|
DEMAND MEDIA INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Part II, Item 6, "Selected
Financial Data" and our consolidated financial statements included elsewhere in
this Annual Report on Form 10-K. In addition to historical data, this discussion
contains forward-looking statements about our business, operations and financial
performance based on current expectations that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those discussed in
the forward-looking statements as a result of various factors, including but not
limited to those discussed in "Disclosure Regarding Forward-Looking Statements"
and Item I, Part 1A, "Risk Factors" included elsewhere in this Annual Report on
Form 10-K.
Overview
We are a diversified Internet media and domain services company. We have
developed a leading Internet-based model for the professional creation and
distribution of high-quality, commercially valuable, long-lived content at
scale, and we operate the world's largest wholesale registrar and the world's
second largest registrar overall. Our business is comprised of two service
offerings: Content & Media and Registrar. Our Content & Media offering is
engaged in creating media content, primarily consisting of text articles and
videos, and delivering content along with our social media and monetization
tools to our owned and operated websites and mobile applications and to our
network of customer websites and their mobile applications. Our Content & Media
service offering also includes a portfolio of websites primarily containing
advertising listings, which we refer to as undeveloped websites. Our Registrar
service is the world's largest wholesale registrar of Internet domain names and
the world's second largest registrar overall, based on the number of names under
management, and provides domain name registration and related value-added
services. We are also a leading participant in ICANN's, significant expansion of
the number of generic Top Level Domain ("gTLDs"), which is expected to result in
the delegation on new gTLDs commencing in 2013.
Our principal operations and decision-making functions are located in the United
States. We report our financial results as one operating segment, with two
distinct service offerings. Our operating results are regularly reviewed by our
chief operating decision maker on a consolidated basis, principally to make
decisions about how we allocate our resources and to measure our consolidated
operating performance. Together, our service offerings provide us with
proprietary data that facilitate the creation of commercially valuable,
long-lived content, which we combine with broad distribution and targeted
monetization capabilities. We currently generate the vast majority of our
Content & Media revenue through the sale of advertising, and to a lesser extent
through subscriptions to our social media applications and licensing and sales
of select content and service offerings. Substantially all of our Registrar
revenue is derived from domain name registration and related value-added service
subscriptions. Our chief operating decision maker regularly reviews revenue for
each of our Content & Media and Registrar service offerings in order to gain a
greater understanding of the key business metrics driving our business.
Accordingly, we report Content & Media and Registrar revenue separately.
In February 2013, we announced that our board of directors authorized a plan to
explore separating the Company into two independent, publicly-traded companies:
a pure-play Internet-based content and media company and a pure-play domain
services company (hereinafter referred to as the "Proposed Business
Separation"). We anticipate that the Proposed Business Separation will be
structured as a tax-free pro rata distribution to stockholders of new publicly
traded shares in the new domain services company. Consummation of the Proposed
Business Separation is subject to final approval by our board of directors.
Consummation of the Proposed Business Separation also is subject to satisfaction
of several conditions, including confirmation of the transaction's tax-free
treatment, receipt of listing approval, and the filing and effectiveness of a
registration statement on Form 10 with the SEC. We have not yet finalized all of
the details of the Proposed Business Separation and there is no assurance that
the Proposed Business Separation as described herein will occur.
In January 2011, we completed our initial public offering and received proceeds,
net of underwriters discounts but before deducting offering expenses, of
$81.8 million from the issuance of 5.2 million shares of common stock. As a
result of the initial public offering, all shares of our convertible preferred
stock converted into 61.7 million shares of common stock and warrants to
purchase common stock or convertible preferred stock net exercised into
0.5 million shares of common stock.
For the years ended December 31, 2010, 2011 and 2012, we reported revenue of
$253 million, $325 million and $381 million, respectively. For the years ended
December 31, 2010, 2011 and 2012, our Content & Media offering accounted for
42
--------------------------------------------------------------------------------61%, 63% and 65% of our total revenue, respectively, and our Registrar service
accounted for 39%, 37% and 35% of our total revenue, respectively.
Key Business Metrics
We regularly review a number of business metrics, including the following key
metrics, to evaluate our business, measure the performance of our business
model, identify trends impacting our business, determine resource allocations,
formulate financial projections and make strategic business decisions. Measures
which we believe are the primary indicators of our performance are as follows:
Content & Media Metrics
• page views: We define page views as the total number of web pages viewed
across (1) our owned and operated websites and/or (2) our network of
customer websites, to the extent that the viewed customer web pages host
the Company's monetization, social media and/or content services.
Page views are primarily tracked through internal systems, such as our Omniture web analytics tool, contain estimates for our customer websites
using our social media tools and may use data compiled from certain
customer websites. We periodically review and refine our methodology for
monitoring, gathering, and counting page views in an effort to improve the
accuracy of our measure.
• RPM: We define RPM as Content & Media revenue per one thousand page views.
Registrar Metrics
• domain: We define a domain as an individual domain name paid for by a
third-party customer where the domain name is managed through our
Registrar service offering. Beginning July 1, 2011, the number of net new
domains has been adjusted to include only new registered domains added to
our platform for which we have recognized revenue. This metric does not
include any of the Company's owned and operated websites.
• average revenue per domain: We calculate average revenue per domain by
dividing Registrar revenues for a period by the average number of domains
registered in that period. The average number of domains is the simple
average of the number of domains at the beginning and end of the period.
The following table sets forth additional performance highlights of key business
metrics for the periods presented:
2010 to 2011 to
2011 2012
Year ended December 31, % %
2010 2011 2012 Change Change
Content & Media Metrics (1)
Owned & operated
Page views (in millions) 8,234 10,378 13,192 26 % 27 %
RPM $ 13.45 $ 15.14 $ 13.53 13 % (11 )%
Network of customer websites
Page views (in millions) 13,155 17,436 18,989 33 % 9 %
RPM $ 3.20 $ 2.77 $ 3.58 (13 )% 29 %
RPM ex-TAC $ 2.28 $ 2.06 $ 2.55 (10 )% 24 %
Registrar Metrics (1)
End of Period # of Domains (2) (in
millions) 11.0 12.7 13.7 15 % 8 %
Average Revenue per Domain (2) $ 9.96 $ 10.08 $ 10.19 1 % 1 %
___________________________________
(1) For a discussion of these period to period changes in the number of
page views, RPM, end of period domains and average revenue per domain and
how they impacted our financial results, see "Results of Operations" below.
(2) Beginning July 1, 2011, the number of net new domains has been adjusted to
include only new registered domains added to our platform for which we have
recognized revenue. Excluding the impact of this change, end of period
domains at
43--------------------------------------------------------------------------------
December 31, 2012 would have increased 13% and average revenue per domain during
the year ended December 31, 2012 would have decreased 4%, each compared to the
corresponding prior-year period.
Opportunities, Challenges and Risks
To date, we have derived the majority of our revenue through the sale of
advertising in connection with our Content & Media service offering and through
domain name registration subscriptions in our Registrar service offering. Our
advertising revenue is primarily generated by advertising networks, which
include both performance-based Internet advertising, such as cost-per-click
where an advertiser pays only when a user clicks on its advertisement, and
display Internet advertising, where an advertiser pays when the advertising is
displayed. For the year ended December 31, 2012, the majority of our advertising
revenue was generated by our relationship with Google. We deliver online
advertisements provided by Google on our owned and operated websites as well as
on certain of our customer websites where we share a portion of the advertising
revenue. Additionally, we recognized significant revenue from our YouTube
multi-channel premium video initiative during 2012. We do not expect to generate
significant revenue under this agreement in 2013. For the years ended
December 31, 2011 and 2012, approximately 33% and 38%, respectively, of our
total consolidated revenue was derived from our advertising and content
arrangements with Google. Google maintains the direct relationships with the
advertisers and provides us with cost-per-click and display advertising
services.
Growth in Content & Media revenue is principally dependent upon growth in page
views and RPMs. Our recent growth in page views has been primarily due to an
increase in the number of visitors to our library of content published in 2011
and earlier, the increase in the amount of our content distributed to our
network of content partners, and traffic growth from mobile devices. We believe
that there are opportunities to grow our page views by creating and publishing
more content in a greater variety of formats on our owned and operated sites as
well as expanding our network of customer websites. Our RPMs are subject to
changes in the online advertising marketplace, where we expect ad unit price
volatility, which could include lower rates received for certain ad units.
Currently, our Content & Media revenue is primarily advertising-based; however,
we believe there is an opportunity to diversify our revenue by expanding our
paid content services, including offering paid subscriptions to access certain
of our media content.
Google, the largest provider of search engine referrals to the majority of the
Company's websites, regularly deploys changes to its search engine algorithms,
some of which have led the Company to experience fluctuations in the total
number of Google search referrals to its owned and operated and network of
customer websites. Other search engines may deploy similar changes. In 2011, the
overall impact of these changes on the Company's owned and operated websites was
negative primarily due to a decline in traffic to eHow.com, the Company's
largest website. In 2012, Google continued to make changes to its search engine
algorithms; however, we do not believe that these changes in the aggregate had
an overall negative impact on our traffic. In response to the changes in search
engine algorithms in 2011, the Company performed an evaluation of its existing
content library to identify potential improvements in its content creation and
distribution platform. As a result of this evaluation, the Company elected to
remove certain content assets from service, resulting in approximately $5.9
million and $2.1 million of accelerated amortization expense in the years ended
December 31, 2011 and 2012, respectively.
We intend to evolve and continuously improve our content creation and
distribution platform. During 2011 and 2012, we made certain improvements to
this platform including establishment of more stringent criteria for the
admission of content creators, an increase in our investment in video, long-form
content and images, publication of content directed at international markets and
in languages other than English, addition of content production algorithms
targeted toward ensuring that each additional unit of content published is
unique in relation to existing content units, as well as an expansion of the
distribution of our content to our network of customer websites. As we made
these improvements to our content creation and distribution platform, we reduced
the level of our overall investment in media content in 2012 when compared to
2011. Based on our assessment of the results of these improvements, we increased
our investment in media content over the course of 2012. We expect this trend to
continue and anticipate increased media content expenditures in 2013 compared to
2012, including additional investment in short-form articles on our owned and
operated sites including eHow.com, growth in content published on our network of
customer websites and creation of new content formats, including paid content,
designed to further diversify our content offering.
There can be no assurance that these or any future changes that may be
implemented by the Company, by search engines to their algorithms and search
methodologies, or by consumers in their web usage habits will not adversely
impact the carrying value, estimated useful life or intended use of our
long-lived assets. The Company will continue to monitor these changes as well as
any future changes and emerging trends in search engine algorithms and
methodologies, including the resulting impact that these changes may have on
future operating results, the economic performance of the Company's long-lived
assets and in
44
--------------------------------------------------------------------------------
its assessment as to whether significant changes in circumstances might provide
an indication of potential impairment of the carrying value of its long-lived
assets, including its media content and goodwill arising from acquisitions.
