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COMSCORE, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes to those statements included elsewhere in
Part II Item 8 of this Annual Report on Form 10-K. In addition to historical
financial information, the following discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results and timing of selected events may differ materially from
those anticipated in these forward-looking statements as a result of many
factors, including those discussed under Item 1A, "Risk Factors" and elsewhere
in this Annual Report on Form 10-K. See also "Cautionary Statement Regarding
Forward-Looking Statements" at the beginning of this Form 10-K.
Overview
We provide leading, on-demand digital analytics that enable our customers to
make well-informed, data-driven decisions and implement more effective digital
business strategies. More specifically, we are an Internet technology company
that measures what people do as they navigate the digital world and we turn that
information into insights and actions for our clients to maximize the value of
their digital investments. One of the key elements of our products is our
ability to effectively combine our proprietary comScore data, which we obtain
via our global panel and census network, with our clients own data. Our products
provide our customers with deep insight into consumer behavior, including
objective, detailed information regarding usage of their online properties and
those of their competitors, coupled with information on consumer demographic
characteristics, attitudes, lifestyles and offline behavior. In addition, we
offer mobile operator analytics products that provide comprehensive marketing
and customer care insight to mobile carriers worldwide. During the year ended
December 31, 2012, we provided service to over 2,150 customers worldwide with
our broad geographic base of employees located in 31 locations in 23 countries.
We deliver our products on-demand using our digital measurement and analytics
platforms, which are comprised of proprietary databases, internally developed
software, and a computational infrastructure that measures, analyzes and reports
on digital activity. Our scalable, Software-as-a-Service, or SaaS, delivery
model, eliminates the need for our customers to install and maintain hardware
and software in order to use our products. Our products are hosted and
maintained by us, which
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significantly reduces the cost and complexity for our customers relative to
traditional software products and provides significant operating efficiencies.
We can quickly deploy or update our products with minimal to no lead time, which
significantly enhances our customers' productivity. We offer our products as a
subscription-based service for which our customers pay a recurring fee during
the subscription term.
Our digital media measurement and analytics platforms are comprised of
proprietary databases and a computational infrastructure that measures, analyzes
and reports on digital activity worldwide. The foundation of our platform is
data collected from our comScore panel of approximately two million Internet
users worldwide who have granted us explicit permission to confidentially
measure their Internet usage patterns, online and certain offline buying
behavior and other activities. By applying advanced statistical methodologies to
our panel data, we project consumers' online behavior for the total online
population and a wide variety of user categories. This panel information is
complemented by our Unified Digital Measurement™ methodology which enables us to
more accurately measure digital audiences. Our Unified Digital Measurement
approach blends panel and census methodologies into products that provide a
direct linkage and reconciliation between census and panel measurement. Our
tagged network of global websites and apps is referred to as the comScore Census
Network™, which has been built with a substantial infrastructure and technology
that processes over 1.4 trillion events per month worldwide. We also provide
products to the large mobile networks that deliver network analysis focused on
the experience of wireless subscribers, as well as network intelligence with
respect to performance, capacity and configuration analytics. We also provide
digital (web, apps, video, gaming, and other digital assets) and monetization
analytics and innovative video measurement products.
We deliver our Analytics for a Digital World™ through a wide array of products
organized around the following four major suites; audience analytics,
advertising analytics, digital business analytics and mobile operator analytics.
Our audience analytics products deliver digital media intelligence by providing
an independent, third-party measurement of the size, behavior and
characteristics of Internet users on multiple devices, such as TVs, PCs,
smartphones and tablets as well as insight into the effectiveness of online
advertising. Our core product offerings are built around our Media Metrix™,
product, but also include Video Metrix ™, Mobile Metrix ™, Plan Metrix™ and Ad
Metrix ™. As the Internet evolves, we are continually creating new solutions,
such as Social Essentials, which provides insight into the audience size,
composition, behavior and brand engagement of consumers reached by brands on
Facebook. We typically deliver our audience analytics products electronically in
the form of weekly, monthly or quarterly subscription based reports. Customers
can access current and historical data and analyze this data anytime online.
Our advertising analytics products combine the proprietary information gathered
from our comScore Census Network with the vertical industry expertise of
comScore analysts to deliver digital marketing intelligence, including the
measurement of online advertising effectiveness, customized for specific
industries. Our advertising analytics products include the AdEffx ™ suite Media
Planner 2.0 ™ and validated Campaign Essentials ™, which provide a solution for
developing, executing and evaluating online advertising campaigns across
multiple platforms, including TV, Web (Display and Video) and Mobile
(Smartphones and Tablets). In August 2011, we acquired AdXpose, which provides
advertisers and publishers with greater transparency in the quality, safety, and
performance of their digital advertising campaigns by allowing them to verify
and optimize billions of campaign data points captured in real-time. The
combination of AdXpose with our Campaign Essentials product has enabled us to
develop a new product we refer to as validated Campaign Essentials, or vCE,
which provides intelligence regarding validated impressions, ads that are
actually seen, shown in safe content and delivered to the right target audience.
Our advertising analytics products are typically delivered on a monthly,
quarterly or ad hoc basis.
Our digital business analytics products help organizations optimize the customer
experience on their digital assets (websites, apps, video, etc.) and maximize
return on digital media investments by allowing marketers to collect, view and
distribute information tailored to their specific business requirements. Our
digital business analytics platform is designed to integrate data from multiple
sources including web, mobile, video and social media interactions. Our digital
business analytics services are provided primarily through Digital Analytix™,
our SaaS based product that enables our customers to have access to all of their
proprietary click stream data. Our digital business analytics platform is
further enhanced by data obtained as part of our audience measurement efforts,
and viewable on a quick turnaround basis. Customers can access our digital
business analytics data sets and reports anytime online.
Our mobile operator analytics products suite connects mobile behavior, content
merchandising, and device capabilities to provide comprehensive mobile market
intelligence to mobile carriers worldwide. Our core software product, Subscriber
AnalytixTM, powered by XPLORE™, provides mobile carriers with information on
network optimization and capacity planning, customer experience, and market
intelligence. Our mobile operator analytics platform is designed to integrate
data from multiple sources including web and mobile interactions as well as
customer relationship management, call center and back office systems. Customers
can access our mobile and network data sets and reports anytime online via our
software-based delivery platform.
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During the second quarter of 2012, we noted a significant decline in revenues
from ARSgroup, or ARS, which we acquired in February 2010. As a result, we
performed an impairment test of the long-lived assets of ARS and ultimately
recorded an impairment charge of $3.3 million during the year ended December 31,
2012. As a result of the significant decline in revenue from ARS and the
resulting impairment charge of $3.3 million, we began exploring all strategic
options with respect to maximizing the value of ARS, including a potential sale
of some or all of ARS. Currently, we expect to dispose of the non-health
portions of ARS. We do not expect this transaction to have a material impact on
our financial statements.
Our company was founded in August 1999. In 2007, we completed our initial public
offering. We have complemented our internal development initiatives with
targeted acquisitions. In February 2010, we acquired the outstanding stock of
ARSgroup, Inc. to expand our ability to provide our customers with actionable
information to improve their creative and strategic messaging targeted against
specific audiences. In July 2010, we acquired the outstanding stock of Nexius,
Inc., a provider of products to the large mobile networks that deliver network
analysis focused on the experience of wireless subscribers, as well as network
intelligence with respect to performance, capacity and configuration analytics.
In August 2010, we acquired the outstanding stock of Nedstat B.V., a provider of
web analytics and innovative video measurement products based out of Amsterdam,
Netherlands. In August 2011, we acquired all of the outstanding equity of
AdXpose, Inc., a provider of digital advertising analytics products based out of
Seattle, Washington.
Since our initial public offering in 2007, our revenues and expenses have grown
significantly. We attribute the growth in our revenue and expenses primarily to:
• increased sales to existing customers, as a result of our efforts to deepen
our relationships with these customers by increasing their awareness of,
and confidence in, the value of our digital marketing intelligence
platform;
• growth in our customer base through the addition of new customers and from
acquired businesses;
• the sales of new products to existing and new customers; and
• growth in sales outside of the U.S., as a result of entering into new
international markets.
As a result of economic events such as the global financial crisis in the credit
markets, softness in the housing markets, difficulties in the financial services
sector, political uncertainty in the Middle East, and concerns regarding the
eurozone, the direction and relative strength of the U.S. and global economies
have become somewhat uncertain in recent periods. During 2011 and 2012, we
experienced a limited number of our current and potential customers ceasing,
delaying or reducing renewals of existing subscriptions and purchases of new or
additional services and products presumably due to the economic downturn.
Further, certain of our existing customers exited the market due to industry
consolidation and bankruptcy in connection with these challenging economic
conditions. Since these negative economic events began in 2008, we continued to
annually add net new customers and our existing customers renewed their
subscriptions at a rate of over 90% based on dollars renewed each year.
Notwithstanding our performance during these macroeconomic trends, if economic
recovery slows or economic conditions deteriorate, our operating results could
be adversely affected in coming periods.
Our Revenues
We derive our revenues primarily from the fees that we charge for
subscription-based products, customized projects, and software licenses. We
define subscription-based revenues as revenues that we generate from products
that we deliver to a customer on a recurring basis, as well as arrangements
where a customer is committing up-front to purchase a series of deliverables
over time, which includes revenue from software licenses as further discussed
below. We define project revenues as revenues that we generate from customized
projects that are performed for a specific customer on a non-recurring basis. A
significant characteristic of our SaaS-based business model is our large
percentage of subscription-based contracts. Subscription-based revenues
accounted for 85% of total revenues in each of the years ended December 31, 2012
and 2011. Many of our customers who initially purchased a customized project
have subsequently purchased one of our subscription-based products. Similarly,
many of our subscription-based customers have subsequently purchased additional
customized projects.
Historically, we have generated most of our revenues from the sale and delivery
of our products to companies and organizations located within the United States.
