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Omniture 10-Q 2009 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2009
or
For the transition period from to
Commission file number: 000-52076
OMNITURE, INC.
(Exact name of Registrant as specified in its charter)
550 East Timpanogos Circle
Orem, Utah 84097 (Address, including zip code, of Registrant’s principal executive offices) 801.722.7000
(Registrant’s telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). Yes o No þ
There were 77,045,826 shares of the Registrant’s common stock, par value $0.001 per share,
outstanding on August 3, 2009.
TABLE OF CONTENTS
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
OMNITURE, INC.
Condensed Consolidated Balance Sheets (in thousands) (unaudited)
See accompanying notes to the condensed consolidated financial statements.
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OMNITURE, INC.
Condensed Consolidated Statements of Operations (in thousands, except per share data) (unaudited)
See accompanying notes to the condensed consolidated financial statements.
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OMNITURE, INC.
Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)
See accompanying notes to the condensed consolidated financial statements.
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) 1. Description of Business and Basis of Presentation
Description of Business
Omniture, Inc. (the “Company”) was incorporated in Delaware in August 1999 and has its
principal offices located in Orem, Utah. The Company began providing its enterprise on-demand
online business optimization services in February 2001. The Company is a leading provider of online
business optimization products and services, which it delivers through the Omniture Online
Marketing Suite. The Company’s customers use its products and services to manage and enhance
online, offline and multi-channel business initiatives. The Omniture Online Marketing Suite, which
is hosted and delivered to customers on-demand and as an on-premise solution, consists of an open
business analytics platform and an integrated set of optimization applications for online
analytics, channel analytics, visitor acquisition and conversion. The Omniture Online Marketing
Suite consists of Omniture SiteCatalyst, the Company’s core product offering, Omniture
DataWarehouse, Omniture Discover, Omniture Genesis, Omniture SearchCenter, Omniture Test&Target,
Omniture SiteSearch, Omniture Merchandising, Omniture Recommendations and Omniture Survey services
and Omniture Insight (formerly known as Discover OnPremise) and Omniture Insight for Retail
(formerly known as Discover OnPremise for Retail) software.
The condensed consolidated financial statements included in this quarterly report on Form 10-Q
have been prepared by the Company without audit, pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures contained in this quarterly report
are adequate to make the information presented not misleading. The condensed consolidated financial
statements included herein reflect all adjustments (consisting of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods presented. These condensed
consolidated financial statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal
year ended December 31, 2008. The results of operations for the three and six months ended June 30,
2009 are not necessarily indicative of the results to be anticipated for the entire year ending
December 31, 2009, or any other period.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and transactions have been
eliminated in the condensed consolidated financial statements.
Segments
The Company operates its business in one reportable segment.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated
financial statements and accompanying notes. Significant estimates made by management include the
determination of the fair value of stock awards issued, allowances for accounts receivable, the
assessment for impairment of long-lived assets, restructuring costs related to business
acquisitions and income taxes. The Company also uses estimates in determining the remaining
economic lives and fair values of purchased intangible assets and property and equipment related to
business acquisitions. Actual results could differ from those estimates.
Subsequent Events
We have evaluated subsequent events through August 6, 2009, the date the financial statements
were issued. No material subsequent events have occurred since June 30, 2009 that required
recognition or disclosure in these financial statements.
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) Revenue Recognition
The Company derives its revenues from three primary sources: (1) subscription fees from
customers implementing and utilizing the Company’s on-demand online business optimization services;
(2) license revenue from selling software licenses; and (3) related professional and other
services, consisting primarily of consulting and training.
The Company accounts for its subscription revenues and related professional services revenues
following the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, and
Emerging Issues Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. The Company recognizes revenue when all of the following conditions are met:
The Company recognizes subscription revenues, including implementation and set-up fees, on a
monthly basis, beginning on the date the customer commences use of the Company’s services and
ending on the final day of the contract term. The Company records amounts that have been invoiced
in accounts receivable and in deferred revenues or revenues, depending on whether the revenue
recognition criteria have been met.
The Company recognizes revenue resulting from professional services sold with subscription
offerings (generally considered to be at the time of, or within 45 days of, sale of the
subscription offering) over the term of the related subscription contract as these services are
considered to be inseparable from the subscription service, and the Company has not yet established
objective and reliable evidence of fair value for the undelivered element. The Company recognizes
revenues resulting from professional services sold separately from the subscription services as
those professional services are performed.
Although the Company’s subscription contracts are generally noncancelable, a limited number of
customers have the right to cancel their contracts by providing prior written notice to the Company
of their intent to cancel the remainder of the contract term. In the event a customer cancels its
contract, it is not entitled to a refund for prior services provided to it by the Company.
The Company recognizes its license revenue in accordance with Statement of Position (“SOP”)
97-2, Software Revenue Recognition and SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition. All software license arrangements include post-contract support services for the
initial term, which are recognized ratably over the term of the post-contract service period,
typically one year. License arrangements may also include installation and training services as
well. As such, a combination of these products and services represent a “multiple-element”
arrangement for revenue recognition purposes.
For contracts with multiple elements, the Company recognizes revenue using the residual method
in accordance with SOP 98-9. Under the residual method, the fair value of the undelivered elements
is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements
and recognized as revenue, assuming all other revenue recognition criteria have been met. If
evidence of fair value for each undelivered element of the arrangement does not exist, all revenue
from the arrangement is recognized when evidence of fair value is determined or when all elements
of the arrangement are delivered.
Post-contract support services provide customers with rights to, when and if available,
updates, maintenance releases and patches released during the term of the support period. The
Company does not provide custom software development services or create tailored products to sell
to specific customers.
Foreign Currency
The Company’s results of operations and cash flows are subject to fluctuations due to changes
in foreign currency exchange rates, particularly changes in the Australian dollar, British pound,
Canadian dollar, Danish krone, EU euro, Hong Kong dollar, Japanese yen and Swedish krona.
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) The functional currency of the Company’s international subsidiaries is generally the local
currency. The financial statements of these subsidiaries are translated into U.S. dollars using
period-end or historical rates of exchange for assets and liabilities and average rates of exchange
for the period for revenues and expenses. Translation gains (losses), including intercompany
foreign currency transactions that are of a long-term-investment nature, are recorded in
accumulated other comprehensive loss as a component of stockholders’ equity. Net foreign currency
losses are included in other expense, net in the accompanying condensed consolidated statements of
operations.
Cash and Cash Equivalents and Short-term Investments
Cash and cash equivalents consist of cash on deposit with banks, money market funds
and highly liquid debt securities with an original maturity of 90 days or less. Short-term
investments include debt securities with an original maturity greater than 90 days. The Company
classifies its investments in debt securities as available-for-sale and realized gains and losses
are included in income based on the specific identification method. Unrealized gains and losses on
available-for-sale securities are recorded to other comprehensive income, a component of
stockholders’ (deficit) equity. Interest on securities classified as available-for-sale is included
as a component of interest income.
Comprehensive Loss
Comprehensive loss is equal to net loss plus other comprehensive income (loss). Other
comprehensive income (loss) includes changes in stockholders’ equity that are not the result of
transactions with stockholders. The following table sets forth the calculation of comprehensive
loss (in thousands):
Recent Accounting Pronouncements
In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position
(“FAS FSP”) FAS No. 157-2, Effective Date of FASB Statement No. 157, which delayed the effective
date of Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements, for
all non-financial assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually), until
the beginning of the first quarter of 2009. Therefore, on January 1, 2009, the Company adopted SFAS
No. 157 for non-financial assets and non-financial liabilities. The adoption of SFAS No. 157 for
non-financial assets and non-financial liabilities that are not measured and recorded at fair value
on a recurring basis did not have a significant impact on the Company’s consolidated financial
statements.
In April 2009,
the FASB issued three FAS FSPs that are intended to provide additional application guidance and enhance
disclosures about fair value measurements and impairments of securities. FSP FAS 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, clarifies the objective and method of
fair value measurement even when there has been a significant decrease in market activity for the
asset being measured. FSP FAS 115-2 and FAS No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, establish a new model for measuring other-than-temporary
impairments for debt securities, including criteria for when to recognize a write-down through
earnings versus other comprehensive income. FSP FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments, expands the fair value disclosures required for all financial
instruments within the scope of SFAS No. 107 to interim periods. All of these FSPs are
effective for the Company beginning April 1, 2009. As a result of the adoption of these FSPs, the
Company has included the appropriate disclosures in its consolidated
financial statements. These FSPs did not have a material impact on
the Company’s financial results.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general
standards of accounting for, and requires disclosure of, events that occur after the balance sheet
date but before financial statements are issued or are available to be issued. The Company adopted
the provisions of SFAS No. 165 for the quarter ended June 30, 2009. The adoption of SFAS No. 165
did not have a material effect on the Company’s consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification™ and
the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No.
162. SFAS No. 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles
and establishes the FASB Accounting Standard Codification™ (“the Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by non-governmental
entities in the preparation of financial statements in conformity with generally accepted
accounting principles in the United States. All guidance
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) contained in the Codification carries an equal level of authority. On the effective date of SFAS
No. 168, the Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not included in the
Codification will become non-authoritative. SFAS No. 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The Company has evaluated
this new statement, and has determined that it will not have a significant impact on the
determination or reporting of its financial results.
2. Acquisitions
Touch Clarity Limited
In 2007, the Company acquired Touch Clarity Limited (“Touch Clarity”). The terms of the
acquisition provided for the payment of up to $3,000,000 in additional consideration during 2008,
contingent upon the achievement of certain milestones during 2007. In 2008, it was determined that
the actual milestones had been achieved in accordance with the acquisition agreement. As a result,
the Company accrued a total of $2,124,000 in additional consideration at December 31, 2008, which
increased the aggregate purchase price and goodwill. The Company paid the $2,124,000 during the
six months ended June 30, 2009.
Visual Sciences, Inc.
In January 2008, the Company acquired all of the outstanding voting stock of Visual Sciences,
Inc. (“Visual Sciences”) a provider of on-demand Web analytics applications. The aggregate purchase
price was approximately $447,270,000, which consisted of (1) the issuance of 10,265,449 shares of
the Company’s common stock upon closing of the acquisition, valued at approximately $354,846,000,
net of issuance costs, (2) cash consideration of approximately $50,069,000 paid upon closing of the
acquisition, (3) the fair value of assumed Visual Sciences stock options of $15,251,000, (4)
acquisition-related costs, (5) restructuring charges and (6) a $2,250,000 license payment to
NetRatings, Inc. (“NetRatings”) in accordance with a settlement and patent cross-license agreement
entered into by Visual Sciences with NetRatings in August 2007. The fair value of the 10,265,449
shares of common stock was determined based on the average closing price of the Company’s common
stock during the period two days before and two days after the terms of the acquisition were agreed
to and announced. Acquisition-related costs for the Visual Sciences acquisition totaled
$17,422,000, of which $16,000 were unpaid at June 30, 2009.
The estimated restructuring charges recorded in conjunction with the acquisition totaled
$7,432,000 and related to 1) severance payments and severance-related benefits associated with the
termination of approximately 70 Visual Sciences employees from all functions within the business
made redundant by the acquisition and 2) estimated excess facilities costs resulting from the
employee terminations included in this restructuring. These restructuring charges were accounted
for in accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection with a
Purchase Business Combination. Future decreases to the estimates of executing the restructuring
plan will be recorded as an adjustment to goodwill. Future increases to the estimates of the
restructuring plan will be recorded as an adjustment to operating expenses. The following table
summarizes the activity related to the Visual Sciences restructuring (in thousands):
Mercado Asset Acquisition
On November 5, 2008, the Company acquired certain assets, including intellectual property and
other business assets, of Mercado Software Ltd. (“Mercado”), a leading search and merchandising
solution provider. The preliminary aggregate purchase price was
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) approximately $8,477,000, which consisted of (1) cash consideration of approximately $6,643,000,
(2) restructuring charges and (3) acquisition-related costs. The determination of the final
purchase price is subject to potential adjustments, including finalization of acquisition-related
costs. The Company does not expect any changes to the purchase price allocation to materially
increase or decrease operating and amortization expenses, but they may have a material effect on
the amount of recorded goodwill.