The growth in our Registrar revenue is dependent upon our ability to attract and
retain customers to our Registrar platform through competitive pricing on domain
registrations and value added services. Beginning in the first quarter of 2010
and extending through the third quarter of 2011, we added several customers with
large volumes of domains to our Registrar platform. This resulted in
fluctuations in our average revenue per domain over these periods, from which we
only recognized revenue on a portion of these domain names while deferring
revenue recognition on the remainder. Beginning July 1, 2011, we adjusted the
number of net new domains to include only new registered domains added to our
platform for which we have recognized revenue. Excluding the impact of this
change, average revenue per domain during the year ended December 31, 2012 would
have decreased 4% compared to the corresponding prior-year period, primarily due
to the acquisition of Name.com on December 31, 2012 for which we did not
recognize any revenue in 2012. In the near term, we anticipate our average
revenue per domain to continue to fluctuate as a result of an increasing mix of
large volume customers and the recent acquisition of Name.com. Due in part to
the higher mix of large, higher volume customers in 2012 as compared to 2011, we
also expect that the associated service costs as a percentage of revenue will
increase when compared to our historical results.
The Internet Corporation for Assigned Names and Numbers, or ICANN, has approved
a framework for the significant expansion of the number of gTLDs, which is
expected to result in the delegation of new gTLDs commencing in 2013. We believe
that such expansion, once completed, could result in an increase in the number
of domains registered on our platform commencing in the second half of 2013. In
addition, we believe that the New gTLD Program could also provide us with new
revenue opportunities commencing in 2013, which include operating the back-end
infrastructure for new gTLD registries and/or owning one or more gTLDs in our
own right.
During the year ended December 31, 2012, the Company paid $18.2 million for
certain gTLD applications under the New gTLD Program. Payments for gTLD
applications represent amounts paid directly to ICANN and third parties in the
pursuit of the Company's ownership of certain gTLD operator rights. While there
can be no assurance that the Company will be awarded any gTLDs, the Company
capitalizes payments made for gTLD applications that are determined to embody
probable economic benefit, which are included in other long-term assets at
December 31, 2012. During 2013 as part of the New gTLD Program, the Company may
receive partial cash refunds for certain gTLD applications, and to the extent
the Company elects to sell or dispose of certain gTLD applications throughout
the process, it may also incur gains or losses on amounts invested. Gains on the
sale of the Company's interest in gTLDs will be recognized when realized, while
losses will be recognized when deemed probable. Upon the delegation of operator
rights for each gTLD by ICANN, which the Company expects to commence in 2013,
gTLD application fees will be reclassified as finite lived intangible assets and
amortized on a straight-line basis over their estimated useful life. Other costs
incurred by the Company as part of its gTLD initiative and not directly
attributable to the acquisition of gTLD operator rights are expensed as
incurred.
We expect to incur between $5 million and $10 million of formation expenses
related to the New gTLD Program in 2013, and the total amount of our investment
at the completion of the New gTLD Program could be substantially higher or lower
than the amounts invested to date. Revenue is not expected to commence until the
third quarter of 2013 at the earliest.
Our service costs, the largest component of our operating expenses, can vary
from period to period, particularly as a percentage of revenue, based upon the
mix of the underlying Content & Media and Registrar services revenues we
generate. In the near term, we expect that the period-over-period growth in our
Content & Media revenue will exceed the growth in our Registrar revenue, which
would typically provide for higher operating margins. However, we expect that
service costs will increase in 2013 compared to 2012 due to the growth of higher
volume, lower margin Registrar customers offset by a substantial reduction of
costs associated with our premium multi-channel initiative with YouTube. We
believe that these factors, together with costs associated with our preparation
for new gTLDs becoming available for registration later in 2013, will constrain
our operating margin growth in the short-term as we increase our investment in
new business initiatives to support future growth.
Our content studio identifies and creates online text articles and videos
through a community of freelance creative professionals and is core to our
business strategy and long-term growth initiatives. Historically, we have made
substantial investments in our platform to support our community of freelance
creative professionals and the growth of our content production and distribution
and expect to continue to make such investments. As we develop new content
formats, we may not be able to attract and retain qualified creative
professionals to produce such new content at scale, which may adversely impact
our ability to execute against emerging business opportunities or retain
existing content creators.
For the year ended December 31, 2012, more than 90% of our revenue has been
derived from websites and customers located in the United States. While our
content is primarily targeted towards English-speaking users in the United
States today,
45
--------------------------------------------------------------------------------
we believe that there is an opportunity in the longer term for us to create
content targeted to users outside of the United States and thereby increase our
revenue generated from countries outside of the United States. We plan to
further expand our operations internationally to address this opportunity by
launching new websites and expanding our existing web properties such as eHow en
Español and eHow Brasil. As we expand our business internationally, we may incur
additional expenses associated with this growth initiative.
Basis of PresentationRevenue
Our revenue is derived from our Content & Media and Registrar service offerings.
Content & Media Revenue
We currently generate substantially all of our Content & Media revenue through
the sale of advertising, and to a lesser extent through subscriptions to our
social media applications and select content and service offerings. Articles and
videos, each of which we refer to as a content unit, generate revenue both
directly and indirectly. Direct revenue is directly attributable to a content
unit, such as advertisements, including sponsored advertising links, display
advertisements and in-text advertisements, on the same webpage on which the
content is displayed. Beginning in 2013, we also expect to generate direct
revenue from paid content subscription services. Indirect revenue is derived
primarily by our content library, but is not directly attributable to a specific
content unit. Indirect revenue includes advertising revenue generated from our
owned and operated websites' home pages (e.g., home page of eHow.com), topic
category webpages (e.g., home and garden category page), user generated article
pages that feature content that was not acquired through our proprietary content
acquisition process, and to a lesser extent, certain subscription-based revenue.
Our revenue generating advertising arrangements, for both our owned and operated
websites and our network of customer websites, include cost-per-click
performance-based advertising; display advertisements where revenue is dependent
upon the number of page views; and lead generating advertisements where revenue
is dependent upon users registering for, or purchasing or demonstrating interest
in, advertisers' products and services. We generate revenue from advertisements
displayed alongside our content offered to consumers across a broad range of
topics and categories on our owned and operated websites and on certain customer
websites. Our advertising revenue also includes revenue derived from
cost-per-click advertising links we place on undeveloped websites owned by us,
which we acquire and sell on a regular basis, and certain of our customers. To a
lesser extent, we also generate revenue from our subscription-based offerings,
which include our social media applications deployed on our network of customer
websites and subscriptions to premium content or services offered on certain of
our owned and operated websites.
Where we enter into revenue sharing arrangements with our customers, such as
those relating to IndieClick and our undeveloped customer websites, and when we
are considered the primary obligor, we report the underlying revenue on a gross
basis in our consolidated statements of operations, and record these
revenue-sharing payments to our customers as traffic acquisition costs, or TAC,
which are included in service costs. In circumstances where we distribute our
content on third-party websites and the customer acts as the primary obligor we
recognize revenue on a net basis.
Registrar Revenue
Our Registrar revenue is principally comprised of registration fees charged to
resellers and consumers in connection with new, renewed and transferred domain
name registrations. In addition, our Registrar also generates revenue from the
sale of other value-added services that are designed to help our customers
easily build, enhance and protect their domains, including security services,
e-mail accounts and web-hosting. Finally, we generate revenue from fees related
to auction services we provide to facilitate the selling of third-party owned
domains. Our Registrar revenue varies based upon the number of domains
registered, the rates we charge our customers and our ability to sell
value-added services. We market our Registrar wholesale services under our eNom
brand, and our retail registration services under the eNomCentral and Name.com
brands, among others.
We expect to commence recognizing revenue from our gTLD initiative in the second
half of 2013. The amount, as well as the timing of revenue, is uncertain and is
dependent upon whether our applications for gTLDs are approved by ICANN, the
outcome of negotiations or auctions to acquire the operating rights for gTLDs
applications contested with other participants, and the continued progress of
the overall ICANN new gTLD initiative.
Operating Expenses
46
--------------------------------------------------------------------------------
Operating expenses consist of service costs, sales and marketing, product
development, general and administrative, and amortization of intangible assets.
Included in our operating expenses are stock-based compensation and depreciation
expenses associated with our capital expenditures.
Service costs primarily consist of: fees paid to registries and ICANN associated
with domain registrations; advertising revenue recognized by us and shared with
others as a result of our revenue-sharing arrangements, such as TAC and content
creator revenue-sharing arrangements; Internet connection and co-location
charges and other platform operating expenses including depreciation of the
systems and hardware used to build and operate our Content & Media platform and
Registrar service; personnel costs related to in-house editorial, customer
service and information technology; and certain content production costs. Our
service costs are dependent on a number of factors, including the number of
page views generated across our platform and the volume of domain registrations
and value-added services supported by our Registrar service. In the near term,
we expect higher overall registration costs as a percentage of revenue due to
the recent growth in higher volume, lower margin Registrar customers and the
Name.com acquisition as well as increased costs associated with our investment
in new business initiatives in 2013, including our preparation for new gTLDs. We
also anticipate increased traffic acquisition costs due to growth in network
revenue and that content production costs will comprise a lower proportion of
total service costs in 2013 compared to 2012, due to the substantial reduction
in costs (and revenue) associated with our premium multi-channel video
initiative with YouTube.
Sales and Marketing
Sales and marketing expenses consist primarily of sales and marketing personnel
costs, sales support, public relations, advertising, marketing and general
promotional expenditures. Fluctuations in our sales and marketing expenses are
generally the result of our efforts to support the growth in our Content & Media
service, including expenses required to support our direct advertising and
content channel sales teams. We currently anticipate that our sales and
marketing expenses will continue to increase in the near term as a percent of
revenue as we continue to build our sales and marketing organizations and invest
in marketing activities to support the growth of our business including our new
gTLD initiative.
Product Development
Product development expenses consist primarily of expenses incurred in our
software engineering, product development and web design activities and related
personnel costs. Fluctuations in our product development expenses are generally
the result of hiring personnel to support and develop our platform, including
the costs to further develop our content algorithms, our owned and operated
websites and future product and service offerings of our Registrar. We currently
anticipate that our product development expenses will increase as we continue to
hire more product development personnel and further develop our products and
offerings to support the growth of our business, including our gTLD initiative
and acquisition of Name.com, but remain relatively flat as a percentage of
revenue compared to 2012.
General and Administrative
General and administrative expenses consist primarily of personnel costs from
our executive, legal, finance, human resources and information technology
organizations and facilities related expenditures, as well as third party
professional fees, insurance and bad debt expenses. Professional fees are
largely comprised of outside legal, audit and information technology consulting.
During the year ended December 31, 2011 and 2012, our allowance for doubtful
accounts and bad debt expense were not significant and we expect that this trend
will continue in the near term. However, as we grow our revenue from direct
advertising sales, which tend to have longer collection cycles, our allowance
for doubtful accounts may increase, which may lead to increased bad debt
expense. As we continue to expand our business, we anticipate general and
administrative expenses will increase in the near term, primarily due to higher
rent expense related to our expansion into new corporate headquarters in Santa
Monica in 2013 and professional fees related to the potential separation of our
business into two public companies.
Amortization of Intangibles
We capitalize certain costs allocated to the purchase price of certain
identifiable intangible assets acquired in connection with business
combinations, to acquire content that our models predict to embody probable
economic benefit, and to acquire undeveloped websites, including initial
registration costs. We amortize these costs on a straight-line basis over the
related expected useful lives of these assets, which have a weighted average
useful life of approximately 5.3 years on a combined basis as of December 31,
2012. We estimate our capitalized content to have a weighted average useful life
of 5.1 years as of December 31, 2012. The Company determines the appropriate
useful life of intangible assets by performing an analysis of expected cash
flows based on its historical experience of intangible assets of similar quality
and value. We expect intangible amortization expense to be relatively flat in
the near term as we reduced our investment in content intangible assets in 2012
as
47
--------------------------------------------------------------------------------compared to prior years and as a result of our election to remove certain
articles from service in 2012, offset by additional amortization of other
intangible assets, such as the amortization expense related to the Name.com
acquisition in December 2012. Amortization as a percentage of revenue will
depend upon a variety of factors, such as the amounts and mix of our investments
in content and identifiable intangible assets acquired in business combinations.
