REALPAGE INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read together with "Selected Financial Data" and our audited consolidated financial statements and accompanying notes included elsewhere in this filing. This discussion contains forward-looking statements, based on current expectations and related to our plans, estimates, beliefs and anticipated future financial performance. These statements involve risks and uncertainties and our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Risk Factors," "Special Note Regarding Forward-Looking Statements" and elsewhere in this filing.

Overview We are a leading provider of on demand software solutions for the rental housing industry. Our broad range of property management solutions enable owners and managers of single-family and a wide variety of multi-family rental property types to manage their marketing, pricing, screening, leasing, accounting, purchasing and other property operations. We deliver our on demand software solutions via the Internet through an integrated software platform that provides a single point of access and a shared repository of prospect, resident and property data.

We derive a substantial majority of our revenue from sales of our on demand software solutions. We also derive revenue from our professional and other services. A small percentage of our revenue is derived from sales of our on premise software solutions to our existing on premise customers. Our on demand software solutions are sold pursuant to subscription license agreements and our on premise software solutions are sold pursuant to term or perpetual license agreements and associated maintenance agreements. Typically, we price our solutions based primarily on the number of units the customer manages with our solutions. For our insurance-based solutions, we earn revenue based on a fixed commission rate of earned premiums and a contingent commission calculated in accordance with the applicable agreement. For our transaction-based solutions, we price based on a fixed rate per transaction. We sell our solutions through our direct sales organization and derive substantially all of our revenue from sales in the United States. Our revenue has increased from $188.3 million in 2010 to $322.2 million in 2012. The increase in revenue has primarily been driven by increased sales of our on demand software solutions, a substantial amount of which has been derived from purchases of additional on demand software solutions by our existing customers. In 2012, our on demand revenue represented 95.1% of our total revenue.

While the adoption of on demand software solutions in the rental housing industry is growing rapidly, it remains at a relatively early stage of development. Additionally, there is a low level of penetration of our on demand software solutions in our existing customer base. We believe these factors present us with significant opportunities to generate revenue through sales of additional on demand software solutions. Our existing and potential customers base their decisions to invest in our solutions on a number of factors, including general economic conditions.

Our company was formed in 1998 to acquire Rent Roll, Inc., which marketed and sold on premise property management systems for the conventional and affordable multi-family rental housing markets. In June 2001, we released OneSite, our first on demand property management system. Since 2002, we have expanded our on demand software solutions to include a number of software-enabled value-added services that provide complementary sales and marketing, asset optimization, risk mitigation, billing and utility management and spend management capabilities. In connection with this expansion, we have allocated greater resources to the development and infrastructure needs of developing and increasing sales of our suite of on demand software solutions. In addition, since July 2002, we have completed 21 acquisitions of complementary technologies to supplement our internal product development and sales and marketing efforts and expand the scope of our solutions, the types of rental housing properties served by our solutions and our customer base. As of December 31, 2012, we had approximately 2,893 employees.

On August 11, 2010, our registration statement on Form S-1 (File No 333-166397) relating to our initial public offering was declared effective by the Securities and Exchange Commission, or SEC. We sold 6,000,000 shares of common stock in our initial public offering. Our common stock began trading on August 12, 2010 on the NASDAQ Global Select Stock Market under the symbol "RP," and the offering closed on August 17, 2010. Upon closing of our initial public offering, all outstanding shares of our convertible preferred stock, including a portion of accrued but unpaid dividends on our outstanding shares of Series A, Series A1 and Series B convertible preferred stock, were converted into 29,567,952 shares of common stock.

On December 6, 2010, our registration statement on Form S-1 (File No 333-170667) relating to a public stock offering was declared effective by the SEC. We sold an additional 4,000,000 shares of common stock in the offering. The offering closed on December 10, 2010.

48 -------------------------------------------------------------------------------- Table of Contents New Product Families In August 2011, we announced our new product family, LeaseStar, which consolidated and integrated products and services related to our acquisitions of eREI, LevelOne, SeniorLiving.net, MTS, RMO and our suite of products and services historically branded as Crossfire. We believe the LeaseStar product family unifies major organic and paid lead channels into a single marketplace where consumers can find a rental unit and transact business by viewing real time availability, pricing, pre-qualify and lease online.

In February 2012, we announced our new product family, RealPage Senior Living.

We believe RealPage Senior Living will help owners and managers attract more residents and improve the living and care experience enjoyed by those residents.

Recent Acquisitions In January 2012, we acquired substantially all of the operating assets of Vigilan, Incorporated ("Vigilan"). A provider of assisted living software-as-a-service solutions, Vigilan products allow assisted living communities to monitor and schedule detailed care, manage labor costs, provide accurate billing and maintaining regulatory compliance through its comprehensive compliance module. We acquired Vigilan for a purchase price of $5.0 million consisting of a cash payment of $4.0 million and two additional cash payments of up to $0.5 million due 12 months and 24 months after the acquisition date.

In July 2012, we acquired all of the issued and outstanding shares of Rent Mine Online, Inc. ("RMO") for a purchase price which consists of a cash payment of $5.5 million at closing, a deferred payment of up to $3.5 million and a contingent deferred earn out payment of up to 300,000 shares of our common stock, payable based on the achievement of specified milestones on or before December 31, 2014. The acquisition of RMO expands our resident referral capabilities into the multifamily residential rental housing market.

In February 2013, we acquired certain assets of Seniors for Living, Inc.

("SFL"). SFL is a leading performance-based marketing company that provides senior housing communities and home care companies with industry-leading referral and marketing services to help them achieve their occupancy goals. We plan to integrate SFL with our existing senior living software solutions. We acquired SFL for a purchase price of $2.7 million which consisted of a cash payment of $2.3 million and additional cash payments of $0.2 million each due six months and 12 months after the acquisition date.

Key Business Metrics In addition to traditional financial measures, we monitor our operating performance using a number of financially and non-financially derived metrics that are not included in our consolidated financial statements. We monitor the key performance indicators reflected in the following table: Year Ended December 31, 2012 2011 2010 (in thousands, except dollar per unit data) Revenue: Total revenue $ 322,172 $ 257,979 $ 188,274 On demand revenue $ 306,400 $ 239,436 $ 169,678 On demand revenue as a percentage of total revenue 95.1 % 92.8 % 90.1 % Ending on demand units 8,113 7,302 6,066 Average on demand units 7,625 6,574 5,249 Non-GAAP on demand revenue $ 306,489 $ 240,142 $ 169,678 Non-GAAP on demand revenue per average on demand unit $ 40.20 $ 36.53 $ 32.33 Adjusted EBITDA $ 73,349 $ 56,459 $ 35,303 Adjusted EBITDA as a percentage of total revenue 22.8 % 21.9 % 18.8 % On demand revenue. This metric represents the license and subscription fees relating to our on demand software solutions, typically licensed for one year terms, commission income from sales of renter's insurance policies and transaction fees for certain of our on demand software solutions. We consider on demand revenue to be a key business metric because we believe the market for our on demand software solutions represents the largest growth opportunity for our business.

On demand revenue as a percentage of total revenue. This metric represents on demand revenue for the period presented divided by total revenue for the same period. We use on demand revenue as a percentage of total revenue to measure our success in executing our strategy to increase the penetration of our on demand software solutions and expand our recurring revenue streams attributable to these solutions. We expect our on demand revenue to remain a significant percentage of our total revenue although the actual percentage may vary from period to period due to a number of factors, including the timing of acquisitions, professional and other revenue and on premise perpetual license sales and maintenance fees resulting from our February 2010 acquisition.

49-------------------------------------------------------------------------------- Table of Contents Ending on demand units. This metric represents the number of rental housing units managed by our customers with one or more of our on demand software solutions at the end of the period. We use ending on demand units to measure the success of our strategy of increasing the number of rental housing units managed with our on demand software solutions. Property unit counts are provided to us by our customers as new sales orders are processed. Property unit counts may be adjusted periodically as information related to our customers' properties is updated or supplemented, which could result in adjustments to the number of units previously reported.

Non-GAAP on demand revenue. This metric represents on demand revenue adjusted to reverse the effect of the write down of deferred revenue associated with purchase accounting for strategic acquisitions. We use this metric to evaluate our on demand revenue as we believe its inclusion provides a more accurate depiction of on demand revenue arising from our strategic acquisitions.

The following provides a reconciliation of non-GAAP on demand revenue to on demand revenue, our most directly comparable GAAP financial measure: Year Ended December 31, 2012 2011 2010 (in thousands) On demand revenue $ 306,400 $ 239,436 $ 169,678 Acquisition-related deferred revenue adjustment 89 706 - Non-GAAP on demand revenue $ 306,489 $ 240,142 $ 169,678 Non-GAAP on demand revenue per average on demand unit. This metric represents non-GAAP on demand revenue for the period presented divided by average on demand units for the same period. For interim periods, the calculation is performed on an annualized basis. We calculate average on demand units as the average of the beginning and ending on demand units for each quarter in the period presented.

