Item
2.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The
following discussion and analysis should be read in conjunction with the
consolidated financial statements and accompanying notes and the other
financial
information appearing elsewhere in this Quarterly Report on Form
10-Q. In this discussion and analysis, dollar, share and per
share amounts are not rounded to thousands unless otherwise indicated.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result
of
various factors, including those discussed below and elsewhere in this
Quarterly
Report on Form 10-Q, particularly under the heading "Risk
Factors."
Overview
Background
We
are a
leading provider of specialized online content that brings together buyers
and
sellers of corporate IT products. We sell customized marketing programs
that
enable IT vendors to reach corporate IT decision makers who are actively
researching specific IT purchases.
Our
integrated content platform consists of a network of 42 websites that we
complement with targeted in-person events and three specialized IT magazines.
Throughout all stages of the purchase decision process, these content offerings
meet IT professionals' needs for expert, peer and IT vendor information,
and
provide a platform on which IT vendors can launch targeted marketing campaigns
that generate measurable, high ROI. As IT professionals have become increasingly
specialized, they have come to rely on our sector-specific websites for
purchasing decision support. Our content enables IT professionals to navigate
the complex and rapidly changing IT landscape where purchasing decisions
can
have significant financial and operational consequences. Based upon the
logical
clustering of our users' respective job responsibilities and the marketing
focus
of the products that our customers are advertising, we currently categorize
our
content offerings across eleven distinct media groups: Application Development;
Channel; CIO and IT Management; Data Center; Enterprise Applications; Laptops
and Mobile Technology; Networking; Security; Storage; Vertical Software;
and
Windows and Distributed Computing.
In
May
2007, we completed our initial public offering of 8.9 million shares of our
common stock, of which 7.1 million shares were sold by us and 1.8 million
shares
were sold by certain of our existing shareholders at a price to the
public of $13.00 per share. We raised a total of $91.9 million
in gross proceeds from the offering, or $83.2 million in net proceeds after
deducting underwriting discounts and commissions of $6.4 million and other
offering costs of approximately $2.3 million. Upon the closing of the offering,
all shares of our redeemable convertible preferred stock automatically
converted
into 24.4 million shares of common stock.
Material
Developments
On
November 6, 2007, we acquired KnowledgeStorm, Inc. (KnowledgeStorm), a
privately-held company based in Alpharetta, GA for an aggregate purchase
price
of approximately $58 million, consisting of approximately $52 million in
cash
and 359,820 shares of the Company's common stock. KnowledgeStorm is
a leading online search resource providing vendor generated content targeted
toward corporate IT professionals. KnowledgeStorm offers IT marketers products
with a lead generation and branding focus to reach these corporate IT
professionals throughout the purchasing decision process.
In
our
Current Report on Form 8-K filed on November 7, 2007 (Initial 8-K),
we reported
that we completed the acquisition of KnowledgeStorm. As permitted by
Item 9.01
of Form 8-K, we indicated in the Initial 8-K that we would file financial
statements for KnowledgeStorm and pro forma financial information
reflecting the effect of the acquisition by amendment to the Initial
8-K.
Sources
of Revenues
We
sell
advertising programs to IT vendors targeting a specific audience within
a
particular IT sector or sub-sector. We maintain multiple points of contact
with
our customers to provide support throughout their organizations and the
sales
cycle. As a result, our customers often run multiple advertising programs
with
us in order to reach discrete portions of our targeted audience. There
are
multiple factors that can impact our customers' advertising objectives
and
spending with us, including but not limited to, product launches, increases
or
decreases to their advertising budgets, the timing of key industry marketing
events, responses to competitor activities and efforts to address specific
marketing objectives such as creating brand awareness, generating sales
leads, or a combination of both. Our services are generally delivered under
short-term contracts that run for the length of a given advertising program,
typically less than 90 days.
We
generate substantially all of our revenues from the sale of targeted advertising
campaigns that we deliver via our network of websites, events and print
publications.
Online.
The
majority of our revenue is derived from the delivery of our online offerings
from our eleven distinct media groups. We expect the majority of our revenues
to
be derived through the delivery of online offerings for the foreseeable
future.
As a result of our customers' advertising objectives and preferences, the
specific allocation of online advertising offerings sold and delivered
by us, on
a period by period basis, can fluctuate.
Through
our 42 websites we sell a variety of online media offerings to connect
IT
vendors to IT professionals. Our lead generation offerings allow IT vendors
to
capture qualified sales leads from the distribution and promotion of content
to
our audience of IT professionals. Our branding offerings provide IT vendors
exposure to targeted audiences of IT professionals actively researching
information related to their products and services.
Our
branding offerings include banners and e-newsletters. Banner advertising
can be
purchased on specific websites within our network. We also offer the ability
to
advertise in e-newsletters focused on key site sub-topics. These offerings
give
IT vendors the ability to increase their brand awareness to highly specialized
IT sectors.
Our
lead
generation offerings include the following:
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White
Papers.
White papers are technical documents created by IT
vendors to describe business or technical problems that are addressed
by
the vendors' products or services. IT vendors pay us to have
their white
papers distributed to our users and receive targeted promotions
on our
relevant websites. When viewing white papers, our registered
members and
visitors supply their corporate contact and qualification information
and
agree to receive further information from the vendor. The corporate
contact and other qualification information for these leads are
supplied
to the vendor in real time through our proprietary lead management
software.
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Webcasts
and Podcasts.
IT vendors pay us to sponsor and host
webcasts and podcasts that bring informational sessions directly
to
attendees' desktops and, in the case of podcasts, directly to
their mobile
devices. As is the case with white papers, our users supply their
corporate contact and qualification information to the webcast
or podcast
sponsor when they view or download the content. Sponsorship includes
access to the registrant information and visibility before, during
and
after the event.
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Software
Package Comparisons.
Through our 2020software.com website,
IT vendors pay us to post information and specifications about
their
software packages, typically organized by application category.
Users can
request further information, which may include downloadable trial
software
from multiple software providers in sectors such as accounting,
retail,
manufacturing, medical, customer relationship management and
business
analytics. IT vendors, in turn, receive qualified leads based
upon the
users who request their
information.
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Dedicated
E-mails.
IT vendors pay us to further target the promotion
of their white papers, webcasts, podcasts or downloadable trial
software
by including their content in our periodic e-mail updates to
registered
users of our websites. Users who have voluntarily registered
on our
websites receive an e-mail update from us when vendor content
directly
related to their interests is listed on our
sites.
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List
Rentals.
We also offer IT vendors the ability to message
relevant registered members on topics related to their interests.
IT
vendors can rent our e-mail and postal lists of registered members
using
specific criteria such as company size, geography or job
title.
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Contextual
Advertising.
Our contextual advertising programs associate
IT vendor white papers, webcasts, podcasts or other content on
a
particular topic with our related sector-specific content. IT
vendors have
the option to purchase exclusive sponsorship of content related
to their
product or category.
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Events.
Most
of our media groups operate revenue generating events. The majority of
our
events are free to IT professionals and are sponsored by IT vendors. Attendees
are pre-screened based on event-specific criteria such as sector-specific
budget
size, company size, or job title. We offer three types of events: multi-day
conferences, single-day seminars and custom events. Multi-day conferences
provide independent expert content for our attendees and allow vendors
to
purchase exhibit space and other sponsorship offerings that enable interaction
with the attendees. We also hold single-day seminars on various topics
in major
cities. These seminars provide independent content on key sub-topics in
the
sectors we serve, are free to qualified attendees, and offer multiple vendors
the ability to interact with specific, targeted audiences actively focused
on
buying decisions. Our custom events differ from our conferences and seminars
in
that they are exclusively sponsored by a single IT vendor, and the content
is
driven primarily by the sole sponsor.
