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LOGMEIN, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following discussion and analysis of our financial condition
and results of operations together with our consolidated financial statements
and the related notes and other financial information included elsewhere in this
Annual Report on Form 10-K. Some of the information contained in this discussion
and analysis or set forth elsewhere in this Annual Report on Form 10-K,
including information with respect to our plans and strategy for our business
and related financing, includes forward-looking statements that involve risks
and uncertainties. You should review the "Risk Factors" section of this Annual
Report on Form 10-K for a discussion of important factors that could cause
actual results to differ materially from the results described in or implied by
the forward-looking statements contained in the following discussion and
analysis.
Overview
LogMeIn provides essential cloud-based collaboration, IT management, and
customer service offerings aimed at addressing the evolving multi-device,
security, management, and accessibility requirements of the new mobile
workplace. Our solutions are used by tens of millions of professionals to work
from virtually anywhere on virtually any Internet-enabled device. Hundreds of
thousands of small and medium businesses use our solutions to manage distributed
work environments, embrace employee-owned technology in the workplace and
facilitate collaboration across distributed teams. Thousands of service
providers, including more than 50 of the world's largest telecommunications
providers, use our solutions to service and support businesses and individual
professionals across mobile, social and online channels. Our services range from
free downloadable apps to state-of-the-art SaaS-based professional helpdesk
solutions and are accessible from anywhere with an Internet connection. With
tens of millions of users and hundreds of millions of sessions, we believe our
cloud-services are used to connect more Internet-enabled devices worldwide -
smartphones, tablets, PCs, Macs and sensor-enabled devices - than any other
connectivity platform on the market.
We offer seven free services and ten premium services. Sales of our premium
services are generated through word-of-mouth referrals, web-based advertising,
expiring free trials that we convert to paid subscriptions and direct marketing
to new and existing customers.
We derive our revenue principally from subscription fees from SMBs, IT service
providers, mobile carriers, customer service centers, OEMs, and consumers. The
majority of our customers subscribe to our services on an annual basis. Our
revenue is driven primarily by the number and type of our premium services for
which our paying customers subscribe. For the year ended December 31, 2012, we
generated revenues of $138.8 million, compared to $119.5 million for the year
ended December 31, 2011, an increase of approximately 16%.
In addition to selling our services to end users, we entered into a service and
marketing agreement with Intel Corporation in December 2007 pursuant to which we
adapted our service delivery platform, Gravity, to work with specific technology
delivered with Intel hardware and software products. The agreement provided that
Intel market and sell the services to its customers. Intel paid us a minimum
license and service fee on a quarterly basis during the term of the agreement,
and we shared with Intel revenue generated by the use of the services by third
parties to the extent it exceeded certain minimum payments. We began recognizing
revenue associated with the Intel service and marketing agreement in the quarter
ended September 30, 2008 upon receipt of customer acceptance. In September 2010,
Intel notified us that it intended to terminate the connectivity service and
marketing agreement effective on December 26, 2010. In accordance with the
termination provisions of the agreement, Intel paid us a one-time termination
fee of $2.5 million and did not owe us any of the $5.0 million in fees
associated with 2011, the final year of the agreement. During the year ended
December 31, 2010, we recognized $9.6 million in revenue from this agreement,
which includes the $2.5 million termination fee which was paid in December 2010.
Through December 31, 2012, we have primarily funded our operations through the
sale of common stock in connection with our initial and secondary offerings
which resulted in proceeds of $85.7 million, the sale of redeemable convertible
preferred stock which resulted in proceeds of approximately $27.8 million and
cash flows from operations. We earned net income of $21.1 million for 2010, $5.8
million for 2011, and $3.6 million for 2012. We expect to continue making
significant future expenditures to develop and expand our business.
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Certain Trends and Uncertainties
The following represents a summary of certain trends and uncertainties, which
could have a significant impact on our financial condition and results of
operations. This summary is not intended to be a complete list of potential
trends and uncertainties that could impact our business in the long or short
term. The summary, however, should be considered along with the factors
identified in the section titled "Risk Factors" of this Annual Report on Form
10-K.
• We continue to closely monitor current adverse economic conditions,
particularly as they impact SMBs, IT service providers and consumers. We
are unable to predict the likely duration and severity of the current
adverse economic conditions in the United States and other countries, but
the longer the duration the greater risks we face in operating our
business.
• We believe that competition will continue to increase. Increased competition could result from existing competitors or new competitors that
enter the market because of the potential opportunity. We will continue to
closely monitor competitive activity and respond accordingly. Increased
competition could have an adverse effect on our financial condition and
results of operations.
• We believe that as we continue to grow revenue at expected rates, our cost
of revenue and operating expenses, including sales and marketing, research
and development and general and administrative expenses will increase in
absolute dollar amounts. For a description of the general trends we
anticipate in various expense categories, see "Cost of Revenue and
Operating Expenses" below.
• There is frequent litigation in the software and technology industries
based on allegations of infringement or other violations of intellectual
property rights. We have been, and may in the future be, subject to third
party patent infringement or other intellectual property-related lawsuits
as we face increasing competition and become increasingly visible. Any
adverse determination related to intellectual property claims or litigation
could adversely affect our business, financial condition and operating
results.
Sources of Revenue
We derive our revenue principally from subscription fees from SMBs, IT service
providers, mobile carriers, customer service centers, OEMs and consumers. Our
revenue is driven primarily by the number and type of our premium services for
which our paying customers subscribe and is not concentrated within one customer
or group of customers. The majority of our customers subscribe to our services
on an annual basis and pay in advance, typically with a credit card, for their
subscription. A smaller percentage of our customers subscribe to our services on
a monthly basis through either month-to-month commitments or annual commitments
that are then paid monthly with a credit card. We initially record a
subscription fee as deferred revenue and then recognize it ratably, on a daily
basis, over the life of the subscription period. Typically, a subscription
automatically renews at the end of a subscription period unless the customer
specifically terminates it prior to the end of the period.