We monitor this metric to measure our success in increasing the number of on demand software solutions utilized by our customers to manage their rental housing units, our overall revenue and profitability.

Adjusted EBITDA. We define this metric as net income (loss) plus depreciation and asset impairment; amortization of intangible assets; interest expense, net; income tax expense (benefit); stock-based compensation expense and acquisition-related expense. Beginning in January 2011, Adjusted EBITDA excludes litigation related expenses pertaining to the Yardi litigation as discussed in Part I, Item 3 "Legal Proceedings." Beginning in the second quarter of 2011, Adjusted EBITDA includes acquisition-related deferred revenue adjustments.

Beginning in the third quarter of 2012, Adjusted EBITDA excludes stock registration costs. We believe that the use of Adjusted EBITDA is useful in evaluating our operating performance because it excludes certain non-cash expenses, including depreciation, amortization and stock-based compensation.

Adjusted EBITDA is not determined in accordance with accounting principles generally accepted in the United States, or GAAP, and should not be considered as a substitute for or superior to financial measures determined in accordance with GAAP. For a reconciliation of Adjusted EBITDA to net income, refer to the table below. Our Adjusted EBITDA grew from approximately $35.3 million in 2010 to approximately $73.3 million in 2012, as a result of our efforts to expand market share and increase revenue.

The following provides a reconciliation of net income (loss) to Adjusted EBITDA: Year Ended December 31, 2012 2011 2010 (in thousands) Net income (loss) $ 5,183 $ (1,231 ) $ 67 Acquisition-related deferred revenue adjustment 89 706 - Depreciation and asset impairment 13,539 11,539 10,371 Amortization of intangible assets 19,498 18,006 10,675 Interest expense, net 2,160 2,868 5,510 Income tax expense (benefit) 4,219 (210 ) 719 Litigation-related expense 10,158 1,298 - Stock-based compensation expense 18,178 22,618 7,340 Acquisition-related expense (350 ) 865 621 Stock registration costs 675 - - Adjusted EBITDA $ 73,349 $ 56,459 $ 35,303 50 -------------------------------------------------------------------------------- Table of Contents Key Components of our Results of Operations Revenue We derive our revenue from three primary sources: our on demand software solutions; our on premise software solutions; and our professional and other services. In 2012, 2011, 2010, we generated revenue of $322.2 million, $258.0 million and $188.3 million, respectively.

On Demand Revenue Revenue from our on demand software solutions is comprised of license and subscription fees relating to our on demand software solutions, typically licensed for one year terms, commission income from sales of renter's insurance policies, and transaction fees for certain on demand software solutions, such as payment processing, spend management and billing services. Typically, we price our on demand software solutions based primarily on the number of units or beds the customer manages with our solutions. For our insurance based solutions, our agreement provides for a fixed commission on earned premiums related to the policies sold by us. The agreement also provides for a contingent commission to be paid to us in accordance with the agreement. This agreement provides for a calculation that considers, on the policies sold by us, earned premiums less i) earned agent commissions; ii) a percent of premium retained by our underwriting partner; iii) incurred losses; and iv) profit retained by our underwriting partner during the time period. Our estimate of our contingent commission revenue considers historical loss experience on the policies sold by us. For our transaction-based solutions, we price based on a fixed rate per transaction.

In 2012, 2011 and 2010, revenue from our on demand software solutions was approximately $306.4 million, $239.4 million and $169.7 million, respectively, representing approximately 95.1%, 92.8% and 90.1% of our total revenue for the same periods. Revenue from our on demand software solutions has continued to increase in absolute dollars and as a percentage of our total revenue as we have ceased actively marketing our legacy on premise software solutions to new customers and many of our existing on premise customers have transitioned to our on demand software solutions. We expect our on demand revenue to continue to increase in absolute dollars and as a percentage of revenue in 2013, although the actual percentage of revenue may vary from period to period due to a number of factors, including the impact of acquisitions and revenue derived from our professional and other services related to our on demand software solutions.

On Premise Revenue Our on premise software solutions are distributed to our customers and maintained locally on the customers' hardware. Revenue from our on premise software solutions is comprised of license fees under term and perpetual license agreements. Typically, we have licensed our on premise software solutions pursuant to term license agreements with an initial term of one year that include maintenance and support. Customers can renew their term license agreement for additional one-year terms at renewal price levels. In February 2010, we completed a strategic acquisition of assets that included on premise software solutions that were historically marketed and sold pursuant to perpetual license agreements and related maintenance agreements.

We no longer actively market our legacy on premise software solutions to new customers, and only license our on premise software solutions to a small portion of our existing on premise customers as they expand their portfolio of rental housing properties. While we intend to support our acquired on premise software solutions, we expect that many of the customers who license these solutions will transition to our on demand software solutions over time.

In 2012, 2011 and 2010, revenue from our on premise software solutions was approximately $5.2 million, $6.6 million and $8.5 million, respectively, representing approximately 1.6%, 2.6% and 4.5%, of our total revenue for the same periods, respectively. Revenue from our on premise software solutions has continued to decrease in absolute dollars as we have ceased actively marketing our legacy on premise software solutions to new customers and as many of our existing on premise customers have transitioned to our on demand software solutions. We expect our legacy on premise revenue to decrease over time in absolute dollars and as a percentage of our total revenue although the actual percentage of revenue may vary from period to period due to a number of factors, including the impact of our past and potential future acquisition of on premise software solutions.

Professional and Other Revenue Revenue from professional and other services consists of consulting and implementation services, training and other ancillary services. We complement our solutions with professional and other services for our customers willing to invest in enhancing the value or decreasing the implementation time of our solutions. Our professional and other services are typically priced as time and material engagements. In 2012, 2011 and 2010, revenue from professional and other services was approximately $10.6 million, $12.0 million and $10.1 million, respectively, representing approximately 3.3%, 4.6% and 5.3% of our total revenue for the same periods, respectively. We expect professional and other services will represent 5.0% or less of our total revenue in 2013 and 2014, consistent with our performance for the previous three years.

51-------------------------------------------------------------------------------- Table of Contents Cost of Revenue Cost of revenue consists primarily of personnel costs related to our operations, support services, training and implementation services, expenses related to the operation of our data center and fees paid to third-party service providers.

Personnel costs include salaries, bonuses, stock-based compensation and employee benefits. Cost of revenue also includes an allocation of facilities costs, overhead costs and depreciation, as well as amortization of acquired technology related to strategic acquisitions and amortization of capitalized development costs. We allocate facilities, overhead costs and depreciation based on headcount. We expect our cost of revenue in 2013 and 2014 to increase in absolute dollars.

Operating Expenses We classify our operating expenses into three categories: product development, sales and marketing, and general and administrative. Our operating expenses primarily consist of personnel costs, costs for third-party contracted development, marketing, legal, accounting and consulting services and other professional service fees. Personnel costs for each category of operating expenses include salaries, bonuses, stock-based compensation and employee benefits for employees in that category. In addition, our operating expenses include an allocation of our facilities costs, overhead costs and depreciation based on headcount for that category, as well as amortization of purchased intangible assets resulting from our acquisitions.

Our operating expenses increased in absolute dollars in each of 2012 and 2011 as we built infrastructure and added employees across all categories in order to accelerate and support our growth and to expand our markets. We expect our operating expenses in 2013 and 2014 to continue to increase in absolute dollars as compared to 2012 but decrease as a percentage of revenue, as the capacity we have added in prior years is more fully utilized and we continue to create operating leverage.

Product development. Product development expense consists primarily of personnel costs for our product development employees and executives and fees to contract development vendors. Our product development efforts are focused primarily on increasing the functionality and enhancing the ease of use of our on demand software solutions and expanding our suite of on demand software solutions. In 2008 and 2011, we established a product development and service center in Hyderabad, India and Manila, Philippines, respectively, to take advantage of strong technical talent at lower personnel costs compared to the United States.

We expect our product development expenses in 2013 and 2014 to increase in absolute dollars as compared to 2012 but decrease as a percentage of revenue, as the capacity we have added in prior years is more fully utilized and we continue to create operating leverage.

Sales and marketing. Sales and marketing expense consists primarily of personnel costs for our sales, marketing and business development employees and executives, travel and entertainment and marketing programs. Marketing programs consist of amounts paid for search engine optimization ("SEO") and search engine marketing ("SEM"), renter's insurance and other advertising, tradeshows, user conferences, public relations, industry sponsorships and affiliations and product marketing. In addition, sales and marketing expense includes amortization of certain purchased intangible assets, including customer relationships and key vendor and supplier relationships obtained in connection with our acquisitions. We expect our sales and marketing expense in 2013 and 2014 to increase in absolute dollars as compared to 2012.

General and administrative. General and administrative expense consists of personnel costs for our executive, finance and accounting, human resources, management information systems and legal personnel, as well as legal, accounting and other professional service fees and other corporate expenses. We expect our general and administrative expense in 2013 and 2014 to increase in absolute dollars as compared to 2012 but decrease as a percentage of revenue, as we continue to add operating leverage.

