second quarter of 2011 we experienced an modest increase in average revenue per
domain in part as a result of the provision of a greater amount of value-added
services per domain.
Our direct costs to register domain names on behalf of our customers are almost
exclusively controlled by registries and by the Internet Corporation for
Assigned Names and Numbers, or ICANN. ICANN is a private sector, not for profit
corporation formed to oversee a number of Internet related tasks, including
domain registrations for which it collects fees, previously performed directly
on behalf of the U.S. government. In addition, the market for wholesale
registrar services is both price sensitive and competitive, particularly for
large volume customers, such as large web hosting companies and owners of large
portfolios of domain names. We have a relatively limited ability to increase the
pricing of domain name registrations without negatively impacting our ability to
maintain or grow our customer base. Moreover, we anticipate that any price
increases mandated by registries could adversely increase our service costs as a
percentage of our total revenue. ICANN has approved a framework for the
significant expansion of the number of generic TLDs, or gTLDs. We believe that
such expansion, if it occurs, will result in an increase in the number of
domains registered on our platform and related revenues as early as the fourth
quarter of 2012.
Our service costs, the largest component of our operating expenses, can vary
from period to period based upon the mix of the underlying Content & Media and
Registrar services revenue we generate. We believe that our service costs as a
percentage of total revenue will decrease as our percentage of revenues derived
from our Content & Media service offering increases. In the near term and
consistent with historical trends, we expect that the year-over-year growth in
our Content & Media revenue will exceed the growth in our Registrar revenue. As
a result, we expect that our service costs as a percentage of our total revenue
will decrease when compared to our historical results. However, as we expand our
Content & Media offering,
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increase the creation of premium content, take further actions to enhance the
consistency of the consumer experience on our largest properties including
taking editorial control of user generated content, adding a curation layer to
incorporate consumer feedback in our content processes and expand our investment
in editorial innovation, create internationally focused content as well as enter
into more revenue-sharing arrangements with our customers and content creators,
our service costs as a percentage of our total revenue when compared to our
historical results may not decrease at a similar rate, if at all.
For the six months ended June 30, 2011, more than 90% of our revenue has been
derived from websites and customers located in the United States. While our
content is primarily targeted towards English-speaking users in the United
States today, we believe that there is a substantial opportunity in the long
term for us to create content targeted to users outside of the United States and
thereby increase our revenue generated from countries outside of the United
States. In the near term, we plan to expand our operations internationally to
exploit this opportunity, most recently through the acquisition of a Latin
American language content creation company on July 1, 2011. In July 2011, we
also launched a beta version of eHow Español - a Spanish language site which
will target both the United States Hispanic market as well as the larger online
Spanish-speaking market worldwide. As we expand our business internationally and
incur additional expenses associated with this growth initiative, we anticipate
certain operating expenses to outpace our international revenue growth in the
near term, and modestly impact our operating expenses as a percentage of our
revenue throughout the year ending December 31, 2011.
Basis of Presentation
Revenue
Our revenue is derived from our Content & Media and Registrar service offerings.
Content & Media Revenue
We currently generate substantially all of our Content & Media revenue through
the sale of advertising, and to a lesser extent through subscriptions to our
social media applications and select content and service offerings. Articles and
videos, each of which we refer to as a content unit, generate revenue both
directly and indirectly. Direct revenue is that directly attributable to a
content unit, such as advertisements, including sponsored advertising links,
display advertisements and in-text advertisements, on the same webpage on which
the content is displayed. Indirect revenue is also derived primarily by our
content library, but is not directly attributable to a specific content unit.
Indirect revenue includes advertising revenue generated on our owned and
operated websites' home pages (e.g., home page of eHow), on topic category
webpages (e.g., home and garden category page), on user generated article
pages that feature content that was not acquired through our proprietary content
acquisition process, and subscription revenue. Our revenue generating
advertising arrangements, for both our owned and operated websites and our
network of customer websites, include cost-per-click performance-based
advertising; display advertisements where revenue is dependent upon the number
of page views; and lead generating advertisements where revenue is dependent
upon users registering for, or purchasing or demonstrating interest in,
advertisers' products and services. We generate revenue from advertisements
displayed alongside our content offered to consumers across a broad range of
topics and categories on our owned and operated websites and on certain customer
websites. Our advertising revenue also includes revenue derived from
cost-per-click advertising links we place on undeveloped websites owned both by
us, which we acquire and sell on a regular basis, and certain of our customers.
To a lesser extent, we also generate revenue from our subscription-based
offerings, which include our social media applications deployed on our network
of customer websites and subscriptions to premium content or services offered on
certain of our owned and operated websites.
Where we enter into revenue sharing arrangements with our customers, such as for
the online version of the San Francisco Chronicle and for undeveloped customer
websites, and when we are considered the primary obligor, we report the
underlying revenue on a gross basis in our consolidated statements of
operations, and record these revenue-sharing payments to our customers as
traffic acquisition costs, or TAC, which are included in service costs. In
circumstances where the customer acts as the primary obligor, such as YouTube
which sells advertisements alongside our video content, we recognize revenue on
a net basis.
Registrar Revenue
Our Registrar revenue is principally comprised of registration fees charged to
resellers and consumers in connection with new, renewed and transferred domain
name registrations. In addition, our Registrar also generates revenue from the
sale of other value-added services that are designed to help our customers
easily build, enhance and protect their domains, including security services,
e-mail accounts and web-hosting. Finally, we generate revenue from fees related
to auction services we provide to facilitate the selling of third-party owned
domains. Our Registrar revenue varies based upon the number of domains
registered, the rates we charge our customers and our ability to sell
value-added services. We market our Registrar wholesale services under our eNom
brand, and our retail registration services under the eNomCentral brand, among
others.
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Operating Expenses
Operating expenses consist of service costs, sales and marketing, product
development, general and administrative, and amortization of intangible assets.
Included in our operating expenses are stock based compensation and depreciation
expenses associated with our capital expenditures.