The estimated restructuring charges recorded in conjunction with the acquisition totaled
$1,389,000 and related to 1) severance payments and severance-related benefits associated with the
termination of Mercado employees from all functions within the business made redundant by the
acquisition and 2) estimated excess facilities costs resulting from the employee terminations
included in this restructuring. These restructuring charges were accounted for in accordance with
EITF Issue No. 95-3. Estimates associated with the Company’s restructuring accrual primarily relate
to lease loss assumptions associated with excess facilities. Future decreases to the estimates of
executing the restructuring plan will be recorded as an adjustment to goodwill. Increases to the
estimates of the restructuring plan will be recorded as an adjustment to goodwill during the
purchase accounting allocation period and as an adjustment to operating expenses thereafter.
The following table summarizes the activity related to the Mercado restructuring (in
thousands):
Pro Forma Information
The following unaudited pro forma information presents the condensed consolidated results of
operations of the Company, Visual Sciences and Mercado as if these acquisitions had occurred on
January 1, 2008 (in thousands, except per share data):
3. Stockholders’ Equity
WPP Common Stock Purchase Agreement
On January 27, 2009, the Company entered into a Common Stock Purchase Agreement (the “Purchase
Agreement”) with WPP Luxembourg Gamma Three Sarl (“WPP”) and WPP Group USA, Inc. (“WPP USA”),
pursuant to which the Company issued to WPP a total of 2,852,578 unregistered shares of its common
stock, at a cash purchase price equal to $8.76 per share, which price was equal to the arithmetic
average of the closing prices of the Company’s common stock for the five consecutive trading days
ending on January 26, 2009, for aggregate consideration of $25,000,000. In addition, WPP, WPP USA
and any of their respective affiliates are bound by certain standstill and market standoff
provisions for a period of eighteen months, which restrict their ability to liquidate any portion
of their common stock holdings during that period of time.
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) Warrants
Concurrent with the execution of the Purchase Agreement, the Company and WPP USA also entered
into an Enterprise Channel Partner Agreement (the “Enterprise Agreement”), which specifies the
terms under which WPP will resell and market the Company’s online business optimization services.
In the event WPP USA achieves certain performance milestones under the Enterprise Agreement, the
Company will issue to WPP a warrant (the “Warrant”) to purchase a number of shares of the Company’s
common stock to be determined by dividing an amount ranging from $0 to $10,000,000, with the exact
amount to be based on WPP USA’s achievement of certain performance milestones under the Enterprise
Agreement, by the exercise price per share of the Warrant. The exercise price of the Warrant equals
the arithmetic average of the daily volume weighted-average prices of the Company’s common stock
for the five consecutive trading days immediately prior to April 15, 2010. The Enterprise
Agreement contemplates that if the performance milestones are met, the Warrant will be issued on or
around April 15, 2010, and will be subject to periodic vesting over a period of 21 months following
its issuance, so long as the Enterprise Agreement remains in effect, subject to certain exceptions.
As of June 30, 2009, the Company did not record any expense associated with the Warrant because
management does not believe the recognition criteria for recording an expense under applicable
accounting guidance has yet been met. At each balance sheet date, the Company will reassess the
likelihood of WPP achieving the performance milestones. If the Company determines at that time
that it is likely the milestones will be achieved, the fair value of the warrant will be amortized
as a reduction to revenues over the period the warrant is earned beginning on the date of the
Enterprise Agreement.
Equity Incentive Plans
On January 1, 2009, the number of authorized shares of common stock available for issuance
under the Omniture, Inc. 2006 Equity Incentive Plan (the “2006 Plan”) was increased by 3,648,724 in
accordance with the provisions of the 2006 Plan with respect to annual increases of the number of
shares of common stock available for issuance under the 2006 Plan. At June 30, 2009, a total of
4,772,104 shares of common stock were available for grant under the Company’s equity incentive
plans.
Employee Stock Purchase Plan
During the six months ended June 30, 2009, the Company issued 20,966 shares of common stock
under the 2006 employee stock purchase plan. At June 30, 2009, a total of 1,542,656 shares of
common stock were reserved for future issuance under this plan.
Stock Options
The Company estimates the fair value of stock option awards granted in accordance with SFAS
No. 123R, Share-Based Payment, using the Black-Scholes-Merton option-pricing formula and a single
option award approach. The Company amortizes the fair value of awards expected to vest on a
straight-line basis over the requisite service periods of the awards, which is generally the period
from the grant date to the end of the vesting period.
Estimated volatility for options granted through December 31, 2007 reflected the application
of SAB No. 107 interpretive guidance and, accordingly, was derived solely from historical
volatility of similar entities whose share prices were publicly available. Effective January 1,
2008, the Company changed its methodology for estimating its volatility and now uses a
weighted-average volatility based on 50% of the Company’s actual historical volatility since its
initial public offering in 2006 and 50% of the average historical stock volatilities of similar
entities.
The risk-free interest rate was based on the yield curve of a zero-coupon U.S. Treasury bond
on the date the stock option award was granted with a maturity equal to the expected term of the
stock option award. The Company used historical data to estimate the number of future stock option
forfeitures.
During the three months ended June 30, 2008 and 2009, the Company recorded compensation
expense related to these stock option awards totaling $6,412,000 and $5,478,000, respectively, and
$11,660,000 and $10,951,000 during the six months ended June 30, 2008 and 2009, respectively. At
June 30, 2009, there was $48,281,000 of total unrecognized compensation cost related to these
unvested stock option awards. This unrecognized compensation cost is equal to the fair value of
awards expected to vest and will be recognized over a weighted-average period of 3.3 years.
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) The fair value of stock option awards granted during the six months ended June 30, 2008 and
2009 was estimated at the date of grant using the Black-Scholes-Merton valuation method with the
following assumptions:
Stock Option Exchange
On June 15, 2009, the Company completed a stock option exchange program (the “Exchange
Offer”). Pursuant to the Exchange Offer, eligible employees tendered, and the Company accepted for
cancellation, eligible options to purchase 4,388,243 shares of the Company’s common stock from 410
participants, representing approximately 66% of the total shares of common stock underlying options
eligible for exchange in the Exchange Offer.
On June 15, 2009, the Company granted new options to eligible employees to purchase 3,109,238
shares of common stock in exchange for the cancellation of the tendered eligible options. The
exercise price per share of the new options granted in the Exchange Offer was $12.99, the closing
price of the Company’s common stock on June 15, 2009 as reported by the Nasdaq Global Select
Market. For all employees other than executive officers, the new options will vest monthly
beginning on June 15, 2009 over a period ranging from 36 to 48 months, and have expiration dates of
5 years from June 15, 2009. The new options issued to executive officers will vest monthly
beginning on June 15, 2009 over a period ranging from 48 to 60 months, and have expiration dates of
7 years from June 15, 2009.
The Company will not record additional compensation cost related to the exchange as the
estimated fair value of the new options did not exceed the fair value of the exchanged stock
options calculated immediately prior to the exchange. The Company will recognize the remaining
unamortized compensation cost related to the exchanged options over the vesting period of the new
options. At June 30, 2009, there was $27,712,000 of total unrecognized compensation cost related to
these new options. This unrecognized compensation cost is equal to the fair value of the new
options expected to vest and will be recognized over a weighted-average period of 3.9 years.
Stock Option Activity
The following table summarizes stock option activity under the Company’s equity incentive
plans for the six months ended June 30, 2009:
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) Additional information related to stock option activity under the Company’s equity incentive
plans during the six months ended June 30, 2008 and 2009 was as follows:
Deferred Stock-based Compensation
Prior to January 1, 2006, the Company recorded deferred stock-based compensation in the amount
by which the exercise price of a stock option was less than the deemed fair value of the Company’s
common stock at the date of grant. The Company recorded stock-based compensation expense related to
these stock options of $196,000 and $109,000 for the three months ended June 30, 2008 and 2009,
respectively, and $401,000 and $280,000 for the six months ended June 30, 2008 and 2009,
respectively. At June 30, 2009, $80,000 of deferred stock-based compensation remained on the
accompanying condensed consolidated balance sheet.
Restricted Stock Units and Restricted Stock Awards
The following table summarizes activity during the six months ended June 30, 2009 related to
restricted stock units (“RSUs”) and restricted stock awards (“RSAs”):
During the three months ended June 30, 2008 and 2009, the Company recorded stock-based
compensation expense related to RSUs and RSAs of $1,543,000 and $1,502,000, respectively, and
$5,241,000 and $3,227,000 for the six months ended June 30, 2008 and 2009, respectively. The total
fair value of shares vested during the three months ended June 30, 2008 and 2009, related to RSUs
and RSAs was $622,000 and $3,232,000, respectively. The total fair value of shares vested during
the six months ended June 30, 2008 and 2009, related to RSUs and RSAs was $3,390,000 and
$6,769,000, respectively. At June 30, 2009, there was $20,919,000 of total unrecognized
compensation cost related to unvested RSUs and RSAs. This unrecognized compensation cost is equal
to the fair value of RSUs and RSAs expected to vest and will be recognized over a weighted-average
period of 2.9 years.
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) Repurchases of Vested Restricted Stock
The Company’s equity incentive plans provide that employees can elect to forfeit vested shares
of restricted stock to pay for the minimum statutory tax withholding obligations related to the
vesting of RSAs and RSUs. The Company is then required to remit the amount of taxes owed by the
employee to the appropriate taxing authority. As a result of such elections by the Company’s
employees, during the six months ended June 30, 2009, the Company effectively repurchased a total
of 101,821 shares of common stock. The Company has recorded $963,000 and $1,103,000 as a financing
activity for these repurchases in the condensed consolidated statement of cash flows for the six
months ended June 30, 2008 and 2009, respectively.
Stock-based Compensation Expense
Total stock-based compensation expense was classified as follows in the accompanying condensed
consolidated statements of operations (in thousands):
4. Concentrations of Credit Risk and Significant Customers
No customer accounted for 5% or greater of accounts receivable at December 31, 2008 and June
30, 2009. At December 31, 2008 and June 30, 2009, tangible assets located outside the United States
were not material.
No customer and no single foreign country accounted for more than 10% of total revenues for
the three and six months ended June 30, 2008 and 2009. Subscription, license and maintenance
revenues accounted for 90% of total revenues for the three and six months ended June 30, 2008 and
88% of total revenues for the three and six months ended June 30, 2009.
5. Net Loss Per Share
The following table presents the numerator and a reconciliation of the denominator used in the
calculation of net loss per share, basic and diluted (in thousands):
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) The following weighted-average common stock equivalents (in thousands) were excluded from the
computation of diluted net loss per share because they had an anti-dilutive impact:
6. Balance Sheet Accounts
Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments were as follows (in thousands):
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) Unrealized gains and losses on available-for-sale securities are reported as a component of
stockholders’ equity in the consolidated balance sheets. Proceeds from the sales of
available-for-sale securities were $1,171,000 and $5,000,000 during the three months ended June 30,
2008 and 2009, respectively and $36,970,000 and $5,000,000 during the six months ended June 30,
2008 and 2009, respectively.
Gross realized gains and losses on available-for-sale securities were as follows (in
thousands):
At June 30, 2008, the estimated fair value of available-for-sale securities by contractual
maturity was as follows (in thousands):
Securities with contractual maturities in the above table due in greater than 10 years are
auction rate securities, which the Company has classified as long-term investments in the
accompanying consolidated balance sheet at June 30, 2009.
Goodwill
The changes in the carrying amount of goodwill for the six months ended June 30, 2009 were as
follows (in thousands):
Notes Payable
Notes payable consisted of the following (in thousands):
In December 2008, the Company entered into a credit agreement (the “Credit Agreement”), that
provides for a secured revolving credit facility in an amount of up to $35,000,000 that is subject
to a borrowing base formula and a secured term loan in an amount of $15,000,000. The revolving
credit facility has sub limits for certain cash management services, interest rate and foreign
exchange hedging arrangements, and for the issuance of letters of credit in a face amount up to
$7,500,000. The Credit Agreement is secured by substantially all of the assets owned by the Company
and its U.S. subsidiaries, including intellectual property.
