EXACTTARGET, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. Unless otherwise indicated, all references to 2012, 2011 and 2010 mean our fiscal year ended December 31, 2012, 2011 and 2010, as applicable.

Overview We are a leading global provider of cross-channel, digital marketing SaaS solutions that empower organizations of all sizes to communicate with their customers through the digital channels they use most - email, mobile, social media and websites. Our solutions provide marketers with a broad and powerful suite of integrated applications to plan, automate, deliver and optimize data-driven digital marketing campaigns and real-time communications to drive customer engagement, increase sales and improve their return on marketing investment. Our direct client base consists of organizations ranging from enterprises to small businesses in numerous industries, including retail and e-commerce, media and entertainment, travel and hospitality, financial services and insurance, internet and technology, and marketing service providers. Our direct client base also includes marketing service providers that extend our global sales distribution by reselling our solutions to several thousand additional organizations.

We provide our solutions primarily through annual and multi-year subscriptions based on the volume of contracted utilization, level of functionality, number of digital marketing channels, number of users and level of customer support.

Clients are charged additional usage-based fees for utilization above the contracted level. Our subscription-based model and track record of long-term client relationships have allowed us to achieve dollar-based subscription revenue renewal rates of over 100% in 2012, 2011 and 2010.

We face a number of risks in the execution of our strategy, including our potential failure to manage our domestic and international growth effectively, inability to attract new clients and retain existing clients, inability to achieve and sustain profitability and the overall impact of uncertain economic conditions. Due to the size and expected growth of the market opportunity, we recognize that we may face increased competition from established vendors and potential new entrants in our markets. We believe the expansion of our suite of cross-channel, digital marketing SaaS solutions have been important in winning new clients and cross selling into our existing client base.

We were founded in December 2000, and initially focused on providing email marketing solutions to small and medium-sized clients. Since that time, we have expanded our solutions offerings to serve the enterprise market. In 2007, we broadened our product strategy to expand beyond email into emerging cross-channel, digital marketing technologies such as mobile, landing pages and microsites. In 2010, we further expanded our cross-channel, digital marketing capabilities with the acquisition of the enterprise social media management platform, SocialEngage (formerly CoTweet Enterprise). Additionally, we continued to develop and improve our proprietary, cloud-based platform, expanding our integration framework to enable third-party marketing technology providers to embed our technology into their solutions and build applications on our platform. In 2011, we made our Interactive Marketing Hub generally available to clients, providing a broad and powerful suite of cross-channel, digital marketing SaaS solutions to plan, automate, deliver and optimize data-driven digital marketing campaigns and real-time communications. In 2012, we continued the expansion of our cross-channel product suite with the acquisitions of business-to-business marketing automation provider Pardot and web personalization provider iGoDigital.

We have achieved 48 consecutive quarters of sequential revenue growth since our inception in December 2000. In 2012, 2011 and 2010 our revenue was $292.3 million, $207.5 million and $134.3 million, respectively, representing period-over-period growth of 41%, 55% and 41%, respectively. We were profitable for the first time during the year ended December 31, 2006 and recorded operating income between 8% and 9% of revenue each year from 2006 through 2008.

In 2009, we raised significant private capital and implemented a strategy focused on increased investments in sales, marketing, research and development activities and international expansion. This investment strategy has accelerated our revenue growth and has also resulted in operating losses since 2009.

We have established a direct presence in international markets through acquisitions of resellers in the United Kingdom, Australia and Brazil, and subsequent investments in each of these operations. In August 2009, we acquired a reseller in the United Kingdom, allowing us to directly support clients in Europe including many of our U.S. headquartered clients doing business in the region. In August 2010, we acquired an Australian reseller to extend our ability to support multinational clients in the Asia-Pacific region. In August 2011, we acquired a reseller in Sao Paulo, Brazil, to support clients in Latin America and to expand our sales in the region.

In 2012, we established a direct presence in France, Germany and Sweden. Our substantial investments to establish a direct presence in multiple countries have negatively impacted our consolidated net loss. Revenue from outside the United States as a percentage of total revenue was 18%, 14% and 8% in 2012, 2011 and 2010, respectively. As a result of our increased 35-------------------------------------------------------------------------------- Table of Contents investment strategy initiated in 2009, our cash flows from operations decreased from $6.7 million in 2009 to $3.6 million in 2010 and we used $2.8 million of cash for operations in 2011. For the year ended December 31, 2012, our cash flows from operations increased to $22.7 million. We intend to continue to expand our direct and indirect sales channels, expand our global reach, extend our suite of cross-channel, digital marketing SaaS solutions and increase revenue from new and existing clients.

Key Metrics We use certain key metrics to evaluate and manage our business as further described below.

Recurring Subscription Revenue. As a SaaS provider, we monitor recurring subscription revenue to measure our success in executing our strategy to increase the adoption of our SaaS solutions and expand our recurring revenue streams attributable to these solutions. We expect our recurring subscription revenue to remain the most significant portion of our total revenue although its percentage of total revenue may vary from period to period due to a number of factors, including the amount of revenue recognized from utilization above the contracted level and the timing of recognition of professional services revenue.

We define recurring subscription revenue as the total amount of contractually-committed subscription revenue under each of our client agreements, which excludes revenue related to utilization above the contracted level.

Year Ended December 31, 2012 2011 2010 (in thousands, except percentages) Recurring subscription revenue (1) $ 228,722 $ 160,659 $ 106,412 Percentage of subscription revenue 98% 94% 92% (1) Recurring subscription revenue excludes revenue related to utilization above our clients' contracted volume level of $5.5 million, $10.0 million and $9.1 million in 2012, 2011 and 2010, respectively.