Stock-based Compensation
Included in our operating expenses are expenses associated with stock-based
compensation, which are allocated and included in service costs, sales and
marketing, product development and general and administrative expenses.
Stock-based compensation expense is largely comprised of costs associated with
stock options and restricted stock units granted to employees, restricted stock
issued to employees and expenses relating to our Employee Stock Purchase Plan.
We record the fair value of these equity-based awards and expense at their cost
ratably over related vesting periods. In addition, stock-based compensation
expense includes the cost of warrants to purchase common and preferred stock
issued to certain non-employees.
As of December 31, 2012, we had approximately $56.0 million of unrecognized
employee related stock-based compensation, net of estimated forfeitures, that we
expect to recognize over a weighted average period of approximately 2.5 years.
Stock-based compensation expense in 2013 is expected to be relatively consistent
with 2012 based on the existing unrecognized stock-based compensation expense,
but may fluctuate depending on the magnitude of additional stock-based awards
that we will make in order to continue to attract and retain employees and in
connection with potential business acquisitions.
Interest Expense
Interest expense principally consists of interest on outstanding debt and
amortization of debt issuance costs associated with our revolving credit
facility. As of December 31, 2012 no principal balance was outstanding under the
revolving credit facility.
Interest Income
Interest income consists of interest earned on cash balances and short-term
investments. We typically invest our available cash balances in money market
funds and short-term United States Treasury obligations.
Other Income (Expense), Net
Other income (expense), net consists primarily of transaction gains and losses
on foreign currency-denominated assets and liabilities and changes in the value
of certain long term investments and, prior to our initial public offering,
changes in the fair value of our preferred stock warrant liability. We expect
our transaction gains and losses will vary depending upon potential gains or
losses on gTLD application negotiations as well as movements in underlying
currency exchange rates which could become more significant as we continue to
expand internationally. Our preferred stock warrants were net exercised for
common stock upon our initial public offering in January 2011 and thus we no
longer record changes in the value of the warrants subsequent to that date.
Provision for Income Taxes
Since our inception, we have been subject to income taxes principally in the
United States, and certain other countries where we have legal presence,
including the United Kingdom, the Netherlands, Canada, and Sweden. More recently
we became subject to income taxes in Ireland and Argentina. We anticipate that
as we expand our operations outside the United States, we will become subject to
taxation based on the foreign statutory rates and our effective tax rate could
fluctuate accordingly.
Income taxes are computed using the asset and liability method, under which
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Based on the
available information we have taken a full valuation allowance against all of
our United States deferred tax assets. However, considering the Company's
current year results and forecasted income, there is a possibility that the
Company may release its valuation allowance against its deferred tax assets in
the next 12 months.
As of December 31, 2012, we had approximately $66 million of federal and $13
million of state operating loss carry-forwards available to offset future
taxable income which expire in varying amounts beginning in 2020 for federal and
2013 for
48
--------------------------------------------------------------------------------
state purposes if unused. Federal and state laws impose substantial restrictions
on the utilization of net operating loss and tax credit carry-forwards in the
event of an "ownership change," as defined in Section 382 of the Internal
Revenue Code of 1986, as amended, or the Internal Revenue Code. Currently, we do
not expect the utilization of our net operating loss and tax credit
carry-forwards in the near term to be materially affected as no significant
limitations are expected to be placed on these carry-forwards as a result of our
previous ownership changes. If an ownership change is deemed to have occurred as
a result of our initial public offering, potential near term utilization of
these assets could be reduced.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States. The preparation of these
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosures. We evaluate our estimates and assumptions on an ongoing
basis. Our estimates are based on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Our actual
results could differ from these estimates.
We believe that the assumptions and estimates associated with our revenue
recognition, accounts receivable and allowance for doubtful accounts,
capitalization and useful lives associated with our intangible assets, including
our internal software and website development and content costs, income taxes,
stock-based compensation and the recoverability of our goodwill and long-lived
assets including our media content portfolio and gTLD applications, have the
greatest potential impact on our consolidated financial statements. Therefore,
we consider these to be our critical accounting policies and estimates.
Revenue Recognition
We recognize revenue when four basic criteria are met: persuasive evidence of a
sales arrangement exists; performance of services has occurred; the sales price
is fixed or determinable; and collectability is reasonably assured. We consider
persuasive evidence of a sales arrangement to be the receipt of a signed
contract. Collectability is assessed based on a number of factors, including
transaction history and the credit worthiness of a customer. If it is determined
that collection is not reasonably assured, revenue is not recognized until
collection becomes reasonably assured, which is generally upon receipt of cash.
We record cash received in advance of revenue recognition as deferred revenue.
Content & Media
Advertising Services
In determining whether an arrangement for our advertising services exists, we
ensure that a binding arrangement is in place, such as a standard insertion
order or a fully executed customer-specific agreement. Obligations pursuant to
our advertising revenue arrangements typically include a minimum number of
impressions or the satisfaction of the other performance criteria. Revenue from
performance-based arrangements, including cost-per-click and referral revenues,
is recognized as the related performance criteria are met. We assess whether
performance criteria have been met and whether our fees are fixed or
determinable based on a reconciliation of the performance criteria and an
analysis of the payment terms associated with a transaction. The reconciliation
of the performance criteria generally includes a comparison of third-party
performance data, such as periodic online reports provided by certain of our
customer websites, to the contractual performance obligation and to internal or
customer performance data in circumstances where such data is available.
Historically, any difference between the amounts recognized based on preliminary
information and cash collected has not been material to our results of
operations.
Where we enter into revenue sharing arrangements with our customers, such as for
the online version of the San Francisco Chronicle or with respect to undeveloped
customer websites, and when we are considered the primary obligor, we report the
underlying revenues on a gross basis in our consolidated statements of
operations. In circumstances where the customer acts as the primary obligor,
such as YouTube, we recognize the underlying revenue on a net basis in our
statement of operations.
Content Revenue
Content revenue is generated through the sale or license of media content.
Revenue from the sale or perpetual license of content is recognized when the
content has been delivered and the contractual performance obligations have been
fulfilled. Revenue from the license of content is recognized over the period of
the license as content is delivered or when other related performance criteria
are fulfilled.
Subscription and Social Media Services
Subscription services revenue is generated through the sale of membership fees
paid to access content available on certain owned and operated websites, such as
Trails.com. Historically, the majority of the memberships ranged from six to
twelve month terms, and generally renew automatically at the end of the
membership term, if not previously canceled.
Membership revenue is recognized on a straight-line basis over the membership
term.
We configure, host and maintain almost all of our platform's social media
services for commercial customers. We earn revenues from our social media
services through initial set-up fees, recurring management support fees, overage
fees in excess of standard usage terms and outside consulting fees. Due to the
fact that our social media services customers have no contractual right to take
possession of our software, we account for our social media services as
subscription service arrangements, whereby social media services revenues are
recognized when persuasive evidence of an arrangement exists, delivery of the
service has occurred and no significant obligations remain, the selling price is
fixed or determinable and collectability is reasonably assured.
Social media service arrangements may contain multiple elements, including, but
not limited to, single arrangements containing set-up fees, monthly support fees
and overage billings and consulting services. To the extent that consulting
services have value on a standalone basis and there is objective and reliable
evidence of social media services, we allocate revenue to each element based
upon each element's objective and reliable evidence of fair value. Objective and
reliable evidence of fair value for all elements of a service arrangement is
based upon our normal pricing and discounting practices for those services when
such services are sold separately. To date, substantially all consulting
services entered into concurrently with the original social media service
arrangements are not treated as separate deliverables as such services are
essential to the functionality of the hosted social media services and do not
have value to the customer on a standalone basis. Such fees are recognized as
revenue on a straight-line basis over the greater of the contractual or
estimated customer life once monthly recurring services have commenced. Fees for
other items are recognized as follows:
• Customer set-up fees: set-up fees are generally paid prior to the
commencement of monthly recurring services. We initially defer set-up fees
and recognize the related revenue straight-line over the greater of the
contractual or estimated customer life once monthly recurring services
have commenced.
• Monthly support fees: recognized each month at contractual rates.
• Overage billings: recognized when delivered and at contractual rates in
excess of standard usage terms.
We determine the estimated customer life based on analysis of historical
attrition rates, average contractual term and renewal expectations. We
periodically review the estimated customer life and when events or changes in
circumstances, such as significant customer attrition relative to expected
historical or projected future results, occur. Outside consulting services
performed for customers on a standalone basis are recognized ratably as services
are performed at contractual rates.
Registrar
Domain Name Registration Fees
Registration fees charged to third parties in connection with new, renewed and
transferred domain name registrations are recognized on a straight line basis
over the registration term, which ranges from one to ten years. Payments
received in advance of the domain name registration term are included in
deferred revenue in our consolidated balance sheets. The registration term and
related revenue recognition commences once we confirm that the requested domain
name has been recorded in the appropriate registry under accepted contractual
performance standards. Associated direct and incremental costs, which
principally consist of registry and ICANN fees, are also deferred and expensed
as service costs on a straight line basis over the registration term.
Our wholly owned subsidiary, eNom, is an ICANN accredited registrar. Thus, we
are the primary obligor with our reseller and retail registrant customers and
are responsible for the fulfillment of our registrar services. As a result, we
report revenue derived from the fees we receive from our resellers and retail
registrant customers for registrations on a gross basis in our consolidated
statements of operations. A minority of our resellers have contracted with us to
provide billing and credit card processing services to the resellers' retail
customer base in addition to registration services. Under these circumstances,
the cash collected from these resellers' retail customer base exceeds the fixed
amount per transaction that we charge for domain name registration services.
Accordingly, these amounts, which are collected for the benefit of the reseller,
are not recognized as revenue and are recorded as a liability until remitted to
the reseller on a periodic basis. Revenue from these resellers is reported on a
net basis because the reseller determines the price to charge retail customers
and maintains the primary customer relationship.
Value-added Services
49
--------------------------------------------------------------------------------
Revenue from online Registrar value-added services, which include, but are not
limited to, security certificates, domain name identification protection,
charges associated with alternative payment methodologies, web hosting services
and email services is recognized on a straight line basis over the period in
which services are provided. Payments received in advance of services being
provided are included in deferred revenue.
Auction Service Revenue
Domain name auction service revenue represents fees received from facilitating
the sale of third-party owned domains through an online bidding process
primarily through NameJet, a domain name aftermarket auction company. While
certain names sold through the auction process are registered on our Registrar
platform upon sale, we have determined that auction revenue and related
registration revenue represent separate units of accounting, given that the
domain name has value to the customers on a standalone basis and there is
objective and reliable evidence of the fair value of the registration service.