Print.
We
publish monthly three controlled-circulation magazines that are free to
subscribers and generate revenue solely based on advertising fees. The
highly
targeted magazines we publish are:
Storage
magazine (Storage Media
Group), which we began publishing in 2002;
Information Security
magazine (Security Media Group), which we began publishing in
2003; and
CIO Decisions
magazine (CIO Media Group), which we began publishing in
2005. Our three magazines provide readers with strategic guidance on important
enterprise-level technology decisions. We expect print revenue as a percentage
of total revenue to decrease in the foreseeable future.
Cost
of Revenues, Operating Expenses and Other
Expenses
consist of cost of revenues, selling and marketing, product development,
general
and administrative, depreciation, and amortization expenses. Personnel-related
costs are a significant component of most of these expense
categories. We grew from 411 employees at December 31, 2005 to
520 employees at September 30, 2007. We expect personnel-related
expenses to continue to increase in absolute dollars, but to decline over
time
as a percentage of total revenues due to anticipated economies of scale
in our
business support functions.
Cost
of Online Revenue.
Cost of online revenue consists primarily of:
salaries and related personnel costs; member acquisition expenses (primarily
keyword purchases from leading Internet search sites); freelance writer
expenses; website hosting costs; vendor expenses associated with the delivery
of
webcast, podcast and list rental offerings; stock-based compensation expenses;
and related overhead.
Cost
of Events Revenue.
Cost of events revenue consists primarily of:
facility expenses, including food and beverages for the event attendees;
salaries and related personnel costs; event speaker expenses; stock-based
compensation expenses; and related overhead.
Cost
of Print Revenue.
Cost of print revenue consists primarily of:
printing and graphics expenses; mailing costs; salaries and related personnel
costs; freelance writer expenses; subscriber acquisition expenses (primarily
telemarketing); stock-based compensation expenses; and related
overhead.
Selling
and Marketing.
Selling and marketing expense consists primarily
of: salaries and related personnel costs; sales commissions; travel, lodging
and
other out-of-pocket expenses; stock-based compensation expenses; and related
overhead. Sales commissions are recorded as expense when earned by the
employee.
Product
Development.
Product development includes the creation and
maintenance of our network of websites, advertiser offerings and technical
infrastructure. Product development expense consists primarily of salaries
and
related personnel costs; stock-based compensation expenses; and related
overhead.
General
and Administrative.
General and administrative expense consists
primarily of: salaries and related personnel costs; facilities expenses;
accounting, legal and other professional fees; stock-based compensation
expenses; and related overhead. General and administrative expense may
continue
to increase as a percentage of total revenue for the foreseeable future
as we
invest in infrastructure to support continued growth and incur additional
expenses related to being a publicly traded company, including increased
audit
and legal fees, costs of compliance with securities and other regulations,
investor relations expense, and higher insurance premiums.
Depreciation.
Depreciation
expense consists of the depreciation of our property and equipment. Depreciation
of property and equipment is calculated using the straight-line method
over
their estimated useful lives ranging from three to five years.
Amortization
of Intangible Assets.
Amortization of intangible assets expense
consists of the amortization of intangible assets recorded in connection
with
our acquisitions. Separable intangible assets that are not deemed to have
an
indefinite life are amortized over their useful lives using the straight-line
method over periods generally ranging from one to six years.
Interest
Income (Expense), Net.
Interest income (expense) net consists
primarily of interest income earned on cash and short-term investment balances
less interest expense incurred on bank term loan balances. We historically
have
invested our cash in money market accounts, commercial paper corporate
debt
securities, auction rate securities, variable rate demand notes, and municipal
bonds.
Stock-Based
Compensation Expense
On
January 1, 2006, we adopted the requirements of SFAS No. 123(R),
which requires us to measure the cost of employee services received in
exchange for an award of equity instruments, based on the fair value of
the
award on the date of grant, and to recognize the cost over the period during
which the employee is required to provide the services in exchange for
the
award. We adopted SFAS 123(R) using the prospective method, which requires
us to apply its provisions only to stock-based awards to employees granted
on or
after January 1, 2006. In connection with share-based payment
awards, we recorded expense of $1.7 million and $91,000 for
the three months ended September 30, 2007 and 2006, respectively, and $3.9
million and $156,000 for the nine months ended September 30, 2007 and 2006,
respectively. Unrecognized stock-based compensation expense for
non-vested options of $15.1 million is expected to be recognized using the
straight-line method over a weighted-average period of 1.59 years. We
expect stock-based compensation expenses to increase, both in absolute
dollars
and as a percentage of total revenue, as a result of the adoption of SFAS
No. 123(R). 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
stock options issued and the volatility of our stock price over time. The
adoption of SFAS No. 123(R) will have no effect on our cash flow for any
period.
Acquisitions
TechnologyGuide.com
On
April
26, 2007, we acquired substantially all of the assets of
TechnologyGuide.com from TechnologyGuide, Inc., which was a privately-held
company based in Cincinnati, OH, for $15.0 million in
cash. TechnologyGuide.com is a website business consisting of a
portfolio of five websites; Notebookreview.com, Brighthand.com,
TabletPCReview.com, DigitalCameraReview.com and SpotStop.com. The
websites offer independent product reviews, price comparisons, and forum-based
discussions for selected technology products. The acquisition
provides us with opportunities for growth within the laptop/notebook PC
and
"smart phone" markets in which we currently do not have a significant
presence. In connection with this acquisition, the Company recorded $7.0
million of goodwill and $8.0 million of intangible assets related to developed
websites, customer relationships, and non-compete agreements with estimated
useful lives ranging from three to six years.
2020software.com
On
May 3, 2006, we acquired substantially all of the assets associated with
2020software.com from 20/20 Software, Inc., which was a privately-held
company based in Los Angeles, California, for a purchase price of
$15.0 million in cash. In connection with this acquisition, we
purchased $397,000 of accounts receivable, recorded $9.4 million of
goodwill and recorded $5.2 million of intangible assets related to customer
relationships, customer order backlog and a non-compete agreement, with
estimated useful lives ranging from one to five years. At the time of
acquisition, 2020Software.com was a website business focused on providing
detailed feature-comparison information and access to trial software for
businesses seeking trial versions of accounting, customer relationship
management and other business software. Since the acquisition of
2020Software.com, we have expanded into additional vertical markets including
the retail, manufacturing, construction and medical software
markets.
The
results of operations for these acquisitions are included in our consolidated
financial statements beginning on the closing date of the
acquisition.
Application
of Critical Accounting Policies and Use of Estimates
The
discussion of our financial condition and results of operations is based
upon
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates,
judgments and assumptions that affect the reported amount of assets,
liabilities, revenues and expenses and related disclosure of contingent
assets
and liabilities. On an ongoing basis, we evaluate our estimates, including
those
related to revenue, long-lived assets, allowance for doubtful accounts,
stock-based compensation, and income taxes. We based our estimates of the
carrying value of certain assets and liabilities on historical experience
and on
various other assumptions that we believe to be reasonable. In many cases,
we
could reasonably have used different accounting policies and estimates.
In some
cases, changes in the accounting estimates are reasonably likely to occur
from
period to period. Our actual results may differ from these estimates under
different assumptions or conditions.