Subscription Revenue Renewal Rate. Our ability to retain our clients and expand their use of our suite of cross-channel, digital marketing SaaS solutions over time is an indicator of the stability of our revenue base and the long-term value of our client relationships. We assess our performance in this area using a metric we refer to as our subscription revenue renewal rate. This metric is calculated by dividing (a) subscription revenue (including revenue related to messaging utilization above our clients' contracted levels, but excluding customer support) in the current period from those clients who were clients during the prior year period, including additional sales to those clients, by (b) subscription revenue (including revenue related to messaging utilization above our clients' contracted levels, but excluding customer support) from all clients in the prior year period. This metric is calculated on a quarterly basis and, for periods longer than one quarter, we use an average of the quarterly metrics. For each of the years ended December 31, 2012, 2011 and 2010, our subscription revenue renewal rate was greater than 100%.

Adjusted EBITDA. We monitor Adjusted EBITDA because we believe this measure provides important supplemental information regarding our operating performance and is often used by investors and analysts in their evaluation of companies such as ours. In addition, we use Adjusted EBITDA as a measurement of our operating performance because it assists us in comparing our operating performance on a consistent basis by removing the impact of certain non-cash and non-operating items. We calculate Adjusted EBITDA as net income (loss) before (1) other (income) expense, which includes interest income, interest expense and other income and expense, (2) income tax expense (benefit), (3) depreciation and amortization of property and equipment, (4) amortization of intangible assets, (5) stock-based compensation and (6) the impact of adjusting deferred revenue to fair value under purchase accounting. This non-GAAP financial measure is used in addition to and in conjunction with results presented in accordance with accounting principles generally accepted in the United States ("GAAP") and should not be relied upon to the exclusion of GAAP financial measures. Adjusted EBITDA reflects an additional way of viewing aspects of our operations that we believe, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provides a more complete understanding of factors and trends affecting our business.

Year Ended December 31, 2012 2011 2010 (in thousands) Adjusted EBITDA (1) $ 15,674 $ (59 ) $ (2,769 ) (1) Adjusted EBITDA is a non-GAAP financial measure. See "Results of Operations" below for a reconciliation from net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA.

36-------------------------------------------------------------------------------- Table of Contents Components of Results of Operations Revenue We generate revenue through the sale of subscriptions to our suite of cross-channel, digital marketing SaaS solutions and the delivery of professional services. More than 80% of our revenue in each of 2012, 2011 and 2010 was derived from our enterprise, medium-sized and small business clients, with the balance attributable to marketing service providers that resell our solutions to thousands of their customers. We serve a wide range of clients across many industries and sizes, and our revenue is not concentrated within any single client or small group of clients. In each of 2012, 2011 and 2010 no single client represented more than 5% of our revenue, and our largest ten clients accounted for less than 20% of our revenue in the aggregate.

Clients are typically invoiced in advance on an annual, quarterly or monthly basis, with payment due upon receipt of the invoice. Invoiced amounts are reflected on the balance sheet as accounts receivable or as cash when collected and as deferred revenue until earned and recognized as revenue ratably over the performance period. Accordingly, deferred revenue represents the amount billed to clients that has not yet been earned or recognized as revenue, pursuant to agreements entered into in current and prior periods, and does not reflect that portion of a contract to be invoiced to clients on a periodic basis for which payment is not yet due. In recent periods, more of our clients have requested monthly instead of quarterly or annual billing terms. As a result, we believe that the proportion of aggregate contract value reflected on the balance sheet as deferred revenue may continue to decrease if this trend continues.

Subscription Revenue. Our subscriptions are based on volume of contracted utilization, level of functionality, number of digital marketing channels, number of users, number of records under management and level of customer support. Utilization levels are based on the volume of email messages, SMS messages, website impressions and other activities. If clients exceed the specified volume of utilization, additional fees are billed for the excess volume, generally at rates equal to or greater than the contracted minimum per-utilization fee, and are included in subscription revenue. If clients use less than the minimum contracted utilization, no rollover credit or refunds are given. Subscription agreements with our clients typically are not cancellable for a minimum period, generally one year but ranging up to three years. Our subscription revenue as a percentage of our total revenue was as follows for the periods presented: Year Ended December 31, 2012 2011 2010 Subscription revenue 80% 82% 86% We recognize the aggregate minimum subscription fee ratably on a straight-line basis over the subscription term, provided that an enforceable contract has been signed by both parties, access to our SaaS solutions has been granted to the client, the fee for the subscription is fixed or determinable and collection is reasonably assured. Revenue from utilization above the contracted level is recognized in the period in which the utilization occurs.

Professional Services Revenue. Professional services revenue consists primarily of fees associated with training, implementation, integration, deliverability, campaign services and strategic consulting. Our professional services are not required for clients to utilize our suite of cross-channel, digital marketing SaaS solutions. Depending upon the nature of the engagement, we may provide professional services over the term of the SaaS subscription or in connection with discrete projects. Revenue for our professional services engagements is recognized over the period of performance and is typically contracted on a fixed-fee basis. Our professional services revenue as a percentage of our total revenue was as follows for the periods presented: Year Ended December 31, 2012 2011 2010 Professional services revenue 20% 18% 14% Cost of Revenue We allocate certain overhead expenses, such as rent, utilities, office supplies and depreciation of general office assets to cost of revenue categories based on related headcount. As a result, an overhead expense allocation is reflected in each cost of revenue category.

Cost of Subscription Revenue. Cost of subscription revenue consists primarily of wages and benefits for software operations personnel, as well as depreciation, licensing, maintenance and support for hardware and software used in production, and co-location facilities, bandwidth and infrastructure expenses. The expenses related to co-location, bandwidth and infrastructure are affected by the number of clients using our suite of cross-channel, digital marketing SaaS solutions, the complexity and frequency of their use, the level of utilization and the amount of stored data. In addition, these expenses are affected by our 37-------------------------------------------------------------------------------- Table of Contents requirement to maintain high application availability. Our system hardware is primarily hosted in three third-party operated co-location facilities, with two located in Indianapolis, Indiana and one in Las Vegas, Nevada. The Pardot systems are hosted by a co-location provider located in Dallas, Texas and Seattle, Washington, and iGoDigital is hosted by facilities in Virginia and Northern California. We expect to make further significant capital investments in the expansion and operation of our data centers and to continue to expand our business, which will increase our cost of subscription revenue in absolute dollars.