Service Costs
Service costs consist of: fees paid to registries and ICANN associated with
domain registrations; advertising revenue recognized by us and shared with
others as a result of our revenue-sharing arrangements, such as TAC and content
creator revenue-sharing arrangements; Internet connection and co-location
charges and other platform operating expenses associated with our owned and
operated websites and our network of customer websites, including depreciation
of the systems and hardware used to build and operate our Content & Media
platform and Registrar; and personnel costs related to in-house editorial,
customer service and information technology. Our service costs are dependent on
a number of factors, including the number of page views generated across our
platform and the volume of domain registrations and value-added services
supported by our Registrar. In the near term and consistent with historical
trends, we expect that the growth in our Content & Media revenue will exceed the
growth in our Registrar revenue. As a result, we expect that our service costs
as a percentage of our total revenue will decrease when compared to our
historical results.
Sales and Marketing
Sales and marketing expenses consist primarily of sales and marketing personnel
costs, sales support, public relations advertising and promotional expenditures.
Fluctuations in our sales and marketing expenses are generally the result of our
efforts to support the growth in our Content & Media service, including expenses
required to support the expansion of our direct advertising sales force. We
currently anticipate that our sales and marketing expenses will continue to
increase and will increase in the near term as a percent of revenue as we
continue to build our sales and marketing organizations to support the growth of
our business.
Product Development
Product development expenses consist primarily of expenses incurred in our
software engineering, product development and web design activities and related
personnel costs. Fluctuations in our product development expenses are generally
the result of hiring personnel to support and develop our platform, including
the costs to further develop our content algorithms, our owned and operated
websites and future product and service offerings of our Registrar. We currently
anticipate that our product development expenses will increase as we continue to
hire more product development personnel and further develop our products and
offerings to support the growth of our business, but may decrease as a
percentage of revenue.
General and Administrative
General and administrative expenses consist primarily of personnel costs from
our executive, legal, finance, human resources and information technology
organizations and facilities related expenditures, as well as third party
professional fees, insurance and bad debt expenses. Professional fees are
largely comprised of outside legal, audit and information technology consulting.
During the six months ended June 30, 2010 and 2011, our allowance for doubtful
accounts and bad debt expense were not significant and we expect that this trend
will continue in the near term. However, as we grow our revenue from direct
advertising sales, which tend to have longer collection cycles, we expect that
our allowance for doubtful accounts will increase, which may lead to increased
bad debt expense. In addition, prior to our initial public offering in January
2011, we operated as a private company. As we continue to expand our business
and incur additional expenses associated with being a publicly traded company,
we anticipate general and administrative expenses will increase and will
increase as a percentage of revenue in the near term. Specifically, we expect
that we will incur additional general and administrative expenses to provide
insurance for our directors and officers and to comply with the SEC's reporting
requirements, exchange listing standards, the Dodd-Frank Wall Street Reform and
Consumer Protection Act and the Sarbanes-Oxley Act of 2002. We anticipate that
these insurance and compliance costs will substantially increase certain of our
general and administrative expenses compared to 2010 although its percentage of
revenue will depend upon a variety of factors as listed above.
Amortization of Intangibles
We capitalize certain costs allocated to the purchase price of certain identifiable intangible assets acquired in connection with business combinations, to acquire content that our models show embody probable economic benefit, and to
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acquire, including through initial registration, undeveloped websites. We
amortize these costs on a straight-line basis over the related expected useful
lives of these assets, which have a weighted average useful life of
approximately 5.2 years on a combined basis as of June 30, 2011. We estimate our
capitalized content to have a weighted average useful life of 5.1 years as of
June 30, 2011. The Company determines the appropriate useful life of intangible
assets by performing an analysis of expected cash flows based on its historical
experience of intangible assets of similar quality and value. We expect
amortization expense to increase modestly in the near term, although its
percentage of revenues will depend upon a variety of factors, such as the mix of
our investments in content as compared to our identifiable intangible assets
acquired in business combinations.
Stock-based Compensation
Included in our operating expenses are expenses associated with stock based
compensation, which are allocated and included in service costs, sales and
marketing, product development and general and administrative expenses.
Stock-based compensation expense is largely comprised of costs associated with
stock options and restricted stock units granted to employees, restricted stock
issued to employees and expenses relating to our Employee Stock Purchase Plan.
We record the fair value of these equity-based awards and expense their cost
ratably over related vesting periods, which is generally four years. In
addition, stock-based compensation expense includes the cost of warrants to
purchase common and preferred stock issued to certain non-employees. In
addition, during the first quarter of 2011, we recognized approximately
$5.0 million in additional stock-based compensation related to awards granted to
certain executive officers in prior years to acquire approximately 2.6 million
of our shares that vested in that quarter upon meeting an average closing price
of our stock for a stipulated period of time subsequent to our initial public
offering.
As of June 30, 2011, we had approximately $79.3 million of unrecognized employee
related stock-based compensation, net of estimated forfeitures, that we expect
to recognize over a weighted average period of approximately 3.7 years. In
addition we also had approximately $3.2 million of unrecognized compensation
expense related to our Employee Stock Purchase Plan that we expect to recognize
on a straight-line basis through the second quarter of 2013. Stock-based
compensation expense is expected to increase materially as a result of our
existing unrecognized stock-based compensation and as we issue additional
stock-based awards to continue to attract and retain employees and non-employee
directors.
Interest Expense
Interest expense principally consists of interest on outstanding debt and
certain prepaid underwriting costs associated with our $100 million revolving
credit facility with a syndicate of commercial banks. As of June 30, 2011, we
had no indebtedness outstanding under this facility.
Interest Income
Interest income consists of interest earned on cash balances and short-term investments. We typically invest our available cash balances in money market funds, short-term United States Treasury obligations and commercial paper.
