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TMCNet:  MARKETO, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[August 11, 2014]

MARKETO, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed on March 3, 2014.


As discussed in the section above titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included under Part II, Item 1A below.

Overview We are the provider of a leading cloud-based marketing software platform that enables organizations to engage in modern relationship marketing. Our software platform is designed to enable the effective execution, management and analytical measurement of marketing activities, helping organizations to acquire new customers more efficiently, build stronger relationships with existing customers, improve sales effectiveness and drive faster revenue growth. On our platform, we deliver an easy-to-use, integrated suite of advanced applications, which today include Marketing Automation, Social Marketing, Marketing Management, and Real-time Personalization. To enable our customers to obtain maximum value from our platform, we have created an ecosystem of third-party applications, as well as a network of resources to foster marketing thought leadership, sharing and collaboration among our users. Furthermore, we provide our customers with expert professional services, delivered by marketers, for marketers, to enable rapid time to value through effective implementation and usage of our solutions.

We deliver our solutions entirely through a multi-tenant cloud-based, or Software as a Service (SaaS), architecture which customers can configure to their specific needs. We designed our platform to be valuable across large enterprises and small and medium businesses (SMBs) that sell to both businesses and consumers in virtually any industry. We define the SMB market as companies with fewer than 1,500 employees and the enterprise market as companies with 1,500 or more employees.

We market and sell our products directly and through a growing network of distribution partners. Our client base is diverse, with 3,359 customers across a wide range of industries including business services, consumer, financial services, healthcare, manufacturing, media, technology and telecommunications.

Representative customers include one or more divisions of the following companies: Capgemini, CenturyLink, Citrix, General Electric, Hyundai, Medtronic, Moody's, Panasonic, Symantec and Sony. No single customer represented more than 1% of subscription and support revenue during the three and six months ended June 30, 2014 and 2013. During the three and six months ended June 30, 2014, our 20 largest customers accounted for slightly over 11% and 10% of our total revenue, respectively, and our 20 largest customers accounted for less than 10% of our total revenue for the three and six months ended June 30, 2013. The percentage of our subscription and support revenue from enterprise customers was 27% and 28% during the three and six months ended June 30, 2014, respectively.

Our direct sales force has separate sales teams for the enterprise market and for the SMB market. Within our direct sales force, we also have a team that is responsible for selling to existing customers, who may renew their subscriptions, increase their usage of our platform and applications, acquire additional applications from our product family, or broaden the deployment of our solutions across their organizations. In addition, we have indirect sales teams that sell to distributors, agencies, resellers and OEMs, who in turn resell or use our platform to provide managed marketing services to their end customers. To date, substantially all of our revenue has been derived from direct sales, but we intend to invest in our indirect sales teams to increase indirect revenue as a percentage of our total revenue over time.

We provide our solutions on a subscription basis, and we generated total revenue of $36.0 million and $22.5 million for the three months ended June 30, 2014 and 2013, respectively, and $68.3 million and $42.2 million for the six months ended June 30, 2014 and 2013, respectively. We derive most of our revenue from subscriptions to our cloud-based software and related customer support services.

Subscription and support revenue accounted for 87% and 88% of our total revenue during each of the three months ended June 30, 2014 and 2013, respectively, and 88% and 89% of our total revenue during the six months ended June 30, 2014 and 2013, respectively. We price our products based on customer usage measures, which can include the number of records in each customer's database and the number of user seats authorized to access our service. Our subscription contracts are typically one year in length, but can range from one year to three years in length.

Professional services revenue accounted for 13% and 12% of our total revenue during the three months ended June 30, 2014 and 2013, respectively, and 12% and 11% of our total revenue during the six months ended June 30, 2014 and 2013, respectively. Our solution is designed to be ready to use immediately upon provisioning of a new customer subscription. However, we believe that our customers' success is enhanced by the effective use of modern relationship marketing strategies performed with our software, which we foster primarily through the sale and delivery of expert services that educate our customers on the best use of our solutions as well as assist in the implementation of our solutions. In addition, some of our customers require services to support integrating their existing systems with our solutions. Enterprise customers typically exhibit a higher demand for all of these services. Over the near term, due to market demand for expertise in modern relationship marketing, we expect our professional services revenue to grow at a faster rate than our subscription and support revenue, and therefore, to increase as a percentage of our total revenue. In addition, we also partner with third party consulting organizations that provide similar services to our customers in connection with their use of our solutions.