Cost of Professional Services Revenue. Cost of professional services revenue primarily consists of wages and benefits for services personnel and related costs. Our cost of professional services revenue is significantly higher as a percentage of associated revenue than our cost of subscription revenue due to the labor costs associated with providing professional services. As it takes several months to ramp up a professional services consultant to full productivity, we generally increase our professional services capacity ahead of the recognition of associated professional services revenue, which can result in lower margins in a period of significant hiring. We expect the number of professional services personnel to increase in the future as we continue to serve more enterprise clients, resulting in higher cost of professional services revenue in absolute dollars.

Operating Expenses We allocate certain overhead expenses, such as rent, utilities, office supplies and depreciation of general office assets to operating expense categories based on related headcount. As a result, an overhead expense allocation is reflected in each operating expense category.

Sales and Marketing. Sales and marketing expenses consist primarily of wages and benefits for sales and marketing personnel, sales commissions, travel and meeting expenses and lead-generation marketing programs. All sales and marketing costs are expensed as incurred. In particular, sales bonuses are expensed in the period of contract signing and commissions are expensed upon contract billing.

Our sales and marketing expenditures have historically been highest in the last two quarters of each year, which are periods of increased sales and marketing activity. In order to continue to grow our business and increase our brand awareness, we expect to continue investing substantial resources in our sales and marketing efforts. As a result, we expect sales and marketing expenses to increase as we invest to acquire new clients and retain and grow revenue from existing clients.

Research and Development. Research and development expenses consist primarily of wages and benefits for product strategy, product architecture, product design, development and quality assurance personnel, and the costs of third-party development contractors. We focus our research and development efforts on usability, application performance, new features and functionality and development of emerging cross-channel marketing technologies. We expense research and development costs as incurred due to our relatively short development cycle. We expect research and development expenses to increase as we continue to enhance our product offerings.

General and Administrative. General and administrative expenses consist primarily of wages and benefits for executive, finance and accounting, legal, human resources, internal information technology support and administrative personnel. In addition, general and administrative expenses include professional services fees, bad debt expenses and other corporate expenses. We expect that general and administrative expenses will increase as we continue to add personnel to support our growth. We also anticipate that we will continue to incur additional costs for personnel and for professional services including auditing and legal services, insurance and other corporate governance-related costs related to operating as a public company.

Provision for Income Taxes We are subject to taxes in the United States as well as other tax jurisdictions in which we conduct business. Earnings from our non-U.S. activities are subject to local income tax and may be subject to current U.S. income tax.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We record a valuation allowance to reduce deferred tax assets to an amount whose realization is more likely than not.

We recognize tax benefits from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. We record interest and penalties related to unrecognized tax benefits in our provision for income taxes.

38-------------------------------------------------------------------------------- Table of Contents As of December 31, 2012, we had recorded a full valuation allowance on our deferred tax assets. In the third quarter of 2011, we decided to explore the opportunity to launch an initial public offering and, as a result, we determined that it was no longer more likely than not that our deferred tax assets would be realized due to continued planned business investment with the proceeds of our initial public offering. We previously overcame the negative evidence provided by our recent losses by demonstrating that we had generated income in 2008, 2007 and 2006 and using that information to show our ability to generate taxable income from existing client contracts if our planned investments were not made.

In making such determination, we considered all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.

Critical Accounting Policies Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. See also Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for information about these critical accounting policies, as well as a description of our other significant accounting policies.

We are an "emerging growth company" under the JOBS Act and, except as set forth below, will take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to opt out of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

We believe that of our significant accounting policies, which are described in the notes to our consolidated financial statements, the following accounting policies involve the greatest degree of judgment and complexity and have the greatest potential impact on our consolidated financial statements. A critical accounting policy is one that is material to the presentation of our consolidated financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition We recognize revenue for subscriptions to our suite of cross-channel, digital marketing SaaS solutions ratably over the term of the subscription agreement, which is typically one year in length but can range up to three years, commencing upon the later of the agreement start date or such time as there is persuasive evidence of an arrangement, access to our SaaS solutions has been granted to the client, the collection of the fee is reasonably assured and the fees to be paid by the client are fixed or determinable. Amounts that have been invoiced are recorded in accounts receivable and deferred revenue until revenue recognition criteria have been met. Our subscription agreements generally contain multiple elements including access to our SaaS solutions, contracted utilization volume and professional services. In addition, we charge fees for utilization above the contracted level which are recognized in the period in which the utilization occurs. Our subscription agreements do not provide clients the right to take possession of the software supporting the SaaS solution at any time.

We also derive revenue from professional services. Professional services revenue consists primarily of fees associated with training, implementation, integration, deliverability, campaign services and strategic consulting. Our professional services are not required for clients to utilize our SaaS solutions. Depending upon the nature of the engagement, we may provide professional services over the term of the SaaS subscription or in connection with discrete projects. Revenue from professional services is recognized using a proportional performance model based on services performed. Professional services, when sold with our subscriptions, are accounted for separately when these services have value to the client on a standalone basis.

Our revenue recognition methodology requires assumptions and judgments to be made by management regarding the amount and timing of credit allowances and considerations of collectibility. Further, our determination of the best estimate of selling price or BESP is based on an analysis of the historical pricing with respect to both our bundled and standalone arrangements. We have not made any material changes in the methodology we utilize to determine these assumptions nor do we believe there is a reasonable likelihood there will be a material change in the future. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to adjustments of the timing of revenue recognition that could be material.

