e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2010
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-34628
QuinStreet, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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77-0512121 |
(State or Other Jurisdiction of
Incorporation or Organization)
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(IRS Employer
Identification No.) |
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950 Tower Lane, 6th Floor |
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Foster City, California
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94404 |
(Address of principal executive offices)
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(Zip Code) |
650-578-7700
Registrants Telephone Number, Including Area Code
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Number of shares of common stock outstanding as of January 31, 2011: 46,739,548
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUINSTREET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
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December 31, |
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June 30, |
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2010 |
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2010 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
106,821 |
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$ |
155,770 |
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Marketable securities |
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18,903 |
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Accounts receivable, net |
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52,421 |
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51,466 |
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Deferred tax assets |
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8,527 |
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8,528 |
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Prepaid expenses and other assets |
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10,883 |
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3,123 |
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Total current assets |
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197,555 |
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218,887 |
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Property and equipment, net |
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9,370 |
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5,419 |
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Goodwill |
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211,161 |
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158,582 |
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Other intangible assets, net |
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77,182 |
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47,156 |
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Deferred tax assets, noncurrent |
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3,972 |
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3,972 |
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Other assets, noncurrent |
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453 |
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614 |
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Total assets |
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$ |
499,693 |
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$ |
434,630 |
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Liabilities and Stockholders Equity |
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Current liabilities |
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Accounts payable |
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$ |
22,604 |
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$ |
16,776 |
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Accrued liabilities |
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28,597 |
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30,144 |
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Deferred revenue |
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1,809 |
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1,241 |
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Debt |
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15,414 |
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15,562 |
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Total current liabilities |
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68,424 |
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63,723 |
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Deferred revenue, noncurrent |
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177 |
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305 |
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Debt, noncurrent |
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101,607 |
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78,046 |
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Other liabilities, noncurrent |
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2,926 |
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2,534 |
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Total liabilities |
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173,134 |
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144,608 |
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Commitments and contingencies (See Note 8) |
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Stockholders equity |
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Common stock: $0.001 par value; 100,000,000 shares authorized;
48,683,445 and 47,247,147 shares issued, and 46,505,993 and
45,069,695
shares outstanding at December 31, 2010 and June 30, 2010,
respectively |
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49 |
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47 |
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Additional paid-in capital |
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239,724 |
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217,581 |
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Treasury stock, at cost (2,177,452 shares at December 31, 2010
and June 30, 2010,
respectively) |
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(7,779 |
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(7,779 |
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Accumulated other comprehensive (loss) income |
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(28 |
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9 |
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Retained earnings |
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94,593 |
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80,164 |
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Total stockholders equity |
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326,559 |
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290,022 |
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Total liabilities and stockholders equity |
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$ |
499,693 |
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$ |
434,630 |
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See notes to condensed consolidated financial statements
3
QUINSTREET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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December 31, |
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December 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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Net revenue |
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$ |
97,582 |
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$ |
76,963 |
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$ |
201,198 |
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$ |
155,515 |
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Cost of revenue (1) |
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70,662 |
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56,557 |
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144,291 |
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111,604 |
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Gross profit |
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26,920 |
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20,406 |
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56,907 |
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43,911 |
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Operating expenses: (1) |
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Product development |
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5,933 |
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4,739 |
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11,484 |
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9,209 |
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Sales and marketing |
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4,665 |
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3,990 |
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9,410 |
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7,615 |
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General and administrative |
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4,943 |
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6,203 |
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9,665 |
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9,644 |
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Operating income |
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11,379 |
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5,474 |
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26,348 |
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17,443 |
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Interest income |
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47 |
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8 |
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114 |
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17 |
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Interest expense |
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(1,028 |
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(881 |
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(2,017 |
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(1,629 |
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Other income (expense), net |
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(79 |
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165 |
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85 |
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285 |
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Income before income taxes |
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10,319 |
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4,766 |
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24,530 |
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16,116 |
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Provision for taxes |
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(3,391 |
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(2,356 |
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(10,101 |
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(7,193 |
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Net income |
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$ |
6,928 |
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$ |
2,410 |
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$ |
14,429 |
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$ |
8,923 |
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Net income attributable to common stockholders |
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Basic |
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$ |
6,928 |
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$ |
620 |
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$ |
14,429 |
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$ |
2,831 |
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Diluted |
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$ |
6,928 |
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$ |
708 |
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$ |
14,429 |
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$ |
3,154 |
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Net income per share attributable to common stockholders |
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Basic |
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$ |
0.15 |
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$ |
0.05 |
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$ |
0.32 |
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$ |
0.21 |
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Diluted |
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$ |
0.14 |
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$ |
0.04 |
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$ |
0.30 |
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$ |
0.20 |
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Weighted average shares used in computing net income
per share attributable to common stockholders |
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Basic |
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45,858 |
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13,521 |
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45,478 |
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13,463 |
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Diluted |
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49,194 |
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16,958 |
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48,153 |
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16,169 |
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(1) |
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Cost of revenue and operating expenses include stock-based compensation expense as follows: |
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Cost of revenue |
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$ |
1,129 |
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$ |
762 |
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$ |
2,273 |
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$ |
1,490 |
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Product development |
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691 |
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631 |
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1,415 |
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884 |
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Sales and marketing |
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992 |
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834 |
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2,198 |
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1,341 |
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General and administrative |
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804 |
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2,637 |
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1,460 |
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3,378 |
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See notes to condensed consolidated financial statements
4
QUINSTREET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months Ended |
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December 31, |
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2010 |
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2009 |
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Cash Flows from Operating Activities |
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Net income |
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$ |
14,429 |
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$ |
8,923 |
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Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation and amortization |
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12,620 |
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8,603 |
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Provision for sales returns and doubtful accounts receivable |
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(468 |
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(124 |
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Stock-based compensation |
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7,346 |
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7,093 |
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Excess tax benefits from stock-based compensation |
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(5,312 |
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(1,372 |
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Other non-cash adjustments, net |
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85 |
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309 |
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Changes in assets and liabilities, net of effects of acquisitions: |
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Accounts receivable |
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123 |
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(4,076 |
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Prepaid expenses and other assets |
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(2,705 |
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(4,352 |
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Other assets, noncurrent |
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167 |
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(796 |
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Accounts payable |
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5,255 |
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1,946 |
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Accrued liabilities |
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(2,654 |
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752 |
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Deferred revenue |
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440 |
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(828 |
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Other liabilities, noncurrent |
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392 |
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(1 |
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Net cash provided by operating activities |
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29,718 |
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16,077 |
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Cash Flows from Investing Activities |
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Restricted cash |
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(6 |
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15 |
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Proceeds from sales of property and equipment |
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43 |
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Capital expenditures |
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(2,947 |
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(1,035 |
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Business acquisitions, net of notes payable and cash acquired |
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(86,628 |
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(45,952 |
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Internal software development costs |
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(880 |
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(647 |
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Purchases of marketable securities |
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(18,916 |
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Net cash used in investing activities |
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(109,377 |
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(47,576 |
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Cash Flows from Financing Activities |
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Payments for issuance of common stock |
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(106 |
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(402 |
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Proceeds from exercise of common stock options |
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9,614 |
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1,252 |
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Proceeds from bank debt |
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24,800 |
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43,300 |
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Principal payments on bank debt |
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(1,775 |
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(1,500 |
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Principal payments on acquisition-related notes payable |
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(7,111 |
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(2,843 |
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Excess tax benefits from stock-based compensation |
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5,312 |
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1,372 |
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Repurchases of common stock |
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(715 |
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Net cash provided by financing activities |
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30,734 |
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40,464 |
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Effect of exchange rate changes on cash and cash equivalents |
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(24 |
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(8 |
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Net (decrease) increase in cash and cash equivalents |
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(48,949 |
) |
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8,957 |
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Cash and cash equivalents at beginning of period |
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155,770 |
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25,182 |
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Cash and cash equivalents at end of period |
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$ |
106,821 |
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$ |
34,139 |
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Supplemental Disclosure of Cash Flow Information |
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Cash paid for interest |
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1,940 |
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1,142 |
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Cash paid for taxes |
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|
12,974 |
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|
11,029 |
|
Supplemental Disclosure of Noncash Investing and Financing
Activities |
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Notes payable issued in connection with business acquisitions |
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2,956 |
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|
10,484 |
|
See notes to condensed consolidated financial statements
5
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(
Unaudited)
1. The Company
QuinStreet, Inc. (the Company) is an online vertical marketing and media company. The
Company was incorporated in California on April 16, 1999 and reincorporated in Delaware on December
31, 2009. The Company provides vertically oriented customer acquisition programs for its clients.
The Company also provides hosted solutions for direct selling companies. The corporate headquarters
are located in Foster City, California, with offices in Arkansas, Connecticut, Florida,
Massachusetts, Nevada, New Jersey, New York, North Carolina, Oklahoma, Oregon, India and the United
Kingdom.
2. Summary of Significant Accounting Policies
Basis of Presentation
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its
subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The accompanying condensed consolidated financial statements and the notes to the condensed
consolidated financial statements as of December 31, 2010 and for the three and six months ended
December 31, 2010 and 2009 are unaudited. These unaudited interim consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States
(GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC)
regarding interim financial reporting. Certain information and note disclosures normally included
in the financial statements prepared in accordance with GAAP have been condensed or omitted
pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements and notes
thereto contained in the Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2010, as filed with the SEC on September 13, 2010. The condensed consolidated balance sheet as of
June 30, 2010 included herein was derived from the audited financial statements as of that date,
but does not include all disclosures including notes required by GAAP.
The unaudited interim condensed consolidated financial statements have been prepared on the
same basis as the audited consolidated financial statements and in the opinion of management
include all adjustments (consisting only of normal recurring adjustments) necessary for the fair
statement of the Companys condensed consolidated balance sheet at December 31, 2010, its condensed
consolidated statements of operations for the three and six months ended December 31, 2010 and
2009, and its condensed consolidated statements of cash flows for the six months ended December 31,
2010 and 2009. The results of operations for the three and six months ended December 31, 2010 are
not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2011
or any other future period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and reported amounts of
revenue and expenses during the reporting period. These estimates are based on information
available as of the date of the financial statements; therefore, actual results could differ from
those estimates.
Revenue Recognition
The Company derives its revenue from two sources: Direct Marketing Services (DMS) and Direct
Selling Services (DSS). DMS revenue, which constituted 99.6% and 99.7% of net revenue for the
three and six months ended December 31, 2010, respectively, and 99.0% and 99.2% of net revenue for
the three and six months ended December 31, 2009, respectively, is derived
6
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
from fees which are earned through the delivery of qualified leads, clicks and, to a
lesser extent, display advertisements (impressions). The Company recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collectability is reasonably assured. Delivery is deemed to have occurred at the
time a qualified lead, click or impression is delivered to the client, provided that no significant
obligations remain.
On July 1, 2010, as required under GAAP, the Company adopted the amended accounting standard
for multiple deliverable revenue arrangements which provides guidance on whether multiple
deliverables exist, how the deliverables in an arrangement should be separated, and how the
consideration should be allocated. The adoption of this amended standard did not have a significant
impact on the Companys revenue recognition for multiple deliverable revenue arrangements.
The guidance requires an entity to allocate revenue in an arrangement using the estimated
selling price (ESP) of deliverables if it does not have vendor-specific objective evidence
(VSOE) of selling price based on historical stand-alone sales or third-party evidence (TPE) of
selling price. Due to the unique nature of some of its multiple deliverable revenue arrangements,
the Company may not be able to establish selling prices based on historical stand-alone sales or
third party evidence, therefore the Company may use its best estimate to establish selling prices
for these arrangements under the new standard. The Company establishes best estimates within a
range of selling prices considering multiple factors including, but not limited to, factors such as
class of client, size of transaction, available media inventory, pricing strategies and market
conditions. The Company believes the use of the best estimates of selling price allows revenue
recognition in a manner consistent with the underlying economics of the transaction.
From time to time, the Company may agree to credit a client for certain leads, clicks or
impressions if they fail to meet the contractual or other guidelines of a particular client. The
Company has established a sales reserve based on historical experience. To date, such credits have
been immaterial and within managements expectations.
For a portion of its revenue, the Company has agreements with providers of online media or
traffic (Publishers) used in the generation of leads and clicks. The Company receives a fee from
its clients and pays a fee to Publishers as a portion of revenue generated or on a cost per lead,
cost per click or cost per thousand impressions basis. The Company is the primary obligor in the
transaction. As a result, the fees paid by the Companys clients are recognized as revenue and the
fees paid to its Publishers are included in cost of revenue.
DSS revenue, which constituted 0.4% and 0.3% of net revenue for the three and six months ended
December 31, 2010, respectively, and 1.0% and 0.8% for the three and six months ended December 31,
2009, respectively, comprises (i) set-up and professional services fees and (ii) usage fees. Set-up
and professional service fees that do not provide stand-alone value to a client are recognized over
the contractual term of the agreement or the expected client relationship period, whichever is
longer, effective when the application reaches the go-live date. The Company defines the
go-live date as the date when the application enters into a production environment or all
essential functionalities have been delivered. Usage fees are recognized on a monthly basis as
earned.
Deferred revenue is comprised of contractual billings in excess of recognized revenue and
payments received in advance of revenue recognition.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of
credit risk consist principally of cash and cash equivalents, marketable securities and accounts
receivable. The Companys investment portfolio consists of liquid high-quality fixed income US
government securities, time deposits with financial institutions and money market funds. Cash and
time deposits are deposited with financial institutions that management believes are creditworthy.
Historically, the Company has not
experienced any losses of its deposits.
The Companys accounts receivable are derived from clients located principally in the United
States. The Company performs ongoing credit evaluation of its clients, does not require collateral
and maintains allowances for potential credit losses on client accounts when deemed necessary. To
date, such losses have been within managements expectations.
No client accounted for 10% or more of total revenue for the three or six months ended
December 31, 2010. One client accounted for 11% and 12% of total revenue for the three and six
months ended December 31, 2009, respectively. No client accounted for 10% or more of net accounts
receivable as of December 31, 2010 or June 30, 2010.
7
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
Fair Value of Financial Instruments
The Companys financial instruments consist principally of cash and cash equivalents,
marketable securities, accounts receivable, accounts payable, acquisition-related notes payable, a
term loan and a revolving credit line. The fair value of the securities held as cash equivalents or
marketable securities is determined based on quoted prices if an active market for identical assets
exists. If quoted prices for identical assets are not available, the fair value is determined by
using quoted prices for similar assets in active markets or observable inputs, such as interest
rates. The recorded values of the Companys accounts receivable and accounts payable approximate
their current fair values due to the relatively short-term nature of these accounts. The fair value
of acquisition-related notes payable approximates their recorded amounts at December 31, 2010 as
the interest rates on similar financing arrangements available to the Company at December 31, 2010
approximates the interest rates implied when these acquisition-related notes payable were
originally issued and recorded. The Company believes that the fair values of the term loan and
revolving credit line, after consideration of nonperformance and credit risk, approximate their
recorded amounts at December 31, 2010 as the interest rates on these instruments are variable and
based on market interest rates.
Goodwill
Goodwill is tested for impairment at the reporting unit level on an annual basis and whenever
events or changes in circumstances indicate the carrying value of an asset may not be recoverable.
Application of the goodwill impairment test requires judgment, including the identification of
reporting units, assigning assets and liabilities to reporting units, assigning goodwill to
reporting units and determining the fair value of each reporting unit. Significant judgments
required to estimate the fair value of reporting units include estimating future cash flows and
determining appropriate discount rates, growth rates and other assumptions. Changes in these
estimates and assumptions could materially affect the determination of fair value for each
reporting unit which could trigger impairment.
The Company has determined that DMS and DSS constitute two separate reporting units. The
Company performs its annual goodwill impairment review during its fourth fiscal quarter. No
impairment charges were recorded in the periods presented.
Long-Lived Assets
The Company evaluates long-lived assets, such as property and equipment and purchased
intangible assets with finite lives, for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. The Company applies judgment
when assessing the fair value of the assets based on the undiscounted future cash flows the assets
are expected to generate and recognizes an impairment loss if estimated undiscounted future cash
flows expected to result from the use of the asset plus net proceeds expected from disposition of
the asset, if any, are less than the carrying value of the asset. When the Company identifies an
impairment, it reduces the carrying amount of the asset to its estimated fair value based on a
discounted cash flow approach or, when available and appropriate, to comparable market values. No
impairment charges were recorded in the periods presented.
Income Taxes
The Company accounts for income taxes using an asset and liability approach to record deferred
taxes. The Companys deferred income tax assets represent temporary differences between the
financial statement carrying amount and the tax basis of certain existing assets and liabilities
that will result in deductible amounts in future years, including net operating loss carry
forwards. Based on estimates, the carrying value of the Companys net deferred tax assets assumes
that it is more likely than not that the Company will be able to generate sufficient future taxable
income in certain tax jurisdictions. The Companys judgments regarding future profitability may
change due to future market conditions, changes in U.S. or international tax laws and other
factors.
In December 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act
of 2010 (2010 Tax Relief Act) was signed into law. The 2010 Tax Relief Act, among other
provisions, provides for the extension of certain tax cuts for two years, the retroactive
reinstatement of the research and development credits, as well as certain depreciation benefits.
The Company expects a favorable impact on the effective tax rate as a result of the extension of
the research and development credits.
8
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
Stock-Based Compensation
The Company measures and records the expense related to share-based transactions based on the
fair value of stock-based payment awards, as determined on the date of grant. To determine the fair
value of stock options, the Company has selected the Black-Scholes option pricing model. In
applying the Black-Scholes option pricing model, the Companys determination of fair value of the
share-based payment award on the date of grant is affected by the Companys estimated fair value of
common stock for stock options granted prior to the Companys initial public offering (IPO), as
well as assumptions regarding a number of highly complex and subjective variables. These variables
include, but are not limited to, the Companys expected stock price volatility over the term of the
stock options, the employees projected stock option exercise behaviors and projected pre-vesting
employment terminations. The fair value of restricted stock units is determined based on the
closing price of the Companys common stock on the date of grant.
For awards with graded vesting, the Company recognizes stock-based compensation expense over
the requisite service period using the straight-line method, based on awards ultimately expected to
vest. The Company estimates future forfeitures at the date of grant and revises the estimates, as
necessary, in subsequent periods if actual forfeitures differ from those estimates.
See Note 9 for further information.
Recent Accounting Pronouncements
In October 2009, the FASB amended the accounting standards for revenue recognition to remove
tangible products containing software components and non-software components that function together
to deliver the products essential functionality from the scope of industry-specific software
revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for
multiple deliverable revenue arrangements to
|
|
|
provide updated guidance on whether multiple deliverables exist, how the deliverables in
an arrangement should be separated, and how the consideration should be allocated; |
|
|
|
|
require an entity to allocate revenue in an arrangement using the estimated selling price
(ESP) of deliverables if a vendor does not have vendor-specific objective evidence
(VSOE) of selling price or third-party evidence (TPE) of selling price; |
|
|
|
|
and eliminate the use of the residual method and require an entity to allocate revenue
using the relative selling price method. |
Both standards became effective for the Company on July 1, 2010. The adoption of the new
standards did not have a material effect on the Companys condensed consolidated financial
statements.
In December 2010, the FASB issued an update to the accounting standard for business
combinations. The revised guidance clarifies how to present pro forma information and mandates that
all business combinations that occurred during the current reporting period should be reported as
though the business combination had occurred as of the beginning of the comparative prior reporting
period. The amendment is effective for annual reporting periods beginning on or after December 15,
2010, with early adoption permitted. The Company adopted the guidance effective in the second
quarter of fiscal 2011. The adoption of the amended standard did not have a material effect on the
Companys consolidated financial statements.