Interest Expense, Net Interest expense, net, consists primarily of interest income and interest expense. Interest income represents earnings from our cash and cash equivalents.

Interest expense is associated with our term loan, revolver, capital lease obligations and certain acquisition-related liabilities. Total amounts outstanding under our interest-bearing obligations at December 31, 2012, 2011 and 2010 include: As of December 31, 2012 2011 2010 (in thousands) Term loan $ - $ - $ 66,039 Revolver 10,000 50,312 - Capital lease obligations - 65 590 Interest bearing acquisition-related liabilities 864 1,420 1,955 52 -------------------------------------------------------------------------------- Table of Contents Based on our current operations, we expect our interest expense in 2013 to decrease from our 2012 expense.

Income Taxes As of December 31, 2012, we had net operating loss carry forwards for federal and state income tax purposes of approximately $182.8 million. If not utilized, our federal net operating loss carry forwards will begin to expire in 2020 and the state operating losses will begin to expire in 2013. Net operating losses generated by us are not currently subject to the carryforward limitation in Section 382 of the Internal Revenue Code ("Section 382 limitation"); however $25.2 million of net operating losses generated by subsidiaries prior to their acquisition by us are subject to the Section 382 limitation. The limitation on these pre-acquisition net operating loss carryforwards will fully expire in 2019. A cumulative change in ownership among material shareholders, as defined in Section 382 of the Internal Revenue Code, during a three-year period may limit utilization of the federal net operating loss carryforwards.

Critical Accounting Policies Our consolidated financial statements are prepared in accordance with GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application, while in other cases, management's judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. The preparation of our consolidated financial statements and related disclosures require us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. In some instances, we could reasonably use different accounting estimates, and in some instances results could differ significantly from our estimates. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe that the assumptions and estimates associated with revenue recognition, fair value measurements, accounts receivable, business combinations, goodwill and other intangible assets with indefinite lives, impairment of long-lived assets, intangible assets, stock-based compensation, income taxes and capitalized product development costs have the greatest potential impact on our consolidated financial statements. Therefore, we believe the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving our management's judgments, assumptions and estimates.

Revenue Recognition We derive our revenue from three primary sources: our on demand software solutions; our on premise software solutions; and professional and other services. We commence revenue recognition when all of the following conditions are met: • there is persuasive evidence of an arrangement; • the solution and/or service has been provided to the customer; • the collection of the fees is probable; and • the amount of fees to be paid by the customer is fixed or determinable.

For multi-element arrangements that include multiple software solutions and/or services, we allocate arrangement consideration to all deliverables that have stand-alone value based on their relative selling prices. In such circumstances, we utilize the following hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: • Vendor specific objective evidence (VSOE), if available. The price at which we sell the element in a separate stand-alone transaction; • Third-party evidence of selling price (TPE), if VSOE of selling price is not available. Evidence from us or other companies of the value of a largely interchangeable element in a transaction; and • Estimated selling price (ESP), if neither VSOE nor TPE of selling price is available. Our best estimate of the stand-alone selling price of an element in a transaction.

53 -------------------------------------------------------------------------------- Table of Contents Our process for determining ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors primarily considered in developing ESP include prices charged by us for similar offerings when sold separately, pricing policies and approvals from standard pricing and other business objectives.

From time to time, we sell on demand software solutions with professional services. In such cases, as each element has stand alone value, we allocate arrangement consideration based on our ESP of the on demand software solution and VSOE of the selling price of the professional services.

Taxes collected from customers and remitted to governmental authorities are presented on a net basis.

On Demand Revenue Our on demand revenue consists of license and subscription fees, transaction fees related to certain of our software-enabled value-added services and commissions derived from us selling certain risk mitigation services.

License and subscription fees are comprised of a charge billed at the initial order date and monthly or annual subscription fees for accessing our on demand software solutions. The license fee billed at the initial order date is recognized as revenue on a straight-line basis over the longer of the contractual term or the period in which the customer is expected to benefit, which we consider to be four years. Recognition starts once the product has been activated. Revenue from monthly and annual subscription fees is recognized on a straight-line basis over the access period.

We recognize revenue from transaction fees derived from certain of our software-enabled value-added services as the related services are performed.

As part of our risk mitigation services to the rental housing industry, we act as an insurance agent and derive commission revenue from the sale of insurance products to individuals. The commissions are based upon a percentage of the premium that the insurance company charges to the policyholder and are subject to forfeiture in instances where a policyholder cancels prior to the end of the policy. If the policy is cancelled, our commissions are forfeited as a percent of the unearned premium. As a result, we recognize the commissions related to these services ratably over the policy term as the associated premiums are earned. Our contract with our underwriting partner provides for contingent commissions to be paid to us in accordance with the agreement. This agreement provides for a calculation that considers, on the policies sold by us, earned premiums less i) earned agent commissions; ii) a percent of premium retained by our underwriting partner; iii) incurred losses; and iv) profit retained by our underwriting partner during the time period. Our estimate of contingent commission revenue considers historical loss experience on the policies sold by us.

On Premise Revenue Revenue from our on premise software solutions is comprised of an annual term license, which includes maintenance and support. Customers can renew their annual term licenses for additional one-year terms at renewal price levels. We recognize revenue from each annual term license on a straight-line basis over the contract term.

In addition, we have arrangements that include perpetual licenses with maintenance and other services to be provided over a fixed term. We allocate and defer revenue equivalent to the VSOE of fair value for the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. We have determined that we do not have VSOE of fair value for our customer support and professional services in these specific arrangements. As a result, the elements within our multiple-element sales agreements do not qualify for treatment as separate units of accounting. Accordingly, we account for fees received under multiple-element arrangements with customer support or other professional services as a single unit of accounting and recognize the entire arrangement ratably over the longer of the customer support period or the period during which professional services are rendered.

Professional and Other Revenue Professional and other revenue is recognized as the services are rendered for time and material contracts. Training revenues are recognized after the services are performed.

54 -------------------------------------------------------------------------------- Table of Contents Accounts Receivable For several of our solutions, we invoice our customers prior to the period in which service is provided. Accounts receivable represent trade receivables from customers when we have invoiced for software solutions and/or services and we have not yet received payment. We present accounts receivable net of an allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments, or the customer cancelling prior to the service being rendered. In doing so, we consider the current financial condition of the customer, the specific details of the customer account, the age of the outstanding balance, the current economic environment and historical credit trends. As a result of a portion of our allowance is for services not yet rendered and, therefore, is charged as an offset to deferred revenue, which does not have an effect on the statement of operations. Any change in the assumptions used in analyzing a specific account receivable might result in an additional allowance for doubtful accounts being recognized in the period in which the change occurs. For certain transactions, we have met the requirements to recognize income in advance of physically invoicing the customer. In these instances, we record an asset for the amount that will be due from the customer upon invoicing.

Business Combinations When we acquire businesses, we allocate the total consideration to the fair value of tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on the application of valuation models using historical experience and information obtained from the management of the acquired companies. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted average cost of capital and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of these estimates.

Goodwill and Other Intangible Assets with Indefinite Lives We test goodwill and other intangible assets with indefinite lives for impairment separately on an annual basis in the fourth quarter of each year.

Additionally, we will test goodwill and other intangible assets with indefinite lives in the interim if events and circumstances indicate that goodwill and other intangible assets with indefinite lives may be impaired. The events and circumstances that we consider include significant under-performance relative to projected future operating results and significant changes in our overall business and/or product strategies. We evaluate impairment of goodwill by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test. The first step involves a comparison of the fair value of a reporting unit with its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, the second step involves a comparison of the implied fair value and carrying amount of the goodwill of that reporting unit to determine the impairment charge, if any. We quantitatively evaluate other intangible assets with indefinite lives by estimating the fair value of those assets based on estimated future earnings derived from the assets using the income approach model. For those intangible assets with indefinite lives that have been determined to be inseparable due to their interchangeable use, we have grouped into single units of accounting for purposes of testing for impairment. If the carrying amount of the other intangible assets with indefinite lives exceeds the fair value, we would recognize an impairment loss equal to the excess of carrying value over fair value. If an event occurs that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill and other intangible assets with indefinite lives, the revision could result in a non-cash impairment charge that could have a material impact on our financial results.

55-------------------------------------------------------------------------------- Table of Contents We recorded goodwill and other intangible assets with indefinite lives in conjunction with all our business acquisitions completed since the beginning of 2008. We test goodwill for impairment based on a single reporting unit. We believe we operate in a single reporting unit because our chief operating decision maker does not regularly review our operating results other than at a consolidated level for purposes of decision making regarding resource allocation and operating performance.

Impairment of Long-lived Assets We perform an impairment review of long-lived assets held and used whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, significant under-performance relative to projected future operating results, significant changes in the manner of our use of the acquired assets or our overall business and/or product strategies and significant industry or economic trends. When we determine that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of these indicators, we determine the recoverability by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate. We would then recognize an impairment charge equal to the amount by which the carrying amount exceeds the fair market value of the asset.