39-------------------------------------------------------------------------------- Table of Contents Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which temporary differences such as loss carry-forwards and tax credits become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment and ensuring that the deferred tax asset valuation allowance is adjusted as appropriate.

Our position on unrecognized tax benefits contains uncertainties because it requires management to make assumptions and apply judgment to estimate the exposure associated with our various filing positions. We believe our judgments and estimates are reasonable, but actual results could differ.

Acquisitions We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to items such as intangible assets and deferred revenue obligations. In valuing the intangible assets we have acquired, future expected cash flows are estimated based on various assumptions and management's judgment. Outside valuation specialists also assist management in determining the fair value of identifiable intangible assets.

Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to complete the purchase price allocation and estimate the fair value of acquired assets and liabilities. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to losses that could be material.

Goodwill Goodwill is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We have determined that we operate in one reporting unit and have selected October 31 as the date to perform our annual impairment test. In the valuation of our goodwill, we must make assumptions regarding certain qualitative factors including macroeconomic conditions, industry and market conditions, cost factors, financial performance and other events, to determine if further impairment testing is necessary. If further impairment testing is necessary, management must also make assumptions regarding estimated future cash flows, discount rates and comparable growth data to be derived from our reporting unit. If these estimates or their related assumptions change in the future, we may be required to record an impairment for these assets.

This type of analysis contains uncertainties because it requires management to make assumptions and apply judgment to estimate industry economic factors and the profitability of future business strategies. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to determine the potential for impairment losses. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to losses that could be material. The carrying value of goodwill was $108.2 million and $18.4 million as of December 31, 2012 and 2011, respectively, and there was no impairment as of the date of our annual impairment test.

Stock-Based Compensation We value all stock-based compensation, including grants of stock options and restricted stock awards, at fair value on the date of grant, and expense the fair value over the applicable service period. The straight-line method is applied to all awards since only service conditions apply. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards requires the use of highly subjective assumptions, including the expected life of the stock-based payment awards and stock price volatility. We have used the Black-Scholes option-pricing model to value our option grants and determine the related compensation expense.

40-------------------------------------------------------------------------------- Table of Contents The following assumptions were used to determine fair values of option grants and related compensation expense: Year ended December 31, 2012 2011 2010 Expected volatility 53.84 % - 55.54% 54.99 % - 57.78% 59.07 % - 62.07% Risk free interest rate 0.65 % - 0.92% 0.95 % - 2.12% 1.50 % - 2.43% Expected dividend yield -% -% -% Expected option term (in years) 6.25 6.25 6.25 Fair value of options granted $8.83 $4.56 $3.02 The assumptions used in calculating the fair value of stock-based payment awards represent management's best estimates, but the estimates involve inherent uncertainties and the application of management's judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. There is inherent uncertainty in our forecasts and projections, and if we had made different assumptions and estimates than those described above, the amount of our stock-based compensation expense, net income and net income per share amounts could have been materially different.

41-------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth consolidated statements of operations and comprehensive loss data for each of the periods indicated and a reconciliation of our net loss to Adjusted EBITDA.

Year Ended December 31, 2012 2011 2010 Consolidated Statements of Operations and Comprehensive Loss Data: (in thousands) Revenue: Subscription revenue(1) $ 234,222 $ 170,696 $ 115,553 Professional services revenue 58,050 36,797 18,714 Total revenue 292,272 207,493 134,267 Cost of revenue: Cost of subscription revenue(2, 3) 56,770 40,333 25,882 Cost of professional services revenue(2) 46,830 29,862 18,012 Total cost of revenue 103,600 70,195 43,894 Gross profit 188,672 137,298 90,373 Operating expenses: Sales and marketing(2,3) 115,312 93,559 63,978 Research and development(2) 54,022 41,390 27,400 General and administrative(2,3) 39,725 25,985 17,159 Total operating expenses 209,059 160,934 108,537 Operating loss (20,387 ) (23,636 ) (18,164 ) Other expense, net (571 ) (1,001 ) (53 ) Loss before taxes (20,958 ) (24,637 ) (18,217 ) Income tax expense (benefit) - 10,798 (6,127 ) Net loss(4) (20,958 ) (35,435 ) (12,090 ) Other comprehensive loss: Foreign currency translation adjustment, net of tax (40 ) (948 ) (17 ) Net unrealized loss on marketable securities, net of tax (31 ) - - Comprehensive loss $ (21,029 ) $ (36,383 ) $ (12,107 ) (1) Subscription revenue includes fees for utilization above the contracted level as follows: Year Ended December 31, 2012 2011 2010 (in thousands)Revenue from utilization above contracted level $ 5,500 $ 10,037 $ 9,141 Percentage of subscription revenue 2% 6% 8% Percentage of total revenue 2% 5% 7% (2) Total cost of revenue and operating expenses include the following amounts related to stock-based compensation: Year Ended December 31, 2012 2011 2010 (in thousands) Cost of revenue-subscription $ 345 $ 351 $ 218 Cost of revenue-professional services 1,033 704 446 Sales and marketing 3,179 2,265 1,413 Research and development 2,183 1,511 1,147 General and administrative 4,442 2,123 1,201 Total stock-based compensation $ 11,182 $ 6,954 $ 4,425 42-------------------------------------------------------------------------------- Table of Contents (3) Total cost of revenue and operating expenses include the following amounts related to amortization of intangible assets: Year Ended December 31, 2012 2011 2010 (in thousands) Cost of revenue - subscription $ 1,024 $ 300 $ 250 Sales and marketing 704 372 166 General and administrative 354 481 381 Total amortization of intangible assets $ 2,082 $ 1,153 $ 797 (4) The following table sets forth the reconciliation of net loss to Adjusted net loss and Adjusted EBITDA: Year Ended December 31, 2012 2011 2010 (in thousands) Net loss $ (20,958 ) $ (35,435 ) $ (12,090 ) Acquired deferred revenue fair value adjustment 1,523 - - Stock-based compensation 11,182 6,954 4,425 Amortization of intangible assets 2,082 1,153 797 Adjusted net loss (6,171 ) (27,328 ) (6,868 ) Income tax expense - 10,798 (6,127 ) Depreciation and amortization of property and equipment 21,274 15,470 10,173 Other expense, net 571 1,001 53 Adjusted EBITDA $ 15,674 $ (59 ) $ (2,769 ) The following table sets forth selected consolidated statements of operations as a percentage of total revenue: Consolidated Statements of Operations Data Year Ended December 31, as a Percentage of Total Revenue: 2012 2011 2010 Revenue: Subscription revenue 80% 82% 86% Professional services revenue 20% 18% 14% Total revenue 100% 100% 100% Cost of revenue: Cost of subscription revenue 19% 19% 19% Cost of professional services revenue 16% 14% 13% Total cost of revenue 35% 34% 33% Gross profit 65% 66% 67% Operating expenses: Sales and marketing 39% 45% 48% Research and development 18% 20% 20% General and administrative 14% 13% 13% Total operating expenses 72% 78% 81% Operating loss (7)% (11)% (14)% Other expense, net -% -% -% Loss before taxes (7)% (12)% (14)% Income tax expense (benefit) -% 5% (5)% Net loss (7)% (17)% (9)% Note: Due to rounding, totals may not equal the sum of the line items in the table.