Other Income (Expense), Net
Other income (expense), net consists primarily of the change in the fair value
of our preferred stock warrant liability, transaction gains and losses on
foreign currency-denominated assets and liabilities and changes in the value of
certain long term investments. We expect our transaction gains and losses will
vary depending upon movements in underlying currency exchange rates, and could
become more significant when we expand internationally. Our preferred stock
warrants were net exercised for common stock upon our initial public offering in
January 2011 and thus we no longer record changes in the value of the warrant
subsequent to that date.
Provision for Income Taxes
Since our inception, we have been subject to income taxes principally in the
United States, and certain other countries where we have legal presence,
including the United Kingdom, the Netherlands, Canada, Sweden and beginning in
2011, Ireland and Argentina. We anticipate that as we expand our operations
outside the United States, we will become subject to taxation based on the
foreign statutory rates and our effective tax rate could fluctuate accordingly.
Income taxes are computed using the asset and liability method, under which
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when
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necessary to reduce deferred tax assets to the amount expected to be realized.
We currently believe that based on the available information, it is more likely
than not that our deferred tax assets will not be realized, and accordingly we
have taken a full valuation allowance against all of our United States deferred
tax assets. As of December 31, 2010, we had approximately $62 million of federal
and $10 million of state operating loss carry-forwards available to offset
future taxable income which expire in varying amounts beginning in 2020 for
federal and 2013 for state purposes if unused. Federal and state laws impose
substantial restrictions on the utilization of net operating loss and tax credit
carry-forwards in the event of an "ownership change," as defined in Section 382
of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code.
Currently, we do not expect the utilization of our net operating loss and tax
credit carry-forwards in the near term to be materially affected as no
significant limitations are expected to be placed on these carry-forwards as a
result of our previous ownership changes. If an ownership change is deemed to
have occurred as a result of our initial public offering, potential near term
utilization of these assets could be reduced.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States. The preparation of these
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues, 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 our revenue
recognition, accounts receivable and allowance for doubtful accounts,
capitalization and useful lives associated with our intangible assets, including
our internal software and website development and content costs, income taxes,
stock-based compensation and the recoverability of our goodwill and long-lived
assets have the greatest potential impact on our consolidated financial
statements. Therefore, we consider these to be our critical accounting policies
and estimates and have discussed those in our 2010 Annual Report on Form 10-K.
We adopted ASU 2009-13 "Multiple-Element Arrangements" and ASU 2009-14 "Certain
Revenue Arrangements That Include Software Elements" using the prospective
method on January 1, 2011. See Note 2 to our condensed consolidated financial
statements included herein for further information. The adoption of these
accounting standards did not have a material effect on our financial position or
result of operations. There have been no other material changes to our critical
accounting policies and estimates since the date of our 2010 Annual Report on
Form 10-K.
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Results of Operations
The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
Three months ended Six months ended
June 30, June 30,
2010 2011 2010 2011
(In thousands) (In thousands)
Revenue $ 60,355 $ 79,455 $ 114,002 $ 158,978
Operating expenses(1)(2):
Service costs (exclusive of amortization
of intangible assets) 31,571 37,869 61,735 75,523
Sales and marketing 5,645 9,286 10,396 18,869
Product development 6,482 9,642 12,514 18,893
General and administrative 9,462 13,787 17,440 30,811
Amortization of intangible assets 8,238 9,750 16,173 19,953
Total operating expenses 61,398 80,334 118,258 164,049
Loss from operations (1,043 ) (879 ) (4,256 ) (5,071 )
Other income (expense)
Interest income 3 5 11 47
Interest expense (168 ) (163 ) (349 ) (325 )
Other income (expense), net (109 ) (2 ) (128 ) (259 )
Total other expense (274 ) (160 ) (466 ) (537 )
Loss before income taxes (1,317 ) (1,039 ) (4,722 ) (5,608 )
Income tax expense (610 ) (1,332 ) (1,327 ) (2,345 )
Net loss (1,927 ) (2,371 ) (6,049 ) (7,953 )
Cumulative preferred stock dividends (8,243 ) - (16,206 ) (2,477 )
Net loss attributable to common
shareholders $ (10,170 ) $ (2,371 ) $ (22,255 ) $ (10,430 )
(1) Depreciation expense included in the above line items:
Service costs $ 3,483 $ 4,149 $ 6,826 $ 8,193
Sales and marketing 41 115 82 187
Product development 318 438 659 759
General and administrative 516 878 921 1,450 Total depreciation expense $ 4,358 $ 5,580 $ 8,488 $ 10,589
(2) Stock-based compensation included in the above line items:
Service costs $ 221 $ 347 $ 428 $ 584
Sales and marketing 504 1,136 968 2,036
Product development 437 1,130 775 2,246
General and administrative 1,367 2,807 2,600 9,481 Total stock-based compensation $ 2,529 $ 5,420 $ 4,771 $ 14,347
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As a percentage of revenue:
Three Months ended Six months ended
June 30, June 30,
2010 2011 2010 2011
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses: - - - -
Service costs (exclusive of amortization
of intangible assets) 52.3 % 47.7 % 54.2 % 47.5 %
Sales and marketing 9.4 % 11.7 % 9.1 % 11.9 %
Product development 10.7 % 12.1 % 11.0 % 11.9 %
General and administrative 15.7 % 17.4 % 15.3 % 19.4 %
Amortization of intangible assets 13.6 % 12.3 % 14.2 % 12.6 %
Total operating expenses 101.7 % 101.1 % 103.7 % 103.2 %
Loss from operations (1.7 )% (1.1 )% (3.7 )% (3.2 )%
Other income (expense) - - - -
Interest income - % - % - % - %
Interest expense (0.3 )% (0.2 )% (0.3 )% (0.2 )%
Other income (expense), net (0.2 )% - % (0.1 )% (0.2 )%
Total other expense (0.5 )% (0.2 )% (0.4 )% (0.3 )%
Loss before income taxes (2.2 )% (1.3 )% (4.1 )% (3.5 )%
Income tax expense (1.0 )% (1.7 )% (1.2 )% (1.5 )%
Net Loss (3.2 )% (3.0 )% (5.3 )% (5.0 )%
Revenue
Revenue by service line were as follows:
Three months ended June 30, Six months ended June 30,
2010 2011 % Change 2010 2011 % Change
(In thousands) (In thousands)
Content & Media:
Owned and operated websites $ 25,703 $ 39,095 52 % $ 46,636 $ 79,619 71 %
Network of customer websites 10,390 10,727 3 % 19,655 22,055 12 %
Total Content & Media 36,093 49,822 38 % 66,291 101,674 53 %
Registrar 24,262 29,633 22 % 47,711 57,304 20 %
Total revenue $ 60,355 $ 79,455 32 % $ 114,002 $ 158,978 39 %
Content & Media Revenue from Owned and Operated Websites
Content & Media revenue from our owned and operated websites increased by $13.4
million, or 52%, to $39.1 million for the three months ended June 30, 2011, as
compared to $25.7 million for the same period in 2010. The increase was largely
due to increased page views and RPMs. Page views on our owned and operated
websites increased by 29%, from 1,994 million page views in the three months
ended June 30, 2010 to 2,573 million page views in the three months ended
June 30, 2011. RPMs on our owned and operated websites increased by 18%, from
$12.89 in the three months ended June 30, 2010 to $15.19 in the three months
ended June 30, 2011.