We recognize the related registration fees on a straight-line basis over the
registration term. We recognize the bidding portion of auction revenues upon
sale, net of payments to third parties since we are acting as an agent only.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable primarily consist of amounts due from:
• third parties who provide advertising services to our owned and operated
websites and certain customer websites in exchange for a share of the
underlying advertising revenue. Accounts receivable from these advertising
providers are recorded as the amount of the revenue share as reported to
us by them and are generally due within 30 to 45 days from the month-end
in which the invoice is generated. Certain accounts receivable from these
providers are billed quarterly and are due within 45 days from the
quarter-end in which the invoice is generated, and are non-interest
bearing;
• social media services customers and include: account set-up fees, which are generally billed and collected once set-up services are completed;
monthly recurring services, which are billed in advance of services on a
quarterly or monthly basis; account overages, which are billed when
incurred and contractually due; and consulting services, which are generally billed in the same manner as set-up fees. Accounts receivable
from social media customers are recorded at the invoiced amount, are
generally due within 30 days and are non-interest bearing;
• direct advertisers who engage us to deliver branded advertising views.
Accounts receivable from our direct advertisers are recorded at negotiated
advertising rates (customarily based on advertising impressions) and as
the related advertising is delivered over our owned and operated websites.
Direct advertising accounts receivables are due within 30 to 60 days from
the date the advertising services are delivered and billed;
• customers who syndicate the Company's content over their websites in exchange for a share of related advertising revenue. Accounts receivable
from our customers are recorded at the revenue share as reported by our
customers and are due within 30 to 45 days; and
• certain domain reseller customers of our Registrar service offering.
We maintain an allowance for doubtful accounts to reserve for potentially
uncollectible receivables from our customers based on our best estimate of the
amount of probable losses from existing accounts receivable. We determine the
allowance based on analysis of historical bad debts, advertiser concentrations,
advertiser credit-worthiness and current economic trends. In addition, past due
balances over 90 days and specific other balances are reviewed individually for
collectability on at least a quarterly basis.
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair
value of the acquired net assets. We test goodwill for impairment annually
during the fourth quarter of our fiscal year or when events or circumstances
change that would indicate that goodwill might be impaired. Events or
circumstances that could trigger an impairment review include, but are not
limited to, a significant adverse change in legal factors or in the business
climate, an adverse action or assessment by a regulator, unanticipated
competition, a loss of key personnel, significant changes in the manner of our
use of the acquired assets or the strategy for our overall business, significant
negative industry or economic trends or significant underperformance relative to
expected historical or projected future results of operations.
Goodwill is tested for impairment at the reporting unit level, which is one
level below or the same as an operating segment. As of December 31, 2012, we
determined that we have three reporting units. For 2012, in accordance with
amended FASB guidance for goodwill impairment testing, the Company performed a
qualitative assessment for its reporting units which management estimates each
have fair values that significantly exceed their respective carrying values. For
each reporting unit,
50
--------------------------------------------------------------------------------
the Company weighed the relative impact of factors that are specific to the
reporting unit as well as industry and macroeconomic factors. The reporting unit
specific factors that were considered included financial performance and changes
to the reporting units' carrying amounts since the most recent impairment tests.
For each reporting unit, the Company considered assumptions about sales,
operating margins, and growth rates which are based on our forecasts, business
plans, economic projections, anticipated future cash flows and marketplace data.
The Company also determined that the impact of macroeconomic factors on the
discount rates and growth rates used for the most recent impairment tests would
not significantly affect the fair value of the reporting units. Based on this
qualitative assessment and considering the aggregation of these factors, the
Company concluded that for each of its three reporting units, it is more likely
than not that the fair value of each reporting unit exceeds its carrying amount
and that it was therefore unnecessary to perform the two-step impairment test.
Capitalization and Useful Lives Associated with our Intangible Assets, including
Content and Internal Software and Website Development Costs
We publish long-lived media content generated by our content studio which we
commission and acquire from third-party freelance creative professionals. Direct
costs incurred for each individual content unit that we determine embodies a
probable future economic benefit are capitalized. The vast majority of direct
content costs represent amounts paid to freelance creative professionals to
acquire content units and, to a lesser extent, specifically identifiable
internal direct labor costs incurred to enhance the value of acquired content
units prior to their publication. Internal costs not directly attributable to
the enhancement of content units acquired prior to publication are expensed as
incurred. All costs incurred to deploy and publish content are expensed as
incurred, including the costs incurred for the ongoing maintenance of websites
on which our content resides. We generally acquire content when our internal
systems and processes, including an analysis of millions of historical Internet
search queries, advertising marketing terms, or keywords, and other data provide
reasonable assurance that, given predicted consumer and advertiser demand
relative to our predetermined cost to acquire the content, the content unit will
generate revenues over its useful life that exceed the cost of acquisition. In
determining whether content embodies probable future economic benefit required
for asset capitalization, we make judgments and estimates including the
forecasted number of page views and the advertising rates that the content will
generate. These estimates and judgments take into consideration various inherent
uncertainties including, but not limited to, total expected page views over the
articles useful life, our expected ability to renew at favorable terms or
replace certain material agreements with Google that currently provide a
significant portion of our revenues; the expected ability of our direct
advertising sales force to sell branded advertisements; the fact that our
content creation and distribution model is new and evolving and may be impacted
by competition and technological advancements; our ability to expand existing
and enter into new distribution channels and applications for our content; and
whether we will be able to continue to create content of the same quality or
generate similar economic returns from content in the future. Management has
reviewed, and intends to regularly review the operating performance of content
in determining probable future economic benefits of our content.
We also capitalize initial registration and acquisition costs of our undeveloped
websites and our internally developed software and website development costs
during their development phase.
In addition we have also capitalized certain identifiable intangible assets
acquired in connection with business combinations and we use valuation
techniques to value these intangibles assets, with the primary technique being a
discounted cash flow analysis. A discounted cash flow analysis requires us to
make various judgmental assumptions and estimates including projected revenues,
operating costs, growth rates, useful lives and discount rates.
Our finite lived intangible assets are amortized over their estimated useful
lives using the straight-line method, which approximates the estimated pattern
in which the underlying economic benefits are consumed. Capitalized website
registration costs for undeveloped websites are amortized on a straight-line
basis over their estimated useful lives of one to seven years. Internally
developed software and website development costs are depreciated on a
straight-line basis over their estimated three year useful life. We amortize our
intangible assets acquired through business combinations on a straight-line
basis over the period in which the underlying economic benefits are expected to
be consumed.
Capitalized content is amortized on a straight-line basis over five years,
representing our estimate of the pattern that the underlying economic benefits
are expected to be realized and based on our estimates of the projected cash
flows from advertising revenues expected to be generated by the deployment of
our content. These estimates are based on our current plans and projections for
our content, our comparison of the economic returns generated by content of
comparable quality and an analysis of historical cash flows generated by that
content to date which, particularly for more recent content cohorts, is somewhat
limited. To date, certain content that we acquired in business combinations has
generated cash flows from advertisements beyond a five year useful life. The
acquisition of content, at scale, however, is a new and rapidly evolving model,
and therefore we closely monitor its performance and, periodically, assess its
estimated useful life.
Advertising revenue generated from the deployment of our media content makes up
a significant element of our business such that amounts we record in our
financial statements related to our content are material. Significant judgment
is required in
51
--------------------------------------------------------------------------------
estimating the useful life of our content. Changes from the five year useful
life we currently use to amortize our capitalized content would have a
significant impact on our financial statements. For example, if underlying
assumptions were to change such that our estimate of the weighted average useful
life of our media content was higher by one year from January 1, 2012, our net
income would increase by approximately $5 million for the year ended
December 31, 2012, and our net income would decrease by approximately $4 million
should the weighted average useful life be reduced by one year. We periodically
assess the useful life of our content, and when adjustments in our estimate of
the useful life of content are required, any changes from prior estimates are
accounted for prospectively.
Recoverability of Long-lived Assets
We evaluate the recoverability of our intangible assets, and other long-lived
assets with finite useful lives for impairment when events or changes in
circumstances indicate that the carrying amount of an asset group may not be
recoverable. These trigger events or changes in circumstances include, but are
not limited to a significant decrease in the market price of a long-lived asset,
a significant adverse change in the extent or manner in which a long-lived asset
is being used, significant adverse changes in legal factors, including changes
that could result from our inability to renew or replace material agreements
with certain of our partners such as Google on favorable terms, significant
adverse changes in the business climate including changes which may result from
adverse shifts in technology in our industry and the impact of competition, a
significant adverse deterioration in the amount of revenue or cash flows we
expect to generate from an asset group, an accumulation of costs significantly
in excess of the amount originally expected for the acquisition or development
of a long-lived asset, current or future operating or cash flow losses that
demonstrates continuing losses associated with the use of our long-lived asset,
or a current expectation that, more likely than not, a long-lived asset will be
sold or otherwise disposed of significantly before the end of its previously
estimated useful life. We perform impairment testing at the asset group level
that represents the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities. In making this
determination, we consider the specific operating characteristics of the
relevant long-lived assets, including (i) the nature of the direct and any
indirect revenues generated by the assets; (ii) the interdependency of the
revenues generated by the assets; and (iii) the nature and extent of any shared
costs necessary to operate the assets in their intended use. An impairment test
would be performed when the estimated undiscounted future cash flows expected to
result from the use of the asset group is less than its carrying amount.
Impairment is measured by assessing the usefulness of an asset by comparing its
carrying value to its fair value. If an asset is considered impaired, the
impairment loss is measured as the amount by which the carrying value of the
asset group exceeds its estimated fair value. Fair value is determined based
upon estimated discounted future cash flows. The key estimates applied when
preparing cash flow projections relate to revenues, operating margins, economic
life of assets, overheads, taxation and discount rates. To date, we have not
recognized any such impairment loss associated with our long-lived assets.
Income Taxes
We account for our income taxes using the liability and asset method, which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in our financial
statements or in our tax returns. In estimating future tax consequences,
generally all expected future events other than enactments or changes in the tax
law or rates are considered. Deferred income taxes are recognized for
differences between financial reporting and tax bases of assets and liabilities
at the enacted statutory tax rates in effect for the years in which the
temporary differences are expected to reverse. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. We evaluate the realizability of our deferred tax assets and
valuation allowances are provided when necessary to reduce deferred tax assets
to the amounts expected to be realized.
We operate in various tax jurisdictions and are subject to audit by various tax
authorities. We provide tax contingencies whenever it is deemed probable that a
tax asset has been impaired or a tax liability has been incurred for events such
as tax claims or changes in tax laws. Tax contingencies are based upon their
technical merits, and relevant tax law and the specific facts and circumstances
as of each reporting period. Changes in facts and circumstances could result in
material changes to the amounts recorded for such tax contingencies.
We recognize a tax benefit from an uncertain tax position only if it is 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 consolidated financial statements from such positions
are then measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon settlement. We recognize interest and
penalties accrued related to unrecognized tax benefits in our income tax
(benefit) provision in the accompanying statements of operations.
We calculate our current and deferred tax provision based on estimates and
assumptions that could differ from the actual results reflected in income tax
returns filed in subsequent years. Adjustments based on filed returns are
recorded when identified. The amount of income taxes we pay is subject to
ongoing audits by federal, state and foreign tax authorities. Our estimate of
the potential outcome of any uncertain tax issue is subject to management's
assessment of relevant risks, facts, and
52
--------------------------------------------------------------------------------
circumstances existing at that time. To the extent that our assessment of such
tax positions changes, the change in estimate is recorded in the period in which
the determination is made.