43-------------------------------------------------------------------------------- Table of Contents Years Ended December 31, 2012, 2011 and 2010 Revenue Year Ended December 31, Change 2012 2011 2010 2011 to 2012 2010 to 2011 (in thousands, exceptpercentages) Subscription revenue $ 234,222 $ 170,696 $ 115,553 37% 48% Professional services revenue 58,050 36,797 18,714 58% 97% Total revenue $ 292,272 $ 207,493 $ 134,267 41% 55% 2012 compared to 2011. The $63.5 million of growth in subscription revenue was primarily attributable to increased revenue from new direct client additions, including new direct clients added outside of the United States as a result of our continued investments in international operations. Subscription revenue from international clients increased by $18.8 million, or 81%, from $23.3 million to $42.1 million in 2012. Other contributing factors included the full period impact of recognition of revenue from new clients added throughout 2011 and a larger base of renewal clients. Revenue from utilization above the contracted level decreased by $4.5 million, or 45%, from $10.0 million in 2011 to $5.5 million in 2012. Revenue associated with utilization above the contracted level decreased due to more existing clients renewing at higher contracted utilization volumes.

The $21.3 million of growth in professional services revenue was attributable to the acceleration of new direct client additions utilizing implementation, integration and other services. We continue to experience an increase in the number of enterprise and medium-sized clients with complex digital marketing programs utilizing our professional services. Furthermore, our growth in international operations indicated above, has resulted in increased professional services evidenced by an increase in professional services revenue from international operations of $5.5 million, or 98%, to $11.0 million in 2012.

2011 compared to 2010. The $55.1 million of growth in subscription revenue was primarily attributable to increased revenue from new direct client additions and the full period impact of recognition of revenue from new clients added during the prior period, a larger base of renewal clients and growth in the United Kingdom and Australia. Subscription revenue recognized from international clients increased by $13.2 million, or 130%, from $10.1 million in 2010 to $23.3 million for 2011. Revenue from utilization above the contracted level increased by $0.9 million, or 10%, from $9.1 million in 2010 to $10.0 million for 2011.

Revenue associated with utilization above the contracted level increased in total dollars, but decreased as a percentage of total revenue due to a larger base of existing clients renewing at higher contracted utilization volumes.

The $18.1 million of growth in professional services revenue was attributable to an increase in the number of enterprise and medium-sized clients and additional clients utilizing our implementation, integration and other services as well as increased activity in our international operations.

Cost of Revenue Year Ended December 31, 2012 2011 2010 Change % of % of % of 2011 2010 Cost of Cost of Cost of to to Amount Revenue Amount Revenue Amount Revenue 2012 2011 (in thousands, except percentages) Cost of subscription revenue $ 56,770 55% $ 40,333 57% $ 25,882 59% 41% 56% Cost of professional services revenue 46,830 45% 29,862 43% 18,012 41% 57% 66% Total cost of revenue $ 103,600 100% $ 70,195 100% $ 43,894 100% 48% 60% 2012 compared to 2011. The $16.4 million increase in cost of subscription revenue was due in part to a $4.5 million increase in employee-related costs due to the net addition of 86 employees in 2012, primarily in our customer support and software operations team to support our larger base of clients and our international expansion. Cost of subscription revenue also increased due to a $3.9 million increase in depreciation and amortization costs related to equipment and software in our data centers, a $5.7 million increase in costs related to enhancing and expanding our global infrastructure and a $1.3 million increase in purchases of third-party partner applications and products for resale to our clients.

44-------------------------------------------------------------------------------- Table of Contents The $17.0 million increase in cost of professional services revenue was primarily due to a $9.6 million increase in employee-related costs due to the addition of more than 70 product solution and global support personnel during 2012. Cost of professional services revenue also increased $1.9 million due to travel and meeting expenses, partially due to continued expansion of our international operations and a $3.9 million increase in payments to third-party professional services consultants as demand for our integration services have increased.