We intend to expand our international revenues by selling our products and
deploying our direct sales force model in additional international markets in
the future. For the year ended December 31, 2012, our international revenues
were $71.8 million, an increase of $11.8 million, or 20% over international
revenues of $60.0 million for the year ended December 31, 2011. International
revenues comprised approximately 28%, 26% and 19% of our total revenues for the
fiscal years ended December 31, 2012, 2011 and 2010, respectively.
We anticipate that revenues from our U.S. customers will continue to constitute
a substantial portion of our revenues in coming periods, but we expect that
revenues from customers outside of the U.S. will increase as a percentage of
total revenues as we build greater international recognition of our brand and
expand our sales operations globally.
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Subscription Revenues
We generate a significant portion of our subscription-based revenues from our
Media Metrix product suite. Products within the Media Metrix suite include Media
Metrix 360, Media Metrix, Plan Metrix, World Metrix, Video Metrix and Ad Metrix.
These product offerings provide subscribers with intelligence on digital media
usage, audience characteristics, audience demographics and online and offline
purchasing behavior. Customers who subscribe to our Media Metrix products are
provided with login IDs to our web site, have access to our database and can
generate reports at anytime.
We also generate subscription-based revenues from certain reports and analyses
provided through our customer research product, if that work is procured by
customers on a recurring basis. Through our customer research products, we
deliver digital marketing intelligence relating to specific industries, such as
automotive, consumer packaged goods, entertainment, financial services, media,
pharmaceutical, retail, technology, telecommunications and travel. This
marketing intelligence leverages our global consumer panel and extensive
database to deliver information unique to a particular customer's needs on a
recurring schedule, as well as on a continual-access basis. Our Marketing
Solutions customer agreements typically include a fixed fee with an initial term
of at least one year. We also provide these products on a non-subscription basis
as described under "Project Revenues" below.
In addition, we generate subscription-based revenues from survey products that
we sell to our customers. In conducting our surveys, we generally use our global
Internet user panel. After questionnaires are distributed to the panel members
and completed, we compile their responses and then deliver our findings to the
customer, who also has ongoing access to the survey response data as they are
compiled and updated over time. These data include responses and information
collected from the actual survey questionnaires and can also include behavioral
information that we passively collect from our panelists. If a customer has a
history of purchasing survey products in each of the last four quarters, then we
believe this indicates the surveys are being conducted on a recurring basis, and
we classify the revenues generated from such survey products as
subscription-based revenues. Our contracts for survey services typically include
a fixed fee with terms that range from two months to one year.
Our acquisition of Nedstat, resulted in additional revenue sources, including
software subscriptions, server calls, and professional services (including
training and consulting). Our arrangements generally contain multiple elements,
consisting of the various service offerings. Our acquisition of AdXpose,
resulted in additional revenue sources, including fees for the use of the
AdXpose platform. Fees for the use of the AdXpose platform are generally a fixed
fee for each impression that is generated using the AdXpose technology. Revenue
is recognized on a usage basis when the impression is delivered and reported via
the AdXpose service portal.
Project Revenues
We generate project revenues by providing customized information reports to our
customers on a nonrecurring basis through comScore Marketing Solutions. For
example, a customer in the media industry might request a custom report that
profiles the behavior of the customer's active online users and contrasts their
market share and loyalty with similar metrics for a competitor's online user
base. If this customer continues to request the report beyond an initial project
term of at least nine months and enters into an agreement to purchase the report
on a recurring basis, we begin to classify these future revenues as
subscription-based.
Software Licenses
We generate subscription revenue through software licenses, professional
services (including software customization, implementation, training and
consulting services), and maintenance and technical support contracts.
We recognize software license arrangements that include significant modification
and customization of the software in accordance with FASB Accounting Standards
Codification ("ASC") 985-605, Software Recognition, and ASC 605-35, Revenue
Recognition-Construction-Type and Certain Production-Type Contracts, typically
using the completed-contract method. Prior to March 31, 2011, we had not
established VSOE of fair value for the multiple deliverables and therefore
accounted for all elements in these arrangements as a single unit of accounting,
recognizing the entire arrangement fee as revenue on a straight line basis over
the service period of the last delivered element. During the period of
performance, billings and costs (to the extent they are recoverable) are
accumulated on the balance sheet, but no profit or income is recorded before
user acceptance of the software license. To the extent estimated costs are
expected to exceed revenue, we accrue for costs immediately. During the quarter
ended June 30, 2011 we established VSOE of fair value for post contract support
("PCS") services for certain customers. The establishment of VSOE of fair value
followed an alignment of our pricing practices for these services.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates, assumptions and
judgments that affect the amounts reported in our consolidated financial
statements and the accompanying notes. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from these estimates.
While our significant accounting policies are described in more detail in the
notes to our consolidated financial statements included in Part II, Item 8 of
this Annual Report on Form 10-K, we believe the following accounting policies to
be the most critical to the judgments and estimates used in the preparation of
our consolidated financial statements.
Revenue Recognition
We recognize revenues when the following fundamental criteria are met:
(i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or
the services have been rendered, (iii) the fee is fixed or determinable, and
(iv) collection of the resulting receivable is reasonably assured.
We generate revenues by providing access to our online database or delivering
information obtained from our database, usually in the form of periodic reports.
Revenues are typically recognized on a straight-line basis over the period in
which access to data or reports is provided, which generally ranges from three
to twenty four months. Sales taxes remitted to government authorities are
recorded on a net basis.
We also generate revenues through survey services under contracts ranging in
term from two months to one year. Our survey services consist of survey and
questionnaire design with subsequent data collection, analysis and reporting. At
the outset of an arrangement, we allocate total arrangement consideration
between the development of the survey questionnaire and subsequent data
collection, analysis and reporting services based on relative selling price. We
recognize revenue allocated to the survey questionnaire when it is delivered and
we recognize revenue allocated to the data collection, analysis and reporting
services on a straight-line basis over the estimated data collection period once
the survey or questionnaire design has been delivered. Any change in the
estimated data collection period results in an adjustment to revenues recognized
in future periods.
Certain of our arrangements contain multiple elements, consisting of the various
services we offer. Multiple element arrangements typically consist of either
subscriptions to multiple online product solutions or a subscription to our
online database combined with customized services. Prior to January 1, 2011, we
had determined there was not objective and reliable evidence of fair value for
any of our services and, therefore, accounted for all elements in multiple
element arrangements as a single unit of accounting. Access to data under the
subscription element is generally provided shortly after the execution of the
contract. However, the initial delivery of customized services generally occurs
subsequent to the commencement of the subscription element. For these historical
arrangements, we recognized the entire arrangement fee over the performance
period of the last deliverable. As a result, the total arrangement fee is
recognized on a straight-line basis over the period beginning with the
commencement of the last element deliverable.
Effective January 1, 2011, we adopted the provisions of the Financial Accounting
Standards Board ("FASB") Accounting Standards Update ("ASU") 2009-13, Multiple
Deliverable Revenue Arrangements, which requires us to allocate arrangement
consideration at the inception of an arrangement to all deliverables, if they
represent a separate unit of accounting, based on their relative selling prices.
In addition, this guidance eliminated the use of the residual method for
allocating arrangement consideration. This guidance is applicable to us for all
arrangements entered into subsequent to December 31, 2010 and for any existing
arrangements that are materially modified after December 31, 2010.
For these types of arrangements, the guidance establishes a hierarchy to
determine the selling price to be used for allocating arrangement consideration
to deliverables: (i) vendor-specific objective evidence of fair value ("VSOE"),
(ii) third-party evidence of selling price ("TPE") if VSOE is not available, or
(iii) an estimated selling price ("ESP") if neither VSOE nor TPE are available.
VSOE generally exists only when we sell the deliverable separately and is the
price actually charged by us for that deliverable on a stand-alone basis. ESP
reflects our estimate of what the selling price of a deliverable would be if it
was sold regularly on a stand-alone basis.
We have concluded that we do not have VSOE, for these types of arrangements, and
TPE is generally not available because our service offerings are highly
differentiated and we are unable to obtain reliable information on the products
and pricing practices of our competitors. As such, ESP is used to allocate the
total arrangement consideration at the arrangement inception based on each
element's relative selling price.
Our process for determining ESP involves management's judgments based on
multiple factors that may vary depending upon the unique facts and circumstances
related to each product suite and deliverable. We determine ESP by considering
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several external and internal factors including, but not limited to, current
pricing practices, pricing concentrations (such as industry, channel, customer
class or geography), internal costs and market penetration of a product or
service. The total arrangement consideration is allocated to each of the
elements based on the relative selling price. If the ESP is determined as a
range of selling prices, the mid-point of the range is used in the
relative-selling-price method. Once the total arrangement consideration has been
allocated to each deliverable based on the relative allocation of the
arrangement fee, we commence revenue recognition for each deliverable on a
stand-alone basis as the data or service is delivered. In the future, as our
pricing strategies and market conditions change, modifications may occur in the
determination of ESP to reflect these changes. As a result, the future revenue
recognized for these arrangements could differ from the results in the current
period.
Generally, our contracts are non-refundable and non-cancelable. In the event a
portion of a contract is refundable, revenue recognition is delayed until the
refund provisions lapse. A limited number of customers have the right to cancel
their contracts by providing us with written notice of cancellation. In the
event that a customer cancels its contract, it is not entitled to a refund for
prior services, and it will be charged for costs incurred plus services
performed up to the cancellation date.
