|
Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
Introduction and Business Outlook
Salary.com is a leading provider of on-demand compensation and
talent management solutions helping businesses and individuals manage pay and performance. We provide companies of all sizes comprehensive on-demand software applications that are tightly integrated with our proprietary data sets to automate the
essential elements of our customers’ compensation management processes. As a result, our solutions can significantly improve the effectiveness of our customers’ compensation spending. We enable employers of all sizes to replace or
supplement inefficient and expensive traditional approaches to compensation management, including the use of paper-based surveys, consultants, internally developed software applications and spreadsheets.
Our on-demand solutions, which incorporate market compensation intelligence from our proprietary
data sets, enable companies to determine how much to pay new and existing employees and to manage overall compensation programs. Our data sets contain base, bonus and incentive pay data for positions held by more than 74% of U.S. employees and
similar data for the top executives in over 10,000 U.S. public companies. Our flagship offering is CompAnalyst
®
, a suite of compensation management applications that integrates our data,
third party survey data and a customer’s own pay data in a complete analytics offering. We also offer TalentManager
®
, an employee life-cycle performance management application that
links employee pay to performance. We offer these solutions principally on an annual or multi-year subscription basis. In addition to our on-demand enterprise software offerings, we also provide a series of applications through our website, which
allows us to deliver salary management comparison and analysis tools to individuals and small businesses on a cost-effective, real-time basis.
We were organized as a Delaware corporation in 1999. As of September 30, 2007, our enterprise subscriber base has grown to more than 2,500 companies who spend from $2,000 to more than $100,000 annually. We have achieved 26 consecutive
quarters of revenue growth since April 2001. However, during that time, we have consistently incurred operating losses. During the three months ended September 30, 2007, we incurred an operating loss of $3.0 million compared to an operating
loss of $1.9 million in the three months ended June 30, 2007. During the three months ended September 30, 2007, we achieved positive operating cash flows of $1.5 million compared to $1.6 million in the three months ended June 30,
2007. As of September 30, 2007, we had an accumulated deficit of $33.3 million.
The following information should be read in
conjunction with the unaudited consolidated financial statements and notes thereto included in this quarterly report and the audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2007. We maintain a website where copies of our reports filed with SEC may be accessed, as well as other information concerning our
business, products and news releases. The address of our website is www.salary.com. Our website is included as a textual reference only and the information on our website is not incorporated by reference into this Quarterly Report on Form 10-Q.
Acquisition of Businesses
On
August 3, 2007 we acquired the assets of ITG Competency Group, LLC, or ITG. ITG is a provider of off-the-shelf competency models and related implementation services used in a wide range of industries. Under the terms of the agreement, we have
paid the owner of ITG $1.8 million in cash and newly issued shares of our common stock valued at $500,000. ITG will receive an additional $0.25 million in April 2008 and will also be eligible to earn up to $1.0 million in additional consideration
based on meeting certain performance targets during the first two years after the closing of the acquisition, and can earn additional consideration if these targets are exceeded. The additional consideration, if earned, will be paid 50% in cash and
50% in common stock.
On May 15, 2007, we acquired all of the membership interests of ICR Limited, L.C. and all of the outstanding
share capital of ICR International Ltd., collectively referred to as ICR, a leading provider of industry-specific market intelligence for employee pay and benefits for the global technology and specialty consumer goods markets. Pursuant to the terms
of the purchase agreements, we paid $10.3 million to the owners of ICR, of which $1 million has been placed in escrow for 12 months. The escrow fund will be
19
available to compensate us for any losses we may incur as a result of any breach of the representations or warranties by the owners of ICR contained in the
purchase agreements, and certain liabilities arising out of the ownership or operation of ICR prior to the acquisition.
Sources of Revenues
We derive our revenues primarily from subscription fees and, to a lesser extent, through advertising on our website. For the three
months ended September 30, 2007 and 2006, subscription revenues accounted for 92% and 89%, respectively, of our total revenues and for the three months ended September 30, 2007 and 2006, advertising revenues accounted for 8% and 11%,
respectively, of our total revenues.