2011 compared to 2010. The $14.5 million increase in cost of subscription revenue was due in part to a $4.7 million increase in employee-related costs due to the net addition of 44 employees in 2011, primarily in our customer support and software operations team to support our larger base of clients and our international expansion. Cost of subscription revenue also increased due to a $3.6 million increase in depreciation and amortization costs related to equipment and software in our data centers, a $1.8 million increase in operating costs related to enhancing and expanding our infrastructure and a $2.2 million increase in purchases of third-party partner applications and products for resale to our clients.

The $11.9 million increase in cost of professional services revenue was primarily due to a $6.2 million increase in employee-related costs due to the net addition of 114 professional services personnel in 2011. Cost of professional services revenue also increased due to a $2.0 million increase in payments to third-party professional services consultants and a $1.0 million increase related to travel and meeting expenses due to the increase in professional services personnel to support our larger base of clients and international expansion.

Gross Profit Year Ended December 31, 2012 2011 2010 Change 2011 2010 to to Amount % of Revenue Amount % of Revenue Amount % of Revenue 2012 2011 (in thousands, except percentages) Subscription revenue gross profit $ 177,452 76% $ 130,363 76% $ 89,671 78% 36% 45% Professional services revenue gross profit 11,220 19% 6,935 19% 702 4% 62% * Total gross profit $ 188,672 65% $ 137,298 66% $ 90,373 67% 37% 52% * Not meaningful 2012 compared to 2011. Our subscription revenue gross profit increased $47.1 million in absolute dollars and was unchanged as a percentage of associated revenue. This increase in terms of absolute dollars is attributable to the growth in the number of clients and our ability to grow revenues while controlling costs as a percentage of revenues.

Professional services revenue gross profit increased $4.3 million in absolute dollars and was unchanged as a percentage of associated revenue. The increase was due in part to the growth in the number of clients using our professional services in the U.S. and other countries as well as the prior year adoption of a new accounting standard for revenue recognition of multiple deliverable arrangements on a prospective basis as disclosed previously. This prospective accounting change, along with increased revenue in the U.S. and other countries and leveraging the prior year investment in our professional services headcount, resulted in a 62% increase in professional services gross profit.

2011 compared to 2010. Our subscription revenue gross profit increased $40.7 million in absolute dollars, but decreased as a percentage of associated revenue. This decrease in gross profit as a percentage of associated revenue, or gross margin, was attributable to the increased use of our solutions and scaling for future growth. This activity resulted in higher third-party data center costs and associated hardware and software costs, along with increased employee-related costs in our customer support and software operations team.

The $6.2 million increase in professional services revenue gross profit was due in part to the prospective adoption of a new accounting standard for revenue recognition of multiple deliverable arrangements, specifically related to professional services revenue and the growth in the number of clients using our professional services. Revenue from professional services is recognized using a proportional performance model based on services performed. Prior to January 1, 2011, professional services revenue was recognized ratably over the subscription term.

45-------------------------------------------------------------------------------- Table of Contents Sales and Marketing Expenses Year Ended December 31, Change 2012 2011 2010 2011 to 2012 2010 to 2011 (in thousands, except percentages) Sales and marketing $ 115,312 $ 93,559 $ 63,978 23% 46%Percentage of total revenue 39% 45% 48% 2012 compared to 2011. The $21.8 million increase in sales and marketing expenses was primarily due to a $13.0 million increase in employee-related costs, including sales commissions and bonuses, due to the net addition of 168 sales and marketing employees during 2012. It also reflected an increase of $3.9 million in marketing program and expenses for events, such as our Connections 2012 client conference, and an increase in travel and meeting expenses of $2.7 million. Our sales and marketing team size increased as we continued our expansion both domestically and abroad in Brazil, Europe and Australia. As a percentage of total revenue, sales and marketing expenses decreased 6 percentage points due to revenue growing at a faster rate than expenses during the period.

2011 compared to 2010. The $29.6 million increase in sales and marketing expenses was primarily due to a $11.4 million increase in employee-related costs due to the net addition of 80 sales and marketing employees in 2011 and an $8.4 million increase in sales commissions and bonuses as a result of increased sales and performance that exceeded our sales targets. It also reflects an increase in travel and meeting expenses of $3.3 million and an increase in marketing program and event expenses of $1.4 million. Our sales and marketing headcount increased as we continued to invest in expanding our domestic and international presence.

Research and Development Expenses Year Ended December 31, Change 2012 2011 2010 2011 to 2012 2010 to 2011 (in thousands, except percentages) Research and development $ 54,022 $ 41,390 $ 27,400 31% 51%Percentage of total revenue 18% 20% 20% 2012 compared to 2011. The $12.6 million increase in research and development expenses was primarily due to a $7.4 million increase in employee-related costs due to a full year of expenses from 2011 hires and the net addition of more than 80 employees dedicated to product development, a $2.5 million increase in third-party development contractor resources and an increase in software support costs of $1.8 million. As a percentage of total revenue, research and development expenses decreased 2 percentage points due to revenue growing at a faster rate than expenses during the period.

2011 compared to 2010. The $14.0 million increase in research and development expenses was primarily due to a $4.6 million increase in employee-related costs due to a full year of expenses related to 2010 hires and the net addition of 15 employees in 2011, a $7.4 million increase in third-party development contractor resources and an increase of $1.9 million in software support costs. Our research and development spending increased as we accelerated the development of our suite of cross-channel, digital marketing SaaS solutions.

General and Administrative Expenses Year Ended December 31, Change 2012 2011 2010 2011 to 2012 2010 to 2011 (in thousands, except percentages)General and administrative $ 39,725 $ 25,985 $ 17,159 53% 51% Percentage of total revenue 14% 13% 13% 2012 compared to 2011. The $13.7 million increase in general and administrative expenses was primarily due to a $7.6 million increase in employee-related costs from the addition of more than 60 new employees in finance and accounting, legal, human resources, talent acquisition and internal information technology support to support our growth. Expenses incurred for third-party accounting, information technology, insurance and consulting-related fees also increased $3.5 million as the scope of such work grew in connection with our growth and costs of becoming a publicly traded company. We also incurred $1.1 46-------------------------------------------------------------------------------- Table of Contents million in costs associated with specific events such as the secondary offering completed in September 2012 and the two acquisitions previously mentioned. As a percentage of total revenue, general and administrative expenses increased 1 percentage point due to increased expenses, primarily as a result of becoming a publicly traded company.