In connection with our acquisition of Nexius, Inc., we acquired additional
revenue sources, including software licenses, professional services (including
software customization implementation, training and consulting services), and
maintenance and technical support contracts. Our arrangements generally contain
multiple elements, consisting of the various service offerings. We recognize
software license arrangements that include significant modification and
customization of the software in accordance with ASC 985-605, Software
Recognition and ASC 605-35, Revenue Recognition-Construction-Type and Certain
Production-Type Contracts, typically using the completed contract method. During
the quarter ended June 30, 2011, we established VSOE of fair value for post
contract support services for a group of certain Nexius customers. For these
specific arrangements, we allocate the total consideration to the various
elements in the arrangement based on VSOE of fair value and recognize revenue
when the fundamental revenue recognition criteria above are met. For the
remainder of the Nexius customers, we currently do not have VSOE for the
multiple deliverables and account for all elements in these arrangements as a
single unit of accounting, recognizing the entire arrangement fee as revenue
over the service period of the last delivered element. During the period of
performance, billings and costs (to the extent they are recoverable) are
accumulated on the balance sheet, but no profit or income is recorded before
user acceptance of the software license. To the extent estimated costs are
expected to exceed revenue we accrue for costs immediately.
We account for nonmonetary transactions under ASC 845, Nonmonetary Transactions.
Nonmonetary transactions with commercial substance are recorded at the estimated
fair value of assets surrendered including cash, if cash is less than 25% of the
fair value of the overall exchange, unless the fair value of the assets received
is more clearly evident, in which case the fair value of the asset received is
used. During the year ended December 31, 2012 we recognized $1.4 million in
revenue related to nonmonetary transactions. Due to timing differences in the
delivery and receipt of the respective nonmonetary assets exchanged, the expense
recognized in each period is different from the amount of revenue recognized. As
a result, during the year ended December 31, 2012, we recognized $1.1 million in
expense related to nonmonetary transactions.
Business Combinations
We recognize all of the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair value on the
acquisition date. Acquisition-related costs are recognized separately from the
acquisition and expensed as incurred. Generally, restructuring costs incurred in
periods subsequent to the acquisition date are expensed when incurred. All
subsequent changes to an income tax valuation allowance or uncertain tax
position that relate to the acquired company and existed at the acquisition date
that occur both within the measurement period and as a result of facts and
circumstances that existed at the acquisition date are recognized as an
adjustment to goodwill. All other changes in income tax valuation allowances are
recognized as a reduction or increase to income tax expense or as a direct
adjustment to additional paid-in capital as required. Acquired in-process
research and development is capitalized as an intangible asset and amortized
over its estimated useful life.
Goodwill and Intangible Assets
We record goodwill and intangible assets when we acquire other businesses. The
allocation of the purchase price to intangible assets and goodwill involves the
extensive use of management's estimates and assumptions, and the result of the
allocation process can have a significant impact on our future operating
results. We estimate the fair value of identifiable intangible assets acquired
using several different valuation approaches, including relief from royalty
method, and income and market approaches. The relief from royalty method assumes
that if we did not own the intangible asset or intellectual property, we would
be willing to pay a royalty for its use. We generally use the relief from
royalty method for estimating the value of acquired technology/methodology
assets. The income approach converts the anticipated economic benefits that we
assume will be realized from a given asset into value. Under this approach,
value is measured as the present worth of anticipated future net cash flows
generated by an asset. We generally use the income approach to value customer
relationship assets and non-compete
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agreements. The market approach compares the acquired asset to similar assets
that have been sold. We generally use the income approach to value trademarks
and brand assets.
Intangible assets with finite lives are amortized over their useful lives while
goodwill and indefinite lived assets are not amortized, but rather are
periodically tested for impairment. An impairment review generally requires
developing assumptions and projections regarding our operating performance. We
have determined that all of our goodwill is associated with one reporting unit
as we do not operate separate lines of business with respect to our services.
Accordingly, on an annual basis we perform the impairment assessment for
goodwill at the enterprise level by comparing the fair value of our reporting
unit to its carrying value including goodwill recorded by the reporting unit. If
the carrying value exceeds the fair value, impairment is measured by comparing
the implied fair value of the goodwill to its carrying value and any impairment
determined is recorded in the current period. If our estimates or the related
assumptions change in the future, we may be required to record impairment
charges to reduce the carrying value of these assets, which could be material.
There were no impairment charges to Goodwill recognized during the years ended
December 31, 2012, 2011 or 2010.
During the three months ended June 30, 2012, we noted a significant decline in
revenues from ARS, which we acquired in February 2010. As a result, we performed
an impairment test of the long-lived assets of ARS. The long-lived assets of ARS
consist of customer relationships and acquired methodologies and technology. The
first step in testing the long-lived assets of ARS for impairment was to compare
the sum of the undiscounted cash flows expected to result from the use and
eventual disposition of ARS to the carrying value of ARS's long-lived assets.
Based on this analysis, we determined as of June 30, 2012 that the sum of the
expected undiscounted cash flows to be generated from ARS was less than the
carrying value of the ARS intangible assets. As such, we concluded that the ARS
intangible assets were impaired as of June 30, 2012. To measure the amount of
the impairment, we then estimated the fair value of the intangible assets as of
June 30, 2012. In determining the fair value of the intangible assets, we
prepared a discounted cash flow ("DCF") analysis for each intangible asset. In
preparing the DCF analysis, we used a combination of income approaches including
the relief from royalty approach and the excess earnings approach. Determining
fair value requires the exercise of significant judgment, including judgments
about appropriate discount rates, terminal growth rates, royalty rates and the
amount and timing of expected future cash flows. The cash flows employed in the
DCF analysis were based on our most recent budgets, forecasts and business plans
as well as growth rate assumptions for years beyond the current business plan
period. Significant assumptions used include a discount rate of 18.5%, which is
based on an assessment of the risk inherent in the future revenue streams and
cash flows of ARS, as well as a royalty rate of 3.0%, which is based on an
analysis of royalty rates in similar, market transactions. Based on the DCF
analysis, we estimated the fair value of the intangible assets of ARS to be $2.5
million as of June 30, 2012, which resulted in an impairment charge of $3.3
million during the year ended December 31, 2012. The impairment charge had a
negative impact on net loss of $3.3 million and an impact on earnings per share
of $0.10 per share during the year ended December 31, 2012. In addition, these
intangible assets will be amortized over a remaining estimated useful life of
eighteen months, beginning July 1, 2012. There were no impairment charges to
Intangible Assets recognized during the years ended 2011 or 2010.
Long-lived assets
Our long-lived assets primarily consist of property and equipment and intangible
assets. We evaluate the recoverability of our long-lived assets for impairment
whenever events or changes in circumstances indicate the carrying value of such
assets may not be recoverable. If an indication of impairment is present, we
compare the estimated undiscounted future cash flows to be generated by the
asset to its carrying amount.
Recoverability measurement and estimation of undiscounted cash flows are grouped
at the lowest level for which identifiable cash flows are largely independent of
the cash flows of other assets and liabilities. If the undiscounted future cash
flows are less than the carrying amount of the asset group, we record an
impairment loss equal to the excess of the asset group's carrying amount over
its fair value. The fair value is determined based on valuation techniques such
as a comparison to fair values of similar assets or using a discounted cash flow
analysis. Although we believe that the carrying values of our long-lived assets
are appropriately stated, changes in strategy or market conditions or
significant technological developments could significantly impact these
judgments and require adjustments to recorded asset balances. Other than the
impairment charge for ARS discussed above, there were no impairment charges
recognized during the years ended December 31, 2012, 2011 or 2010.
Allowance for Doubtful Accounts
We manage credit risk on accounts receivable by performing credit evaluations of
our customers for existing customers coming up for renewal as well as all
prospective new customers, by reviewing our accounts and contracts and by
providing appropriate allowances for uncollectible amounts. Allowances are based
on management's judgment, which considers historical experience and specific
knowledge of accounts that may not be collectible. We make provisions based on
our historical bad debt experience, a specific review of all significant
outstanding invoices and an assessment of general economic conditions. If
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the financial condition of a customer deteriorates, resulting in an impairment
of its ability to make payments, additional allowances may be required.
Income Taxes
We account for income taxes using the asset and liability method. We estimate
our tax liability through calculations we perform for the determination of our
current tax liability, together with assessing temporary differences resulting
from the different treatment of items for income tax and financial reporting
purposes. These differences result in deferred tax assets and liabilities, which
are recorded on our balance sheet. We then assess the likelihood that deferred
tax assets will be recovered in future periods. In assessing the need for a
valuation allowance against the deferred tax assets, we consider factors such as
future reversals of existing taxable temporary differences, taxable income in
prior carryback years, if carryback is permitted under the tax law, tax planning
strategies and future taxable income exclusive of reversing temporary
differences and carryforwards. In evaluating projections of future taxable
income, we consider our history of profitability, the competitive environment,
the overall outlook for the online marketing industry and general economic
conditions. In addition, we consider the timeframe over which it would take to
utilize the deferred tax assets prior to their expiration. To the extent we
cannot conclude that it is more-likely-than-not that the benefit of such assets
will be realized, we establish a valuation allowance to adjust the carrying
value of such assets.
As of December 31, 2012 and 2011, we recorded valuation allowances against
certain deferred tax assets of $4.0 million and $2.7 million, respectively. At
December 31, 2012, the valuation allowance was related to the deferred tax
assets (primarily net operating loss carryforwards) of the foreign subsidiaries
that are either loss companies or are in their start-up phases, including
entities in Mexico, Singapore, Spain, Australia, Czech Republic, Netherlands and
China, the deferred tax asset related to the U.S. capital loss carryforwards,
and the deferred tax asset related to certain state net operating loss
carryforwards. At December 31, 2011, the valuation allowance was primarily
related to the deferred tax assets of the foreign subsidiaries that are in their
start-up phases, including China, Spain, Singapore, and certain Certifica and
Nedstat subsidiaries, and the deferred tax asset related to the value of our
auction rate securities.