Intangible Assets Intangible assets consist of acquired developed product technologies, acquired customer relationships, vendor relationships, non-competition agreements and trade names. We record intangible assets at fair value and amortize those with finite lives over the shorter of the contractual life or the estimated useful life. We estimate the useful lives of acquired developed product technologies and customer relationships based on factors that include the planned use of each developed product technology and the expected pattern of future cash flows to be derived from each developed product technology and existing customer relationships. We include amortization of acquired developed product technologies in cost of revenue, amortization of acquired customer relationships in sales and marketing expenses and amortization of vendor relationships and non-competition agreements in general and administrative expenses in our consolidated statements of operations.

Stock-Based Compensation Our share-based compensation is measured on the grant date based on the fair value of the award and is recognized as an expense over the requisite service period, which is generally the vesting period, on a straight-line basis.

The fair value of option awards is calculated through the use of option pricing models. These models require subjective assumptions regarding future share price volatility and the expected life of each option grant.

The fair value of employee stock options was estimated at the grant date using the Black-Scholes option pricing model by applying the following weighted average assumptions: Risk-free interest rates 1.5-5.1 % Expected option life (in years) 6 Dividend yield 0 % Expected volatility 49-60 % At each stock option grant date, we utilized peer group data to calculate our expected volatility. Expected volatility was based on historical and expected volatility rates of comparable publicly traded peers. In 2012, we began using our own historical data in addition to peer group data in calculating expected volatility. Expected life is computed using the mid-point between the vesting period and contractual life of the options granted. The risk-free interest rate was based on the treasury yield rate with a maturity corresponding to the expected option life assumed at the grant date.

Changes to the underlying assumptions may have a significant impact on the underlying value of the stock options, which could have a material impact on our consolidated financial statements.

Prior to our initial public offering, we granted stock options at exercise prices above the fair value of our common stock as of the grant date, as determined by our compensation committee on a contemporaneous basis. Given the absence of any active market for our common stock, the fair value of the common stock underlying stock options granted was determined by our compensation committee, with input from our management. In arriving at these valuations, our compensation committee and management also considered contemporaneous third-party valuations. Options granted subsequent to our initial public offering have been granted at fair market value as of the date of grant.

56-------------------------------------------------------------------------------- Table of Contents The fair value of our time-based restricted stock awards is based on the closing price on the date of grant as reported on the NASDAQ Global Select Market. For our performance-based restricted stock awards, we recognize compensation expense based on the probability of achievement of the performance condition.

Income Taxes Income taxes are provided based on the liability method, which results in income tax assets and liabilities arising from temporary differences. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The liability method requires the effect of tax rate changes on current and accumulated deferred income taxes to be reflected in the period in which the rate change was enacted. The liability method also requires that the deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized.

We may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. Upon our adoption of the related standard, there was no liability for uncertain tax positions due to the fact that there were no material identified tax benefits that were considered uncertain positions.

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. We consider whether a valuation allowance is needed on our deferred tax assets by evaluating all positive and negative evidence relative to our ability to recover deferred tax assets, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we begin with historical results, if any, and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies, if any. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.

Capitalized Product Development Costs We capitalize specific product development costs, including costs to develop software products or the software components of our solutions to be marketed to our customers, as well as software programs to be used solely to meet our internal needs. The costs incurred in the preliminary stages of development related to research, project planning, training, maintenance and general and administrative activities, and overhead costs are expensed as incurred. The costs of relatively minor upgrades and enhancements to the software are also expensed as incurred. Once an application has reached the development stage, internal and external costs incurred in the performance of application development stage activities, including materials, services and payroll-related costs for employees are capitalized, if direct and incremental, until the software is substantially complete and ready for its intended use.

Capitalization ceases upon completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs are recorded as part of property and equipment. Internal use software is amortized on a straight-line basis over its estimated useful life, generally three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no impairments to internal use software during the years ended December 31, 2012, 2011 or 2010.

Results of Operations The following tables set forth our results of operations for the specified periods. The period-to-period comparison of financial results is not necessarily indicative of future results. Certain prior year expenses have been reclassified to conform with current year presentation.

57-------------------------------------------------------------------------------- Table of Contents Consolidated Statements of Operations Data Year Ended December 31, 2012 2011 2010 (in thousands) Revenue: On demand $ 306,400 $ 239,436 $ 169,678 On premise 5,216 6,581 8,545 Professional and other 10,556 11,962 10,051 Total revenue 322,172 257,979 188,274 Cost of revenue(1) 128,562 108,155 79,044 Gross profit 193,610 149,824 109,230 Operating expense: Product development(1) 48,177 43,441 36,922 Sales and marketing(1) 76,992 63,775 37,693 General and administrative(1) 56,993 40,798 28,328 Total operating expense 182,162 148,014 102,943 Operating income 11,448 1,810 6,287 Interest expense and other, net (2,046 ) (3,251 ) (5,501 ) Net income (loss) before taxes 9,402 (1,441 ) 786 Income tax expense (benefit) 4,219 (210 ) 719 Net income (loss) $ 5,183 $ (1,231 ) $ 67 (1) Includes stock-based compensation expense as follows: Year Ended December 31, 2012 2011 2010 (in thousands) Cost of revenue $ 2,806 $ 1,655 $ 633 Product development 4,391 4,594 2,568 Sales and marketing 4,790 12,017 2,493 General and administrative 6,191 4,352 1,646 The following table sets forth our results of operations for the specified periods as a percentage of our revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.

Year Ended December 31, 2012 2011 2010 (as a percentage of total revenue) Revenue: On demand 95.1 % 92.8 % 90.1 % On premise 1.6 2.6 4.5 Professional and other 3.3 4.6 5.3 Total revenue 100.0 100.0 100.0 Cost of revenue 39.9 41.9 42.0 Gross profit 60.1 58.1 58.0 Operating expense: Product development 14.9 16.9 19.6 Sales and marketing 23.9 24.7 20.0 General and administrative 17.7 15.8 15.0 Total operating expenses 56.5 57.4 54.7 Operating income 3.6 0.7 3.3 Interest expense and other, net (0.7 ) (1.2 ) (2.9 ) Net income (loss) before taxes 2.9 (0.5 ) 0.4 Income tax expense (benefit) 1.3 0.0 0.4 Net income (loss) 1.6 (0.5 ) 0.0 58 -------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 and 2011 Revenue Year Ended December 31, 2012 2011 Change % Change (in thousands, except dollar per unit data) Revenue: On demand $ 306,400 $ 239,436 $ 66,964 28.0 % On premise 5,216 6,581 (1,365 ) (20.7 ) Professional and other 10,556 11,962 (1,406 ) (11.8 ) Total revenue $ 322,172 $ 257,979 $ 64,193 24.9 On demand unit metrics: Ending on demand units 8,113 7,302 811 11.1 Average on demand units 7,625 6,574 1,051 16.0 Non-GAAP on demand revenue $ 306,489 $ 240,142 $ 66,347 27.6 Non-GAAP on demand revenue per average on demand unit $ 40.20 $ 36.53 $ 3.67 10.0 On demand revenue. Our on demand revenue increased in 2012 compared to 2011 due to an increase in rental property units managed with our on demand solutions and an increase in the number of our on demand solutions utilized by our existing customer base as well as an increase in revenue resulting from our 2012 and 2011 acquisitions.

On premise revenue. On premise revenue decreased in 2012 compared to 2011. We no longer actively market our legacy on premise software solutions to new customers and only market and support our acquired on premise software solutions. We expect on premise revenue to continue to decline over time as we transition acquired on premise customers to our on demand property management solutions.

Professional and other revenue. Professional and other services revenue decreased in 2012 compared to 2011, primarily due to a decrease in revenue from training and consulting services.

On demand unit metrics. As of December 31, 2012, one or more of our on demand solutions was utilized in the management of 8.1 million rental property units, representing an increase compared to 2011. The increase in the number of rental property units managed by one or more of our on demand solutions was due to new customer sales and marketing efforts to existing customers.

As of December 31, 2012, annualized non-GAAP on demand revenue per average on demand unit increased compared to 2011, primarily due to improved penetration of our on demand solutions into our customer base.

Cost of Revenue Year Ended December 31, 2012 2011 Change % Change (in thousands) Cost of revenue $ 112,487 $ 93,101 $ 19,386 20.8 % Depreciation and amortization 16,075 15,054 1,021 6.8 Total cost of revenue $ 128,562 $ 108,155 $ 20,407 18.9 Cost of revenue. Total cost of revenue increased in 2012 compared to 2011 primarily due to: a $5.4 million increase from costs related to the increased sales of our solutions, which includes investments in infrastructure and other support services; a $12.7 million increase in personnel expense related to increased headcount to support our growth initiatives and headcount added as a result of our 2012 and 2011 acquisitions; a $0.6 million increase in non-cash amortization of acquired technology as a result of our 2012 acquisitions; a $0.5 million increase in property and equipment depreciation expense resulting from expanding our infrastructure to support revenue delivery activities; and a $1.2 million increase in stock-based compensation related to our professional services personnel and data center operations personnel.