Subscription revenues
are comprised primarily of subscription fees from enterprise and small
business customers who pay a bundled fee for our on-demand software applications and data products and implementation services related to our subscription products, as well as syndication fees from our website partners and premium membership
subscriptions sold primarily to individuals. Subscription revenues are primarily recognized ratably over the contract period as they are earned. Our subscription agreements for our enterprise subscription customer base are typically one to five
years in length, and as of September 30, 2007, approximately 50% of our contracts were more than one year in length. We generally invoice our customers annually in advance of their subscription (for both new products and renewals), with payment
due upon receipt of invoice. Deferred revenue consists primarily of billings or payments received in advance of revenue recognition from our subscription agreements and is recognized over time as the revenue recognition criteria are met. Changes in
deferred revenue generally indicate the trend for subscription revenues over the following year as the current portion of deferred revenue is expected to be recognized as revenue within 12 months. To a lesser extent, subscription revenues also
include fees for professional services which are not bundled with our subscription products and revenue from the sale of our Compensation Market Study and Salary.com Survey products, which are not sold on a subscription basis.
Advertising revenues
are comprised of revenues that we generate through agreements to display third party advertising on our website for a fixed
period of time or fixed number of impressions. Advertising revenues are recognized as the advertising is displayed on the website.
Cost of Revenues and
Operating Expenses
Cost of Revenues.
Cost of revenues consists primarily of costs for data acquisition and data
development, fees paid to our network provider for the hosting and managing of our servers, related bandwidth costs, compensation costs for the support and implementation of our products and amortization of capitalized software costs. As we continue
to implement and support our new and existing products and expand our data sets, we expect that over the next few years cost of revenues will continue to increase as a percentage of revenue and on an absolute dollar basis. Over the longer term, we
expect our cost of revenues to decrease as a percentage of revenue as our business grows and our new data products gain market acceptance.
Research and Development.
Research and development expenses consist primarily of compensation for our software and data application development personnel. We have historically focused our research and development efforts on
improving and enhancing our existing on-demand software and data offerings as well as developing new features, functionality and products. We expect that in the future, research and development expenses will increase on an absolute dollar basis as
we upgrade and extend our service offerings and develop new technologies.
Sales and Marketing.
Sales and marketing expenses
consist primarily of compensation for our sales and marketing personnel, including sales commissions, as well as the costs of our marketing programs. We capitalize our sales commissions at the time a subscription agreement is executed by a customer
and we recognize the initial year sales commission expense ratably over one year. In the case of multi-year agreements, upon billing the customer for each additional year, we incur a subsequent sales commission and recognize the expense for such
commission over the applicable year. Typically, a majority of the sales commission is recognized in the initial year of the subscription term. In order to add new customers and increase sales to our existing customers, we plan to continue to invest
heavily in our sales efforts by increasing the number of direct sales personnel. We also plan to expand our marketing activities in order to extend brand awareness and generate additional leads for our sales staff. As a result, we expect that our
sales and marketing expenses will increase on an absolute dollar basis as we grow our business.
20
General and Administrative.
General and administrative expenses consist of compensation
expenses for executive, finance, accounting, administrative and management information systems personnel, professional fees and other corporate expenses.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally
accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an
ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in the notes to our financial statements, the following accounting policies involve a greater degree of judgment, complexity and effect on
materiality. A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our
financial condition and results of operations. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
. In accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,”
as amended by Staff Accounting Bulletin No. 104, “Revenue Recognition,” we recognize revenues from subscription agreements for our on-demand software and related services when there is persuasive evidence of an arrangement, the
service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. Amounts that have been invoiced are recorded in accounts receivable and deferred
revenue. Our subscription agreements generally contain multiple service elements and deliverables. These elements include access to our software and often specify initial services including implementation and training. Except under limited
circumstances, our subscription agreements do not provide customers the right to take possession of the software at any time.
In
accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21, issued by the Emerging Issues Task Force of the Financial Accounting Standards Board, or FASB, in May 2003, we define all
elements in our multiple element subscription agreements as a single unit of accounting, and accordingly, recognize all associated revenue over the subscription period, which is typically one to five years in length. In the event professional
services relating to implementation are required, we generally do not recognize revenue until such implementation is complete. In applying the guidance in EITF 00-21, we determined that we do not have objective and reliable evidence of the fair
value of the subscription to our on-demand software after delivery of specified initial services. We therefore account for our subscription arrangements and our related service fees as a single unit
.