Stock-based Compensation
We measure and recognize compensation expense for all share-based payment awards
made to employees and directors based on the grant date fair values of the
awards. For stock option awards to employees with service and/or performance
based vesting conditions, the fair value is estimated using the Black-Scholes
option pricing model. The value of an award that is ultimately expected to vest
is recognized as expense over the requisite service periods in our consolidated
statements of operations. We elected to treat share-based payment awards, other
than performance awards, with graded vesting schedules and time-based service
conditions as a single award and recognize stock-based compensation expense on a
straight-line basis (net of estimated forfeitures) over the requisite service
period. Stock-based compensation expenses are classified in the statement of
operations based on the department to which the related employee reports. Our
stock-based awards are comprised principally of stock options, restricted stock
units, restricted stock awards and restricted stock purchase rights.
Some employee award grants contain certain performance and/or market conditions.
We recognize compensation cost for awards with performance conditions based upon
the probability of the performance condition being met, net of an estimate of
pre-vesting forfeitures. Awards granted with performance and/or market
conditions are amortized using the graded vesting method. The effect of a market
condition is reflected in the award's fair value on the grant date. We use a
Monte Carlo simulation model or a binomial lattice model to determine the grant
date fair value of awards with market conditions. All compensation expense for
an award that has a market condition is recognized as the requisite service
period is fulfilled, even if the market condition is never satisfied.
We account for stock options issued to non-employees in accordance with the
guidance for equity-based payments to non-employees. Stock option awards to
non-employees are accounted for at fair value using the Black-Scholes option
pricing model. Our management believes that the fair value of stock options is
more reliably measured than the fair value of the services received. The fair
value of the unvested portion of the options granted to non-employees is
re-measured each period. The resulting increase in value, if any, is recognized
as expense during the period the related services are rendered.
The Black-Scholes option pricing model requires management to make assumptions
and to apply judgment in determining the fair value of our awards. The most
significant assumptions and judgments include estimating the fair value of our
underlying stock, the expected volatility and the expected term of the award. In
addition, the recognition of stock-based compensation expense is impacted by
estimated forfeiture rates.
Because our common stock was not publicly traded since our inception through
January 31, 2011, we estimated the expected volatility of our awards from the
historical volatility of selected public companies within the Internet and media
industry with comparable characteristics to us, including similarity in size,
lines of business, market capitalization, revenue and financial leverage. From
our inception through December 31, 2008, the weighted average expected life of
options was calculated using the simplified method as prescribed under guidance
by the SEC. This decision was based on the lack of relevant historical data due
to our limited experience and the lack of an active market for our common stock.
Effective January 1, 2009, we calculated the weighted average expected life of
our options based upon our historical experience of option exercises combined
with estimates of the post-vesting holding period. The risk free interest rate
is based on the implied yield currently available on U.S. Treasury issues with
terms approximately equal to the expected life of the option. The expected
dividend rate is zero based on the fact that we currently have no history or
expectation of paying cash dividends on our common stock. The forfeiture rate is
established based on the historical average period of time that options were
outstanding and adjusted for expected changes in future exercise patterns.
Under the Company's Employee Stock Purchase Plan (the "ESPP"), eligible officers
and employees may purchase a limited amount of our common stock at a discount to
the market price in accordance with the terms of the plan as described in Note
11 (Share-based Compensation Plans and Awards) to our consolidated financial
statements. The Company uses the Black-Scholes option pricing model to determine
the fair value of the ESPP awards granted which is recognized straight-line over
the total offering period.
Some equity awards granted by the Company contain certain performance and/or
market conditions. The Company recognizes compensation cost for awards with
performance conditions based upon the probability of that performance condition
being met, net of an estimate of pre-vesting forfeitures. Awards granted with
performance and/or market conditions are amortized using the graded vesting
method.
The effect of a market condition is reflected in the award's fair value on the
grant date. The Company uses a Monte Carlo simulation model or binomial lattice
model to determine the grant date fair value of awards with market conditions.
53
--------------------------------------------------------------------------------
Compensation cost for an award that has a market condition is recognized as the
requisite service period is fulfilled, even if the market condition is never
satisfied.
Stock-based awards issued to non-employees are accounted for at fair value
determined using the Black-Scholes option-pricing model. Management believes
that the fair value of the stock options is more reliably measured than the fair
value of the services received. The fair value of each non-employee stock-based
compensation award is re-measured each period until a commitment date is
reached, which is generally the vesting date.
54
--------------------------------------------------------------------------------
Results of OperationsThe following tables set forth our results of operations for the periods
presented. The period-to-period comparison of financial results is not
necessarily indicative of future results.
Year ended December 31,
2010 2011 2012
(In thousands)
Revenue $ 252,936 $ 324,866 $ 380,578
Operating expenses(1)(2):
Service costs (exclusive of amortization of intangible
assets) 131,332 155,830 181,018
Sales and marketing 24,424 37,394 46,501
Product development 26,538 38,146 40,708
General and administrative 37,371 59,451 63,025
Amortization of intangible assets 33,750 47,174 40,676
Total operating expenses 253,415 337,995 371,928
Income (loss) from operations (479 ) (13,129 ) 8,650
Other income (expense)
Interest income 25 56 42
Interest expense (688 ) (861 ) (622 )
Other income (expense), net (286 ) (413 ) (111 )
Total other expense (949 ) (1,218 ) (691 )
Income (loss) before income taxes (1,428 ) (14,347 ) 7,959
Income tax expense (3,897 ) (4,177 ) (1,783 )
Net income (loss) (5,325 ) (18,524 ) 6,176
Cumulative preferred stock dividends (33,251 ) (2,477 ) -
Net income (loss) attributable to common shareholders $ (38,576 ) $ (21,001 ) $ 6,176
(1) Depreciation expense included in the above line items:
Service costs $ 14,783 $ 16,075 $ 14,452
Sales and marketing 187 423 453
Product development 1,346 1,466 1,025
General and administrative 1,950 2,994 3,728
Total depreciation expense $ 18,266 $ 20,958 $ 19,658
(2) Stock-based compensation included in the above line items:
Service costs $ 868 $ 2,052 $ 2,820
Sales and marketing 2,379 4,857 6,118
Product development 1,692 5,013 6,452General and administrative 4,750 16,934 15,978
Total stock-based compensation $ 9,689 $ 28,856 $ 31,368
55--------------------------------------------------------------------------------
As a percentage of revenue:
Year ended December 31,
2010 2011 2012
Revenue 100.0 % 100.0 % 100.0 %
Operating expenses: - -
Service costs (exclusive of amortization of intangible
assets) 51.9 % 48.0 % 47.6 %
Sales and marketing 9.7 % 11.5 % 12.2 %
Product development 10.5 % 11.7 % 10.7 %
General and administrative 14.8 % 18.3 % 16.6 %
Amortization of intangible assets 13.3 % 14.5 % 10.7 %
Total operating expenses 100.2 % 104.0 % 97.7 %
Income (loss) from operations (0.2 )% (4.0 )% 2.3 %
Other income (expense) - -
Interest income - % - % - %
Interest expense (0.3 )% (0.3 )% (0.2 )%
Other income (expense), net (0.1 )% (0.1 )% - %
Total other expense (0.4 )% (0.4 )% (0.2 )%
Income (loss) before income taxes (0.6 )% (4.4 )% 2.1 %
Income tax expense (1.5 )% (1.3 )% (0.5 )%
Net income (loss) (2.1 )% (5.7 )% 1.6 %
Revenue
Revenue by service line was as follows:
% Change
Year Ended December 31,
2010 2011 2012 2010 to 2011 2011 to 2012
(In thousands)Content & Media:
Owned and operated websites $ 110,770 $ 157,089 $ 178,511
42 % 14 %
Network of customer websites 42,140 48,361 67,888 15 % 40 %
Total Content & Media 152,910 205,450 246,399 34 % 20 %
Registrar 100,026 119,416 134,179 19 % 12 %
Total revenue $ 252,936 $ 324,866 $ 380,578 28 % 17 %
Content & Media Revenue from Owned and Operated Websites
2012 compared to 2011. Content & Media revenue from our owned and operated
websites increased by $21.4 million, or 14%, to $178.5 million for the year
ended December 31, 2012, as compared to $157.1 million for the same period in
2011. The increase was largely due to increased page views partially offset by
decreased RPMs. Page views on our owned and operated websites increased by 27%,
from 10,378 million page views in the year ended December 31, 2011 to 13,192
million page views in the year ended December 31, 2012. RPMs on our owned and
operated websites decreased by 11%, from $15.14 in the year ended December 31,
2011 to $13.53 in the year ended December 31, 2012. The page view increase
included the impact of a website product enhancement we implemented in the
second quarter of 2011 with respect to the presentation of photo-centric content
on certain of the Company's owned and operated sites, which did not impact
advertising impressions. Excluding the impact of such change, we estimate that
during the year ended December 31, 2012, page views would have increased
approximately 19% and RPMs would have decreased 4%, compared to the
corresponding prior year. The remaining increase in underlying page views was
due primarily to growth in traffic, including rapid growth in traffic from
mobile devices, to our content published during or before 2011 on our largest
owned and operated websites including eHow.com and
56
--------------------------------------------------------------------------------Cracked.com. The underlying decrease in RPMs was primarily attributable to
relatively higher growth in page views driven from mobile devices which
currently generate lower RPMs as compared to those generated from desktop
devices.
2011 compared to 2010. Content & Media revenue from our owned and operated
websites increased by $46.3 million, or 42%, to $157.1 million for the year
ended December 31, 2011, as compared to $110.8 million for the same period in
2010. The increase was largely due to increased page views and RPMs. Page views
on our owned and operated websites increased by 26%, from 8,234 million
page views in the year ended December 31, 2010 to 10,378 million page views in
the year ended December 31, 2011. RPMs on our owned and operated websites
increased by 13%, from $13.45 in the year ended December 31, 2010 to $15.14 in
the year ended December 31, 2011. The page view increase included the impact of
a website product enhancement we implemented in the second quarter of 2011 with
respect to the presentation of photo-centric content on certain of the Company's
owned and operated sites, which did not impact advertising impressions.
Excluding the impact of such change, we estimate that during the year ended
December 31, 2011, page views would have increased approximately 19% and RPMs
would have increased 19%, compared to the corresponding prior year. The
remaining increase in underlying page views was due primarily to increased
publishing of our platform content on our owned and operated websites. The
underlying increase in RPMs was primarily attributable to the overall increase
in page views on eHow, which has higher RPMs than the weighted average of our
other owned and operated websites, as well as an increase in RPMs on the
monetization of our undeveloped websites. In addition, RPM growth was driven by
increased display advertising revenue sold directly through our sales force
during the year ended December 31, 2011 as compared to 2010. On average, our
direct display advertising sales generate higher RPMs than display advertising
that we deliver from our advertising networks, such as Google.
Content & Media Revenue from Network of Customer Websites
2012 compared to 2011. Content & Media revenue from our network of customer
websites for the year ended December 31, 2012 increased by $19.5 million, or
40%, to $67.9 million, as compared to $48.4 million in the same period in 2011.
The increase was largely due to growth in both page views and RPMs. Page views
on our network of customer websites increased by 1,553 million, or 9%, from
17,436 million page views in the year ended December 31, 2011, to 18,989 million
pages viewed in the year ended December 31, 2012. The increase in page views was
due primarily to the acquisition of IndieClick on August 8, 2011, which
contributed approximately 7.5 billion page views during the year ended December
31, 2012 compared to approximately 3.1 billion in 2011 as well as growth in
content channel arrangements where we deploy our content to third party customer
websites. These increases were partially offset by a decrease in reported page
views associated with our social media customers. RPMs increased 29% from $2.77
in the year ended December 31, 2011 to $3.58 in the year ended December 31,
2012. The increase in RPMs was largely due to higher revenue earned under the
premium multi-channel initiative with YouTube, growth in content channel
arrangements and the decline in page views from lower yielding social media
customers.