We
believe the following critical accounting policies affect our more significant
judgments used in the preparation of our consolidated financial statements.
See
the notes to our financial statements included elsewhere in this prospectus
for
information about these critical accounting policies as well as a description
of
our other accounting policies.
Revenue
Recognition
We generate
substantially all of our revenue from the sale of targeted advertising
campaigns
that are delivered via our network of websites, events and print
publications. Revenue is recognized in accordance with Staff
Accounting Bulletin (SAB) No. 104,
Revenue Recognition
, and Financial
Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF) Issue No.
00-21,
Revenue Arrangements with Multiple
Deliverables
. Revenue is recognized only when the service has
been provided and when there is persuasive evidence of an arrangement,
the fee
is fixed or determinable and collection of the receivable is reasonably
assured.
Online
media.
Revenue for online media offerings is recognized
for specific online media offerings as follows:
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White
Papers.
White paper revenue is recognized
ratably over the period in which the white paper is available on our
websites.
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Webcasts
and Podcasts.
Webcast revenue is recognized in the period
in which the webcast occurs. Podcast revenue is recognized in
the period in which it is first posted and becomes available
on our
websites.
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Software
Package Comparisons.
Software package comparison revenue
is recognized ratably over the period in which the software
information is available on our
websites.
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Dedicated
E-mails, E-mail Newsletters.
Dedicated e-mail and
e-newsletter revenue is recognized in the period in which the
e-mail or
e-newsletter is sent to registered
members.
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List
Rentals.
List rental revenue is recognized in the period
in which the e-mails are sent to the list of registered
members.
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Banners. Banner
revenue is recognized in the period in which the banner
impressions
occur.
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Amounts
collected or billed prior to satisfying the above revenue recognition criteria
are recorded as deferred revenue.
While
each of our online media offerings can be sold separately, most of our
online
media sales involve multiple online offerings. At inception of the arrangement,
we evaluate the deliverables to determine whether they represent separate
units
of accounting under EITF Issue No. 00-21. Deliverables are deemed to be
separate units of accounting if all of the following criteria are met:
the
delivered item has value to the customer on a standalone basis; there is
objective and reliable evidence of the fair value of the item(s); and delivery
or performance of the item(s) is considered probable and substantially
in our
control. We allocate revenue to each unit of accounting in a transaction
based
upon its fair value as determined by vendor objective evidence. Vendor
objective
evidence of fair value for all elements of an arrangement is based upon
the
normal pricing and discounting practices for those online media offerings
when
sold to other similar customers. If vendor objective evidence of fair value
has
not been established for all items under the arrangement, no allocation
can be
made, and we recognize revenue on all items over the term of the
arrangement.
We
offer
customers the ability to purchase integrated ROI program offerings, which
can
include any of our online media offerings packaged together to address
the
particular customer's specific advertising requirements. As part of these
offerings, we will guarantee a minimum number of qualified sales leads
to be
delivered over the course of the advertising campaign. Throughout the
advertising campaign, revenue is recognized as individual offerings are
delivered, and the lead guarantee commitments are closely monitored to
assess
campaign performance. If the minimum number of qualified sales leads is
not met
by the scheduled completion date of the advertising campaign, the campaign
is
extended and we will extend the period over which we recognize revenue.
In
accordance with EITF Issue No. 00-21, we defer revenue for any undelivered
offerings equal to a pro-rata amount of the fair value of the additional
media
offerings as compared to the total combined value of the original contract
and
the fair value of the additional media offerings. The fair value of the
additional media offerings is determined based on our standard rate card
pricing
for each of the additional media offerings. We estimate the additional
media
offerings to be delivered during the extended period based on our historical
lead generation performance for each of the offerings. We have managed
and
completed over 1,000 integrated ROI program offerings since 2004, which we
feel provides a reasonable basis to establish these estimates. During
the twelve months ended September 30, 2007, lead shortfalls for integrated
ROI
program offerings were satisfied within an average extended period of 38
days.
As
of
September 30, 2007, substantially all of the integrated ROI program
offerings that had a guaranteed minimum number of qualified sales leads
had been
delivered within the original contractual term. Our standard contractual
terms and conditions for integrated ROI program offerings allow for us
to extend
advertising campaigns in order to satisfy lead shortfalls. When lead
shortfalls are unable to be satisfied within a mutually agreed-upon
extended period, we recognize revenue equal to, and the customer is only
responsible for paying us, a pro rata amount based on the actual number
of leads
delivered compared to the number of leads originally guaranteed. Historically,
lead guarantees associated with integrated ROI program offerings have not
required us to refund or extend payment terms to customers, nor have they
resulted in deferral of a material amount of revenue outside of the original
contractual term of the advertising campaign.
Amounts
collected or billed prior to satisfying the above revenue recognition criteria
are recorded as deferred revenue.
Events.
We
recognize event sponsorship revenue upon completion of the event in the
period
the event occurs. The majority of our events are free to qualified attendees,
however certain events are based on a paid attendee model. We recognize
revenue
for paid attendee events upon completion of the event and receipt of payment
from the attendee. Amounts collected or billed prior to satisfying the
above
revenue recognition criteria are recorded as deferred revenue.
Print.
We
recognize print revenue at the time the applicable magazine is distributed.
Amounts collected or billed prior to satisfying the above revenue recognition
criteria are recorded as deferred revenue.
Long-Lived
Assets
Our
long-lived assets consist of property and equipment, goodwill and other
intangible assets. Goodwill and other intangible assets have arisen principally
from our acquisitions. The amount assigned to intangible assets is subjective
and based on our estimates of the future benefit of the intangible assets
using
accepted valuation techniques, such as discounted cash flow and replacement
cost
models. Our long-lived assets, other than goodwill, are amortized over
their
estimated useful lives, which we determined based on the consideration
of
several factors including the period of time the asset is expected to remain
in
service. We evaluate the carrying value and remaining useful lives of long-lived
assets, other than goodwill, whenever indicators of impairment are present.
We
evaluate the carrying value of goodwill annually, and whenever indicators
of
impairment are present. We use a discounted cash flow approach to determine
the
fair value of goodwill.
Allowance
for Doubtful Accounts
We
offset
gross trade accounts receivable with an allowance for doubtful accounts.
The
allowance for doubtful accounts is our best estimate of the amount of probable
credit losses in our existing accounts receivable. We review our allowance
for
doubtful accounts on a regular basis, and all past due balances are reviewed
individually for collectibility. Account balances are charged against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. Provisions for allowance for doubtful
accounts are recorded in general and administrative expense. If our historical
collection experience does not reflect our future ability to collect outstanding
accounts receivables, our future provision for doubtful accounts could
be
materially affected. To date, we have not incurred any write-offs of accounts
receivable significantly different than the amounts reserved. The
allowance for doubtful accounts was $510,000 at September 30, 2007.
Stock-Based
Compensation
Through
December 31, 2005, we accounted for our stock-based awards to employees
using the intrinsic value method prescribed in APB Opinion No. 25 and
related interpretations. Under the intrinsic value method, compensation
expense
is measured on the date of the grant as the difference between the deemed
fair
value of our common stock and the exercise or purchase price multiplied
by the
number of stock options or restricted stock awards granted.
Through
December 31, 2005, we accounted for stock-based compensation expense for
non-employees using the fair value method prescribed by Statement of Financial
Accounting Standards, or SFAS, No. 123 and the Black-Scholes option-pricing
model, and recorded the fair value of non-employee stock options as an
expense
over the vesting term of the option.