As of December 31, 2012, we concluded that it was not more-likely-than-not that
a substantial portion of our deferred tax assets related to certain state net
operating losses would be realized and determined that it was appropriate to
establish a valuation allowance of $0.3 million against our state deferred tax
assets. We also concluded that it was not more-likely-than-not that a
substantial portion of our deferred tax assets in certain other foreign
jurisdictions, primarily the Netherlands, would be realized and that an increase
to the valuation allowance of $1.2 million was necessary. In making that
determination, we considered the losses incurred in these foreign jurisdictions
during 2012, the current overall economic environment, and the uncertainty
regarding the profitability of certain foreign operations currently in start-up
phase. In addition, during 2012, we wrote-off certain deferred tax assets
related to net operating losses that will never be realized. As these deferred
tax assets had a full valuation allowance recorded against them, the associated
valuation allowance of $0.2 million was released.
As a result of the losses incurred in 2012, our U.S. entities are in a three
year cumulative pretax loss position at December 31, 2012. A cumulative loss
position is considered significant negative evidence in assessing the
realizability of our deferred tax assets, which includes deferred tax assets of
$8.2 million related to net operating loss and tax credit carryforwards in the
U.S. We have concluded that there is sufficient positive evidence to overcome
this negative evidence. This positive evidence includes the fact that (i) our
three year cumulative pretax loss position includes $16.6 million of litigation
and settlement charges that are not expected to recur in the future and (ii) our
profitable U.S. operating forecasts, exclusive of tax planning strategies,
result in full utilization of our net deferred tax assets by the end of 2017
based on the current projections. However, our ability to realize our net U.S.
deferred tax assets of $19.3 million at December 31, 2012 is primarily dependent
upon generating sufficient taxable income in future years. We believe that
there is sufficient objective and reliable evidence to support the realization
of the recorded U.S. deferred tax assets as of December 31, 2012 based on our
current projections of future pre-tax income. If our actual results do not
validate our current projections of pre-tax income, we may be required to record
a valuation allowance that could have a material impact on our consolidated
financial statements in future periods.
As of December 31, 2011, we concluded that it was not more-likely-than-not that
a substantial portion of our Netherlands deferred tax assets will be realized
and determined that it was appropriate to establish a valuation allowance of
$1.3 million against our Netherlands deferred tax assets. In making that
determination, we considered the losses incurred in the Netherlands during 2011
and in prior years and the uncertainty regarding the future profitability of the
Netherlands operations. We also concluded that it was not more-likely-than-not
that a substantial portion of our deferred tax assets in certain other foreign
jurisdictions would be realized and that an increase to the valuation allowance
was necessary. In making that determination, we considered the losses incurred
in these foreign jurisdictions during 2011, the current overall economic
environment, and the uncertainty regarding the profitability of certain foreign
operations. As a result, in the fourth quarter of 2011 we recorded an increase
in the deferred tax asset valuation allowance of approximately $0.4 million.
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As of December 31, 2012, we estimate our federal and state net operating loss
carryforwards for tax purposes are approximately $46.8 million and $43.1
million, respectively. These net operating loss carryforwards will begin to
expire in 2022 for federal income tax purposes and in 2013 for state income tax
purposes. In addition, at December 31, 2012, we estimate our aggregate net
operating loss carryforwards for tax purposes related to our foreign
subsidiaries is $30.7 million, which begins to expire in 2013.The exercise of
certain stock options and the vesting of certain restricted stock awards during
the years ended December 31, 2012 and 2011 generated income tax deductions equal
to the excess of the fair market value over the exercise price or grant date
fair value, as applicable. We will not recognize a deferred tax asset with
respect to the excess of tax over book stock compensation deductions until the
tax deductions actually reduce our current taxes payable. As such, we have not
recorded a deferred tax asset in the accompanying financial statements related
to the additional net operating losses generated from the windfall tax
deductions associated with the exercise of these stock options and the vesting
of the restricted stock awards. If and when we utilize these net operating
losses to reduce income taxes payable, the tax benefit will be recorded as an
increase in additional paid-in capital. As of December 31, 2012 and December 31,
2011, the cumulative amount of net operating losses relating to such option
exercises and vesting events that have been included in the gross net operating
loss carryforwards above is $28.9 million and $26.4 million, respectively.
During the years ended December 31, 2012 and 2011, we recognized windfall tax
benefits of approximately $0.1 million and $0.2 million, respectively, related
to certain state and foreign tax jurisdictions, which were recorded as an
increase to additional paid-in capital.
During the years ended December 31, 2012 and 2011, certain stock options were
exercised and certain shares related to restricted stock awards vested at times
when our stock price was substantially lower than the fair value of those shares
at the time of grant. As a result, the income tax deduction related to such
shares is less than the expense previously recognized for book purposes. Such
shortfalls reduce additional paid-in capital to the extent relevant windfall tax
benefits have been previously recognized. As described above, we recognized a
portion of the windfall tax benefits in 2012 and recorded an increase to
additional paid-in capital. Therefore, $0.2 million of shortfalls has not been
included in income tax expense but has reduced additional paid-in capital for
the year ended December 31, 2012. The remaining impact of the shortfalls
totaling $0.4 million has been included in income tax expense. As of
December 31, 2011, we recognized a portion of the windfall tax benefits and
recorded an increase to additional paid-in capital. Therefore, the impact of the
shortfalls totaling $0.1 million was not included in income tax expense but
reduced additional paid-in capital for the year ended December 31, 2011. Looking
forward we cannot predict the stock compensation shortfall impact because of
dependency upon future market price performance of our stock. For uncertain tax
positions, we use a more-likely-than-not recognition threshold based on the
technical merits of the tax position taken. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefits determined on a cumulative probability basis, which are
more-likely-than-not to be realized upon ultimate settlement in the financial
statements. As of December 31, 2012, 2011 and 2010, we had unrecognized tax
benefits of $1.4 million, $1.4 million and $2.4 million, respectively, on a
tax-effected basis. It is our policy to recognize interest and penalties related
to income tax matters in income tax expense. As of December 31, 2012, the amount
of accrued interest and penalties on unrecognized tax benefits was $0.7 million.
As of December 31, 2011, the amount of accrued interest and penalties on
unrecognized tax benefits was $0.6 million. We or one of our subsidiaries files
income tax returns in the U.S. Federal jurisdiction and various state and
foreign jurisdictions. For income tax returns filed by us, we are no longer
subject to U.S. Federal examinations by tax authorities for years before 2009 or
state and local tax examinations by tax authorities for years before 2008,
although tax attribute carryforwards generated prior to these years may still be
adjusted upon examination by tax authorities.
Stock-Based Compensation
We estimate the fair value of share-based awards on the date of grant. The fair
value of stock options is determined using the Black-Scholes option-pricing
model. The fair value of market-based stock options and restricted stock units
is determined using a Monte Carlo simulation embedded in a lattice model. The
fair value of restricted stock awards is based on the closing price of our
common stock on the date of grant. The determination of the fair value of stock
option awards and restricted stock awards is based on a variety of factors
including, but not limited to, the our common stock price, expected stock price
volatility over the expected life of awards, and actual and projected exercise
behavior. Additionally we estimate forfeitures for share-based awards at the
dates of grant based on historical experience, adjusted for future expectation.
The forfeiture estimate is revised as necessary if actual forfeitures differ
from these estimates.
We issue restricted stock awards whose restrictions lapse upon either the
passage of time (service vesting), achieving performance targets, or some
combination of these restrictions. For those restricted stock awards with only
service conditions, we recognize compensation cost on a straight-line basis over
the explicit service period. For awards with both performance and service
conditions, we start recognizing compensation cost over the remaining service
period when it is probable the performance condition will be met. Stock awards
that contain performance or market vesting conditions, are excluded from diluted
earnings per share computations until the contingency is met as of the end of
that reporting period. If factors change and we employ different assumptions in
future periods, the compensation expense we record may differ significantly from
what we have previously recorded.
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At December 31, 2012, total estimated unrecognized compensation expense related
to unvested stock-based awards granted prior to that date was $25.7 million,
which is expected to be recognized over a weighted-average period of 1.24 years.
The actual amount of stock-based compensation expense we record in any fiscal
period will depend on a number of factors, including the number of shares
subject to restricted stock and/or stock options issued, the fair value of our
common stock at the time of issuance and the expected volatility of our stock
price over time. In addition, changes to our incentive compensation plan that
heavily favor stock-based compensation are expected to cause stock-based
compensation expense to increase in absolute dollars. If factors change and we
employ different assumptions in future period, the compensation expense we
record may differ significantly from what we have previously recorded.
Seasonality
Historically, a slightly higher percentage of our customers have renewed their
subscription products with us during the fourth quarter.
Results of Operations
The following table sets forth selected consolidated statements of operations
data as a percentage of total revenues for each of the periods indicated.
Year Ended
December 31,
2012 2011 2010
Revenues 100.0 % 100.0 % 100.0 %
Cost of Revenues 33.9 32.3 29.7
Selling and marketing expenses 36.0 33.7 34.1
Research and development 13.3 14.7 15.0
General and administrative 14.9 20.9 19.4
Amortization of intangible assets 3.7 4.0 2.6
Impairment of intangible assets 1.3 - -
Settlement of litigation - 2.2 -
Total expenses from operations 103.1 107.8 100.8
Loss from operations (3.1 ) (7.8 ) (0.8 )
Interest and other (expense) income, net (0.3 ) (0.2 ) -
Loss from foreign currency transactions (0.3 ) (0.2 ) (0.2 )
Gain on sale (impairment) of marketable securities - 0.1 -
Loss before income tax (benefit) provision
(3.7 ) (8.1 ) (1.0 )
Income tax (benefit) provision (0.9 ) 1.3 0.1
Net (loss) income attributable to common stockholders (4.6 )% (6.8 )% (0.9 )%
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenues
Year Ended
December 31, Change
2012 2011 $ %
(In thousands)
Revenues $ 255,193 $ 232,392 $ 22,801 9.8 %
Total revenues increased by approximately $22.8 million during the year ended
December 31, 2012 as compared to the year ended December 31, 2011. We attribute
the revenue growth to increased sales to our existing customer base and
continued growth of our customer base during the period. Revenue from existing
customers increased $25.4 million from $202.6 million for the year ended
December 31, 2011 to $228.0 million for the year ended December 31, 2012, while
revenue from new customers decreased $2.6 million from $29.8 million for the
year ended December 31, 2011 to $27.2 million for the year ended December 31,
2012. Revenue from new customers decreased due to a significant focus on the
selling of new products, especially vCE, to our current customer base. In
addition, revenue associated with the ARS copy testing products decreased
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$6.3 million to $9.4 million during the year ended December 31, 2012 from $15.7
million during the year ended December 31, 2011.