In addition to our subscription fees, to a lesser extent, we generate revenue
from license and annual maintenance fees from the licensing of our
RemotelyAnywhere product. We license RemotelyAnywhere to our customers on a
perpetual basis. Because we do not have vendor specific objective evidence of
fair value, or VSOE, for our maintenance arrangements, we record the initial
license and maintenance fee as deferred revenue and recognize the fees as
revenue ratably, on a daily basis, over the initial maintenance period. We also
initially record maintenance fees for subsequent maintenance periods as deferred
revenue and recognize revenue ratably, on a daily basis, over the maintenance
period. We also generate revenue from the license of our Ignition for iPhone,
iPad and Android product, which is sold as a perpetual license and is recognized
as delivered. In the fourth quarter of 2011, we introduced LogMeIn for iOS, a
free app for iPhones and iPads, to the Apple App Store and changed our Ignition
for iPhone and iPad business model from a perpetually-based licensing model to a
subscription-based business model. We believe this change will have a positive
impact on our business, but short-term the business model change has impacted
the revenue recognized from our Ignition product.
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Employees
We have increased our number of full-time employees to 575 at December 31, 2012
as compared to 482 at December 31, 2011.
Cost of Revenue and Operating Expenses
We allocate certain overhead expenses, such as rent and utilities, to expense
categories based on the headcount in or office space occupied by personnel in
that expense category as a percentage of our total headcount or office space. As
a result, an overhead allocation associated with these costs is reflected in the
cost of revenue and each operating expense category.
Cost of Revenue. Cost of revenue consists primarily of costs associated with
our data center operations and customer support centers, including wages and
benefits for personnel, telecommunication and hosting fees for our services,
equipment maintenance, software license and maintenance fees and depreciation.
Additionally, amortization expense associated with the acquired software and
technology as well as internally developed software is included in cost of
revenue. The expenses related to hosting our services and supporting our free
and premium customers is related to the number of customers who subscribe to our
services and the complexity and redundancy of our services and hosting
infrastructure. We expect cost of revenue expenses to increase in absolute
dollars but remain relatively constant as a percentage of revenue as we continue
to increase our number of customers over time.
Research and Development. Research and development expenses consist primarily
of wages and benefits for development personnel, professional fees associated
with outsourced development projects, facilities rent and depreciation
associated with assets used in development. We have focused our research and
development efforts on both improving ease of use and functionality of our
existing services, as well as developing new offerings. The majority of our
research and development employees are located in our development centers in
Europe. Therefore, a majority of research and development expense is subject to
fluctuations in foreign exchange rates. The majority of research and development
costs have been expensed as incurred. However, we capitalized approximately $0.7
million and $0.3 million for the years ended December 31, 2012 and 2011,
respectively, of costs related to internally developed computer software to be
sold as a service, which was incurred during the application development stage.
We expect that research and development expenses will increase in absolute
dollars but remain relatively constant as a percentage of revenue primarily as a
result of an increase in stock-based compensation offset by lower contingent
payment costs associated with acquisitions and as we continue to enhance and
expand our services and invest in research and development.
Sales and Marketing. Sales and marketing expenses consist primarily of online
search and advertising costs, wages, commissions and benefits for sales and
marketing personnel, offline marketing costs such as media advertising and trade
shows, professional fees and credit card processing fees. Online search and
advertising costs consist primarily of pay-per-click payments to search engines
and other online advertising media such as banner ads. Offline marketing costs
include radio and print advertisements as well as the costs to create and
produce these advertisements, and tradeshows, including the costs of space at
tradeshows and costs to design and construct tradeshow booths. Advertising costs
are expensed as incurred. In order to continue to grow our business and
awareness of our services, we expect that we will continue to commit resources
to our sales and marketing efforts. We expect that sales and marketing expenses
will increase in both absolute dollars and as a percentage of revenue.
General and Administrative. General and administrative expenses consist
primarily of wages and benefits for management, human resources, internal IT
support, finance and accounting personnel, professional fees, insurance and
other corporate expenses. We expect general and administrative expenses to
increase primarily due to the significant legal costs associated with our
continued defense against the patent infringement claims made by 01 Communique
and the declaratory judgment action we filed against Pragmatus. Additionally,
general and administrative expenses will increase as we continue to add
personnel, enhance our internal information systems, incur additional expenses
related to audit, accounting and insurance costs. We expect that our general and
administrative expenses will significantly increase in both absolute dollars and
as a percentage of revenue primarily related to defending the patent
infringement claims made by 01.
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Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of our
financial statements and related disclosures requires us to make estimates,
assumptions and judgments that affect the reported amount of assets,
liabilities, revenue, costs and expenses, and related disclosures. We base our
estimates and assumptions on historical experience and other factors that we
believe to be reasonable under the circumstances. We evaluate our estimates and
assumptions on an ongoing basis. Our actual results may differ from these
estimates under different assumptions and conditions. Our most critical
accounting policies are summarized below. See Note 2 to our financial statements
included elsewhere in this Annual Report on Form 10-K for additional information
about these critical accounting policies, as well as a description of our other
significant accounting policies.
Revenue Recognition. We derive our revenue primarily from subscription fees
related to our premium services, the licensing of our Ignition for iPhone, iPad
and Android software products, and the licensing of our RemotelyAnywhere
software and its related maintenance.
Revenue from our premium subscription services is recognized on a daily basis
over the subscription term as the services are delivered, provided that there is
persuasive evidence of an arrangement, the fee is fixed or determinable and
collectability is deemed reasonably assured. Subscription periods range from
monthly to five years, but are generally one year in duration. Our software
cannot be run on another entity's hardware nor do customers have the right to
take possession of the software and use it on their own or another entity's
hardware.