Income Taxes
. We account for income taxes in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” or SFAS 109,
which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets
be reduced by a valuation allowance if it is more likely than not that some portion of all of the deferred tax asset will not be realized. The realization of the deferred tax assets is evaluated quarterly by assessing the valuation allowance and by
adjusting the amount of the allowance, if necessary. As of September 30, 2007, we have a full valuation allowance against its deferred tax assets.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109
(“FIN 48”), which clarifies the accounting for uncertainty in income taxes by prescribing the minimum recognition threshold and measurement requirements a tax position must meet before recognized a benefit in the financial statements.
FIN No. 48 also provides guidance on derecognition, measurement,
21
classification, interest and penalties, accounting for interim periods and disclosures for uncertain tax positions. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Our adoption of FIN No. 48 on April 1, 2007 did not result in the recognition of a tax liability for any previously unrecognized tax benefits and did not have an effect on our financial position or
results of operations as we have a full valuation allowance against its deferred tax assets.
Software Development Costs
. We
capitalize certain internal software development costs under the provisions of Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (“SOP 98-1”). SOP 98-1 requires
computer software costs associated with internal use software to be charged to operations as incurred until certain capitalization criteria are met
.
Costs incurred during the preliminary project stage and the post-implementation stages are
expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property, equipment and software. These costs generally consist of internal labor during configuration, coding, and testing
activities. Capitalization begins when the preliminary project stage is complete, management with the relevant authority authorizes and commits to the funding of the software project, and it is probable that the project will be completed and the
software will be used to perform the function intended. These costs are amortized using the straight-line method over the estimated useful life of the software, generally three years.
Allowance for Doubtful Accounts
. We maintain an allowance for doubtful accounts for estimated losses resulting from our customers’
inability to pay us. The provision is based on our historical experience and for specific customers that, in our opinion, are likely to default on our receivables from them. In order to identify these customers, we perform ongoing reviews of all
customers that have breached their payment terms, as well as those that have filed for bankruptcy or for whom information has become available indicating a significant risk of non-recoverability. In addition, we have experienced significant growth
in the number of our customers, and we have less payment history to rely upon with these customers. We rely on historical trends of bad debt as a percentage of total revenue and apply these percentages to the accounts receivable associated with new
customers and evaluate these customers over time. To the extent that our future collections differ from our assumptions based on historical experience, the amount of our bad debt and allowance recorded may be different.
Stock-Based Compensation
. Effective April 1, 2005, we adopted FASB Statement No. 123-revised, “Share-Based Payment” or
SFAS 123R, which revises SFAS No. 123, “Accounting for Stock-Based Compensation” or SFAS 123 and supersedes Accounting Principles Board or APB Opinion No. 25, “Accounting for Stock Issued to Employees
”
or APB 25. SFAS 123R requires that all stock-based compensation be recognized as an expense in the financial statements over the vesting period and that such expense be measured at the fair value of the award.
We adopted SFAS 123R using the prospective method of application, which requires us to recognize compensation expense on a prospective basis;
therefore, prior period financial statements have not been restated. Compensation expense recognized includes the expense of stock options granted on and subsequent to April 1, 2005. Stock options granted by us prior to that time are
specifically excluded from SFAS 123R and will continue to be accounted for in accordance with APB 25. These options were valued using the minimum value method.
Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective assumptions, including the expected life of the stock-based payment awards
and stock price volatility. Beginning in fiscal year 2006, we have used the Black-Scholes option-pricing model to value our option grants and determine the related compensation expense. The assumptions used in calculating the fair value of
stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based
compensation expense could be materially different in the future. Prior to the adoption of SFAS 123R, we had adopted SFAS 123, but in accordance with SFAS 123, we had elected not to apply fair value-based accounting for awards under
our employee stock incentive plan through March 31, 2005. Instead, we measured compensation expense for our stock plans using the intrinsic value method prescribed by APB 25 and related interpretations and provided pro forma disclosures as
permitted under SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure an amendment of SFAS 123.”
22
We estimate our expected volatility based on that of our publicly traded peer companies and expect to
continue to do so until such time as we have adequate historical data from our traded share price. Management believes that the historical volatility of our stock price does not best represent the expected volatility of the stock price. Until
February 2007, we were a private company and therefore lack sufficient company-specific historical and implied volatility information. We intend to continue to consistently use the same group of publicly-traded peer companies to determine volatility
in the future until such time that sufficient information regarding the volatility of our share price becomes available or that the selected companies are no longer suitable for this purpose.