We experienced continued revenue growth in subscription revenues, which
increased by approximately $19.2 million during the year ended December 31,
2012, from $196.8 million in the prior year period. We also experienced
continued revenue growth from our project-based revenues which increased by
approximately $3.6 million during the year ended December 31, 2012, from $35.6
million in the prior year period.
Revenues from U.S customers were $183.4 million for the year ended December 31,
2012, or approximately 72% of total revenues, while revenues from customers
outside of the U.S. were $71.8 million for the year ended December 31, 2012, or
approximately 28% of total revenues. Our focus on organic growth efforts in
international markets resulted in increased international revenues of $11.8
million, comprised of increases of $7.7 million in Europe, $1.8 million in
Canada, $1.8 million in Asia and $1.7 million in Latin America, offset by a
decrease of $1.2 million in the Middle East and Africa during the year ended
December 31, 2012 as compared to the prior year period.
Operating Expenses
The majority of our operating expenses consist of employee salaries and related
benefits, stock compensation expense, professional fees, rent and other facility
related costs, depreciation expense, and amortization and impairment of acquired
intangible assets. Our single largest operating expense relates to our people.
In order to effectively motivate our employees and to provide them with proper
long-term incentives, we pay the vast majority of our annual bonus arrangements
using our common stock. In addition, three of our most senior executives,
including our Chief Executive Officer, have agreed to receive shares of our
common stock instead of a cash salary.
Our total operating expenses increased by approximately $12.6 million, or
approximately 5%, during the year ended December 31, 2012 as compared to the
year ended December 31, 2011. This increase is primarily attributable to
increased expenditures for employee salaries, benefits and related costs of
$11.5 million associated with our increased headcount, increased use of stock
based compensation of $3.6 million, an impairment charge of $3.3 million related
to a decline in value of intangible assets acquired as part of the ARS
acquisition, increased royalties and reseller fees of $2.4 million associated
with an increase in the usage of third parties to sell our products, increased
rent and other facilities related costs and depreciation expense of $2.4
million, increased travel and airfare of $1.6 million associated with our sales
efforts, and increased bad debt expense of $1.2 million associated with the
write-off of accounts receivable deemed uncollectible. The increases were
partially offset by a decrease in professional fees of $11.3 million associated
with patent infringement litigation that occurred in 2011 and the related
settlement expense of $5.2 million.
Cost of Revenues
Year Ended
December 31, Change
2012 2011 $ %
(In thousands)
Cost of revenues $ 86,379 $ 75,103 $ 11,276 15.0 %
As a percentage of revenues 33.9 % 32.3 %
Cost of revenues consists primarily of expenses related to operating our network
infrastructure, producing our products, and the recruitment, maintenance and
support of our consumer panels. Expenses associated with these areas include the
salaries, stock-based compensation, and related personnel expenses of network
operations, survey operations, custom analytics and technical support, all of
which are expensed as they are incurred. Cost of revenues also includes data
collection costs for our products, operational costs associated with our data
centers, including depreciation expense associated with computer equipment that
supports our panel and systems, and allocated overhead, which is comprised of
rent and other facilities related costs, and depreciation expense related to
general purpose equipment and software.
Cost of revenues increased by approximately $11.3 million during the year ended
December 31, 2012 compared to the year ended December 31, 2011. This increase is
primarily attributable to increased expenditures for employee salaries, benefits
and related costs of $5.6 million associated with our increased headcount,
increased royalties and reseller fees of $2.4 million associated with an
increase in the usage of third-parties to sell our products, increased panel
recruitment costs of $1.3 million associated with new panels in the UK and
Spain, increased third-party sample costs of $1.1 million associated with
specific projects, such as the 2012 NBC summer Olympics coverage, and increased
incentive costs of $0.5 million associated with compensating members of our
panels. These costs were partially offset by a decrease of $1.9 million
associated with a reduction in the usage of third-party providers for customer
service and support related to our data collection efforts
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Cost of revenues increased as a percentage of revenues during the year ended
December 31, 2012 as compared to the year ended December 31, 2011 reflecting our
increased expenses for additional employees and infrastructure in anticipation
of increased growth in 2013 and beyond coupled with costs associated with our
expanding panel.
Selling and Marketing Expenses
Year Ended
December 31, Change
2012 2011 $ %
(In thousands)
Selling and marketing $ 91,849 $ 78,289 $ 13,560 17.3 %
As a percentage of revenues 36.0 % 33.7 %
Selling and marketing expenses consist primarily of salaries, benefits,
commissions, bonuses, and stock-based compensation paid to our direct sales
force and industry analysts, as well as costs related to online and offline
advertising, industry conferences, promotional materials, public relations,
other sales and marketing programs, and allocated overhead, which is comprised
of rent and other facilities related costs, and depreciation expense related to
general purpose equipment and software. All selling and marketing costs are
expensed as they are incurred. Commission plans are developed for our account
managers with criteria and size of sales quotas that vary depending upon the
individual's role. Commissions are expensed as selling and marketing costs when
a sales contract is executed by both the customer and us. Selling and marketing
expenses have increased because we have been recruiting additional salespeople
in order to support international growth, especially in our Digital Analytix and
vCE product offerings.
Selling and marketing expenses increased by $13.6 million during the year ended
December 31, 2012 compared to the year ended December 31, 2011. This increase is
primarily attributable to increased employee salaries, benefits and related
costs of $5.5 million and increased stock-based compensation of $3.8 million
associated with our increased headcount as well as a decision to pay certain
sales related bonuses with our common stock, increased travel and airfare of
$1.6 million associated with our sales efforts, increased rent and other
facility related costs and depreciation expense allocations of $1.6 million, and
increased sales commissions of $0.5 million associated with our increased sales
level. These costs were partially offset by severance costs of $0.4 million that
occurred in 2011 but not in 2012.
Selling and marketing expenses increased as a percentage of revenues during the
year ended December 31, 2012 as compared to the year ended December 31, 2011 due
to slower than expected revenue growth.
Research and Development Expenses
Year Ended
December 31, Change
2012 2011 $ %
(In thousands)
Research and development $ 33,994 $ 34,050 $ (56 ) (0.2 )%
As a percentage of revenues 13.3 % 14.7 %
Research and development expenses include new product development costs,
consisting primarily of salaries, benefits, stock-based compensation and related
costs for personnel associated with research and development activities, fees
paid to third parties to develop new products and allocated overhead, which is
comprised of rent and other facilities related costs, and depreciation expense
related to general purpose equipment and software.
Research and development expenses decreased by $0.1 million during the year
ended December 31, 2012 as compared to the year ended December 31, 2011. This
decrease is primarily attributable to decreased employee salaries, benefits and
related costs of $0.8 million associated with a reallocation of resources away
from research and development activities offset by higher costs of $0.8 million
related to certain data licensing contracts associated with new products in
development.
Research and development expenses decreased as a percentage of revenues for the
year ended December 31, 2012 compared to the year ended December 31, 2011 due to
the fact that overall research and development costs remained relatively
constant coupled with the increase in revenues.
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General and Administrative Expenses
Year Ended
December 31, Change
2012 2011 $ %
(In thousands)
General and administrative $ 38,134 $ 48,514 $ (10,380 ) (21.4 )%
As a percentage of revenues 14.9 % 20.9 %
General and administrative expenses consist primarily of salaries, benefits,
stock-based compensation, and related expenses for executive management,
finance, accounting, human capital, legal and other administrative functions, as
well as professional fees, overhead, including allocated overhead, which is
comprised of rent and other facilities related costs, and depreciation expense
related to general purpose equipment and software, and expenses incurred for
other general corporate purposes.
General and administrative expenses decreased by $10.4 million during the year
ended December 31, 2012 as compared to the year ended December 31, 2011. This
decrease is primarily attributable to a decrease in professional fees of
$11.3 million associated with patent infringement litigation that occurred in
2011 and was settled in the fourth quarter of 2011, partially offset by
increased employee salaries, benefits and related costs of $1.2 million
associated with our increased headcount and increased bad debt expense of $1.2
million associated with the write-off of accounts receivable deemed
uncollectible and an increase in our allowance for doubtful accounts due to our
continued international expansion. In particular, during the year we wrote-off
approximately $0.3 million in accounts receivable from two customers located in
the Middle East. As a result, we have modified our sales practices in certain
countries by going to a reseller type model whereby we contract with one
customer in the region as opposed to contracting directly with multiple
customers. In addition, based on our recent historical experience we have
increased our allowance for doubtful accounts.
General and administrative expenses decreased as a percentage of revenues during
the year ended December 31, 2012 as compared to the year ended December 31,
2011, due to the overall reduction in costs coupled with the increase in
revenues.
Amortization Expense
Year Ended December 31, Change
2012 2011 $ %
(In thousands)
Amortization expense $ 9,289 $ 9,301 $ (12 ) (0.1 )%
As a percentage of revenues 3.7 % 4.0 %
Amortization expense consists of charges related to the amortization of
intangible assets associated with acquisitions.
Amortization expense remained constant at $9.3 million during the year ended
December 31, 2012, as compared to the year ended December 31, 2011 due
principally to certain intangible assets whose useful life ended as of
December 31, 2011, offset by increased amortization of intangible assets that
were acquired as part of the AdXpose acquisition in the third quarter of 2011,
the acquisition of certain patent intangible assets acquired in the fourth
quarter of 2011, and the shortening of the useful life of the ARS intangible
assets.