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) Letters of credit in the aggregate face amount of approximately $1,280,000 were outstanding
under the revolving credit facility at June 30, 2009.
At the option of the Company, revolving loans and the term loan accrue interest at a per annum
rate based on, either (1) the base rate plus a margin of 3.00%; or (2) the London Interbank Offered
Rate (“LIBOR”) plus a margin equal to 3.00%, but in no event less than 5.5%, in each case for
interest periods of one, two or three months. The base rate is defined as the greatest of (i) 3.50%
per annum, (ii) the federal funds rate plus a margin equal to 0.50% and (iii) the lender’s prime
rate. The Company is also obligated to pay other customary closing fees, servicing fees, letter of
credit fees and unused line fees for a credit facility of this size and type. At June 30, 2009, the
$14,625,000 outstanding under the term loan accrued interest at a weighted-average variable rate of
5.53%. The total amount available for borrowing under the Credit Facility at June 30, 2009 was
$33,720,000.
Revolving loans may be borrowed, repaid and reborrowed until December 24, 2012, at which time
all amounts outstanding must be repaid. The term loan will be repaid in quarterly principal
payments in an amount equal to $375,000, with the remaining outstanding principal balance and all
accrued and unpaid interest due on December 24, 2012. Accrued interest on the revolving loans and
term loans will be paid monthly, or with respect to revolving loans and term loans that are
accruing interest based on the LIBOR rate, then at the end of the applicable LIBOR interest rate
period, which is typically 90 days.
The revolving loans and term loans are subject to mandatory prepayments in the event that
certain borrowing formulas are not maintained. In addition, the term loan is subject to certain
mandatory prepayments under certain circumstances, including in connection with the receipt of net
proceeds from certain asset sales, casualty events, tax refunds, the incurrence of certain types of
indebtedness and the issuance of certain equity securities. In the event that the revolving credit
facility commitment is terminated by the Company, in whole or part, prior to its maturity date,
then, under certain circumstances, a prepayment fee will be due in an amount up to 2.00% of the
reduced commitment amount. In the event that the term loan is prepaid, then a prepayment fee will
be due in an amount up to 2.00% of the principal amount prepaid.
The aggregate maturities of notes payable at June 30, 2009 were as follows (in thousands):
7. Derivative Financial Instruments
On January 1, 2009, the Company adopted the provisions of SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No.
161”). Under SFAS No. 161, additional disclosures are required regarding the objectives of
derivative instruments and hedging activities, the method of accounting for such instruments under
SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such
instruments and related hedged items on financial position, financial performance, and cash flows.
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) Foreign Currency Forward Contracts
During the six months ended June 30, 2009, the Company entered into foreign currency forward
contracts to limit net foreign currency transaction gains and losses primarily related to cash and
accounts receivable balances denominated in certain foreign currencies. The Company typically
enters into new contracts at the end of each month. As of June 30, 2009, the Company had the
following outstanding foreign currency forward contracts (in thousands):
During the three months ended June 30, 2009, the Company recognized $2,439,000 in net realized
losses and $336,000 in net unrealized losses associated with these forward contracts. During the
six months ended June 30, 2009, the Company recognized $2,168,000 in net realized losses and
$336,000 in net unrealized losses associated with these forward contracts. These forward contracts
were not designated as accounting hedges under SFAS No. 133; therefore, unrealized gains and losses
are recorded as other expense, net in the condensed consolidated statements of operations. The
effect on the condensed consolidated financial statements from foreign exchange contracts not
designated as hedging instruments under SFAS No. 133 was as follows (in thousands):
The gross estimated fair value of all derivative instruments and their classification in
the condensed consolidated balance sheet are shown as follows (in thousands):
8. Fair Value Measurements
The Company
adopted the provisions of SFAS No. 157 as of January 1,
2008. Under SFAS No. 157, fair value is based on the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. In order to increase consistency and comparability in fair value measurements,
SFAS No. 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs
used to measure fair value into three broad levels. These levels, in order of highest priority to
lowest priority, are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement
date for assets or liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available.
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) The following tables summarize the financial instruments of the Company subject to SFAS No.
157 and the valuation approach applied to each class of security at December 31, 2008 and June 30,
2009 (in thousands):
The following table is a reconciliation of financial assets measured at fair value using
significant unobservable inputs (Level 3) during the six months ended June 30, 2009 (in thousands):
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) At June 30, 2009, the Company held AAA-rated auction rate securities with a total estimated
fair value of $13,993,000. Auction rate securities are collateralized long-term debt instruments
that are intended to provide liquidity through a Dutch auction process that resets the applicable
interest rate at pre-determined intervals, typically every 7 to 35 days. Beginning in February
2008, auctions failed for the Company’s holdings because sell orders exceeded buy orders. The funds
associated with these failed auctions will not be accessible until the issuer calls the security, a
successful auction occurs, a buyer is found outside of the auction process or the security matures.
The underlying assets of the auction rate securities the Company holds, including the securities
for which auctions have failed, are student loans which are guaranteed by the U.S. government under
the Federal Education Loan Program. The Company does not believe the carrying values of these
auction rate securities are permanently impaired and believes the positions will be liquidated
without any significant loss.
At March 31, 2009, the Company increased the fair value of certain auction rate securities
from $4,143,000 to their par value of $5,000,000, resulting in an unrealized gain of $857,000. The
Company also reclassified the $5,000,000 fair value of these auction rate securities from long-term
investments to short-term investments as these securities were redeemed at their par value in April
2009.
Due to the lack of actively traded market data, the valuation of the auction rate securities
classified as long-term investments was based on Level 3 unobservable inputs. These inputs include
management’s assumptions of pricing by market participants, including assumptions about risk. The
Company used an internally developed model of the expected future cash flows related to the
securities over a projected ten year period, which is reflective of the length of time the Company
anticipates it could take the securities to become liquid. As a result of the estimated fair value,
the Company has determined a temporary impairment in the valuation of these securities of
$2,507,000 and has recorded an unrealized loss on these securities which is included as a component
of accumulated other comprehensive loss within stockholders’ equity on the Company’s balance sheet
at June 30, 2009. Due to the uncertainty related to the liquidity in the auction rate securities
market and the Company’s determination at June 30, 2009, that it intends to hold these investments
until the anticipated recovery in market value occurs, the Company has classified these auction
rate securities as long-term assets on the condensed consolidated balance sheet.
Fair Value of Other Financial Instruments
The carrying amounts of the Company’s accounts receivable, accounts payable, accrued
liabilities and other liabilities approximate their fair values due to their short maturities.
Based on borrowing rates currently available to the Company for loans with similar terms, the
carrying value of the Company’s notes payable and capital lease obligations also approximate fair
value.
9. Income Taxes
The Company calculates its interim tax provision in accordance with Accounting Principles
Board Opinion No. 28, Interim Financial Reporting, and FASB Interpretation No. 18, Accounting for
Income Taxes in Interim Periods. At the end of each interim period, the Company estimates the
annual effective tax rate and applies that to its ordinary year-to-date income or loss. In
addition, the effect of changes in enacted tax laws, rates or other discrete items affecting the
Company’s effective tax rate are recognized in the interim period in which the change occurs. The
computation of the annual estimated effective tax rate at each interim period requires certain
estimates and significant judgment, including, but not limited to, the expected operating income or
loss for the year, projections of the proportion of income earned and taxed in foreign
jurisdictions, permanent and temporary differences between book and tax amounts and the likelihood
of recovering deferred tax assets generated in the current year. The accounting estimates used to
compute the Company’s provision for income taxes may change as new events occur, additional
information becomes available or as the tax environment changes.
At June 30, 2009, the Company had approximately $1,746,000 in unrecognized tax benefits under
FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, which relate to
the acquisition of Visual Sciences and certain research tax credits. Any interest and penalties
incurred on the settlement of outstanding tax positions are recorded as a component of interest
expense. The Company does not foresee material changes to its gross FIN 48 liability within the
next twelve months.
The Company’s effective income tax rate for the three and six months ended June 30, 2009, was
a tax provision of approximately 12% and 9%, respectively, compared to tax benefits of
approximately 45% and 27% for the same periods in 2008, which were primarily due to a reduction in
deferred tax liabilities related to the Visual Sciences acquisition. As of June 30, 2009, the
Company estimated its annual effective tax rate for the year ended December 31, 2009, to be a tax
provision of approximately 9%, excluding certain one-time discrete items.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which
it operates. The Company’s federal and state taxes for the years 2004 through 2008 are subject to
examination. The Company believes any assessments would be immaterial to its financial statements.
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) 10. Commitments and Contingencies
Litigation Settlement and Patent License Agreements
In February 2006, the Company entered into a settlement and patent license agreement with
NetRatings. In the event that the Company acquires certain specified companies, it may be required
to make additional license payments based on the Web analytics revenues of the acquired company.
The agreement also provides that if the Company acquires other companies, it may elect to make
additional license payments based on the Web analytics revenues of the acquired company to ensure
that the acquired company’s products, services or technology are covered by the license.
In August 2007, Visual Sciences entered into a settlement and patent-license agreement with
NetRatings. The agreement required Visual Sciences to make license payments of $11,250,000,
$2,000,000 of which was paid by Visual Sciences on or about the date of the agreement, $4,250,000
of which was paid by the Company following the closing of the acquisition of Visual Sciences and
the remaining $5,000,000 of which must be paid by the Company in quarterly installments beginning
on March 31, 2008, of which $2,500,000 was paid as of June 30, 2009. As of the date of the
acquisition, the Company recorded a liability equal to the net present value of the total remaining
license payments based upon the Company’s estimated incremental borrowing rate at the time of the
acquisition of 6.0%. At June 30, 2009, the amount of unpaid license payments related to this
settlement and patent-license agreement, discounted to its net present value was $2,391,000 which
was included in accrued liabilities in the condensed consolidated balance sheet.
On October 25, 2005, Visual Sciences, LLC, which is a wholly owned subsidiary of Visual
Sciences, entered into a settlement and patent license agreement with NetRatings. The agreement
required total license payments of $2,000,000, $1,550,000 of which was paid as of June 30, 2009.
The remaining $450,000 must be paid in annual installments, which are capped at $200,000 per year
and calculated based on revenue of Visual Sciences, LLC products for each year.
Leases
The Company leases certain equipment under capital leases. These capital leases generally
contain a discounted buyout option at the end of the initial lease terms, which range between 36
and 60 months and mature at various dates through 2010.
The future minimum lease payments under noncancelable capital and operating leases at June 30,
2009, were as follows (in thousands):
Operating lease payments primarily relate to the Company’s leases of office space in various
domestic and international locations and leases of computer equipment under operating leases.
During the three and six months ended June 30, 2009, the Company leased equipment under
operating leases with total future minimum lease payments of $1,511,000 and $9,397,000,
respectively. The Company did not enter into any equipment leases during the three and six months
ended June 30, 2008. Each lease of computer equipment has a thirty-six month initial term. At the
end of the initial lease term, the Company generally has the option to either: (1) return the
equipment to the lessor, (2) purchase the equipment for its fair market value at that date or (3)
renew the lease for a stated number of months. As a condition of one of these lease
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Omniture, Inc.
Notes to Condensed Consolidated Financial Statements — (Continued) (unaudited) agreements, the Company must not allow its cash balance to fall below $10,000,000 as long as this
agreement is in force. Failure to maintain a minimum of $10,000,000 in cash would constitute an
event of default as defined in the lease agreement.
Indemnification
The Company has also agreed to indemnify its directors and executive officers for costs
associated with any fees, expenses, judgments, fines and settlement amounts incurred by them in any
action or proceeding to which any of them is, or is threatened to be, made a party by reason of his
or her service as a director or officer, including any action by the Company, arising out of his or
her services as the Company’s director or officer or his or her services provided to any other
company or enterprise at the Company’s request. Historically, the Company has not been required to
make payments under these obligations and the Company has recorded no liabilities for these
obligations in its condensed consolidated balance sheets.
