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TMCNet:  XOOM CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[February 21, 2014]

XOOM CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in "Risk Factors." Xoom is a leader in the digital consumer-to-consumer international money transfer industry. Our customers use Xoom to send money to family and friends in 31 countries. Since January 1, 2009, our customers have used Xoom to send $11.9 billion, including $1.7 billion in 2011, $3.2 billion in 2012 and $5.5 billion in 2013. We believe we create significant value for our customers by providing a convenient, fast and cost-effective solution for international money transfers.


We believe our business model is characterized by sustainable revenue from a growing base of active customers, creating attractive per unit economics and operating leverage. We expect to continue to grow this customer base through increased marketing investment.

Although we are not a traditional subscription business, we operate our business and forecast our revenue similar to a subscription-based business model. This similarity is demonstrated by the predictable and recurring revenue from our active customers. The following graph identifies the quarterly gross sending volume by the year in which we originally acquired the customer and demonstrates a meaningful amount of stable recurring sending volume from active customers (unaudited): [[Image Removed: LOGO]] 47 -------------------------------------------------------------------------------- Table of Contents On February 21, 2013, we completed our initial public offering, or IPO, whereby 7,273,750 shares of our common stock were sold to the public (inclusive of 948,750 shares of common stock sold by us pursuant to the full exercise of an overallotment option granted to the underwriters and 1,104,107 shares of common stock sold by selling stockholders) at a price of $16.00 per share. The aggregate net proceeds received by us from the offering were $88.4 million, net of underwriting discounts and commissions and offering expenses payable by us.

Immediately prior to the completion of the IPO, all shares of our then-outstanding convertible preferred stock automatically converted into 21,444,251 shares of common stock.

On September 16, 2013, we closed a follow-on public offering whereby 5,063,760 shares of our common stock were sold to the public (inclusive of 660,490 shares of common stock sold by us pursuant to the full exercise of an overallotment option granted to the underwriters and 1,432,622 shares of common stock sold by selling stockholders) at a price of $30.50 per share. The aggregate net proceeds received by us from the follow-on offering were $104.8 million, net of underwriting discounts and commissions and offering expenses payable by us.

We did not receive any proceeds from the sale of shares by the selling stockholders in either offering.

Key Metrics In addition to the line items in our consolidated financial statements, we regularly review the following key metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections, make strategic business decisions, and assess marketing program efficacy, market share trends and working capital needs. We believe information on these metrics is useful for investors to understand the underlying trends in our business. The following table presents our key operating and financial metrics for the years presented (unaudited): Year Ended December 31, 2013 2012 2011 Gross Sending Volume (in thousands) $ 5,544,755 $ 3,248,457 $ 1,706,659 Transactions 9,988,000 6,617,000 4,068,000 Active Customers 1,059,689 776,426 516,597 New Customers 481,110 405,304 291,532 Cost Per Acquisition of a New Customer $ 43 $ 44 $ 38 Adjusted EBITDA (in thousands) $ 14,378 $ (493 ) $ (2,532 ) Gross Sending Volume. We define gross sending volume, or GSV, as the total principal amount of funds sent by our customers in a given period, excluding our fees. A percentage of GSV does not ultimately get paid out to recipients due to customer cancellations, our risk management decisions and customer error. In the periods presented, this percentage has ranged from 2.75% to 3.25%. Our GSV increased 71% for 2013 compared to the prior year, 90% for 2012 and 99% for 2011. Some of our customers transact more depending on the value of the local currency relative to the U.S. dollar. For example, amongst our Indian customers, we saw an increase in activity in the three months ended June 30, 2013 and September 30, 2013 due to a weakening Indian Rupee and a decrease in activity in the three months ended December 31, 2013 due to a strengthening Indian Rupee.

Transactions. This represents the total number of transactions sent by our customers in a given period. A small percentage of transactions do not ultimately get paid out to recipients due to customer cancellations, our risk management decisions and customer error. Our transactions increased 51% for 2013 compared to the prior year, 63% for 2012 and 43% for 2011. The increase in GSV was higher than the increase in number of transactions due to changes in the mix of countries we serve toward those with a higher average transaction amount.

48 -------------------------------------------------------------------------------- Table of Contents Active Customers. We define active customers as the number of customers who have sent at least one transaction during a trailing twelve month period. A new customer with one transaction during a trailing twelve month period would also be included as an active customer in the same period. The number of active customers increased 36% for 2013 compared to the prior year, 50% for 2012 and 32% for 2011.

New Customers. We define new customers as those customers who have sent their first transaction in a given period. Our new customer growth increased by 19% for 2013 compared to the prior year, 39% for 2012 and 29% for 2011.

Cost Per Acquisition of a New Customer. We calculate cost per acquisition of a new customer, or CPA, in a reporting period as direct marketing cost, a portion of which is reflected in our cost of revenue, divided by new customers added in a given period. Our direct marketing cost does not include certain indirect marketing costs that are included in our marketing expense line item in our consolidated statements of operations. Examples of our indirect marketing costs include personnel-related costs, including stock-based compensation, and creative production costs.

Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss) adjusted for provision for income taxes, interest expense, interest income, depreciation and amortization and stock-based compensation. For a reconciliation of adjusted EBITDA to net income (loss) and an explanation of how management uses this metric, see "Selected Financial Data." Basis of Presentation Revenue. We generate revenue from transaction fees charged to customers, and foreign exchange spreads on transactions where the payout currency is other than U.S. dollars. Our revenue is derived from each transaction and may vary based on the size of the transaction, the funding method used, the currency to ultimately be disbursed and the country to which the funds are transferred. Revenue is recognized when we accept the transaction for processing, net of cancellations and refunds. Revenue growth will depend on our ability to retain active customers and attract new customers.

Cost of Revenue. Our cost of revenue includes fees to our disbursement partners for paying funds to the recipient, fees to our payment processors for funding our transactions, a provision for transaction losses and the promotional expenses to acquire new customers that are referees described below under "-Marketing Expense." We expect our cost of revenue to increase on an absolute basis for the foreseeable future as we continue to grow our business.

Marketing Expense. Our marketing expense consists of business development costs, television, out-of-home, print, online and promotional advertising costs to acquire new customers, employee compensation and related costs to support the marketing process and allocated facilities and other supporting overhead costs.

During 2011, we introduced a Refer-A-Friend incentive program where the referrer receives either a cash-type or non-cash award and the referee receives a non-cash award. Cash-type awards are considered to be cash-type because the referrer could use them as cash. The amount related to the referee is classified as cost of revenue for non-cash awards. Awards provided to the referrer are recorded in marketing expense as these payments are a reward for bringing a new customer to Xoom. We anticipate our marketing expense will vary from period to period due to the timing of when such programs occur.

Technology and Development Expense. Our technology and development expense consists of employee compensation and related costs for our engineers and developers, professional services and consulting, costs related to the development of new technologies, costs associated with the enhancements of existing technologies, amortization of capitalized internally-developed software and allocated facilities and other supporting overhead costs.

Internally-developed software costs are a combination of internal compensation costs of engineering time and costs of outside consultants and primarily relate to the development of specific enhancements such as the 49-------------------------------------------------------------------------------- Table of Contents development of our mobile application. We intend to continue to invest in technology and development efforts to further improve our customer experience and to continue expanding our operating platform. As a result, we expect technology and development expense to increase on an absolute basis for the foreseeable future.

Customer Service and Operations Expense. Our customer service and operations expense consists of outsourced customer call centers, employee compensation for our employees who support customer service calls, costs incurred for fraud detection, compliance operations, maintenance costs related to our outsourced customer call centers and allocated facilities and other supporting overhead costs. We expect customer service and operations expense to increase on an absolute basis for the foreseeable future to support the anticipated growth of our business.

General and Administrative Expense. Our general and administrative expense consists of employee compensation and related costs for our executives, finance, legal, compliance policy, human resources and other administrative employees, outside consulting, legal and accounting services and facilities and other supporting overhead costs not allocated to other departments. We expect to incur additional expenses associated with being a public company and to support our continuing growth, including increased legal and accounting costs and compliance costs in connection with the Sarbanes-Oxley Act.

Interest Expense. Interest expense represents interest incurred in connection with our line of credit and amortization of commitment and arrangement fees.

Interest Income. Interest income represents interest earned on our cash and cash equivalents and short-term investments.

Other Income (Expense). Other income (expense) consists of gains and/or losses on foreign currency balances due to fluctuations in exchange rates between the initiation of a transaction and the settlement of the transaction (usually a period of no longer than 24 hours).

Provision for Income Taxes. Provision for income taxes consists of state income taxes in the United States. We have not been required to pay U.S. federal income taxes to date because of our current and accumulated net operating losses which totaled $70.4 million as of December 31, 2013. Since inception, we have only been required to pay minimal state income taxes. For 2013, tax expense was $37,000, which consisted of U.S. state income taxes. As we expand our operations outside the United States, we will become subject to foreign taxes and our effective tax rate could change accordingly.

Results of Operations The following tables set forth our results of operations in dollars and as a percentage of revenue for the years presented. The year-to-year comparison of financial results is not necessarily indicative of future results.

Year Ended December 31, 2013 2012 2011 (in thousands) Consolidated Statements of Operations Data: Revenue $ 122,206 $ 80,016 $ 50,020 Cost of revenue 38,082 26,779 18,075 Gross profit 84,124 53,237 31,945 Marketing 25,926 21,496 14,314 Technology and development 22,451 15,950 9,431 Customer service and operations 13,552 10,964 7,321 General and administrative 13,145 9,135 4,957 Total operating expense 75,074 57,545 36,023 Income (loss) from operations 9,050 (4,308 ) (4,078 ) 50 -------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2013 2012 2011 (in thousands) Other income (expense): Interest expense (1,837 ) (1,504 ) (370 ) Interest income 203 85 29 Other income (expense) (1,051 ) (125 ) 49 Income (loss) before provision for income taxes 6,365 (5,852 ) (4,370 ) Provision for income taxes 37 2 2 Net income (loss) $ 6,328 $ (5,854 ) $ (4,372 ) Year Ended December 31, 2013 2012 2011 Consolidated Statements of Operations Data:(1) Revenue 100 % 100 % 100 % Cost of revenue 31 33 36 Gross profit 69 67 64 Marketing 21 27 29 Technology and development 18 20 19 Customer service and operations 11 14 15 General and administrative 11 11 10 Total operating expense 61 72 72 Income (loss) from operations 7 (5 ) (8 ) Other income (expense): Interest expense (2 ) (2 ) (1 ) Interest income - - - Other income (expense) (1 ) - - Income (loss) before provision for income taxes 5 (7 ) (9 ) Provision for income taxes - - - Net income (loss) 5 % (7 )% (9 )% (1) Certain items may not foot due to rounding.