Impairment of Intangible Assets
During the three months ended June 30, 2012, we noted a significant decline in
revenues from ARS, which we acquired in February 2010. As a result, we performed
an impairment test of the long-lived assets of ARS. The long-lived assets of ARS
consist of customer relationships and acquired methodologies and technology. The
first step in testing the long-lived assets of ARS for impairment was to compare
the sum of the undiscounted cash flows expected to result from the use and
eventual disposition of ARS to the carrying value of ARS's long-lived assets.
Based on this analysis, we determined as of June 30, 2012 that the sum of the
expected undiscounted cash flows to be generated from ARS was less than the
carrying value of the ARS intangible assets. As such, we concluded that the
intangible assets of ARS were impaired. To measure the amount of the impairment,
we then estimated the fair value of the ARS intangible assets as of June 30,
2012. In determining the fair value of the intangible assets, we prepared a
discounted cash flow ("DCF") analysis for each intangible asset. In preparing
the DCF analysis, we used a combination of income approaches, including the
relief from royalty approach and the excess earnings approach. Determining fair
value requires the exercise of significant judgment, including judgments about
appropriate discount rates, terminal growth rates, royalty rates and the amount
and timing of expected future cash flows. The cash flows employed in
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the DCF analysis are based on our most recent budgets, forecasts and business
plans as well as growth rate assumptions for years beyond the current business
plan period. Significant assumptions used include a discount rate of 18.5%,
which is based on an assessment of the risk inherent in the future revenue
streams and cash flows of ARS, as well as a royalty rate of 3.0%, which is based
on an analysis of royalty rates in similar, market transactions. Based on the
DCF analysis, we have estimated the fair value of the intangible assets of ARS
to be $2.5 million as of June 30, 2012, which resulted in an impairment charge
of $3.3 million during the year ended December 31, 2012. In addition, these
intangible assets will be amortized over a remaining estimated useful life of
eighteen months, beginning July 1, 2012.
Interest and Other Income, Net
Interest and other income/expense, net, consists of interest income, interest
expense and gains or losses on disposals of fixed assets.
Interest income consists of interest earned from our cash and cash equivalent
balances. Interest expense is incurred due to capital leases pursuant to several
equipment loan and security agreements to finance the lease of various hardware
and other equipment purchases and our revolving credit facility. Our capital
lease obligations are secured by a senior security interest in eligible
equipment.
Interest and other income (expense), net for the year ended December 31, 2012
resulted in net expense of $0.9 million as compared to net expense of $0.5
million for the year ended December 31, 2011. The increase in interest expense
was due to our increased use of capital leases to finance the expansion of our
technology infrastructure along with fees associated with our revolving credit
facility coupled with a reduction in interest income associated with the sale of
our auction rate securities in 2011.
Loss From Foreign Currency
The functional currency of our foreign subsidiaries is the local currency. All
assets and liabilities are translated at the current exchange rates as of the
end of the period, and revenues and expenses are translated at average rates in
effect during the period. The gain or loss resulting from the process of
translating the foreign currency financial statements into U.S. dollars is
included as a component of other comprehensive (loss) income.
We recorded a transaction loss of $0.7 million for the year ended December 31,
2012 as compared to a transaction loss of $0.4 million during the year ended
December 31, 2011, respectively, due to our increased international presence in
Europe and Latin America.
Provision for Income Taxes
As of December 31, 2012, we had federal and state net operating loss
carryforwards for tax purposes of approximately $46.8 million and $43.1 million,
respectively. These net operating loss carryforwards begin to expire in 2022 for
federal income tax purposes and begin to expire in 2013 for state income tax
purposes. In the future, we intend to utilize any carryforwards available to us
to reduce our tax payments. A portion of our net operating loss carryforwards
are subject to an annual limitation under Section 382 of the Internal Revenue
Code. We do not expect that this limitation will impact our ability to utilize
all of our net operating losses prior to their expiration. We recognized income
tax expense of approximately $2.4 million during the year ended December 31,
2012, which is comprised of current tax expense of $0.1 million related to
federal alternative minimum tax and state income tax liabilities, $1.4 million
of foreign income tax expense, and deferred tax expense of approximately $0.9
million related to temporary differences between the tax treatment and financial
reporting treatment for certain items. Included within the total deferred tax
expense of $0.9 million is $2.6 million of deferred tax expense associated with
the write-off of a deferred tax asset related to certain market-based stock
awards that will never be realized due to the expiration of the stock awards.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Revenues
Year Ended December 31, Change
2011 2010 $ %
(In thousands)
Revenues $ 232,392 $ 174,999 $ 57,393 32.8 %
Total revenues increased by approximately $57.4 million during the year ended
December 31, 2011 as compared to the year ended December 31, 2010. We attribute
the revenue growth to a combination of increased sales to our existing customer
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base and continued growth of our customer base during the period. Revenue from
existing customers increased $48.5 million from $154.1 million for the year
ended December 31, 2010 to $202.6 million for the year ended December 31, 2011,
while revenue from new customers increased $8.9 million from $20.9 million for
the year ended December 31, 2010 to $29.8 for the year ended December 31, 2011.
Revenues were also impacted due to the fact that our results of operations in
2011 included a full year of activity associated with the 2010 acquisitions, as
opposed to only a partial year in 2010.
We experienced continued revenue growth in subscription revenues, which
increased by approximately $48.1 million during the year ended December 31,
2011, from $148.7 million in the prior year period. In addition, our
project-based revenues increased by approximately $9.3 million during the year
ended December 31, 2011, from $26.3 million in the prior year period.
Revenues from U.S customers increased to $172.3 million for the year ended
December 31, 2011, or approximately 74% of total revenues, while revenues from
customers outside of the U.S. increased to $60.1 million for the year ended
December 31, 2011, or approximately 26% of total revenues. A substantial portion
of this increase in the proportion of our international revenues was
attributable to our international acquisitions in the second half of 2010.
However, this growth was further supplemented by our organic growth efforts in
international markets. These combined activities resulted in increased
international revenues of $27.4 million, comprised of increases of $20.0 million
in Europe, $1.9 million in Canada, and $5.5 million in all other international
locations during the year ended December 31, 2011 as compared to the prior year
period.
Operating Expenses
The majority of our operating expenses consist of employee salaries and related
benefits, stock compensation expense, professional fees, rent and other facility
related costs, depreciation expense, and amortization of acquired intangible
assets.
Our total operating expenses increased by approximately $74.0 million, or
approximately 42%, during the year ended December 31, 2011 as compared to the
year ended December 31, 2010. This increase is primarily attributable to
increased expenditures for employee salaries, benefits and related costs of
$23.5 million and increased stock-based compensation of $3.5 million associated
with our increased headcount, increased professional fees of $10.8 million
primarily associated with litigation, increased use of third party providers for
customer service and support related to our data collection efforts of
$6.8 million due to increased revenue and expansion, increased rent and other
facility related costs and depreciation expense allocations of $6.3 million,
increases in amortization expense of $4.8 million related to the acquired
intangible assets from our recent acquisitions, a one-time charge of $5.2
million related to the settlement of outstanding litigation and increases in
sales commissions of $2.5 million due to our increases in revenue. All of the
above costs have been allocated to the various components of our operating
expenses, as further described in the following sections. Operating Expenses
were also impacted due to the fact that our results of operations in 2011
included a full year of activity associated with the 2010 acquisitions, as
opposed to only a partial year in 2010.
Cost of Revenues
Year Ended
December 31, Change
2011 2010 $ %
(In thousands)
Cost of revenues $ 75,103 $ 51,953 $ 23,150 44.6 %
As a percentage of revenues 32.3 % 29.7 %
Cost of revenues consists primarily of expenses related to operating our network
infrastructure, producing our products, and the recruitment, maintenance and
support of our consumer panels. Expenses associated with these areas include the
salaries, stock-based compensation, and related personnel expenses of network
operations, survey operations, custom analytics and technical support, all of
which are expensed as they are incurred. Cost of revenues also includes data
collection costs for our products, operational costs associated with our data
centers, including depreciation expense associated with computer equipment that
supports our panel and systems, and allocated overhead, which is comprised of
rent and other facilities related costs, and depreciation expense related to
general purpose equipment and software.
Cost of revenues increased by approximately $23.2 million during the year ended
December 31, 2011 compared to the year ended December 31, 2010. This increase
was attributable to increased expenditures for employee salaries, benefits and
related costs of $7.8 million associated with our increased headcount, increased
use of third party providers for customer service and support related to our
data collection efforts of $6.4 million due to increased revenue and expansion,
increased rent and other facility related costs and depreciation expense
allocations of $4.2 million, and increased data center and bandwidth costs of
$1.5 million related to the increased number of Web sites using our Unified
Digital Measurement solution.
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Cost of revenues increased as a percentage of revenues during the year ended
December 31, 2011 as compared to the year ended December 31, 2010 reflecting our
increased expenses for additional employees and infrastructure in anticipation
of increased growth in 2012 and beyond.
Selling and Marketing Expenses
Year Ended
December 31, Change
2011 2010 $ %
(In thousands)
Selling and marketing $ 78,289 $ 59,641 $ 18,648 31.3 %
As a percentage of revenues 33.7 % 34.1 %
Selling and marketing expenses consist primarily of salaries, benefits,
commissions, bonuses, and stock-based compensation paid to our direct sales
force and industry analysts, as well as costs related to online and offline
advertising, industry conferences, promotional materials, public relations,
other sales and marketing programs, and allocated overhead, which is comprised
of rent and other facilities related costs, and depreciation expense related to
general purpose equipment and software. All selling and marketing costs are
expensed as they are incurred. Commission plans are developed for our account
managers with criteria and size of sales quotas that vary depending upon the
individual's role. Commissions are paid to a salesperson and are expensed as
selling and marketing costs when a sales contract is executed by both the
customer and us. In the case of multi-year agreements, one year of commissions
is paid initially, with the remaining amounts paid at the beginning of the
succeeding years.
