$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
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:
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
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,
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.
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
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
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.
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
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
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.
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
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
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
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
(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.
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
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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