The risk-free interest rate used for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar
expected life.
The expected term of the options granted was determined based upon review of the period that our share-based awards are
expected to be outstanding and is estimated based on historical experience of similar awards, giving consideration to the contractual term of the awards, vesting schedules, employee turnover and expectations of employee exercise behavior.
The stock price volatility and expected terms utilized in the calculation of fair values involve management’s best estimates at that
time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the vesting period of the option. SFAS 123R also requires that we recognize
compensation expense for only the portion of options that are expected to vest. Therefore, we have estimated expected forfeitures of stock options with the adoption of SFAS 123R. In developing a forfeiture rate estimate, we have considered our
historical experience, our growing employee base and the historical limited liquidity of our common stock. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required
in future periods.
We recognized stock-based compensation pursuant to SFAS 123R in the amount of $1,148,000 and $1,734,000 in the
three and six months ended September 30, 2007, respectively. As of September 30, 2007, we had $16.5 million of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under our equity plans.
The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.5 years.
Goodwill and
Intangible Assets.
We follow the guidance of SFAS No. 142, “Goodwill and Other Intangible Assets” or SFAS 142. In accordance with SFAS No. 142, goodwill and certain intangible assets are no longer amortized, but instead
we assess the impairment of goodwill and identifiable intangible assets on at least an annual basis and whenever events or changes in circumstances indicate that the carrying value of the goodwill or intangible asset is greater than its fair value.
Factors we consider important that could trigger an impairment review include significant underperformance relative to historically or projected future operating results, identification of other impaired assets within a reporting unit, the
disposition of a significant portion of a reporting unit, significant adverse changes in business climate or regulations, significant changes in senior management, significant changes in the manner of our use of the acquired assets or the strategy
for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, a decline in our credit rating, or a reduction of our market capitalization relative to net book value.
Determining whether a triggering event has occurred includes significant judgment from management.
The estimation of the fair values of
goodwill and the reporting units to which it pertains requires the use of discounted cash flow valuation models. Those models require estimates of future revenue, profits, capital expenditures and working capital for each unit. These estimates will
be determined by evaluating historical trends, current budgets, operating plans and industry data. Determining the fair value of reporting units and goodwill includes significant judgment by management and different judgments could yield different
results.
Results of Operations
The
following tables set forth selected statements of operations data for each of the periods indicated as a percentage of total revenues.
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Six Months Ended
September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription Revenues
|
|
92
|
%
|
|
89
|
%
|
|
91
|
%
|
|
88
|
%
|
|
Advertising Revenues
|
|
8
|
|
|
11
|
|
|
9
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
100
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
Cost of Revenues
|
|
22
|
|
|
21
|
|
|
22
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
78
|
|
|
79
|
|
|
78
|
|
|
79
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
15
|
|
|
17
|
|
|
13
|
|
|
15
|
|
|
Sales and Marketing
|
|
52
|
|
|
54
|
|
|
52
|
|
|
53
|
|
|
General and Administrative
|
|
43
|
|
|
28
|
|
|
41
|
|
|
28
|
|
|
Amortization of Intangible Assets
|
|
3
|
|
|
1
|
|
|
3
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
113
|
|
|
100
|
|
|
109
|
|
|
97
|
|
|
Loss from Operations
|
|
(35
|
)
|
|
(21
|
)
|
|
(31
|
)
|
|
(18
|
)
|
|
Other Income (Expense), Net
|
|
6
|
|
|
0
|
|
|
7
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
(29
|
)%
|
|
(21
|
)%
|
|
(24
|
)%
|
|
(19
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our total revenue, deferred revenue and net cash provided by
operating activities for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Six Months Ended
September 30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Total revenue
|
|
$
|
8,468,168
|
|
$
|
5,441,648
|
|
$
|
16,007,173
|
|
$
|
10,597,253
|
|
Total deferred revenue at end of period
|
|
|
18,261,848
|
|
|
12,280,069
|
|
|
18,261,848
|
|
|
12,280,069
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,493,501
|
|
|
1,227,180
|
|
|
3,106,080
|
|
|
569,128
|
Three Months Ended September 30, 2007 compared to Three Months Ended September 30, 2006
Revenues.