22 -------------------------------------------------------------------------------- Table of Contents We generate the majority of our revenue in the United States; however, we are focused on growing our international business. Revenue generated from our international customers was approximately 16% and 14% during the three months ended June 30, 2014 and 2013, respectively, and 15% and 14% during the six months ended June 30, 2014 and 2013, respectively.

We have focused on rapidly growing our business and plan to continue to invest in growth. We expect our cost of revenue and operating expenses to continue to increase in absolute dollars in future periods. Marketing and sales expenses are expected to increase in absolute dollars as we continue to expand our sales teams, increase our marketing activities and grow our international operations.

Research and development expenses are expected to increase in absolute dollars to support the enhancement of our existing products and the development of new products. We also intend to invest in maintaining a high level of customer service and support which we consider critical for our continued success. We plan to continue investing in our data center infrastructure and services capabilities in order to support continued future customer growth. We also expect to incur additional general and administrative expenses as a result of both our growth and the infrastructure required to be a public company. We also may acquire or invest in businesses, products or technologies that we believe could complement or expand our platform and enhance our technical capabilities.

Considering our plans for investment, we do not expect to be profitable in the near term and, in order to achieve profitability, we will need to grow revenue at a rate faster than our investments in cost of revenue and operating expenses.

For the remaining six months of 2014, we expect the demand for our solutions and services, along with revenue growth rates, to remain strong.

We had net losses attributable to Marketo of $13.1 million and $12.4 million for the three months ended June 30, 2014 and 2013, respectively, and $25.6 million and $21.9 million for the six months ended June 30, 2014 and 2013, respectively, primarily due to increased investments in our current and projected future growth.

Since our inception, we financed our operations through cash collected from customers as well as preferred equity financings, our initial public offering and concurrent private placement completed in May 2013, and our follow-on public offering completed in September 2013. We also maintain a credit facility. As of June 30, 2014, we had outstanding borrowings of $6.7 million under this facility.

Seasonality, Cyclicality and Quarterly Trends We have historically experienced seasonality in terms of when we enter into new customer agreements for our service. We sign a significantly higher percentage of agreements with new customers as well as renewal agreements with existing customers in the fourth quarter of each year as compared to any of the prior quarters. The first quarter and third quarter are typically the slowest in this regard. Furthermore, we usually sign a significant portion of these agreements during the last month, and often the last two weeks, of each quarter. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in our revenue, because we recognize subscription revenue over the term of the license agreement, which is typically one year, but generally ranges from one to three years. As a result, a slowdown in our ability to enter into customer agreements may not be apparent in our revenue for the quarter, as the revenue recognized in any quarter is primarily from customer agreements entered into in prior quarters. Historical patterns should not be considered a reliable indicator of our future sales activity or performance.

Our revenue has increased over the periods presented due to increased sales to new customers, as well as increased usage of existing and new products by existing customers. Our operating expenses generally have increased sequentially in every quarter primarily due to increases in headcount and other related expenses to support our growth. We anticipate our operating expenses will continue to increase in absolute dollars in future periods as we invest in the long-term growth of our business.

In addition, each year we typically participate in several key industry trade shows, including our own annual user conference, which typically occurs in the second quarter of the fiscal year. The timing of these events can vary from year to year, and the costs associated with these events typically have a significant effect on our sales and marketing expenses for the applicable quarter and cause our quarterly results to fluctuate.

23 -------------------------------------------------------------------------------- Table of Contents Results of Operations for the Three and Six Months Ended June 30, 2014 and 2013 The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