Revenue Year Ended December 31, 2013 to 2012 2012 to 2011 2013 2012 2011 % Change % Change (in thousands) Revenue $ 122,206 $ 80,016 $ 50,020 53 % 60 % 2013 Compared to 2012. Revenue increased $42.2 million, or 53%, in 2013 as compared to 2012. The increase was primarily due to a 36% increase in active customers, which included 481,110 new customers added during 2013. Revenue grew at a faster rate than the increase in our active customers because the annual revenue per average active customer increased from $124 in 2012 to $133 in 2013, or 8%. This increase was due to changes in the mix of countries we serve toward those with a higher average transaction amount.

2012 Compared to 2011. Revenue increased $30.0 million, or 60%, in 2012 as compared to 2011. The increase was primarily due to a 50% increase in active customers, which included 405,304 new customers added during 2012. Revenue grew at a faster rate than the increase in our active customers because the annual revenue 51 -------------------------------------------------------------------------------- Table of Contents per average active customer increased from $110 in 2011 to $124 in 2012, or 13%.

This increase was due to changes in the mix of countries we serve toward those with a higher average transaction amount.

Cost of Revenue Year Ended December 31, 2013 to 2012 2012 to 2011 2013 2012 2011 % Change % Change (dollars in thousands) Cost of revenue $ 38,082 $ 26,779 $ 18,075 42 % 48 % Percentage of revenue 31 % 33 % 36 % 2013 Compared to 2012. Cost of revenue increased $11.3 million, or 42%, in 2013 as compared to 2012. The increase in cost of revenue was driven by a $6.4 million increase to $22.7 million in processing and disbursement costs to support the 51% increase in transactions and a $5.9 million increase to $13.6 million in transaction losses due to the increase in our GSV. This was partially offset by a decrease of $0.9 million in costs related to Refer-A-Friend and other incentive programs. The decrease in cost of revenue as a percentage of revenue and corresponding increase in gross profit for 2013 was primarily a result of a reduction in Refer-A-Friend costs due to a reduction in the reward amount per new user and a result of a reduction in disbursement costs per transaction due to changes in the mix of countries we serve toward those with lower disbursement costs per transaction.

2012 Compared to 2011. Cost of revenue increased $8.7 million, or 48%, in 2012 as compared to 2011. The increase in cost of revenue was driven by a $4.4 million increase to $16.3 million in processing and disbursement costs to support the 63% increase in transactions, a $2.3 million increase to $7.7 million in transaction losses due to the increase in our GSV and an additional $1.8 million in costs related to the Refer-A-Friend and other incentive programs. The decrease in cost of revenue as a percentage of revenue and corresponding increase in gross profit for 2012 was primarily a result of a reduction in processing costs due to more active customers funding their money transfers via bank account, which is less costly to us than if they fund via credit or debit card. Further, we experienced a reduction in our processing costs per transaction as a result of the Durbin Amendment to the Dodd-Frank Act, which resulted in lower debit card fees beginning in the fourth quarter of 2011.

Marketing Expense Year Ended December 31, 2013 to 2012 2012 to 2011 2013 2012 2011 % Change % Change (dollars in thousands) Marketing $ 25,926 $ 21,496 $ 14,314 21 % 50 % Percentage of revenue 21 % 27 % 29 % 2013 Compared to 2012. Marketing expense increased $4.4 million, or 21%, in 2013 as compared to 2012. The increase was primarily due to an expansion of our marketing programs to drive increased customer acquisition, including increasing television, out-of-home, online and incentive promotions by $3.5 million to $21.4 million during 2013. In addition, there was an increase of $0.6 million in personnel-related costs (including stock-based compensation). As a percentage of revenue, marketing expense fluctuates from period to period due to the timing of marketing programs and incentive programs to acquire new customers.

2012 Compared to 2011. Marketing expense increased $7.2 million, or 50%, in 2012 as compared to 2011. The increase was primarily due to an increase in our marketing programs to drive increased customer acquisition, including television, online and incentive promotions of $6.3 million to $17.9 million in 2012. Our 52 -------------------------------------------------------------------------------- Table of Contents Refer-A-Friend incentive program contributed $2.0 million of this $6.3 million increase. As stated in "-Cost of Revenue" above, marketing expenses in this line item do not reflect certain marketing expenses related to our Refer-A-Friend incentive program that we recognize under cost of revenue. The remaining increase was due to personnel-related costs (including stock-based compensation).

Technology and Development Expense Year Ended December 31, 2013 to 2012 2012 to 2011 2013 2012 2011 % Change % Change (dollars in thousands) Technology and development $ 22,451 $ 15,950 $ 9,431 41 % 69 % Percentage of revenue 18 % 20 % 19 % 2013 Compared to 2012. Technology and development expense increased $6.5 million, or 41%, in 2013 as compared to 2012. The increase was primarily the result of an increase in personnel-related costs of $4.3 million to $17.2 million (including stock-based compensation) due to an increase in headcount to expand and improve our service. The remaining increase was due to an increase in facilities, information technology and other infrastructure costs of $0.9 million, an increase in depreciation and amortization expense of $0.7 million due to various software projects that were put into service in 2013, including mobile app and text messaging, and an increase in allocated insurance costs of $0.3 million.