Revenues for the second quarter of fiscal 2008 were $8.5 million, an increase of $3.1 million, or 56%, compared
to revenues of $5.4 million for the second quarter of fiscal 2007. Subscription revenues were $7.8 million for the second quarter of fiscal 2008, an increase of $3.0 million, or 61%, compared to subscription revenues of $4.8 million
for the second quarter of fiscal 2007. The growth in subscription revenues was due principally to an increase of $1.1 million in renewal revenues from existing subscription customers, an increase of $0.9 million in revenues from new subscription
customers and an increase of $0.6 million in revenues from additional products sold to existing customers in the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007. A contributing factor in the increase in total revenues was
the result of our hiring of additional sales personnel focused on retaining existing customers, adding new customers and selling additional products to existing customers. Advertising revenues were $687,000 for the second quarter of fiscal 2008, an
increase of $85,000, or 14%, compared to advertising revenues of $602,000 for the second quarter of fiscal 2007. The growth in advertising revenues was primarily due to increased advertising volume. Total deferred revenue as of September 30,
2007 was $18.3 million, representing an increase of $6.0 million, or 49%, compared to total deferred revenue of $12.3 million as of September 30, 2006.
24
Cost of Revenues.
Cost of revenues for the second quarter of fiscal 2008 was $1.9 million, an
increase of $0.8 million, or 68%, compared to cost of revenues of $1.1 million for the second quarter of fiscal 2007. The increase in cost of revenues was primarily due to a $0.5 million increase in payroll and benefit related costs due to the
addition of 8 personnel for our compensation and professional service teams in the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007, a $0.2 million increase in stock-based compensation expense as well as $0.1 million of
additional costs associated with our CompAnalyst Executive Product due to the new SEC proxy rules, which were not in effect during the second quarter of fiscal 2007. As a percent of total revenues, cost of revenues increased to 22% in the second
quarter of fiscal 2008 compared to 21% in the second quarter of fiscal 2007. The increase was primarily the result of an increase in the number of professional service personnel in order to provide implementation services to our increasing number of
customers.
Research and Development Expenses.
Research and development expenses for the second quarter of fiscal 2008 were
$1.2 million, an increase of $0.3 million, or 37%, compared to research and development expenses of $0.9 million for the second quarter of fiscal 2007. The increase in research and development expenses was primarily due to a $0.3 million increase in
expenses related to our subsidiary in Shanghai, China, which was established in December 2006 and is engaged primarily in research and development activities. Research and development expenses decreased to 15% of total revenues in the second quarter
of fiscal 2008 compared to 17% of total revenues in the second quarter of fiscal 2007 due to the fact that our revenue growth outpaced our increasing investment in research and development. Our research and development headcount increased by 61
employees in the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007 as we hired additional personnel to upgrade and expand our on-demand software product suite.
Sales and Marketing Expenses.
Sales and marketing expenses for the second quarter of fiscal 2008 were $4.4 million, an increase of $1.4
million, or 49%, compared to sales and marketing expenses of $3.0 million for the second quarter of fiscal 2007. The increase was primarily due to a $1.0 million increase in payroll and benefit related costs due to the addition of 37 sales and
marketing personnel in the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007, a $0.2 million increase in sales commissions as a result of increased sales, and a $0.3 million increase in stock-based compensation expense
which were offset by a slight decrease in certain marketing related expenses. Sales and marketing expenses decreased to 52% of total revenues in the second quarter of fiscal 2008 compared to 54% of total revenues in the second quarter of fiscal
2007. Our sales and marketing headcount increased as we hired additional personnel to focus on adding new customers and increasing revenues from existing customers.
General and Administrative Expenses.
General and administrative expenses for the second quarter of fiscal 2008 were $3.6 million, an increase of $2.0 million, or 133%, compared to general and
administrative expenses of $1.6 million for the second quarter of fiscal 2007. The increase in general and administrative expenses was primarily due to an increase of $0.3 million in stock-based compensation expense, $0.4 million increase in
payroll and benefit related costs due to the addition of 9 information technology, accounting and legal employees, a $0.6 million increase in legal expenses consisting mostly of the settlement of the litigation with a former consultant to the
Company and a $0.2 million increase in accounting expenses related to our Sarbanes-Oxley compliance efforts. General and administrative expenses increased to 43% of total revenues in the second quarter of fiscal 2008 compared to 28% in the second
quarter of fiscal 2007.