Revenue from the sales of our Ignition for iPhone, iPad and Android software
product, which is sold as a perpetual license, is recognized when there is
persuasive evidence of an arrangement, the product has been provided to the
customer, the collection of the fee is probable, and the amount of the fees to
be paid by the customer is fixed and determinable.
Our multi-element arrangements typically include subscription and professional
services, which may include development services. We evaluate each element
within the arrangement to determine if they can be accounted for as separate
units of accounting. If the delivered item or items have value to the customer
on a standalone basis, either because they are sold separately by any vendor or
the customer could resell the delivered item or items on a standalone basis, we
have determined that the deliverables within these arrangements qualify for
treatment as separate units of accounting. Accordingly, we recognize revenue for
each delivered item or items as a separate earnings process commencing when all
of the significant performance obligations have been performed and when all the
revenue recognition criteria have been met. In cases where we have determined
that the delivered items within our multi-element arrangements do not have value
to the customer on a stand-alone basis, the arrangement is accounted for as a
single unit of accounting and the total consideration is recognized ratably over
the term of the related agreement, or the estimated customer life, commencing
when all of the significant performance obligations have been delivered and when
all the revenue recognition criteria have been met.
Income Taxes. We are subject to federal, state, and foreign income taxes for
jurisdictions in which we operate, and we use estimates in determining our
provision for these income taxes and deferred tax assets. Deferred tax assets,
related valuation allowances, current tax liabilities and deferred tax
liabilities are determined separately by tax jurisdiction. In making these
determinations, we estimate deferred tax assets, related valuation allowances,
current tax liabilities and deferred tax liabilities, and we assess temporary
differences resulting from differing treatment of items for tax and accounting
purposes. At December 31, 2012 and 2011, our deferred tax assets consisted
primarily of net operating losses, research and development credit
carryforwards, and stock option compensation expense. We assess the likelihood
that deferred tax assets will be realized, and we recognize a valuation
allowance if it is more likely than not that some portion of the deferred tax
assets will not be realized. This assessment requires judgment as to the
likelihood and amounts of future taxable income by tax jurisdiction. During
2010, we reassessed the need for a valuation allowance against our deferred tax
assets and concluded that it was more likely than not that we would be able to
realize certain of our deferred tax assets primarily as a result of continued
profitability, achieving three years of cumulative profitability and forecasted
future earnings. Accordingly, we reversed the valuation allowance related to our
U.S. and certain foreign deferred tax assets of $8.6 million during the year
ended December 31, 2010. As of December 31, 2012 and 2011, we maintained a full
valuation allowance against the deferred tax assets of our Hungarian subsidiary.
This entity has historical losses and we concluded it was not more likely than
not that these deferred tax assets are realizable.
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During 2012, we reassessed the need for a valuation allowance against our
deferred tax assets related to our Cosm subsidiary and concluded that we would
be able to realize the deferred tax assets as a result of projected future
profitability. Accordingly, we reversed the valuation allowance related to our
Cosm subsidiary of approximately $677,000 during the year ended December 31,
2012.
We evaluate our uncertain tax positions based on a determination of whether and
how much of a tax benefit we have taken in our tax filings or positions is more
likely than not to be realized. Potential interest and penalties associated with
any uncertain tax positions are recorded as a component of income tax expense.
As of December 31, 2012, we provided a liability of approximately $251,000 for
uncertain tax positions. Although we believe that our tax estimates are
reasonable, the ultimate tax determination involves significant judgment that is
subject to audit by tax authorities in the ordinary course of business.
On January 2, 2013, President Barack Obama signed into law the American Taxpayer
Relief Act of 2012. This law extended the federal research and development tax
credit for the year ended December 31, 2012. Since the law was signed after
December 31, 2012, we will record a federal income tax benefit of approximately
$140,000 related to the R&D tax credit in the 2013 financial statements.
Goodwill and acquired intangible assets. We record goodwill as the excess of
the acquisition price over the fair value of the net tangible and identifiable
intangible assets acquired. We do not amortize goodwill, but perform an annual
impairment test of goodwill on the last day of our fiscal year and whenever
events and circumstances indicate that the carrying amount of goodwill may
exceed its fair value. We operate as a single operating segment with one
reporting unit and consequently evaluate goodwill for impairment based on
an evaluation of the fair value of the Company as a whole. As of December 31,
2012, our fair value as a whole significantly exceeds our carrying value. No
impairments have been recorded through December 31, 2012.
We record intangible assets at their respective estimated fair values at the
date of acquisition. Intangible assets are amortized based upon the pattern in
which their economic benefit will be realized, or if this pattern cannot be
reliably determined, using the straight-line method over their estimated useful
lives, which range from one to seven years.
Stock-Based Compensation. Share-based awards are accounted for at fair value,
which requires us to recognize compensation expense for all share-based awards
granted, modified, repurchased or cancelled on or after January 1, 2006. These
costs are recognized on a straight-line basis over the requisite service period
for all time-based vested awards.
The assumptions used in determining the fair value of share-based awards
represent management's best estimates, but these estimates involve inherent
uncertainties and the application of management's judgment. As a result, if
factors change, and we use different assumptions, our share-based compensation
could be materially different in the future. The risk-free interest rate used
for each grant is based on a U.S. Treasury instrument with a term similar to the
expected term of the share-based award. The expected term of options has been
estimated utilizing the vesting period of the option, the contractual life of
the option and our option exercise history. We estimate the expected volatility
of our common stock at the date of grant based on the historical volatility of
comparable public companies over the option's expected term as well as our own
stock price volatility since our IPO. We recognize compensation expense for only
the portion of options that are expected to vest. Accordingly, we have estimated
expected forfeitures of stock options based on our historical forfeiture rate
and we use these rates to develop future forfeiture rates. If our actual
forfeiture rate varies from our historical rates and estimates, additional
adjustments to compensation expense may be required in future periods. Past fair
value of option grants may not be a reliable indicator of future fair values as
assumptions such as volatility may change over time.