2012 Compared to 2011. Technology and development expense increased $6.5 million, or 69%, in 2012 as compared to 2011. The increase was primarily the result of an increase in personnel-related costs of $5.0 million to $12.9 million (including stock-based compensation) due to an increase in headcount to expand and improve our service. The remaining increase was due to an increase in depreciation and amortization expense of $0.5 million, an increase in the investment of additional technology infrastructure of $0.5 million and an increase in allocated overhead costs.

Customer Service and Operations Expense Year Ended December 31, 2013 to 2012 2012 to 2011 2013 2012 2011 % Change % Change (dollars in thousands)Customer service and operations $ 13,552 $ 10,964 $ 7,321 24 % 50 % Percentage of revenue 11 % 14 % 15 % 2013 Compared to 2012. Customer service and operations expense increased $2.6 million, or 24%, in 2013 as compared to 2012. The increase was primarily due to an increase in the volume of transactions we processed, resulting in an increase in costs of $1.8 million to $8.7 million associated with our outsourced customer call centers (including communication and software costs), $0.4 million in personnel-related costs (including stock-based compensation) and $0.3 million in customer verification costs.

2012 Compared to 2011. Customer service and operations expense increased $3.6 million, or 50%, in 2012 as compared to 2011. The increase was primarily due to an increase in the volume of transactions we processed, resulting in higher costs of $2.5 million to $6.1 million associated with our outsourced customer call centers and personnel-related costs of $0.8 million to $3.0 million (including stock-based compensation) due to an increase in headcount.

53-------------------------------------------------------------------------------- Table of Contents General and Administrative Expense Year Ended December 31, 2013 to 2012 2012 to 2011 2013 2012 2011 % Change % Change (dollars in thousands) General and administrative $ 13,145 $ 9,135 $ 4,957 44 % 84 % Percentage of revenue 11 % 11 % 10 % 2013 Compared to 2012. General and administrative expense increased $4.0 million, or 44%, in 2013 as compared to 2012. The increase was primarily the result of an increase in personnel-related costs of $2.8 million to $8.3 million (including stock-based compensation) due to an increase in headcount to support our overall growth, and an increase in consulting, professional services and public company costs of $0.6 million. The remaining $0.6 million increase was due to an increase in facilities, allocated insurance costs, information technology and other infrastructure costs.

2012 Compared to 2011. General and administrative expense increased $4.2 million, or 84%, in 2012 as compared to 2011. The increase was primarily the result of an increase in personnel-related costs of $2.4 million to $5.5 million (including stock-based compensation) due to an increase in headcount to support our overall growth and an increase in consulting and professional services of $0.9 million. The remaining increase was due to an increase in allocated overhead costs.

Interest Expense 2013 Compared to 2012. Interest expense increased $0.3 million in 2013 as compared to 2012 as a result of the increase in amortization of line of credit fees.

2012 Compared to 2011. Interest expense increased $1.1 million as a result of the increase in average outstanding balances during 2012 on our line of credit.

Other Expense 2013 Compared to 2012. Other expense increased $0.9 million in 2013 as compared to 2012 as a result of currency fluctuations over the period between the initiation of and the settlement of transactions (usually a period of no longer than 24 hours), primarily related to Indian Rupee exchange rate fluctuations against the U.S. dollar.

2012 Compared to 2011. Other expense increased $0.2 million in 2012 as compared to 2011 as a result of currency fluctuations over the period between the initiation of and the settlement of transactions (usually a period of no longer than 24 hours), primarily related to Indian Rupee exchange rate fluctuations against the U.S. dollar.

54 -------------------------------------------------------------------------------- Table of Contents Quarterly Results of Operations Data The following tables set forth our unaudited quarterly consolidated statements of operations data in dollars and as a percentage of revenue and our key metrics for each of the eight quarters ended December 31, 2013. We have prepared the quarterly data on a consistent basis with the audited consolidated financial statements included in this report. In the opinion of management, the financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this report. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