Three Months Six Months Ended June 30, Ended June 30, 2014 2013 2014 2013 Revenue: Subscription and support 86.7 % 88.4 % 87.6 % 88.6 % Professional services and other 13.3 11.6 12.4 11.4 Total revenue 100.0 100.0 100.0 100.0 Cost of revenue: Subscription and support 19.1 28.1 19.2 28.7 Professional services and other 15.4 13.9 15.2 13.6 Total cost of revenue 34.5 42.0 34.4 42.3 Gross margin: Subscription and support 67.6 60.3 68.4 59.9 Professional services and other -2.1 -2.2 -2.8 -2.2 Total gross margin 65.5 58.0 65.6 57.7 Operating expenses: Research and development 20.0 26.6 21.0 26.0 Sales and marketing 66.0 68.8 64.6 65.8 General and administrative 15.9 17.2 17.5 17.3 Total operating expenses 101.9 112.6 103.1 109.1 Loss from operations -36.4 -54.6 -37.4 -51.4 Other income (expense), net -0.5 -0.4 -0.4 -0.3 Loss before provision for income taxes -36.9 -55.0 -37.8 -51.8 Provision (benefit) for income taxes 0.0 0.1 0.0 0.1 Net loss -36.8 -55.1 -37.7 -51.9 Net loss attributable to redeemable non-controlling interests 0.4 0.0 0.2 0.0 Net loss attributable to Marketo -36.4 % -55.1 % -37.5 % -51.9 % Percentages are based on actual values. Totals may not sum due to rounding.

Percentages are based on actual values. Totals may not sum due to rounding.

Revenue Three Months Six Months Ended June 30, Ended June 30, (in thousands, except percentages) 2014 2013 $ Change % Change 2014 2013 $ Change % Change Revenues: Subscription and support $ 31,236 $ 19,883 $ 11,353 57.1 % $ 59,847 $ 37,438 $ 22,409 59.9 % Professional services and other 4,794 2,621 2,173 82.9 8,475 4,802 3,673 76.5 Total revenue $ 36,030 $ 22,504 $ 13,526 60.1 % $ 68,322 $ 42,240 $ 26,082 61.7 % Percentage of revenues: Subscription and support 86.7 % 88.4 % 87.6 % 88.6 % Professional services and other 13.3 % 11.6 % 12.4 % 11.4 % Total 100.0 % 100.0 % 100.0 % 100.0 % Total revenue increased $13.5 million, or 60%, during the second quarter of 2014 compared to the comparable period in 2013, due to the increase in subscription and support revenue of $11.4 million and an increase in professional services revenue of $2.2 million. During the six month period ended June 30, 2014, total revenue increased $26.1 million, or 62%, compared to the comparable period in 2013, due to the increase in subscription and support revenue of $22.4 million and an increase in professional services revenue of $3.7 million.

The increase in subscription and support revenue was primarily attributable to (1) growth in our total customer count primarily from the SMB market, (2) growth in both usage rights (driven by higher use, consumption and/or database size of our products used by existing customers) and cross sell of additional products either during the term of their subscription or at the point of renewal of their subscription and (3) higher customer retention rates.

24 -------------------------------------------------------------------------------- Table of Contents Of the total increase in subscription and support revenue for the second quarter of 2014, 62% was attributable to revenue from new customers acquired from July 1, 2013 through June 30, 2014, and 38% was attributable to revenue from customers existing on or before June 30, 2013.

The increase in professional services revenue resulted from increased demand of services across our customer base. We expect professional services revenue to continue to grow as we continue to grow our customer base, and as we sell follow-on services, training, education and optimization of our products to our installed base.

Cost of Revenue and Gross Margin Three Months Six Months Ended June 30, Ended June 30, (in thousands, except percentages) 2014 2013 $ Change % Change 2014 2013 $ Change % Change Cost of revenue: Subscription and support $ 6,876 $ 6,321 $ 555 8.8 % $ 13,111 $ 12,141 $ 970 8.0 % Professional services and other 5,540 3,121 2,419 77.5 10,381 5,739 4,642 80.9 Total cost of revenue $ 12,416 $ 9,442 $ 2,974 31.5 % $ 23,492 $ 17,880 $ 5,612 31.4 % Gross margin: Subscription and support 78.0 % 68.2 % 78.1 % 67.6 % Professional services and other -15.6 % -19.1 % -22.5 % -19.5 % Total gross margin 65.5 % 58.0 % 65.6 % 57.7 % Cost of subscription and support increased due to the following (in thousands): Change Three Six Months Months Depreciation and amortization $ 745 $ 1,569 Personnel-related costs 676 1,384 Software subscription 230 436 Hosting costs (1,640 ) (3,140 ) Various other items 544 721 $ 555 $ 970 The increase in cost of subscription and support for the three and six month ended June 30, 2014 primarily reflects an increase in depreciation and amortization expense and personnel-related costs (salary, benefits and stock-based compensation). The increase in depreciation and amortization expense and software subscription expense reflects the completion of our transition to our U.S. based co-location data center facilities at the end of fiscal 2013, where we now manage our own computer equipment and systems. The increase in salary and benefit costs primarily reflects an increase in headcount directly associated with our cloud infrastructure, customer support and customer success organizations to support our customer growth, while the increase in stock-based compensation reflects grants of additional equity awards to existing employees and of equity awards to new employees. These increases were offset by a decrease in hosting costs for the three and six months ended June 30, 2014 as compared to the corresponding period in 2013 as a result of our decreased use of a managed hosting service provider due to the completion of the transition to our own U.S.