Loss Contingencies. We are currently involved in various legal claims and legal
proceedings and may be subject to additional legal claims and proceedings in the
future that arise in the ordinary course of business. We consider the likelihood
of a loss or the incurrence of a liability, as well as our ability to reasonably
estimate the amount of loss, in determining loss contingencies. An estimated
loss contingency is accrued when we believe that it is both probable that a
liability has been incurred and the amount of loss can be reasonably estimated.
Significant judgment is required to determine both probability and the estimated
amount. We regularly evaluate current information available and reflect the
impact of negotiations, settlements, rulings, advice of legal counsel, and
updated information to determine whether such accruals should be adjusted and
whether new accruals are required and update our disclosures accordingly.
Litigation is inherently unpredictable and is subject to sig-
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nificant uncertainties, some of which are beyond our control. Should any of
these estimates and assumptions change or prove to have been incorrect, it could
have a material adverse effect on our results of operations, financial position
and cash flows. See Note 12 to the Consolidated Financial Statements in Part II,
Item 8 for a further discussion of litigation and contingencies as well as
"Legal Proceedings" in Part I, Item 3.
Results of Consolidated Operations
The following table sets forth selected consolidated statements of operations
data for each of the periods indicated as a percentage of total revenue.
Years Ended December 31,
2010 2011 2012
Operations Data:
Revenue 100 % 100 % 100 %
Cost of revenue 9 9 10
Gross profit 91 91 90
Operating expenses:
Research and development 15 17 19
Sales and marketing 46 48 51
General and administrative 12 17 15
Legal settlements - 1 -
Amortization of acquired intangibles - - -
Total operating expenses 73 83 85
Income from operations 18 8 5
Interest and other income (expense), net - - -
Income before income taxes 18 8 5
Benefit from (provision for) income taxes 3 (3 ) (2 )
Net income 21 % 5 % 3 %
Years Ended December 31, 2012 and 2011
Revenue. Revenue for the year ended December 31, 2012 was $138.8 million, an
increase of $19.4 million, or 16%, over revenue of $119.5 million for the year
ended December 31, 2011. Of the 16% increase in revenue, the majority of the
increase was due to an increase in revenue from new customers, as our total
number of premium subscribers increased to approximately 462,000 at December 31,
2012 from approximately 360,000 premium subscribers at December 31, 2011, and
incremental add-on revenues from our existing customer base.
Cost of Revenue. Cost of revenue for the year ended December 31, 2012 was $14.5
million, an increase of $3.9 million, or 37%, over cost of revenue of $10.6
million for the year ended December 31, 2011. As a percentage of revenue, cost
of revenue was 10% and 9% for the years ended December 31, 2012 and 2011,
respectively. The increase in absolute dollars resulted primarily from an
increase in both the number of customers using our premium services and the
total number of devices that connected to our services, including devices owned
by free users, which resulted in increased hosting and customer support costs.
The increase in cost of revenue was primarily due to a $1.9 million increase in
costs associated with managing our data centers and the hosting of our services.
The increase was also due to a $1.0 million increase in amortization of
intangible assets primarily due to the Cosm acquisition in July 2011 and the
Bold acquisition in January 2012 and a $0.9 million increase in
personnel-related costs, as we increased the number of customer support
employees to support our overall growth. Included in the increase in
personnel-related costs is a $0.1 million increase in stock-based compensation.
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Research and Development Expenses. Research and development expenses for the
year ended December 31, 2012 were $26.3 million, an increase of $5.6 million, or
27%, over research and development expenses of $20.8 million for the year ended
December 31, 2011. As a percentage of revenue, research and development expenses
were 19% and 17% for the year ended December 31, 2012 and 2011, respectively.
The increase in absolute dollars was primarily due to a $4.9 million increase in
personnel-related costs as we hired additional employees to improve the ease of
use and functionality of our existing services and develop new service
offerings, and retained employees from the Cosm acquisition in July 2011 and the
Bold acquisition in January 2012, respectively. Included in the increase in
personnel-related costs is a $1.3 million increase in stock-based compensation.
The increase was also due to a $0.3 million increase in travel-related costs, a
$0.2 million increase in professional fees, a $0.2 million increase in rent
costs, a $0.2 million increase in hardware and software maintenance costs, and a
$0.1 million increase in depreciation expense. These were offset by a $0.3
million increase in costs related to internally developed computer software to
be sold as a service which was incurred during the application development stage
and therefore capitalized rather than expensed.
Sales and Marketing Expenses. Sales and marketing expenses for the year ended
December 31, 2012 were $70.1 million, an increase of $12.9 million, or 23%, over
sales and marketing expenses of $57.2 million for the year ended December 31,
2011. As a percentage of revenue, sales and marketing expenses were 51% and 48%
for the year ended December 31, 2012 and 2011, respectively. The increase in
absolute dollars was primarily due to a $6.9 million increase in
personnel-related and recruiting costs, as we hired additional employees to
support our growth in sales and expand our marketing efforts and $3.8 million
increase in marketing program costs. Included in the increase in
personnel-related and recruiting costs is a $2.1 million increase in stock-based
compensation. The increase was also due to a $0.7 million increase in credit
card processing fees, a $0.6 million increase in professional fees, a $0.3
million increase in travel-related costs, a $0.2 million increase in hardware
and software maintenance costs, and a $0.2 million increase in depreciation
expense.
General and Administrative Expenses. General and administrative expenses for
the year ended December 31, 2012 were $21.3 million, an increase of $1.3
million, or 7%, over general and administrative expenses of $20.0 million for
the year ended December 31, 2011. As a percentage of revenue, general and
administrative expenses were 15% and 17% for the year ended December 31, 2012
and 2011, respectively. The increase in absolute dollars was due to a
$3.5 million increase in personnel-related costs, primarily consisting of a $2.1
million increase in stock-based compensation. The increase was also due to a
$0.4 million increase in accounting fees, a $0.2 million increase in
travel-related costs, a $0.1 million increase in hardware and software
maintenance costs, a $0.1 million increase in rent expense, a $0.1 million
increase in telecom expense, a $0.1 million increase in depreciation expense, a
$0.1 million increase in director fees, and a $0.1 million increase in
miscellaneous tax fees. These were offset by a decrease of $1.8 million for
legal costs primarily associated with our defense against the patent
infringement claims made by 01 Communique and a $1.3 million state sales tax
settlement for uncollected taxes recorded in 2011.