Operating Expenses Year Ended December 31, 2012 2011 Change % Change (in thousands) Product development $ 45,542 $ 41,552 $ 3,990 9.6 % Depreciation and amortization 2,635 1,889 746 39.5 Total product development expense $ 48,177 $ 43,441 $ 4,736 10.9 59 -------------------------------------------------------------------------------- Table of Contents Product development. Total product development expense increased in 2012 compared to 2011 primarily due to: a $3.3 million increase in personnel related expense related to product development groups added as a result of our 2011 and 2012 acquisitions combined with the associated costs to support our growth initiatives; a $0.5 million increase in consulting costs; a $0.3 million increase in other information technology costs; a $0.7 million increase in depreciation expense; $0.1 million increase in other product development expense; and offset by a decrease of $0.2 million in stock-based compensation.

Year Ended December 31, 2012 2011 Change % Change (in thousands) Sales and marketing $ 65,864 $ 53,765 $ 12,099 22.5 % Depreciation and amortization 11,128 10,010 1,118 11.2 Total sales and marketing expense $ 76,992 $ 63,775 $ 13,217 20.7 Sales and marketing. Total sales and marketing expense increased in 2012 compared to 2011 primarily due to: a $9.5 million increase in sales and marketing personnel expense related to our increased investment in sales personnel and personnel acquired as a result of our 2011 and 2012 acquisitions; a $5.4 million increase from SEO and SEM activity driven by investment in our Internet listing service; a $1.8 million increase in marketing program expense as a part of our strategy to expand our market share and further penetrate our existing customer base with sales of additional on demand solutions; a $1.5 million increase in information technology expense; a $0.2 million increase in travel related expense; a $0.9 million increase in non-cash amortization expense as a result of our 2012 acquisitions; a $0.2 million increase in depreciation expense; a $0.7 million increase in bad debt expense; a $0.2 million increase in other general sales and marketing expense; and offset by a $7.2 million decrease in stock-based compensation expense primarily resulting from certain performance-based restricted stock awards that were previously expected to vest.

Year Ended December 31, 2012 2011 Change % Change (in thousands) General and administrative $ 54,362 $ 38,604 $ 15,758 40.8 % Depreciation and amortization 2,631 2,194 437 19.9 Total general and administrative expense $ 56,993 $ 40,798 $ 16,195 39.7 General and administrative. Total general and administrative expense increased in 2012 compared to 2011 primarily due to: a $3.2 million increase in personnel expense related to accounting, management information systems, legal, and human resources staff to support the growth in our business; a $1.0 million increase in facilities expense; a $1.8 million increase in stock-based compensation related to general and administrative personnel; a $0.4 million increase in depreciation expense; a $0.8 million increase in information technology costs; a $0.2 million increase in sales and property taxes; a $0.3 million decrease from the fair value adjustment of acquisition-related liabilities; $0.7 million of stock registration costs; a $0.6 million increase in other general and administrative expense; and a $7.8 million increase in litigation expense offset by decreases in other legal fees related the Yardi litigation. Refer to Part II, Item 1, "Legal Proceedings" for further information regarding the litigation settlement.

Interest Expense and Other, Net The decrease in interest expense and other, net in 2012 as compared to 2011 was primarily due to a decrease in interest expense as a result of lower debt balances and a reduction in interest rates under the December 2011 and September 2012 amendments to our Credit Agreement. See "Long-Term Debt Obligations" for further information regarding our Credit Agreement. In addition, interest expense and other decreased $0.4 million related to the sale of a non-operating asset held for sale in 2011.

Provision for Income Taxes As of December 31, 2012, we incurred tax expense of $4.2 million with an effective tax rate of 44.9%. The 2012 domestic income taxes are a net expense of $4.2 million with an effective tax rate of 45.7% resulting from state tax liabilities in jurisdictions where tax is considered an income tax for financial reporting purposes but is assessed on adjusted gross revenue rather than adjusted net income and where we have current year taxable income for financial reporting purposes that cannot be offset by net operating loss carryforwards until those carryforwards reduce our cash tax liability. The 2012 foreign income taxes are a net expense of less than $0.1 million with an effective rate of 13.1%. The Company's foreign effective tax rate decreased in 2012 from 2011 as a result of the tax holiday of our PEZA-registered project in the Philippines.

60 -------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2011 and 2010 Revenue Year Ended December 31, 2011 2010 Change % Change (in thousands, except dollar per unit data) Revenue: On demand $ 239,436 $ 169,678 $ 69,758 41.1 % On premise 6,581 8,545 (1,964 ) (23.0 ) Professional and other 11,962 10,051 1,911 19.0 Total revenue $ 257,979 $ 188,274 $ 69,705 37.0 On demand unit metrics: Ending on demand units 7,302 6,066 1,236 20.4 Average on demand units 6,574 5,249 1,325 25.2 Non-GAAP on demand revenue $ 240,142 $ 169,678 $ 70,464 41.5 Non-GAAP on demand revenue per average on demand unit $ 36.53 $ 32.33 $ 4.20 13.0 On demand revenue. Our on demand revenue increased in 2011 compared to 2010 due to an increase in rental property units managed with our on demand solutions and an increase in the number of our on demand solutions utilized by our existing customer base as well as an increase in revenue resulting from our 2011 and 2010 acquisitions.

On premise revenue. On premise revenue decreased in 2011 compared to 2010. As of December 31, 2011, we have completed migrating our legacy on premise customer base (i.e. RentRoll and HUDManager) to our on demand property management solutions. We no longer actively market our legacy on premise software solutions to new customers and only market and support our acquired on premise software solutions. We expect on premise revenue to continue to decline over time as we transition acquired on premise customers to our on demand property management solutions.

Professional and other revenue. Professional and other services revenue increased $1.9 million, or 19.0%, in 2011 compared to 2010, primarily due to an increase in revenue from training and consulting services.

On demand unit metrics. As of December 31, 2011, one or more of our on demand solutions was utilized in the management of 7.3 million rental property units, representing an increase of 1.2 million units, or 20.4% compared to 2010. The increase in the number of rental property units managed by one or more of our on demand solutions was due to new customer sales and marketing efforts and our 2011 acquisitions which contributed 8.9% of total ending on demand units as of December 31, 2011.

As of December 31, 2011, annualized non-GAAP on demand revenue per average on demand unit was $36.53, representing an increase of $4.20, or 13.0%, compared to 2010, primarily due to improved penetration of our on demand solutions into our customer base.

Cost of Revenue Year Ended December 31, 2011 2010 Change % Change (in thousands) Cost of revenue $ 93,101 $ 66,677 $ 26,424 39.6 % Depreciation and amortization 15,054 12,367 2,687 21.7 Total cost of revenue $ 108,155 $ 79,044 $ 29,111 36.8 Cost of revenue. Total cost of revenue increased in 2011 compared to 2010 primarily due to: a $7.9 million increase from costs related to the increased sales of our solutions, which includes investments in infrastructure and other support services; a $17.5 million increase in personnel expense primarily related to our 2011 and 2010 acquisitions; a $2.0 million increase in non-cash amortization of acquired technology as a result of our 2010 and 2011 acquisitions; a $0.7 million increase in property and equipment depreciation expense resulting from expanding our infrastructure to support revenue delivery activities; and a $1.0 million increase in stock-based compensation related to our professional services personnel and data center operations personnel. Cost of revenue as a percentage of total revenue was 41.0% for the year ended December 31, 2011 as compared to 42.0% for the same period in 2010.

Operating Expenses Year Ended December 31, 2011 2010 Change % Change (in thousands) Product development $ 41,552 $ 34,692 $ 6,860 19.8 % Depreciation and amortization 1,889 2,230 (341 ) (15.3 ) Total product development expense $ 43,441 $ 36,922 $ 6,519 17.7 61 -------------------------------------------------------------------------------- Table of Contents Product development. Total product development expense increased in 2011 compared to 2010 primarily due to: a $3.4 million increase in personnel related expense primarily related to product development groups added as a result of our 2011 and 2010 acquisitions combined with the associated costs to support our growth initiatives; a $2.0 million increase in stock-based compensation related to product development personnel expense; a $0.8 million increase in web hosting and other information technology costs; a $0.5 million increase in facilities expense; a $0.1 million increase in other product development expenses; and offset by a $0.3 million decrease in depreciation expense.