3. Net Income Attributable to Common Stockholders and Net Income per Share
Basic and diluted net income per share attributable to common stockholders is presented in
conformity with the two-class method required for participating securities. In February 2010, all
of the Companys outstanding convertible preferred stock converted into common stock in connection
with the IPO. Prior to the conversion, holders of Series A, Series B and Series C convertible
preferred stock were each entitled to receive 8% per annum non-cumulative dividends, payable prior
and in preference to any dividends on any other shares of the Companys capital stock. No such
dividends were paid.
For periods prior to the conversion of the convertible preferred stock, net income per share
information is computed using the two-class method. Under the two-class method, basic net income
per share attributable to common stockholders is computed by dividing the net income attributable
to common stockholders by the weighted average number of common shares outstanding during the
period. Net income attributable to common stockholders is computed by subtracting from net income
the portion of period-to-date earnings that the preferred stockholders would have been entitled to
receive pursuant to their dividend rights had this portion of net income been distributed. Diluted
net income per share attributable to common stockholders is computed by using the weighted-average
number of common shares outstanding, including potential dilutive shares of common stock assuming
the dilutive effect of outstanding stock options and restricted stock units using the treasury
stock method.
9
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
The following table presents the calculation of basic and diluted net income per share
attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009(2 ) |
|
|
2010 |
|
|
2009(2 ) |
|
|
|
(In thousands, except per share data) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,928 |
|
|
$ |
2,410 |
|
|
$ |
14,429 |
|
|
$ |
8,923 |
|
8% non-cumulative dividends on convertible preferred stock |
|
|
|
|
|
|
(819 |
) |
|
|
|
|
|
|
(1,638 |
) |
Undistributed earnings allocated to convertible preferred stock |
|
|
|
|
|
|
(971 |
) |
|
|
|
|
|
|
(4,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic |
|
$ |
6,928 |
|
|
$ |
620 |
|
|
$ |
14,429 |
|
|
$ |
2,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic |
|
$ |
6,928 |
|
|
$ |
620 |
|
|
$ |
14,429 |
|
|
$ |
2,831 |
|
Undistributed earnings re-allocated to common stock |
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders diluted |
|
$ |
6,928 |
|
|
$ |
708 |
|
|
$ |
14,429 |
|
|
$ |
3,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in
computing basic net income per share |
|
|
45,858 |
|
|
|
13,521 |
|
|
|
45,478 |
|
|
|
13,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in
computing basic net income per share |
|
|
45,858 |
|
|
|
13,521 |
|
|
|
45,478 |
|
|
|
13,463 |
|
Add weighted average effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
3,264 |
|
|
|
3,437 |
|
|
|
2,639 |
|
|
|
2,706 |
|
Restricted stock units |
|
|
72 |
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock
used in computing diluted net income per share |
|
|
49,194 |
|
|
|
16,958 |
|
|
|
48,153 |
|
|
|
16,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.15 |
|
|
$ |
0.05 |
|
|
$ |
0.32 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.14 |
|
|
$ |
0.04 |
|
|
$ |
0.30 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities excluded from weighted average shares used in computing diluted
net income per share because the effect would have been anti-dilutive: (1) |
|
|
1,918 |
|
|
|
1,735 |
|
|
|
3,633 |
|
|
|
2,955 |
|
|
|
|
(1) |
|
These weighted shares relate to anti-dilutive stock options and restricted stock units as calculated using the treasury stock method and could be dilutive in the future. |
|
(2) |
|
Earnings per share for the three and six months ended December 31, 2009 are presented before the conversion of the convertible preferred stock in connection with the IPO under the two-class method. |
4. Marketable Securities and Fair Value Measurements
Marketable Securities
All liquid investments with maturities of three months or less at the date of purchase are
classified as cash equivalents. Investments with maturities greater than three months at the date
of purchase are classified as marketable securities. The Companys marketable securities have been
classified and accounted for as available-for-sale. Management determines the appropriate
classification of its investments at the time of purchase and reevaluates the available-for-sale
designation as of each balance sheet date. Available-for-sale securities are carried at fair value,
with unrealized gains and losses, net of tax, reported as a component of stockholders equity. The
cost of securities sold is based upon the specific identification method.
10
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
The following table summarizes unrealized gains and losses related to available-for-sale
securities held by the Company as of December 31, 2010 and June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
Gross |
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
US government securities |
|
$ |
28,996 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
28,996 |
|
Time deposits |
|
|
12,542 |
|
|
|
|
|
|
|
13 |
|
|
|
12,529 |
|
Money market funds |
|
|
972 |
|
|
|
|
|
|
|
|
|
|
|
972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42,510 |
|
|
$ |
|
|
|
$ |
13 |
|
|
$ |
42,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
|
Gross |
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Money market funds |
|
$ |
133,128 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
133,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
133,128 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
133,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 and June 30, 2010, the Company did not hold securities that had
maturity dates greater than one year.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability (the exit price) in an orderly transaction between market participants at the
measurement date. A hierarchy for inputs used in measuring fair value has been defined to minimize
the use of unobservable inputs by requiring the use of observable market data when available.
Observable inputs are inputs that market participants would use in pricing the asset or liability
based on active market data. Unobservable inputs are inputs that reflect the Companys assumptions
about the assumptions market participants would use in pricing the asset or liability based on the
best information available in the circumstances.
The fair value hierarchy prioritizes the inputs into three broad levels:
|
Level 1 |
|
Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities. |
|
|
Level 2 |
|
Inputs are quoted prices for similar assets and liabilities in active markets or
inputs that are observable for the asset or liability, either directly or indirectly through
market corroboration, for substantially the full term of the financial instrument. |
|
|
Level 3 |
|
Inputs are unobservable inputs based on the Companys assumptions. |
The securities held by the Company as of December 31, 2010 and June 30, 2010 are categorized
as follows in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
|
|
|
|
|
Active Markets |
|
|
Observable |
|
|
|
|
|
|
|
for Identical Assets |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
US government securities |
|
$ |
28,996 |
|
|
$ |
28,996 |
|
|
$ |
|
|
Time deposits |
|
|
12,529 |
|
|
|
|
|
|
|
12,529 |
|
Money market funds |
|
|
972 |
|
|
|
972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2010 |
|
$ |
42,497 |
|
|
$ |
29,968 |
|
|
$ |
12,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
133,128 |
|
|
$ |
133,128 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Total at June 30, 2010 |
|
$ |
133,128 |
|
|
$ |
133,128 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
11
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
5. Acquisitions
Acquisitions in Fiscal Year 2011
Acquisition of CarInsurance.com
On November 5, 2010, the Company acquired 100% of the outstanding shares of Car Insurance.com,
Inc., or CarInsurance.com, a Florida-based online insurance business, and certain of its affiliated
companies, in exchange for $49,665 in cash paid upon closing of the acquisition. The results of
CarInsurance.coms operations have been included in the consolidated financial statements since the
acquisition date. The Company acquired CarInsurance.com for its capacity to generate online
visitors in the financial services market. The total purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
49,655 |
|
|
|
|
|
|
|
$ |
49,655 |
|
|
|
|
|
The acquisition was accounted for as a purchase business combination. The Company
allocated the purchase price to tangible assets acquired, liabilities assumed and identifiable
intangible assets acquired based on their estimated fair values. The excess of the purchase price
over the aggregate fair value was recorded as goodwill. The goodwill is deductible for tax
purposes. The following table summarizes the preliminary allocation of the purchase price and the
estimated useful lives of the identifiable intangible assets acquired as of the date of the
acquisition:
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Estimated |
|
|
|
Fair Value |
|
|
Useful Life |
|
Tangible assets acquired |
|
$ |
660 |
|
|
|
|
|
Liabilities assumed |
|
|
(807 |
) |
|
|
|
|
Content |
|
|
16,130 |
|
|
7 years |
|
Advertiser relationships |
|
|
260 |
|
|
6-7 years |
|
Website/trade/domain names |
|
|
4,350 |
|
|
10 years |
|
Acquired technology and others |
|
|
3,000 |
|
|
2-4 years |
|
Noncompete agreements |
|
|
40 |
|
|
4 years |
|
Goodwill |
|
|
26,022 |
|
|
Indefinite |
|
|
|
|
|
|
|
|
|
|
|
$ |
49,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Insurance.com
On July 26, 2010, the Company acquired the website business of Insurance.com, from
Insurance.com Group, Inc., an Ohio-based online insurance business, in exchange for $33,000 in cash
paid upon closing of the acquisition and the issuance of a $2,640 non-interest-bearing, unsecured
promissory note payable in one installment on the second anniversary of the acquisition date. The
results of Insurance.coms operations have been included in the consolidated financial statements
since the acquisition date. The Company acquired Insurance.com for its capacity to generate online
visitors in the financial services market. The total purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
33,000 |
|
Fair value of debt (net of $157 of imputed interest) |
|
|
2,483 |
|
|
|
|
|
|
|
$ |
35,483 |
|
|
|
|
|
The acquisition was accounted for as a purchase business combination. The Company
allocated the purchase price to tangible assets and identifiable intangible assets acquired based
on their estimated fair values. The excess of the purchase price over the aggregate fair value was
recorded as goodwill. The goodwill is deductible for tax purposes. The following table summarizes
the preliminary allocation of the purchase price and the estimated useful lives of the identifiable
intangible assets acquired as of the date of the acquisition:
12
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Estimated |
|
|
|
Fair Value |
|
|
Useful Life |
|
|
|
|
|
|
|
|
Tangible assets acquired |
|
$ |
1,204 |
|
|
|
|
|
Content |
|
|
4,290 |
|
|
4 years |
|
Advertiser relationships |
|
|
2,120 |
|
|
7 years |
|
Website/trade/domain names |
|
|
2,940 |
|
|
10 years |
|
Acquired technology and others |
|
|
5,530 |
|
|
2-4 years |
|
Noncompete agreements |
|
|
60 |
|
|
5 years |
|
Goodwill |
|
|
19,339 |
|
|
Indefinite |
|
|
|
|
|
|
|
|
|
|
|
$ |
35,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Acquisitions in Fiscal Year 2011
During the six months ended December 31, 2010, in addition to the acquisition of
CarInsurance.com and Insurance.com, the Company acquired operations from nine other online
publishing businesses in exchange for $4,003 in cash paid upon closing of the acquisitions and $500
in non-interest-bearing, unsecured promissory notes payable over a period of
time ranging from one to two years. The Company also recorded $4,500 in earn-out payments related
to a prior period acquisition as addition to goodwill; the payment is due in January 2011 and is
reflected in debt as of December 31, 2010. The aggregate purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
4,003 |
|
Fair value of debt (net of $27 of imputed interest) |
|
|
4,973 |
|
|
|
|
|
|
|
$ |
8,976 |
|
|
|
|
|
|
|
|
|
|
The acquisitions were accounted for as purchase business combinations. In each of the
acquisitions, the Company allocated the purchase price to identifiable intangible assets acquired
based on their estimated fair values. The excess of the purchase price over the aggregate fair
value was recorded as goodwill. Goodwill deductible for tax
purposes is $7,218. The following table summarizes the preliminary allocation of the purchase
prices of these other acquisitions during the six months ended December 31, 2010 and the estimated useful lives of the identifiable intangible assets
acquired as of the respective dates of these acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Estimated |
|
|
|
Fair Value |
|
|
Useful Life |
|
Content |
|
$ |
1,052 |
|
|
3-5 years |
|
Customer/publisher relationships |
|
|
197 |
|
|
5 years |
|
Website/trade/domain names |
|
|
447 |
|
|
4-5 years |
|
Noncompete agreements |
|
|
62 |
|
|
1-3 years |
Goodwill |
|
|
7,218 |
|
|
Indefinite |
|
|
|
|
|
|
|
|
|
|
|
$ |
8,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions in Fiscal Year 2010
Acquisition of Internet.com
On November 30, 2009, the Company acquired the website business of Internet.com, a division of
WebMediaBrands, Inc., a New York-based Internet media company, in exchange for $16,000 in cash paid
upon closing of the acquisition and the issuance of a $2,000 non-interest-bearing,
unsecured promissory note payable in one installment. The Company received $357 in a working capital
adjustment following the closing of the acquisition. The adjustment reduced the face value of the
note payable by $300 and the cash paid by $57. The results of Internet.coms operations have been
included in the consolidated financial statements since the acquisition date. The Company acquired
Internet.com to broaden its media access and client base in the business-to-business market. The
total purchase price recorded was as follows:
13
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
15,943 |
|
Fair value of debt (net of $46 of imputed interest) |
|
|
1,654 |
|
|
|
|
|
|
|
$ |
17,597 |
|
|
|
|
|
The acquisition was accounted for as a purchase business combination. The Company allocated
the purchase price to tangible assets acquired, liabilities assumed and identifiable intangible
assets acquired based on their estimated fair values. The excess of the purchase price over the
aggregate fair value was recorded as goodwill. The goodwill is deductible for tax purposes. The
following table summarizes the allocation of the purchase price and the estimated useful lives of
the identifiable intangible assets acquired as of the date of the acquisition:
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Estimated |
|
|
|
Fair Value |
|
|
Useful Life |
|
Tangible assets acquired |
|
$ |
3,136 |
|
|
|
|
|
Liabilities assumed |
|
|
(503 |
) |
|
|
|
|
Advertiser relationships |
|
|
1,300 |
|
|
5-7 years | |
Website/trade/domain names |
|
|
2,500 |
|
|
5 years | |
Content |
|
|
2,400 |
|
|
4 years | |
Noncompete agreements |
|
|
200 |
|
|
2 years | |
Goodwill |
|
|
8,564 |
|
|
Indefinite | |
|
|
|
|
|
|
|
|
|
|
$ |
17,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Insure.com
On October 8, 2009, the Company acquired the website business Insure.com, from Life Quotes,
Inc., an Illinois-based online marketing company, in exchange for $15,000 in cash paid upon closing
of the acquisition and the issuance of a $1,000 non-interest-bearing, unsecured promissory note
payable in one installment. The results of Insure.coms acquired operations have been included in
the consolidated financial statements since the acquisition date. The Company acquired Insure.com
for its capacity to generate online visitors in the financial services market. The total purchase
price recorded was as follows:
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
15,000 |
|
Fair value of debt (net of $24 of imputed interest) |
|
|
976 |
|
|
|
|
|
|
|
$ |
15,976 |
|
|
|
|
|
The acquisition was accounted for as a purchase business combination. The Company allocated
the purchase price to identifiable intangible assets acquired based on their estimated fair values.
The excess of the purchase price over the aggregate fair value was recorded as goodwill. The
goodwill is deductible for tax purposes. The following table summarizes the allocation of the
purchase price and the estimated useful lives of the identifiable intangible assets acquired as of
the date of the acquisition:
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Estimated |
|
|
|
Fair Value |
|
|
Useful Life |
|
Advertiser relationships |
|
$ |
900 |
|
|
3 years | |
Website/trade/domain names |
|
|
1,250 |
|
|
8 years | |
Content |
|
|
3,900 |
|
|
8 years | |
Goodwill |
|
|
9,926 |
|
|
Indefinite | |
|
|
|
|
|
|
|
|
|
|
$ |
15,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
Acquisition of Payler Corp. D/B/A HSH Associates Financial Publishers (HSH)
On September 14, 2009, the Company acquired 100% of the outstanding shares of HSH, a New
Jersey-based online marketing business, in exchange for $6,000 in cash paid upon closing of the
acquisition and the issuance of $4,000 in non-interest-bearing, unsecured promissory notes payable
in five installments over the next five years. The results of HSHs acquired operations have been
included in the consolidated financial statements since the acquisition date. The Company acquired
HSH for its capacity to generate online visitors in the financial services market. The total
purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
6,000 |
|
Fair value of debt (net of $241 of imputed interest) |
|
|
3,759 |
|
|
|
|
|
|
|
$ |
9,759 |
|
|
|
|
|
The acquisition was accounted for as a purchase business combination. The Company allocated
the purchase price to tangible assets acquired, liabilities assumed and identifiable intangible
assets acquired based on their estimated fair values. The excess of the purchase price over the
aggregate fair value was recorded as goodwill. The goodwill is not deductible for tax purposes.
The following table summarizes the allocation of the purchase price and the estimated useful lives
of the identifiable intangible assets acquired as of the date of the acquisition:
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Estimated |
|
|
|
Fair Value |
|
|
Useful Life |
|
Tangible assets acquired |
|
$ |
50 |
|
|
|
|
|
Liabilities assumed |
|
|
(1,695 |
) |
|
|
|
|
Advertiser relationships |
|
|
1,100 |
|
|
3 years | |
Website/trade/domain names |
|
|
800 |
|
|
6 years | |
Content |
|
|
1,400 |
|
|
6 years | |
Goodwill |
|
|
8,104 |
|
|
Indefinite | |
|
|
|
|
|
|
|
|
|
|
$ |
9,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Acquisitions in Fiscal Year 2010
During fiscal year 2010, in addition to the acquisition of Internet.com, Insure.com and HSH,
the Company acquired operations from 30 other online publishing businesses in exchange for $29,882
in cash paid upon closing of the acquisitions and $8,643 in
non-interest-bearing, unsecured promissory notes payable over a period of time ranging from one to
five years. The aggregate purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
29,882 |
|
Fair value of debt (net of $531 of imputed interest) |
|
|
8,112 |
|
|
|
|
|
|
|
$ |
37,994 |
|
|
|
|
|
The acquisitions were accounted for as purchase business combinations. In each of the
acquisitions, the Company allocated the purchase price to identifiable intangible assets acquired
based on their estimated fair values and liabilities assumed, if any. The excess of the purchase
price over the aggregate fair value was recorded as
goodwill. Goodwill deductible for tax purposes is $24,299. The following table summarizes the
allocation of the purchase prices of these other acquisitions and the estimated useful lives of the
identifiable intangible assets acquired as of the respective dates of these acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Estimated |
|
|
|
Fair Value |
|
|
Useful Life |
|
Tangible assets acquired |
|
$ |
45 |
|
|
|
|
|
Content |
|
|
8,384 |
|
|
1-6 years | |
Customer/publisher relationships |
|
|
1,150 |
|
|
1-7 years | |
Website/trade/domain names |
|
|
2,748 |
|
|
5 years | |
Noncompete agreements |
|
|
224 |
|
|
2-3 years | |
Acquired technology |
|
|
199 |
|
|
3 years | |
Goodwill |
|
|
25,244 |
|
|
Indefinite | |
|
|
|
|
|
|
|
|
|
|
$ |
37,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
15
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
Pro Forma Financial Information
The pro forma financial information in the table below summarizes the combined results of
operations for the Company and other companies that were acquired since the beginning of fiscal
year 2010. The pro forma financial information includes the business combination accounting effects
resulting from these acquisitions including amortization charges from acquired intangible assets
and the related tax effects as though the aforementioned companies were combined as of the
beginning of fiscal year 2010. The pro forma financial information as presented below is for
informational purposes only and is not indicative of the results of operations that would have been
achieved if the acquisitions had taken place at the beginning of fiscal year 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
December 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Net revenue |
|
$ |
98,636 |
|
|
$ |
78,970 |
|
|
$ |
202,732 |
|
|
$ |
159,310 |
|
Net income |
|
|
6,917 |
|
|
|
2,036 |
|
|
|
14,391 |
|
|
|
8,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.15 |
|
|
$ |
0.04 |
|
|
$ |
0.32 |
|
|
$ |
0.20 |
|
Diluted net income per share |
|
$ |
0.14 |
|
|
$ |
0.03 |
|
|
$ |
0.30 |
|
|
$ |
0.19 |
|
6. Intangible Assets, Net and Goodwill
Intangible assets, net balances, excluding goodwill, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
June 30, 2010 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Customer/publisher/advertiser relationships |
|
$ |
29,233 |
|
|
$ |
(14,180 |
) |
|
$ |
15,053 |
|
|
$ |
26,656 |
|
|
$ |
(11,455 |
) |
|
$ |
15,201 |
|
Content |
|
|
56,441 |
|
|
|
(20,504 |
) |
|
|
35,937 |
|
|
|
34,969 |
|
|
|
(16,454 |
) |
|
|
18,515 |
|
Website/trade/domain names |
|
|
23,438 |
|
|
|
(6,779 |
) |
|
|
16,659 |
|
|
|
15,701 |
|
|
|
(5,198 |
) |
|
|
10,503 |
|
Acquired technology and others |
|
|
20,168 |
|
|
|
(10,635 |
) |
|
|
9,533 |
|
|
|
11,477 |
|
|
|
(8,540 |
) |
|
|
2,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
129,280 |
|
|
$ |
(52,098 |
) |
|
$ |
77,182 |
|
|
$ |
88,803 |
|
|
$ |
(41,647 |
) |
|
$ |
47,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets was $5,529 and $10,451 in the three and six months
ended December 31, 2010, respectively, and $3,805 and $6,960 in the three and six months ended
December 31, 2009, respectively.