Warranties
The Company typically warrants its on-demand online business optimization services to perform
in a manner consistent with general industry standards that are reasonably applicable under normal
use and circumstances. Historically, the Company has not been required to make payments under these
obligations, and the Company has recorded no liabilities for these obligations in its condensed
consolidated balance sheets.
The Company’s warranty arrangements generally include certain provisions for indemnifying
customers against liabilities if its services infringe a third party’s intellectual property
rights.
The Company has entered into service level agreements with a small number of its customers
warranting certain levels of uptime reliability and permitting those customers to receive credits
or terminate their agreements in the event that the Company fails to meet those levels. To date,
amounts credited to customers pursuant to these agreements have been immaterial and the Company has
recorded no liabilities for these obligations in its condensed consolidated balance sheets.
Other Legal Matters
The Company is and may become involved in various other legal proceedings arising from the
normal course of its business activities. Management does not believe the ultimate disposition of
these matters will have a material adverse impact on the Company’s consolidated results of
operations, cash flows or financial position. However, litigation is inherently unpredictable, and
depending on the nature and timing of these proceedings, an unfavorable resolution could materially
affect the Company’s future consolidated results of operations, cash flows or financial position in
a particular period.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with the accompanying condensed consolidated financial statements and
related notes included elsewhere in this report. In addition to historical information, this
quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We may also make forward-looking statements in other reports filed with the U.S.
Securities and Exchange Commission, or SEC, in materials delivered to stockholders and in press
releases. In addition, our representatives may from time to time make oral forward-looking
statements.
These statements relate to our, and in some cases our customers’ or partners’, future plans,
objectives, expectations, intentions and financial performance and the assumptions that underlie
these statements. These forward-looking statements include, but are not limited to, statements
concerning the following: our ability to achieve or maintain profitability; the impact of quarterly
fluctuations of revenue and operating results; the acceptance of our pricing model; our business
plan and growth management; operating expenses, including sales and marketing expenses, research
and development expenses and general and administrative expenses; business expansion; expansion and
effectiveness of our sales and marketing capabilities; growth of the number of Internet users,
Internet commerce and the market for on-demand services and online business optimization services;
the impact of the ongoing economic downturn and continued uncertainty in the financial markets in
the U.S. and internationally; changing technological developments; expansion of product and service
offerings, including the development of new and improved services; scalability, reliability,
efficiency and performance of our platforms; our ability to provide adequate service to customers;
network and systems integrity; retention of key employees; the release of future versions of
current services; levels and sources of revenue; our ability to effectively integrate our recent
acquisitions; future acquisitions of or investments in complementary companies, products, services
or technologies; acquisition of new customers; customer renewal rates; our expectations concerning
relationships with third parties, including strategic partners, technology integration, channel
partners, resellers and key customers; our ability to compete effectively in the market and the
competitive factors that impact the market; levels of capital expenditures; issuance of common
stock for acquisitions; changes in stock-based compensation; future cash requirements and
sufficiency of our existing cash and credit line; fluctuations in interest rates and foreign
currency exchange rates; our ability to attain certain economies of scale; expansion of our network
infrastructure; our ability to utilize our network hardware more efficiently; legal proceedings;
our future license payments under our patent license agreements with NetRatings; adequacy of our
intellectual property; changes in U.S. and international laws regarding privacy, private
information, the Internet and other areas; changes in accounting standards; maintenance of adequate
internal controls; utilization of net operating loss and tax credit carryforwards to reduce our tax
payments in future periods; the trends of our costs and expenses; staffing, direct sales force and
expense levels; expansion of our European and other international operations; adequacy of our
capital resources to fund operations and growth; customer costs of ownership; expenditures related
to equipment operating leases; and our ability to liquidate auction rate securities without loss.
These statements are based on current expectations and assumptions regarding future events and
business performance and involve known and unknown risks, uncertainties and other factors that may
cause industry trends or our actual results, level of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or achievements
expressed or implied by these statements. These factors include those set forth in the following
discussion and within Part II. Item 1A “Risk Factors” of this quarterly report on Form 10-Q and
elsewhere within this report.
Although we believe that expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We
will not update any of the forward-looking statements after the date of this quarterly report on
Form 10-Q to conform these statements to actual results or changes in our expectations, except as
required by law. You should not place undue reliance on these forward-looking statements, which
apply only as of the date of this report. You should carefully review the risk factors described in
other documents that we file from time to time with the SEC.
The reports we file with the SEC are available, free of charge, on the Investor Relations page
of our Internet Web site under “SEC Filings,” as soon as reasonably practicable after we
electronically file such material with the SEC. Our Internet Web site address is
http://www.omniture.com. Information on our Web site does not constitute a part of this quarterly
report on Form 10-Q.
Overview
We are a leading provider of online business optimization products and services, which we
deliver through the Omniture Online Marketing Suite. Our customers use our products and services to
manage and enhance online, offline and multi-channel business initiatives. The Omniture Online
Marketing Suite, which we host and deliver to our customers on-demand and provide as an on-premise
solution, consists of our Open Business Analytics Platform and our integrated set of optimization
applications for online
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analytics, channel analytics, visitor acquisition and conversion. Our Open Business Analytics
Platform, the foundation of the Omniture Online Marketing Suite, includes the Omniture
DataWarehouse, which contains the information captured by Omniture SiteCatalyst, our core product
offering, and our other products and services. The platform also includes the Omniture Genesis
application programming interfaces to integrate and augment this data with relevant data from
Internet and enterprise applications and data from a number of online and offline channels to
enable business optimization. Our online analytics applications are Omniture SiteCatalyst and
Omniture Discover and our channel analytics applications are Omniture Insight (formerly known as
Omniture Discover OnPremise) and Omniture Insight for Retail (formerly known as Omniture Discover
OnPremise for Retail). Our visitor acquisition application is Omniture SearchCenter and conversion
applications include: Omniture Test&Target, Omniture Recommendations, Omniture SiteSearch, Omniture
Survey and Omniture Merchandising. These services, built on a scalable and flexible computing
architecture, enable our customers to capture, store and analyze information generated by their Web
sites and other sources and to gain critical business insights into the performance and efficiency
of marketing and sales initiatives and other business processes. This information is also utilized
to automate the delivery of content and marketing offers on a Web site and test site design and
navigational elements to optimize the user experience and revenue opportunities for our customers.
Our services provide customers with real-time access to online business information, the ability to
generate flexible reports using real-time and historical data and the ability to measure, automate
and optimize critical online processes. Our services, accessed primarily by a Web browser, reduce
the need for our customers to make upfront investments in technology, implementation services or
additional IT personnel, thereby increasing our customers’ flexibility in allocating their IT
capital investments.
We were founded in 1996, began offering our on-demand online business optimization services in
1997 and began offering these services to large enterprise customers in 2001. We have experienced
significant growth in recent years as illustrated in the following table:
We sell our products and services through direct sales efforts and indirectly through
resellers. A substantial majority of our revenues are derived from subscription, license and
maintenance fees, which represented approximately 94% of total revenues in 2006, 92% of total
revenues in 2007 and 90% of total revenues in 2008. Subscription, license and maintenance fees
represented 90% of our total revenues for the six months ended June 30, 2008, and 88% of total
revenues for the six months ended June 30, 2009.
We provide our online business optimization products and services to businesses in 92
countries. During the six months ended June 30, 2008, our products and services captured 1.7
trillion transactions and during the six months ended June 30, 2009, our products and services
captured almost 2.1 trillion transactions for over 5,000 customers worldwide.
Our future revenue growth will depend on our ability to attract new customers, to retain the
existing revenues from our current customers over time and to sell additional products and services
to our installed Omniture SiteCatalyst customer base. In addition to these factors that will impact
our revenue growth, our profitability will be affected by our ability to realize economies of scale
and manage our expenses as our business grows, the amount of stock-based compensation expense we
must record related to future stock-based awards and the amount of amortization expense associated
with future intangible asset acquisitions. The delivery of our services requires us to make
significant upfront capital expenditures to support the network infrastructure needs of our
services. We typically depreciate our network infrastructure equipment over a period of
approximately four years, and we begin to include the depreciation amount in our cost of
subscription revenues promptly after making the expenditures. During 2007, we began leasing a
portion of our network infrastructure equipment requirements under operating leases, which require
us to begin making lease payments and begin recording lease expense immediately upon receipt of the
equipment. We generally recognize revenue from our customers ratably over the contractual service
period but only after we begin to provide our services to them. As a result, any delays we
encounter in the implementation of our services to our customers will impact our ability to start
recognizing revenue and to begin to offset the depreciation and lease costs resulting from the
upfront expenditures for capital equipment and acquisitions under operating leases. These delays
will also defer the collection of cash necessary to begin offsetting the expenditures.
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Those few customers that contract for the measurement of the highest numbers of transactions
generally require us to make more significant upfront capital expenditures and require more
prolonged implementation cycles. In addition, we typically provide customers that commit to a
higher number of transactions with lower per transaction pricing, which results in lower gross
margins for revenues from those customers. These factors together further delay the profitability
and positive cash-flow realization from these large customers.
Historically, most of our revenues have resulted from the sale of our services to companies
located in the U.S. Since 2007, we have acquired four businesses with significant European
operations as part of our strategy to expand our international sales operations by growing our
direct sales force abroad. We have also utilized, and intend to continue utilizing, resellers and
other sales channel relationships with third parties, to expand our international sales operations.
As a result of these efforts, our revenues from customers outside of the U.S. increased from 17% of
total revenues in 2006, to 26% of total revenues in 2007 and to 28% of total 2008 revenues. Our
revenues from customers outside the United States increased from 27% of total revenues for the six
months ended June 30, 2008, to 28% of total revenues for the six months ended June 30, 2009.
We experience seasonality in our contracting activity. Historically, a significant percentage
of our customers have entered into or renewed subscription services agreements in the fourth
quarter. Also, a significant percentage of our customer agreements within a given quarter are
entered into during the last month, weeks or days of the quarter.
How We Generate Revenues
Our revenues are classified into two categories: (1) subscription, license and maintenance
revenues and (2) professional services and other revenues. Subscription, license and maintenance
revenues accounted for 94% of total revenues for 2006, 92% of total revenues for 2007 and 90% of
total 2008 revenues. Subscription, license and maintenance revenues represented 90% of our total
revenues for the six months ended June 30, 2008, and 88% of total revenues for the six months ended
June 30, 2009.
Subscription, License and Maintenance Revenues
We derive subscription, license and maintenance revenues primarily from customers that use our
online business optimization services. We generally bill for our Omniture SiteCatalyst and Omniture
Discover subscription fees based on a committed minimum number of transactions from which we
capture data over a predetermined period. We generally consider a transaction to be any electronic
interaction, which could be either online or offline, between our customer and its customer that
generates data which is incorporated into our optimization suite. Most of our customer contracts
provide for additional fees for over-usage based on the number of transactions in excess of the
committed minimum numbers. In addition, we generally charge an annual fee for Omniture Discover,
based on the number of users of these subscription services. We bill a limited number of large
customers based on actual transactions from which we capture data during the billing period.
We generally bill customers for our Omniture SearchCenter subscription services based on
either a fixed percentage of our customer’s monthly online advertising spending managed through our
Omniture SearchCenter services, or based on a committed minimum number of bid reviews tracked on a
monthly basis. We generally consider a bid review to be each instance where our Omniture
SearchCenter services check or change a customer’s bids on its keyword or product listing. Most of
our customer contracts provide for additional fees for bid reviews in excess of a stated quantity
during a month.
For our Omniture Test&Target subscription services, we generally bill the targeting portion of
these subscription fees based on the number of campaign containers we manage for our customers. We
consider a campaign container to be any unique location on a customer’s Web page for which the
customer is tracking data about a specific marketing campaign activity. We generally bill the
testing portion of our Omniture Test&Target subscription services based on a committed minimum
number of daily visits to the customer’s Web page that are tracked through our services. Most of
our customer contracts for Omniture Test&Target subscription services provide for additional fees
for transactions tracked in excess of a specified quantity of transactions.