based co-location data center facilities.

Our subscription and support gross margin were 78.0% and 68.2% for the three months ended June 30, 2014 and 2013, respectively, and 78.1% and 67.6% for the six months ended June 30, 2014 and 2013, respectively. The increase in subscription and support gross margin for the three and six months ended June 30, 2014 primarily reflects the transition to our own co-location data center facilities from a managed hosting service provider which we completed at the end of fiscal 2013.

25 -------------------------------------------------------------------------------- Table of Contents Cost of professional services and other increased due to the following (in thousands): Change Three Six Months Months Personnel-related costs $ 1,639 $ 2,992 Consulting 566 1,132 Various other items 214 518 $ 2,419 $ 4,642 The increase in cost of professional services and other during the three and six months ended June 30, 2014 was due primarily to an increase in personnel-related costs (salary, commissions, benefits and stock-based compensation) and consulting costs. The increase in salary and benefit costs primarily reflects an increase in headcount as we continue to grow our professional services organization to support demand for expert marketing services, while the increase in stock-based compensation reflects grants of additional equity awards to existing employees and of equity awards to new employees. Additionally, consulting costs increased as a result of increased usage of outside contractors to supplement our existing staff.

Our professional services and other gross margin were (15.6)% and (19.1)% for the three months ended June 30, 2014 and 2013, respectively, and (22.5)% and (19.5)% for the six months ended June 30, 2014 and 2013, respectively. The improvement in gross margin for the three months ended June 30, 2014 was due to higher billable utilization of professional services consultants. While our overall utilization of professional services consultants was higher for the six months ended June 30, 2014, the increase in personnel-related costs, primarily associated with stock-based compensation, had a negative impact on gross margins.

We expect that cost of revenue may increase in the future depending on the growth rate of new customer acquisition. We also expect that cost of revenue as a percentage of total revenue could fluctuate from period to period depending on growth of our professional services business and any associated costs relating to the delivery of professional services, the timing of sales of products that have royalties associated with them and the timing of significant expenditures.

Research and Development Three Months Six Months Ended June 30, Ended June 30, (in thousands, except percentages) 2014 2013 $ Change % Change 2014 2013 $ Change % Change Research and development $ 7,198 $ 5,985 $ 1,213 20.3 % $ 14,329 $ 10,981 $ 3,348 30.5 % Percentage of total revenue 20.0 % 26.6 % 21.0 % 26.0 % Research and development expenses increased due to the following (in thousands): Change Three Six Months Months Personnel-related costs $ 668 $ 2,442 Depreciation and amortization 281 554 Various other items 264 352 $ 1,213 $ 3,348 The increase in research and development expenses during the three and six months ended June 30, 2014 was primarily due to an increase in personnel-related costs (salary, bonuses, benefits and stock-based compensation). The increase in salary and benefit costs primarily reflects the increase in headcount to help continue the enhancement of our existing product suite and to a lesser extent, an increase in headcount from our acquisition of Insightera in December 2013, while the increase in stock-based compensation reflects grants of additional equity awards to existing employees and of equity awards to new employees. The increase in depreciation and amortization expense is driven by growth in depreciable assets.

We believe that continued investment in our technology is important for our future growth, and, as a result, we expect research and development expenses to increase in absolute dollars, and increase modestly as a percentage of total revenue for the remainder of 2014.