2011 compared to 2010. Content & Media revenue from our network of customer
websites for the year ended December 31, 2011 increased by $6.2 million, or 15%,
to $48.4 million, as compared to $42.1 million in the same period in 2010. The
increase was largely due to growth in page views, offset by a decline in
RPMs. Page views on our network of customer websites increased by 4,281 million,
or 33%, from 13,155 million page views in the year ended December 31, 2010, to
17,436 million pages viewed in the year ended December 31, 2011. The increase in
page views was due primarily to the acquisition of IndieClick on August 8, 2011,
which contributed 3.1 billion page views during the period, growth in publishers
utilizing our social media applications and growth in content channel
arrangements where we deploy our content to third party customer websites.
RPMs decreased 13% from $3.20 in the year ended December 31, 2010 to $2.77 in
the year ended December 31, 2011. The decrease in RPMs was largely due to a mix
shift toward lower RPM page views such as IndieClick and our social media
customers, as well as slight declines in advertising yields from our advertising
networks relating to our customers' undeveloped websites.
Registrar Revenue
Registrar revenue for the year ended December 31, 2012 increased $14.8 million,
or 12%, to $134.2 million compared to $119.4 million for the same period in
2011. The increase was largely due to an increase in domains, which were
attributable in large part to an increased number of new domain registrations
and domain renewal registrations in 2012 compared to 2011, as well as an overall
increase in our average revenue per domain. The number of domain registrations
increased 1.0 million, or 8%, to 13.7 million during the year ended December 31,
2012 as compared to 12.7 million in the same period in 2011. The increase was
driven by new partnerships with large reseller partners and growth from existing
resellers. Our average revenue per domain increased slightly by $0.11, or 1%, to
$10.19 during the year ended December 31, 2012 from $10.08 in the same period in
2011 due in part to an increase in value added services revenue as compared to
2011.
57--------------------------------------------------------------------------------
Beginning July 1, 2011, the number of net new domains has been adjusted to
include only new registered domains added to our platform for which we have
recognized revenue. Excluding the impact of this change, end of period domains
at December 31, 2012 would have increased 13% compared to the prior year and
average revenue per domain during the year ended December 31, 2012 would have
decreased 4% compared to the prior year, primarily due to the acquisition of
Name.com on December 31, 2012 for which we did not recognize any revenue in
2012.
2011 compared to 2010. Registrar revenue for the year ended December 31, 2011
increased $19.4 million, or 19%, to $119.4 million compared to $100.0 million
for the same period in 2010. The increase was largely due to an increase in
domains, which were attributable in large part to an increased number of new
domain registrations and domain renewal registrations in 2011 compared to 2010,
as well as an overall increase in our average revenue per domain. The number of
domain registrations increased 1.7 million, or 15%, to 12.7 million during the
year ended December 31, 2011 as compared to 11.0 million in the same period in
2010 driven by new partnerships with large domain owners and growth from
existing resellers. Our average revenue per domain increased slightly by $0.12,
or 1%, to $10.08 during the year ended December 31, 2011 from $9.96 in the same
period in 2010 due in part to an increase in value added services revenue as
compared to 2010.
Beginning July 1, 2011, the number of net new domains has been adjusted to
include only new registered domains added to our platform for which we have
recognized revenue. Excluding the impact of this change, end of period domains
at December 31, 2011 would have increased 22% compared to the prior year and
average revenue per domain during the year ended December 31, 2011 would have
decreased 2% compared to the prior year.
Cost and Expenses
Operating costs and expenses were as follows:
% Change
Year ended December 31,
2010 2011 2012 2010 to 2011 2011 to 2012
(in thousands)
Service costs (exclusive of
amortization of intangible assets) $ 131,332 $ 155,830 $ 181,018 19 % 16 %
Sales and marketing 24,424 37,394 46,501 53 % 24 %
Product development 26,538 38,146 40,708 44 % 7 %
General and administrative 37,371 59,451 63,025 59 % 6 %Amortization of intangible assets 33,750 47,174 40,676
40 % (14 )%
Service Costs
2012 compared to 2011. Service costs for the year ended December 31, 2012
increased by approximately $25.2 million, or 16%, to $181.0 million compared to
$155.8 million in the same period in 2011. The increase was largely due to a
$15.0 million increase in domain registry fees associated with our growth in
domain registrations and related revenue over the same period, a $6.9 million
increase in traffic acquisition costs primarily related to the acquisition of
IndieClick in August 2011, a $3.6 million increase in content and related costs
including premium video, a $1.5 million increase in related information
technology expense and a $0.9 million increase in personnel and related costs
due to increased head count. These increases were partially offset by a $1.6
million decrease in depreciation expense of technology assets purchased in the
prior and current periods that are used to manage our Internet traffic, data
centers, advertising transactions and domain registrations. As a percentage of
revenues, service costs (exclusive of amortization of intangible assets)
decreased 40 basis points to 47.6% for the year ended December 31, 2012 from
48.0% during the same period in 2011 primarily due to Content & Media revenues
representing a higher percentage of total revenues during the year ended
December 31, 2012 as compared to the same period in 2011.
2011 compared to 2010. Service costs for the year ended December 31, 2011
increased by approximately $24.5 million, or 19%, to $155.8 million compared to
$131.3 million in the same period in 2010. The increase was largely due to a
$12.5 million increase in domain registry fees associated with our growth in
domain registrations and related revenue over the same period, a $6.1 million
increase in content and related costs, a $1.7 million increase in related
information technology expense and a $1.3 million increase in depreciation
expense of technology assets purchased in the prior and current periods required
to manage the growth of our Internet traffic, data centers, advertising
transactions, domain registrations and new
58
--------------------------------------------------------------------------------
products and services and a $2.6 million increase in personnel and related costs
due to increased head count. As a percentage of revenues, service costs
(exclusive of amortization of intangible assets) decreased 390 basis points to
48.0% for the year ended December 31, 2011 from 51.9% during the same period in
2010 primarily due to Content & Media revenues representing a higher percentage
of total revenues during the year ended December 31, 2011 as compared to the
same period in 2010.
Sales and Marketing
2012 compared to 2011. Sales and marketing expenses increased 24%, or $9.1
million, to $46.5 million for the year ended December 31, 2012 from $37.4
million for the same period in 2011. The increase was primarily due to our
direct sales and marketing efforts in 2012 and acquisition of IndieClick in
August 2011 and included a $4.1 million increase in personnel related costs,
including stock-based compensation expense and sales commissions and $4.9
million related to expansion of marketing and promotional activities to support
growth in our Content and Media business. Stock-based compensation expense in
2012 included $0.3 million incremental expense related to the early termination
of a warrant issued in 2011 as part of the website development, endorsement and
license agreement with Bankable Enterprises, Inc. As a percentage of revenue,
sales and marketing expense increased 70 basis points to 12.2% during the year
ended December 31, 2012 from 11.5% during the same period in 2011.
2011 compared to 2010. Sales and marketing expenses increased 53%, or $13.0
million, to $37.4 million for the year ended December 31, 2011 from $24.4
million for the same period in 2010. The increase was primarily due to our
direct sales and marketing efforts in 2011 and acquisition of IndieClick in
August 2011 and included a $10.1 million increase in personnel related costs,
including stock-based compensation expense and sales commissions and $1.8
million related to expansion of marketing and promotional activities. As a
percentage of revenue, sales and marketing expense increased 180 basis points to
11.5% during the year ended December 31, 2011 from 9.7% during the same period
in 2010.
Product Development
2012 compared to 2011. Product development expenses increased by $2.6 million,
or 7%, to $40.7 million during the year ended December 31, 2012 compared to
$38.1 million in the same period in 2011. The increase was largely due to an
approximately $2.8 million increase in personnel and related costs including
stock-based compensation expense, net of internal costs capitalized as internal
software development. These costs increased as a result of our decision to hire
additional employees to further develop our platform, our owned and operated
websites, and to support and grow our Registrar product and service offerings as
well as our new gTLD initiative. These costs were partially offset by a $0.4
million decrease in depreciation expense. As a percentage of revenue, product
development expenses decreased 100 basis points to 10.7% during the year ended
December 31, 2012 compared to 11.7% during the same period in 2011 due to the
factors described above as well as the revenue growth during the same period.
2011 compared to 2010. Product development expenses increased by $11.6 million,
or 44%, to $38.1 million during the year ended December 31, 2011 compared to
$26.5 million in the same period in 2010. The increase was largely due to
approximately $9.1 million increase in personnel and related costs including
stock-based compensation expense, net of internal costs capitalized as internal
software development, due to additional headcount to further develop our
platform, our owned and operated websites, and to support and grow our Registrar
product and service offerings. The remaining increase was largely attributable
to additional consultant and associated costs of $2.2 million incurred to
develop and enhance new and existing products to support the growth in our
business, as well as a $0.1 million increase in depreciation expense. The
stock-based compensation expense for the year ended December 31, 2011 included a
one-time charge of $0.4 million related to certain stock awards vesting on
certain conditions related to our initial public offering. As a percentage of
revenue, product development expenses increased 120 basis points to 11.7% during
the year ended December 31, 2011 compared to 10.5% during the same period in
2010.
General and Administrative
2012 compared to 2011. General and administrative expenses increased by $3.6
million, or 6%, to $63.0 million during the year ended December 31, 2012
compared to $59.5 million in the same period in 2011. The increase was primarily
due to a $1.5 million increase in professional services and consulting fees
primarily related to our public company compliance initiatives and business
acquisitions, a $0.5 million increase in facilities and rent expense for
additional office space and a $0.7 million increase in depreciation expense. As
a percentage of revenue, general and administrative costs decreased 170 basis
points to 16.6% during the year ended December 31, 2012 compared to 18.3% during
the same period in 2011.
2011 compared to 2010. General and administrative expenses increased by $22.1
million, or 59%, to $59.5 million during the year ended December 31, 2011
compared to $37.4 million in the same period in 2010. The increase was primarily
59
--------------------------------------------------------------------------------
due to a $15.8 million increase in personnel related costs, inclusive of a $12.2
million increase stock-based compensation expense, due to additional headcount
to support the growth of our business and the first year as a public company, a
$1.7 million increase in professional fees primarily related to our public
company compliance initiatives and business acquisitions, a $1.9 million
increase in facilities and rent expense for additional office space and a $1.0
million increase in depreciation expense. The stock-based compensation expense
for the year ended December 31, 2011 included a one-time charge of $4.6 million
related to certain stock awards vesting on certain conditions related to our
initial public offering. As a percentage of revenue, general and administrative
costs increased 350 basis points to 18.3% during the year ended December 31,
2011 compared to 14.8% during the same period in 2010.