In
December 2004, FASB issued SFAS No. 123(R), which requires companies
to expense the fair value of employee stock options and other forms of
stock-based compensation. We adopted SFAS No. 123(R) effective
January 1, 2006. SFAS No. 123(R) requires nonpublic companies that
used the minimum value method under SFAS No. 123 for either recognition or
pro forma disclosures to apply SFAS No. 123(R) using the
prospective-transition method. As such, we will continue to apply APB Opinion
No. 25 in future periods to equity awards outstanding at the date of
adoption of SFAS No. 123(R) that were measured using the minimum value
method. In accordance with SFAS No. 123(R), we will recognize the
compensation cost of employee stock-based awards in the statement of operations
using the straight line method over the vesting period of the award. Effective
with the adoption of SFAS No. 123(R), we have elected to use the
Black-Scholes option pricing model to determine the fair value of stock
options
granted. We calculated the fair values of the options granted using
the following estimated weighted-average assumptions:
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Three
Months Ended September 30,
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Nine
Months Ended September 30,
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2007
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2006
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2007
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2006
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Risk-free
interest rate
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*
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4.68%-5.05
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%
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4.61%-5.04
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%
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4.68%-5.05
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%
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Expected
volatility
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*
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58%-59
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%
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49%-50
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%
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58%-63
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%
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Expected
life
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|
|
*
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6.25
years
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6.25
years
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6.25
years
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Dividend
yield
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*
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-
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%
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-
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%
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%
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Weighted-average
grant date fair value per share
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*
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$
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4.47
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$
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7.71
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$
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4.48
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*
|
We
did not grant any stock options during the three months ended
September
30, 2007.
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As
there
was no public market for our common stock prior to our initial public offering
in May 2007, and there has been limited historical information on the volatility
of our common stock since the date of our initial public offering, we determined
the volatility for options granted in the three and nine months ended September
30, 2007 and 2006 based on an analysis of reported data for a peer group
of
companies that issued options with substantially similar terms. The expected
volatility of options granted has been determined using an average of the
historical volatility measures of this peer group of companies for a period
equal to the expected life of the option. The expected life of
options has been determined utilizing the "simplified" method as prescribed
by
the SEC's Staff Accounting Bulletin No. 107,
Share-Based
Payment.
The risk-free interest rate is based on a zero coupon
United States treasury instrument whose term is consistent with the expected
life of the stock options. We have not paid and do not anticipate paying
cash
dividends on our shares of common stock; therefore, the expected dividend
yield
is assumed to be zero. In addition, SFAS No. 123(R) requires companies to
utilize an estimated forfeiture rate when calculating the expense for the
period, whereas SFAS No. 123 permitted companies to record forfeitures
based on actual forfeitures, which was our historical policy under SFAS
No. 123. As a result, we applied an estimated forfeiture rate,
based on our historical forfeiture experience during the previous six years,
of
8.40% in determining the expense recorded in the three and nine months
ended
September 30, 2006. In September 2007, we changed the estimated
forfeiture rate from 8.40% to 4.00% based on a significant decrease in
our
historical forfeiture experience during the previous two years. We
applied the new forfeiture rate of 4.00% in determining the expense recorded
in
the three and nine months ended September 30, 2007.
Internal
Use Software and Website Development Costs
We
account for internal-use software and website development costs in accordance
with the guidance set forth in Statement of Position, or SOP, 98-1,
Accounting for the Cost of Computer Software Developed or Obtained
for
Internal Use,
and EITF Issue No. 00-2,
Accounting for Website
Development Costs
. We capitalize costs of materials, consultants and
compensation and related expenses of employees who devote time to the
development of internal-use software and website applications and infrastructure
involving developing software to operate our websites. However, we expense
as
incurred website development costs for new features and functionalities
since it
is not probable that they will result in additional functionality until
they are
both developed and tested with confirmation that they are more effective
than
the current set of features and functionalities on our websites. Our judgment
is
required in determining the point at which various projects enter the states
at
which costs may be capitalized, in assessing the ongoing value of the
capitalized costs and in determining the estimated useful lives over which
the
costs are amortized, which is generally three years. To the extent that
we
change the manner in which we develop and test new features and functionalities
related to our websites, assess the ongoing value of capitalized assets
or
determine the estimated useful lives over which the costs are amortized,
the
amount of website development costs we capitalize and amortize in future
periods
would be impacted. We review capitalized internal use software and website
development costs for recoverability whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable. We would recognize an impairment loss only if the carrying
amount of the asset is not recoverable and exceeds its fair value. We
capitalized internal-use software and website development costs of $191,000
and
$272,000 for the three months ended September 30, 2007 and 2006, respectively,
and $889,000 and $452,000 for the nine months ended September 30, 2007
and 2006,
respectively.
Income
Taxes
We
are
subject to income taxes in both the United States and foreign jurisdictions,
and
we use estimates in determining our provision for income taxes. We account
for
income taxes in accordance with SFAS No. 109,
Accounting for Income
Taxes
, which is the asset and liability method for accounting and reporting
for income taxes. Under SFAS No. 109, deferred tax assets and liabilities
are recognized based on temporary differences between the financial reporting
and income tax bases of assets and liabilities using statutory
rates.
Our
deferred tax assets are comprised primarily of net operating loss, or NOL,
carryforwards. As of December 31, 2006, we had federal and state NOL
carryforwards of approximately $3.4 million and $2.1 million,
respectively, which may be used to offset future taxable income. The NOL
carryforwards expire at various times through 2024, and are subject to
review
and possible adjustment by the Internal Revenue Service. The Internal Revenue
Code contains provisions that limit the NOL and tax credit carryforwards
available to be used in any given year in the event of certain changes
in the
ownership interests of significant stockholders. The federal NOL carryforwards
of $3.4 million available at December 31, 2006 were acquired from
Bitpipe and are subject to limitations on their use in future
years.
Net
Income (Loss) Per Share
As
of May
16, 2007, the effective date of our IPO, we transitioned from having two
classes of equity securities outstanding, common and preferred stock, to
a
single class of equity securities outstanding, common stock, upon automatic
conversion of shares of redeemable convertible preferred stock into shares
of
common stock. For the period prior to May 16, 2007, we calculated net
income (loss) per share in accordance with SFAS No. 128, as clarified by
EITF
Issue No. 03-6. EITF Issue No. 03-6 clarifies the use of the
“two-class” method of calculating earnings per share as originally prescribed in
SFAS No. 128. Under the two-class method, basic net income (loss) per
share is computed by dividing the net income (loss) applicable to common
stockholders by the weighted-average number of common shares outstanding
for the
fiscal period. Diluted net income (loss) per share is computed using
the more dilutive of (a) the two-class method, or (b) the if-converted
method. We allocate net income first to preferred stockholders based
on dividend rights under our charter and then to preferred and common
stockholders based on ownership interests. Net losses are not
allocated to preferred stockholders.
For
the
period subsequent to May 16, 2007, we have followed SFAS No. 128,
Earnings Per Share
, which requires that basic EPS be calculated by
dividing earnings available to common shareholders for the period by the
weighted average number of common shares outstanding. Diluted EPS is
computed using the weighted-average number of common shares outstanding
during
the period, plus the dilutive effect of potential future issuances of common
stock relating to stock option programs and other potentially dilutive
securities using the treasury stock method. In calculating diluted EPS,
the
dilutive effect of stock options is computed using the average market price
for
the respective period. In addition, under SFAS No. 123(R), the assumed
proceeds
under the treasury stock method include the average unrecognized compensation
expense and assumed tax benefit of stock options that are in-the-money.