26 -------------------------------------------------------------------------------- Table of Contents Sales and Marketing Three Months Six Months Ended June 30, Ended June 30, (in thousands, except percentages) 2014 2013 $ Change % Change 2014 2013 $ Change % Change Sales and marketing $ 23,786 $ 15,488 $ 8,298 53.6 % $ 44,154 $ 27,806 $ 16,348 58.8 % Percentage of total revenue 66.0 % 68.8 % 64.6 % 65.8 % Sales and marketing expenses increased due to the following (in thousands): Change Three Six Months Months Personnel-related expenses $ 5,136 $ 10,620 Marketing programs 1,816 3,283 Facilities and IT allocation 430 949 Travel and entertainment 564 639 Various other items 352 857 $ 8,298 $ 16,348 The increase in sales and marketing expenses during the three and six months ended June 30, 2014 was due primarily to an increase in personnel-related costs (salary, benefits, stock-based compensation and commission expense). The increase in salary and benefit costs was primarily driven by an increase in headcount for our sales, marketing and business development employees and executives. The increase in stock-based compensation reflects grants of additional equity awards to existing employees and of equity awards to new employees and the increase in commission expense primarily reflects an increase in new customer acquisitions. The increase in marketing program costs reflects increased activity to support growth in our business. The increase in the allocation of facility and IT expenses was due principally to headcount growth in the sales and marketing department as compared to other departments and overall higher IT and facilities expenses. The increase in travel costs reflects increased international sales and marketing efforts.

We expect sales and marketing expenses to increase in absolute dollars and remain our largest expense in absolute dollars and as a percentage of total revenue, although they may fluctuate as a percentage of total revenue for the remainder of 2014.

General and Administrative Three Months Six Months Ended June 30, Ended June 30, (in thousands, except percentages) 2014 2013 $ Change % Change 2014 2013 $ Change % Change General and administrative $ 5,731 $ 3,876 $ 1,855 47.9 % $ 11,923 $ 7,303 $ 4,620 63.3 % Percentage of total revenue 15.9 % 17.2 % 17.5 % 17.3 % General and administrative expenses increased due to the following (in thousands): Change Three Six Months Months Personnel-related costs $ 1,517 $ 3,270 Professional services 218 862 Various other items 120 488 $ 1,855 $ 4,620 The increase in general and administrative expenses during the three and six months ended June 30, 2014 was primarily due to increased personnel-related costs (salary, benefits and stock-based compensation). The increase in salary and benefit costs was primarily driven by an increase in headcount for our administrative, legal, human resources, finance and accounting departments, while the increase in stock-based compensation reflects grants of additional equity awards to existing employees and of equity awards to new employees. The increase in professional services represents increases in both legal and accounting fees, primarily from supporting our international expansion, our Sarbanes-Oxley compliance efforts and integration costs associated with our acquisition of Insightera.

27 -------------------------------------------------------------------------------- Table of Contents We expect that our general and administrative expenses will increase in absolute dollars and as a percentage of revenues as we continue to expand our business and infrastructure to support being a public company although they may fluctuate as a percentage of total revenue for the remainder of 2014.

Liquidity and Capital Resources To date, we have financed our operations through cash collected from customers as well as preferred equity financings, our IPO and concurrent private placement completed in May 2013, and our follow-on public offering completed in September 2013. We also maintain a credit facility. As of June 30, 2014 and December 31, 2013, we had cash and cash equivalents of $119.7 million and $128.3 million, respectively, most of which was held in money market accounts.

In May 2012, we entered into a loan and security agreement with a bank related to a credit facility providing us with an equipment line of up to $4.0 million.

In June 2013 we entered into a first amendment to the loan and security agreement, which provided an additional line of credit for advances of up to $4.5 million. The interest rate associated with both lines of credit is the greater of 4% or 0.75 of a percentage point above the bank's prime rate, as determined on the applicable funding date. For each equipment loan advance, we pay interest only for approximately nine months. Subsequently, we make thirty-six equal monthly payments of principal and interest. In May 2014 we entered into a second amendment to revise the existing covenants associated with this facility. As of June 30, 2014, we were in compliance with these revised covenants. As of June 30, 2014 and December 31, 2013, the outstanding loan balance was $6.7 million and $7.6 million, respectively. See Note 7 - Credit Facility to our Condensed Consolidated Financial Statements for a discussion of our credit facility.