Future amortization expense for the Companys acquisition-related intangible assets as of
December 31, 2010 was as follows:
|
|
|
|
|
Year Ending June 30, |
|
|
|
|
2011 (remaining six months) |
|
$ |
11,642 |
|
2012 |
|
|
20,795 |
|
2013 |
|
|
15,214 |
|
2014 |
|
|
10,514 |
|
2015 |
|
|
6,711 |
|
2016 and thereafter |
|
|
12,306 |
|
|
|
|
|
|
|
$ |
77,182 |
|
|
|
|
|
The change in the carrying amount of goodwill for the six months ended December 31, 2010
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMS |
|
|
DSS |
|
|
Total |
|
Balance at June 30, 2010 |
|
$ |
157,351 |
|
|
$ |
1,231 |
|
|
$ |
158,582 |
|
Additions |
|
|
52,579 |
|
|
|
|
|
|
|
52,579 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
209,930 |
|
|
$ |
1,231 |
|
|
$ |
211,161 |
|
|
|
|
|
|
|
|
|
|
|
16
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
In the six months ended December 31, 2010, the additions to goodwill relate to the
Companys acquisitions as described in Note 5, and primarily reflect the value of the synergies
expected to be generated from combining the Companys technology and know-how with the acquired
businesses access to online visitors.
7. Debt
Promissory Notes
During the six months ended December 31, 2010 and 2009, the Company issued total promissory
notes for the acquisition of businesses of $2,956 and $10,484, respectively, net of imputed
interest amounts of $184 and $596, respectively. All of the promissory notes are
non-interest-bearing and unsecured. For these notes, interest was imputed such that the notes carry
an interest rate commensurate with that available to the Company in the market for similar debt
instruments. The Company recorded accretion of promissory notes of $127 and $303 as interest expense
for the three and six months ended December 31, 2010, respectively, and $328 and $642 for the three
and six months ended December 31, 2009, respectively.
Credit Facility
In January 2010, the Company replaced its existing credit facility with a new credit facility
with a total borrowing capacity of $175,000. The new credit facility consists of a $35,000
four-year term loan, with principal amortization of 10%, 15%, 35% and 40% annually, and a $140,000
four-year revolving credit line with an option to increase the revolving credit line by an
additional $50,000. The Company exercised this option in February 2011. See Note 12 for further
information.
Borrowings under the credit facility are collateralized by the Companys assets and interest
is payable quarterly at specified margins above either LIBOR or the Prime Rate. The interest rate
varies dependent upon the ratio of funded debt to adjusted EBITDA and ranges from LIBOR + 2.125% to
2.875% or Prime + 1.00% to 1.50% for the revolving credit line and from LIBOR + 2.50% to 3.25% or
Prime + 1.00% to 1.50% for the term loan. Adjusted EBITDA is defined as net income less provision
for taxes, depreciation expense, amortization expense, stock-based compensation expense, interest
and other income (expense), net and acquisition costs for business combinations. The revolving
credit line requires a quarterly facility fee of 0.375% of the revolving credit line capacity. The
credit facility expires in January 2014. The credit facility agreement restricts the Companys
ability to raise additional debt financing and pay dividends. In addition, the Company is required
to maintain financial ratios computed as follows:
1. Quick ratio: ratio of (i) the sum of unrestricted cash and cash equivalents and trade
receivables less than 90 days from invoice date to (ii) current liabilities and face amount of
any letters of credit less the current portion of deferred revenue.
2. Fixed charge coverage: ratio of (i) trailing twelve months of adjusted EBITDA to (ii) the
sum of capital expenditures, net cash interest expense, cash taxes, cash dividends and trailing
twelve months payments of indebtedness. Payment of unsecured indebtedness is excluded to the
degree that sufficient unused revolving credit line exists such that the relevant debt payment
could be made from the credit facility.
3. Funded debt to adjusted EBITDA: ratio of (i) the sum of all obligations owed to lending
institutions, the face amount of any letters of credit, indebtedness owed in connection with
acquisition-related notes and indebtedness owed in connection with capital lease obligations to
(ii) trailing twelve months of adjusted EBITDA.
Under the terms of the credit facility the Company must maintain a minimum quick ratio of
1.15:1.00, a minimum fixed charge coverage ratio of 1.15:1.00 and a maximum funded debt to adjusted
EBITDA ratio of 2.75:1.00 through December 31, 2010 and 2.50:1.00 for all fiscal quarters
thereafter and also requires the Company to comply with other nonfinancial covenants. The Company
was in compliance with the covenants as of December 31, 2010 and June 30, 2010.
Upfront arrangement fees incurred in connection with the credit facility are deferred and
amortized over the remaining term of the arrangement as interest expense. As of December 31, 2010
and June 30, 2010, $32,375 and $34,150, respectively, was outstanding under the term loan. Under
the revolving credit line, $66,553 and $41,754 was outstanding as of December 31, 2010 and June 30,
2010, respectively.
17
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
Debt Maturities
The maturities of debt as of December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Promissory |
|
|
Credit |
|
Year Ending June 30, |
|
Notes |
|
|
Facility |
|
2011 (remaining six months) |
|
$ |
9,163 |
|
|
$ |
2,187 |
|
2012 |
|
|
3,409 |
|
|
|
7,000 |
|
2013 |
|
|
4,846 |
|
|
|
12,688 |
|
2014 |
|
|
1,624 |
|
|
|
77,053 |
|
2015 |
|
|
560 |
|
|
|
|
|
2016 and thereafter |
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,652 |
|
|
|
98,928 |
|
Less: imputed interest and unamortized discounts |
|
|
(466 |
) |
|
|
(1,093 |
) |
Less: current portion |
|
|
(10,961 |
) |
|
|
(4,453 |
) |
|
|
|
|
|
|
|
Noncurrent portion of debt |
|
$ |
8,225 |
|
|
$ |
93,382 |
|
|
|
|
|
|
|
|
Letters of Credit
The Company has a $350 letter of credit agreement with a financial institution that is used as
collateral for fidelity bonds placed with an insurance company, and a $223 and $500 letter of
credit agreement with a financial institution that is used as collateral for the Companys previous
and current corporate headquarters operating leases, respectively. The letters of credit
automatically renew annually without amendment unless cancelled by the financial institutions
within 30 days of the annual expiration date.
8. Commitments and Contingencies
Leases
The Company leases office space and equipment under non-cancelable operating leases with
various expiration dates through 2018. Rent expense for the three and six months ended December 31,
2010 was $1,017 and $1,687, respectively, and $1,008 and $1,671 for the three and six months ended
December 31, 2009, respectively. The Company recognizes rent expense on a straight-line basis over
the lease period and accrues for rent expense incurred but not paid.
Future annual minimum lease payments under noncancelable operating leases as of December 31,
2010 were as follows:
|
|
|
|
|
|
|
Operating |
|
Year Ending June 30, |
|
Leases |
|
2011 (remaining six months) |
|
$ |
408 |
|
2012 |
|
|
1,234 |
|
2013 |
|
|
2,162 |
|
2014 |
|
|
2,421 |
|
2015 |
|
|
2,468 |
|
2016 |
|
|
2,482 |
|
Thereafter |
|
|
5,875 |
|
|
|
|
|
|
|
$ |
17,050 |
|
|
|
|
|
The lease for the Companys previous corporate headquarters located at 1051 Hillsdale
Boulevard, Foster City, California expired in October 2010.
In February 2010, the Company entered into a new lease agreement for office space located at
950 Tower Lane, Foster City, California. The term of the lease began on November 1, 2010 and
expires on October 31, 2018. The monthly base rent is abated for the first 12 calendar months under
the lease. Thereafter, the monthly base rent will be $118 through the 24th calendar month of the
term of the lease, after which the monthly base rent will increase to $182 for the subsequent 12
months. In the following years the monthly base rent will increase approximately 3% after each
12-month anniversary during the term of the lease, including any extensions under the Companys
options to extend.
18
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
The Company has two options to extend the term of the lease for one additional year for each
option following the expiration date of the lease or renewal term, as applicable.
Concurrently with the execution of the lease, the Company delivered to the landlord, as
collateral for the full performance by the Company of all of its obligations under the lease, and
for all losses and damages the landlord may suffer as a result of any default by the Company under
the lease, a letter of credit in the face amount of $500.
Guarantor Arrangements
The Company has agreements whereby it indemnifies its officers and directors for certain
events or occurrences while the officer or director is, or was serving, at the Companys request in
such capacity. The term of the indemnification period is for the officer or directors lifetime.
The maximum potential amount of future payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company has a director and officer insurance
policy that limits its exposure and enables the Company to recover a portion of any future amounts
paid. As a result of its insurance policy coverage, the Company believes the estimated fair value
of these indemnification agreements is minimal. Accordingly, the Company had no liabilities
recorded for these agreements as of December 31, 2010 and June 30, 2010.
In the ordinary course of its business, the Company enters into standard indemnification
provisions in its agreements with its clients. Pursuant to these provisions, the Company
indemnifies its clients for losses suffered or incurred in connection with third-party claims that
a Company product infringed upon any United States patent, copyright or other intellectual property
rights. Where applicable, the Company generally limits such infringement indemnities to those
claims directed solely to its products and not in combination with other software or products. With
respect to its DSS products, the Company also generally reserves the right to resolve such claims
by designing a non-infringing alternative or by obtaining a license on reasonable terms, and
failing that, to terminate its relationship with the client. Subject to these limitations, the term
of such indemnity provisions is generally coterminous with the corresponding agreements.
The potential amount of future payments to defend lawsuits or settle indemnified claims under
these indemnification provisions is unlimited; however, the Company believes the estimated fair
value of these indemnity provisions is minimal, and accordingly, the Company had no liabilities
recorded for these agreements as of December 31, 2010 and June 30, 2010.
Litigation
On September 8, 2010, a patent infringement lawsuit was filed against the Company by
LendingTree, LLC (LendingTree) in the United States District Court for the Western District of
North Carolina, seeking a judgment that the Company has infringed a certain patent held by
LendingTree, an injunctive order against the alleged infringing activities and an award for
damages. On September 24, 2010, LendingTree filed a first amended complaint adding an additional
defendant. If an injunction is granted, it could force the Company to stop or alter certain of its
business activities, such as its lead generation in certain client verticals. While the Company
intends to vigorously defend its position, neither the outcome of the litigation nor the amount and
range of potential damages or exposure associated with the litigation can be assessed with
certainty.
9. Stock Benefit Plans
Stock Incentive Plans
In November 2009, the Companys board of directors adopted the 2010 Equity Incentive Plan (the
2010 Incentive Plan) and the Companys stockholders approved the 2010 Incentive Plan in January
2010. The 2010 Incentive Plan became effective upon the completion of the IPO of the Companys
common stock in February 2010. Awards granted after January 2008 but before the adoption of the
2010 Incentive Plan continue to be governed by the terms of the 2008 Equity Incentive Plan (the
2008 Plan). All outstanding stock awards granted before January 2008 continue to be governed by the terms of the Companys
amended and restated 1999 Equity Incentive Plan (the 1999 Plan).
The 2010 Incentive Plan provides for the grant of incentive stock options (ISOs),
nonstatutory stock options (NQSOs), restricted stock, restricted stock units, stock appreciation
rights, performance-based stock awards and other forms of equity compensation, as well as for the grant of performance cash awards. The Company may issue ISOs
only to its employees. NQSOs and all other awards may be granted to employees, including officers,
nonemployee directors and
19
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
consultants.
To date, the Company has issued only ISOs, NQSOs and restricted stock units under the 2010 Incentive Plan. ISOs and NQSOs are generally granted to employees with an
exercise price equal to the market price of the Companys common stock at the date of grant. Stock
options granted to employees generally have a contractual term of seven years and vest over four
years of continuous service, with 25 percent of the stock options vesting on the one-year
anniversary of the date of grant and the remaining 75 percent vesting in equal monthly installments
over the three year period thereafter. Restricted stock units granted to employees generally vest
over five years of continuous service, with 15 percent of the restricted stock units vesting on the
one-year anniversary of the date of grant, 60 percent vesting in equal quarterly installments over
the following three years and the remaining 25 percent vesting in equal quarterly installments over
the last year of the vesting period.
An aggregate of 2,535,761 shares of the Companys common stock was reserved for issuance under
the 2010 Incentive Plan as of December 31, 2010, and this amount will be increased by any
outstanding stock awards that expire or terminate for any reason prior to their exercise or
settlement. The number of shares of the Companys common stock reserved for issuance may be
increased annually through July 1, 2019 by up to five percent of the total number of shares of the
Companys common stock outstanding on the last day of the preceding fiscal year. The maximum number
of shares that may be issued under the 2010 Incentive Plan is 30,000,000.
In November 2009, the Companys board of directors adopted the 2010 Non-Employee Directors
Stock Award Plan (the Directors Plan) and the stockholders approved the Directors Plan in
January 2010. The Directors Plan became effective upon the completion of the Companys IPO. The
Directors Plan provides for the automatic grant of NQSOs to purchase shares of the Companys
common stock to non-employee directors and also provides for the discretionary grant of restricted
stock units. Stock options granted to new non-employee directors vest in equal monthly installments
over four years; annual grants to existing directors vest in equal monthly installments over one
year.
An aggregate of 500,000 shares of the Companys common stock was reserved for issuance under
the Directors Plan as of December 31, 2010. This amount may be increased annually, by the sum of
200,000 shares and the aggregate number of shares of the Companys common stock subject to awards
granted under the Directors Plan during the immediately preceding fiscal year.
Stock-Based Compensation
The Company estimates the fair value of stock options at the date of grant using the
Black-Scholes option-pricing model. Options are granted with an exercise price equal to the fair
value of the common stock at the date of grant. The weighted average Black-Scholes model
assumptions and the weighted average grant date fair value of employee stock options for the three
and six months ended December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
December 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Expected term (in years) |
|
|
4.6 |
|
|
|
4.6 |
|
|
|
4.6 |
|
|
|
4.6 |
|
Expected volatility |
|
|
55 |
% |
|
|
61 |
% |
|
|
54 |
% |
|
|
68 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Risk-free interest rate |
|
|
1.5 |
% |
|
|
2.3 |
% |
|
|
1.5 |
% |
|
|
2.4 |
% |
Grant date fair value |
|
$ |
7.17 |
|
|
$ |
9.74 |
|
|
$ |
6.31 |
|
|
$ |
9.55 |
|
The fair value of restricted stock units is determined based on the closing price of the
Companys common stock on the grant date.
Compensation expense is amortized net of estimated forfeitures on a straight-line basis over
the requisite service period of the stock-based compensation awards.
20
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
10. Stockholders Equity
The following table sets forth the components of comprehensive income for the three and six
months ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
6,928 |
|
|
$ |
2,410 |
|
|
$ |
14,429 |
|
|
$ |
8,923 |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments |
|
|
(13 |
) |
|
|
|
|
|
|
(13 |
) |
|
|
|
|
Foreign currency translation adjustment |
|
|
(5 |
) |
|
|
10 |
|
|
|
(24 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
6,910 |
|
|
$ |
2,420 |
|
|
$ |
14,392 |
|
|
$ |
8,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Segment Information
Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing performance. The
Companys chief operating decision maker is its chief executive officer. The Companys chief
executive officer reviews financial information presented on a consolidated basis, accompanied by
information about operating segments, including net sales and operating income before depreciation,
amortization and stock-based compensation expense.
The Company determined its operating segments to be DMS, which derives
revenue from fees earned through the delivery of qualified leads, clicks and, to a lesser
extent, impressions, and DSS, which derives revenue from the sale of
direct selling services through a hosted solution. The Companys reportable operating segments
consist of DMS and DSS. The accounting policies of the two reportable operating segments are the
same as those described in Note 2.
21
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
The Company evaluates the performance of its operating segments based on net sales and
operating income before depreciation, amortization and stock-based compensation expense.
The Company does not allocate most of its assets, as well as its depreciation and amortization
expense, stock-based compensation expense, interest income, interest expense and income tax expense
by segment. Accordingly, the Company does not report such information.
Summarized information by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net revenue by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMS |
|
$ |
97,228 |
|
|
$ |
76,173 |
|
|
$ |
200,534 |
|
|
$ |
154,330 |
|
DSS |
|
|
354 |
|
|
|
790 |
|
|
|
664 |
|
|
|
1,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
97,582 |
|
|
|
76,963 |
|
|
|
201,198 |
|
|
|
155,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating income before depreciation, amortization, and stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMS |
|
|
21,479 |
|
|
|
14,426 |
|
|
|
45,911 |
|
|
|
32,428 |
|
DSS |
|
|
239 |
|
|
|
563 |
|
|
|
403 |
|
|
|
711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating income before depreciation, amortization, and stock-based compensation expense |
|
|
21,718 |
|
|
|
14,989 |
|
|
|
46,314 |
|
|
|
33,139 |
|
Depreciation and amortization |
|
|
(6,723 |
) |
|
|
(4,651 |
) |
|
|
(12,620 |
) |
|
|
(8,603 |
) |
Stock-based compensation expense |
|
|
(3,616 |
) |
|
|
(4,864 |
) |
|
|
(7,346 |
) |
|
|
(7,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
11,379 |
|
|
$ |
5,474 |
|
|
$ |
26,348 |
|
|
$ |
17,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth net revenue and long-lived assets by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
97,098 |
|
|
$ |
76,408 |
|
|
$ |
200,493 |
|
|
$ |
154,858 |
|
International |
|
|
484 |
|
|
|
555 |
|
|
|
705 |
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
97,582 |
|
|
$ |
76,963 |
|
|
$ |
201,198 |
|
|
$ |
155,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2010 |
|
|
2010 |
|
Long-lived assets: |
|
|
|
|
|
|
|
|
United States |
|
$ |
9,164 |
|
|
$ |
5,193 |
|
International |
|
|
206 |
|
|
|
226 |
|
|
|
|
|
|
|
|
Total long-lived assets |
|
$ |
9,370 |
|
|
$ |
5,419 |
|
|
|
|
|
|
|
|
12. Subsequent Events
On February 2, 2011, the Company exercised the accordion feature of its credit facility and
increased the revolving credit line capacity from $140,000 to $190,000, increasing the total
capacity of the credit facility to $225,000.