For our Omniture SiteSearch subscription services, we generally bill based on the volume of
indexed pages and server requests. We consider an indexed page to be a customer’s Web page included
within a specific search and a server request to be any call to our servers to carry out a search
activity. Most of our customer contracts for Omniture SiteSearch subscription services allow us to
charge additional fees for usage in excess of the volume of server requests purchased.
We generally bill customers for our Omniture Merchandising subscription services based on the
number of queries and the number of stock keeping units, or SKUs, managed on the customer’s Web
site. We consider a query to be any keyword search,
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navigation action, or action resulting in a call to our server and we consider a SKU to be the
customer’s most basic sellable unit. Most of our customer contracts for Omniture Merchandising
allow us to charge additional fees for usage in excess of the purchased volume limit of queries.
We also derive subscription revenues from implementation fees associated with the initial
deployment of our services. Implementation fees are generally billed as fixed fees per service
installation.
The volume of subscription revenues is driven primarily by the number of customers and the
number of transactions from which we capture data. The terms of our service agreements are
typically from one to three years. We recognize subscription revenues ratably over the term of the
agreement, beginning on the commencement of the service. Customers typically have the right to
terminate their contracts for cause if we fail to substantially perform. Some of our customers also
have the right to cancel their service agreements by providing prior written notice to us of their
intent to cancel the remaining term of their agreement. In the event that a customer cancels its
contract, it is not entitled to a refund for prior services provided to it by us.
We derive our license revenue from selling perpetual and term software licenses related to our
Omniture Insight software, a software product acquired in connection with our acquisition of Visual
Sciences Inc., or Visual Sciences, and our Omniture Merchandising software, a software product
acquired in connection with our acquisition of certain assets of Mercado Software Ltd., or Mercado.
Revenue associated with term licenses is recognized over the applicable term of the license
agreement. Pricing of our perpetual software licenses is based on a standard price list with
volume and marketing related discounts, and they are sold with the first year of post-contract
support services, installation and training.
During the three months ended June 30, 2008 and 2009, we recognized approximately $0.4 million
and $0.7 million, respectively, of revenues from the sale of perpetual software licenses related to
our Omniture Insight and Omniture Merchandising software. During the six months ended June 30, 2008
and 2009, we recognized approximately $1.0 million and $1.5 million, respectively, of revenues from
the sale of perpetual software licenses related to these products. Generally, perpetual software
license agreements entered into by us after the date we acquired Visual Sciences and Mercado
entitle the customer to receive, at no additional cost, licenses to certain software released after
the date of their license agreement. Revenues associated with these license agreements are
recognized over the period in which the customer is entitled to receive these additional licenses
free of charge, which is generally three years. We recognize revenue related to post-contract
support services over the applicable term of the support agreement.
We invoice most customers monthly, quarterly or annually in advance for subscription, license
and maintenance fees and implementation fees, while we invoice over-usage fees and actual usage
fees monthly in arrears. Amounts that have been invoiced are recorded in accounts receivable and in
deferred revenues, or in revenues if all the revenue recognition criteria have been met.
Professional Services and Other Revenues
Professional services and other revenues are primarily derived from consulting and training
services provided to our customers.
Depending on the nature of the engagement, consulting services are billed either on a
time-and-materials basis or as a single fee per engagement. We also offer a number of training
courses on implementing, using and administering our services, which are generally billed at a
standard rate per attendee, per course.
Indirect Sales
We sell our online business optimization services primarily through direct sales efforts and
through third parties that resell our services to end users. We typically bill the reseller
directly for services we provide to end users, which is generally a fixed percentage of the fee
charged by the reseller to the end user.
Cost of Revenues and Operating Expenses
Cost of Revenues
Cost of subscription, license and maintenance revenues consists primarily of expenses related
to operating our network infrastructure, including depreciation expenses and operating lease
payments associated with computer equipment, data center costs, salaries and related expenses of
network operations, implementation, account management and technical support personnel,
amortization of intangible assets and allocated overhead. Cost of subscription, license and
maintenance revenues for the three and six
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months ended June 30, 2009, included approximately $5.0 million and $9.9 million, respectively, in
amortization of intangible assets, comprised of existing and core technology related to business
acquisitions and certain patent licenses. Absent any impairment, cost of subscription, license and
maintenance revenues will include approximately $19.9 million in annual amortization for the year
ended December 31, 2009, with decreasing annual amounts thereafter through March 31, 2014. We enter
into contracts with third parties for the use of their data center facilities, and our data center
costs largely consist of the amounts we pay to these third parties for rack space, power and
similar items.
Cost of professional services and other revenues consists primarily of employee-related costs
associated with these services. We recognize costs related to professional services as they are
incurred. The cost of professional services and other revenues is generally higher as a percentage
of professional services and other revenues than the cost of subscription revenues is as a
percentage of subscription revenues, due to the labor costs associated with providing these
services. We expect our cost of professional services and other revenue to remain higher, as a
percentage of the related revenue, than the cost of subscription revenues as a percentage of
subscription revenues.
Operating Expenses
Our operating expenses consist of sales and marketing expenses, research and development
expenses and general and administrative expenses.
Sales and marketing expenses have historically been our largest operating expense category.
Sales and marketing expenses consist primarily of salaries, benefits and related expenses for our
sales and marketing personnel, commissions, the costs of marketing programs (including advertising,
events, corporate communications and other brand building and product marketing) and allocated
overhead. Sales and marketing expenses for the three and six months ended June 30, 2009, included
approximately $3.0 million and $5.9 million, respectively, in amortization of acquired
customer-related intangible assets, and will, absent any impairment, also include approximately
$11.7 million in amortization of acquired customer-related intangible assets annually for the full
years 2009 through 2012 and decreasing amounts thereafter through March 31, 2017.
Research and development expenses consist primarily of salaries, benefits and related expenses
for our software engineering and quality assurance personnel and allocated overhead.
General and administrative expenses consist primarily of salaries, benefits and related
expenses for our executive, finance and accounting, legal, human resources and information systems
personnel, professional fees, other corporate expenses and allocated overhead.
Allocated Overhead Expenses
We allocate overhead such as rent and other occupancy costs, telecommunications charges,
enterprise systems costs and non-network related depreciation to all departments based on
headcount. As a result, general overhead expenses are reflected in each cost of revenues and
operating expense item.
Stock-based Compensation Expenses
Our cost of revenues and operating expenses also include stock-based compensation expenses
related to the following: (1) the fair value of stock-based awards issued to employees and
directors on or after January 1, 2006, including unvested options and restricted stock awards, or
RSAs, assumed in connection with acquisitions; (2) stock options issued to employees prior to 2006
in situations in which the exercise price was less than the deemed fair value of our common stock
on the date of grant; and (3) stock options issued to non-employees.
Trends in Our Business
Our business has grown rapidly. Our total revenues grew from $79.7 million in 2006, to $143.1
million in 2007 and to $295.6 million in 2008, representing an average annual growth rate of
approximately 91% over that time period. Our total revenues grew from $134.8 million for the six
months ended June 30, 2008, to $174.7 million for the six months ended June 30, 2009, representing
a 30% revenue increase. This growth has been driven primarily by an expansion of our customer base,
including those customers obtained through the various businesses we have acquired since the
beginning of 2007, coupled with increased subscription revenues from existing customers. To date,
we have derived a majority of our revenues from subscription fees for Omniture
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SiteCatalyst and related subscription services provided to customers in the United States. We expect that revenues
associated with our current and future products and services other than Omniture SiteCatalyst will
continue to increase over time, both in absolute dollars and as a percentage of our total revenues,
due in part, to the new technologies and services obtained through our acquisitions of Touch
Clarity Limited, or Touch Clarity, Offermatica Corporation, or Offermatica and Visual Sciences, as
well as the acquisition of certain assets of Mercado. As a result, we expect revenues generated by
Omniture SiteCatalyst will continue to decrease as a percentage of our total revenues.
We expect our total revenues to grow at a slower rate than our average historical revenue
growth rate. Due in part to the current economic recession, some of our existing customers have
either reduced or terminated their currently contracted services with us, or notified us of their
intent to do so upon expiration of their current contract term. We expect that other of our
existing customers may either reduce or terminate their currently contracted services with us upon
expiration of their current contract term, primarily due to the uncertainty associated with the
overall macroeconomic environment for the remainder of 2009. We also anticipate that our rate of
new business growth will continue to slow in 2009 as some of our potential customers decrease spending in an
effort to reduce costs, causing them to delay or defer purchasing decisions. A limited number of
our existing customers either ceased operations or filed for bankruptcy during 2008 and during the
six months ended June 30, 2009, due to their inability to meet their existing financial
obligations. We have also experienced delays in the timeliness of payment for our services by
certain of our customers, when compared to the payment history of those customers. If the economy
continues to weaken, it could cause additional customers to delay payments for our services beyond
the stated payment terms, and in certain instances may require them to cease operations altogether
before paying for all of our services used by them.
We intend to continue to expand our international sales operations and international
distribution channels, and accordingly, we expect that revenues from customers located outside the
United States will continue to increase in absolute dollars. Although, we do not expect revenues
from customers located outside of the United States to increase significantly as a percentage of
total revenues. Revenues from customers located outside the United States have increased from 17%
of total revenues for 2006 to 26% of total revenues for 2007 and to 28% of total 2008 revenues. Our
revenues from customers outside the United States increased from 27% of total revenues for the six
months ended June 30, 2008, to 28% of total revenues for the six months ended June 30, 2009. We
expect the percentage of total revenues derived from our largest customers to further decrease over
time as a result of continued expansion of our customer base. We also anticipate that the
percentage of our total revenues derived from indirect sales will continue to grow as a percentage
of our overall revenues, due to an increase in the number of third parties reselling our services.
If our customer base continues to grow, it will be necessary for us to continue to make
significant upfront investments in the network infrastructure equipment and implementation
personnel necessary to support this growth. The rate at which we add new customers, along with the
scale of new customer implementations, will affect the level of these upfront investments. Our
gross margins increased from 60% for 2006 to 63% for 2007, primarily due to more efficient
utilization of our network hardware. Our gross margins decreased to 57% for 2008, primarily due to
the adjustment to record the acquired Visual Sciences deferred revenues at their fair value,
increased amortization of acquired intangible assets related to the Offermatica and Visual Sciences
acquisitions and increased stock-based compensation expense. Our gross margins increased from 57%
for the six months ended June 30, 2008, to 59% for the six months ended June 30, 2009, primarily
because the adjustment to record the acquired Visual Sciences deferred revenue at its fair value
did not continue into 2009, partially offset by additional data center and network infrastructure
costs necessary to support the growth in our customer base.
During 2007, we began leasing a portion of our network infrastructure equipment requirements
under operating leases provided by third-party financing sources. We leased equipment under
operating leases with total future minimum lease payments of approximately $10.9 million during
2007, $7.7 million during 2008 and $9.4 million during the six months ended June 30, 2009. We
expect to acquire additional equipment under operating leases in the future. Although we do not
expect the use of operating leases to have a significant impact on total cost of revenues, when
compared to the effect of purchasing this equipment, our capital expenditures are reduced to the
extent we utilize operating leases.
The timing of additional capital expenditures and equipment operating leases could materially
affect our cost of revenues, both in absolute dollars and as a percentage of revenues, in any
particular period. In addition, because we incur immediate depreciation and lease expense from our
significant upfront network computer equipment requirements as new customers are added, these
customers are not immediately profitable. As a result, our profitability can be significantly
affected by the timing of the addition of new customers, particularly customers with large volume
requirements. At least through March 31, 2014, our cost of revenues and our gross margin will also
be negatively affected by the amortization of the following intangible assets: (1) the estimated
fair value of the patents licensed from NetRatings, Inc., or NetRatings, and (2) the intangible
assets directly related to our subscription service that were acquired as part of our acquisitions
of other businesses.