Legal Settlement Expenses. Legal settlement expenses for the year ended
December 31, 2012 were $0 compared to $1.3 million for the year ended
December 31, 2011. Legal settlement expenses for the year ended December 31,
2011 were related to the License Agreement we entered into with Gemini IP LLC on
April 25, 2011 (see Note 12 to the Notes to the Consolidated Financial
Statements).
Amortization of Acquired Intangibles. Amortization of acquired intangibles for
the years ended December 31, 2012 and 2011 were $0.6 million and $0.2 million,
respectively. The amortization of intangibles for the year ended December 31,
2012 related primarily to the value of intangible assets acquired in our January
2012 acquisition of Bold. The amortization of intangibles for the year ended
December 31, 2011 related primarily to the value of intangible assets acquired
in our July 2006 acquisition of Applied Networking, Inc., which is fully
amortized as of December 31, 2012.
Interest and Other Income, Net. Interest and other income, net was income of
approximately $0.2 million and $0.3 million for the years ended December 31,
2012 and 2011, respectively. The decrease was primarily related to an increase
in foreign currency losses.
Income Taxes. During the years ended December 31, 2012, we recorded a provision
for federal, state and foreign income taxes of approximately $2.7 million
compared to a provision of $4.0 million for the year ended
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December 31, 2011. At each balance sheet date, we assess the likelihood that
deferred tax assets will be realized, and recognize a valuation allowance if it
is more likely than not that some portion of the deferred tax assets will not be
realized. This assessment requires judgment as to the likelihood and amounts of
future taxable income by tax jurisdiction. As of December 31, 2012 and 2011, we
maintained a full valuation allowance related to the deferred tax assets of our
Hungarian subsidiary as this entity has historical losses. During 2012, we
reassessed the need for a valuation allowance against the deferred tax assets of
our Cosm subsidiary and concluded that it was more likely than not that we would
be able to realize these assets based upon forecasted future
earnings. Accordingly, we reversed the valuation allowance related to Cosm's
deferred tax assets of approximately $677,000 during the year ended December 31,
2012. Although we believe that our tax estimates are reasonable, tax
determinations involve significant judgment making and may be subject to audit
by tax authorities in the ordinary course of business.
Net Income. We recognized net income of $3.6 million for the year ended
December 31, 2012 compared to net income of $5.8 million for the year ended
December 31, 2011. For the year ended December 31, 2012, revenue increased $19.4
million while cost of revenue increased $3.9 million, operating expenses
increased $18.9 million, interest and other income decreased $0.1 million, and
our tax provision decreased $1.3 million, resulting in a $2.2 million decrease
in net income.
The $19.4 million increase in revenue is primarily due to an increase in revenue
from new customers and add-on revenues from our existing customer base,
partially offset by a decrease in Ignition product revenue, mainly caused by the
change in our business model related to our Ignition for iPhone and iPad app
from a perpetually based licensing model to a subscription based business model.
The $3.9 million increase in cost of revenue is primarily due to a $1.9 million
increase in costs to manage our data centers and the hosting of our services, a
$1.0 million increase in acquisition related amortization, and $0.9 million
related to an increase in personnel-related costs.
The $18.9 million increase in operating expenses is primarily due to a $13.0
million increase in personnel-related costs, a $5.6 million increase in
stock-based compensation, a $3.8 million increase in marketing program costs,
and a $2.0 million increase in acquisition related costs and amortization. These
are offset by a $3.0 million decrease in patent litigation related costs and a
$1.3 million state sales tax settlement for uncollected taxes recorded in 2011.
The $0.1 million decrease in interest and other income is primarily due to an
increase in foreign currency losses.
The $1.3 million decrease in our tax provision is primarily due to a provision
for federal, state, and foreign income taxes of $2.7 million for the year ended
December 31, 2012, compared to a $4.0 million provision for the year ended
December 31, 2011. The decrease in the tax provision is primarily due to the
release of the valuation allowance relating to Cosm's deferred tax assets as of
December 31, 2012.
Years Ended December 31, 2011 and 2010
Revenue. Revenue for the year ended December 31, 2011 was $119.5 million, an
increase of $18.4 million, or 18%, over revenue of $101.1 million for the year
ended December 31, 2010. Of the 18% increase in revenue, the majority of the
increase was due to an increase in revenue from new customers, as our total
number of premium accounts increased to approximately 1.0 million at
December 31, 2011 from approximately 585,000 premium accounts at December 31,
2010, and incremental add-on revenues from our existing customer base. Revenue
for the year ended December 31, 2010 included $9.6 million related to the
service and marketing agreement with Intel, compared to $0 for the year ended
December 31, 2011.
Cost of Revenue. Cost of revenue for the year ended December 31, 2011 was $10.6
million, an increase of $1.4 million, or 16%, over cost of revenue of $9.1
million for the year ended December 31, 2010. As a percentage of revenue, cost
of revenue was 9% for the years ended December 31, 2011 and 2010. The increase
in absolute dollars resulted primarily from an increase in both the number of
customers using our premium services and the total number of devices that
connected to our services, including devices owned by free users, which resulted
in increased hosting and customer support costs. The increase in cost of revenue
was primarily due to a $0.7 mil-
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lion increase in costs associated with managing our data centers and the hosting
of our services. The increase was also due to a $0.3 million increase in
amortization of intangible assets primarily due to the Cosm acquisition in July
2011 and a $0.2 million increase in personnel-related costs, including a $0.1
million increase in stock-based compensation, as we increased the number of
customer support employees to support our overall growth.