During the quarter ended June 30, 2011, owned and operated page views were
positively impacted by a product change associated with certain page features,
including the presentation of picture slide shows, which did not impact
advertising impressions. Excluding the impact of such change, during the quarter
ended June 30, 2011, page views would have increased approximately 21% and RPMs
would have increased by 26% respectively, compared to the corresponding
prior-year
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period. The remaining increase in underlying page views was due primarily to
increased publishing of our platform content on our owned and operated websites.
The underlying increase in RPMs was primarily attributable to the overall
increase in page views on eHow, which has higher RPMs than the weighted average
of our other owned and operated websites, as well as an increase in RPMs on the
monetization of our undeveloped websites. In addition RPM growth was driven by
increased display advertising revenue sold directly through our sales force
during the three months ended June 30, 2011 as compared to the same period in
2010. On average, our direct display advertising sales generate higher RPMs than
display advertising that we deliver from our advertising networks, such as
Google.
Content & Media revenue from our owned and operated websites increased by $33.0
million, or 71%, to $79.6 million for the six months ended June 30, 2011, as
compared to $46.6 million for the same period in 2010. The increase was largely
due to increased page views and RPMs. Page views on our owned and operated
websites increased by 31%, from 3,948 million page views in the six months ended
June 30, 2010 to 5,155 million page views in the six months ended June 30, 2011.
RPMs on our owned and operated websites increased by 31%, from $11.81 in the six
months ended June 30, 2010 to $15.45 in the six months ended June 30, 2011.
During the six months ended June 30, 2011, owned and operated page views were
positively impacted by a product change associated with certain page features,
including the presentation of picture slide shows, which did not impact
advertising impressions. Excluding the impact of such change, during the six
months ended June 30, 2011, page views would have increased approximately 28%
and RPMs would have increased by 33% respectively, compared to the corresponding
prior-year period. The remaining increase in underlying page views was due
primarily to increased publishing of our platform content on our owned and
operated websites. The underlying increase in RPMs was primarily attributable to
the overall increase in page views on eHow, which has higher RPMs than the
weighted average of our other owned and operated websites, and an increase in
RPMs on the monetization of our undeveloped websites. In addition RPM growth was
driven by increased display advertising revenue sold directly through our sales
force during the six months ended June 30, 2011 as compared to the same period
in 2010. On average, our direct display advertising sales generate higher
RPMs than display advertising that we deliver from our advertising networks,
such as Google.
Content & Media Revenue from Network of Customer Websites
Content & Media revenue from our network of customer websites for the three
months ended June 30, 2011 increased by $0.3 million, or 3%, to $10.7 million,
as compared to $10.4 million in the same period in 2010. The increase was
largely due to growth in page views, offset by a decline in RPMs. Page views on
our network of customer websites increased by 535 million, or 17%, from 3,153
million page views in the three months ended June 30, 2010, to 3,688 million
pages viewed in the three months ended June 30, 2011. The increase in page views
was due primarily to growth in publishers utilizing our social media
applications and the expansion of our arrangements with customers in which we
deploy our content to their websites. RPMs decreased 12% from $3.30 in the three
months ended June 30, 2010 to $2.91 in the three months ended June 30, 2011. The
decrease in RPMs was largely due to a higher mix of page views from our social
media customers, including traffic from CoveritLive which was acquired in
February 2011, which typically generate lower RPMs.
Content & Media revenue from our network of customer websites for the six months
ended June 30, 2011 increased by $2.4 million, or 12%, to $22.1 million, as
compared to $19.7 million in the same period in 2010. The increase was largely
due to growth in page views, offset by a decline in RPMs. Page views on our
network of customer websites increased by 1,655 million, or 29%, from 5,799
million page views in the six months ended June 30, 2010, to 7,454 million
pages viewed in the six months ended June 30, 2011. The increase in page views
was due primarily to growth in publishers utilizing our social media
applications and the expansion of our arrangements with customers in which we
deploy our content to their websites. RPMs decreased 13% from $3.39 in the six
months ended June 30, 2010 to $2.96 in the six months ended June 30, 2011. The
decrease in RPMs was largely due to a higher mix of page views from our social
media customers, including traffic from CoveritLive which was acquired in
February 2011, which typically generate lower RPMs, as well as overall declines
in advertising yields from our advertising networks relating to our customers'
undeveloped websites.