2011 compared to 2010. The $8.8 million increase in general and administrative expenses was primarily due to a $6.9 million increase in employee-related costs due to the net addition of 55 personnel in finance and accounting, legal, human resources, talent acquisition and internal information technology resources in 2011 to support our growth.

Other Expense, Net Year Ended December 31, Change 2012 2011 2010 2011 to 2012 2010 to 2011 (in thousands, except percentages) Other expense, net $ (571 ) $ (1,001 ) $ (53 ) (43)% * * Not meaningful 2012 compared to 2011. Other expense consists of realized foreign exchange gains and losses, interest income and expense. Other expense for 2012 was $0.6 million compared to $1.0 million for 2011. The decrease in other expense is primarily due to lower interest expense incurred as a result of the repayment in full and termination of our loan and security agreement as further described in the "Liquidity and Capital Resources" section below.

2011 compared to 2010. Other expense consists primarily of interest income and expense and foreign exchange gains and losses. The change in other expense resulted from a $0.6 million increase in interest expense, primarily related to the full year of interest on borrowings under our loan and security agreement executed in November 2010. There was also an increase of $0.2 million in foreign exchange losses related to foreign currency transactions in our international locations.

Income Tax Expense (Benefit) Year Ended December 31, Change 2012 2011 2010 2011 to 2012 2010 to 2011 (in thousands, except percentages) Income tax expense (benefit) $ - $ 10,798 $ (6,127 ) * * * Not meaningful 2012 compared to 2011. Income tax expense of no amount in 2012 compared to $10.8 million in 2011 is due to our determination in September of 2011 that it was no longer more likely than not that our deferred tax assets would be realized due to continued planned business investment. In making such determination, we considered all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial results.

Accordingly, we established a full valuation allowance against the net deferred tax assets in the third quarter of 2011.

2011 compared to 2010. Income tax expense of $10.8 million in 2011 compared to an income tax benefit of $6.1 million in 2010 is due to our determination in 2011 that it was no longer more likely than not that our deferred tax assets would be realized due to continued planned business investment.

Liquidity and Capital Resources Since our inception, we have financed our operations primarily through the proceeds from the issuance of our preferred stock, borrowings under credit facilities, cash flows from operations and the proceeds of our initial public offering. In November 2010, we entered into a senior secured loan and security agreement providing for both a $10.0 million bank term loan and a revolving line of credit collateralized by a blanket lien on substantially all of our personal property, including intellectual property. As of December 31, 2011, $6.7 million was outstanding under the term loan and $10.0 million was outstanding under the revolving line. In March 2012, we repaid all outstanding amounts under our loan and security agreement and in April 2012, we terminated our loan and security agreement.

At December 31, 2012, our principal sources of liquidity were cash and cash equivalents totaling $69.2 million and short-term investments of $40.2 million.

47-------------------------------------------------------------------------------- Table of Contents Summary of Cash Flows Year Ended December 31, 2012 2011 2010 (in thousands) Net cash provided by (used in) operating activities $ 22,727 $ (2,760 ) $ 3,624 Net cash used in investing activities (173,479 ) (33,871 ) (24,561 ) Net cash provided by financing activities 159,132 74,489 9,473 Effect of exchange rate changes on cash and cash equivalents 107 43 (74 ) Net increase (decrease) in cash and cash equivalents $ 8,487 $ 37,901 $ (11,538 ) Operating Activities For the year ended December 31, 2012, net cash provided by operating activities was $22.7 million attributable to the net loss from operations of $21.0 million, more than offset by the add back of non-cash charges for depreciation and stock-based compensation expense, along with positive net cash flow from working capital accounts further described below.

The net cash used in 2011 of $2.8 million was attributable to the net loss from operations of $35.4 million and changes in working capital accounts, offset by adjustments to reconcile an increase in our net loss to net cash used in operations including the add-back for the $10.5 million valuation allowance on our deferred tax assets, depreciation and amortization expense and stock-based compensation expense.

The 2010 net cash inflow of $3.6 million resulted primarily from changes in working capital accounts, the receipt of a tax refund, and the add back of non-cash charges for depreciation and stock-based compensation expense, which were offset by a loss from operations.

The changes in working capital items consisted primarily of the following (in each case reflecting amounts as of the dates indicated and amount of change from the prior period): Accounts Receivable As of December 31, 2012 2011 2010 (in thousands, except percentages) Accounts receivable, net $ 55,911 $ 43,380 $ 27,589 Dollar change from prior period 12,531 15,791 7,022 Percentage change from prior period 29% 57% 34% The increases in accounts receivable were due to continued growth in invoiced amounts to our clients, reduced by collections on existing receivables. We generally invoice clients prior to recognizing the associated revenue in full.

In recent periods, more of our clients have requested monthly instead of quarterly or annual billing terms. As of December 31, 2012, accounts receivable increased 29% from December 31, 2011 primarily as a result of a 41% increase in revenue offset by favorable performance in collections. Our accounts receivable are primarily held in the United States, United Kingdom, Australia and Brazil where we believe economic conditions are stable and collectibility is good.

In 2011, accounts receivable increased at a higher rate than in prior years due in part to a larger percentage of client contracts executed and invoices generated in the last month of the fourth quarter of 2011.