Amortization of Intangibles
2012 compared to 2011. Amortization expense for the year ended December 31, 2012
decreased by $6.5 million, or 14%, to $40.7 million compared to $47.2 million in
the same period in 2011. The decrease was primarily due to $5.9 million of
accelerated amortization expense in the year ended December 31, 2011 compared to
$2.1 million in the year ended December 31, 2012 resulting from our election to
remove certain content assets from service in conjunction with improvements to
our content creation and distribution platform. The remaining movement is mainly
due to a reduction in amortization expense of media content related to the
reduction in investment levels in 2012 compared to previous years as well as a
reduction from fully amortized intangible assets acquired in business
acquisitions in prior years, partially offset by incremental amortization
expense of approximately $1.0 million in 2012 compared to 2011 relating to the
four business acquisitions completed throughout 2011. As a percentage of
revenue, amortization of intangible assets decreased 380 basis points to 10.7%
during the year ended December 31, 2012 compared to 14.5% during the same period
in 2011 as a result of the increase in revenue and the factors listed above.
2011 compared to 2010. Amortization expense for the year ended December 31, 2011
increased by $13.4 million, or 40%, to $47.2 million compared to $33.8 million
in the same period in 2010. The increase was primarily due to a $15.5 million
increase in amortization of media content which resulted from our increased
investment in our content library during 2011 compared to 2010, $5.9 million of
accelerated amortization expense resulting from our election to remove certain
content assets from service in the fourth quarter of 2011 in conjunction with
improvements to our content creation and distribution platform and incremental
amortization expense of $1.4 million in the period arising from acquisitions
completed in 2011. Offsetting this was a decrease of $3.5 million in the
amortization of certain intangible assets primarily acquired via acquisitions in
prior years that are now fully amortized. As a percentage of revenue,
amortization of intangible assets increased 120 basis points to 14.5% during the
year ended December 31, 2011 compared to 13.3% during the same period in 2010 as
the result of the factors listed above.
Interest Income
Interest income for the year ended December 31, 2012 and 2011, respectively,
changed by less than $0.1 million compared to the same period in the prior year.
Interest Expense
2012 compared to 2011. Interest expense for the year ended December 31, 2012
decreased by $0.2 million compared to the same period in 2011 primarily due to a
one-time acceleration of the unamortized debt issuance costs following the
replacement of our credit facility in the third quarter of 2011.
2011 compared to 2010. Interest expense for the year ended December 31, 2011
increased by $0.2 million compared to the same period in 2010 primarily due to a
one-time acceleration of the unamortized debt issuance costs following the
replacement of our credit facility in the third quarter of 2011.
Other Income (Expense), Net
2012 compared to 2011. Other income (expense), net for the year ended
December 31, 2012 decreased by $0.3 million to $(0.1) million of expense
compared to $(0.4) million in the same period in 2011. The decrease in other
income (expense) net during the year ended December 31, 2012 was primarily a
result of a non-recurring $0.3 million of expense in 2011 related to the change
in the value of our preferred stock warrants which were recorded at fair value
with changes in value recorded in earnings through the closing date of our
initial public offering.
60
--------------------------------------------------------------------------------
2011 compared to 2010. Other income (expense), net for the year ended
December 31, 2011 increased by $0.1 million to $(0.4) million of expense
compared to $(0.3) million in the same period in 2010. The increase in other
income (expense) net during the year ended December 31, 2011 was primarily a
result of the change in the value of our preferred stock warrants which were
recorded at fair value with changes in value recorded in earnings through the
closing date of our initial public offering.
Income Tax (Benefit) Provision
2012 compared to 2011. During the year ended December 31, 2012, we recorded an
income tax provision of $1.8 million compared to $4.2 million during the same
period in 2011, representing a $2.4 million or 57% decrease. The decrease was
primarily due to changes in state apportionment and revenue sourcing laws that
became effective in 2012. In addition, we experienced a one-time tax savings as
a result of settling a tax issue in a foreign jurisdiction.
2011 compared to 2010. During the year ended December 31, 2011, we recorded an
income tax provision of $4.2 million compared to $3.9 million during the same
period in 2010, representing a $0.3 million or 7% increase. The increase was
primarily due to the recognition of a full valuation allowance against our state
deferred tax assets during 2011. Our state deferred taxes reached a net deferred
tax asset position during 2011, excluding the deferred tax liability for tax
deductible goodwill, which is excluded because the ultimate realization of which
is uncertain and thus not available to assure the realization of deferred tax
assets. Our valuation allowance, which increased by $8.3 million from $14.4
million during the year ended December 31, 2010 to $22.7 million in the same
period in 2011 now applies to both federal and state deferred tax assets. In
addition, the tax increase was also impacted by movement in the company's state
tax apportionment rates due to changes in state tax laws and the Company's state
tax footprint during 2011, partially offset by a one-time benefit of $0.7
million associated with a business acquisition during 2011.
Selected Quarterly Financial Data
The following unaudited quarterly consolidated statements of operations for the
quarters in the years ended December 31, 2011 and 2012, have been prepared on a
basis consistent with our audited consolidated annual financial statements, and
include, in the opinion of management, all normal recurring adjustments
necessary for the fair statement of the financial information contained in those
statements. The period-to-period comparison of financial results is not
necessarily indicative of future results and should be read in conjunction with
our consolidated annual financial statements and the related notes included
elsewhere in this Annual Report on Form 10-K.
61
-------------------------------------------------------------------------------- Quarter Ended,
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
2011 2011 2011 2011 2012 2012 2012 2012
(inthousands, except per share data)
Unaudited
Revenue:
Content & Media:
Owned and operated
websites $ 40,524 $ 39,095 $ 38,298 $ 39,172 $ 39,348 $ 44,990 $ 45,377 $ 48,796
Network websites 11,328 10,727 12,446 13,860 14,615 14,677 18,759 19,837
Total Content & Media 51,852 49,822 50,744 53,032 53,963 59,667 64,136 68,633
Registrar 27,671 29,633 30,729 31,383 32,271 33,388 34,011 34,509
Total revenue 79,523 79,455 81,473 84,415 86,234 93,055 98,147 103,142
Operating
expenses(1)(2):
Service costs
(exclusive of
amortization of
intangible assets)(3) 37,654 37,869 40,109 40,198 41,262 44,367 46,524 48,865
Sales and marketing 9,583 9,286 9,200 9,325 10,393 11,660 11,625 12,823
Product development 9,251 9,642 9,791 9,462 10,124 10,587 10,278 9,719
General and
administrative 17,024 13,787 14,837 13,803 15,395 15,754 15,705 16,171
Amortization of
intangible assets 10,203 9,750 10,828 16,393 11,956 9,759 9,501 9,460
Total operating
expenses 83,715 80,334 84,765 89,181 89,130 92,127 93,633 97,038
Income (loss) from
operations (4,192 ) (879 ) (3,292 ) (4,766 ) (2,896 ) 928 4,514 6,104
Other income (expense)
Interest income 42 5 5 4 15 10 9 8
Interest expense (162 ) (163 ) (385 ) (151 ) (137 ) (173 ) (155 ) (157 )
Other income (expense),
net (257 ) (2 ) (79 ) (75 ) (19 ) (45 ) (13 ) (34 )
Total other expense (377 ) (160 ) (459 ) (222 ) (141 ) (208 ) (159 ) (183 )
Income (loss) before
income taxes (4,569 ) (1,039 ) (3,751 ) (4,988 ) (3,037 ) 720 4,355 5,921
Income tax expense (1,013 ) (1,332 ) (394 ) (1,438 ) 1,195 (626 ) (1,180 ) (1,172 )
Net income (loss) (5,582 ) (2,371 ) (4,145 ) (6,426 ) (1,842 ) 94 3,175 4,749
Cumulative preferred
stock dividends (2,477 ) - - - - - - -
Net income (loss)
attributable to common
stockholder $ (8,059 ) $ (2,371 ) $ (4,145 ) (6,426 ) $ (1,842 ) $ 94 $ 3,175 4,749
Net income (loss) per
share:
Basic $ (0.13 ) $ (0.03 ) $ (0.05 ) $ (0.08 ) $ (0.02 ) $ - $ 0.04 $ 0.06
Diluted $ (0.13 ) $ (0.03 ) $ (0.05 ) $ (0.08 ) $ (0.02 ) $ - $ 0.04 $ 0.05
Weighted average shares
outstanding(4)(5):
Basic 63,759 83,088 83,934 83,592 82,942 83,925 85,182 86,140
Diluted 63,759 83,088 83,934 83,592 82,942 86,802 88,751 88,444
(1) Depreciation
expense included
in the above
line items:
Service costs $ 4,044 $ 4,149 $ 4,112 $ 3,770 $ 3,650 $ 3,552 $ 3,587 $ 3,663
Sales and
marketing 72 115 109 127 134 106 105 108
Product
development 321 438 399 308 282 271 234 238
General and
administrative 572 878 683 861 898 899 906 1,025
Total
depreciation
expense $ 5,009 $ 5,580 $ 5,303 $ 5,066 $ 4,964 $ 4,828 $ 4,832 $ 5,034
(2) Stock-based
compensation
included in the
above line
items:
Service costs $ 237 $ 347 $ 757 $ 711 $ 708 $ 761 $ 672 $ 679
Sales and
marketing 900 1,136 1,405 1,416 1,536 1,585 1,400 1,597
Product
development 1,116 1,130 1,403 1,364 1,688 2,085 1,396 1,283
General and
administrative 6,674 2,807 4,190 3,263 3,459 4,118 4,578 3,823
Total
stock-based
compensation $ 8,927 $ 5,420 $ 7,755 $ 6,754 $ 7,391 $ 8,549 $ 8,046 $ 7,382
(3) Service
costs include:
traffic
acquisitions
costs of $ 3,190 $ 2,813 $ 3,381 $ 3,111 $ 3,379 $ 4,380 $ 5,350 $ 6,332
(4) For a description of the method used to compute our basic and diluted net
loss per share, refer to note 1 in Part II, Item 6, "Selected Financial
Data."
(5) In October 2010, our stockholders approved a 1-for-2 reverse stock split
of our outstanding common stock, and a proportional adjustment to the
existing conversion ratios for each series of preferred stock which was effected in January 2011. Accordingly, all share and per share amounts for
all periods presented have been adjusted retrospectively, where
applicable, to reflect this reverse stock split and adjustment of the
preferred stock conversion ratio.
62--------------------------------------------------------------------------------
Seasonality of Quarterly Results
In general, Internet usage and online commerce and advertising are seasonally
strongest in the fourth quarter and generally slower during the summer months.
While we believe that these seasonal trends have affected and will continue to
affect our quarterly results, our rapid growth in operations may have
overshadowed these effects to date. We believe that our business may become more
seasonal in the future.
Liquidity and Capital Resources
As of December 31, 2012, our principal sources of liquidity were our cash and
cash equivalents in the amount of $102.9 million, which primarily are invested
in money market funds, and our $105 million revolving credit facility with a
syndicate of commercial banks. We completed our initial public offering on
January 31, 2011 and received proceeds, net of underwriting discounts but before
deducting offering expenses, of $81.8 million from the issuance of 5.2 million
shares of common stock.
Historically, we have principally financed our operations from the issuance of
stock, net cash provided by our operating activities and borrowings under our
revolving credit facility. Our cash flows from operating activities are
significantly affected by our cash-based investments in operations, including
working capital, and corporate infrastructure to support our ability to generate
revenue and conduct operations through cost of services, product development,
sales and marketing and general and administrative activities. Cash used in
investing activities has historically been, and is expected to be, impacted
significantly by our upfront investments in content and also reflects our
ongoing investments in our platform, company infrastructure and equipment for
both our service offerings, the net sales and purchases of our marketable
securities and more recently our investments in gTLD applications.