Research and Development Expenses. Research and development expenses for the
year ended December 31, 2011 were $20.7 million, an increase of $5.6 million, or
37%, over research and development expenses of $15.2 million for the year ended
December 31, 2010. As a percentage of revenue, research and development expenses
were 17% and 15% for the year ended December 31, 2011 and 2010, respectively.
The increase in absolute dollars was primarily due to a $4.5 million increase in
personnel-related costs as we hired additional employees to improve the ease of
use and functionality of our existing services and develop new service
offerings, retained employees from the Cosm acquisition in July 2011,
recognition of $1.5 million of contingent payment costs also associated with the
Cosm acquisition (see note 4 to the consolidated financial statements) and a
$0.8 million increase in stock-based compensation primarily resulting from our
decision to issue stock options to our Hungarian employees in 2011. The increase
was also due to $0.4 million increase in professional fees, a $0.3 million
increase in depreciation expense, a $0.1 million increase in travel-related
costs, a $0.1 million increase in rent costs, a $0.1 million increase in
hardware and software maintenance costs and $0.1 million increase in telecom
costs. These were offset by a $0.2 million increase in costs related to
internally developed computer software to be sold as a service which was
incurred during the application development stage and therefore capitalized
rather than expensed.
Sales and Marketing Expenses. Sales and marketing expenses for the year ended
December 31, 2011 were $57.2 million, an increase of $11.3 million, or 25%, over
sales and marketing expenses of $45.9 million for the year ended December 31,
2010. As a percentage of revenue, sales and marketing expenses were 48% and 46%
for the year ended December 31, 2011 and 2010, respectively. The increase in
absolute dollars was primarily due to a $6.0 million increase in
personnel-related and recruiting costs, including a $1.1 million increase in
stock-based compensation, from additional employees hired to support our growth
in sales and expand our marketing efforts and $3.1 million increase in marketing
program costs. The increase was also due to a $0.5 million increase in
travel-related costs, a $0.5 increase in rent costs primarily related to the
expansion of our corporate headquarters, a $0.4 million increase in credit card
processing fees, a $0.3 million increase in hardware and software maintenance
costs, a $0.2 million increase in telecom costs and a $0.1 million increase in
depreciation expense.
General and Administrative Expenses. General and administrative expenses for
the year ended December 31, 2011 were $20.0 million, an increase of $7.7
million, or 62%, over general and administrative expenses of $12.3 million for
the year ended December 31, 2010. As a percentage of revenue, general and
administrative expenses were 17% and 12% for the year ended December 31, 2011
and 2010, respectively. The increase in absolute dollars was primarily due to a
$3.2 million increase in legal costs associated with our defense against the
patent infringement claims made by 01 Communique. The increase was also due to a
$2.6 million increase in personnel-related costs, primarily consisting of a $1.9
million increase in stock-based compensation, a $1.3 million state sales tax
settlement for uncollected taxes, a $0.4 million increase in accounting fees, a
$0.2 million increase in hardware and software maintenance costs and a $0.1
million increase in travel-related costs. These were offset by a $0.2 million
decrease in professional fees.
Legal Settlement Expenses. Legal settlement expenses for the year ended
December 31, 2011 were $1.3 million compared to $0 for the year ended
December 31, 2010. Legal settlement expenses for the year ended December 31,
2011 were related to the License Agreement we entered into with Gemini IP LLC on
April 25, 2011 (see Note 12 to the Notes to the Consolidated Financial
Statements).
Amortization of Acquired Intangibles. Amortization of acquired intangibles for
the year ended December 31, 2011 and 2010 was $0.2 million and $0.3 million,
respectively, and related primarily to the value of intangible assets acquired
in our July 2006 acquisition of Applied Networking, Inc.
Interest and Other Income, Net. Interest and other income, net was income of
approximately $0.3 million and $0.4 million for the years ended December 31,
2011 and 2010, respectively. The change was mainly due to
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an increase in interest income resulting from an increase in the balance of
funds invested in higher yielding marketable securities, offset by an increase
in foreign currency losses.
Income Taxes. During the years ended December 31, 2011, we recorded a provision
for federal, state and foreign income taxes of approximately $4.0 million
compared to a benefit of $2.5 million for the year ended December 31, 2010. Our
effective tax rate increased year-over-year as we released our $8.6 million
valuation allowance against primarily all of our net domestic deferred tax
assets during the year ended December 31, 2010, and also as a result of losses
incurred in our UK subsidiaries attributable to our Cosm acquisition for which
no corresponding benefit was recognized during the year ended December 31, 2011.
At each balance sheet date, we assess the likelihood that deferred tax assets
will be realized, and recognize a valuation allowance if it is more likely than
not that some portion of the deferred tax assets will not be realized. This
assessment requires judgment as to the likelihood and amounts of future taxable
income by tax jurisdiction. As of December 31, 2011 and 2010, we maintained a
full valuation allowance related to the deferred tax assets of our Hungarian
subsidiary. Additionally, as of December 31, 2011, we maintained a full
valuation allowance against the deferred tax assets of our Cosm subsidiary.
These entities have historical losses and we concluded it was not more likely
than not that these deferred tax assets are realizable.
Net Income . We recognized net income of $5.8 million for the year ended
December 31, 2011 compared to net income of $21.1 million for the year ended
December 31, 2010. For the year ended December 31, 2011, revenue increased $18.4
million while cost of revenue increased $1.4 million, operating expenses
increased $25.6 million and our tax provision increased $6.5 million, resulting
in a $15.3 million decrease in net income.
The $18.4 million increase in revenue is primarily due to a $28.0 million
increase in revenue from new customers and add-on revenues from our existing
customer base partially offset by a $9.6 million decrease in revenue related to
our Intel agreement which ended in December 2010.