Three Months Ended, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, 2013 2013 2013 2013 2012 2012 2012 2012 (in thousands, except per share data) (unaudited) Revenue $ 32,119 $ 32,279 $ 33,493 $ 24,315 $ 22,162 $ 19,901 $ 21,008 $ 16,945 Cost of revenue 10,080 10,364 10,119 7,519 7,404 6,533 7,381 5,461 Gross profit 22,039 21,915 23,374 16,796 14,758 13,368 13,627 11,484 Marketing 7,015 6,312 6,907 5,692 5,431 5,648 6,129 4,288 Technology and development 6,016 6,125 5,476 4,834 4,281 4,015 4,031 3,623 Customer service and operations 3,713 3,497 3,325 3,017 3,102 2,885 2,780 2,197 General and administrative 3,791 3,392 3,039 2,923 2,906 2,357 2,194 1,678 Total operating expense 20,535 19,326 18,747 16,466 15,720 14,905 15,134 11,786 Income (loss from operations) 1,504 2,589 4,627 330 (962 ) (1,537 ) (1,507 ) (302 ) Other income (expense): Interest expense (303 ) (588 ) (499 ) (447 ) (515 ) (387 ) (355 ) (247 ) Interest income 80 46 41 36 18 23 23 21 Other income (expense) (106 ) (1,002 ) 53 4 (14 ) (374 ) 227 36 Income (loss) before provision for income taxes 1,175 1,045 4,222 (77 ) (1,473 ) (2,275 ) (1,612 ) (492 ) (Benefit) provision for income taxes 22 (119 ) 132 2 - - - 2 Net income (loss) $ 1,153 $ 1,164 $ 4,090 $ (79 ) $ (1,473 ) $ (2,275 ) $ (1,612 ) $ (494 ) Net income (loss) per share: Basic $ 0.03 $ 0.03 $ 0.12 $ 0.00 $ (0.29 ) $ (0.45 ) $ (0.32 ) $ (0.10 ) Diluted $ 0.03 $ 0.03 $ 0.11 $ 0.00 $ (0.29 ) $ (0.45 ) $ (0.32 ) $ (0.10 ) Weighted-average shares used to compute per share amounts: Basic 37,494 33,880 32,974 19,041 5,071 5,056 5,041 5,030 Diluted 41,690 38,188 37,263 19,041 5,071 5,056 5,041 5,030 55 -------------------------------------------------------------------------------- Table of Contents Stock-based compensation included in the above line items was as follows: Three Months Ended, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, 2013 2013 2013 2013 2012 2012 2012 2012 (in thousands) (unaudited) Stock-based compensation expense: Marketing $ 109 $ 110 $ 106 $ 92 $ 84 $ 81 $ 66 $ 51 Technology and development 433 339 296 226 209 200 170 148 Customer service and operations 111 120 107 77 73 74 67 42 General and administrative 579 531 450 383 367 349 281 183 Total stock-based compensation $ 1,232 $ 1,100 $ 959 $ 778 $ 733 $ 704 $ 584 $ 424 Three Months Ended,(1) Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, 2013 2013 2013 2013 2012 2012 2012 2012 (unaudited) Revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % Cost of revenue 31 32 30 31 33 33 35 32 Gross profit 69 68 70 69 67 67 65 68 Marketing 22 20 21 23 25 28 29 25 Technology and development 19 19 16 20 19 20 19 21 Customer service and operations 12 11 10 12 14 14 13 13 General and administrative 12 11 9 12 13 12 10 10 Total operating expense 64 60 56 68 71 75 72 70 Income (loss from operations) 5 8 14 1 (4 ) (8 ) (7 ) (2 ) Other income (expense): Interest expense (1 ) (2 ) (1 ) (2 ) (2 ) (2 ) (2 ) (1 ) Interest income - - - - - - - - Other income (expense) - (3 ) - - - (2 ) 1 - Income (loss) before provision for income taxes 4 3 13 - (7 ) (11 ) (8 ) (3 ) Provision for income taxes - - - - - - - - Net income (loss) 4 % 4 % 12 % - % (7 )% (11 )% (8 )% (3 )% (1) Certain items may not foot due to rounding.

56 -------------------------------------------------------------------------------- Table of Contents The following table presents our key operating and financial metrics for the periods presented (unaudited): Three Months Ended,(1) Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, 2013 2013 2013 2013 2012 2012 2012 2012 Other Financial and Operational Data:(1) Gross Sending Volume (in thousands) $ 1,366,767 $ 1,515,557 $ 1,606,584 $ 1,055,847 $ 940,154 $ 777,905 $ 884,357 $ 646,041 Transactions 2,744,000 2,623,000 2,582,000 2,039,000 1,935,000 1,680,000 1,648,000 1,354,000 Active Customers 1,059,689 997,753 919,610 841,819 776,426 718,064 658,233 576,446 New Customers 112,980 123,600 134,899 109,631 102,845 94,043 116,100 92,316 Cost Per Acquisition of a New Customer $ 49 $ 40 $ 44 $ 40 $ 41 $ 50 $ 45 $ 40 Adjusted EBITDA (in thousands) $ 3,333 $ 3,322 $ 6,149 $ 1,574 $ 260 $ (828 ) $ (345 ) $ 420 (1) For information on how we define these operational and financial metrics see "-Key Metrics." Three Months Ended, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, 2013 2013 2013 2013 2012 2012 2012 2012 (in thousands) (unaudited) Reconciliation of Adjusted EBITDA: Net income (loss) $ 1,153 $ 1,164 $ 4,090 $ (79 ) $ (1,473 ) $ (2,275 ) $ (1,612 ) $ (494 ) (Benefit) provision for income taxes 22 (119 ) 132 2 - - - 2 Interest expense 303 588 499 447 515 387 355 247 Interest income (80 ) (46 ) (41 ) (36 ) (18 ) (23 ) (23 ) (21 ) Depreciation and amortization 703 635 510 462 503 379 351 262 Stock-based compensation 1,232 1,100 959 778 733 704 584 424 Adjusted EBITDA $ 3,333 $ 3,322 $ 6,149 $ 1,574 $ 260 $ (828 ) $ (345 ) $ 420 With the exception of the three months ended September 30, 2012, September 30, 2013 and December 31, 2013, we have experienced sequential revenue growth in all periods presented as a result of attracting new customers and retaining our active customers. The sequential decline in revenue in the three months ended September 30, 2012 and September 30, 2013 was due to the increased activity we experienced during the three months ended June 30, 2012 and an unprecedented 38% quarter over quarter increase in revenue during the three months ended June 30, 2013, respectively. Revenue was flat between September 30, 2013 and December 31, 2013 due to lower revenue from Indian customers as discussed below. We experience some seasonal trends in our business. Generally, revenue in our second and fourth quarters is stronger due to Mother's Day and Christmas when we tend to have an increased rate of activity from our active customers. In addition, some of our customers transact more depending on the value of the local currency relative to the U.S. dollar. We see this trend most clearly among our Indian customers, a subset of which is highly influenced by the value, or the perceived value, of the Indian Rupee relative to the U.S. dollar. For example, we saw an increase in activity in the three months ended June 30, 2012, June 30, 2013 and September 30, 2013 due to a weakening Indian Rupee, or the perception of a weakening Indian Rupee. Conversely, during the three months ended September 30, 2012 and December 31, 2013, we saw a decrease in activity to India due to a strengthening Indian Rupee, or the perception of a strengthening Indian Rupee.