Amortization of Intangible Assets.
Amortization of intangible assets for the second quarter of fiscal
2008 was $281,000 compared to $24,000 in the second quarter of fiscal 2007. The increase in amortization was primarily due to the amortization of intangible assets acquired as part of the acquisition of ICR in May 2007 and ITG in August 2007.
Interest Income
. Interest income for the second quarter of fiscal 2008 was $514,000 compared to $2,000 in the second quarter of
fiscal 2007. The increase in interest income was due to interest earned on higher invested cash balances resulting from the proceeds from our initial public offering in February 2007.
25
Six Months Ended September 30, 2007 compared to Six Months Ended September 30, 2006
Revenues.
Revenues for the six months ended September 30, 2007 were $16.0 million, an increase of $5.4 million, or 51%, compared to
revenues of $10.6 million for the year earlier period. Subscription revenues were $14.5 million for the six months ended September 30, 2007, an increase of $5.2 million, or 57%, compared to subscription revenues of $9.3 million
for the year earlier period. The growth in subscription revenues was due principally to an increase of $1.9 million in renewal revenues from existing subscription customers, an increase of $1.7 million in revenues from new subscription customers and
an increase of $1.1 million in revenues from additional products sold to existing customers in the six months ended September 30, 2007 compared to the year earlier period. A contributing factor in the increase in total revenues was the result
of our hiring of additional sales personnel focused on retaining existing customers, adding new customers and selling additional products to existing customers. Advertising revenues were $1.5 million for the six months ended September 30, 2007,
an increase of $0.2 million, or 12%, compared to advertising revenues of $1.3 million for the year earlier period. The growth in advertising revenues was primarily due to increased advertising volume.
Cost of Revenues.
Cost of revenues for the six months ended September 30, 2007 was $3.5 million, an increase of $1.3 million, or 61%,
compared to cost of revenues of $2.2 million for the year earlier period. The increase in cost of revenues was primarily due to a $0.8 million increase in payroll and benefit related costs due to the addition of 8 personnel for our compensation and
professional service teams in the six months ended September 30, 2007 compared to the year earlier period, a $0.2 million increase in stock-based compensation expense as well as $0.3 million of additional costs associated with sales of our
CompAnalyst Executive Product due to the new SEC proxy rules, which were not in effect during the six months ended September 30, 2006. As a percent of total revenues, cost of revenues increased to 22% in the six months ended September 30,
2007 compared to 21% in the year earlier period. The increase was primarily the result of an increase in the number of professional service personnel in order to provide implementation services to our increasing number of customers.
Research and Development Expenses.
Research and development expenses for the six months ended September 30, 2007 were $2.1 million, an
increase of $0.5 million, or 30%, compared to research and development expenses of $1.6 million for the year earlier period. The increase in research and development expenses was primarily due to a $0.5 million increase in expenses related to our
subsidiary in Shanghai, China, which was established in December 2006 and is engaged primarily in research and development activities. Research and development expenses decreased to 13% of total revenues in the six months ended September 30,
2007 compared to 15% of total revenues in the year earlier period due to the fact that our revenue growth outpaced our increasing investment in research and development. Our research and development headcount increased by 61 employees in the six
months ended September 30, 2007 compared to the year earlier period as we hired additional personnel to upgrade and expand our on-demand software product suite.
Sales and Marketing Expenses.
Sales and marketing expenses for the six months ended September 30, 2007 were $8.3 million, an increase of $2.6 million, or 47%, compared to sales and marketing expenses
of $5.7 million for the year earlier period. The increase was primarily due to a $1.7 million increase in payroll and benefit related costs due to the addition of 37 sales and marketing personnel in the six months ended September 30, 2007
compared to the year earlier period, a $0.4 million increase in sales commissions as a result of increased sales, and a $0.4 million increase in stock-based compensation expense. Sales and marketing expenses decreased to 52% of total revenues in the
six months ended September 30, 2007 compared to 53% in the year earlier period. Our sales and marketing headcount increased as we hired additional personnel to focus on adding new customers and increasing revenues from existing customers.