This
results in the “assumed” buyback of additional shares, thereby reducing the
dilutive impact of stock options.
For
the
period prior to May 16, 2007, we reported lower earnings per common share
because of accretion of preferred stock dividends. Upon closing of
our initial public offering in May 2007, our preferred stock automatically
converted into shares of our common stock on a one-for-four
basis. After reflecting the pro forma conversion of our preferred
stock into shares of our common stock, our earnings per share increases
from
$(0.16) to $0.05 per basic common share for the three months ended September
30,
2006, and from $0.03 to $0.12 and from $(0.47) to $0.13 per basic common
share
for the nine months ended September 30, 2007 and 2006,
respectively.
Results
of Operations
The
following table sets forth our results of operations for the periods
indicated:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
($
in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
$
|
14,687
|
|
|
|
63
|
%
|
|
$
|
12,565
|
|
|
|
62
|
%
|
|
$
|
44,726
|
|
|
|
68
|
%
|
|
$
|
35,752
|
|
|
|
64
|
%
|
Events
|
|
|
6,912
|
|
|
|
30
|
|
|
|
5,893
|
|
|
|
29
|
|
|
|
16,201
|
|
|
|
24
|
|
|
|
13,962
|
|
|
|
25
|
|
Print
|
|
|
1,702
|
|
|
|
7
|
|
|
|
1,809
|
|
|
|
9
|
|
|
|
5,323
|
|
|
|
8
|
|
|
|
6,181
|
|
|
|
11
|
|
Total
revenues
|
|
|
23,301
|
|
|
|
100
|
|
|
|
20,267
|
|
|
|
100
|
|
|
|
66,250
|
|
|
|
100
|
|
|
|
55,895
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
|
3,769
|
|
|
|
16
|
|
|
|
3,644
|
|
|
|
18
|
|
|
|
11,194
|
|
|
|
17
|
|
|
|
9,257
|
|
|
|
17
|
|
Events
|
|
|
2,283
|
|
|
|
10
|
|
|
|
1,632
|
|
|
|
8
|
|
|
|
6,065
|
|
|
|
9
|
|
|
|
4,641
|
|
|
|
8
|
|
Print
|
|
|
862
|
|
|
|
4
|
|
|
|
1,385
|
|
|
|
7
|
|
|
|
2,990
|
|
|
|
5
|
|
|
|
4,215
|
|
|
|
8
|
|
Total
cost of revenues
|
|
|
6,914
|
|
|
|
30
|
|
|
|
6,661
|
|
|
|
33
|
|
|
|
20,249
|
|
|
|
31
|
|
|
|
18,113
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
16,387
|
|
|
|
70
|
|
|
|
13,606
|
|
|
|
67
|
|
|
|
46,001
|
|
|
|
69
|
|
|
|
37,782
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
7,271
|
|
|
|
31
|
|
|
|
4,932
|
|
|
|
24
|
|
|
|
19,811
|
|
|
|
30
|
|
|
|
14,555
|
|
|
|
26
|
|
Product
development
|
|
|
1,677
|
|
|
|
7
|
|
|
|
1,617
|
|
|
|
8
|
|
|
|
5,021
|
|
|
|
8
|
|
|
|
4,740
|
|
|
|
8
|
|
General
and administrative
|
|
|
3,364
|
|
|
|
14
|
|
|
|
2,126
|
|
|
|
10
|
|
|
|
8,917
|
|
|
|
13
|
|
|
|
6,001
|
|
|
|
11
|
|
Depreciation
|
|
|
401
|
|
|
|
2
|
|
|
|
241
|
|
|
|
1
|
|
|
|
1,095
|
|
|
|
2
|
|
|
|
697
|
|
|
|
1
|
|
Amortization
of intangible assets
|
|
|
1,171
|
|
|
|
5
|
|
|
|
1,378
|
|
|
|
7
|
|
|
|
2,971
|
|
|
|
4
|
|
|
|
3,886
|
|
|
|
7
|
|
Total
operating expenses
|
|
|
13,884
|
|
|
|
60
|
|
|
|
10,294
|
|
|
|
51
|
|
|
|
37,815
|
|
|
|
57
|
|
|
|
29,879
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
2,503
|
|
|
|
11
|
|
|
|
3,312
|
|
|
|
16
|
|
|
|
8,186
|
|
|
|
12
|
|
|
|
7,903
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
897
|
|
|
|
4
|
|
|
|
(16
|
)
|
|
|
*
|
|
|
|
1,207
|
|
|
|
2
|
|
|
|
121
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
3,400
|
|
|
|
15
|
|
|
|
3,296
|
|
|
|
16
|
|
|
|
9,393
|
|
|
|
14
|
|
|
|
8,024
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
1,858
|
|
|
|
8
|
|
|
|
1,709
|
|
|
|
8
|
|
|
|
4,820
|
|
|
|
7
|
|
|
|
3,623
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,542
|
|
|
|
7
|
%
|
|
$
|
1,587
|
|
|
|
8
|
%
|
|
$
|
4,573
|
|
|
|
7
|
%
|
|
$
|
4,401
|
|
|
|
8
|
%
|
* Percentage
not meaningful.
Comparison
of Three Months Ended September 30, 2007 and 2006
Revenues
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(unaudited)
|
|
|
|
($
in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
$
|
14,687
|
|
|
$
|
12,565
|
|
|
$
|
2,122
|
|
|
|
17
|
%
|
Events
|
|
|
6,912
|
|
|
|
5,893
|
|
|
|
1,019
|
|
|
|
17
|
|
Print
|
|
|
1,702
|
|
|
|
1,809
|
|
|
|
(107
|
)
|
|
|
(6
|
)
|
Total
revenues
|
|
$
|
23,301
|
|
|
$
|
20,267
|
|
|
$
|
3,034
|
|
|
|
15
|
%
|
Online.
The
increase in online revenue was primarily attributable to a $3.2 million
increase in revenue from lead generation offerings due primarily to an
increase
in white paper, webcast and list rental sales volumes. The increase
also reflects revenues from TechnologyGuide.com, which we acquired in April
2007. The increase in online revenues was offset in part by a $1.1 million
decrease in revenue from branding offerings due primarily to a decrease
in
banner and e-newsletter sales volumes.
Events.
The
increase in events revenue was primarily attributable to an $878,000 increase
in
seminar series revenue due to an increase in the number of seminar series
events
produced in the third quarter of 2007 compared to 2006.
Print.
The
decrease in print revenue was attributable to the continued shift of our
customer’s advertising budgets away from print and towards online
offerings.
Cost
of Revenues and Gross Profit
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(unaudited)
|
|
|
|
($
in thousands)
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
$
|
3,769
|
|
|
$
|
3,644
|
|
|
$
|
125
|
|
|
|
3
|
%
|
Events
|
|
|
2,283
|
|
|
|
1,632
|
|
|
|
651
|
|
|
|
40
|
|
Print
|
|
|
862
|
|
|
|
1,385
|
|
|
|
(523
|
)
|
|
|
(38
|
)
|
Total
cost of revenues
|
|
$
|
6,914
|
|
|
$
|
6,661
|
|
|
$
|
253
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
16,387
|
|
|
$
|
13,606
|
|
|
$
|
2,781
|
|
|
|
20
|
%
|
Gross
profit percentage
|
|
|
70
|
%
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
Cost
of Online Revenue.