The $1.4 million increase in cost of revenue is primarily due to a $0.7 million
increase in costs to manage our data centers and the hosting of our services, a
$0.3 million increase in acquisition related amortization, and $0.2 million
related to an increase in personnel-related costs.
The $25.6 million increase in operating expenses is primarily due to a $7.8
million increase in personnel-related costs, a $3.8 million increase in
stock-based compensation, a $3.6 million increase in patent litigation related
costs, a $3.1 million increase in marketing program costs, a $1.8 million
increase in acquisition related costs and amortization, a $1.3 million state
sales tax settlement, and a $1.0 million increase in equipment and software
related costs.
The $6.5 million increase in our tax provision is primarily due to a provision
for federal, state, and foreign income taxes of $4.0 million for the year ended
December 31, 2011, compared to a $6.1 million provision for the year ended
December 31, 2010, which was offset by an $8.6 million tax benefit associated
with the reversal of our valuation allowance against our domestic and certain
foreign deferred tax assets.
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash for each of
the periods set forth below:
Years Ended December 31,
2010 2011 2012
(In thousands)
Net cash provided by operations $ 36,469 $ 32,871 $ 28,257
Net cash used in investing activities (65,003 ) (17,760 ) (29,800 )
Net cash provided by financing activities 5,789 12,094 9,228
Effect of exchange rate changes (265 ) (881 ) 643
Net (decrease) increase in cash $ (23,010 ) $ 26,324 $ 8,328
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At December 31, 2012, our principal source of liquidity was cash and cash
equivalents and short-term marketable securities totaling $212.1 million. As of
December 31, 2012, $12.0 million of the $212.1 million of cash and cash
equivalents and short-term marketable securities was held by our foreign
subsidiaries. If the undistributed earnings of our foreign subsidiaries are
needed for our operations in the United States, we would be required to accrue
and pay U.S. taxes upon repatriation. Our current plans are not expected to
require repatriation of cash and investments to fund our U.S. operations and, as
a result, we intend to indefinitely reinvest our foreign earnings to fund our
foreign subsidiaries.
Cash Flows From Operating Activities
Net cash provided by operating activities was $28.3 million, $32.9 million, and
$36.5 million for the years ended December 31, 2012, 2011, and 2010,
respectively.
Net cash inflows from operating activities during the year ended December 31,
2012 were mainly attributable to a $11.0 million increase in deferred revenue
associated with the increase in subscription sales orders and customer growth.
Net cash inflows from operating activities were also attributable to non-cash
operating expenses, including $14.8 million for stock compensation, $6.1 million
for depreciation and amortization, offset by a $6.6 million income tax benefit
from the exercise of stock options and a $0.8 million benefit from deferred
income taxes. The increase in net cash inflows from operating activities were
also attributable to a $7.4 million increase in accounts payable and accrued
expenses, offset by a $4.5 million increase in accounts receivable, a $1.1
million increase in prepaid expenses and other current assets and a $1.3 million
increase in other assets. We expect that our future cash flows from operating
activities will be impacted by costs associated with the relocation of our
corporate headquarters to Boston, Massachusetts and by the contingent payments
associated with the Cosm and Bold acquisitions. Additionally, we expect to incur
significant legal costs associated with our continued defense against the patent
infringement claims made by 01 Communique and the declaratory judgement action
we filed against Pragmatus, which will impact our future cash flows from
operating activities.
Net cash inflows from operating activities during the year ended December 31,
2011 were mainly attributable to a $15.5 million increase in deferred revenue
associated with the increase in subscription sales orders and customer growth.
Net cash inflows from operating activities were also attributable to non-cash
operating expenses, including $8.9 million for stock compensation, $4.4 million
for depreciation and amortization, and a $3.8 million provision for deferred
income taxes, offset by non-cash benefits, primarily including a $5.9 million
income tax benefit from the exercise of stock options. The increase in net cash
inflows from operating activities were also attributable to a $3.3 million
increase in accounts payable and accrued expenses, a $0.1 million increase in
other long-term liabilities and a $0.1 million decrease in prepaid expenses and
other current assets, offset by a $4.1 million increase in accounts receivable
and a $0.2 increase in other assets.
Cash Flows From Investing Activities
Net cash used in investing activities was $29.8 million, $17.8 million, and
$65.0 million for the years ended December 31, 2012, 2011, and 2010,
respectively.
Net cash used in investing for the year ended December 31, 2012 was primarily
related to the acquisition of Bold for $14.8 million, net of cash acquired, and
the purchase of $135.1 million of marketable securities offset by proceeds of
$130.0 million from redemption and maturity of marketable securities. Net cash
used in investing activities also related to the addition of $5.3 million in
property and equipment mainly related to the expansion and upgrade of our data
center capacity, the expansion and upgrade of our internal IT infrastructure and
expansion of our offices. Restricted cash and deposits also increased $3.6
million as a result of the letter of credit associated with the lease of our new
corporate headquarters in Boston. We also had $1.0 million in intangible asset
additions related to internally developed software and the purchase of domain
names and trademarks.
Net cash used in investing for the year ended December 31, 2011 was primarily
related to the acquisition of Cosm for $10.0 million and the purchase of $150.1
million of marketable securities offset by proceeds of $145.0 million from
maturity of marketable securities. Net cash used in investing activities also
related to the addition of $2.3 million in property and equipment mainly related
to the expansion and upgrade of our data center capacity as well as the
expansion and upgrade of our internal IT infrastructure.
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Our future capital requirements may vary materially from historical levels and
will depend on many factors including, but not limited to, the relocation of our
corporate headquarters to Boston, Massachusetts and the expansion of our other
existing offices, the establishment of additional offices in the United States
and worldwide, the expansion of our data center infrastructure, the development
of new services and the expansion of our sales, support, development and
marketing organizations necessary to support our growth. Since our inception, we
have experienced increases in our expenditures consistent with the growth in our
operations and personnel, and we anticipate that our expenditures will continue
to increase in the future. We also intend to make investments in computer
equipment and systems and infrastructure related to existing and new offices as
we move and expand our facilities, add additional personnel and continue to grow
our business. We are not currently party to any purchase contracts related to
future capital expenditures.