Deferred Revenue As of December 31, 2012 2011 2010 (in thousands, except percentages) Total deferred revenue(1) $ 58,962 $ 40,423 $ 32,966 Dollar change from prior period 18,539 7,457 8,548 Percentage change from prior period 46% 23% 35% (1) Includes deferred revenue included in long-term obligations and other.

48-------------------------------------------------------------------------------- Table of Contents The increases in total deferred revenue were due to continued growth in invoiced amounts under our subscription agreements, offset by the recognition of revenue.

The growth in invoiced amounts was primarily due to new direct client additions, a larger base of renewal clients and increases in revenue associated with our international operations.

Deferred revenue represents the amount billed to clients that has not yet been earned or recognized as revenue, pursuant to agreements entered into in current and prior periods, and does not reflect that portion of subscriptions and professional services to be invoiced to clients on a periodic basis for which payment is not yet due. In recent periods, more of our clients have requested monthly instead of quarterly or annual billing terms. As a result, we believe that the proportion of aggregate contract value reflected on the balance sheet as deferred revenue may continue to decrease if this trend continues. This trend may reduce the amount of deferred revenue, accounts receivable and cash inflow in our financial statements.

Accrued Compensation As of December 31, 2012 2011 2010 (in thousands, except percentages)Accrued compensation and related expenses $ 18,503 $ 14,167 $ 10,143 Dollar change from prior period 4,336 4,024 4,184 Percentage change from prior period 31% 40% 70% As of December 31, 2012 and 2011, the increase of 31% and 40%, respectively, was primarily driven by the increase in the number of our employees as well as timing and size of the payments of our annual performance bonuses and commissions. These amounts are paid out in the first quarter of the following year.

Investing Activities Net cash used in investing activities was $173.5 million, $33.9 million and $24.6 million during 2012, 2011 and 2010, respectively. During the fourth quarter of 2012, we purchased $40.2 million of high quality diversified investment grade securities that are classified as available-for-sale as we do not intend to hold these securities to maturity. Net cash used in investing activities also consisted of payments in the amounts of $100.8 million, $2.7 million, and $5.8 million made during 2012, 2011 and 2010, respectively, related to our acquisitions further described in the notes to the Consolidated Financial Statements. Investing activity also reflects the cash used to purchase fixed assets to expand our data center infrastructure, computer equipment and office furniture for our employees as well as leasehold improvements related to additional office space. Net cash used in investing activities did not include $5.5 million, $4.2 million and $3.1 million of fixed assets capitalized in 2012, 2011 and 2010, respectively, as payments were made in the subsequent periods.

Financing Activities Net cash provided by financing activities was $159.1 million, $74.5 million and $9.5 million during 2012, 2011 and 2010, respectively. Activity during 2012 included proceeds from the issuance of $169.7 million of common stock in our initial public offering, net of issuance costs, which was offset by $16.7 million of payments on our term loan and revolving line of credit. Net cash used in financing activities during these periods also included repayments of certain borrowings pursuant to our capital leases, as well as proceeds of $7.7 million from the exercise of stock options.

In March 2011, we issued an aggregate of 1,948,052 shares of our Series G preferred stock for total proceeds of $30.0 million. In November 2011, we issued 2,000,000 shares of Series D preferred stock for total proceeds of $40.0 million. Such shares were sold to existing holders of Series G and D preferred stock and their affiliates. Net cash provided by financing activities during 2011 also included $9.8 million borrowed under our revolving line of credit, partially offset by $3.3 million in payments on our term loan.

Net cash provided by financing activities during 2010 included $9.9 million borrowed under our term loan.

Capital Resources Since 2009, we have increased our expenditures faster than the growth in our revenue. Our future capital requirements may vary materially from those now planned and will depend on many factors, including, but not limited to: • the development of new cross-channel, digital marketing SaaS solutions; • market acceptance of our solutions; • the levels of marketing programs required to maintain and improve our competitive position in the marketplace; 49-------------------------------------------------------------------------------- Table of Contents • future acquisitions or investments in complementary businesses, products or technologies; • the expansion of our sales, support and marketing organizations; • the establishment of additional offices in the United States and internationally; • the building of infrastructure necessary to support our growth; • the response of competitors to our solutions; and • our relationships with suppliers and clients.

Based on our current cash and accounts receivable balances, we believe that we will have sufficient liquidity to fund our business and meet our contractual obligations for the next twelve months. However, we may need or choose to raise additional funds in the future if we consummate acquisitions or investments in complementary businesses, products or technologies, which could deplete the amount of cash on our balance sheet. If we raise additional funds through the issuance of equity or convertible securities, our stockholders may experience ownership dilution.

During the last three years, inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the next twelve months.

Off-Balance Sheet Arrangements During fiscal years ended December 31, 2012, 2011 and 2010 we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes that are likely to have a material effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity or capital resources or expenditures.

Contractual Obligations The following table summarizes our contractual cash obligations at December 31, 2012 and the effect such obligations are expected to have on our liquidity and cash flows in future periods: Payments Due by Period Less than More than Total 1 Year 1-3 years 3-5 Years 5 Years (in thousands) Capital leases $ 1,245 $ 739 $ 506 $ - $ - Operating leases 25,566 5,103 9,856 5,974 4,633 Contractual commitments(1) 31,880 12,761 10,244 7,100 1,775 Total $ 58,691 $ 18,603 $ 20,606 $ 13,074 $ 6,408 (1) Contractual commitments primarily consist of hosting and hosting-related costs for the data center facilities that house our infrastructure and a software licensing agreement for certain software product licenses.

In the normal course of business, we indemnify third parties with whom we enter into contractual relationships, including clients, lessors, and parties to other transactions, with respect to certain matters. We have agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third-party claims that our suite of cross-channel, digital marketing SaaS solutions, when used for their intended purposes, infringe upon the intellectual property rights of such other third parties or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to our limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. In the past we have not been required to make payments under these obligations.

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