A substantial source of our cash flow from operating activities results from changes in our deferred revenue balance, which is included on our consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of billed fees for our software subscriptions and professional services and is amortized into revenue in accordance with our revenue recognition policy. As of June 30, 2014 and December 31, 2013, we had working capital of $77.7 million and $88.3 million, respectively, which included $53.2 million and $41.4 million of deferred revenue recorded as a current liability, respectively. The decrease in our working capital at June 30, 2014 is primarily due to our net cash used in operating activities, partially offset by proceeds received for common stock issued upon exercise of stock options and under our employee stock purchase plan and the investment we received from the redeemable non-controlling interests holders in our Japan joint venture.

We assess our liquidity primarily through our cash on hand as well as the projected timing of billings under contract with our customers and related collection cycles. We believe our current cash and cash equivalents, cash to be received from existing and new customers will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

Our future capital requirements will depend on many factors, including revenue growth and costs incurred to support customer growth, international expansion, research and development, litigation, increased general and administrative expenses to support the anticipated growth in our operations, including being a public company, capital equipment required to support our growing headcount and equipment required in connection with our co-location data center facilities which we manage and own. Our capital expenditures in future periods are expected to grow in line with our business. To the extent that existing cash and cash from operations are not sufficient to fund our future operations, we may need to raise additional funds through public or private equity or additional debt financing. Although we currently are not a party to any agreement and do not have any understanding with any third parties with respect to potential investments in, or acquisitions of, businesses or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

The table below provides selected cash flow information for the periods indicated (in thousands): Six Months Ended June 30, 2014 2013 Net cash used in operating activities $ (9,644 ) $ (5,071 ) Net cash used in investing activities (4,667 ) (6,084 ) Net cash provided by financing activities 5,635 88,842 Net increase (decrease) in cash and cash equivalents, net of impact of foreign exchange rates on cash (8,585 ) 77,635 28 -------------------------------------------------------------------------------- Table of Contents Net Cash Used in Operating Activities Cash used in operating activities is significantly influenced by the amount of cash we invest in personnel to support the anticipated growth of our business, the increase in the number of customers using our cloud-based software and services, the amount and timing of customer payments and variable compensation such as bonus and commissions payments. Cash used in operating activities has historically come from a net loss driven by sales of subscriptions to our solutions and adjusted for non-cash expense items, such as depreciation and amortization of property and equipment, stock-based compensation and acquired intangible assets. The percentage of customers that pay quarterly rather than annually varies from quarter to quarter. The percentage of customers who pay us quarterly has a material impact on our net cash used in operating activities.

Our cash used in operating activities during the six ended June 30, 2014 primarily reflected our net loss of $25.8 million, offset by non-cash expenses that included $4.3 million of depreciation and amortization and $10.9 million in stock-based compensation. Cash outflows resulting from changes in assets and liabilities included a decrease in accrued expenses and other current liabilities and increases in accounts receivable and prepaid expenses and other current assets. The decrease in accrued expenses and other current liabilities of $5.8 million primarily reflected cash payments of fiscal 2013 liabilities including year-end bonuses and commissions. The increase in prepaid expenses and other current assets of $2.2 million primarily reflected prepaid costs related to amounts paid for annual subscription software services and prepaid insurance.

While days' sales outstanding (DSO) decreased from 87 days in the fourth quarter of 2013 to 75 days in the second quarter of 2014, accounts receivable increased by $2.7 million due to a higher level of sales and the timing of billings in the second quarter of 2014. These cash outflows were partially offset by an increase in deferred revenue of $11.8 million, which primarily reflected the addition of new customers and to a lesser extent, cross sell of additional products to existing customers.

Our cash used in operating activities during the six months ended June 30, 2013 primarily reflected our net loss of $21.9 million, offset by non-cash expenses that included $1.8 million of depreciation and amortization and $3.6 million in stock-based compensation. Working capital sources of cash included a $9.9 million increase in deferred revenue resulting primarily from the addition of new customers and the customer mix of more annual versus quarterly billing invoiced during the period and a $3.0 million increase accrued expenses and other current liabilities primarily resulting from an increase in accrued commissions costs. These sources of cash were partially offset by a $2.9 million increase in accounts receivable. While our DSO improved from 81 days during the second quarter of 2012 to 69 days during the second quarter of 2013, our accounts receivable balance experienced an overall increase as a result of higher customer billings related to the increase in the number of customers during the period and an increase in annual billings.