Registrar Revenue
Registrar revenue for the three months ended June 30, 2011 increased $5.4
million, or 22%, to $29.6 million compared to $24.3 million for the same period
in 2010. The increase was largely due to an increase in domains, due in large
part to an increased number of new domain registrations and domain renewal
registrations in 2011 compared to 2010 as well as a smaller increase in our
average revenue per domain. The number of domain registrations increased 1.8
million, or 18%, to 11.9 million during the three months ended June 30, 2011 as
compared to 10.1 million in the same period in 2010. Our average revenue per
domain increased slightly by $0.17, or 2%, to $10.17 during the three months
ended June 30, 2011 from $10.00 in the same period in 2010 due in part to an
increase in value added services per domain as compared to 2010.
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Registrar revenue for the six months ended June 30, 2011 increased $9.6 million,
or 20%, to $57.3 million compared to $47.7 million for the same period in 2010.
The increase was largely due to an increase in domains, due in large part to an
increased number of new domain registrations and domain renewal registrations in
2011 compared to 2010, as well as an overall increase in our average revenue per
domain. The number of domain registrations increased 1.8 million, or 18%, to
11.9 million during the six months ended June 30, 2011 as compared to 10.1
million in the same period in 2010. Our average revenue per domain increased
slightly by $0.07, or 1%, to $10.03 during the six months ended June 30, 2011
from $9.96 in the same period in 2010 due in part to an increase in value added
services per domain as compared to 2010.
Cost and Expenses
Operating costs and expenses were as follows:
Three months ended June 30, Six months ended June 30,
2010 2011 % Change 2010 2011 % Change
(In thousands) (In thousands)
Service costs (exclusive of
amortization of intangible assets) $ 31,571 $ 37,869 20 % $ 61,735 $ 75,523 22 %
Sales and marketing 5,645 9,286 64 % 10,396 18,869 82 %
Product development 6,482 9,642 49 % 12,514 18,893 51 %
General and administrative 9,462 13,787 46 % 17,440 30,811 77 %
Amortization of intangible assets 8,238 9,750 18 % 16,173 19,953 23 %
Service Costs
Service costs for the three months ended June 30, 2011 increased by
approximately $6.3 million, or 20%, to $37.9 million compared to $31.6 million
in the same period in 2010. The increase was largely due to a $3.2 million
increase in domain registry fees associated with our growth in domain
registrations and related revenue over the same period, a $0.9 million increase
in costs related to certain initiatives associated with the expansion and
enhancement of quality of the content published on our platform, a $0.7 million
increase in personnel and related costs due to increased head count, and a $0.5
million increase in related information technology expense and a $0.7 million
increase in depreciation expense of technology assets purchased in the prior and
current periods required to manage the growth of our Internet traffic, data
centers, advertising transactions, domain registrations and new products and
services. As a percentage of revenues, service costs (exclusive of amortization
of intangible assets) decreased 465 basis points to 47.7% for the three months
ended June 30, 2011 from 52.3% during the same period in 2010 primarily due to
Content & Media revenues representing a higher percentage of total revenues
during the three months ended June 30, 2011 as compared to the same period in
2010.
Service costs for the six months ended June 30, 2011 increased by approximately
$13.8 million, or 22%, to $75.5 million compared to $61.7 million in the same
period in 2010. The increase was largely due to a $6.1 million increase in
domain registry fees associated with our growth in domain registrations and
related revenue over the same period, a $1.9 million increase in costs related
to certain initiatives associated with the expansion and enhancement of quality
of the content published on our platform, a $1.5 million increase in other cost
of service expense related to the growth in our content and media service
offerings including content channels, a $0.9 million increase in related
information technology expense and a $1.4 million increase in depreciation
expense of technology assets purchased in the prior and current periods required
to manage the growth of our Internet traffic, data centers, advertising
transactions, domain registrations and new products and services, a $0.3 million
increase in TAC due to an increase in undeveloped website customers and related
revenue over the same period and a $1.1 million increase in personnel and
related costs due to increased head count. As a percentage of revenues, service
costs (exclusive of amortization of intangible assets) decreased 665 basis
points to 47.5% for the six months ended June 30, 2011 from 54.2% during the
same period in 2010 primarily due to Content & Media revenues representing a
higher percentage of total revenues during the six months ended June 30, 2011 as
compared to the same period in 2010.
Sales and Marketing
Sales and marketing expenses increased 64%, or $3.6 million, to $9.3 million for
the three months ended June 30, 2011 from $5.6 million for the same period in
2010. The increase was largely due to growth in our business including a $1.8
million increase in personnel related costs connected to growing our direct
advertising sales team and an increase in sales
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commissions, $0.4 million related to expansion of marketing and promotional
activities, $0.6 million related to increase in stock-based compensation expense
due to additional equity awards granted to our employees and $0.2 million in
employee severance costs attributable to corporate realignment activity. As a
percentage of revenue, sales and marketing expense increased 233 basis points to
11.7% during the three months ended June 30, 2011 from 9.4% during the same
period in 2010.
Sales and marketing expenses increased 82%, or $8.5 million, to $18.9 million
for the six months ended June 30, 2011 from $10.4 million for the same period in
2010. The increase was largely due to growth in our business including a $4.1
million increase in personnel related costs connected to growing our direct
advertising sales team and an increase in sales commissions, $1.8 million
related to expansion of marketing and promotional activities, $1.1 million
related to increase in stock-based compensation expense due to additional equity
awards granted to our employees and $0.2 million in employee severance costs
attributable to corporate realignment activity. As a percentage of revenue,
sales and marketing expense increased 275 basis points to 11.9% during the six
months ended June 30, 2011 from 9.1% during the same period in 2010.
Product Development
Product development expenses increased by $3.2 million, or 49%, to $9.6 million
during the three months ended June 30, 2011 compared to $6.5 million in the same
period in 2010. The increase was largely due to approximately $1.8 million
increase in personnel and related costs, net of internal costs capitalized as
internal software development, to further develop our platform, our owned and
operated websites, and to support and grow our Registrar product and service
offerings. The remaining increase was largely attributable to increased
stock-based compensation expense of $0.7 million due to additional equity awards
granted to our employees and a $0.1 million increase in depreciation expense. As
a percentage of revenue, product development expenses increased 140 basis points
to 12.1% during the three months ended June 30, 2011 compared to 10.7% during
the same period in 2010.