22
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Annual Report on Form 10-K
for the fiscal year ended June 30, 2010, as filed with the Securities and Exchange Commission
(SEC) on September 13, 2010.
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could
cause our results to differ materially from those expressed or implied by such forward-looking
statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are often identified by the use of words such as, but not limited to,
anticipate, believe, can, continue, could, estimate, expect, intend, may, will,
plan, project, seek, should, target, will, would, and similar expressions or
variations intended to identify forward-looking statements. These statements are based on the
beliefs and assumptions of our management based on information currently available to management.
Such forward-looking statements are subject to risks, uncertainties and other important factors
that could cause actual results and the timing of certain events to differ materially from future
results expressed or implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those identified in Part II Item
1A. Risk Factors below, and those discussed in the sections titled Special Note Regarding
Forward-Looking Statements and Risk Factors included in our Annual Report on Form 10-K for the
fiscal year ended June 30, 2010, as filed with the SEC on September 13, 2010. Furthermore, such
forward-looking statements speak only as of the date of this report. Except as required by law, we
undertake no obligation to update any forward-looking statements to reflect events or circumstances
after the date of such statements.
Management Overview
Quinstreet is a leader in vertical marketing and media online. We have built a strong set of
capabilities to engage Internet visitors with targeted media and to connect our marketing clients
with their potential customers online. We focus on serving clients in large, information-intensive
industry verticals where relevant, targeted media and offerings help visitors make informed
choices, find the products that match their needs, and thus become qualified customer prospects for
our clients.
We deliver cost-effective marketing results to our clients most typically in the form of a
qualified lead, also referred to as inquiry, or click. These leads or clicks can then convert
into a customer or sale for clients at a rate that results in an acceptable marketing cost to them.
We are typically paid by clients when we deliver qualified leads or clicks as defined by our
agreements with them. Because we bear the costs of media, our programs must deliver a value to our
clients and provide for a media yield, or our ability to generate an acceptable margin on our media
costs that provides a sound financial outcome, for us. Our general process is:
|
|
|
We own or access targeted media; |
|
|
|
|
We run advertisements or other forms of marketing messages and programs in that media to
create visitor responses or clicks through to client offerings; |
|
|
|
|
We match these responses or clicks to client offerings that meet visitor interests or
needs, converting visitors into qualified leads or clicks; and |
|
|
|
|
We optimize client matches and media yield such that we achieve desired results for
clients and a sound financial outcome for us. |
Our primary financial objective has been and remains creating revenue growth from sustainable
sources, at target levels of profitability. Our primary financial objective is not to maximize
profits, but rather to achieve target levels of profitability while investing in various growth
initiatives, as we believe we are in the early stages of a large, long-term market.
23
Our Direct Marketing Services, or DMS, business accounted for 99.6% and 99.7% of our net
revenue in the three and six months ended December 31, 2010, respectively, and 99.0% and 99.2% of
our net revenue in the three and six months ended December 31, 2009, respectively. Our DMS business
derives net revenue from fees earned through the delivery of qualified
leads and clicks and, to a lesser extent, from fees for display advertisements, or impressions.
Through a vertical focus, targeted media presence and our technology platform, we are able to
deliver targeted, measurable marketing results to our clients.
Our two largest client verticals are financial services and education. Our financial services
client vertical represented 45% and 47% of net revenue in the three and six months ended December
31, 2010, respectively, and 42% and 41% of net revenue in the three and six months ended December
31, 2009, respectively. Our education client vertical represented 44% and 43% of net revenue in the
three and six months ended December 31, 2010, respectively, and 47% and 49% of net revenue in the
three and six months ended December 31, 2009, respectively. Other DMS client verticals, consisting
primarily of home services, business-to-business, or B2B, and medical, represented 11% of net
revenue in both the three and six months ended December 31, 2010, and 10% and 9% of net revenue in
the three and six months ended December 31, 2009, respectively.
In addition, we derived 0.4% and 0.3% of our net revenue in the three and six months ended
December 31, 2010, respectively, and 1.0% and 0.8% of our net revenue in the three and six months
ended December 31, 2009, respectively, from the provision of a hosted solution and related services
for clients in the direct selling industry, also referred to as our Direct Selling Services, or
DSS, business.
We generated substantially all of our revenue from sales to clients in the United States.
One of our largest clients retained an advertising agency and reduced its purchases of leads
from us beginning November 2009. This client accounted for 11% and 12% of our net revenue in the
three and six months ended December 31, 2009, respectively. In the three and six months ended
December 31, 2010, this client comprised less than 10% of our net revenue.
Trends Affecting our Business
Client Verticals
To date, we have generated the majority of our revenue from clients in our education and
financial services client verticals. We expect that a large majority of our revenue in fiscal year
2011 will be generated from clients in our financial services and education client verticals. Over
the past year, some categories of the financial services industry, particularly mortgages, credit
cards and deposits, have seen declines in marketing budgets given the difficult market conditions.
Marketing budgets for clients in our education client vertical are affected by a number of factors,
including the availability of student financial aid, the regulation
of for-profit educational
institutions and economic conditions. In addition, the education and financial services industries
are highly regulated. Changes in regulations or government actions may negatively affect our
clients businesses and marketing practices and therefore, adversely affect our financial results.
Acquisitions
Acquisitions in Fiscal Year 2011
In November 2010, we acquired 100% of the outstanding shares of Car Insurance.com, Inc., or
CarInsurance.com, a Florida-based online insurance business, and certain of its affiliated
companies, in exchange for $49.7 million in cash, for its capacity to generate online visitors in
the financial services market. In July 2010, we acquired the website business Insurance.com from
Insurance.com Group, Inc., an Ohio-based online insurance business, in exchange for $33.0 million
in cash and the issuance of a $2.6 million non-interest-bearing, unsecured promissory note, for its
capacity to generate online visitors in the financial services market. During the six months ended
December 31, 2010, in addition to the acquisition of CarInsurance.com and Insurance.com, we
acquired nine other online publishing businesses.
Acquisitions in Fiscal Year 2010
In November 2009, we acquired the website business Internet.com, a division of WebMediaBrands,
Inc., a New York-based Internet media company, in exchange for $15.9 million in cash and the
issuance of a $1.7 million non-interest-bearing, unsecured promissory note, to broaden our media
access and client base in the B2B market. In October 2009, we acquired the website business
Insure.com from Life Quotes, Inc., an Illinois-based online insurance quote service and brokerage
business, in exchange for $15.0 million in cash and the issuance of a $1.0 million
non-interest-bearing, unsecured promissory note, for its capacity to generate online visitors in
the financial services market. During fiscal year 2010, in addition to the acquisitions of
Internet.com and Insure.com, we acquired 31 other online publishing businesses.
24
Our acquisition strategy may result in significant fluctuations in our available working
capital from period to period and over the years. We may use cash, stock or promissory notes to
acquire various businesses or technologies, and we cannot accurately predict the timing of those
acquisitions or the impact on our cash flows and balance sheet. Large acquisitions or multiple
acquisitions within a particular period may significantly affect our financial results for that
period. We may utilize debt financing to make acquisitions, which could give rise to higher
interest expense and more restrictive operating covenants. We may also utilize our stock as
consideration, which could result in substantial dilution.
Development and Acquisition of Targeted Media
One of the primary challenges of our business is finding or creating media that is targeted
enough to attract prospects economically for our clients and at costs that work for our business
model. In order to continue to grow our business, we must be able to continue to find or develop
quality targeted media on a cost-effective basis. Our inability to find or develop quality targeted
media could impair our growth or adversely affect our financial performance.
Seasonality
Our results are subject to significant fluctuation as a result of seasonality. In particular,
our quarters ending December 31 (our second fiscal quarter) typically demonstrate seasonal
weakness. In our second fiscal quarters, there is lower availability of lead supply from some forms
of media during the holiday period on a cost effective basis and some of our clients request fewer
leads due to holiday staffing. In our quarters ending March 31 (our third fiscal quarter), this
trend generally reverses with better lead availability and often new budgets at the beginning of
the year for our clients with fiscal years ending December 31.
Basis of Presentation
General
We operate in two segments: DMS and DSS. For further discussion and financial information
about our reporting segments, see Note 11 to our condensed consolidated financial statements.
Net Revenue
DMS.
Our DMS business generates revenue from fees earned through the delivery of
qualified leads, clicks and, to a lesser extent, display advertisements, or impressions. We deliver
targeted and measurable results through a vertical focus that we classify into the following client
verticals: financial services, education and other (which includes home services, B2B and
medical).
DSS.
Our DSS business generated 0.4% and 0.3% of net revenue in the three and six months ended December 31,
2010, respectively, and 1.0% and 0.8% of net revenue in the three and six months ended December
31, 2009, respectively. We expect DSS to continue to represent an immaterial
portion of our business.
Cost of Revenue
Cost of revenue consists primarily of media costs, personnel costs, amortization of
acquisition-related intangible assets, depreciation expense and amortization of internal software
development costs relating to revenue-producing technologies. Media costs consist primarily of fees
paid to website publishers that are directly related to a revenue-generating event and
pay-per-click, or PPC, ad purchases from Internet search companies. We pay these Internet search
companies and website publishers on a revenue-share, cost-per-lead, or CPL, cost-per-click, or CPC
and cost-per-thousand-impressions, or CPM, basis. Personnel costs include salaries, stock-based
compensation expense, bonuses and employee benefit costs. Personnel costs are primarily related to
individuals associated with maintaining our servers and websites, our editorial staff, client
management, creative team, compliance group and media purchasing analysts. Costs associated with
software incurred in the development phase or obtained for internal use are capitalized and
amortized in cost of revenue over the softwares estimated useful life. We anticipate that our cost
of revenue will increase in absolute dollars as we continue to increase our revenue base and
product offerings.
25
Operating Expenses
We classify our operating expenses into three categories: product development, sales and
marketing, and general and administrative. Our operating expenses consist primarily of personnel
costs and, to a lesser extent, professional services fees, rent and allocated costs. Personnel
costs for each category of operating expenses generally include salaries, stock-based compensation
expense, bonuses, commissions and employee benefit costs.
Product Development. Product development expenses consist primarily of personnel costs and
professional services fees associated with the development and maintenance of our technology
platforms, development and launching of our websites, product-based quality assurance and testing.
We believe that continued investment in technology is critical to attaining our strategic
objectives and, as a result, we expect product development expenses to increase
in absolute dollars in future periods.
Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs and, to
a lesser extent, allocated overhead costs, professional services fees, travel costs, advertising
and marketing materials. We expect sales and marketing expenses to increase in absolute dollars as
we hire additional personnel in sales and marketing to support our increasing revenue base and
product offerings.
General and Administrative. General and administrative expenses consist primarily of personnel
costs of our executive, finance, legal, corporate and business development, employee benefits and
compliance, technical support and other administrative personnel, as well as accounting and legal
professional services fees and other corporate expenses. We expect general and administrative
expenses to increase in absolute dollars in future periods as we continue to invest in corporate
infrastructure and incur additional expenses associated with being a public company, including
increased legal and accounting costs, higher insurance premiums, investor relations costs and
compliance costs associated with Section 404 of the Sarbanes-Oxley Act of 2002.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, consists primarily of interest expense and interest
income. Interest expense is related to our credit facility and promissory notes issued in
connection with our acquisitions and includes imputed interest. The outstanding balance of our
credit facility and acquisition-related promissory notes was $98.9 million and $19.7 million,
respectively, as of December 31, 2010. Borrowings under our credit facility and related interest
expense could increase as we continue to implement our acquisition strategy. Interest income
represents interest received on our cash and cash equivalents, which may decrease depending on
market interest rates and the amount of our invested cash and cash equivalents.
Other income (expense), net, includes gains and losses from settlements of legal matters and
foreign currency exchange gains and losses.
Income Tax Expense
We are subject to tax in the United States as well as other tax jurisdictions or countries in
which we conduct business. Earnings from our limited non-U.S. activities are subject to local
country income tax and may be subject to current U.S. income tax.
As of December 31, 2010, we did not have net operating loss carryforwards for federal income
tax purposes and had approximately $2.5 million in California state net operating loss
carryforwards that begin to expire in March 2011 and that we expect to utilize in an amended
return. The California net operating loss carryforwards will not offset future taxable income, but
may instead result in a refund of historical taxes paid.
As of December 31, 2010, we had net deferred tax assets of $12.5 million. Our net deferred tax
assets consist primarily of accruals, reserves and stock-based compensation expense not currently
deductible for tax purposes. We assess the need for a valuation allowance on the deferred tax
assets by evaluating both positive and negative evidence that may exist. Any adjustment to the
deferred tax asset valuation allowance has been recorded in the income statement of the periods
that the adjustment is determined to be required. As of December 31, 2010, we had recorded a
valuation allowance of $0.2 million against our deferred tax assets.
26
Critical Accounting Policies, Estimates and Judgments
In presenting our consolidated financial statements in conformity with U.S. generally
accepting accounting principles, or GAAP, we are required to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures.
Some of the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. We base these estimates and assumptions on
historical experience or on various other factors that we believe to be reasonable and appropriate
under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and
assumptions. Actual results may differ significantly from these estimates.
We believe that the critical accounting policies listed below involve our more significant
judgments, assumptions and estimates and, therefore, could have the greatest potential impact on
our consolidated financial statements. There have been no material changes to our critical
accounting policies, estimates and judgments subsequent to June 30, 2010.
|
|
|
Revenue recognition; |
|
|
|
|
Stock-based compensation; |
|
|
|
|
Goodwill; |
|
|
|
|
Long-lived assets; and |
|
|
|
|
Income taxes. |
For further information on our critical and other significant accounting policies, see Note 2
to our condensed consolidated financial statements and our Annual Report on Form 10-K for the
fiscal year ended June 30, 2010 as filed with the SEC on September 13, 2010.
Recently Issued Accounting Standards
See Note 2 to our condensed consolidated financial statements.
27
Results of Operations
The following table sets forth our consolidated statement of operations for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|
Six Months Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
97,582 |
|
|
|
100.0 |
% |
|
$ |
76,963 |
|
|
|
100.0 |
% |
|
$ |
201,198 |
|
|
|
100.0 |
% |
|
$ |
155,515 |
|
|
|
100.0 |
% |
Cost of revenue (1) |
|
|
70,662 |
|
|
|
72.4 |
|
|
|
56,557 |
|
|
|
73.5 |
|
|
|
144,291 |
|
|
|
71.7 |
|
|
|
111,604 |
|
|
|
71.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
26,920 |
|
|
|
27.6 |
|
|
|
20,406 |
|
|
|
26.5 |
|
|
|
56,907 |
|
|
|
28.3 |
|
|
|
43,911 |
|
|
|
28.2 |
|
Operating expenses: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development |
|
|
5,933 |
|
|
|
6.1 |
|
|
|
4,739 |
|
|
|
6.1 |
|
|
|
11,484 |
|
|
|
5.7 |
|
|
|
9,209 |
|
|
|
5.9 |
|
Sales and marketing |
|
|
4,665 |
|
|
|
4.8 |
|
|
|
3,990 |
|
|
|
5.2 |
|
|
|
9,410 |
|
|
|
4.7 |
|
|
|
7,615 |
|
|
|
4.9 |
|
General and administrative |
|
|
4,943 |
|
|
|
5.0 |
|
|
|
6,203 |
|
|
|
8.1 |
|
|
|
9,665 |
|
|
|
4.8 |
|
|
|
9,644 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
11,379 |
|
|
|
11.7 |
|
|
|
5,474 |
|
|
|
7.1 |
|
|
|
26,348 |
|
|
|
13.1 |
|
|
|
17,443 |
|
|
|
11.2 |
|
Interest income |
|
|
47 |
|
|
|
0.1 |
|
|
|
8 |
|
|
|
0.0 |
|
|
|
114 |
|
|
|
0.1 |
|
|
|
17 |
|
|
|
0.0 |
|
Interest expense |
|
|
(1,028 |
) |
|
|
(1.1 |
) |
|
|
(881 |
) |
|
|
(1.1 |
) |
|
|
(2,017 |
) |
|
|
(1.0 |
) |
|
|
(1,629 |
) |
|
|
(1.0 |
) |
Other income (expense), net |
|
|
(79 |
) |
|
|
(0.1 |
) |
|
|
165 |
|
|
|
0.2 |
|
|
|
85 |
|
|
|
0.0 |
|
|
|
285 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
10,319 |
|
|
|
10.6 |
|
|
|
4,766 |
|
|
|
6.2 |
|
|
|
24,530 |
|
|
|
12.2 |
|
|
|
16,116 |
|
|
|
10.4 |
|
Provision for taxes |
|
|
(3,391 |
) |
|
|
(3.5 |
) |
|
|
(2,356 |
) |
|
|
(3.1 |
) |
|
|
(10,101 |
) |
|
|
(5.0 |
) |
|
|
(7,193 |
) |
|
|
(4.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,928 |
|
|
|
7.1 |
% |
|
$ |
2,410 |
|
|
|
3.1 |
% |
|
$ |
14,429 |
|
|
|
7.2 |
% |
|
$ |
8,923 |
|
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cost of revenue and operating expenses include stock-based compensation expense as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
1,129 |
|
|
|
1.2 |
% |
|
$ |
762 |
|
|
|
1.0 |
% |
|
$ |
2,273 |
|
|
|
1.1 |
% |
|
$ |
1,490 |
|
|
|
1.0 |
% |
Product development |
|
|
691 |
|
|
|
0.7 |
|
|
|
631 |
|
|
|
0.8 |
|
|
|
1,415 |
|
|
|
0.7 |
|
|
|
884 |
|
|
|
0.6 |
|
Sales and marketing |
|
|
992 |
|
|
|
1.0 |
|
|
|
834 |
|
|
|
1.1 |
|
|
|
2,198 |
|
|
|
1.1 |
|
|
|
1,341 |
|
|
|
0.9 |
|
General and administrative |
|
|
804 |
|
|
|
0.8 |
|
|
|
2,637 |
|
|
|
3.4 |
|
|
|
1,460 |
|
|
|
0.7 |
|
|
|
3,378 |
|
|
|
2.2 |
|
Net Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Three |
|
|
Six |
|
|
|
December 31, |
|
|
December 31, |
|
|
Months |
|
|
Months |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
% Change |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
97,582 |
|
|
$ |
76,963 |
|
|
$ |
201,198 |
|
|
$ |
155,515 |
|
|
|
27 |
% |
|
|
29 |
% |
Cost of revenue |
|
|
70,662 |
|
|
|
56,557 |
|
|
|
144,291 |
|
|
|
111,604 |
|
|
|
25 |
% |
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
26,920 |
|
|
$ |
20,406 |
|
|
$ |
56,907 |
|
|
$ |
43,911 |
|
|
|
32 |
% |
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue increased $20.6 million, or 27%, for the three months ended December 31, 2010,
compared to the three months ended December 31, 2009. The majority of this increase was
attributable to an increase in revenue from our financial services client vertical and, to a lesser
extent, our education client vertical and other client verticals. Financial services client
vertical revenue increased $11.6 million, or 36%, for the three months ended December 31, 2010,
compared to the three months ended December 31, 2009, driven by click and lead volume increases at
relatively steady prices. Education client vertical revenue increased $6.7 million, or 18%, for the
three months ended December 31, 2010, compared to the three months ended December 31, 2009, driven
by an increase in inquiry volume (leads are referred to as inquiries in the education client
vertical), higher prices and a shift in mix towards higher priced inquiries. Our other client
verticals revenue increased $2.3 million, or 29%, for the three months ended December 31, 2010,
compared to the three months ended December 31, 2009. The increase in our other client vertical was
primarily affected by growth in our B2B client vertical resulting from our acquisition of the
website business of Internet.com in November 2009.