Net Cash Used in Investing Activities For the six months ended June 30, 2014, cash used in investing activities of $4.7 million consisted of $4.3 million for the purchases of property and equipment, primarily associated with an increase in equipment in our co-location data center facilities as we continue to expand capacity and to a lesser extent, increases associated with our higher employee headcount and supporting general growth in our business and capitalized software development costs of $0.4 million.

For the six months ended June 30, 2013, cash used in investing activities of $6.1 million consisted of $5.9 million for the purchases of property and equipment, primarily associated with our transition from a managed hosting service provider to co-location data center facilities for which we are purchasing and managing our own computer equipment and system and to a lesser extent, an increase in computer equipment, furniture and fixtures and leasehold improvements associated with supporting our increasing employee headcount and capitalized software development costs of $0.2 million.

Net Cash Provided By Financing Activities For the six months ended June 30, 2014, cash provided by financing activities of $5.7 million consisted of $3.4 million of proceeds from the issuance of common stock under our employee stock purchase plan, $3.3 million of proceeds received from the issuance of common stock upon the exercise of stock options and $2.0 million of investment proceeds received from our redeemable non-controlling interest holders in our Japan joint venture. These increases were partially offset by $1.7 million to satisfy withholding taxes on equity awards that are net share settled, $0.9 million related to repayments under our credit facility, $0.1 million in cash payments related to costs associated with our follow-on offering and $0.3 million in cash payments related to the registration of common stock issued in connection with our acquisition of Insightera during the fourth quarter of 2013.

For the six months ended June 30, 2013, cash provided by financing activities of $88.8 million consisted of IPO proceeds of $80.5 million, net of paid underwriter discounts, proceeds of $6.5 million from the completion of our private placement offering, $3.1 million in proceeds from borrowings under the credit facility and $1.4 million from proceeds received from the issuance of common stock upon the exercise of stock options, partially offset by $2.5 million in cash payments related to costs associated with our IPO and $0.1 million related to the repayment of our credit facility.

29 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Significant Judgments and Estimates Our management's discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes in our critical accounting policies and estimates during the first six months of 2014 as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our most recent Annual Report on Form 10-K.

Recent Accounting Pronouncements In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This amendment clarifies the guidance on the presentation of an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The adoption of this update in the first quarter of 2014 did not have a material impact to our consolidated financial position, results of operations, or cash flows.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 also specifies the accounting for some costs to obtain or fulfill a contract with a customer. The new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

Contractual Obligations and Commitments Our primary contractual obligations are from our operating leases, a credit facility and other contractual commitments. See Note 7 - Credit Facility to our condensed consolidated financial statements for a discussion of our credit facility. Except as set forth below, there were no material changes in our commitments under contractual obligations, as disclosed in the Company's audited consolidated financial statements for the year ended December 31, 2013.

In May 2014, we amended our lease agreement associated with our pre-existing building space in San Mateo, California, whereby we agreed to lease additional space of 14,864 square feet and extend the lease term of our pre-existing space through the end of August 2018. The amended lease agreement has increased the future minimum lease payments by approximately $9.3 million.

In May 2014, we entered into a definitive lease agreement whereby we will lease approximately 7,245 square feet of office space in Atlanta, Georgia. Our future minimum lease payments under this agreement are approximately $1.1 million, payable over the sixty-six month term of the lease.

30 -------------------------------------------------------------------------------- Table of Contents As of June 30, 2014, future minimum operating lease payments are as follow (in thousands): 2014 (remaining 6 months) $ 2,243 2015 4,474 2016 4,638 2017 4,742 2018 3,237 Thereafter 205 Total $ 19,539 Additionally, in May 2014, we entered into a hosting service agreement with a vendor. Our contractual obligation under this agreement is approximately $1.8 million, payable over the thirty-six month term of the agreement.

Off-Balance Sheet Arrangements During the six months ended June 30, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.

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