Selling and marketing expenses increased by $18.6 million during the year ended
December 31, 2011 compared to the year ended December 31, 2010. This increase
was attributable to increased employee salaries, benefits and related costs of
$9.7 million and increased stock-based compensation of $2.3 million associated
with our increased headcount, additional sales commissions of $2.5 million,
increased rent and other facility related costs and depreciation expense
allocations of $1.3 million, and increased travel costs of $0.8 million incurred
to support our sales growth.
Selling and marketing expenses remained relatively constant as a percentage of
revenues during the year ended December 31, 2011 as compared to the year ended
December 31, 2010.
Research and Development Expenses
Year Ended
December 31, Change
2011 2010 $ %
(In thousands)
Research and development $ 34,050 $ 26,377 $ 7,673 29.1 %
As a percentage of revenues 14.7 % 15.0 %
Research and development expenses include new product development costs,
consisting primarily of salaries, benefits, stock-based compensation and related
costs for personnel associated with research and development activities, fees
paid to third parties to develop new products and allocated overhead, which is
comprised of rent and other facilities related costs, and depreciation expense
related to general purpose equipment and software.
Research and development expenses increased by $7.7 million during the year
ended December 31, 2011 as compared to the year ended December 31, 2010. This
increase was attributable to increased employee salaries, benefits and related
costs of $4.4 million associated with our increased headcount for research and
development activities, higher costs of $0.9 million related to certain data
licensing contracts that began in Q1 2011, increased rent and other facility
related costs and depreciation expense allocations of $0.6 million and increased
hardware and software costs of $0.6 million.
Research and development expenses were generally unchanged as a percentage of
revenues for the year ended December 31, 2011 compared to the year ended
December 31, 2010.
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General and Administrative Expenses
Year Ended December 31, Change
2011 2010 $ %
(In thousands)
General and administrative $ 48,514 $ 33,953 $ 14,561 42.9 %
As a percentage of revenues 20.9 % 19.4 %
General and administrative expenses consist primarily of salaries, benefits,
stock-based compensation, and related expenses for executive management,
finance, accounting, human capital, legal and other administrative functions, as
well as professional fees, overhead, including allocated overhead, which is
comprised of rent and other facilities related costs, and depreciation expense
related to general purpose equipment and software, and expenses incurred for
other general corporate purposes.
General and administrative expenses increased by $14.6 million during the year
ended December 31, 2011 as compared to the year ended December 31, 2010. This
increase was primarily attributable to additional professional fees of
$10.6 million, which includes costs related to recent litigation and for other
accounting, legal and general consulting services due to our expanding business.
In addition, there was increased employee salaries, benefits and related costs
of $1.5 million and increased stock-based compensation expense of $0.6 million
and increased recruiting costs of $0.4 million associated with our increased
headcount, and increased rent and other facility related costs and depreciation
expense allocations of $0.2 million. These costs were partially offset by a
reduction in severance expense of $0.8 million due to significant termination
costs incurred in the year ended December 31, 2010.
General and administrative expenses increased slightly as a percentage of
revenues during the year ended December 31, 2011 as compared to the year ended
December 31, 2010, primarily due to costs related to recent litigation and
increased headcount.
Amortization Expense
Year Ended December 31, Change
2011 2010 $ %
(In thousands)
Amortization expense $ 9,301 $ 4,534 $ 4,767 105.1 %
As a percentage of revenues
4.0 % 2.6 %
Amortization expense consists of charges related to the amortization of
intangible assets associated with acquisitions.
Amortization expense increased $4.8 million during the year ended December 31,
2011, respectively, as compared to the year ended December 31, 2010 due
principally to amortization of intangible assets that were acquired after the
second quarter of 2010 in connection with our recent acquisitions. In addition,
we recorded additional amortization expense associated with a change in the
useful life of the ARS trade name in the second quarter of 2011, which we ceased
using as of December 31, 2011.
Interest and Other Income, Net
Interest income (expense), net for the year ended December 31, 2011 resulted in
net interest expense of $0.6 million compared to less than $0.1 million of net
income for the year ended December 31, 2010. The increase in interest was due to
our increased use of capital leases to finance the expansion of our technology
infrastructure along with fees associated with our revolving credit facility
coupled with a reduction in interest income.
Loss From Foreign Currency
We recorded a transaction loss of $0.4 million during the year ended December
31, 2011 as compared to a transaction loss of $0.3 million during the year ended
December 31, 2010 due to our increased international presence in Europe and
Latin America. Our foreign currency transactions are recorded primarily as a
result of fluctuations in the exchange rate between the U.S. dollar and the
British Pound, Euro, and the functional currencies of our Latin America
entities.
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Gain on Sale of Marketable Securities
During the year ended December 31, 2011, we recognized a gain of $0.2 million
from the sale of four auction rate securities.
Provision for Income Taxes
As of December 31, 2011, we had federal and state net operating loss
carryforwards for tax purposes of approximately $50.8 million and $36.9 million,
respectively. These net operating loss carryforwards begin to expire in 2022 for
federal income tax purposes and begin to expire in 2013 for state income tax
purposes. In the future, we intend to utilize any carryforwards available to us
to reduce our tax payments. A portion of our net operating loss carryforwards
are subject to an annual limitation under Section 382 of the Internal Revenue
Code. We do not expect that this limitation will impact our ability to utilize
all of our net operating losses prior to their expiration. For the year ended
December 31, 2011, the tax provision is comprised of U.S. income tax expense of
$0.3 million related to our federal alternative minimum tax and state tax
liabilities, $1.1 million of foreign income tax expense, and deferred tax
benefit of approximately $4.4 million related to temporary differences between
the tax treatment and financial reporting treatment for certain items, most
notably the Nielsen transaction.
As of December 31, 2010, we had federal and state net operating loss
carryforwards for tax purposes of approximately $51.9 million and $37.3 million,
respectively. These net operating loss carryforwards begin to expire in 2022 for
federal income tax purposes and begin to expire in 2016 for state income tax
purposes. For the year ended December 31, 2010, the tax provision is comprised
of U.S. income tax expense of $0.6 million related to our federal alternative
minimum tax and state tax liabilities, $1.2 million of foreign income tax
expense, and deferred tax benefit of approximately $1.9 million related
primarily to the reduction of our valuation allowance.
Effects of Acquisitions on our Business
During 2010 and 2011, we expanded our business by completing four acquisitions.
Specifically, we acquired ARS, Nexius, Nedstat, and AdXpose on February 19,
2010, July 1, 2010, August 31, 2010, and August 11, 2011, respectively. As a
result of these acquisitions, our revenues and expenses increased significantly.
On a comparative basis, the amount of our revenues and expenses in the second
half of 2010 and the first half of 2011 were significantly higher than the
applicable year ago period due to the fact that the results of operations from
these acquisitions were not included in the comparative year ago periods.
In evaluating the results of operations for the years ended December 31, 2011
and 2010, it is important to note that the period of time that each acquired
entity is included in our results of operations is different. The following
table illustrates the number of months that each of these acquired entities has
been included in our results of operations discussed above:
Year Ended Year Ended
December 31, December 31,
2011 2010
(In thousands)
ARS 12 11
Nexius 12 6
Nedstat 12 4
AdXpose 5 -
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Liquidity and Capital Resources
The following table summarizes our cash flows:
Year Ended December 31,
2012 2011 2010
(In thousands)
Consolidated Cash Flow Data
Net cash provided by operating activities $ 44,872 $ 26,750 $ 25,410
Net cash used in investing activities
(7,590 ) (9,806 ) (44,023 )
Net cash used in financing activities (14,285 ) (12,303 ) (6,083 )
Effect of exchange rate changes on cash 696 (306 ) 148
Net increase (decrease) in cash and equivalents 23,693 4,335 (24,548 )
Our principal uses of cash historically have consisted of cash paid for business
acquisitions, payroll and other operating expenses and payments related to the
investments in equipment primarily to support our consumer panel and technical
infrastructure required to support our customer base. As of December 31, 2012,
our principal sources of liquidity consisted of $61.8 million in cash, the
majority of which represents cash generated from operating activities. As of
December 31, 2012, $10.1 million of the $61.8 million in cash on hand was held
by foreign subsidiaries that would be subject to tax withholding payments if it
is repatriated to the U.S. It is management's current intention that all foreign
earnings will be indefinitely reinvested in these foreign countries and will not
be repatriated to the U.S. However, if management were to repatriate these funds
to the U.S., they would be subject to income tax payments ranging from 5% to 15%
of the amount repatriated.
On June 30, 2011, we entered into a secured credit and security agreement (the
"Credit Agreement") with Bank of America, N.A. ("Bank of America") for a
two-year, $50.0 million secured revolving credit facility (the "Revolving Credit
Facility"). The agreement includes a maximum $7.0 million sublimit for a euro
loan facility and a $10.0 million sublimit for the issuance of letters of
credit. The maturity date of the Revolving Credit Facility is June 30,
2013. Borrowings under the Revolving Credit Facility shall be used towards
working capital and other general corporate purposes as well as for the issuance
of letters of credit. Loans made under the Revolving Credit Facility will bear
interest at a fluctuating rate based on the London Interbank Offered Rate
("LIBOR") plus an applicable margin, which will range from 1.75% to 2.75%, based
on our funded debt ratio. We and each of our material, wholly-owned subsidiaries
entered into a Security Agreement in favor of Bank of America (the "Security
Agreement"). Pursuant to the Security Agreement, the obligations under the
Revolving Credit Facility are secured by a security interest in substantially
all of our assets.