Year Ended December 31, 2011 2010 Change % Change (in thousands) Sales and marketing $ 53,765 $ 32,893 $ 20,872 63.5 % Depreciation and amortization 10,010 4,800 5,210 108.5 Total sales and marketing expense $ 63,775 $ 37,693 $ 26,082 69.2 Sales and marketing. Total sales and marketing expense increased in 2011 compared to 2010 primarily due to: a $9.5 million increase in stock-based compensation related to sales and marketing personnel and a $6.7 million increase in salaries, bonuses and employee benefits for sales and marketing personnel. We have increased our sales force head count from 116 at December 31, 2010 to 163 at December 31, 2011, which includes sales personnel added as a result of our 2011 acquisitions and overall company growth. Additional factors contributing to the increase in sales and marketing expense include a $0.9 million increase in marketing program expense as a part of our strategy to expand our market share and further penetrate our existing customer base with sales of additional on demand solutions; $2.3 million increase from SEO and SEM activity driven by our 2011 acquisitions of MyNewPlace and SeniorLiving.net; a $0.9 million increase in travel related expense; a $5.3 million increase in non-cash amortization expense as a result of our 2010 and 2011 acquisitions; and a $0.5 million increase in other general sales and marketing expense.

Year Ended December 31, 2011 2010 Change % Change (in thousands) General and administrative $ 38,604 $ 26,767 $ 11,837 44.2 % Depreciation and amortization 2,194 1,561 633 40.6 Total general and administrative expense $ 40,798 $ 28,328 $ 12,470 44.0 General and administrative. Total general and administrative expense increased in 2011 compared to 2010 primarily due to: a $3.5 million increase in personnel expense related to accounting, management information systems, legal, and human resources staff to support the growth in our business combined with the increase from our 2011 acquisitions; a $0.8 million increase in facilities expense; a $2.7 million increase in stock-based compensation related to general and administrative personnel; a $1.2 million increase in professional fees primarily resulting from our 2011 acquisitions; a $0.6 million increase in depreciation expense; a $0.4 million increase in travel expense; a $0.5 million increase in insurance expense; a $0.5 million increase in information technology costs; a $0.7 million increase in sales and property taxes; $1.1 million increase in legal fees related to litigation; a $0.4 million decrease from the fair value adjustment of acquisition-related liabilities; and a $0.9 million increase in other general and administrative expense.

62-------------------------------------------------------------------------------- Table of Contents Interest Expense and Other, Net Interest expense and other, net, decreased primarily due to a decrease associated with the early extinguishment of our preferred stockholder notes payable in connection with our initial public offering combined with the effect of lower interest rates under our amended credit agreement. See "Long-term Debt Obligations" for further discussion regarding our amended credit agreement. This decrease was offset by an increase in other losses of $0.4 million related to the sale of a non-operating asset held for sale.

Quarterly Results of Operations The following table presents our unaudited consolidated quarterly results of operations for the eight fiscal quarters ended December 31, 2012. This information is derived from our unaudited consolidated financial statements, and includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for fair statement of our financial position and operating results for the quarters presented. Certain prior year expenses have been reclassified to conform with current year presentation. Operating results for these periods are not necessarily indicative of the operating results for a full year. Historical results are not necessarily indicative of the results to be expected in future periods. You should read this data together with our consolidated financial statements and the related notes to these financial statements included elsewhere in this filing.

Three Months Ended, December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2012 2012 2012 2012 2011 2011 2011 2011 (in thousands) Revenue: On demand $ 81,771 $ 78,973 $ 74,938 $ 70,718 $ 66,695 $ 62,765 $ 57,039 $ 52,937 On premise 1,313 1,226 1,261 1,416 1,536 1,772 1,628 1,645 Professional and other 2,640 3,040 2,593 2,283 2,910 3,118 2,968 2,966 Total revenue 85,724 83,239 78,792 74,417 71,141 67,655 61,635 57,548 Cost of revenue(1) 33,204 32,897 31,848 30,613 28,924 28,207 26,122 24,902 Gross profit 52,520 50,342 46,944 43,804 42,217 39,448 35,513 32,646 Operating expense: Product development(1) 12,852 12,274 11,738 11,313 11,945 10,952 10,349 10,195 Sales and marketing(1) 19,806 21,792 18,588 16,806 18,762 17,638 14,571 12,804 General and administrative(1) 12,199 12,545 19,946 12,303 10,195 11,546 9,389 9,668 Total operating expense 44,857 46,611 50,272 40,422 40,902 40,136 34,309 32,667 Operating income (loss) 7,663 3,731 (3,328 ) 3,382 1,315 (688 ) 1,204 (21 ) Interest expense and other, net (426 ) (407 ) (577 ) (636 ) (669 ) (684 ) (732 ) (1,166 ) Net income (loss) before taxes 7,237 3,324 (3,905 ) 2,746 646 (1,372 ) 472 (1,187 ) Income tax expense (benefit) 3,515 1,211 (1,533 ) 1,026 405 (266 ) 190 (539 ) Net income (loss) $ 3,722 $ 2,113 $ (2,372 ) $ 1,720 $ 241 $ (1,106 ) $ 282 $ (648 ) Net income (loss) per share: Basic 0.05 0.03 (0.03 ) 0.02 0.00 (0.02 ) 0.00 (0.01 ) Diluted 0.05 0.03 (0.03 ) 0.02 0.00 (0.02 ) 0.00 (0.01 ) (1) Includes stock-based compensation expense as follows: Three Months Ended, December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2012 2012 2012 2012 2011 2011 2011 2011 (in thousands) Cost of revenue $ 718 $ 649 $ 750 $ 689 $ 586 $ 459 $ 312 $ 298 Product development 1,211 1,116 1,002 1,062 1,251 1,258 1,105 980 Sales and marketing 368 2,653 1,032 737 3,224 3,433 2,627 2,733 General and administrative 1,564 1,595 1,532 1,500 1,327 1,258 925 842 Total stock-based compensation expense $ 3,861 $ 6,013 $ 4,316 $ 3,988 $ 6,388 $ 6,408 $ 4,969 $ 4,853 The following table sets forth our results of operations for the specified periods as a percentage of our revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.

Three Months Ended, December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2012 2012 2012 2012 2011 2011 2011 2011 (as a percentage of total revenue) Revenue: On demand 95.4 % 94.8 % 95.1 % 95.0 % 93.8 % 92.8 % 92.5 % 92.0 % On premise 1.5 1.5 1.6 1.9 2.2 2.6 2.6 2.9 Professional and other 3.1 3.7 3.3 3.1 4.0 4.6 4.9 5.1 Total revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of revenue: Software and services 38.7 39.5 40.4 41.1 40.7 41.7 42.4 43.3 Gross profit 61.3 60.5 59.6 58.9 59.3 58.3 57.6 56.7 Operating expense: Product development 15.0 14.7 14.9 15.2 16.8 16.2 16.8 17.7 Sales and marketing 23.1 26.2 23.6 22.6 26.4 26.1 23.6 22.2 General and administrative 14.3 15.1 25.3 16.5 14.3 17.0 15.2 16.8 Total operating expenses 52.4 56.0 63.8 54.3 57.5 59.3 55.6 56.7 Operating income (loss) 8.9 4.5 (4.2 ) 4.6 1.8 (1.0 ) 2.0 0.0 Interest expense and other, net (0.5 ) (0.5 ) (0.7 ) (0.9 ) (0.9 ) (1.0 ) (1.2 ) (2.0 ) Net income (loss) before taxes 8.4 4.0 (4.9 ) 3.7 0.9 (2.0 ) 0.8 (2.0 ) Income tax expense (benefit) 4.1 1.5 (1.9 ) 1.4 0.6 (0.4 ) 0.3 (0.9 ) Net income (loss) 4.3 2.5 (3.0 ) 2.3 0.3 (1.6 ) 0.5 (1.1 ) 63 -------------------------------------------------------------------------------- Table of Contents Reconciliation of Quarterly Non-GAAP Financial Measures Our investor and analyst presentations include Adjusted EBITDA. We define this metric as net income (loss) plus depreciation and asset impairment; amortization of intangible assets; interest expense, net; income tax expense (benefit); stock-based compensation expense and acquisition-related expense. Beginning in 2011, Adjusted EBITDA excludes litigation related expenses pertaining to the Yardi litigation as discussed in Part I, Item 3 "Legal Proceedings." Beginning in the second quarter of 2011, Adjusted EBITDA includes acquisition-related deferred revenue adjustments. Beginning in the third quarter of 2012, Adjusted EBITDA excludes stock registration costs. We believe that the use of Adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that: • Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and facilitates comparisons with our peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and • it is useful to exclude certain non-cash charges, such as depreciation and asset impairment, amortization of intangible assets and stock-based compensation and non-core operational charges, such as acquisition-related expense, from Adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly between periods as a result of new acquisitions, full amortization of previously acquired tangible and intangible assets or the timing of new stock-based awards, as the case may be.

We use Adjusted EBITDA in conjunction with traditional GAAP operating performance measures as part of our overall assessment of our performance, for planning purposes, including the preparation of our annual operating budget, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance.

We do not place undue reliance on Adjusted EBITDA as our only measure of operating performance. Adjusted EBITDA should not be considered as a substitute for other measures of liquidity or financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do, that they do not reflect our capital expenditures or future requirements for capital expenditures and that they do not reflect changes in, or cash requirements for, our working capital. We compensate for the inherent limitations associated with using the Adjusted EBITDA measures through disclosure of these limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss).