Net revenue increased $45.7 million, or 29%, for the six months ended December 31, 2010,
compared to the six months ended December 31, 2009. The majority of this increase was attributable
to an increase in revenue from our financial services client vertical and, to a lesser extent, our
education client vertical and other client verticals. Financial services client vertical revenue
increased $30.4 million, or 48%, for the six months ended December 31, 2010, compared to the six
months ended December 31, 2009, driven by click and lead volume increases at relatively steady
prices. Education client vertical revenue increased $8.9 million, or 12%, for the six months ended
December 31, 2010, compared to the six months ended December 31, 2009, driven by higher prices, a
shift in mix towards higher priced inquiries and an increase in inquiry volume. Our other client
verticals revenue increased $6.4 million, or 42%, for the six months ended December 31, 2010,
compared to the six months ended December 31, 2009. The increase in our other client
28
vertical was primarily affected by growth in our B2B client vertical resulting from our
acquisition of the website business of Internet.com in November 2009.
Cost of Revenue
Cost of revenue increased $14.1 million, or 25%, for the three months ended December 31, 2010,
compared to the three months ended December 31, 2009, driven by an increase in media costs of $7.5
million due to higher lead and click volumes, increased personnel costs of $3.5 million and
increased amortization of acquisition-related intangible assets of $1.7 million resulting from
acquisitions during the past twelve months. The increase in personnel costs was attributable to a
58% increase in average headcount, primarily resulting
from the acquisition of the website business of Internet.com and the expansion of our business.
Gross margin, which is the difference between net revenue and cost of revenue as a percentage of
net revenue, increased from 27% in the three months ended December 31, 2009 to 28% in the three
months ended December 31, 2010, due to a higher mix of traffic from owned and operated targeted
media and higher margins from publisher arrangements, partially offset by the above-mentioned
increase in headcount and related personnel costs, as well as higher amortization expense.
Cost of revenue increased $32.7 million, or 29%, for the six months ended December 31, 2010,
compared to the six months ended December 31, 2009, driven by an increase in media costs of $17.5
million due to higher lead and click volumes, increased personnel costs of $8.7 million and
increased amortization of acquisition-related intangible assets of $3.5 million resulting from
acquisitions during the past twelve months. The increase in personnel costs was attributable to a
63% increase in average headcount, primarily resulting
from the acquisition of the website business of Internet.com and the expansion of our business, as
well as increased performance bonus expense due to an increase in the number of individuals
eligible for such bonus. Gross margin remained flat at 28% in both the six months ended December
31, 2009 and December 31, 2010, as a higher mix of traffic from owned and operated targeted media
and higher margins from publisher arrangements were offset by the above-mentioned increase in
headcount and related personnel costs, as well as higher amortization expense.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Three |
|
|
Six |
|
|
|
December 31, |
|
|
December 31, |
|
|
Months |
|
|
Months |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
% Change |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development |
|
$ |
5,933 |
|
|
$ |
4,739 |
|
|
$ |
11,484 |
|
|
$ |
9,209 |
|
|
|
25 |
% |
|
|
25 |
% |
Sales and marketing |
|
|
4,665 |
|
|
|
3,990 |
|
|
|
9,410 |
|
|
|
7,615 |
|
|
|
17 |
% |
|
|
24 |
% |
General and administrative |
|
|
4,943 |
|
|
|
6,203 |
|
|
|
9,665 |
|
|
|
9,644 |
|
|
|
-20 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
$ |
15,541 |
|
|
$ |
14,932 |
|
|
$ |
30,559 |
|
|
$ |
26,468 |
|
|
|
4 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Development Expenses
Product development expenses increased $1.2 million, or 25%, for the three months ended
December 31, 2010, compared to the three months ended December 31, 2009, due to increased
compensation expense of $1.1 million affected by a 29% increase in average headcount from
additional hiring in connection with development projects and recent acquisitions.
Product development expenses increased $2.3 million, or 25%, for the six months ended December
31, 2010, compared to the six months ended December 31, 2009, due to increased personnel costs. The
increase in personnel costs was due to increased compensation expense of $1.4 million, increased
stock-based compensation expense of $0.5 million and various smaller increases in product
development expenses. The increase in compensation expense and stock-based compensation expense was
due a 28% increase in average headcount from additional hiring in connection with development
projects and recent acquisitions.
29
Sales and Marketing Expenses
Sales and marketing expenses increased $0.7 million, or 17%, for the three months ended
December 31, 2010, compared to the three months ended December 31, 2009, due to increased personnel
costs. The increase in personnel costs was due to increased compensation expense of $0.5 million
and increased stock-based compensation expense of $0.2 million. The increase in compensation
expense was due to increased performance bonus expenses associated with the achievement of
specified financial metrics for the three months ended December 31, 2010 and a 5% increase in
average headcount.
Sales and marketing expenses increased $1.8 million, or 24%, for the six months ended December
31, 2010, compared to the six months ended December 31, 2009, due to increased personnel costs. The
increase in personnel costs was due to increased stock-based compensation expense of $0.9 million
and increased compensation expense of $0.8 million. The increase in compensation expense was due to
a 4% increase in average headcount and increased performance bonus expenses associated with the
achievement of specified financial metrics for the six months ended December 31, 2010.
General and Administrative Expenses
General and administrative expenses decreased $1.3 million, or 20%, for the three months ended
December 31, 2010, compared to the three months ended December 31, 2009, due to decreased personnel
costs of $1.4 million partially offset by increased professional service fees of $0.2 million. The
decrease in personnel costs was driven by a decline in stock-based compensation expense of $1.8
million primarily due to the grant of fully-vested options to certain members of the board of
directors in the three months ended December 31, 2009. The decrease in stock-compensation expense
was partially offset by increased compensation expense of $0.5 million due to a 16% increase in
average headcount.
General and administrative expenses remained relatively unchanged for the six months ended
December 31, 2010, compared to the six months ended December 31, 2009, as increased professional
service fees of $0.9 million were offset by decreased personnel costs of $0.8 million and various
smaller decreases in general and administrative expenses. Professional service fees increased due
to our continued investment in corporate infrastructure and related expenses associated with being
a public company, including increased compliance costs and higher insurance premiums. The decrease in personnel costs was driven by decreased stock-based compensation
expense of $1.9 million primarily due to the grant of fully-vested options to certain members of
the board of directors in the six months ended December 31, 2009. The decrease in
stock-compensation expense was partially offset by increased compensation expense of $1.1 million
due to a 17% increase in average headcount.
Interest and Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Three |
|
|
Six |
|
|
|
December 31, |
|
|
December 31, |
|
|
Months |
|
|
Months |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
% Change |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
47 |
|
|
$ |
8 |
|
|
$ |
114 |
|
|
$ |
17 |
|
|
|
488 |
% |
|
|
571 |
% |
Interest expense |
|
|
(1,028 |
) |
|
|
(881 |
) |
|
|
(2,017 |
) |
|
|
(1,629 |
) |
|
|
17 |
% |
|
|
24 |
% |
Other income (expense), net |
|
|
(79 |
) |
|
|
165 |
|
|
|
85 |
|
|
|
285 |
|
|
|
-148 |
% |
|
|
-70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net |
|
$ |
(1,060 |
) |
|
$ |
(708 |
) |
|
$ |
(1,818 |
) |
|
$ |
(1,327 |
) |
|
|
50 |
% |
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net decreased $0.4 million, or 50%, for the three
months ended December 31, 2010, compared to the three months ended December 31, 2009, due to a
decline in other income (expense), net of $0.2 million and an increase in interest expense of $0.1
million. The decline in other income (expense), net is due to proceeds from a settlement of a legal
matter in the three months ended December 31, 2009. The increase in interest expense is
attributable to the draw down on our credit facility.
Interest and other income (expense), net decreased $0.5 million, or 37%, for the six months
ended December 31, 2010, compared to the six months ended December 31, 2009, due to an increase in
interest expense of $0.4 million and a decline in other income (expense), net of $0.2 million,
partially offset by a slight increase in interest income of $0.1 million. The increase in interest
expense is attributable to the draw down on our credit facility. The decline in other income
(expense), net is due to proceeds from a settlement of a legal matter in the three months ended
December 31, 2009.
30
Provision for Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Provision for taxes |
|
$ |
3,391 |
|
|
$ |
2,356 |
|
|
$ |
10,101 |
|
|
$ |
7,193 |
|
Effective tax rate |
|
|
32.9 |
% |
|
|
49.4 |
% |
|
|
41.2 |
% |
|
|
44.6 |
% |
The decrease in our effective tax rate for both the three and six months ended December
31, 2010, compared to the three and six months ended December 31, 2009, was primarily driven by the
retroactive reinstatement of research and development tax credits and higher tax benefits from
stock option exercises. The research and development credits were retroactively extended under the
Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief
Act) beginning January 1, 2010 through December 31, 2012. See Note 2 to the condensed consolidated
financial statements for more information.
31
Liquidity and Capital Resources
Our primary operating cash requirements include the payment of media costs, personnel costs,
costs of information technology systems and office facilities.
Our principal sources of liquidity as of December 31, 2010, consisted of cash and cash
equivalents of $106.8 million, short-term marketable securities of $18.9 million and our credit
facility which had $73.4 million available for borrowing. We believe that our existing cash, cash
equivalents, short-term marketable securities, available borrowings under the credit facility and
cash generated from operations will be sufficient to satisfy our currently anticipated cash
requirements through at least the next 12 months.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Cash flows from operating activities |
|
$ |
29,718 |
|
|
$ |
16,077 |
|
Cash flows from investing activities |
|
|
(109,377 |
) |
|
|
(47,576 |
) |
Cash flows from financing activities |
|
|
30,734 |
|
|
|
40,464 |
|
Net Cash Provided by Operating Activities
Our net cash provided by operating activities is primarily the result of our net income
adjusted for non-cash expenses such as depreciation and amortization, stock-based compensation
expense and changes in working capital components, and is influenced by the timing of cash
collections from our clients and cash payments for purchases of media and other expenses.
Net cash provided by operating activities in the six months ended December 31, 2010 was due to
net income of $14.4 million, non-cash depreciation, amortization and stock-based compensation
expense of $20.0 million and a net increase in accounts payable and accrued liabilities of $2.6
million, partially offset by excess tax benefits from stock-based compensation of $5.3 million and
an increase in prepaid expenses and other assets of $2.7 million. The net increase in accounts
payable and accrued liabilities is due to timing of payments and increased cost of sales associated
with increased revenue. The increase in prepaid expenses and other assets is primarily due to
timing of payments.
Net cash provided by operating activities in the six months ended December 31, 2009, was the
result of net income of $8.9 million, non-cash depreciation, amortization and stock-based
compensation expense of $15.7 million and an increase in accounts payable and accrued liabilities
of $2.7 million, partially offset by an increase in prepaid expenses and other assets of $4.4
million, an increase in accounts receivable of $4.1 million and excess tax benefits from
stock-based compensation of $1.4 million. The increase in accounts payable and accrued liabilities
is due to timing of payments. The increase in prepaid expenses and other assets is due to timing of
payments. The increase in accounts receivable is attributable to increased revenue, as well as
timing of receipts.
Net Cash Used in Investing Activities
Our investing activities include acquisitions of media websites and businesses; capital
expenditures and capitalized internal development costs.
Cash used in investing activities in the six months ended December 31, 2010 was primarily due
to our acquisition of CarInsurance.com for an initial cash payment of $49.7 million and
Insurance.com for an initial cash payment of $33.0 million. Cash used in investing activities in
the six months ended December 31, 2010 was also impacted by purchases of the operations of nine
other online publishing businesses for an aggregate of $4.0 million in cash payments, as well as
purchases of marketable securities of $18.9 million. Capital expenditures and internal software
development costs totaled $3.8 million in the six months ended December 31, 2010.
Cash used in investing activities in the six months ended December 31, 2009 was primarily due
to our acquisition of Internet.com. for an initial cash payment of $15.9 million and Insure.com for
an initial cash payment of $15.0 million. Cash used in investing activities in the six months ended
December 31, 2009 was also impacted by purchases of the operations of 20 other online publishing
businesses for an aggregate of $13.7 million in cash payments. Capital expenditures and internal
software development costs totaled $1.7 million in the six months ended December 31, 2009.
32
Net Cash Provided by Financing Activities
Cash provided by financing activities in the six months ended December 31, 2010 was primarily
due to proceeds from the draw-down of our revolving credit line of $24.8 million, proceeds from the
exercise of stock options of $9.6 million and excess tax benefits from stock-based compensation of
$5.3 million, partially offset by $8.9 million in principal payments on acquisition-related notes
payable and our term loan.
Cash provided by financing activities in the six months ended December 31, 2009 was primarily
due to proceeds from the draw-down of our revolving credit line of $43.3 million, excess tax
benefits from stock-based compensation of $1.4 million and proceeds from the exercise of stock
options of $1.3 million, partially offset by $5.1 million in principal payments on
acquisition-related notes payable and our term loan, as well as repurchases of our common stock.
Off-Balance Sheet Arrangements
During the periods presented, we did not have any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured finance or special
purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
33
Contractual Obligations
Our contractual obligations relate primarily to borrowings under our credit facility,
acquisition-related notes payable, operating leases and purchase obligations. There have been no
significant changes in our contractual obligations from those disclosed in our Annual Report on
Form 10-K for the year ended June 30, 2010.
Credit Facility
In January 2010, we replaced our existing credit facility with a credit facility totaling
$175.0 million. The new facility consists of a $35.0 million four-year term loan, with principal
amortization of 10%, 15%, 35% and 40% annually, and a $140.0 million four-year revolving credit
line with an option to increase the revolving credit line by $50.0 million. We exercised this
option in February 2011, increasing the total capacity of the credit facility to $225.0 million.
Borrowings under the credit facility are collateralized by our assets and interest is payable
quarterly at specified margins above either LIBOR or the Prime Rate. The interest rate varies
dependent upon the ratio of funded debt to adjusted EBITDA and ranges from LIBOR + 2.125% to 2.875%
or Prime + 1.00% to 1.50% for the revolving credit line and from LIBOR + 2.50% to 3.25% or Prime +
1.00% to 1.50% for the term loan. Adjusted EBITDA is defined as net income less provision for
taxes, depreciation expense, amortization expense, stock-based compensation expense, interest and
other income (expense), net and acquisition costs for business combinations. The revolving credit
line requires a quarterly facility fee of 0.375% of the revolving credit line capacity. The credit
facility expires in January 2014. The credit facility agreement restricts our ability to raise
additional debt financing and pay dividends. In addition, we are required to maintain financial
ratios computed as follows:
1. Quick ratio: ratio of (i) the sum of unrestricted cash and cash equivalents and trade
receivables less than 90 days from invoice date to (ii) current liabilities and face amount of
any letters of credit less the current portion of deferred revenue.
2. Fixed charge coverage: ratio of (i) trailing twelve months of adjusted EBITDA to (ii) the
sum of capital expenditures, net cash interest expense, cash taxes, cash dividends and trailing
twelve months payments of indebtedness. Payment of unsecured indebtedness is excluded to the
degree that sufficient unused revolving credit line exists such that the relevant debt payment
could be made from the credit facility.
3. Funded debt to adjusted EBITDA: ratio of (i) the sum of all obligations owed to lending
institutions, the face amount of any letters of credit, indebtedness owed in connection with
acquisition-related notes and indebtedness owed in connection with capital lease obligations to
(ii) trailing twelve months of adjusted EBITDA.
Under the terms of the credit facility we must maintain a minimum quick ratio of 1.15:1.00, a
minimum fixed charge coverage ratio of 1.15:1.00 and a maximum funded debt to adjusted EBITDA ratio
of 2.75:1.00 through December 31, 2010 and 2.50:1.00 for all fiscal quarters thereafter and we must
comply with other non-financial covenants. We were in compliance with the covenants as of December
31, 2010 and June 30, 2010.
New Lease
As the previous lease for our corporate headquarters located at 1051 Hillsdale Boulevard,
Foster City, California expired in October 2010, we entered into a new lease agreement in February
2010 for approximately 63,998 square feet of office space located at 950 Tower Lane, Foster City,
California. The term of the lease began on November 1, 2010 and expires on October 31, 2018. The
monthly base rent is abated for the first 12 calendar months under the lease. Thereafter the base
rent will be $118,000 through the 24th calendar month of the term of the lease, after which the
monthly base rent will increase to $182,000 for the subsequent 12 months. In the following years
the monthly base rent will increase approximately 3% after each 12-month anniversary during the
term of the lease, including any extensions under our options to extend.
We have two options to extend the term of the lease for one additional year for each option
following the expiration date of the lease or renewal term, as applicable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. These risks include
primarily foreign currency exchange and interest rate risks.
34
Foreign Currency Exchange Risk
To date, our international client agreements have been predominately denominated in U.S.
dollars, and accordingly, we have limited exposure to foreign currency exchange rate fluctuations
related to client agreements, and do not currently engage in foreign currency hedging transactions.
As the local accounts for some of our foreign operations are maintained in the local currency of
the respective country, we are subject to foreign currency exchange rate fluctuations associated
with the remeasurement to U.S. dollars. A hypothetical change of 10% in foreign currency exchange
rates would not have a material effect on our consolidated financial condition or results of
operations.
Interest Rate Risk
We invest our cash equivalents and short-term investments primarily in money market funds and
short-term deposits with original maturities of less than three months. Unrestricted cash, cash
equivalents and short-term investments are held for working capital purposes and acquisition
financing. We do not enter into investments for trading or speculative purposes. We believe that we
do not have material exposure to changes in the fair value as a result of changes in interest rates
due to the short-term nature of our investments. Declines in interest rates may reduce future
investment income. However, a hypothetical decline of 1% in the interest rate on our investments
would not have a material effect on our consolidated financial condition or results of operations.
As of December 31, 2010, we had an outstanding credit facility with a total borrowing capacity
of $172.4 million. Interest on borrowings under the credit facility is payable quarterly at
specified margins above either LIBOR or the Prime Rate. Our exposure to interest rate risk under
the credit facility will depend on the extent to which we utilize such facility. As of December 31,
2010, we had $98.9 million outstanding under our credit facility. A hypothetical increase of 1% in
the LIBOR or Prime Rate-based interest rate on our credit facility would result in an increase in
our interest expense of $1.0 million per year, assuming constant borrowing levels.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31,
2010. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Securities Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SECs rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the Securities Exchange
Act is accumulated and communicated to the companys management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures as of December
31, 2010, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date,
our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection
with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Securities Exchange Act that
occurred during the period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
35
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 8, 2010, a patent infringement lawsuit was filed against us by LendingTree, LLC
(LendingTree) in the United States District Court for the Western District of North Carolina,
seeking a judgment that we have infringed a certain patent held by LendingTree, an injunctive order
against the alleged infringing activities and an award for damages. On September 24, 2010,
LendingTree filed a first amended complaint adding an additional defendant. If an injunction is
granted, it could force us to stop or alter certain of our business activities, such as our lead
generation in the mortgage client vertical. While we intend to vigorously defend our position,
neither the outcome of the litigation nor the amount and range of potential damages or exposure
associated with the litigation can be assessed with certainty.