Under the terms of the Revolving Credit Facility, we are restricted from paying
dividends and incurring certain indebtedness, among other restrictive covenants.
We continue to be in full compliance with all covenants contained in the
Revolving Credit Facility.
During the third quarter of 2012, we borrowed €3.3 million under the Revolving
Credit Facility. This amount was subsequently repaid in the fourth quarter of
2012 and as of December 31, 2012 and February 19, 2013, no amounts are
outstanding under the terms of our Revolving Credit Facility.
We maintain letters of credit in lieu of security deposits with respect to
certain office leases. As of December 31, 2012, $3.9 million in letters of
credit were outstanding, leaving $6.1 million available for additional letters
of credit. These letters of credit may be reduced periodically provided that we
meet the conditional criteria of each related lease agreement.
Operating Activities
Our cash flows from operating activities are significantly influenced by our
investments in personnel and infrastructure to support the anticipated growth in
our business, increases in the number of customers using our products and the
amount and timing of payments made by these customers.
We generated approximately $44.9 million of net cash from operating activities
during the year ended December 31, 2012. Our cash flows from operations were
driven by our net loss of $11.8 million, offset by $55.1 million in non-cash
items such as depreciation, impairment of intangible assets, amortization,
provision for bad debts, stock-based compensation, and a non-cash deferred tax
provision. In addition, our operating cash flows were positively impacted by a
$11.6 million increase in deferred revenue and amounts collected from customers
in advance of when we recognize revenue, a $1.3 million increase in deferred
rent due to tenant allowances related to our leases and a $1.5 million decrease
in prepaid expenses and other current assets. Cash flows from operations were
negatively impacted by a $7.8 million decrease in accounts payable, accrued
expense
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and other liabilities associated with the timing of payments associated with
annual bonuses paid in the first quarter of the year and professional fees
accrued as of December 31, 2011, and a $4.9 million increase in accounts
receivable associated with our increased revenues.
We generated approximately $26.8 million of net cash from operating activities
during the year ended December 31, 2011. Our cash flows from operations were
driven by our net loss of $15.8 million, offset by $43.9 million in non-cash
items such as depreciation, amortization, provision for bad debts, stock-based
compensation, the settlement of outstanding litigation, a non-cash deferred tax
benefit, and a gain on the sale of marketable securities. In addition, our
operating cash flows were positively impacted by an $11.4 million net increase
in accounts payable and accrued expenses due to the timing of payments issued to
our vendors and a $0.5 million increase in deferred rent due to tenant
allowances related to our leases. Cash flows from operations were negatively
impacted by a $10.2 million increase in accounts receivable associated with our
increased revenues, a $1.6 million decrease in amounts collected from customers
in advance of when we recognize revenue and a $1.5 million increase in prepaid
expenses and other current assets.
We generated approximately $25.4 million of net cash from operating activities
during the year ended December 31, 2010. Our cash flows from operations was
driven by our net loss of $1.6 million, as adjusted for $30.2 million in
non-cash charges such as depreciation, amortization, provision for bad debts,
stock-based compensation, deferred rent and bond premium amortization, and a
$1.9 million non-cash deferred tax benefit. At the same time, our cash flows
from operations were negatively impacted by a $4.5 million increase in prepaid
expenses and other assets due to an increase in advanced payments to vendors for
annual maintenance agreements and estimated quarterly income tax payments. This
was partially offset by a positive impact of $2.9 million due to an increase in
accounts payable and accrued expenses in 2010 due to the timing of payments to
vendors.
Investing Activities
Our primary regularly recurring investing activities have consisted of purchases
of computer network equipment to support our Internet user panel and maintenance
of our database, furniture and equipment to support our operations, purchases
and sales of marketable securities, and payments related to the acquisition of
several companies. As our customer base continues to expand, we expect purchases
of technical infrastructure equipment to grow in absolute dollars. The extent of
these investments will be affected by our ability to expand relationships with
existing customers, grow our customer base, introduce new digital formats and
increase our international presence.
We used $7.6 million of net cash in investing activities during the year ended
December 31, 2012, associated with the purchase of property and equipment to
maintain and expand our technology infrastructure.
We used $9.8 million of net cash in investing activities during the year ended
December 31, 2011. Approximately $7.2 million was associated with the purchase
of property and equipment to maintain and expand our technology infrastructure,
approximately $5.2 million, net of cash acquired, was used for acquisitions of
businesses and certain intellectual property In addition, we sold certain
marketable securities for $2.6 million.
We used $44.0 million of cash during the year ended December 31, 2010 for
investing activities. We used $68.9 million, net of cash acquired, to purchase
ARSgroup, Nexius and Nedstat. In addition, we used $5.1 million to purchase
property and equipment to maintain and expand our technology and infrastructure.
Of this amount $0.4 million was funded through landlord allowances received in
connection with our Toronto office lease. These cash outflows were offset by a
net $30.0 million generated from sale and maturity of investments.
We expect to achieve greater economies of scale and operating leverage as we
expand our customer base and utilize our Internet user panel and technical
infrastructure more efficiently. While we anticipate that it will be necessary
for us to continue to invest in our Internet user panel, technical
infrastructure and technical personnel to support the combination of an
increased customer base, new products, international expansion and new digital
market intelligence formats, we believe that these investment requirements will
be less than the revenue growth generated by these actions. This should result
in a lower rate of growth in our capital expenditures to support our technical
infrastructure. In any given period, the timing of our incremental capital
expenditure requirements could impact our cost of revenues, both in absolute
dollars and as a percentage of revenues.
Financing Activities
We used $14.3 million of cash during the year ended December 31, 2012 for
financing activities. This included $7.4 million for shares repurchased by us
pursuant to the exercise by stock incentive plan participants of their right to
elect to use common stock to satisfy their tax withholding obligations. In
addition we used $7.0 million to make payments on our capital lease obligations
offset by $0.2 million in proceeds from the exercise of our common stock
options. Also, during the year ended December 31, 2012, we received $4.1 million
related to borrowings under our revolving credit facility. The total amount
borrowed, which was denominated in euros, was repaid prior to December 31, 2012
and translated to $4.3 million.
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We used $12.3 million of cash during the year ended December 31, 2011 for
financing activities. This included $7.4 million for shares repurchased by us
pursuant to the exercise by stock incentive plan participants of their right to
elect to use common stock to satisfy their tax withholding obligations. In
addition we used $5.4 million to make payments on our capital lease obligations
offset by $0.4 million in proceeds from the exercise of our common stock
options.
We used $6.1 million of cash during the year ended December 31, 2010 for
financing activities. This included $5.5 million for shares repurchased by us
pursuant to the exercise by stock incentive plan participants of their right to
elect to use common stock to satisfy their tax withholding obligations. In
addition we used $1.7 million to make payments on our capital lease obligations.
These cash outflows were offset by $1.0 million in proceeds from the exercise of
our common stock options and warrants and a $0.1 million excess tax benefit from
the exercise of stock options.
We do not have any special purpose entities and we do not engage in off-balance
sheet financing arrangements.
Contractual Obligations and Known Future Cash Requirements
Set forth below is information concerning our known contractual obligations as
of December 31, 2012 that are fixed and determinable.
More
Less Than 3-5 Than 5
Total 1 Year 1-3 Years Years Years
(In thousands)
Capital lease obligations $ 15,248 $ 8,514 $ 6,621 $ 113 $ -
Operating lease obligations 83,790 8,560 19,115 19,249 36,866
Total $ 99,038 $ 17,074 $ 25,736 $ 19,362 $ 36,866
Our principal lease commitments consist of obligations under leases for office
space and computer and telecommunications equipment. In prior and current years,
we financed the purchase of some of our computer equipment under capital lease
arrangements over a period of either 36 or 42 months. Our purchase obligations
relate to outstanding orders to purchase computer equipment, are typically small
and they do not materially impact our overall liquidity.
We have a lease financing arrangement with Banc of America Leasing & Capital,
LLC in the amount of $22.9 million. This arrangement has been established to
allow us to finance the purchase of new software, hardware and other computer
equipment as we expand our technology infrastructure in support of our business
growth. During the year ended December 31, 2012 we incurred $5.7 million of
additional borrowings under this financing arrangement. As of December 31, 2012,
we have total borrowings under this arrangement of approximately $10.7 million.
These leases bear an interest rate of approximately 5% per annum. The base terms
for these leases range from three years to three and a half years and include a
nominal charge in the event of prepayment. Lease payments are approximately
$6.5 million per year. Assets acquired under the equipment lease secure the
obligations. In addition to our leasing arrangement with Banc of America, we
have also entered into a number of capital lease arrangements with various
equipment vendors. As of December 31, 2012, we have total borrowings under these
arrangements of $3.8 million.
As of December 31, 2012, $3.9 million in letters of credit were outstanding,
leaving $6.1 million available for additional letters of credit. These letters
of credit may be reduced periodically provided we meet the conditional criteria
of each related lease agreement.
As noted in the liquidity and capital resources section, in June 2011, we
entered into a $50.0 million revolving credit agreement with Bank of America,
N.A. During the third quarter of 2012, we borrowed €3.3 million (or
approximately $4.1 million) under the Revolving Credit Facility. This amount was
subsequently repaid in the fourth quarter of 2012 and as of December 31, 2012
and February 19, 2013, no amounts are outstanding under the terms of our
Revolving Credit Facility.
Future Capital Requirements
Our ability to generate cash is subject to our performance, general economic
conditions, industry trends and other factors. To the extent that our existing
cash, cash equivalents, short-term investments and operating cash flow are
insufficient to fund our future activities and requirements, we may need to
raise additional funds through public or private equity or debt financing. If we
issue equity securities in order to raise additional funds, substantial dilution
to existing stockholders may occur.
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Recent Accounting Pronouncements
Recent accounting pronouncements are detailed in Note 2 to our Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on
Form 10-K.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements (as defined in Item 303 of Regulation
S-K).
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