The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for the eight fiscal quarters ended December 31, 2012: Three Months Ended, December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2012 2012 2012 2012 2011 2011 2011 2011 (in thousands) Net income (loss) $ 3,722 $ 2,113 $ (2,372 ) $ 1,720 $ 241 $ (1,106 ) $ 282 $ (648 ) Acquisition-related deferred revenue adjustment 3 3 2 81 186 276 244 - Depreciation and asset impairment 3,521 3,416 3,375 3,227 2,969 2,696 2,750 3,124 Amortization of intangible assets 5,447 4,537 4,685 4,829 4,720 4,749 4,491 4,046 Interest expense, net 426 518 578 638 669 684 732 783 Income tax expense (benefit) 3,515 1,211 (1,533 ) 1,026 405 (266 ) 190 (539 ) Litigation related expense 399 860 8,539 360 337 605 36 320 Stock-based compensation expense 3,861 6,013 4,316 3,988 6,388 6,408 4,969 4,853 Acquisition-related expense (94 ) (572 ) (237 ) 553 (334 ) 969 44 186 Stock registration costs 7 668 - - - - - - Adjusted EBITDA $ 20,807 $ 18,767 $ 17,353 $ 16,422 $ 15,581 $ 15,015 $ 13,738 $ 12,125 Liquidity and Capital Resources Prior to our initial public offering, we financed our operations primarily through private placements of convertible preferred stock and common stock, secured credit facilities with commercial lenders, a private placement of subordinated debt securities and cash provided by operating activities. On August 11, 2010, our registration statement on Form S-1 (File No. 333-166397) relating to our initial public offering was declared effective by the SEC. We sold 6,000,000 shares of common stock in our initial public offering. On December 6, 2010, our registration statement on Form S-1 (File No 333-170667) relating to a public stock offering was declared effective by the SEC. We sold an additional 4,000,000 shares of common stock in the offering. Our 2010 stock offerings resulted in proceeds, net of transaction expenses, of $155.2 million.

Our primary sources of liquidity as of December 31, 2012 consisted of $33.8 million of cash and cash equivalents, $140.0 million available under our revolving line of credit and $29.5 million of current assets less current liabilities (excluding $33.8 of cash and cash equivalents and $60.6 million of deferred revenue).

64 -------------------------------------------------------------------------------- Table of Contents Our principal uses of liquidity have been to fund our operations, working capital requirements, capital expenditures and acquisitions and to service our debt obligations. We expect that working capital requirements, capital expenditures and acquisitions will continue to be our principal needs for liquidity over the near term. In addition, we have made several acquisitions in which a portion of the cash purchase price is payable at various times through 2014. We expect to fund these obligations from cash provided by operating activities or, in some cases, the issuance of shares of our common stock at our election.

We believe that our existing cash and cash equivalents, working capital (excluding deferred revenue and cash and cash equivalents) and our cash flow from operations, will be sufficient to fund our operations and planned capital expenditures and service our debt obligations for at least the next 12 months.

Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and size of acquisitions, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts, the timing of introductions of new solutions and enhancements to existing solutions and the continuing market acceptance of our solutions. We may enter into acquisitions of complementary businesses, applications or technologies, in the future, which could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us, or at all. As of December 31, 2012, we have federal and state net operating loss carryforwards of $176.4 million and $6.4 million, respectively. These carryforwards may be available to offset potential payments of future federal and state income tax liabilities and, if unused, expire at various dates through 2031 for both federal and state income tax purposes.

The following table sets forth cash flow data for the periods indicated therein: Year Ended December 31, 2012 2011 2010 Net cash provided by operating activities $ 58,412 $ 49,226 $ 27,690 Net cash used in investing activities (32,776 ) (107,746 ) (83,095 ) Net cash used in financing activities (43,054 ) (8,176 ) 169,004 Net Cash Provided by Operating Activities In 2012, we generated $58.4 million of net cash from operating activities representing an increase compared to 2011. Our net cash from operating activities consisted of our net income of $5.2 million, net non-cash charges of $50.6 million and $0.1 million from changes in working capital. Net non-cash charges to income primarily consisted of depreciation, amortization and stock-based compensation expense. The $0.1 million provided by changes in working capital was primarily due to a decrease in other assets and increases in deferred revenue and accrued compensation and benefits, offset by increases in accounts receivable and decreases in accounts payable.

In 2011, we generated $49.2 million of net cash from operating activities representing an increase compared to 2010. Our net cash from operating activities consisted of our net loss of $1.2 million and net non-cash charges of $52.4 million partially offset by a $2.0 million use of operating cash flow resulting from changes in working capital. Net non-cash charges to income primarily consisted of depreciation, amortization and stock-based compensation expense. The $2.0 million use of operating cash flow resulting from the changes in working capital was primarily due to higher accounts receivable balances, general timing differences in other current assets, accounts payable and other current liabilities, offset by an increase in deferred revenue.

In 2010, we generated $27.7 million of net cash from operating activities representing an increase compared to 2009. Our net cash from operating activities consisted of our net income of $0.1 million and net non-cash charges of $28.1 million partially offset by a $0.5 million use of operating cash flow resulting from changes in working capital. Net non-cash charges to income primarily consisted of depreciation, amortization and stock-based compensation expense. The $0.5 million use of operating cash flow resulting from the changes in working capital was primarily due to higher accounts receivable balances, general timing differences in other current assets, accounts payable and other current liabilities, offset by an increase in deferred revenue.

Net Cash Used in Investing Activities In 2012, our investing activities consisted of acquisition consideration of $10.6 million, net of cash acquired, for our 2012 acquisitions and $22.2 million of capital expenditures and intangible asset purchases. The decrease in cash used in investing activities for 2012 relates to lower acquisition related payments in 2012 compared to 2011.

In 2011, our investing activities used $107.7 million. Investing activities consisted of acquisition consideration of $89.7 million, net of cash acquired, for our 2011 acquisitions and $18.0 million of capital expenditures and intangible asset purchases. The increase in cash used in investing activities from 2010 relates to the consideration paid net of cash acquired for our 2011 acquisitions combined with an increase in capital spending.

65-------------------------------------------------------------------------------- Table of Contents In 2010, our investing activities used $83.1 million. Investing activities consisted of acquisition consideration of $70.9 million net of cash acquired for our 2010 acquisitions and $12.2 million of capital expenditures.

Capital expenditures as of December 31, 2012, 2011 and 2010 were primarily related to investments in technology infrastructure to support our growth initiatives.

Net Cash Used in Financing Activities Our financing activities used $43.1 million in 2012, representing an increase of $34.9 million, as compared to 2011. Cash used by financing activities during 2012 was primarily related to payments on our revolving credit facility of $40.3 million, payments of $11.6 million for acquisition-related consideration and capital lease payments of $0.1 million. These increases were offset by $8.9 million in proceeds from the issuance of common stock.

Our financing activities used $8.2 million in 2011. Cash used by financing activities during 2011 was primarily related to payments on our term loan of $8.1 million, payments on our revolving credit facility of $8.0 million, payments of $1.5 million for acquisition-related consideration, capital lease payments of $0.5 million, $0.8 million of follow on offering costs and $0.2 million of excess tax benefit related to stock options. These increases were offset by $10.5 million in proceeds from the issuance of common stock.

Our financing activities provided $169.0 million in 2010. Cash provided by financing activities during 2010 was used to support our operations, as a funding source for acquisitions and for capital expenditures related to the expansion of our technology infrastructure. Cash provided by financing activities in 2010 was primarily related to net proceeds from our initial public offering on August 11, 2010, a subsequent public stock offering on December 10, 2010 and $40.0 million of proceeds as a result of borrowing from our credit facility. Related to our August 11, 2010 initial public offering, we sold 6,000,000 shares of common stock resulting in proceeds, net of transaction expenses, of $57.5 million. Related to our December 3, 2010 public stock offering, we sold an additional 4,000,000 shares of common stock in the offering resulting in net proceeds, net of transaction expenses, of $98.4 million. Cash proceeds were partially offset by payments to extinguish our secured subordinated promissory notes and our preferred stockholder notes payable of $10.0 million and $6.5 million, respectively, in the third quarter of 2010, combined with aggregate principal payments of $11.3 million for scheduled term debt maturities, capital lease obligations and preferred stockholder notes payable. Additionally, during 2010, we paid $0.7 million of preferred stock dividends that had accrued on our convertible preferred stock, which were offset by $2.4 million in proceeds from the issuance of common stock, and had payments of $1.0 million for acquisition-related consideration.

Contractual Obligations, Commitments and Contingencies The following table summarizes, as of December 31, 2012, our minimum payments for long-term debt and other obligations for the next five years and thereafter: Payments Due by Period Less Than More Than Total 1 year 1-3 years 3-5 years 5 years (in thousands) Secured revolving credit facility $ 10,000 $ - $ 10,000 $ - $ - Interest payments on long-term debt obligations(1) 663 221 442 - - Operating lease obligations 25,800 7,463 13,425 4,912 - Acquisition-related liabilities(2) 2,842 2,056 786 - - $ 39,305 $ 9,740 $ 24,653 $ 4,912 $ - (1) The amount of interest payments on long-term debt obligations represents current obligations using rates in effect as of December 31, 2012.