Product development expenses increased by $6.4 million, or 51%, to $18.9 million
during the six months ended June 30, 2011 compared to $12.5 million in the same
period in 2010. The increase was largely due to approximately $4.0 million
increase in personnel and related costs, net of internal costs capitalized as
internal software development, to further develop our platform, our owned and
operated websites, and to support and grow our Registrar product and service
offerings. The remaining increase was largely attributable to increased
stock-based compensation expense of $1.5 million due to additional equity awards
granted to our employees, which included a one-time charge of $0.5 million
related to certain stock options vesting on certain conditions related to our
IPO during the six months ended June 30, 2011, and a $0.1 million increase in
depreciation expense. As a percentage of revenue, product development expenses
increased 91 basis points to 11.9% during the six months ended June 30, 2011
compared to 11.0% during the same period in 2010
General and Administrative
General and administrative expenses increased by $4.3 million, or 46%, to $13.8
million during the three months ended June 30, 2011 compared to $9.5 million in
the same period in 2010. The increase was primarily due to a $0.9 million
increase in personnel related costs to support the growth of our business, a
$0.4 million increase in professional fees primarily related to our public
company compliance initiatives and business acquisitions, a $1.4 million
increase in stock-based compensation expense, a $0.7 million increase in
facilities and rent related expense for additional office space and an increase
in depreciation expense of $0.4 million to support our growth. As a percentage
of revenue, general and administrative costs increased 167 basis points to 17.4%
during the three months ended June 30, 2011 compared to 15.7% during the same
period in 2010.
General and administrative expenses increased by $13.4 million, or 77%, to $30.8
million during the six months ended June 30, 2011 compared to $17.4 million in
the same period in 2010. The increase was primarily due to a $2.6 million
increase in personnel related costs to support the growth of our business, a
$1.3 million increase in professional fees primarily related to our public
company compliance initiatives and business acquisitions, a $6.9 million
increase in stock-based compensation expense which included a one-time charge of
$4.6 million related to certain stock awards vesting on certain conditions
related to our IPO during the six months ended June 30, 2011, and a $0.9 million
increase in facilities and rent expense for additional office space and an $0.5
million increase in depreciation expense to support our growth. As a percentage
of revenue, general and administrative costs increased 408 basis points to 19.4%
during the six months ended June 30, 2011 compared to 15.3% during the same
period in 2010.
Amortization of Intangibles
Amortization expense for the three months ended June 30, 2011 increased by $1.5
million, or 18%, to $9.8 million compared to $8.2 million in the same period in
2010. The increase was primarily due to a $2.6 million increase in amortization
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of media content due to our increased investment in our content library in the
last twelve months compared to the preceding twelve months. Offsetting this was
a decrease of $1.3 million in the amortization of certain intangible assets from
acquisitions in prior years that are now fully amortized. As a percentage of
revenue, amortization of intangible assets decreased 138 basis points to 12.3%
during the three months ended June 30, 2011 compared to 13.6% during the same
period in 2010 as the result of the increase in revenue and the factors listed
above.
Amortization expense for the six months ended June 30, 2011 increased by $3.8
million, or 23%, to $20.0 million compared to $16.2 million in the same period
in 2010. The increase was primarily due to a $5.7 million increase in
amortization of media content due to our increased investment in our content
library in the last twelve months compared to the preceding twelve months.
Offsetting this was a decrease of $2.0 million in the amortization of certain
intangible assets from acquisitions in prior years that are now fully
amortized. As a percentage of revenue, amortization of intangible assets
decreased 164 basis points to 12.6% during the six months ended June 30, 2011
compared to 14.2% during the same period in 2010 as the result of the increase
in revenue and the factors listed above.
Interest Income
Interest income for the three and six months ended June 30, 2011 increased by less than $0.1 million compared to the same periods in 2010.
Interest Expense
Interest expense for the three and six months ended June 30, 2011 decreased by less than $0.1 million compared to the same periods in 2010.
Other Income (Expense), Net
Other income (expense), net for the three months ended June 30, 2011 changed by
$0.1 million to $0.0 million of expense compared to $(0.1) million in the same
period in 2010. The decrease in other income (expense) net during the three
months ended June 30, 2011 was primarily a result of the change in the value of
our preferred stock warrants which were recorded at fair value with changes in
value recorded in earnings through the closing date of our IPO. These warrants
were converted into common stock on the closing date of our IPO.
Other income (expense), net for the six months ended June 30, 2011 increased by
$0.1 million to $(0.3) million of expense compared to $(0.1) million in the same
period in 2010. The increase in other income (expense) net during the six months
ended June 30, 2011 was primarily a result of the change in the value of our
preferred stock warrants which
were recorded at fair value with changes in value recorded in earnings through
the closing date of our IPO.
Income Tax (Benefit) Provision
During the three months ended June 30, 2011, we recorded an income tax provision
of $1.3 million compared to $0.6 million during the same period in 2010,
representing a $0.7 million or 118% increase. The increase was largely due to an
increase in state and foreign taxes during the period.
During the six months ended June 30, 2011, we recorded an income tax provision
of $2.3 million compared to $1.3 million during the same period in 2010,
representing a $1.0 million or 77% increase. The increase was largely due to an
increase in state and foreign taxes during the period.