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We have also experienced, and we expect to continue to experience, increases in our operating
expenses as we make investments to support the anticipated growth of our customer base. Our
full-time employee headcount increased from 353 at December 31, 2006, to 713 at December 31, 2007,
and to 1,189 at December 31, 2008. Our full-time employee headcount increased further to 1,208 at
June 30, 2009. We expect operating expenses to continue to increase in absolute dollars, but to
decline over time as a percentage of total revenues, compared to the six months ended June 30,
2009, due to anticipated economies of scale in our business support functions. In general, over
time we also expect our operating expenses to increase in absolute dollars due to the incremental
salaries, benefits and expenses related to the addition of personnel from our acquisitions
completed during 2008, along with any future acquisitions. We will continue to assess our overall
operating cost structure and employee headcount growth in light of the changing macroeconomic
conditions, and, as a result, we may choose to reduce the rate at which we increase future
operating expenses and headcount.
We currently plan to continue investing in sales and marketing by increasing the number of
direct sales personnel over time and the number and type of indirect distribution channels,
expanding our domestic and international selling and marketing activities and building brand
awareness through advertising and sponsoring additional marketing events. During the remainder of
2009, due to the changing macroeconomic environment, we will continue to assess the level of our
advertising and marketing programs, and, as a result, may further reduce the level of spending in
these areas, compared to currently anticipated spending in these areas through the remainder of
2009. We also intend to further consolidate our sales channels in an effort to increase
efficiencies. We expect that sales and marketing expenses will continue to increase in absolute
dollars over time and remain our largest operating expense category. Generally, sales personnel are
not immediately productive and sales and marketing expenses do not immediately result in revenues.
This reduces short-term operating margins until the salesperson becomes more fully utilized and
revenues can be recognized. We expect that at least through March 31, 2017, sales and marketing
expenses will be negatively affected by the amortization of customer-related intangible assets
acquired as part of our acquisitions of other businesses.
We expect stock-based compensation expenses to increase in absolute dollars, compared to
historical levels, primarily due to the stock-based awards granted during 2008 and thus far during
2009, along with stock-based awards we expect to grant in the future. Since the first quarter of
2006, we have recorded stock-based compensation expense under the provisions of Statement of
Financial Accounting Standards, or SFAS, No. 123R, Share-Based Payment, based on the fair value of
stock-based awards at the date of grant. The actual amount of stock-based compensation expense we
record in any fiscal period will depend on a number of factors including the number of shares
subject to the stock options issued and the fair value of our common stock at the time of issuance. At June 30, 2009, there was $48.3 million of total
unrecognized compensation cost related to unvested stock option awards granted subsequent to the
adoption of SFAS No. 123R and $20.9 million of total unrecognized compensation cost related to
unvested restricted stock units, or RSUs, and RSAs. These amounts of unrecognized compensation cost
are equal to the fair value of stock option awards and RSUs and RSAs expected to vest. The
unrecognized compensation cost related to unvested stock option awards will be recognized over a
weighted-average period of 3.3 years and the unrecognized compensation cost related to unvested
RSUs and RSAs will be recognized over a weighted-average period of 2.9 years.
In the future, as part of our overall growth strategy, we expect to acquire other businesses,
products, services or technologies to complement our Omniture Online Marketing Suite and accelerate
access to strategic markets. In January 2009, we entered into a strategic partner relationship with
WPP Group USA, Inc., or WPP USA, under which both companies will collaborate on technology
development, on sharing data and information and on consulting services. As part of our overall
growth strategy, we expect to enter into strategic partner relationships with other companies.
During 2008, we utilized $23.4 million in net operating loss carryforwards to reduce our
provision for income taxes for the year. We may utilize additional net operating loss carryforwards
to reduce our 2009 provision for income taxes. At December 31, 2008, we had approximately $102.9
million in net operating loss carryforwards for federal income tax purposes, which will begin to
expire in 2020, and approximately $2.5 million in federal tax credit carryforwards, which will
begin to expire in 2020. These carryforwards do not include the portion that is subject to annual
limitations that result in their expiration before being fully utilized. For fiscal years beginning
on or after January 1, 2008, through years ending on December 31, 2009, the state of California
suspended the utilization of net operating loss carryforwards by taxpayers to reduce their state
income taxes. Despite the potential availability of these net operating loss carryforwards, we
expect our income tax expense to increase in absolute dollars, primarily due to income taxes in the
foreign jurisdictions in which we operate and because we will likely be subject to alternative
minimum tax for federal income tax purposes.
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Results of Operations
The following table sets forth selected consolidated statements of operations data as a
percentage of total revenues for each of the periods indicated.
Revenues
Subscription, license and maintenance revenues increased $12.7 million from the three months
ended June 30, 2008, to the three months ended June 30, 2009, and increased $32.6 million from the
six months ended June 30, 2008 to the six months ended June 30, 2009, primarily due to the growth
in the number of customers for our subscription services, including the customers acquired in
connection with business acquisitions, as well as greater revenues from existing customers as they
increased the number of transactions from which we captured data and the number of services that
they contracted to use.
Professional services and other revenues increased $3.2 million from the three months ended
June 30, 2008, to the three months ended June 30, 2009, and increased $7.3 million from the six
months ended June 30, 2008 to the six months ended June 30, 2009,
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primarily due to the growth in our consulting and training services, resulting from an increase in
consulting opportunities in connection with our expanding product offerings, an increase in the
number of customers for our subscription services, including the customers acquired in connection
with business acquisitions and additional staffing available to provide consulting and training
services to support increased customer demand.
The following table sets forth revenues from customers within and outside the United
States:
Revenues from customers outside the U.S. grew from 27% of total revenues during the three and
six months ended June 30, 2008, to 28% of total revenues during the three and six months ended June
30, 2009, as a result of the expansion of our international sales force, an increase in the number
of locations outside the U.S. where we conduct business and increased international marketing
activities. This revenue increase is also partly due to international customers acquired in
connection with business acquisitions. No single foreign country and no customer accounted for more
than 10% of total revenues during the three months ended June 30, 2008 and 2009.
Cost of Revenues
The following table sets forth our cost of revenues as a percentage of related revenues:
Cost of subscription, license and maintenance revenues increased $5.7 million from the three
months ended June 30, 2008 to the three months ended June 30, 2009, primarily due to a $3.3 million
increase in third-party data center costs associated with housing and operating network hardware, a
$1.1 million increase in employee salaries and benefits and related costs principally resulting
from increased staffing, all necessary to support a larger customer base and increases in the
number of transactions from which we capture data, and a $1.8 million increase in depreciation and
operating lease expense related to additional investment in our network infrastructure hardware.
Cost of subscription, license and maintenance revenues increased $13.1 million from the six
months ended June 30, 2008 to the six months ended June 30, 2009, primarily due to a $6.7 million
increase in third-party data center costs associated with housing and operating network hardware, a
$2.9 million increase in employee salaries and benefits and related costs principally resulting
from increased staffing, and a $3.9 million increase in depreciation and operating lease expense
related to additional investment in our
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network infrastructure hardware, all necessary to support a larger customer base and increases
in the number of transactions from which we capture data. The change in cost of subscription,
license and maintenance revenue was also due to a $1.0 million decrease in stock-based compensation
and a $0.9 million increase in amortization of the intangible assets acquired in the Visual
Sciences and Mercado acquisitions.
Gross margin associated with subscription, license and maintenance revenues were 58% for both
the three months ended June 30, 2008 and 2009 and increased from 58% for the six months ended June
30, 2008 to 59% for the six months ended June 30, 2009, primarily because the adjustments made in
2008 to record the acquired Visual Sciences deferred revenue at its fair value did not continue
into 2009, partially offset by increased data center and network infrastructure costs necessary to
support the growth in our business.
Cost of professional services and other revenues increased $0.5 million from the three months
ended June 30, 2008 to the three months ended June 30, 2009 and increased $1.8 million from the six
months ended June 30, 2008 to the six months ended June 30, 2009, primarily due to increased
headcount and related costs to meet customer demand for consulting and training services.
Gross margin associated with professional services increased to 59% for the three months ended
June 30, 2009 from 48% for the three months ended June 30, 2008, and increased to 58% for the six
months ended June 30, 2009 from 48% for the six months ended June 30, 2008, primarily due to higher
utilization of the professional services staff.
Operating Expenses
Sales and Marketing
Sales and marketing expenses increased $1.2 million from the three months ended June 30, 2008
to the three months ended June 30, 2009, primarily due to a $2.1 million increase in employee
salaries and benefits and related costs, principally resulting from increased staffing and a $1.2
million increase in commission costs due to increased staffing and revenues. These increases were
partially offset by a $0.9 million decrease in marketing expenses primarily associated with new
product introductions, our online marketing and annual customer summit events, a $0.7 million
reduction in travel-related costs, and a $0.3 million decrease in stock-based compensation.
Sales and marketing expenses increased $7.5 million from the six months ended June 30, 2008 to
the six months ended June 30, 2009, primarily due to a $4.6 million increase in employee salaries
and benefits and related costs, principally resulting from increased staffing. The increase was
also due to a $3.7 million increase in commission costs due to increased staffing and revenues, a
$0.3 million increase in amortization of intangibles, and a $0.2 million increase in marketing
expenses primarily associated with new product introductions, our online marketing and annual
customer summit events. These increases were partially offset by a $0.9 million reduction in
travel-related costs, and a $0.2 million decrease in stock-based compensation.
Research and Development
Research and development expenses decreased $0.5 million from the six months ended June 30,
2008 to the six months ended June 30, 2009, primarily due by a $1.4 million decrease in stock-based
compensation expense, offset by a $0.8 million increase in salaries and benefits and related costs
resulting from an increase in staffing, including the Mercado acquisition.
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General and Administrative
The change in general and administrative expenses was not significant from the three months
ended June 30, 2008 to the three months ended June 30, 2009. General and administrative expenses
increased $0.8 million from the six months ended June 30, 2008 to the six months ended June 30,
2009, primarily due to a $1.2 million increase in employee salaries and benefits and related costs
to support the continued growth of our business, including our international expansion and business
acquisitions, and a $0.9 million increase in bad debt expense resulting from an increase in
customer bankruptcies and delinquent customer payments. These increases were offset by a $0.4
million reduction in travel-related costs, a $0.4 million reduction in outside professional
services costs, a $0.3 million reduction in recruiting expenses, and a $0.2 million decrease in
stock-based compensation.
Stock-based Compensation Expense
Total stock-based compensation expense was classified as follows in the accompanying condensed
consolidated statements of operations:
Stock-based compensation expense decreased $1.1 million and $2.8 million during the three and
six months ended June 30, 2009, respectively, as compared to the same periods in 2008, primarily
due to the higher expense in 2008 related to the acceleration of vesting of certain stock-based
awards.
Interest Income, Interest Expense and Other Expense, Net
Interest income decreased $0.3 million and $1.1 million during the three and six months ended
June 30, 2009, respectively, as compared to the same periods in 2008, primarily due to lower
interest rate yields on our cash, cash equivalents and investments. Other expense, net increased
$0.6 million and $1.3 million during the three and six months ended June 30, 2009, respectively, as
compared to the same periods in 2008, primarily due to net foreign currency-related losses.
(Benefit from) provision for Income taxes
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The provision for income taxes increased $5.8 million and $8.3 million during the three and
six months ended June 30, 2009, respectively, as compared to the same periods in 2008, primarily
due non-cash tax benefits recorded during the three and six months ended June 30, 2008,
respectively, resulting from the reduction in deferred tax liabilities related to the Visual
Sciences acquisition.
Liquidity and Capital Resources
At June 30, 2009, our principal sources of liquidity consisted of cash and cash equivalents of
$86.9 million, short-term investments of $30.0 million, accounts receivable, net, of $119.1
million, amounts available under our credit facility of $33.7 million and our equipment lease
agreements. In January 2009, we issued 2.9 million shares of our common stock to WPP Luxembourg
Gamma Three Sarl, or WPP, for aggregate cash consideration of $25.0 million.