We intend to evolve and continuously improve our content creation and
distribution platform and to create new content formats to enhance our content
product offerings. In 2012 such changes included increasing our investment in
video, long-form content and images, publishing content directed at
international markets and in languages other than English, as well as increasing
and expanding distribution of our content to our network of customer websites.
As we made improvements and assessed the impact of such improvements to our
content creation and distribution platform we reduced the level of our overall
investment in media content in 2012 when compared to 2010 and 2011. However,
based on our assessment of the results to date, we expect to increase our
investment in media content during 2013 compared to 2012.
In connection with our gTLD initiative under the New gTLD Program, we incurred
formation cash costs of $2.2 million and expect to incur further formation costs
of between $5 million and $10 million in 2013. We also made $18.2 million of
capital investment in gTLD applications in the year ended December 31, 2012 and
the net amount of capital investment incurred in our pursuit of gTLD operator
rights in 2013 could be substantially higher or lower as the New gTLD Program
progresses.
Since our inception through December 31, 2012 we also used significant cash to
make strategic acquisitions to further grow our business, including those
detailed in Note 13 (Business Acquisitions) to our consolidated financial
statements. We may make further acquisitions in the future.
We announced a $25 million stock repurchase plan on August 19, 2011 which was
further increased on February 8, 2012 to $50 million. Under the plan, the
Company is authorized to repurchase up to $50 million of its common stock from
time to time in open market purchases or in negotiated transactions. During the
year ended December 31, 2012, we repurchased 1.1 million shares at an average
price of $8.02 per share for an aggregate amount of $8.9 million and
approximately $24 million remains available under the repurchase plan at
December 31, 2012. The timing and actual number of shares repurchased will
depend on various factors including price, corporate and regulatory
requirements, debt covenant requirements, alternative investment opportunities
and other market conditions.
We entered into a credit agreement (the "Credit Agreement") with a syndicate of
commercial banks in August 2011. The Credit Agreement provides for a $105
million, five year revolving credit facility, with the right (subject to certain
conditions) to increase such facility by up to $75 million in the aggregate. The
syndicate of commercial banks under the Credit Agreement has no obligation to
fund any increase in the size of the facility. The Credit Agreement contains
customary events of default and affirmative and negative covenants and
restrictions, including certain financial maintenance covenants such as a
maximum total net leverage ratio and a minimum fixed charge ratio. As of
December 31, 2012, no principal balance was outstanding and approximately $95
million was available for borrowing under the Credit Agreement, after deducting
the face amount of outstanding standby letters of credit, and we were in
compliance with all covenants.
63
--------------------------------------------------------------------------------
In the future, we may utilize commercial financings, bonds, debentures, lines of
credit and term loans with a syndicate of commercial banks or other bank
syndicates for general corporate purposes, including acquisitions and investing
in our intangible assets, platform and technologies.
We expect that our existing cash and cash equivalents, our revolving credit
facility and our cash flows from operating activities will be sufficient to fund
our operations for at least the next 24 months. However, we may need to raise
additional funds through the issuance of equity, equity-related or debt
securities or through additional credit facilities to fund our growing
operations, invest in new business opportunities and make potential
acquisitions. We currently have an effective shelf registration statement on
file with the SEC which we may use to offer and sell debt or equity securities
with an aggregate offering price not to exceed $100 million.
The following table sets forth our major sources and (uses) of cash for each
period as set forth below:
Year ended December 31,
2010 2011 2012
(In thousands)
Net cash provided by operating activities $ 61,624 $ 85,349 $ 90,983
Net cash used in investing activities (66,296 ) (98,539 ) (67,482 )
Net cash provided by (used in) financing activities (10,537 ) 66,936 (6,566 )
Cash Flow from Operating Activities
Year ended December 31, 2012
Net cash inflows from our operating activities was $91.0 million, an increase of
7% or $5.6 million compared to the prior year. Our net income during the period
was $6.2 million, which included non-cash charges of $93.4 million such as
depreciation, amortization, stock-based compensation and deferred taxes. The
remainder of the movement in our cash flow from operating activities was from
changes in our working capital, including increases in deferred revenue,
accounts payable and accrued expenses of $10.6 million, offset in part by
increases in accounts receivable and deferred registration costs of $21.0
million. The increases in our deferred revenue and deferred registry fees were
primarily due to growth in our Registrar service during the period. The increase
in accrued expenses is reflective of increases in amounts due to certain vendors
and our employees resulting from growth in our business. The increase in our
accounts receivable reflects growth in advertising revenue including a higher
mix of balances from brand advertising sales.
Year ended December 31, 2011
Net cash inflows from our operating activities was $85.3 million, an increase of
38% or $23.7 million compared to the prior year. Our net loss during the period
was $(18.5) million, which included non-cash charges of $100.4 million such as
depreciation, amortization, stock-based compensation and deferred taxes. The
remainder of our sources of net cash flow from operating activities was from
changes in our working capital, including increases in deferred revenue,
accounts payable and accrued expenses of $14.8 million, offset in part by
increases in accounts receivable, deferred registration costs and deposits with
registries of $13.3 million. The increases in our deferred revenue and deferred
registry fees were primarily due to growth in our Registrar service during the
period. The increase in accrued expenses is reflective of increases in amounts
due to certain vendors and our employees resulting from growth in our business.
The increase in our accounts receivable reflects growth in advertising revenue
including a higher mix of balances from brand advertising sales.
Year ended December 31, 2010
Net cash inflows from our operating activities of $61.6 million primarily
resulted from improved operating performance. Our net loss during the year was
$5.3 million, which included non-cash charges of $64.3 million such as
depreciation, amortization, stock-based compensation and deferred taxes. The
remainder of our sources of net cash inflows was from changes in our working
capital, including deferred revenue and accrued expenses of $17.6 million,
offset by net cash outflows from deferred registry fees and accounts receivable
of $16.9 million. The increases in our deferred revenue and deferred registry
fees were primarily due to growth in our Registrar service during the period.
The increase in accrued expenses is reflective of significant amounts due to
certain vendors and our employees. The increase in our accounts receivable
reflects growth in advertising revenue.
64
-------------------------------------------------------------------------------- Cash Flow from Investing Activities
Year ended December 31, 2010, 2011 and 2012
Net cash used in investing activities was $67.5 million, $98.5 million and $66.3
million during the years ended December 31, 2012, 2011 and 2010, respectively.
Cash used in investing activities during the year ended December 31, 2012, 2011
and 2010 included investments in our intangible assets of $13.2 million, $49.3
million and $47.2 million, respectively, primarily comprising media content.
Cash used in investing activities included investments in property and equipment
of $17.7 million, $18.2 million and $21.4 million during the year ended
December 31, 2012, 2011 and 2010. These expenditures included investments in
servers and IT equipment, fixtures and fittings, leasehold improvements and
internally developed software. Cash flows from investing activities in 2012 also
included $16.2 million related to business acquisitions made in 2012 as
described in Note 13 (Business Acquisitions) to our consolidated financial
statements, as well as $1.3 million of deferred consideration for acquisitions
made in prior years. Business acquisitions made during the year ended December
31, 2012 included Name.com for total anticipated purchase consideration of $18.0
million. Name.com was acquired to expand our registrar platform as we prepare
for the historic release of new gTLDs. Business acquisitions made during the
year ended December 31, 2011 included RSS Graffiti for total purchase
consideration of $16.3 million and IndieClick Media Group for total purchase
consideration of $13.0 million. RSS Graffiti was acquired to enhance our social
media service offering and the IndieClick Media Group was acquired to expand our
sales organization with particular focus on online properties in the
entertainment, music, film, fashion and comedy categories. Cash invested in
purchases of intangible assets and property and equipment, including internally
developed software, was largely to support the growth of our business and
infrastructure during these periods.
Cash Flow from Financing Activities
Year ended December 31, 2010, 2011 and 2012
Net cash provided by (used in) financing activities was $(6.6) million, $66.9
million and $(10.5) million during the years ended December 31, 2012, 2011 and
2010, respectively. During the years ended December 31, 2012 and 2011, we
repurchased 1.1 million and 2.3 million shares of common stock at a cost of $8.9
million and $17.1 million, respectively, under our share repurchase plan. During
the years ended December 31, 2012 and 2011 we received proceeds of $12.5 million
and $7.6 million from the exercise of employee stock options and contributions
from participants in our Employee Stock Purchase Plan and we incurred $9.5
million and $0.7 million of costs related to net taxes paid on employee stock
options exercises and RSUs vesting. Cash provided from financing activities in
the year ended December 31, 2011 included $78.5 million in net proceeds from our
IPO net of issuance costs of $3.3 million paid in that period. We also incurred
$1.0 million of costs related to the replacement of our previous credit facility
with our Credit Agreement in 2011 which provides for a $105 million, five year
revolving loan facility, with the right (subject to certain conditions) to
increase such facility by up to $75 million in the aggregate. The syndicate of
commercial banks under the Credit Agreement has no obligation to fund any
increase in the size of the facility.
During the year ended December 31, 2010 we paid down the remaining $10.0 million
outstanding under our revolving credit facility at that time.
From time to time, we expect to receive cash from the exercise of employee stock
options in our common stock. Proceeds from the exercise of employee stock
options will vary from period to period based upon, among other factors,
fluctuations in the market value of our common stock relative to the exercise
price of such stock options.
Off Balance Sheet ArrangementsAs of December 31, 2012, we did not have any off balance sheet arrangements.
Capital Expenditures
For the years ended December 31, 2010, 2011 and 2012, we used $21.4 million,
$18.2 million and $17.7 million in cash to fund capital expenditures to create
internally developed software and purchase equipment. We currently anticipate
making capital expenditures of between $20 million and $30 million during the
year ending December 31, 2013.
Contractual Obligations
The following table summarizes our outstanding contractual obligations as of
December 31, 2012:
65
--------------------------------------------------------------------------------
Less Than 1-3 3-5 More Than
Total 1 Year Years Years 5 Years
(in thousands)
Operating lease obligations $ 26,944 $ 4,044 $ 9,040 $ 6,995 $ 6,865
Capital lease obligations 1,528 735 793 - -
Purchase obligations(1) 466 466 - - -Total contractual obligations $ 28,938 $ 5,245 $ 9,833 $ 6,995
$ 6,865
(1) consists of minimum contractual purchase obligations for undeveloped
websites with one of our partners.
Included in operating lease obligations are agreements to lease our primary
office space in Santa Monica, California and other locations under various
non-cancelable operating leases that expire between January 2013 and April 2019.
We have no debt obligations, other than our $105.0 million revolving credit
facility for general corporate purposes, which currently has no outstanding
principal borrowings. At December 31, 2012, we had outstanding standby letters
of credit for approximately $9.6 million primarily associated with certain
payment arrangements with domain name registries and landlords.
Indemnifications
In the normal course of business, we have made certain indemnities under which
we may be required to make payments in relation to certain transactions. Those
indemnities include intellectual property indemnities to our customers,
indemnities to our directors and officers to the maximum extent permitted under
the laws of the State of Delaware and indemnifications related to lease
agreements. In addition, certain of our advertiser and distribution partner
agreements contain certain indemnification provisions, which are generally
consistent with those prevalent in our industry. We have not incurred
significant obligations under indemnification provisions historically, and do
not expect to incur significant obligations in the future. Accordingly, we have
no recorded liability for any of these indemnities.
Recent Accounting PronouncementsSee Note 2 of notes to the consolidated financial statements.
[ Back To Technology News's Homepage ]
|
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