Non-GAAP Financial Measures
To provide investors and others with additional information regarding our
financial results, we have disclosed in the table below the following non-GAAP
financial measures: adjusted operating income before depreciation and
amortization expense, or Adjusted OIBDA, and revenue less traffic acquisition
costs, or Revenue ex-TAC. We have provided a reconciliation of our non-GAAP
financial measures to the most directly comparable GAAP financial measures. Our
non-GAAP Adjusted OIBDA financial measure differs from GAAP in that it excludes
certain expenses such as depreciation, amortization, stock-based compensation,
as well as the financial impact of acquisition and realignment costs, and any
gains or losses on certain asset sales or dispositions. Acquisition and
realignment costs include such items, when applicable, as (1) non-cash GAAP
purchase accounting adjustments for certain deferred revenue and costs, (2)
legal, accounting and other professional fees directly attributable to
acquisition activity, and (3) employee severance payments attributable to
acquisition or
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corporate realignment activities. Our non-GAAP Revenue ex-TAC financial measure
differs from GAAP as it reflects our consolidated revenues net of our traffic
acquisition costs. Adjusted OIBDA, or its equivalent, and Revenue ex-TAC are
frequently used by securities analysts, investors and others as a common
financial measure of our operating performance.
These non-GAAP financial measures are the primary measures used by our
management and board of directors to understand and evaluate our financial
performance and operating trends, including period to period comparisons, to
prepare and approve our annual budget and to develop short and long term
operational plans. Additionally, Adjusted OIBDA is the primary measure used by
the compensation committee of our board of directors to establish the target for
and ultimately fund our annual employee bonus pool for virtually all bonus
eligible employees. We also frequently use Adjusted OIBDA in our discussions
with investors, commercial bankers and other users of our financial statements.
Management believes these non-GAAP financial measures reflect our ongoing
business in a manner that allows for meaningful period to period comparisons and
analysis of trends. In particular, the exclusion of certain expenses in
calculating Adjusted OIBDA can provide a useful measure for period to period
comparisons of our business' underlying recurring revenue and operating costs
which is focused more closely on the current costs necessary to utilize
previously acquired long-lived assets. In addition, we believe that it can be
useful to exclude certain non-cash charges because the amount of such expenses
is the result of long-term investment decisions in previous periods rather than
day-to-day operating decisions. For example, due to the long-lived nature of our
media content, revenue generated from our content assets in a given period bears
little relationship to the amount of our investment in content in that same
period. Accordingly, we believe that content acquisition costs represent a
discretionary long-term capital investment decision undertaken by management at
a point in time. This investment decision is clearly distinguishable from other
ongoing business activities, and its discretionary nature and long term impact
differentiate it from specific period transactions, decisions regarding
day-to-day operations, and activities that would have immediate performance
consequences if materially changed, deferred or terminated.
We believe that Revenue ex-TAC is a meaningful measure of operating performance
because it is frequently used for internal managerial purposes and helps
facilitate a more complete period to period understanding of factors and trends
affecting our underlying revenue performance.
Accordingly, we believe that these non-GAAP financial measures provide useful
information to investors and others in understanding and evaluating our
consolidated revenue and operating results in the same manner as our management
and in comparing financial results across accounting periods and to those of our
peer companies.
The following table presents a reconciliation of Revenue ex-TAC and Adjusted OIBDA for each of the periods presented:
Three months ended Six months ended
June 30, June 30,
2010 2011 2010 2011
(In thousands) (In thousands)
Non-GAAP Financial Measures:
Content & Media revenue $ 36,093 $ 49,822 $ 66,291 $ 101,674
Registrar revenue 24,262 29,633 47,711 57,304
Less: traffic acquisition costs (TAC)(1) (3,063 ) (2,813 ) (5,757 ) (6,003 )
Total revenue ex-TAC $ 57,292 $ 76,642 $ 108,245 $ 152,975
Loss from operations $ (1,043 ) $ (879 ) $ (4,256 ) $ (5,071 )
Add (deduct):
Depreciation 4,358 5,580 8,488 10,589
Amortization(2) 8,238 9,750 16,173 19,953
Stock-based compensation(3) 2,529 5,420 4,771 14,347
Acquisition and realignment costs(4) 209 638 425 771
Adjusted OIBDA $ 14,291 $ 20,509 $ 25,601 $ 40,589
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(1) Represents revenue-sharing payments made to our network customers from
advertising revenue generated from such customers' websites.
(2) Represents the amortization expense of our finite lived intangible assets,
including that related to our investment in media content assets, included
in our GAAP results of operations.
(3) Represents the fair value of stock-based awards and certain warrants to
purchase our stock included in our GAAP results of operations including $5.1
million of non-recurring stock-based compensation expense related to awards
granted to certain executive officers in prior years that vested in the
three months ended March 31, 2011 on the fulfillment of certain market and
performance conditions.
(4) Acquisition and realignment costs include non-cash purchase accounting
adjustments, acquisition-related legal and accounting professional fees and
employee severance payments from corporate realignment activities.
The use of non-GAAP financial measures has certain limitations because they do
not reflect all items of income and expense that affect our operations. We
compensate for these limitations by reconciling the non-GAAP financial measures
to the most comparable GAAP financial measures. These non-GAAP financial
measures should be considered in addition to, not as a substitute for, measures
prepared in accordance with GAAP. Further, these non-GAAP measures may differ
from the non-GAAP information used by other companies, including peer companies,
and therefore comparability may be limited. We encourage investors and others to
review our financial information in its entirety and not rely on a single
financial measure.
Liquidity and Capital Resources
As of June 30, 2011, our principal sources of liquidity were our cash and cash
equivalents in the amount of $103.6 million, which primarily are invested in
money market funds, and our $100 million revolving credit facility with a
syndicate of commercial banks. This facility was replaced with a new credit
agreement in August 2011 as detailed below. We completed our initial public
offering on January 31, 2011 and received proceeds, net of underwriting
discounts but before deducting offering expenses, of $81.8 million from the
issuance of 5.2 million shares of common stock.