The increase in cost of online revenue was
attributable in part to a $179,000 increase in webcast production and hosting
costs due to the increased volume of webcasts in the third quarter of 2007
as
compared to 2006. The increase in cost of online revenue was offset
in part by a $50,000 decrease in third party list rental handling and production
costs.
Cost
of Events Revenue.
The increase in cost of events revenue was
attributable in part to a $238,000 increase in seminar series costs due
to an
increase in the number of seminar series events produced in the third quarter
of
2007 compared to 2006. The increase also includes $234,000 from one
additional multi-day conference held in the third quarter of 2007 compared
to
2006. The increase also reflects a $139,000 increase in salaries,
bonuses and benefits related to an increase in average headcount of 7 employees
in our events organization. The increase in headcount was needed to
support the growth in revenues.
Cost
of Print Revenue.
The decrease in cost of print revenue was
attributable to our efforts to reduce production costs for all three magazines
in response to our customer’s advertising budgets continuing to shift away from
print and towards online offerings.
Gross
Profit.
The increase in gross profit results in part from a
$2.0 million increase in online gross profit due to an increase in online
revenue at a consistent gross profit percentage. We expect our gross
profit to fluctuate from period to period depending on the relative contribution
of online, events and print revenue to our total revenue.
Operating
Expenses and Other
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(unaudited)
|
|
|
|
($
in thousands)
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
$
|
7,271
|
|
|
$
|
4,932
|
|
|
$
|
2,339
|
|
|
|
47
|
%
|
Product
development
|
|
|
1,677
|
|
|
|
1,617
|
|
|
|
60
|
|
|
|
4
|
|
General
and administrative
|
|
|
3,364
|
|
|
|
2,126
|
|
|
|
1,238
|
|
|
|
58
|
|
Depreciation
|
|
|
401
|
|
|
|
241
|
|
|
|
160
|
|
|
|
66
|
|
Amortization
of intangible assets
|
|
|
1,171
|
|
|
|
1,378
|
|
|
|
(207
|
)
|
|
|
(15
|
)
|
Total
operating expenses
|
|
$
|
13,884
|
|
|
$
|
10,294
|
|
|
$
|
3,590
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
$
|
897
|
|
|
$
|
(16
|
)
|
|
$
|
913
|
|
|
|
*
|
|
Provision
for income taxes
|
|
$
|
1,858
|
|
|
$
|
1,709
|
|
|
$
|
149
|
|
|
|
9
|
%
|
* Percentage
not meaningful.
Selling
and Marketing.
The increase in selling and marketing expense was
attributable in part to a $1,100,000 increase in salaries, commissions,
bonuses
and benefits resulting principally from an increase in average headcount
of 52
employees in our sales and marketing organizations, and increases to employee
compensation. The increase in headcount was needed to support the growth in
revenues. The increase also reflects an $881,000 increase in
stock-based compensation and a $216,000 increase in direct marketing costs
related to a marketing-focused event for our customers held in September
2007.
Product
Development.
The increase in product development expense was
primarily attributable to a $74,000 increase in stock-based
compensation.
General
and Administrative.
The increase in general and administrative
expense was primarily attributable to a $585,000 increase in stock-based
compensation and a $115,000 increase in other employee
compensation. The increase was also attributable to a $339,000
increase in audit, legal, and insurance expenses related to becoming a
publicly
traded company in May 2007. The increase also reflects a $127,000
increase in facilities expense due to leasing additional office space in
our
Needham, MA headquarters beginning in July 2007.
Depreciation.
The
increase in depreciation expense was attributable to purchases of property
and
equipment of $2.3 million in the nine months ended September 30, 2007,
$969,000
in 2006, and $1.5 million in 2005, offset in part by purchases in prior
years
becoming fully depreciated.
Amortization
of Intangible Assets.
The decrease in amortization of intangible
assets expense was attributable to intangible assets related to acquisitions
in
prior years becoming fully amortized, offset in part by the amortization
of
intangible assets related to our acquisitions of 2020software.com in
May 2006 and TechnologyGuide.com in May 2007.
Interest
Income (Expense), Net.
The increase in interest income
(expense), net reflected an increase in average cash and short-term investment
balances during the third quarter of 2007 compared to 2006.
Provision
for Income Taxes.
We recorded a provision for income taxes based
upon a 51% projected effective tax rate in 2007. The provision for
income taxes recorded during the three months ended September 30, 2007
includes
an adjustment to increase our projected effective tax rate from a 49% to
51% for
the nine months ended September 30, 2007. Our effective tax rate
increased after the adoption of SFAS No. 123(R) due to the impact of
stock-based compensation which is a nondeductible expense in our tax
provision.
Comparison
of Nine Months Ended September 30, 2007 and 2006
Revenues
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(unaudited)
|
|
|
|
($
in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
$
|
44,726
|
|
|
$
|
35,752
|
|
|
$
|
8,974
|
|
|
|
25
|
%
|
Events
|
|
|
16,201
|
|
|
|
13,962
|
|
|
|
2,239
|
|
|
|
16
|
|
Print
|
|
|
5,323
|
|
|
|
6,181
|
|
|
|
(858
|
)
|
|
|
(14
|
)
|
Total
revenues
|
|
$
|
66,250
|
|
|
$
|
55,895
|
|
|
$
|
10,355
|
|
|
|
19
|
%
|
Online.
The
increase in online revenue was attributable in part to a $11.8 million
increase
in revenue from lead generation offerings due primarily to an increase
in white
paper, webcast, list rental, and software package comparison sales
volumes. The increase in software package comparison volume was
attributable to expansion into additional vertical markets within
2020Software.com, which we acquired in May 2006. The increase in online
revenues also reflects revenues from TechnologyGuide.com, which we acquired
in
April 2007. The increase in online revenues was offset in part by a $2.9
million decrease in revenue from branding offerings due primarily to a
decrease
in e-newsletter and banner sales volumes.
Events.
The
increase in events revenue was attributable in part to a $2.4 million increase
in seminar series revenue due to an increase in the number of seminar series
events produced in the first nine months of 2007 compared to 2006.
Print.
The
decrease in print revenue was attributable to the continued shift of our
customer’s advertising budgets away from print and towards online
offerings.
Cost
of Revenues and Gross Profit
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(unaudited)
|
|
|
|
($
in thousands)
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
$
|
11,194
|
|
|
$
|
9,257
|
|
|
$
|
1,937
|
|
|
|
21
|
%
|
Events
|
|
|
6,065
|
|
|
|
4,641
|
|
|
|
1,424
|
|
|
|
31
|
|
Print
|
|
|
2,990
|
|
|
|
4,215
|
|
|
|
(1,225
|
)
|
|
|
(29
|
)
|
Total
cost of revenues
|
|
$
|
20,249
|
|
|
$
|
18,113
|
|
|
$
|
2,136
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
46,001
|
|
|
$
|
37,782
|
|
|
$
|
8,219
|
|
|
|
22
|
%
|
Gross
profit percentage
|
|
|
69
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
Cost
of Online Revenue.