Historically, our primary sources of cash have been customer payments for our subscription and
professional services, proceeds from the issuance of capital stock and proceeds from the issuance
of notes payable. Our principal uses of cash historically have consisted of payroll and other
operating expenses, payments relating to purchases of property and equipment primarily to support
the network infrastructure needed to provide our services to our customer base, repayments of
borrowings and acquisitions of businesses and intellectual property.
Operating Activities
Our cash flows from operating activities are significantly influenced by the amount of cash we
invest in personnel and infrastructure to support the anticipated future growth in our business,
increases in the number of customers using our subscription and professional services and the
amount and timing of payments by these customers.
A limited number of our existing customers either ceased operations or filed for bankruptcy
during 2008 and during the six months ended June 30, 2009, due to their inability to meet their
existing financial obligations. We have also experienced delays in the timeliness of payment for
our services by certain of our customers, when compared to the payment history of those customers.
If the economy continues to weaken or sluggishly recovers, it could cause additional customers to
delay payments for our services beyond the stated payment terms, and in certain instances, may
force them to cease operations altogether before paying for all of our services used by them.
We generated $28.0 million of net cash from operating activities during the six months ended
June 30, 2009. Our net loss of $13.1 million was adjusted for $44.5 million in non-cash
depreciation, amortization and stock-based compensation expenses. We also generated cash from
operating activities from a $7.9 million increase in payments received from customers in advance of
when we recognized revenues. This increase in operating cash was partially offset by an $11.7
million increase in accounts receivable, net of allowances, primarily resulting from increased
customer billings and timing of customer payments. Allowances for accounts receivable increased by
$1.8 million during the six months ended June 30, 2009. The increase in payments received from
customers in advance of when we recognized revenues was primarily driven by the overall growth in
our business.
Investing Activities
Historically, our primary investing activities consisted of purchases of computer network
equipment to accommodate the increase in customer transactions, purchases of furniture and
equipment to support our operations and payments related to the acquisition of businesses and
intellectual property.
During 2007, we began leasing a portion of our network infrastructure equipment requirements
under operating leases provided by third-party financing sources, and we expect to acquire
additional equipment under operating leases in the future. Our capital expenditures are reduced to
the extent we utilize operating leases.
We intend to continue to make investments to support our business growth and may require
additional funds to respond to business challenges, including the need to develop new services or
enhance our existing services, enhance our operating infrastructure and acquire complementary
businesses and technologies. Accordingly, we may need to engage in equity or debt financings to
secure additional funds. If we raise additional funds through further issuances of equity or
convertible debt securities, our existing stockholders could suffer significant dilution, and any
new equity securities we issue could have rights, preferences and privileges superior to those of
holders of our common stock. Our credit agreement entered into in December 2008, or the Credit
Agreement, contains restrictive covenants relating to our capital raising activities and other
financial and operational matters, including restrictions on the amount of capital expenditures in
any one year, which may make it more difficult for us to obtain additional capital and to
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pursue business opportunities, including potential acquisitions. In addition, we may not be able to
obtain additional financing on terms favorable to us, if at all, particularly in view of the
ongoing economic downturn and continued uncertainty in the U.S. and global financial markets, which
may cause us to be unable to access capital from the capital markets. If we are unable to obtain
adequate financing or financing on terms satisfactory to us, when we require it, our ability to
continue to support our business growth and to respond to business challenges could be
significantly limited.
We used $32.7 million of net cash in investing activities during the six months ended June 30,
2009. This use of cash primarily resulted from $39.9 million to purchase investments, $11.6 million
to purchase property and equipment, $3.6 million paid related to our prior acquisitions, net of
cash acquired and $2.2 million paid related to losses on foreign currency forward contracts. This
cash used in investing activities was partially offset by sales and maturity of investments of
$25.0 million.
Financing Activities
We generated $24.4 million of net cash from financing activities during the six months ended
June 30, 2009, primarily from the issuance of common stock to WPP.
Other Factors Affecting Liquidity and Capital Resources
In December 2008, we entered into the Credit Agreement that provided for a secured revolving
credit facility in an amount of up to $35.0 million that is subject to a borrowing base formula and
a secured term loan in an amount of $15.0 million. The revolving credit facility has sub limits for
certain cash management services, interest rate and foreign exchange hedging arrangements, and for
the issuance of letters of credit in a face amount up to $7.5 million. Upon execution of the Credit
Agreement, we borrowed $15.0 million under the term loan. Letters of credit in the aggregate face
amount of approximately $1.3 million have also been issued under the revolving credit facility.
At our option, revolving loans and the term loan accrue interest at a per annum rate based on,
either (1) the base rate plus a margin of 3.00%; or (2) the London Interbank Offered Rate, or
LIBOR, plus a margin equal to 3.00%, but in no event less than 5.5%, in each case for interest
periods of one, two or three months. The base rate is defined as the greatest of (i) 3.50% per
annum, (ii) the federal funds rate plus a margin equal to 0.50% and (iii) the lender’s prime rate.
At June 30, 2009, the $14.6 million outstanding under the term loan accrued interest at a variable
rate of 5.5%.
We are also obligated to pay other customary servicing fees, letter of credit fees and unused
line fees for a credit facility of this size and type.
Revolving loans may be borrowed, repaid and reborrowed until December 24, 2012, at which time
all amounts borrowed must be repaid. The term loan is repaid in quarterly principal payments in an
amount equal to $0.4 million, with the remaining outstanding principal balance and all accrued and
unpaid interest due on December 24, 2012. Accrued interest on the revolving loans and term loans is
paid monthly, or with respect to revolving loans and term loans that are accruing interest based on
the LIBOR rate, then at the end of the applicable LIBOR interest rate period.
The revolving loans and term loans are subject to mandatory prepayments in the event that
certain borrowing formulas are not maintained. In addition, the term loan is subject to certain
mandatory prepayments under certain circumstances, including in connection with the receipt of net
proceeds from certain asset sales, casualty events, tax refunds, the incurrence of certain types of
indebtedness and the issuance of certain equity securities. In the event that the revolving credit
facility commitment is terminated, in whole or part, prior to its maturity date, then, under
certain circumstances, a prepayment fee will be due in an amount up to 2.00% of the principal
amount prepaid. In the event that the term loan is prepaid, then a prepayment fee will be due in an
amount up to 2.00% of the principal amount prepaid.
In February 2006, we entered into a settlement and patent license agreement with NetRatings.
In the event that we acquire certain specified companies, we may be required to make additional
license payments based on the Web analytics revenues of the acquired company. The agreement also
provides that, if we acquire other companies, we may elect to make additional license payments
based on the Web analytics revenues of the acquired company to ensure that the acquired company’s
products, services or technology are covered by the license.
In August 2007, Visual Sciences entered into a settlement and patent license agreement with
NetRatings. The agreement required Visual Sciences to make license payments of $11.3 million, $2.0
million of which was paid by Visual Sciences on or about the date of
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the agreement, $4.3 million of which was paid by us following the closing of our acquisition of
Visual Sciences, and the remaining $5.0 million of which must be paid by us in quarterly
installments of $0.5 million beginning on March 31, 2008, of which $3.0 million had been paid.
On October 25, 2005, Visual Sciences, LLC (now known as Visual Sciences Technologies, LLC),
which is a wholly owned subsidiary of Visual Sciences, entered into a settlement and patent license
agreement with NetRatings. The agreement required Visual Sciences, LLC to make license payments of
$2.0 million, $1.5 million of which has already been paid, and the remaining $0.5 million of which
must be paid in annual installments, which are capped at $0.2 million per year and calculated based
on revenue of Visual Sciences, LLC products for each year.
We held AAA-rated municipal note investments with par values totaling $21.5 million and $16.5
million at March 31, 2009 and June 30, 2009, respectively, with an auction reset feature, or
auction rate securities, the underlying assets of which are generally student loans which are
substantially backed by the U.S. federal government. Auction rate securities are generally
long-term instruments that are intended to provide liquidity through a Dutch auction process that
resets the applicable interest rate at pre-determined calendar intervals, allowing holders of these
instruments to rollover their holdings and continue to own their respective securities or liquidate
their holdings by selling the auction rate securities at par. Beginning in February 2008, auctions
failed for our holdings because sell orders for these securities exceeded the amount of purchase
orders. The funds associated with these failed auctions will not be accessible until the issuer
calls the security, a successful auction occurs, a buyer is found outside the auction process, or
the security matures. During April 2009, $5.0 million in auction rate securities held by us at
March 31, 2009, were fully redeemed at their par value. Because there is no assurance we will be
able to liquidate our positions in the remaining $16.5 million of these securities within the next
12 months, we have classified this portion of our auction rate holdings as long-term investments on
our consolidated balance sheet. In addition, as there is currently no active market for these
remaining securities, we determined there to be a temporary impairment in the value of these
securities of $2.5 million and, accordingly, have recorded an unrealized loss on these securities,
which is included as a component of other comprehensive loss within stockholders’ equity on our
balance sheet at June 30, 2009. At June 30, 2009, we determined the impairment to be temporary,
because we believe these securities will ultimately be sold or redeemed at their par values, and at June 30,
2009, we believe that it is not more likely than not that we will be required to sell these
securities before this recovery in value, which could be the securities’ maturity dates. The
maturity dates of our auction rate holdings are between the years 2034 and 2042. Until the issuers
of our remaining auction rate securities are able to successfully close future auctions or if their
credit ratings deteriorate, we may in the future be required to record further impairment charges
on these investments, some or all of which we may determine at some point in the future to be
other-than-temporary, and our liquidity would be adversely affected to the extent that the cash we
would otherwise receive upon liquidation of the investments would not be available for use in the
growth of our business and other strategic opportunities.
In March 2007, we acquired all of the outstanding voting stock of Touch Clarity, a provider of
enterprise on-demand automated onsite behavioral targeting and optimization solutions, based in
London, England. The terms of the acquisition provided for the payment of up to $3.0 million in
additional consideration, contingent upon the achievement of certain milestones during 2007. After
determination of the actual milestones achieved in accordance with the acquisition agreement, we
paid a total of $2.1 million in additional consideration in February 2009. This additional
consideration, which was accrued for by us at December 31, 2008, increased the aggregate purchase
price and goodwill. No further consideration is owed by us under the acquisition agreement after
payment in February 2009 of the $2.1 million in additional consideration.
At June 30, 2009, restructuring charges associated with the Visual Sciences and Mercado
acquisitions that had not yet been paid totaled $2.3 million, comprised primarily of excess
facilities costs. We expect to pay all of these excess facilities restructuring charges by March
31, 2013.
Off-balance Sheet Arrangements
We do not have any special purpose entities, and we do not engage in off-balance sheet
financing arrangements other than operating leases for office space and certain computer equipment,
which are described below.
We have entered into an operating lease related to our principal offices in Orem, Utah, with a
lease term through March 2011. We have also entered into operating leases for office space
elsewhere in the U.S. and in various international locations and for certain computer equipment.
Since 2007, we have entered into three master equipment lease agreements with third-party
financing sources. We have generally accounted for the acquisition of equipment under these lease
agreements as operating leases, in accordance with SFAS No. 13,
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Accounting for Leases. The rental payments and rental terms associated with individual acquisitions
under the leases may vary depending on the nature of the equipment acquired. As a condition of one
of these lease agreements, we must not allow our cash balance to fall below $10.0 million as long
as this agreement is in force. Failure to maintain a minimum of $10.0 million in cash would
constitute an event of default, as defined in the lease agreement.
Contractual Obligations and Future Cash Requirements
During the three and six months ended June 30, 2009, we leased equipment under operating
leases with total future minimum lease payments of $1.5 million and $9.4 million, respectively.
Our future cash requirements will depend on many factors, including the expansion of our
sales, support and marketing activities, the timing and extent of spending to support development
efforts and expansion into new territories, the extent to which we acquire new businesses and
technologies and the costs of these acquisitions, the building of infrastructure, including our
network equipment, to support our growth, the timing of introduction of new services and
enhancements to existing services and the continued market acceptance of our services.