General and Administrative Expenses.
General and administrative expenses for the six months ended September 30, 2007 were
$6.5 million, an increase of $3.5 million, or 118%, compared to general and administrative expenses of $3.0 million for the year earlier period. The increase in general and administrative expenses was due to an increase of $0.6 increase in
stock-based compensation expense, $1.1 million increase in payroll, benefit and other employee related costs due to the addition of 9 information technology, accounting and legal employees, a $0.8 million increase in legal expenses consisting mostly
of the settlement of the litigation with one of our former consultants, a $0.5 million increase in accounting related expenses due to our Sarbanes-Oxley compliance efforts as well as increased audit fees. General and administrative expenses were 41%
of total revenues in the six months ended September 30, 2007 compared to 28% in the year earlier period.
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Amortization of Intangible Assets.
Amortization of intangible assets for the six months ended
September 30, 2007 was $416,000 compared to $77,000 in the year earlier period. The increase in amortization was primarily due to the amortization of intangible assets acquired as part of the acquisition of ICR in May 2007 and ITG in August
2007.
Interest Income
. Interest income for the six months ended September 30, 2007 was $1,075,000 compared to $6,000 in the
year earlier period. The increase in interest income was due to interest earned on higher invested cash balances resulting from the proceeds from our initial public offering in February 2007.
Liquidity and Capital Resources
At
September 30, 2007, our principal sources of liquidity were cash and cash equivalents totaling $39.4 million and accounts receivable, net of allowance for doubtful accounts of $4.9 million, compared to cash and cash equivalents of
$49.0 million and accounts receivable, net of allowance for doubtful accounts of $3.4 million, at March 31, 2007. Our working capital as of September 30, 2007 was $20.8 million compared to working capital of $34.3 million as of
March 31, 2007.
Cash provided by operating activities for the six months ended September 30, 2007 was $3.1 million. This amount
resulted from a net loss of $3.9 million, adjusted for net non-cash charges of $3.1 million and a $3.9 million net increase in working capital accounts. Non-cash items primarily consisted of $0.5 million of depreciation and amortization of property,
equipment and software, $0.5 million of amortization of intangible assets, $1.8 million of stock-based compensation, and $0.2 million from a legal settlement paid in common stock. The net increase in working capital of $2.0 million was
primarily comprised of increases in accounts receivable of $0.9 million, accounts payable of $0.8 million, accrued expenses and other current liabilities of $1.7 million and deferred revenue of $1.7 million, offset by a decrease in prepaid expense
of $0.4 million. The increase in accounts receivable is primarily due to an overall increase in invoicing during the six months ended September 30, 2007 compared to the prior year. The decrease in prepaid expenses and other current assets is
due to the pro rata expensing of prepaid insurance expense during the six months ended September 30, 2007. The increase in accounts payable is due primarily to our continued growth in the six months ended September 30, 2007. The increase
in accrued expenses is primarily due to an increase in accrued compensation. The increase in deferred revenue is primarily due to increased invoicing less revenue recognition from our subscription customers in the six months ended September. The
growth in the invoiced amounts was primarily due to sales to new customers, increased sales to existing customers, the introduction of new products, and the enhancement of existing products. Currently, payment for the majority of our subscription
agreements is due upon invoicing. Because revenue is generally recognized ratably over the subscription period, payments received at the beginning of the subscription period result in an increase to accounts receivable and deferred revenue. Changes
in deferred revenue generally indicate the trend for subscription revenues over the following year as the current portion of deferred revenue is expected to be recognized within 12 months.
Cash used in investing activities was $12.9 million and consisted primarily of an aggregate of $12.0 million paid for the acquisition of ICR in May 2007
and ITG in August 2007, net of cash acquired of $0.1 million, $0.2 million paid for the acquisition of data underlying certain of our products, an increase in restricted cash of $0.3 million, $0.2 million paid for purchases of property and equipment
for new offices, network infrastructure and computer equipment to support our growth in employee headcount and $0.2 million of payments capitalized for the payment of software development costs. We intend to continue to invest in our content data
sets, software development and network infrastructure to ensure our continued ability to enhance our existing software, expand our data sets, introduce new products, and maintain the reliability of our network.