Historically, we have principally financed our operations from the issuance of
convertible preferred stock, net cash provided by our operating activities and
borrowings under our $100 million revolving credit facility. Our cash flows from
operating activities are significantly affected by our cash-based investments in
operations, including working capital, and corporate infrastructure to support
our ability to generate revenue and conduct operations through cost of services,
product development, sales and marketing and general and administrative
activities. Cash used in investing activities has historically been, and is
expected to be, significantly impacted by our upfront investments in content and
also reflects our ongoing investments in our platform, company infrastructure
and equipment for both service offerings and the net sales and purchases of our
marketable securities. Since our inception through June 30, 2011 we also used
significant cash to make strategic acquisitions to further grow our business,
including our acquisition of CoveritLive in February 2011. Subsequent to June
30, 2011 we completed three acquisitions as detailed in Note 15 - Subsequent
Events to our condensed consolidated financial statements. We may make further
acquisitions in the future.
On May 25, 2007, we entered into a five-year $100 million revolving credit
facility with a syndicate of commercial banks. The agreement contains customary
events of default and affirmative and negative covenants, including financial
maintenance covenants such as a minimum fixed charge ratio and a maximum net
senior funded leverage ratio. As of June 30, 2011, no principal balance was
outstanding under the revolving credit facility, and approximately $93 million
was available for borrowing and we were in compliance with all covenants.
On August 4, 2011, the Company replaced its existing revolving credit facility
by entering into a Credit Agreement (the "Credit Agreement") with a syndicate of
commercial banks. The Credit Agreement provides for a $105 million, five year
revolving loan facility, with the right (subject to certain conditions) to
increase such facility by up to $75 million in the aggregate. The Credit
Agreement contains customary events of default and affirmative and negative
covenants and restrictions, including certain financial maintenance covenants
such as maximum total net leverage and a minimum fixed charge ratio.
In the future, we may utilize commercial financings, lines of credit and term
loans with our syndicate of commercial banks or other bank syndicates for
general corporate purposes, including acquisitions and investing in our content,
platform and technologies.
We expect that the proceeds of our initial public offering, our new $105 million
revolving credit facility and our cash flows from operating activities together
with our cash on hand, will be sufficient to fund our operations for at least
the next 24 months. However, we may need to raise additional funds through the
issuance of equity, equity-related or debt securities or through additional
credit facilities to fund our growing operations, invest in content and make
potential acquisitions.
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The following table sets forth our major sources and (uses) of cash for each
period as set forth below:
Six months ended June 30,
2010 2011
(In thousands)
Net cash provided by operating activities $ 24,422 $
36,068
Net cash used in investing activities (28,343 ) (44,731 )
Net cash provided by (used in) financing activities (10,067 )
79,935
Cash Flow from Operating Activities
Six months ended June 30, 2011
Net cash inflows from our operating activities of $36.1 million primarily
resulted from improved operating performance. Our net loss during the period was
$(8.0) million, which included non-cash charges of $46.9 million such as
depreciation, amortization, stock-based compensation and deferred taxes. The
remainder of our sources of net cash flow from operating activities was from
changes in our working capital, including accounts receivable, deferred
registration costs and accrued expenses of $9.4 million, offset by net cash
inflows from deferred revenue of $5.5 million. The increases in our deferred
revenue and deferred registry fees were primarily due to growth in our Registrar
service during the period. The increase in accrued expenses is reflective of
significant amounts due to certain vendors and our employees resulting from
growth in our business. The increase in our accounts receivable reflects growth
in advertising revenue from our platform including a higher mix of balances from
brand advertising sales.
Six months ended June 30, 2010
Net cash inflows from our operating activities of $24.4 million primarily
resulted from improved operating performance. Our net loss during the period was
$(6.0) million, which included non-cash charges of $30.5 million such as
depreciation, amortization, stock-based compensation and deferred taxes. The
remainder of our sources of net cash flow from operating activities was from
changes in our working capital, including deferred revenue and accounts payable
of $8.5 million, offset by net cash outflows from accounts receivable, deferred
registry fees and accrued expenses of $8.9 million. The increases in our
deferred revenue and deferred registry fees were primarily due to growth in our
Registrar service during the period. The increase in accrued expenses is
reflective of significant amounts due to certain vendors and our employees. The
increase in our accounts receivable reflects growth in advertising revenue from
our platform including higher balances from brand advertising sales.
Cash Flow from Investing Activities
Six months ended June 30, 2010 and 2011
Net cash used in investing activities was $44.7 million and $28.3 million during
the six months ended June 30, 2011 and 2010, respectively. Cash used in
investing activities during the six months ended June 30, 2011 and 2010 included
investments in our intangible assets of $30.1 million and $21.1 million,
respectively, investments in our property and equipment of $10.8 million and
$9.5 million respectively, which include internally developed software and the
acquisition of CoveritLive in February 2011.
Cash invested in purchases of intangible assets and property and equipment, including internally developed software, was largely to support the growth of our business and infrastructure during these periods. In February 2011, we completed the acquisition of CoveritLive.
Cash Flow from Financing Activities
Six months ended June 30, 2010 and 2011
Net cash provided by (used in) financing activities was $79.9 million and
$(10.1) million during the six months ended June 30, 2011 and 2010,
respectively. Cash provided from financing activities in the six months ended
June 30, 2011 included $78.6 million in net proceeds from our IPO net of
issuance costs of $3.2 million paid in that period. Upon the completion of our
initial public offering in January 2011, all shares of our convertible preferred
stock outstanding converted into 61.7 million
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shares of our common stock. During the quarter ended March 31, 2010, we paid down $10.0 million outstanding under our revolving credit facility.
From time to time, we expect to receive cash from the exercise of employee stock
options in our common stock. Proceeds from the exercise of employee stock
options will vary from period to period based upon, among other factors,
fluctuations in the market value of our common stock relative to the exercise
price of such stock options. To date, proceeds from employee stock option
exercises have not been significant.
Off Balance Sheet Arrangements
As of June 30, 2011, we did not have any off balance sheet arrangements.
Capital Expenditures
For the six months ended June 30, 2010 and 2011, we used $9.5 million and $10.8
million in cash to fund capital expenditures to create internally developed
software and purchase equipment. We currently anticipate making further capital
expenditures of between $18.0 million and $25.0 million during the remainder of
the year ending December 31, 2011.
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