Our cost of revenue has increased in absolute dollars but has marginally decreased as a percentage of revenue. Our operating expenses have increased in absolute dollars as we continue to invest in service innovation and technology by hiring additional employees, and we continue to introduce new marketing programs to increase brand awareness. We continue to look for innovative and efficient marketing efforts and anticipate our 57-------------------------------------------------------------------------------- Table of Contents marketing expense will vary from period to period due to the timing of when the programs occur. Marketing will continue to be our largest operating expense as a percentage of revenue as we seek to attract new customers.

Liquidity and Capital Resources Since inception, we have financed our operations and capital expenditures through the sale of preferred and common stock and, to a lesser extent, from borrowings and exercise of stock options to purchase common stock. Our principal uses of cash are funding our operations and capital expenditures.

As of December 31, 2013, we had cash, cash equivalents, disbursement prefunding and short-term investments of $249.5 million, which consisted of cash, money market funds, U.S. government securities, commercial paper, certificates of deposit, corporate bonds and prefunded balances with some of our disbursement partners. All of our cash equivalents and short-term investments are held at U.S. financial institutions.

The following table summarizes our cash and cash equivalents and disbursement prefunding as of the dates presented (in millions): December 31, 2013 2012 Domestic institutions $ 92.5 $ 26.7 Foreign institutions 52.3 33.4 We hold cash at foreign financial institutions in order to prefund our disbursement partners. Our policy is generally to have relationships with multiple foreign institutions in each of our major markets so that our institutional risk is diversified. For example, we hold balances in the Philippines at eight different institutions. However, in India, our balances are concentrated at one institution, Punjab National Bank, which is a large, state-owned bank. We generally review financial statements of our disbursement partners before commencing a business relationship with them, and annually thereafter, though such reviews may not mitigate all risk of loss. Certain of our balances in domestic and all of our balances in foreign institutions are uninsured. Our institutional losses of pre-funded balances have totaled less than $150,000 since our inception.

We experience significant day-to-day fluctuations in our cash and cash equivalents, disbursement prefunding and line of credit balances. These fluctuations are primarily due to: • Fluctuations in daily GSV. As daily GSV increases, our cash and cash equivalents and disbursement prefunding amounts will increase, and we may draw down on our line of credit to fund the increased activity. Typically our cash, cash equivalents and disbursement prefunding balances at period end represent one to four days of disbursements to be made in the subsequent period; and • Timing of period end. For periods that end on a weekend or a bank holiday, our cash and cash equivalents and prefunding amounts typically will be more than for periods ending on a weekday as we fund these balances five days a week, but we disburse funds seven days a week.

If a period ends on a weekend or holiday, our cash, cash equivalents and disbursement prefunding is generally higher than if the period ends on a business day, because we will then prefund our disbursement partners for the entire weekend or through the holiday instead of for one business day. As a result, we would need to draw down on our line of credit discussed below under "-Our Indebtedness," which would increase our cash, cash equivalents and disbursement prefunding balances.

We believe that our existing cash and cash equivalents, cash flow from operations, and the available borrowing amount under our line of credit will be sufficient to meet our working capital needs and planned capital expenditures for at least the next 12 months. From time to time, we may explore additional financing 58 -------------------------------------------------------------------------------- Table of Contents sources which could include equity, equity-linked and debt financing arrangements. We cannot assure you that any additional financing will be available to us on acceptable terms or at all.

Our Indebtedness In October 2009, we entered into a line of credit agreement, or the Loan Agreement, with Silicon Valley Bank, or SVB, which was amended in September 2012 to add a second lender and increase the available borrowing amount. The Loan Agreement allowed for borrowings up to $80.0 million, bearing interest at the greater of prime plus 1.25% or 4.50%. As part of the line of credit, we had a $10.0 million standby letter of credit which increased to $15.0 million in May 2013. In September 2013, we amended and restated our line of credit by entering into an Amended and Restated Credit Agreement, or the Restated Loan Agreement.

The Restated Loan Agreement added additional lenders and increased the available borrowing amount to $150.0 million through September 2016. Under the Restated Loan Agreement, the interest rate is the greater of prime plus 1% or 4.25%, and we pay a fee of 0.50% per annum for the daily unused portion of the line of credit.