From time to time, we may become involved in other legal proceedings and claims arising in the
ordinary course of our business.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider
the risks described below and the other information in this Quarterly Report on Form 10-Q. If any
of such risks actually occur, our business, operating results or financial condition could be
adversely affected. In those cases, the trading price of our common stock could decline and you may
lose all or part of your investment.
Risks Related to Our Business and Industry
|
We operate in an immature industry and have a relatively new business model, which makes it
difficult to evaluate our business and prospects. |
We derive nearly all of our
revenue from the sale of online marketing and media services,
which is an immature industry that has undergone rapid and dramatic changes in its short history.
The industry in which we operate is characterized by rapidly-changing Internet media, evolving
industry standards, and changing user and client demands. Our business model is also evolving and
is distinct from many other companies in our industry, and it may not be successful. As a result of
these factors, the future revenue and income potential of our business is uncertain. Although we
have experienced significant revenue growth in recent periods, we may not be able to sustain
current revenue levels or growth rates.
Any evaluation of our business and our prospects must be
considered in light of these factors and the risks and uncertainties often encountered by companies
in an immature industry with an evolving business model such as ours. Some of these risks and
uncertainties relate to our ability to:
|
|
|
maintain and expand client relationships; |
|
|
|
|
sustain and increase the number of visitors to our websites; |
|
|
|
|
sustain and grow relationships with third-party website publishers and other sources of
web visitors; |
|
|
|
|
manage our expanding operations and implement and improve our operational, financial and
management controls; |
|
|
|
|
raise capital at attractive costs, or at all; |
|
|
|
|
acquire and integrate websites and other businesses; |
|
|
|
|
successfully expand our footprint in our existing client verticals and enter new client
verticals; |
|
|
|
|
respond effectively to competition and potential negative effects of competition on
profit margins; |
|
|
|
|
attract and retain qualified management, employees and independent service providers; |
|
|
|
|
successfully introduce new processes and technologies and upgrade our existing
technologies and services;
|
36
|
|
|
protect our proprietary technology and intellectual property rights; and |
|
|
|
|
respond to government regulations relating to the Internet, marketing in our client
verticals, personal data protection, email, software technologies and other aspects of our
business. |
If we are unable to address these risks, our business, results of operations and prospects
could suffer.
We depend upon Internet search companies to attract a significant portion of the visitors to our
websites, and any change in the search companies search algorithms or perception of us or our
industry could result in our websites being listed less prominently in either paid or algorithmic
search result listings, in which case the number of visitors to our websites and our revenue could
decline.
We depend in significant part on various Internet search companies, such as Google, Microsoft
and Yahoo!, and other search websites to direct a significant number of visitors to our websites to
provide our online marketing services to our clients. Search websites typically provide two types
of search results, algorithmic and paid listings. Algorithmic, or organic, listings are determined
and displayed solely by a set of formulas designed by search companies. Paid listings can be
purchased and then are displayed if particular words are included in a users Internet search.
Placement in paid listings is generally not determined solely on the bid price, but also takes into
account the search engines assessment of the quality of website featured in the paid listing and
other factors. We rely on both algorithmic and paid search results, as well as advertising on other
websites, to direct a substantial share of the visitors to our websites.
Our ability to maintain the number of visitors to our websites from search websites and other
websites is not entirely within our control. For example, Internet search websites frequently
revise their algorithms in an attempt to optimize their search result listings or to maintain their
internal standards and strategies. Changes in the algorithms could cause our websites to receive
less favorable placements, which could reduce the number of users who visit our websites. Changes
to search engine user interfaces, such as Google Instant, may also adversely impact the number of
users we attract to our websites. Throughout the years we have experienced fluctuations in the
search result rankings for a number of our websites. We may make decisions that are suboptimal
regarding the purchase of paid listings or our proprietary bid management technologies may contain
defects or otherwise fail to achieve their intended results, either of which could also reduce the
number of visitors to our websites or cause us to incur additional costs. We may also make
decisions that are suboptimal regarding the placement of advertisements on other websites and
pricing, which could increase our costs to attract such visitors or cause us to incur unnecessary
costs. Our approaches may be deemed similar to those of our competitors and others in our industry
that Internet search websites may consider to be unsuitable or unattractive. Internet search
websites could deem our content to be unsuitable or below standards or less attractive or worthy
than those of other or competing websites. In either such case, our websites may receive less
favorable placement in algorithmic or paid listings, or both. Any reduction in the number of
visitors to our websites would negatively affect our ability to earn revenue. If visits to our
websites decrease, we may need to resort to more costly sources to replace lost visitors, and such
increased expense could adversely affect our business and profitability.
A substantial portion of our revenue is generated from a limited number of clients and, if we lose
a major client, our revenue will decrease and our business and prospects would be adversely
impacted.
A substantial portion of our revenue is generated from a limited number of clients. Our top
three clients accounted for 23% of our net revenue for the six months ended December 31, 2010 and
for the fiscal year ended June 30, 2010. Our clients can generally terminate their contracts with
us at any time, with limited prior notice or penalty. DeVry Inc., one of our large clients,
retained an advertising agency and reduced its purchases of leads from us beginning November 2009.
DeVry and other clients may reduce their level of business with us, leading to lower revenue. We
expect that a limited number of clients will continue to account for a significant percentage of
our revenue, and the loss of, or material reduction in, their marketing spending with us could
decrease our revenue and harm our business.
There is significant activity and uncertainty in the regulatory and legislative environment for
the for-profit education sector. These regulatory or legislative changes could negatively affect
our clients businesses, marketing practices and budgets and could impact demand, pricing or form
of our services, any or all of which could have a material adverse impact on our financial
results.
We generate nearly half of our revenue from our education client vertical and nearly all of that
revenue is generated from for-profit educational institutions. There is intense governmental
interest in and scrutiny of the for-profit education industry and a high degree of focus on
marketing practices in the industry. The Department of Education has promulgated proposed and final
regulations that could adversely impact us and our education clients. The intense focus on the
for-profit education industry could result in further regulatory or legislative action.
We cannot predict whether this will happen or what the impact could be on
our financial results.
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Over the past year, the Department of Education has been working on revised regulations
under the United States Higher Education Act. The Higher Education Act, administered by the U.S.
Department of Education, provides that to be eligible to participate in Federal student financial
aid programs, an educational institution must enter into a program participation agreement with the
Secretary of the Department of Education. The agreement includes a number of conditions with which
an institution must comply to be granted initial and continuing eligibility to participate. Among
those conditions is a prohibition on institutions providing to any individual or entity engaged in
recruiting or admission activities any commission, bonus, or other incentive payment based directly
or indirectly on success in securing enrollments. The current regulations promulgated under the
Higher Education Act specify a number of types of compensation, or safe harbors, that do not
constitute incentive compensation in violation of this agreement. One of these safe harbors permits
an institution to award incentive compensation for Internet-based recruitment and admission
activities that provide information about the institution to prospective students, refer
prospective students to the institution, or permit prospective students to apply for admission
online. The Department of Education issued final regulations on October 29, 2010 on incentive
compensation and other matters. These regulations become effective July 1, 2011. The Departments
regulations repeal all safe harbors regarding incentive compensation, including the Internet safe
harbor. The elimination of the safe harbors could create uncertainty for us and our education
clients and impact the way in which we are paid by our clients and, accordingly, could reduce the
amount of revenue we generate from the education client vertical.
In addition, other existing and proposed regulations could negatively impact our for-profit
education clients. For example, the proposal on gainful employment that would restrict or
eliminate federal financial aid to students in programs where certain debt-to-income ratios and
loan default rates are not satisfied could result in the elimination or reduction in some of our
clients programs. In addition, some of our large for-profit education clients have indicated that
in coming years they may violate the 90/10 rule, whereby for-profit institutions must receive at
least 10 percent of their revenue from sources other than federal student financial aid. If a
for-profit institution fails to comply with the rule for two consecutive fiscal years, it may lose
its eligibility to receive student-aid funds for at least two years. These and other regulations or
a failure of our clients to comply with such regulations, could adversely affect our clients
businesses and, as a result, affect or materially reduce the amount of revenue we generate from
those clients.
Moreover, some of our education clients have had and may in the future have issues regarding
their academic accreditation, which could adversely affect their ability to offer certain degree
programs. If any of our significant education clients lose their accreditation, they may reduce or
eliminate their marketing spending, which could adversely affect our financial results.
Any of the aforementioned regulatory or legislative risks could cause some or all of our
education clients to significantly shrink or even to cease doing business, which could have a
material adverse effect on our financial results.
We are dependent on two market verticals for a majority of our revenue. Negative changes in the
economic condition, market dynamics or regulatory environment in one or both of these verticals could cause our
revenue to decline and our business and growth could suffer.
To date, we have generated a majority of our revenue from clients in our education and
financial services client verticals. We expect that a majority of our revenue in fiscal year 2011
will be generated from clients in our education and financial services client verticals. Changes in
the market conditions or the regulatory environment in these two highly-regulated client verticals
may negatively impact our clients businesses, marketing practices and budgets and, therefore,
adversely affect our financial results.
For example, some of our large clients in the education client vertical have publicly
indicated that enrollments are dropping or are expected to drop in the future. While it is not
clear what impact these declines in enrollment may have on these clients marketing budgets and
business with us, declining enrollments could result in reduced marketing budgets and, therefore,
adversely affect our financial results.
Any acquisitions that we complete will involve a number of risks. If we are unable to address and
resolve these risks successfully, such acquisitions could harm our business, results of operations
and financial condition.
The anticipated benefit of any acquisitions that we complete may not materialize. In addition,
the process of integrating acquired businesses or technologies may create unforeseen operating
difficulties and expenditures. Some of the areas where we may face acquisition-related risks
include:
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diversion of management time and potential business disruptions;
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difficulties integrating and supporting acquired products or technologies; |
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disruptions or reductions in client revenues associated with
changes to the business models of acquired businesses; |
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expenses, distractions and potential claims resulting from acquisitions, whether or not
they are completed; |
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retaining and integrating employees from any businesses we may acquire; |
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issuance of dilutive equity securities, incurrence of debt or reduction in cash balances; |
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integrating various accounting, management, information, human resource and other systems
to permit effective management; |
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incurring possible impairment charges, contingent liabilities, amortization expense or
write-offs of goodwill; |
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unexpected capital expenditure requirements; |
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insufficient revenue to offset increased expenses associated with acquisitions; |
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underperformance problems associated with acquisitions; and |
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becoming involved in acquisition-related litigation. |
Foreign acquisitions would involve risks in addition to those mentioned above, including those
related to integration of operations across different cultures and languages, currency risks and
the particular economic, political, administrative and management, and regulatory risks associated
with specific countries. We may not be able to address these risks successfully, or at all, without
incurring significant costs, delay or other operating problems. Our inability to resolve such risks
could harm our business and results of operations.
If we are unable to retain the members of our management team or attract and retain qualified
management team members in the future, our business and growth could suffer.
Our success and future growth depend, to a significant degree, on the continued contributions
of the members of our management team. Each member of our management team is an at-will employee
and may voluntarily terminate his or her employment with us at any time with minimal notice. We
also may need to hire additional management team members to adequately manage our growing business.
We may not be able to retain or identify and attract additional qualified management team members.
Competition for experienced management-level personnel in our industry is intense. Qualified
individuals are in high demand, particularly in the Internet marketing industry, and we may incur
significant costs to attract and retain them. Members of our management team have also become, or
will soon become, substantially vested in their stock option grants. Management team members may be
more likely to leave as a result of the recent establishment of a public market for our common
stock. If we lose the services of any member of our management team or if we are unable to attract
and retain additional qualified senior managers, our business and growth could suffer.
We need to hire and retain additional qualified personnel to grow and manage our business. If we
are unable to attract and retain qualified personnel, our business and growth could be seriously
harmed.
Our performance depends on the talents and efforts of our employees. Our future success will
depend on our ability to attract, retain and motivate highly skilled personnel in all areas of our
organization and, in particular, in our engineering/technology, sales and marketing, media, finance
and legal/regulatory teams. We plan to continue to grow our business and will need to hire
additional personnel to support this growth. We have found it difficult from time to time to locate
and hire suitable personnel. If we experience similar difficulties in the future, our growth may be
hindered. Qualified individuals are in high demand, particularly in the Internet marketing
industry, and we may incur significant costs to attract and retain them. Many of our employees have
also become, or will soon become, substantially vested in their stock option grants. Employees may
be more likely to leave us as a result of the recent establishment of a public market for our
common stock. If we are unable to attract and retain the personnel we need to succeed, our business
and growth could be harmed.
We depend on third-party website publishers for a significant portion of our visitors, and any
decline in the supply of media available through these websites or increase in the price of this
media could cause our revenue to decline or our cost to reach visitors to increase.
39
A significant portion of our revenue is attributable to visitors originating from advertising
placements that we purchase on third-party websites. In many instances, website publishers can
change the advertising inventory they make available to us at any time and, therefore, impact our
revenue. In addition, website publishers may place significant restrictions on our offerings. These
restrictions may prohibit advertisements from specific clients or specific industries, or restrict
the use of certain creative content or formats. If a website publisher decides not to make
advertising inventory available to us, or decides to demand a higher revenue share or places
significant restrictions on the use of such inventory, we may not be able to find advertising
inventory from other websites that satisfy our requirements in a timely and cost-effective manner.
In addition, the number of competing online marketing service providers and advertisers that
acquire inventory from websites continues to increase. Consolidation of Internet advertising
networks and website publishers could eventually lead to a concentration of desirable inventory on
a small number of websites or networks, which could limit the supply of inventory available to us
or increase the price of inventory to us. We cannot assure you that we will be able to acquire
advertising inventory that meets our clients performance, price and quality requirements. If any
of these things occur, our revenue could decline or our operating costs may increase.
If we do not effectively manage our growth, our operating performance will suffer and we may lose
clients.
We have experienced rapid growth in our operations and operating locations, and we expect to
experience continued growth in our business, both through acquisitions and internal growth. This
growth has placed, and will continue to place, significant demands on our management and our
operational and financial infrastructure. In particular, continued rapid growth and acquisitions
may make it more difficult for us to accomplish the following:
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successfully scale our technology to accommodate a larger business and integrate
acquisitions; |
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maintain our standing with key vendors, including Internet search companies and
third-party website publishers; |
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maintain our client service standards; and |
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develop and improve our operational, financial and management controls and maintain
adequate reporting systems and procedures. |
In addition, our personnel, systems, procedures and controls may be inadequate to support our
future operations. The improvements required to manage our growth will require us to make
significant expenditures, expand, train and manage our employee base and allocate valuable
management resources. If we fail to effectively manage our growth, our operating performance will
suffer and we may lose clients, key vendors and key personnel.
Our future growth depends in part on our ability to identify and complete acquisitions.
Our growth over the past several years is in significant part due to the large number of
acquisitions we have completed. We have completed a large number of acquisitions of third-party
website publishing businesses and other businesses that are complementary to our own. We intend to
pursue acquisitions of complementary businesses and technologies to expand our capabilities, client
base and media. We have evaluated, and expect to continue to evaluate, a wide array of potential
strategic transactions. However, we may not be successful in identifying suitable acquisition
candidates or be able to complete acquisitions of such candidates. In addition, we may not be able
to obtain financing on favorable terms, or at all, to fund acquisitions that we may wish to pursue.
We may need additional capital in the future to meet our financial obligations and to pursue our
business objectives. Additional capital may not be available or may not be available on favorable
terms and our business and financial condition could therefore be adversely affected.
While we anticipate that our existing cash and cash equivalents, together with availability
under our existing credit facility, cash balances and cash from operations, will be sufficient to
fund our operations for at least the next 12 months, we may need to raise additional capital to
fund operations in the future or to finance acquisitions. If we seek to raise additional capital in
order to meet various objectives, including developing future technologies and services, increasing
working capital, acquiring businesses and responding to competitive pressures, capital may not be
available on favorable terms or may not be available at all. In addition, pursuant to the terms of
our credit facility, we are required to use a portion of the net proceeds of certain equity
financings to repay the outstanding balance of our term loan. Lack of sufficient capital resources
could significantly limit our ability to take advantage of business and strategic opportunities.
Any additional capital raised through the sale of equity or debt securities with an equity
component would dilute our stock ownership. If adequate additional funds are not available, we may
be required to delay, reduce the scope of, or eliminate material parts of our business strategy,
including potential additional acquisitions or development of new technologies.
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We have incurred a significant amount of debt, which may limit our ability to fund general
corporate requirements and obtain additional financing, limit our flexibility in responding to
business opportunities and competitive developments and increase our vulnerability to adverse
economic and industry conditions.
As of December 31, 2010, we had an outstanding term loan with a principal balance of $32.4
million and a revolving credit line pursuant to which we can borrow up to an additional $140.0
million. On February 2, 2011, we exercised the accordion feature in our credit facility, increasing
the revolving credit line capacity to $190.0 million. As of December 31, 2010, we had drawn $66.6
million from our revolving credit line. As of such date, we also had outstanding notes to sellers
arising from numerous acquisitions in the total principal amount of $19.7 million. As a result of
our debt:
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we may not have sufficient liquidity to respond to business opportunities, competitive
developments and adverse economic conditions; |
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we may not have sufficient liquidity to fund all of these costs if our revenue declines
or costs increase; and |
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we may not have sufficient funds to repay the principal balance of our debt when due. |
Our debt obligations may also impair our ability to obtain additional financing, if needed.
Our indebtedness is secured by substantially all of our assets, leaving us with limited collateral
for additional financing. Moreover, the terms of our indebtedness restrict our ability to take
certain actions, including the incurrence of additional indebtedness, mergers and acquisitions,
investments and asset sales. In addition, even if we are able to raise needed equity financing, we
are required to use a portion of the net proceeds of certain types of equity financings to repay
the outstanding balance of our term loan. A failure to pay interest or indebtedness when due could
result in a variety of adverse consequences, including the acceleration of our indebtedness. In
such a situation, it is unlikely that we would be able to fulfill our obligations under our credit
facility or repay the accelerated indebtedness or otherwise cover our costs.
The severe economic downturn in the United States poses additional risks to our business,
financial condition and results of operations.
The United States has experienced, and is continuing to experience, a severe economic
downturn. The credit crisis, deterioration of global economies, potential insolvency of one or more
countries globally, high unemployment and reduced equity valuations all create risks that could
harm our business. If macroeconomic conditions worsen, we are not able to predict the impact such
worsening conditions will have on the online marketing industry in general, and our results of
operations specifically. Clients in particular client verticals such as financial services,
particularly mortgage, credit cards and deposits, small- and medium-sized business customers and
home services are facing very difficult conditions and their marketing spend has been negatively
affected. These conditions could also damage our business opportunities in existing markets, and
reduce our revenue and profitability. While the effect of these and related conditions poses
widespread risk across our business, we believe that it may particularly affect our efforts in the
mortgage, credit cards and deposits, small- and medium-sized business and home services client
verticals, due to reduced availability of credit for households and business and reduced household
disposable income. Economic conditions may not improve or may worsen.
Poor perception of our business or industry as a result of the actions of third parties could harm
our reputation and adversely affect our business, financial condition and results of operations.
Our business is dependent on attracting a large number of visitors to our websites and
providing leads and clicks to our clients, which depends in part on our reputation within the
industry and with our clients. There are companies within our industry that regularly engage in
activities that our clients customers may view as unlawful or inappropriate. These activities,
such as spyware or deceptive promotions, by third parties may be seen by clients as characteristic
of participants in our industry and, therefore, may have an adverse effect on the reputation of all
participants in our industry, including us. Any damage to our reputation, including from publicity
from legal proceedings against us or companies that work within our industry, governmental
proceedings, consumer class action litigation, or the disclosure of information security breaches
or private information misuse, could adversely affect our business, financial condition and results
of operations.