Cash Flows From Financing Activities
Net cash provided by financing activities for the year ended December 31, 2012
was primarily related to a $6.6 million income tax benefit from the exercise of
stock options as well as $2.7 million in proceeds from the issuance of common
stock upon exercise of stock options. These were offset by a $0.1 million
payment for contingent consideration.
Net cash provided by financing activities for the year ended December 31, 2011
was primarily related to $6.2 million in proceeds received from the issuance of
common stock upon exercise of stock options as well as a $5.9 million income tax
benefit from the exercise of stock options.
On July 7, 2009, we closed our IPO raising net proceeds of approximately
$82.9 million after deducting underwriting discounts and commissions and
offering costs. On December 16, 2009, we closed our secondary public offering
raising net proceeds of approximately $1.2 million after deducting underwriting
discounts and commissions and offering costs. While we believe that our current
cash and cash equivalents will be sufficient to meet our working capital and
capital expenditure requirements for at least the next twelve months, we may
elect to raise additional capital through the sale of additional equity or debt
securities or obtain a credit facility to develop or enhance our services, to
fund expansion, to respond to competitive pressures or to acquire complementary
products, businesses or technologies. If we elect, additional financing may not
be available in amounts or on terms that are favorable to us, if at all. If we
raise additional funds through the issuance of equity or convertible debt
securities, our existing stockholders could suffer significant dilution, and any
new equity securities we issue could have rights, preferences and privileges
superior to those of holders of our common stock.
During the last three years, inflation and changing prices have not had a
material effect on our business and we do not expect that inflation or changing
prices will materially affect our business in the foreseeable future.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing activities, nor do we have
any interest in entities referred to as variable interest entities.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2012
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods.
Payments Due by Period
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
Operating lease obligations $ 53,448,000 $ 7,299,000 $ 10,997,000 $ 9,904,000 $ 25,248,000
Hosting service agreements 2,641,000 2,265,000 363,000 13,000 -
Total $ 56,089,000 $ 9,564,000 $ 11,360,000 $ 9,917,000 $ 25,248,000
The commitments under our operating leases shown above consist primarily of
lease payments for our future corporate headquarters located in Boston,
Massachusetts (see Note 12 to the Condensed Consolidated
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Financial Statements), our research and development offices in Hungary, our
international sales and marketing offices located in The Netherlands, Australia,
the United Kingdom, Ireland, and India, contractual obligations related to our
data centers and our current corporate headquarters located in Woburn,
Massachusetts.
In April 2012, we entered into a lease for a new corporate headquarters located
in Boston, Massachusetts. Pursuant to the lease, the landlord is obligated to
rehabilitate the existing building and we expect that the lease term will begin
in April 2013 and extend through June 2023. The aggregate amount of minimum
lease payments to be made over the term of the lease is approximately $41.3
million. Pursuant to the terms of the lease, the landlord is responsible for
making certain improvements to the leased space up to an agreed upon cost to the
landlord. Any excess costs for these improvements will be billed by the landlord
to us as additional rent. We estimate these excess costs to be approximately
$5.2 million, of which $4.1 million will be paid in 2013. The lease required a
security deposit of approximately $3.3 million in the form of an irrevocable
standby letter of credit which is collateralized by a bank deposit in the amount
of approximately $3.5 million or 105 percent of the security deposit. The
security deposit is classified as restricted cash. The lease includes an option
to extend the original term of the lease for two successive five year periods.
In October 2012, we entered into a lease for new office space in Dublin,
Ireland. The term of the new office space began in October 2012 and extends
through September 2022. The approximate annual lease payments for the new office
space are $161,000 (EUR 122,000). The lease agreement required a security
deposit of approximately $247,000 (EUR 187,000) and contains a termination
option which allows us to terminate the lease pursuant to certain lease
provisions.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board ("FASB") issued an
Accounting Standards Update ("ASU") which simplifies how companies test goodwill
for impairment. The ASU permits an entity to first assess qualitative factors to
determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount as a basis for determining whether it is
necessary to perform the two-step goodwill impairment test described in the
goodwill accounting standard. The amendments are effective for annual and
interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011. Early adoption is permitted. We have adopted this new ASU and
it did not have a material effect on our financial position, results of
operations or cash flows.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)
- Presentation of Comprehensive Income (ASU 2011-05), to require an entity to
present the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. ASU
2011-05 eliminates the option to present the components of other comprehensive
income as part of the statement of equity. In December 2011, the FASB issued ASU
No. 2011-12, Comprehensive Income (Topic 220) - Deferral of the Effective Date
for Amendments to the Presentation of Reclassifications of Items Out of
Accumulated Other Comprehensive Income in ASU 2011-05 (ASU 2011-12), which
defers the effective date of only those changes in ASU 2011-05 that relate to
the presentation of reclassification adjustments. ASU 2011-05 is effective for
us in our first quarter of fiscal 2012 and was applied retrospectively. We have
adopted ASU 2011-05 and ASU 2011-12 and it did not have a material impact on our
financial position, results of operations or cash flows.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820)
- Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs (ASU 2011-04), to provide a consistent
definition of fair value and ensure that the fair value measurement and
disclosure requirements are similar between GAAP and International Financial
Reporting Standards. ASU 2011-04 changes certain fair value measurement
principles and enhances the disclosure requirements particularly for Level 3
fair value measurements (as defined in Note 3). ASU 2011-04 was effective for us
in our first quarter of fiscal 2012 and was applied prospectively. We have
adopted ASU 2011-04 and it did not have a material impact on our financial
position, results of operations or cash flows.
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