At December 31, 2013, we had $135.0 million available under our line of credit, reflecting $15.0 million reserved under the standby letter of credit. We were in compliance with all of our debt covenants as of December 31, 2013. In connection with the new lease arrangement described in the "Properties" section of Part I, Item 2 of this report, SVB issued a $3.9 million letter of credit as a security deposit for our new office lease in January 2014.

Cash Flows We typically prefund our disbursement partners on each business day which allows the funds to be made available to our disbursement partners seconds or minutes after a customer's transaction is processed. Our prefunding estimates are based on historical experiences with our customers and disbursement partners, which vary depending on factors such as seasonality, the timing of bank holidays, weekends and paydays. These estimates incorporate assumptions surrounding the timing in which the customer funds receivables are settled and the customer liabilities are paid out. We have in the past and could in the future utilize our line of credit to satisfy short-term capital requirements over weekends or during bank holiday periods or high volume sending periods. We typically pay down the outstanding amount on the line of credit the first business day after the weekend or bank holiday period. Given these factors, we believe it is useful to review our cash flow in the aggregate to better understand the short-term flow of funds which can vary greatly depending on the timing of a weekend or bank holiday.

The following table summarizes our cash flows for the years presented: Year Ended December 31, 2013 2012 2011 (in thousands) Net cash used in operating activities $ (8,686 ) $ (750 ) $ (12,060 ) Net cash used in investing activities (82,538 ) (16,061 ) (10,274 ) Net cash provided by financing activities 157,126 13,640 49,888 Operating Activities Our use of cash for 2013 was attributable to changes in our working capital of $22.6 million, partially offset by $6.3 million of our net income and $7.6 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of stock-based compensation, depreciation and amortization expense and accretion of premiums on short-term investments. The use of cash resulting from changes in our working capital primarily consisted of an increase in disbursement prefunding of $18.7 million relating to the timing of funding our disbursement partners and an increase in GSV, an increase in customer funds receivable of $7.1 million relating 59-------------------------------------------------------------------------------- Table of Contents to the timing of transactions in process and an increase in GSV, partially offset by an increase in customer liabilities of $2.3 million related to undisbursed transactions and an increase in GSV.

Our use of cash for 2012 was attributable to our net loss of $5.9 million partially offset by $4.5 million in adjustments for non-cash items and changes in our working capital of $0.6 million. Adjustments for non-cash items primarily consisted of stock-based compensation, depreciation and amortization expense and accretion of premiums on marketable securities. The decrease in cash resulting from changes in our working capital primarily consisted of a decrease in customer funds receivable of $7.9 million relating to the timing of transactions in process, partially offset by an increase in disbursement prefunding of $6.1 million related to undisbursed transactions.

Our use of cash for 2011 was attributable to changes in our working capital of $9.5 million and our net loss of $4.4 million, partially offset by $1.8 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of stock-based compensation, depreciation and accretion of premiums on short-term investments. The decrease in cash resulting from changes in our working capital primarily consisted of an increase in customer funds receivable of $13.0 million relating to the timing of transactions in process, partially offset by an increase in customer liabilities of $4.1 million related to undisbursed transactions.

Investing Activities Our primary investing activities have consisted of purchases, sales and maturities of short-term investments, purchases of property, equipment, software and intangible assets and changes in our restricted cash. Purchases of property, equipment, software and intangible assets may vary from period to period due to the timing of the expansion of our operations, website and mobile solutions and internal-use software development. We expect to continue to invest in property and equipment and software development in the coming years.

We used $80.6 million, $5.2 million and $8.4 million in 2013, 2012 and 2011, respectively, in net purchases of short-term investments.

We used $3.4 million, $3.2 million and $1.7 million for purchases of property, equipment, intangible assets and the software development in 2013, 2012 and 2011, respectively.

In February 2013, the Reserve Bank of India extended its rupee drawing arrangement, or RDA, to money transmitters based in the United States. We had a decrease in our restricted cash of $1.7 million during 2013 because we began processing transactions to India exclusively under RDA in July 2013 and are no longer processing transactions to India via our subsidiary, buyindiaonline.com Inc., under its MTSS license. As a result of decreased sending volume under its MTSS license, our subsidiary is no longer bound by the high collateral requirements which applied in previous periods. In addition, in 2013, we maintained $0.2 million as restricted cash at a large financial institution in India for our India operations. We had an increase in our restricted cash of $0.6 million and $0.2 million during 2012 and 2011, respectively, due to higher collateral requirements under our buyindiaonline.com Inc.'s license to disburse funds in India as a result of increased sending volume to India. During 2012, we integrated a new ACH payment processor and increased our GSV with an existing ACH payment processor, which required us to restrict an additional $7.0 million of our cash as collateral.

Financing Activities Our financing activities have primarily consisted of net proceeds from the issuance of preferred and common stock, exercise of common stock options and repayments and borrowings under our line of credit.

Cash provided by financing activities in 2013 was $157.1 million primarily due to $88.4 million net proceeds from our IPO and $104.8 million net proceeds from our follow-on offering. This was partially offset by net repayments of $40.0 million under our line of credit.