The increase in cost of online revenue was
attributable in part to a $792,000 increase in member acquisition expenses,
primarily related to keyword purchases in additional vertical markets
within 2020Software.com, which we acquired in May 2006. The increase was
also attributable to a $427,000 increase in webcast production and hosting
costs
due to the increased volume of webcasts in the first nine months of 2007
compared to 2006. The increase also reflects a $342,000 increase in
salaries and benefits primarily related to an increase in average headcount
of
10 employees in our online editorial and operations organizations, as well
as
increases in employee compensation. We increased headcount to support the
increase in online revenue volume and to provide additional editorial
content. The increase also includes a $140,000 increase in
stock-based compensation.
Cost
of Events Revenue.
The increase in cost of events revenue was
attributable in part to a $568,000 increase in seminar series costs due
to an
increase in the number of seminar series events produced in the first nine
months of 2007 compared to 2006. The increase also includes $415,000
from two additional multi-day conferences held in the first nine
months of 2007 compared to 2006. The increase also reflects a
$346,000 increase in salaries, bonuses, benefits and temporary help related
to
an increase in average headcount of 7 employees in our events organization.
The
increase in headcount was needed to support the growth in
revenues.
Cost
of Print Revenue.
The decrease in cost of print revenue was
attributable to our efforts to reduce production costs for all three magazines
in response to our customer’s advertising budgets continuing to shift away from
print and towards online offerings.
Gross
Profit.
The increase in gross profit results in part from a
$7.0 million increase in online gross profit and a $815,000 increase in
events gross profit. The increase in online gross profit is attributable
to an
increase in online revenue at a consistent gross profit percentage. The
increase
in events gross profit is attributable to an increase in seminar series
revenue,
offset in part by a four percent decrease in gross profit percentage when
compared to 2006. We expect our gross profit to fluctuate from period
to period depending on the relative contribution of online, events and
print
revenue to our total revenue.
Operating
Expenses and Other
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(unaudited)
|
|
|
|
($
in thousands)
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
$
|
19,811
|
|
|
$
|
14,555
|
|
|
$
|
5,256
|
|
|
|
36
|
%
|
Product
development
|
|
|
5,021
|
|
|
|
4,740
|
|
|
|
281
|
|
|
|
6
|
|
General
and administrative
|
|
|
8,917
|
|
|
|
6,001
|
|
|
|
2,916
|
|
|
|
49
|
|
Depreciation
|
|
|
1,095
|
|
|
|
697
|
|
|
|
398
|
|
|
|
57
|
|
Amortization
of intangible assets
|
|
|
2,971
|
|
|
|
3,886
|
|
|
|
(915
|
)
|
|
|
(24
|
)
|
Total
operating expenses
|
|
$
|
37,815
|
|
|
$
|
29,879
|
|
|
$
|
7,936
|
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
$
|
1,207
|
|
|
$
|
121
|
|
|
$
|
1,086
|
|
|
|
*
|
|
Provision
for income taxes
|
|
$
|
4,820
|
|
|
$
|
3,623
|
|
|
$
|
1,197
|
|
|
|
33
|
%
|
Selling
and Marketing.
The increase in selling and marketing expense was
primarily attributable to a $2.9 million increase in salaries, commissions,
bonuses and benefits resulting principally from an increase in average
headcount
of 40 employees in our sales and marketing organizations, and increases
to
employee compensation. The increase in headcount was needed to support the
growth in revenues. The increase also reflects a $2.0 million increase in
stock-based compensation.
Product
Development.
The increase in product development expense was
primarily attributable to a $149,000 increase in consulting expenses related
to
IT infrastructure improvements to support the growing number of online
offerings. The increase also reflects a $214,000 increase in
stock-based compensation.
General
and Administrative.
The increase in general and administrative
expense was primarily attributable to a $1.4 million increase in stock-based
compensation and a $537,000 increase in other employee
compensation. The increase was also attributable to a $655,000
increase in audit, legal, and insurance expenses related to becoming a
publicly
traded company in May 2007. The increase also reflects a $117,000
increase in facilities expense due to leasing additional office space in
our
Needham, MA headquarters beginning in July 2007.
Depreciation.
The
increase in depreciation expense was attributable to purchases of property
and
equipment of $2.3 million in the nine months ended September 30, 2007,
$969,000
in 2006, and $1.5 million in 2005, offset in part by purchases in prior
years
becoming fully depreciated.
Amortization
of Intangible Assets.
The decrease in amortization of intangible
assets expense was attributable to intangible assets related to acquisitions
in
prior years becoming fully amortized, offset in part by the amortization
of
intangible assets related to our acquisitions of 2020software.com in
May 2006 and TechnologyGuide.com in May 2007.
Interest
Income (Expense), Net.
The increase in interest income
(expense), net reflected an increase in average cash and short-term investment
balances during the first nine months of 2007 as compared to 2006.
Provision
for Income Taxes.
We recorded a provision for income taxes in
2007 based upon a 51% effective tax rate. Our effective tax rate
increased after the adoption of SFAS No. 123(R) due to the impact of
stock-based compensation which is a nondeductible expense in our tax
provision.
Seasonality
The
timing of our revenues is affected by seasonal factors. Our revenues are
seasonal primarily as a result of the annual budget approval process of
many of
our customers and the historical decrease in advertising activity in July
and
August. Revenues are usually the lowest in the first quarter of each calendar
year, increase during the second quarter, decrease during the third quarter,
and
increase again during the fourth quarter. Events revenue may vary depending
on
which quarters we produce the event, which may vary when compared to previous
periods. The timing of revenues in relation to our expenses, much of which
does
not vary directly with revenue, has an impact on the cost of online revenue,
selling and marketing, product development, and general and administrative
expenses as a percentage of revenue in each calendar quarter during the
year.
The
majority of our expenses are personnel-related and include salaries, stock-based
compensation, benefits and incentive-based compensation plan expenses.
As a
result, we have not experienced significant seasonal fluctuations in the
timing
of our expenses period to period.
Liquidity
and Capital Resources
Resources
Since
2003, we have funded our operations principally with cash flows generated
by
operations. In May 2007, we completed our initial public offering of
8.9 million shares of our common stock, of which 7.1 million shares were
sold by
us and 1.8 million shares were sold by stockholder of ours, all at a price
to the public of $13.00 per share. We raised a total of $91.9
million in gross proceeds from the offering, or $83.2 million in net proceeds
after deducting underwriting discounts and commissions of $6.4 million
and other
offering costs of approximately $2.3 million. We believe our existing
cash and cash equivalents, our cash flow from operating activities, available
bank borrowings and the net proceeds of this offering will be sufficient
to meet
our anticipated cash needs for at least the next twelve months. Our
future working capital requirements will depend on many factors, including
the
operations of our existing business, our potential strategic expansion
internationally, future acquisitions we might undertake, and the expansion
into
complementary businesses. To the extent that our cash and cash
equivalents and cash flow from operating activities are insufficient to
fund our
future activities, we may need to raise additional funds through bank credit
arrangements or public or private equity or debt financings. We also
may need to raise additional funds in the event we determine in the future
to
effect one or more acquisitions of businesses. In the event
additional funding is required, we may not be able to obtain bank credit
arrangements or effect an equity or debt financing on terms acceptable
to us or
at all.
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
(unaudited)
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and short-term investments
|
|
$
|
108,670
|
|
|
$
|
30,830
|
|
Accounts
receivable, net
|
|
$
|
12,419
|
|
|
$
|
12,096
|
|
Cash,
Cash Equivalents and Short-Term Investments
Our
cash,
cash equivalents and short-term investments at September 30, 2007 were
held for
working capital purposes and were invested primarily in money market accounts,
commercial paper corporate debt securities, auction rate securities, variable
rate demand notes, and municipal bonds. We do not enter into
investments for trading or speculative purposes.