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Cash provided by financing activities was $239,000, which consisted primarily of $264,000 received from
the exercise of common stock options, offset slightly by $25,000 in payments made to buy back unvested common stock related to the early exercise of employee stock options.
In August 2006, we entered into a $5,000,000 credit facility with Silicon Valley Bank. The line, which expires in August 2008, provides for a term loan
up to $1,000,000 and a $4,000,000 revolving working capital line of credit. Borrowings on the term loan bear interest at the bank’s prime rate plus 1.00% and interest is payable on a monthly basis. Borrowings on the revolving line bear interest
at the bank’s prime rate plus 0.25%. The credit facility is collateralized by substantially all of our assets. In addition, the facility carries an unused revolving line facility fee of 0.375% of the undrawn balance. As of September 30,
2007, there were no outstanding borrowings under this credit facility.
On December 30, 2006, we entered into an agreement with a
vendor to obtain additional data sets that runs for an initial one year term following the date of the initial delivery. The fee for the initial term was $1.5 million. At the end of the initial term, the agreement shall automatically renew for up to
six subsequent one year terms unless terminated by us. The annual fees due to the vendor related to years two through seven of the agreement are $0.5 million, $0.6 million, $0.6 million, $0.7 million, $0.8 million, and $0.9 million, respectively.
On May 15, 2007, we acquired the membership interests of ICR, a leading provider of industry-specific market intelligence for
employee pay and benefits for the global technology and specialty consumer goods markets. Pursuant to the terms of the purchase agreements, we paid $10.3 million to the owners of ICR, of which $1 million has been placed in escrow for 12 months.
On June 27, 2007, we entered into a master equipment lease agreement with a maximum commitment of $300,000. The lease term begins on
September 1, 2007 and runs for a term of 36 months. On August 13, 2007, we increased the maximum commitment of the lease agreement to $600,000. As of September 30, 2007, we had leased approximately $381,000 of equipment under the terms of
this agreement. On September 13, 2007, we entered into an additional lease commitment with the same lender with a maximum commitment of $350,000.
On August 3, 2007 we acquired the assets of ITG. ITG is a provider of off-the-shelf competency models and related implementation services used in a wide range of industries. Under the terms of the agreement, we have paid the owner of
ITG $1.8 million in cash and newly issued shares of our common stock valued at $500,000. ITG will receive an additional $0.25 million in April 2008 and will also be eligible to earn up to $1.0 million in additional consideration based on meeting
certain performance targets during the first two years after the closing of the acquisition, and can earn additional consideration if these targets are exceeded. The additional consideration, if earned, will be paid 50% in cash and 50% in common
stock.
In September 2007, we entered into an agreement with a vendor to obtain additional data sets for $2.35 million, which was paid in
full in October 2007.
Given our current cash, accounts receivable and available borrowings under our credit facility, we believe that we
will have sufficient liquidity to fund our business and meet our contractual obligations for at least the next 12 months. However, we may need to raise additional funds in the future in the event that we pursue acquisitions or investments in
complementary businesses or technologies or experience operating losses that exceed our expectations. If we raise additional funds through the issuance of equity or convertible securities, our stockholders may experience dilution. In the event that
additional financing is required, we may not be able to obtain it on acceptable terms or at all.
During the last three fiscal years,
inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
Other than the increase in the maximum commitment under our master equipment lease to $600,000 and the additional lease commitment of $350,000, as
discussed above, there have been no material changes to our contractual obligations, as disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2007.
Off-Balance-Sheet Arrangements
Under GAAP, certain obligations and commitments are not required to
be included in the consolidated balance sheet. These obligations and commitments, while entered into in the normal course of business, may have a material impact on liquidity. We do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
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or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow
or limited purposes. As such, we are not exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.
New Accounting Pronouncements
In February 2007, the FASB issued SFAS 159,
The Fair Value Option for Financial Assets and
Financial Liabilities – Including an amendment of FASB Statement No. 115
(“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS 159
are effective for fiscal years beginning after November 15, 2007. We have not yet determined the impact of adopting SFAS 159 on its financial statements.
In September 2006, the FASB issued SFAS 157,
Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. We have not yet determined the impact of adopting SFAS 157 on its financial statements.
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