Our operating results have fluctuated in the past and may do so in the future, which makes our
results of operations difficult to predict and could cause our operating results to fall short of
analysts and investors expectations.
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While we have experienced continued revenue growth, our prior quarterly and annual operating
results have fluctuated due to changes in our business, our industry and the general economic
climate. Similarly, our future operating results may vary significantly from quarter to quarter due
to a variety of factors, many of which are beyond our control. Our fluctuating results could cause
our performance to be below the expectations of securities analysts and investors, causing the
price of our common stock to fall. Because our business is changing and evolving, our historical
operating results may not be useful to you in predicting our future operating results. Factors that
may increase the volatility of our operating results include the following:
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changes in demand and pricing for our services; |
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changes in our pricing policies, the pricing policies of our competitors, or the pricing
of Internet advertising or media; |
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the addition of new clients or the loss of existing clients; |
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changes in our clients advertising agencies or the marketing strategies our clients or
their advertising agencies employ; |
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changes in the regulatory environment for us or our clients; |
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changes in the economic prospects of our clients or the economy generally, which could
alter current or prospective clients spending priorities, or could increase the time or
costs required to complete sales with clients; |
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changes in the availability of Internet advertising or the cost to reach Internet
visitors; |
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changes in the placement of our websites on search engines; |
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the introduction of new product or service offerings by our competitors; and |
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costs related to acquisitions of businesses or technologies. |
Our quarterly revenue and operating results may fluctuate significantly from quarter to quarter
due to seasonal fluctuations in advertising spending.
The timing of our revenue is affected by seasonal factors. For example, in our education
client vertical, the first quarter of each fiscal year typically demonstrates seasonal strength and
our second fiscal quarter typically demonstrates seasonal weakness. In our second fiscal quarter,
our education clients often take fewer leads due to holiday staffing and lower availability of lead
supply caused by higher media pricing for some forms of media during the holiday period, causing
our revenue to be sequentially lower. Our fluctuating results could cause our performance to be
below the expectations of securities analysts and investors, causing the price of our common stock
to fall. To the extent our rate of growth slows, we expect that the seasonality in our business may
become more apparent and may in the future cause our operating results to fluctuate to a greater
extent.
If we fail to compete effectively against other online marketing and media companies and other
competitors, we could lose clients and our revenue may decline.
The market for online marketing is intensely competitive. We expect this competition to
continue to increase in the future. We perceive only limited barriers to entry to the online
marketing industry. We compete both for clients and for limited high quality advertising inventory.
We compete for clients on the basis of a number of factors, including return on marketing
expenditures, price, and client service.
We compete with Internet and traditional media companies for a share of clients overall
marketing budgets, including:
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online marketing or media services providers such as Monster Worldwide in the education
client vertical and BankRate in the financial services client vertical; |
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offline and online advertising agencies; |
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major Internet portals and search engine companies with advertising networks such as
Google, Yahoo!, MSN, and AOL;
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other online marketing service providers, including online affiliate advertising networks
and industry-specific portals or lead generation companies; |
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website publishers with their own sales forces that sell their online marketing services
directly to clients; |
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in-house marketing groups at current or potential clients; |
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offline direct marketing agencies; and |
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television, radio and print companies. |
Competition for web traffic among websites and search engines, as well as competition with
traditional media companies, could result in significant price pressure, declining margins,
reductions in revenue and loss of market share. In addition, as we continue to expand the scope of
our services, we may compete with a greater number of websites, clients and traditional media
companies across an increasing range of different services, including in vertical markets where
competitors may have advantages in expertise, brand recognition and other areas. Large Internet
companies with brand recognition, such as Google, Yahoo!, MSN, and AOL, have significant numbers of
direct sales personnel and substantial proprietary advertising inventory and web traffic that
provide a significant competitive advantage and have significant impact on pricing for Internet
advertising and web traffic. These companies may also develop more vertically targeted products
that match consumers with products and services, such as Googles mortgage rate and credit card
comparison products, and thus compete with us more directly. The trend toward consolidation in the
Internet advertising arena may also affect pricing and availability of advertising inventory and
web traffic. Many of our current and potential competitors also enjoy other competitive advantages
over us, such as longer operating histories, greater brand recognition, larger client bases,
greater access to advertising inventory on high-traffic websites, and significantly greater
financial, technical and marketing resources. As a result, we may not be able to compete
successfully. If we fail to deliver results that are superior to those that other online marketing
service providers achieve, we could lose clients and our revenue may decline.
If the market for online marketing services fails to continue to develop, our future growth may be
limited and our revenue may decrease.
The online marketing services market is relatively new and rapidly evolving, and it uses
different measurements than traditional media to gauge its effectiveness. Some of our current or
potential clients have little or no experience using the Internet for advertising and marketing
purposes and have allocated only limited portions of their advertising and marketing budgets to the
Internet. The adoption of Internet advertising, particularly by those entities that have
historically relied upon traditional media for advertising, requires the acceptance of a new way of
conducting business, exchanging information and evaluating new advertising and marketing
technologies and services. In particular, we are dependent on our clients adoption of new metrics
to measure the success of online marketing campaigns. We may also experience resistance from
traditional advertising agencies who may be advising our clients. We cannot assure you that the
market for online marketing services will continue to grow. If the market for online marketing
services fails to continue to develop or develops more slowly than we anticipate, our ability to
grow our business may be limited and our revenue may decrease.
Third-party website publishers can engage in unauthorized or unlawful acts that could subject us
to significant liability or cause us to lose clients.
We generate a significant portion of our web visitors from media advertising that we purchase
from third-party website publishers. Some of these publishers are authorized to display our
clients brands, subject to contractual restrictions. In the past, some of our third-party website
publishers have engaged in activities that certain of our clients have viewed as harmful to their
brands, such as displaying outdated descriptions of a clients offerings or outdated logos. Any
activity by publishers that clients view as potentially damaging to their brands can harm our
relationship with the client and cause the client to terminate its relationship with us, resulting
in a loss of revenue. In addition, the law is unsettled on the extent of liability that an
advertiser in our position has for the activities of third-party website publishers. We could be
subject to costly litigation and, if we are unsuccessful in defending ourselves, damages for the
unauthorized or unlawful acts of third-party website publishers.
Because many of our client contracts can be cancelled by the client with little prior notice or
penalty, the cancellation of one or more contracts could result in an immediate decline in our
revenue.
We derive our revenue from contracts with our Internet marketing clients, most of which are
cancelable with little or no prior notice. In addition, these contracts do not contain penalty
provisions for cancellation before the end of the contract term. The non-renewal, renegotiation, cancellation, or deferral of large contracts, or a number of contracts
that in the aggregate account for a significant amount of our revenue, is difficult to anticipate
and could result in an immediate decline in our revenue.
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Unauthorized access to or accidental disclosure of consumer personally-identifiable
information that we collect may cause us to incur significant expenses and may negatively affect
our credibility and business.
There is growing concern over the security of personal information transmitted over the
Internet, consumer identity theft and user privacy. Despite our implementation of security
measures, our computer systems may be susceptible to electronic or physical computer break-ins,
viruses and other disruptions and security breaches. Any perceived or actual unauthorized
disclosure of personally-identifiable information regarding website visitors, whether through
breach of our network by an unauthorized party, employee theft, misuse or error or otherwise, could
harm our reputation, impair our ability to attract website visitors and attract and retain our
clients, or subject us to claims or litigation arising from damages suffered by consumers, and
thereby harm our business and operating results. In addition, we could incur significant costs in
complying with the multitude of state, federal and foreign laws regarding the unauthorized
disclosure of personal information.
If we do not adequately protect our intellectual property rights, our competitive position and
business may suffer.
Our ability to compete effectively depends upon our proprietary systems and technology. We
rely on trade secret, trademark and copyright law, confidentiality agreements, technical measures
and patents to protect our proprietary rights. We currently have two patent applications pending in
the United States and no issued patents. Effective trade secret, copyright, trademark and patent
protection may not be available in all countries where we currently operate or in which we may
operate in the future. Some of our systems and technologies are not covered by any copyright,
patent or patent application. We cannot guarantee that: (i) our intellectual property rights will
provide competitive advantages to us; (ii) our ability to assert our intellectual property rights
against potential competitors or to settle current or future disputes will not be limited by our
agreements with third parties; (iii) our intellectual property rights will be enforced in
jurisdictions where competition may be intense or where legal protection may be weak; (iv) any of
the patents, trademarks, copyrights, trade secrets or other intellectual property rights that we
presently employ in our business will not lapse or be invalidated, circumvented, challenged, or
abandoned; (v) competitors will not design around our protected systems and technology; or (vi)
that we will not lose the ability to assert our intellectual property rights against others.
We are a party to a number of third-party intellectual property license agreements and in the
future, may need to obtain additional licenses or renew existing license agreements. We are unable
to predict with certainty whether these license agreements can be obtained or renewed on
commercially reasonable terms, or at all.
We have from time to time become aware of third parties who we believe may have infringed on
our intellectual property rights. The use of our intellectual property rights by others could
reduce any competitive advantage we have developed and cause us to lose clients, third-party
website publishers or otherwise harm our business. Policing unauthorized use of our proprietary
rights can be difficult and costly. In addition, litigation, while it may be necessary to enforce
or protect our intellectual property rights or to defend litigation brought against us, could
result in substantial costs and diversion of resources and management attention and could adversely
affect our business, even if we are successful on the merits.
Confidentiality agreements with employees, consultants and others may not adequately prevent
disclosure of trade secrets and other proprietary information.
We have devoted substantial resources to the development of our proprietary systems and
technology. In order to protect our proprietary systems and technology, we enter into
confidentiality agreements with our employees, consultants, independent contractors and other
advisors. These agreements may not effectively prevent unauthorized disclosure of confidential
information or unauthorized parties from copying aspects of our services or obtaining and using
information that we regard as proprietary. Moreover, these agreements may not provide an adequate
remedy in the event of such unauthorized disclosures of confidential information and we cannot
assure you that our rights under such agreements will be enforceable. In addition, others may
independently discover trade secrets and proprietary information, and in such cases we could not
assert any trade secret rights against such parties. Costly and time-consuming litigation could be
necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or
maintain trade secret protection could reduce any competitive advantage we have and cause us to
lose clients, publishers or otherwise harm our business.
Third parties may sue us for intellectual property infringement which, if successful, could
require us to pay significant damages or curtail our offerings.
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We cannot be certain that our internally-developed or acquired systems and technologies do not
and will not infringe the intellectual property rights of others. In addition, we license content,
software and other intellectual property rights from third parties and may be subject to claims of
infringement if such parties do not possess the necessary intellectual property rights to the
products they license to us. We have in the past and may in the future be subject to legal
proceedings and claims that we have infringed the patent or other intellectual property rights of a
third-party. These claims sometimes involve patent holding companies or other adverse patent owners
who have no relevant product revenue and against whom our own patents, if any, may therefore
provide little or no deterrence. In addition, third parties have asserted and may in the future
assert intellectual property infringement claims against our clients, which we have agreed in
certain circumstances to indemnify and defend against such claims. Any intellectual property
related infringement claims, whether or not meritorious, could result in costly litigation and
could divert management resources and attention. Moreover, should we be found liable for
infringement, we may be required to enter into licensing agreements, if available on acceptable
terms or at all, pay substantial damages, or limit or curtail our systems and technologies.
Moreover, we may need to redesign some of our systems and technologies to avoid future infringement
liability. Any of the foregoing could prevent us from competing effectively and increase our costs.
Additionally, the laws relating to use of trademarks on the Internet are currently unsettled,
particularly as they apply to search engine functionality. For example, other Internet marketing
and search companies have been sued in the past for trademark infringement and other intellectual
property-related claims for the display of ads or search results in response to user queries that
include trademarked terms. The outcomes of these lawsuits have differed from jurisdiction to
jurisdiction. For this reason, it is conceivable that certain of our activities could expose us to
trademark infringement, unfair competition, misappropriation or other intellectual property related
claims which could be costly to defend and result in substantial damages or otherwise limit or
curtail our activities, and adversely affect our business or prospects.
Our proprietary technologies may include design or performance defects and may not achieve their
intended results, either of which could impair our future revenue growth.
Our proprietary technologies are relatively new, and they may contain design or performance
defects that are not yet apparent. The use of our proprietary technologies may not achieve the
intended results as effectively as other technologies that exist now or may be introduced by our
competitors, in which case our business could be harmed.
If we fail to keep pace with rapidly-changing technologies and industry standards, we could lose
clients or advertising inventory and our results of operations may suffer.
The business lines in which we currently compete are characterized by rapidly-changing
Internet media and marketing standards, changing technologies, frequent new product and service
introductions, and changing user and client demands. The introduction of new technologies and
services embodying new technologies and the emergence of new industry standards and practices could
render our existing technologies and services obsolete and unmarketable or require unanticipated
investments in technology. Our future success will depend in part on our ability to adapt to these
rapidly-changing Internet media formats and other technologies. We will need to enhance our
existing technologies and services and develop and introduce new technologies and services to
address our clients changing demands. If we fail to adapt successfully to such developments or
timely introduce new technologies and services, we could lose clients, our expenses could increase
and we could lose advertising inventory.
Changes in government regulation and industry standards applicable to the Internet and our
business could decrease demand for our technologies and services or increase our costs.
Laws and regulations that apply to Internet communications, commerce and advertising are
becoming more prevalent. These regulations could increase the costs of conducting business on the
Internet and could decrease demand for our technologies and services.
In the United States, federal and state laws have been enacted regarding copyrights, sending
of unsolicited commercial email, user privacy, search engines, Internet tracking technologies,
direct marketing, data security, childrens privacy, pricing, sweepstakes, promotions, intellectual
property ownership and infringement, trade secrets, export of encryption technology, taxation and
acceptable content and quality of goods. Other laws and regulations may be adopted in the future.
Laws and regulations, including those related to privacy and use of personal information, are
changing rapidly outside the United States as well which may make compliance with such laws and
regulations difficult and which may negatively affect our ability to expand internationally. This
legislation could: (i) hinder growth in the use of the Internet generally; (ii) decrease the
acceptance of the Internet as a communications, commercial and advertising medium; (iii) reduce our
revenue; (iv) increase our operating expenses; or (v) expose us to significant liabilities.
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The laws governing the Internet remain largely unsettled, even in areas where there has been
some legislative action. While we actively monitor this changing legal and regulatory landscape to
stay abreast of changes in the laws and regulations applicable to our business, we are not certain
how our business might be affected by the application of existing laws governing issues such as
property ownership, copyrights, encryption and other intellectual property issues, libel, obscenity
and export or import matters to the Internet advertising industry. The vast majority of such laws
were adopted prior to the advent of the Internet. As a result, they do not contemplate or address
the unique issues of the Internet and related technologies. Changes in laws intended to address
such issues could create uncertainty in the Internet market. It may take years to determine how
existing laws apply to the Internet and Internet marketing. Such uncertainty makes it difficult to
predict costs and could reduce demand for our services or increase the cost of doing business as a
result of litigation costs or increased service delivery costs.
In particular, a number of U.S. federal laws impact our business. The Digital Millennium
Copyright Act, or DMCA, is intended, in part, to limit the liability of eligible online service
providers for listing or linking to third-party websites that include materials that infringe
copyrights or other rights. Portions of the Communications Decency Act, or CDA, are intended to
provide statutory protections to online service providers who distribute third-party content. We
rely on the protections provided by both the DMCA and CDA in conducting our business. In addition,
the United States Higher Education Act provides that to be eligible to participate in Federal
student financial aid programs, an educational institution must enter into a program participation
agreement with the Secretary of the Department of Education. The agreement includes a number of
conditions with which an institution must comply to be granted initial and continuing eligibility
to participate. Among those conditions is a prohibition on institutions providing to any individual
or entity engaged in recruiting or admission activities any commission, bonus, or other incentive
payment based directly or indirectly on success in securing enrollments. The current regulations
promulgated under the Higher Education Act specify a number of types of compensation, or safe
harbors, that do not constitute incentive compensation in violation of this agreement. One of
these safe harbors permits an institution to award incentive compensation for Internet-based
recruitment and admission activities that provide information about the institution to prospective
students, refer prospective students to the institution, or permit prospective students to apply
for admission online. The Department of Education issued final regulations on October 29, 2010 on
incentive compensation and other matters. These regulations become effective July 1, 2011. The
Departments regulations repeal all safe harbors regarding incentive compensation, including the
Internet safe harbor. The elimination of the safe harbors could create uncertainty for us and our
education clients and impact the way in which we are paid by our clients and, accordingly, could
reduce the amount of revenue we generate from the education client vertical.
In addition, the Department has proposed regulations that would also restrict Title IV funding
for programs not meeting prescribed income-to-debt ratios (i.e., programs not leading to gainful
employment as defined under the proposed regulation). The Department is expected to issue final
regulations on gainful employment in early 2011 and those regulations would take effect on July 1,
2012. These provisions, if adopted and as enforced, could negatively affect our business with
education clients. Any changes in these laws or judicial interpretations narrowing their
protections will subject us to greater risk of liability and may increase our costs of compliance
with these regulations or limit our ability to operate certain lines of business.
The financial services, education and medical industries are highly regulated and our
marketing activities on behalf of our clients in those industries are also regulated. As described
above, and for example, the proposed regulations from the Department of Education on incentive
compensation, gainful employment and other matters could limit our clients businesses and limit
the revenue we receive from our education clients. As an additional example, our mortgage websites
and marketing services we offer are subject to various federal, state and local laws, including
state mortgage broker licensing laws, federal and state laws prohibiting unfair acts and practices,
and federal and state advertising laws. Any failure to comply with these laws and regulations could
subject us to revocation of required licenses, civil, criminal or administrative liability, damage
to our reputation or changes to or limitations on the conduct of our business. Any of the foregoing
could cause our business, operations and financial condition to suffer.
Increased taxation of companies engaged in Internet commerce may adversely affect the commercial
use of our marketing services and our financial results.
The tax treatment of Internet commerce remains unsettled, and we cannot predict the effect of
current attempts to impose sales, income or other taxes on commerce conducted over the Internet.
Tax authorities at the international, federal, state and local levels are currently reviewing the
taxation of Internet commerce, particularly as many governmental agencies seek to address fiscal
concerns and budgetary shortfalls by introducing new taxes or expanding the applicability of
existing tax laws. We have experienced certain states taking expansive positions with regard to
their taxation of our services. The imposition of new laws requiring the collection of sales or
other transactional taxes on the sale of our services via the Internet could create increased
administrative burdens or costs, discourage clients from purchasing services from us, decrease our
ability to compete or otherwise substantially harm our business and results of operations.
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Limitations on our ability to collect and use data derived from user activities could
significantly diminish the value of our services and cause us to lose clients and revenue.
When a user visits our websites, we use technologies, including cookies, to collect
information such as the users Internet Protocol, or IP, address, offerings delivered by us that
have been previously viewed by the user and responses by the user to those offerings. In order to
determine the effectiveness of a marketing campaign and to determine how to modify the campaign, we
need to access and analyze this information. The use of cookies has been the subject of regulatory
scrutiny and litigation and users are able to block or delete cookies from their browser.