Accounts
Receivable, Net
Our
accounts receivable balance fluctuates from period to period, which affects
our
cash flow from operating activities. The fluctuations vary depending on
the
timing of our service delivery and billing activity, cash collections,
and
changes to our allowance for doubtful accounts. We use days' sales outstanding,
or DSO, calculated on a monthly basis, as a measurement of the quality
and
status of our receivables. We define DSO as average accounts receivable
divided
by total revenue for the applicable period, multiplied by the number of
days in
the applicable period. DSO was 53 days at September 30, 2007 and
51 days December 31, 2006.
Operating
Activities
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$
|
11,805
|
|
|
$
|
7,797
|
|
Net
cash used in investing activities
(1)
|
|
$
|
(18,371
|
)
|
|
$
|
(15,986
|
)
|
Net
cash provided by (used in) financing activities
|
|
$
|
84,406
|
|
|
$
|
(11,221
|
)
|
(1)
Cash
used in investing activities shown net of short-term investment activity
of
$87,901 for the nine months ended September 30, 2007.
Cash
provided by operating activities primarily consists of net income adjusted
for
certain non-cash items including depreciation and amortization, the provision
for bad debt, stock-based compensation, deferred income taxes, and the
effect of
changes in working capital and other activities. Cash provided by
operating activities in the nine months ended September 30, 2007 was $11.8
million and consisted of $4.6 million of net income, $4.1 million of
depreciation and amortization and $3.9 million of stock-based compensation,
partly offset by $766,000 used in working capital and other
activities.
Cash
provided by operating activities in the nine months ended September 30,
2006 was
$7.8 million and consisted primarily of $4.4 million of net income,
$4.6 million of depreciation and amortization, offset by $1.6 million used
in working capital and other activities.
Investing
Activities
Cash
used
in investing activities primarily consists of purchases of property and
equipment and acquisitions of businesses. Cash used in investing
activities in the nine months ended September 30, 2007, net of short-term
investment activity, was $18.4 million and consisted of $15.0 million
for the acquisition of TechnologyGuide.com in April 2007, $1.0 million for
the acquisition of Ajaxian in February 2007 and $2.4 million for the purchase
of
property and equipment. Cash used in investing activities in the nine
months ended September 30, 2006 was $16.0 million and consisted of
$15.0 million for the acquisition of 2020software.com in May 2006 and
$1.0 million for the purchase of property and equipment.
Equity
Financing Activities
In
May
2007, we completed our initial public offering of 8.9 million shares of
our
common stock, of which 7.1 million shares were sold us and 1.8 million
shares
were sold by stockholders of our, all at a price to the public of $13.00
per share. We raised a total of $91.9 million in gross proceeds from
the offering, or $83.2 million in net proceeds after deducting underwriting
discounts and commissions of $6.4 million and other offering costs of
approximately $2.3 million. In addition, we received proceeds from
the exercise of common stock options and warrants in the amounts of $977,000
and
$779,000 in the nine months ended September 30, 2007 and 2006,
respectively.
Term
Loan and Credit Facility Borrowings
On
August 30, 2006, we entered into a credit agreement with Citizens Bank of
Massachusetts, which included a $10.0 million term loan and a
$20.0 million revolving credit facility. As of September 30, 2007,
outstanding borrowings under the credit agreements were
$6.8 million.
We
borrowed $12.0 million against our revolving credit facility in
conjunction with the acquisition of TechnologyGuide.com in April
2007. The entire outstanding balance of $12.0 million was repaid
in May 2007 with proceeds from our initial public offering. As of
September 30, 2007, unused availability under our revolving credit facility
totaled $20.0 million. Our revolving credit facility matures on
August 30, 2011. Unless earlier payment is required by an event of default,
all principal and any unpaid interest will be due and payable on August 30,
2011. At our option, the revolving credit facility bears interest at either
the
lender's prime rate less 1.00% or the London Interbank Offered Rate, or
LIBOR,
plus the applicable LIBOR margin. We are also required to pay an unused
line fee on the daily unused amount of our revolving credit facility at
a per
annum rate of 0.375%.
In
August 2007, we entered into an amendment to the credit
agreement. The amendment changes the applicable LIBOR margin from
1.50% to a sliding scale based on the ratio of total funded debt to EBITDA
for
the preceding four fiscal quarters. As of September 30, 2007, the
applicable LIBOR margin was 1.25%.
Our
term
loan requires the payment of 39 consecutive monthly installments of $250,000
each, plus interest, the first such installment was due on September 30,
2006, with a final payment of the entire unpaid principal balance due on
December 30, 2009. In September 2006, we entered into an
interest rate swap agreement to mitigate interest rate fluctuation, and
fix the
interest rate on the term loan at 5.48% plus the applicable LIBOR
margin.
Borrowings
under our credit agreements are collateralized by an interest in and
lien on all
of our assets and certain other guarantees and pledges. Our credit agreements
contain certain affirmative and negative covenants, which require, among
other
things, that we meet certain financial ratio covenants and limit certain
capital
expenditures. We were in compliance with all covenants under the credit
agreements as of September 30, 2007.
We
have
made capital expenditures primarily for computer equipment and related
software
needed to host our websites, internal-use software development costs, as
well as
for leasehold improvements and other general purposes to support our
growth. Our capital expenditures totaled $2.4 million and $969,000
for the nine months ended September 30, 2007 and 2006,
respectively. We expect to spend approximately $400,000 in capital
expenditures in the remaining three months of 2007 primarily for website
development costs, computer equipment and related software, and internal-use
software development costs. We are not currently party to any purchase
contracts
related to future capital expenditures.
Contractual
Obligations and Commitments
As
of
September 30, 2007, our principal commitments consist of obligations under
leases for office space and principal and interest payments due under our
bank
term loan. The offices are leased under noncancelable operating lease agreements
that expire through November 30, 2012. The following table sets forth our
commitments to settle contractual obligations in cash as of September 30,
2007:
|
|
Payments
Due by Period
|
|
|
|
|
|
|
Less
than
|
|
1-3
|
|
|
3-5
|
|
|
More
than
|
|
|
|
Total
|
|
|
1
Year
|
|
|
Years
|
|
|
Years
|
|
|
5
Years
|
|
|
|
(unaudited)
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
term loan payable
|
|
$
|
6,750
|
|
|
$
|
3,000
|
|
|
$
|
3,750
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating
leases
(1)
|
|
|
7,400
|
|
|
|
2,478
|
|
|
|
3,670
|
|
|
|
1,156
|
|
|
|
96
|
|
Total
|
|
$
|
14,150
|
|
|
$
|
5,478
|
|
|
$
|
7,420
|
|
|
$
|
1,156
|
|
|
$
|
96
|
|
(1)
|
Operating
lease obligations are net of minimum sublease payments of $113,000
due
under various sublease agreements that expire through July 31,
2008.
|
Off-Balance
Sheet Arrangements
In
September 2006, we entered into an interest rate swap agreement to mitigate
interest rate fluctuation, and fix the interest on our variable rate bank
term
loan fixed rate obligation. Our interest rate swap fixed the
effective interest rate on the term loan at 5.48% plus the applicable LIBOR
margin. The fair value of the interest rate swap was $70,000 and $56,000 at
September 30, 2007 and December 31, 2006, respectively and is recorded in
other liabilities. We do not have any other off-balance sheet
arrangements.