60-------------------------------------------------------------------------------- Table of Contents Cash provided by financing activities in 2012 was $13.6 million consisting primarily of net borrowings of $13.5 million on our line of credit.

Cash provided by financing activities in 2011 was $49.9 million consisting of $25.0 million of net proceeds from the issuance of 2.2 million shares of our Series F preferred stock and $24.8 million of net borrowing under our line of credit.

Off-Balance Sheet Arrangements As described in "-Our Indebtedness" above, SVB issued a standby letter of credit which satisfies the additional collateral requirement to maintain our India operations. As of December 31, 2013 and December 31, 2012, we had $15.0 million and $10.0 million, respectively, reserved under our standby letter of credit. In connection with the new lease arrangement entered into in December 2013 described in the "Properties" section of Part I, Item 2 of this report, SVB issued a $3.9 million letter of credit in January 2014 as a security deposit for our new office lease.

Contractual Obligations and Commitments The following table describes our contractual obligations as of December 31, 2013: Payments Due by Period Less Than 1-3 4-5 Total 1 Year Years Years Thereafter (in thousands) Operating lease obligations $ 49,263 $ 2,655 $ 10,662 $ 8,949 $ 26,997 The contractual obligations in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above. We have no material long-term purchase obligations outstanding with any vendors or third parties. This table includes amounts payable under the new lease discussed below.

For a description of our line of credit see "-Our Indebtedness." We lease our office facilities for our corporate headquarters in San Francisco, California, under operating leases which expire in 2016. As described in the "Properties" section of Part I, Item 2 of this report, we entered into a lease arrangement in December 2013 for office space at a different location in San Francisco, California, which will commence in July 2014 for a 120-month term.

The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods. We also lease our back-up data centers under operating leases which expire in 2015 and 2016. We do not have any material capital lease obligations and all of our property, equipment and software have been purchased with cash.

Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, 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 reserve for transaction losses, income taxes and stock-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, please see Note 2 of the accompanying notes to our consolidated financial statements.

61-------------------------------------------------------------------------------- Table of Contents Reserve for Transaction Losses On a quarterly basis, the reserve for estimated transaction losses is calculated based on our historical trends and data specific to each reporting period. We review the actual transaction losses evidenced in prior quarters as a percent of GSV to determine a historical loss rate. We then apply the historical rate to the current period GSV as a basis for estimating future transaction losses. When necessary, we also provide a specific transaction loss reserve for specific risks identified in processing customer transactions. Recoveries are reflected as a reduction in the reserve for transaction losses when the recovery occurs.

We evaluate the adequacy of the provision every reporting period and adjust the reserve accordingly.

Income Taxes We use the asset and liability method to account for income taxes, which requires the recognition of deferred tax assets and liabilities for the expected future income tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized based on temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. The Company has considered a number of factors in concluding that a full valuation allowance remains appropriate at December 31, 2013. These factors include a consideration of our future profitability, expansion plans and future investments in our technology.

We also provide reserves as necessary for uncertain tax positions taken on our tax filings. First, we determine if a tax position is more likely than not to be sustained upon audit solely based on technical merits, including resolution of related appeals or litigation processes, if any. Second, based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement, we recognize any such differences as a liability. We include in income tax expense any interest and penalties related to uncertain tax positions. For all years presented, there are no uncertain tax positions.

Stock-Based Compensation Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is the vesting period of the respective award.

Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of our common stock, our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows: • Fair value of our common stock. Prior to our IPO in February 2013, our Board of Directors considered numerous objective and subjective factors to determine the fair market value of our common stock at each meeting at which stock options were granted and approved. The option-pricing method requires assumptions regarding the anticipated timing of a potential liquidity event, such as an IPO, and the estimated volatility of our equity securities. The anticipated timing of a liquidity event utilized in these valuations for grants made prior to our IPO was based on then current plans and estimates of our Board of Directors and management regarding an IPO. Since the completion of our IPO, we have determined the fair value of the common stock underlying our stock options based on the closing price of our common stock at the date of grant.

• Expected Term. The expected term was estimated using the simplified method allowed under the authoritative guidance.

62 -------------------------------------------------------------------------------- Table of Contents • Volatility. The expected stock price volatility for our common stock was estimated by taking the average of the historical volatilities of an index fund and industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. We did not rely on implied volatilities of traded options in our industry peers' common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available.

• Risk-free rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for zero-coupon U.S. Treasury notes with remaining terms similar to the expected term of the options.

• Dividend yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future.

Consequently, we used an expected dividend yield of zero.

If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.

The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the years presented: Year Ended December 31, 2013 2012 2011 Expected term (in years) 6.1 6.3 5.8 Risk-free interest rate 1.35 % 1.26 % 1.73 % Dividend yield None None None Volatility rate 44 % 42 % 39 % Recently Issued and Adopted Accounting Pronouncements In July 2013, the Financial Accounting Standards Board, or FASB, issued a new accounting standard update on the financial presentation of unrecognized tax benefits. The update provides guidance on the presentation of unrecognized tax benefits to reflect the manner in which companies would settle any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses or tax credit carryforwards exist. The update is effective for fiscal years and interim periods beginning after December 15, 2013. The adoption of this new standard is not expected to have an effect on our consolidated financial statements but may require additional disclosure when applicable to the extent we have unrecognized tax benefits.

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