Periodically, certain of our clients and publishers seek to prohibit or limit our collection or use
of this data. Interruptions, failures or defects in our data collection systems, as well as privacy
concerns regarding the collection of user data, could also limit our ability to analyze data from
our clients marketing campaigns. This risk is heightened when we deliver marketing services to
clients in the financial and medical services client verticals. If our access to data is limited in
the future, we may be unable to provide effective technologies and services to clients and we may
lose clients and revenue.
As a creator and a distributor of Internet content, we face potential liability and expenses for
legal claims based on the nature and content of the materials that we create or distribute. If we
are required to pay damages or expenses in connection with these legal claims, our operating
results and business may be harmed.
We create original content for our websites and marketing messages and distribute third-party
content on our websites and in our marketing messages. As a creator and distributor of original
content and third-party provided content, we face potential liability based on a variety of
theories, including defamation, negligence, deceptive advertising, copyright or trademark
infringement or other legal theories based on the nature, creation or distribution of this
information. It is also possible that our website visitors could make claims against us for losses
incurred in reliance upon information provided on our websites. In addition, as the number of users
of forums and social media features on our websites increases, we could be exposed to liability in
connection with material posted to our websites by users and other third parties. These claims,
whether brought in the United States or abroad, could divert management time and attention away
from our business and result in significant costs to investigate and defend, regardless of the
merit of these claims. In addition, if we become subject to these types of claims and are not
successful in our defense, we may be forced to pay substantial damages.
Wireless devices and mobile phones are increasingly being used to access the Internet, and our
online marketing services may not be as effective when accessed through these devices, which could
cause harm to our business.
The number of people who access the Internet through devices other than personal computers has
increased substantially in the last few years. Our online marketing services were designed for
persons accessing the Internet on a desktop or laptop computer. The smaller screens, lower
resolution graphics and less convenient typing capabilities of these devices may make it more
difficult for visitors to respond to our offerings. In addition, the cost of mobile advertising is
relatively high and may not be cost-effective for our services. If our services continue to be less
effective or economically attractive for clients seeking to engage in marketing through these
devices and this segment of web traffic grows at the expense of traditional computer Internet
access, we will experience difficulty attracting website visitors and attracting and retaining
clients and our operating results and business will be harmed.
We may not succeed in expanding our businesses outside the United States, which may limit our
future growth.
One potential area of growth for us is in the international markets. However, we have limited
experience in marketing, selling and supporting our services outside of the United States and we
may not be successful in introducing or marketing our services abroad. There are risks inherent in
conducting business in international markets, such as:
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the adaptation of technologies and services to foreign clients preferences and customs; |
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application of foreign laws and regulations to us, including marketing and privacy
regulations; |
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changes in foreign political and economic conditions; |
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tariffs and other trade barriers, fluctuations in currency exchange rates and potentially
adverse tax consequences; |
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language barriers or cultural differences; |
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reduced or limited protection for intellectual property rights in foreign jurisdictions; |
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difficulties and costs in staffing, managing or overseeing foreign operations; and |
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education of potential clients who may not be familiar with online marketing. |
If we are unable to successfully expand and market our services abroad, our business and
future growth may be harmed and we may incur costs that may not lead to future revenue.
We rely on Internet bandwidth and data center providers and other third parties for key aspects of
the process of providing services to our clients, and any failure or interruption in the services
and products provided by these third parties could harm our business.
We rely on third-party vendors, including data center and Internet bandwidth providers. Any
disruption in the network access or co-location services provided by these third-party providers or
any failure of these third-party providers to handle current or higher volumes of use could
significantly harm our business. Any financial or other difficulties our providers face may have
negative effects on our business, the nature and extent of which we cannot predict. We exercise
little control over these third-party vendors, which increases our vulnerability to problems with
the services they provide. We license technology and related databases from third parties to
facilitate analysis and storage of data and delivery of offerings. We have experienced
interruptions and delays in service and availability for data centers, bandwidth and other
technologies in the past. Any errors, failures, interruptions or delays experienced in connection
with these third-party technologies and services could adversely affect our business and could
expose us to liabilities to third parties.
Our systems also heavily depend on the availability of electricity, which also comes from
third-party providers. If we or third-party data centers which we utilize were to experience a
major power outage, we would have to rely on back-up generators. These back-up generators may not
operate properly through a major power outage and their fuel supply could also be inadequate during
a major power outage or disruptive event. Furthermore, we do not currently have backup generators
at our Foster City, California headquarters. Information systems such as ours may be disrupted by
even brief power outages, or by the fluctuations in power resulting from switches to and from
back-up generators. This could give rise to obligations to certain of our clients which could have
an adverse effect on our results for the period of time in which any disruption of utility services
to us occurs.
Interruption or failure of our information technology and communications systems could impair our
ability to effectively deliver our services, which could cause us to lose clients and harm our
operating results.
Our delivery of marketing and media services depends on the continuing operation of our
technology infrastructure and systems. Any damage to or failure of our systems could result in
interruptions in our ability to deliver offerings quickly and accurately and/or process visitors
responses emanating from our various web presences. Interruptions in our service could reduce our
revenue and profits, and our reputation could be damaged if people believe our systems are
unreliable. Our systems and operations are vulnerable to damage or interruption from earthquakes,
terrorist attacks, floods, fires, power loss, break-ins, hardware or software failures,
telecommunications failures, computer viruses or other attempts to harm our systems, and similar
events.
We lease or maintain server space in various locations, including in San Francisco,
California. Our California facilities are located in areas with a high risk of major earthquakes.
Our facilities are also subject to break-ins, sabotage and intentional acts of vandalism, and to
potential disruptions if the operators of these facilities have financial difficulties. Some of our
systems are not fully redundant, and our disaster recovery planning cannot account for all
eventualities. The occurrence of a natural disaster, a decision to close a facility we are using
without adequate notice for financial reasons or other unanticipated problems at our facilities
could result in lengthy interruptions in our service.
Any unscheduled interruption in our service would result in an immediate loss of revenue. If
we experience frequent or persistent system failures, the attractiveness of our technologies and
services to clients and website publishers could be permanently harmed. The steps we have taken to
increase the reliability and redundancy of our systems are expensive, reduce our operating margin,
and may not be successful in reducing the frequency or duration of unscheduled interruptions.
Any constraints on the capacity of our technology infrastructure could delay the effectiveness of
our operations or result in system failures, which would result in the loss of clients and harm
our business and results of operations.
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Our future success depends in part on the efficient performance of our software and technology
infrastructure. As the numbers of websites and Internet users increase, our technology
infrastructure may not be able to meet the increased demand. A sudden and unexpected increase in
the volume of user responses could strain the capacity of our technology infrastructure. Any
capacity constraints we experience could lead to slower response times or system failures and
adversely affect the availability of websites and the level of user responses received, which could
result in the loss of clients or revenue or harm to our business and results of operations.
We could lose clients if we fail to detect click-through or other fraud on advertisements in a
manner that is acceptable to our clients.
We are exposed to the risk of fraudulent clicks or actions on our websites or our third-party
publishers websites. We may in the future have to refund revenue that our clients have paid to us
and that was later attributed to, or suspected to be caused by, fraud. Click-through fraud occurs
when an individual clicks on an ad displayed on a website or an automated system is used to create
such clicks with the intent of generating the revenue share payment to the publisher rather than to
view the underlying content. Action fraud occurs when on-line forms are completed with false or
fictitious information in an effort to increase the compensable actions in respect of which a web
publisher is to be compensated. From time to time we have experienced fraudulent clicks or actions
and we do not charge our clients for such fraudulent clicks or actions when they are detected. It
is conceivable that this activity could negatively affect our profitability, and this type of
fraudulent act could hurt our reputation. If fraudulent clicks or actions are not detected, the
affected clients may experience a reduced return on their investment in our marketing programs,
which could lead the clients to become dissatisfied with our campaigns, and in turn, lead to loss
of clients and the related revenue. Additionally, we have from time to time had to terminate
relationships with web publishers who we believed to have engaged in fraud and we may have to do so
in the future. Termination of such relationships entails a loss of revenue associated with the
legitimate actions or clicks generated by such web publishers.
We incur significant costs as a result of operating as a public company, which may adversely
affect our operating results and financial condition.
As a public company, we incur significant accounting, legal and other expenses that we did not
incur as a private company. We incur costs associated with our public company reporting
requirements. We also incur costs associated with corporate governance requirements, including
requirements under the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, as well as rules
implemented by the SEC and NASDAQ. We expect these rules and regulations to continue to increase
our legal and financial compliance costs and to make some activities more time-consuming and
costly. Our management and other personnel will need to continue to devote a substantial amount of
time to these compliance initiatives. Furthermore, these laws and regulations could make it more
difficult or more costly for us to obtain certain types of insurance, including director and
officer liability insurance, and we may be forced to accept reduced policy limits and coverage or
incur substantially higher costs to obtain the same or similar coverage. The impact of these
requirements could also make it more difficult for us to attract and retain qualified persons to
serve on our board of directors, our board committees or as executive officers. These additional
costs may adversely affect our operating results and financial condition.
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal control over financial reporting and disclosure controls and procedures. In particular,
for the fiscal year ending June 30, 2011, we must perform system and process evaluation and testing
of our internal control over financial reporting to allow management and our independent registered
public accounting firm to report on the effectiveness of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404. Our compliance
with Section 404 will require that we incur substantial expense and expend significant management
time on compliance-related issues.
If we fail to maintain proper and effective internal controls, our ability to produce accurate
financial statements on a timely basis could be impaired, which would adversely affect our ability
to operate our business.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for external purposes in accordance with U.S.
generally accepted accounting principles. We may in the future discover areas of our internal
financial and accounting controls and procedures that need improvement. Our internal control over
financial reporting will not prevent or detect all error and all fraud. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute, assurance that the
control systems objectives will be met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that misstatements due to error
or fraud will not occur or that all control issues and instances of fraud will be detected. If we
are unable to maintain proper and effective internal controls, we may not be able to produce
accurate financial statements on a timely basis, which could adversely affect our ability to
operate our business and could result in regulatory action.
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Risks Related to the Ownership of Our Common Stock
Our stock price may be volatile, and you may not be able to resell shares of our common stock at
or above the price you paid.
Prior to our initial public offering there was no public market for shares of our common
stock, and an active public market for our shares may not be sustained. The trading price of our
common stock has been highly volatile since our initial public offering and may continue to be
subject to wide fluctuations in response to various factors, some of which are beyond our control.
These factors include those discussed in this Risk Factors section of this report on Form 10-Q
and others such as:
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changes in earnings estimates or recommendations by securities analysts; |
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announcements about our revenues, earnings or growth rates that are not
in line with analyst expectations, the risk of which is heightened
because it is our policy not to give quarterly guidance on revenue,
earnings, or growth rates. |
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changes in governmental regulations; |
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announcements by us or our competitors of new services, significant contracts, commercial
relationships, acquisitions or capital commitments; |
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changes in the search engine rankings of our sites or our ability to access PPC
advertising; |
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developments with respect to intellectual property rights; |
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our ability to develop and market new and enhanced products on a timely basis; |
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our commencement of, or involvement in, litigation; |
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negative publicity about us, our industry, our clients or our clients industries; and |
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a slowdown in our industry or the general economy. |
In recent years, the stock market in general, and the market for technology and Internet-based
companies in particular, has experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of those companies. Broad market and
industry factors may seriously affect the market price of our common stock, regardless of our
actual operating performance. In addition, in the past, following periods of volatility in the
overall market and the market price of a particular companys securities, securities class action
litigation has often been instituted against these companies. Such litigation, if instituted
against us, could result in substantial costs and a diversion of our managements attention and
resources.
If securities or industry analysts do not publish research or reports about our business, or if
they issue an adverse opinion regarding our stock, our stock price and trading volume could
decline.
The trading market for our common stock is influenced by the research and reports that
industry or securities analysts publish about us or our business. If any of the analysts who cover
us issue an adverse opinion regarding our stock, our stock price would likely decline. If one or
more of these analysts ceases coverage of our company or fail to publish reports on us regularly,
we could lose visibility in the financial markets, which in turn could cause our stock price or
trading volume to decline.
Our directors, executive officers and principal stockholders and their respective affiliates have
substantial control over us and could delay or prevent a change in corporate control.
As of December 31, 2010, our directors and executive officers, together with their affiliates,
beneficially owned approximately 41% of our outstanding common stock. As a result, these
stockholders, acting together, have substantial control over the outcome of matters submitted to
our stockholders for approval, including the election of directors and any merger, consolidation or
sale of all or substantially all of our assets. In addition, these stockholders, acting together,
have significant influence over the management and affairs of our company. Accordingly, this
concentration of ownership may have the effect of:
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delaying, deferring or preventing a change in corporate control; |
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impeding a merger, consolidation, takeover or other business combination involving us; or |
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discouraging a potential acquirer from making a tender offer or otherwise attempting to
obtain control of us. |
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Future sales of shares by existing stockholders could cause our stock price to decline.
If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our
common stock in the public market the trading price of our common stock could decline
significantly. We had 46,505,993 shares of common stock outstanding as of December 31, 2010. In
addition, (i) the 10,808,000 shares subject to outstanding stock options and restricted stock units
under our equity incentive plans as of December 31, 2010 and (ii) the shares reserved for future
issuance under our equity incentive plans will become eligible for sale in the public market in the
future, subject to certain legal and contractual limitations. If these additional shares are sold,
or if it is perceived that they will be sold, in the public market, the price of our common stock
could decline substantially.
We have broad discretion to determine how to use the funds raised in our initial public offering
and may use them in ways that may not enhance our operating results or the price of our common
stock.
Our management has broad discretion over the use of proceeds from our initial public offering,
and we could spend the proceeds from the initial public offering in ways our stockholders may not
agree with or that do not yield a favorable return. We have been using and intend to continue to
use the net proceeds from our initial public offering for working capital, capital expenditures and
other general corporate purposes. We may also use and continue to use a portion of the net proceeds
to make repayments on our debt or acquire other businesses, products or technologies. If we do not
invest or apply the proceeds of our initial public offering in ways that improve our operating
results, we may fail to achieve expected financial results, which could cause our stock price to
decline.
Provisions in our charter documents under Delaware law and in contractual obligations, could
discourage a takeover that stockholders may consider favorable and may lead to entrenchment of
management.
Our amended and restated certificate of incorporation and bylaws contain provisions that could
have the effect of delaying or preventing changes in control or changes in our management without
the consent of our board of directors. These provisions include:
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a classified board of directors with three-year staggered terms, which may delay the
ability of stockholders to change the membership of a majority of our board of directors; |
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no cumulative voting in the election of directors, which limits the ability of minority
stockholders to elect director candidates; |
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the exclusive right of our board of directors to elect a director to fill a vacancy
created by the expansion of the board of directors or the resignation, death or removal of a
director, which prevents stockholders from being able to fill vacancies on our board of
directors; |
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the ability of our board of directors to determine to issue shares of preferred stock and
to determine the price and other terms of those shares, including preferences and voting
rights, without stockholder approval, which could be used to significantly dilute the
ownership of a hostile acquirer; |
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a prohibition on stockholder action by written consent, which forces stockholder action
to be taken at an annual or special meeting of our stockholders; |
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the requirement that a special meeting of stockholders may be called only by the chairman
of the board of directors, the chief executive officer or the board of directors, which may
delay the ability of our stockholders to force consideration of a proposal or to take
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advance notice procedures that stockholders must comply with in order to nominate
candidates to our board of directors or to propose matters to be acted upon at a
stockholders meeting, which may discourage or deter a potential acquiror from conducting a
solicitation of proxies to elect the acquirors own slate of directors or otherwise
attempting to obtain control of us. |
We are subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a
corporation may not, in general, engage in a business combination with any holder of 15% or more of
its capital stock unless the holder has held the stock for three years or, among other things, the
board of directors has approved the transaction. For a description of our capital stock, see
Description of Capital Stock.
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We do not currently intend to pay dividends on our common stock and, consequently, your ability to
achieve a return on your investment will depend on appreciation in the price of our common stock.
We do not intend to declare and pay dividends on our capital stock for the foreseeable future.
We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the
terms of our credit facility restrict our ability to pay dividends. Therefore, you are not likely
to receive any dividends on your common stock for the foreseeable future.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None.
Use of Proceeds
On February 10, 2010, our registration statement on Form S-1 (File No. 333-163228) was
declared effective for our initial public offering, pursuant to which we registered the offering
and sale of 10,000,000 shares of common stock at a public offering price of $15.00 per share and an
aggregate offering price of $150.0 million. The managing underwriters were Credit Suisse Securities
(USA) LLC, Merrill Lynch, Pierce Fenner & Smith Incorporated and J.P. Morgan Securities Inc. The
offering was completed on February 17, 2010.
As a result of the offering, we received net proceeds of $136.7 million, after underwriting
discounts and commissions of $10.5 million and other offering costs of $2.8 million. None of such
payments were a direct or indirect payment to any of our directors or officers or their associates,
to persons owning ten percent or more of our common stock or any of our other affiliates.
The net offering proceeds have been invested in money market accounts.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
52
ITEM 6. EXHIBITS
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Exhibit |
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|
Number |
|
Description of Document |
31.1*
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
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32.1
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|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Filed herewith. |
|
|
|
Furnished herewith. |
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
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|
|
|
QUINSTREET, INC.
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|
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/s/ Kenneth Hahn
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|
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Kenneth Hahn |
|
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Chief Financial Officer
(Principal Financial Officer and duly authorized signatory)
Date: February 11, 2011 |
|
54
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
31.1*
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Filed herewith. |
|
|
|
Furnished herewith. |
55
exv31w1
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Douglas Valenti, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of QuinStreet, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. [Intentionally omitted]
c. Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
/s/ Douglas Valenti
Douglas Valenti
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: February 11, 2011
exv31w2
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Kenneth Hahn, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of QuinStreet, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. [Intentionally omitted]
c. Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
/s/ Kenneth Hahn
Kenneth Hahn
Chief Financial Officer
(Principal Financial Officer)
Date: February 11, 2011
exv32w1
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to the requirement set forth in Rule 13a-14(b) or Rule 15d-14(b) of the Securities
Exchange Act of 1934, as amended (the Exchange Act), and Section 1350 of Chapter 63 of Title 18
of the United States Code (18 U.S.C. §1350), Douglas Valenti, Chairman and Chief Executive Officer
of QuinStreet, Inc. (the Company), hereby certifies that, to the best of his knowledge:
1. |
|
The Companys Quarterly Report on Form 10-Q for the period ended December 31, 2010, to which
this Certification is attached as Exhibit 32.1 (the Report) fully complies with the
requirements of Section 13(a) or Section 15(d) of the Exchange Act, and |
2. |
|
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
|
|
|
|
|
|
|
|
|
/s/ Douglas Valenti
|
|
|
Douglas Valenti |
|
|
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: February 11, 2011 |
|
exv32w2
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to the requirement set forth in Rule 13a-14(b) or Rule 15d-14(b) of the Securities
Exchange Act of 1934, as amended (the Exchange Act), and Section 1350 of Chapter 63 of Title 18
of the United States Code (18 U.S.C. §1350), Kenneth Hahn, Chief Financial Officer of QuinStreet,
Inc. (the Company), hereby certifies that, to the best of his knowledge:
1. |
|
The Companys Quarterly Report on Form 10-Q for the period ended December 31, 2010, to which
this Certification is attached as Exhibit 32.2 (the Report) fully complies with the
requirements of Section 13(a) or Section 15(d) of the Exchange Act, and |
2. |
|
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
|
|
|
|
|
|
|
|
|
/s/ Kenneth Hahn
|
|
|
Kenneth Hahn |
|
|
Chief Financial Officer
(Principal Financial Officer)
Date: February 11, 2011 |
|
|