(2) We have made several acquisitions in which a portion of the cash purchase price is payable at various times through 2014.

66 -------------------------------------------------------------------------------- Table of Contents Long-Term Debt Obligations In September 2009, we entered into a credit facility which provided for a $35.0 million term loan and a $10.0 million revolving line of credit. A portion of the proceeds from the credit facility was used to repay the balance outstanding under our prior credit facility. The term loan and revolving line of credit were collateralized by substantially all our personal property. Prior to the June 2010 amendment discussed below, the term loan and revolving line of credit bore interest at rates of the greater of 7.5%, a stated rate of 5.0% plus LIBOR (or, if greater, 2.5%), or a stated rate of 5.0% plus the bank's prime rate (or, if greater, 3.5%, the federal funds rate plus 0.5% or three month LIBOR plus 1.0%).

In February 2010, we entered into an amendment to the credit facility. Under the terms of the amendment, the original term loan was increased by an additional $10.0 million. The proceeds from the amendment were primarily used to finance the February 2010 acquisition of certain assets of Domin-8 Enterprise Solutions, Inc. The related interest rates and maturity periods remained consistent with the terms of the credit facility. Until the June 2010 amendment discussed below, we made principal payments on the term loan in quarterly installments of approximately $1.8 million.

In June 2010, we entered into a subsequent amendment to the credit facility.

Under the terms of the June 2010 amendment, an additional $30.0 million in term loans was made available for borrowing until December 22, 2011. After the June 2010 amendment and prior to the February 2011 amendment discussed below, the term loan and revolving line of credit bore interest at a stated rate of 3.5% plus LIBOR, or a stated rate of 0.75% plus Wells Fargo's prime rate (or, if greater, the federal funds rate plus 0.5% or three month LIBOR plus 1.0%). After the June 2010 amendment and prior to the February 2011 amendment discussed below, interest on the term loans and the revolver was payable monthly, or for LIBOR loans, at the end of the applicable 1-, 2-, or 3-month interest period.

Under the terms of the June 2010 amendment and prior to the December 2011 amendment and restatement discussed below, principal payments on the term loan were paid in quarterly installments equal to 3.75% of the principal amount of term loans.

In September 2010, we entered into an amendment to the credit facility. Under the terms of the September 2010 amendment, the definition of "fixed charges" under the credit facility was amended to specifically exclude the cash dividend and debt repayments made with the proceeds of our initial public offering.

In November 2010, we entered into an additional amendment to the credit facility and obtained consent to the Level One acquisition. Under the terms of the November 2010 amendment, we increased the maximum allowable "senior leverage ratio" under the credit facility and amended the definition of "permitted indebtedness" in the credit facility to permit amounts payable in the future pursuant to the Level One acquisition. In addition, we borrowed $30.0 million on our delayed draw term loans to facilitate the acquisition.

In February 2011, we entered into a subsequent amendment to the Credit Agreement. Under the terms of the February 2011 amendment, our revolving line of credit was increased from $10.0 million to $37.0 million. In addition, the interest rates on the term loan and revolving line of credit were amended to provide for a rate that was dependent on our senior leverage ratio and ranged from a stated rate of 2.75% to 3.25% plus LIBOR or, at our option, a stated rate of 0.0% to 0.5% plus Wells Fargo's prime rate (or, if greater, the federal funds rate plus 0.5% or three month LIBOR plus 1.0%). Prior to the December 2011 amendment and restatement discussed below, principal payments on the term loan and outstanding revolver balance remain consistent with the June 2010 amendment.

In December 2011, we entered into an Amended and Restated Credit Agreement ("Restated Agreement") to amend the original credit facility. The Restated Agreement provides for a secured revolving credit facility in an aggregate principal amount of up to $150.0 million, subject to a borrowing formula, with a sublimit of $10.0 million for the issuance of letters of credit on our behalf.

The Restated Agreement converted our outstanding term loan under the original credit facility into revolving loans. As of December 31, 2012, $10.0 million was outstanding under our revolving line of credit and $10.0 million was available for the issuance of letters of credit. Revolving loans accrue interest at a per annum rate equal to, at the Company's option, either LIBOR or Wells Fargo's prime rate (or, if greater, the federal funds rate plus 0.50% or three month LIBOR plus 1.00%), in each case plus a margin ranging from 2.50% to 3.00%, in the case of LIBOR loans, and 0.00% to 0.25% in the case of prime rate loans, based upon the Company's senior leverage ratio. The interest is due and payable monthly, in arrears, for loans bearing interest at the prime rate and at the end of the applicable 1-, 2-, or 3-month interest period in the case of loans bearing interest as the adjusted LIBOR rate. Principal, together with all accrued and unpaid interest, is due and payable on December 30, 2015. Advances under the credit facility may be voluntarily prepaid, and must be prepaid with the proceeds of certain dispositions, extraordinary receipts and indebtedness and in full upon a change in control.

In September 2012, we entered into an amendment to the Restated Agreement. Under the terms of the amendment, the LIBOR rate margin ranges from 2.00% to 2.50%, based on our senior leverage ratio. All other interest rates and maturity periods remain consistent with the Restated Agreement. Additionally, our capital expenditure limitations were expanded in the amendment.

All of our obligations under the loan facility are secured by substantially all of our property. All of our existing and future domestic subsidiaries are required to guaranty our obligations under the credit facility, other than certain immaterial subsidiaries and our payment processing subsidiary, RealPage Payment Processing Services, Inc. Our foreign subsidiaries may, under certain circumstances, be required to guaranty our obligations under the credit facility. Such guarantees by existing and future subsidiaries are and will be secured by substantially all of the property of such subsidiaries.

67-------------------------------------------------------------------------------- Table of Contents Our credit facility contains customary covenants which limit our and certain of our subsidiaries' ability to, among other things, incur additional indebtedness or guarantee indebtedness of others; create liens on our assets; enter into mergers or consolidations; dispose of assets; prepay indebtedness or make changes to our governing documents and certain of our agreements; pay dividends and make other distributions on our capital stock, and redeem and repurchase our capital stock; make investments, including acquisitions; enter into transactions with affiliates; and make capital expenditures. Our credit facility additionally contains customary affirmative covenants, including requirements to, among other things, take certain actions in the event we form or acquire new subsidiaries; hold annual meetings with our lenders; provide copies of material contracts and amendments to our lenders; locate our collateral only at specified locations; and use commercially reasonable efforts to ensure that certain material contracts permit the assignment of the contract to our lenders; subject in each case to customary exceptions and qualifications. We are also required to comply with a fixed charge coverage ratio, which is a ratio of our EBITDA to our fixed charges as determined in accordance with the credit facility, of 1.25:1:00 for each 12-month period ending at the end of a fiscal quarter, and a senior leverage ratio, which is a ratio of the outstanding revolver usage to our EBITDA as determined in accordance with the credit facility, of 2.75:1.00 on the last day of each fiscal quarter.

In the event of a default on our credit facility, the obligations under the credit facility could be accelerated, the applicable interest rate under the credit facility could be increased, and our subsidiaries that have guaranteed the credit facility could be required to pay the obligations in full, and our lenders would be permitted to exercise remedies with respect to all of the collateral that is securing the credit facility, including substantially all of our and our subsidiary guarantors' assets. Any such default that is not cured or waived could have a material adverse effect on our liquidity and financial condition.

Off-Balance Sheet Arrangements We do not have any off-balance sheet financing arrangements and we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Recent Accounting Pronouncements In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment, to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. We adopted this accounting standard in the fourth quarter of 2011.

In June 2011, the FASB issued ASU 2011-05 "Comprehensive Income (Topic 220) - Presentation of Comprehensive Income" ("ASU 2011-05") effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted. This accounting standard provides new disclosure guidance related to the presentation of the Statement of Comprehensive Income.

This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. We adopted this accounting standard in the fourth quarter of 2011. This adoption does not have any impact on our financial position or results of operations.

In December 2010, the FASB issued ASU 2010-29 "Business Combinations (Topic 805)-Disclosure of Supplementary Pro Forma Information for Business Combinations" ("ASU 2010-29") effective prospectively for material (either on an individual or aggregate basis) business combinations entered into in fiscal years beginning on or after December 15, 2010. This accounting standard update clarifies that SEC registrants presenting comparative financial statements should disclose in their pro forma information revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. These requirements changed our annual pro forma disclosures for acquisitions which had historically included the impact on all comparable periods. ASU 2010-29 also changes our annual and quarterly pro forma disclosures to include a description and the related amount of material adjustments made to pro forma results as seen in Note 3 of the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.

68 -------------------------------------------------------------------------------- Table of Contents

[ Back To Technology News's Homepage ]