We believe our existing cash and cash equivalents, short-term investments, any cash provided
from our operations and funds available from our existing credit facilities and equipment leasing
arrangements will be sufficient to meet our currently anticipated cash requirements for at least
the next 12 months. Thereafter, we may need to raise additional capital to meet the cash flow
requirements of our business. An element of our growth strategy involves acquisitions. If we make
additional acquisitions or license products or technologies complementary to our business, we may
need to raise additional funds.
Additional financing may not be available on terms that are favorable to us, or at all,
particularly in view of the impact of the ongoing economic downturn and continued uncertainty in
the U.S. and global financial markets, which may cause us to be unable to access capital from the
capital markets. If we are unable to obtain adequate financing or financing on terms satisfactory
to us, when we require it, our ability to continue to support our business growth and to respond to
business challenges could be significantly limited. If we raise additional capital through the
issuance of equity or convertible debt securities, the percentage ownership of our stockholders
would be reduced and these securities might have rights, preferences and privileges senior to those
of our current stockholders. Our Credit Agreement contains restrictive covenants relating to our
capital raising activities and other financial and operational matters, including restrictions on
the amount of capital expenditures in any one year, which could make it more difficult for us to
obtain additional capital and to pursue future business opportunities, including potential
acquisitions.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these consolidated financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,
costs and expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing
basis. Our estimates are based on historical experience and various other assumptions that we
believe to be reasonable under the circumstances. Our actual results could differ from these
estimates.
We believe that the assumptions and estimates associated with revenue recognition, allowances
for accounts receivable, business combinations and impairment of long-lived and intangible assets,
including goodwill; stock-based compensation and income taxes have the greatest potential impact on
our consolidated financial statements. Therefore, we consider these to be our critical accounting
policies and estimates.
Revenue Recognition
We generally provide our applications as services; accordingly, we follow the provisions of
SEC Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition, and EITF Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. We recognize revenue when all of the following
conditions are met:
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For subscription fees that are based on a committed number of transactions, we recognize
subscription revenues, including implementation and set-up fees, ratably beginning on the date the
customer commences use of our services and continuing through the end of the contract term. We
recognize revenues for over-usage fees and for fees that we bill based on the actual number of
transactions from which we capture data on a monthly basis as these fees are incurred. Amounts that
have been invoiced are recorded in accounts receivable and in deferred revenues or revenues,
depending on whether the revenue recognition criteria have been met.
We generally recognize professional services revenues when sold with subscription offerings
(generally considered to be at the time of, or within 45 days of, sale of the subscription
offering) over the term of the related subscription contract as these services are considered to be
inseparable from the subscription service, and we have not yet established objective and reliable
evidence of fair value for the undelivered element. We recognize revenues resulting from
professional services sold separately from subscription services as these services are performed.
Although our subscription contracts are generally noncancelable, a limited number of customers
have the right to cancel their contracts by providing prior written notice to us of their intent to
cancel the remainder of the contract term. In the event that a customer cancels its contract, it is
not entitled to a refund for prior services provided to them by us.
We derive our license revenue from selling perpetual and term software licenses related to our
Insight and Omniture Merchandising software products, which we obtained as part of the Visual
Sciences and Mercado acquisitions, respectively. We do not provide custom software development
services or create tailored products to sell to specific customers. Pricing is based on a standard
price list with volume and marketing related discounts. The software licenses are generally sold
with the first year of post-contract support services, installation and training. As such, a
combination of these products and services represent a “multiple-element” arrangement for revenue
recognition purposes.
For perpetual software license contracts with multiple elements, we recognize revenue using
the residual method in accordance with Statement of Position, or SOP, 97-2, Software Revenue
Recognition and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition. Under the
residual method, the fair value of the undelivered elements is deferred and the remaining portion
of the arrangement fee is allocated to the delivered elements and recognized as revenue, assuming
all other revenue recognition criteria have been met. If evidence of fair value for each
undelivered element of the arrangement does not exist, all revenue from the arrangement is
recognized when evidence of fair value is determined or when all elements of the arrangement are
delivered. For term software license contracts, license revenue is recognized over the applicable
license term.
Generally, perpetual software license agreements entered into by us after the date we acquired
Visual Sciences and Mercado entitle the customer to receive, at no additional cost, licenses to
certain software released after the date of their license agreement. Revenues associated with these
license agreements are recognized over the period in which the customer is entitled to receive
these additional licenses free of charge, which is generally three years.
We recognize revenue related to post-contract support services over the applicable term of the
support agreement.
Allowances for Accounts Receivable
We record a sales allowance to provide for estimated future adjustments to receivables,
generally resulting from credits issued to customers in conjunction with amendments or renewals of
subscription service arrangements. Specific provisions primarily are made based on amendments or
renewals associated with specific subscription service arrangements that are expected to result in
the issuance of customer credits. Non-specific provisions are also made based on actual credits
issued as a percentage of our historical revenues. We record provisions for sales allowances as a
reduction to revenues. We evaluate the estimate of sales allowances on a regular basis and adjust
the amount reserved accordingly.
We make judgments as to our ability to collect outstanding receivables and provide allowances
when collection becomes doubtful. Specific provisions are made based on an account-by-account
analysis of collectability. Additionally, we make provisions for non-customer-specific accounts
based on our historical bad debt experience and current economic trends. We record provisions in
operating expenses. We write off customer accounts receivable balances to the allowance for
doubtful accounts when it becomes likely that we will not collect the receivable from the customer.
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Business Combinations and Impairment of Long-lived and Intangible Assets, Including Goodwill
When we acquire businesses, we allocate the purchase price to tangible assets and liabilities
and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill.
The allocation of the purchase price requires management to make significant estimates in
determining the fair values of assets acquired and liabilities assumed, especially with respect to
intangible assets. These estimates are based on the application of valuation models using
historical experience and information obtained from the management of the acquired companies. These
estimates can include, but are not limited to, the cash flows that an asset is expected to generate
in the future, the appropriate weighted-average cost of capital and the cost savings expected to be
derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. In
addition, unanticipated events and circumstances may occur which may affect the accuracy or
validity of such estimates.
Periodically we assess potential impairment of our long-lived assets, which include property,
equipment and acquired intangible assets, in accordance with the provisions of SFAS No. 144,
Accounting for the Impairment and Disposal of Long-Lived Assets. We perform an impairment review
whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment review include, but
are not limited to, significant under-performance relative to historical or projected future
operating results, significant changes in the manner of our use of the acquired assets or our
overall business strategy and significant industry or economic trends. When we determine that the
carrying value of a long-lived asset may not be recoverable based upon the existence of one or more
of the above indicators, we determine the recoverability by comparing the carrying amount of the
asset to net future undiscounted cash flows that the asset is expected to generate. We recognize an
impairment charge equal to the amount by which the carrying amount exceeds the fair market value of
the asset.
We recorded goodwill in conjunction with all five of our business acquisitions completed since
the beginning of 2007. We test goodwill for impairment at least annually, in accordance with SFAS
No. 142, Goodwill and Other Intangible Assets based on a single reporting unit. We believe we
operate in a single reporting unit because our chief operating decision maker as defined in SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information, does not regularly
review our operating results other than at a consolidated level for purposes of decision making
regarding resource allocation and operating performance.
We amortize intangible assets on a straight-line basis over their estimated useful lives. We
generally determine the estimated useful life of intangible assets based on the projected
undiscounted cash flows associated with these intangible assets.
Stock-based Compensation
We adopted SFAS No. 123R effective January 1, 2006, 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. That cost must be recognized over the period during which the
employee is required to provide services in exchange for the award. We adopted SFAS No. 123R using
the prospective method, which requires us to apply its provisions only to awards granted, modified,
repurchased or cancelled after the effective date.
We use a Black-Scholes-Merton option-pricing model to estimate the fair value of our stock
option awards. The calculation of the fair value of the awards using the Black-Scholes-Merton
option-pricing model is affected by our stock price on the date of grant as well as assumptions
regarding the following:
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At June 30, 2009, there was $48.3 million of total unrecognized compensation cost related to
unvested stock option awards granted subsequent to the adoption of SFAS No. 123R and $20.9 million
of total unrecognized compensation cost related to unvested RSUs and RSAs. The unrecognized
compensation cost related to unvested stock option awards will be recognized over a
weighted-average period of 3.3 years and the unrecognized compensation cost related to unvested
RSUs and RSAs will be recognized over a weighted-average period of 2.9 years.
On June 15, 2009, we completed a stock option exchange program, or the Exchange Offer.
Pursuant to the Exchange Offer, eligible employees tendered, and we accepted for cancellation,
eligible options to purchase 4.4 million shares of the our common stock from 410 participants,
representing approximately 66% of the total shares of common stock underlying options eligible for
exchange in the Exchange Offer.
We granted new options to eligible employees to purchase 3.1 million shares of common stock in
exchange for the cancellation of the tendered eligible options. The exercise price per share of the
new options granted in the Exchange Offer was $12.99, the closing price of our common stock on June
15, 2009. The new options will vest monthly beginning on June 15, 2009, over a period ranging from
36 to 48 months, or 48 to 60 months for executive officers, and have expiration dates of 5 years,
or 7 years for executive officers, from June 15, 2009.
We will not record additional compensation cost related to the exchange as the estimated fair
value of the new options did not exceed the fair value of the exchanged stock options calculated
immediately prior to the exchange. We will recognize the remaining unamortized compensation cost
related to the grant date fair value of the exchanged options over the new vesting period of the
new options. At June 30, 2009, there was $27.7 million of total unrecognized compensation cost
related to these new options. This unrecognized compensation cost is equal to the fair value of
the new options expected to vest and will be recognized over a weighted-average period of 3.9
years.
Income Taxes
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — An Interpretation of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an entity’s financial statements in accordance with
SFAS No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement
attributes for financial statement disclosure of tax positions taken or expected to be taken on a
tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return
must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by
the relevant taxing authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
Our adoption of the provisions of FIN 48 on January 1, 2007 did not have a material impact on
our financial statements. We adopted the accounting policy that interest recognized in accordance
with Paragraph 15 of FIN 48 and penalties recognized in accordance with Paragraph 16 of FIN 48 are
classified as a component of interest expense. We had an unrecognized tax benefit of $1.1 million
at December 31, 2007 for research and development credits and upon the acquisition of Visual
Sciences we assumed unrecognized tax benefits of $0.7 million, which Visual Sciences had previously
recorded upon its adoption of FIN 48 during the year ended December 31, 2007. We have not incurred
a material amount of interest or penalties through June 30, 2009. We do not anticipate any
significant change within 12 months of this reporting date of our uncertain tax positions. We also
do not anticipate any events that could cause a change to these uncertainties. Any future
adjustments to the unrecognized tax benefit will have no impact on our effective tax rate due to
the valuation allowance which fully offsets these unrecognized tax benefits. We are subject to
taxation in
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the U.S. and various state and foreign jurisdictions. There are no ongoing examinations by taxing
authorities at this time. Our various tax years starting with 2004 to 2008 remain open in various
taxing jurisdictions.
Our effective tax rates are primarily affected by the amount of our taxable income or losses
in the various taxing jurisdictions in which we operate, the amount of federal and state net
operating losses and tax credits, the extent to which we can utilize these net operating loss
carryforwards and tax credits and certain benefits related to stock option activity.
Recent Accounting Pronouncements
In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position
(“FAS FSP”) FAS No. 157-2, Effective Date of FASB Statement No. 157, which delayed the effective
date of Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements, for
all non-financial assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually), until
the beginning of the first quarter of 2009. Therefore, on January 1, 2009, we adopted SFAS No. 157
for non-financial assets and non-financial liabilities. The adoption of SFAS No. 157 for
non-financial assets and non-financial liabilities that are not measured and recorded at fair value
on a recurring basis did not have a significant impact on our consolidated financial statements.
In April 2009, the
FASB issued three FAS FSPs that are intended to provide additional application guidance and enhance
disclosures about fair value measurements and impairments of securities. FSP FAS 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, clarifies the objective and method of
fair value measurement even when there has been a significant decrease in market activity for the
asset being measured. FSP FAS 115-2 and FAS No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, establish a new model for measuring other-than-temporary
impairments for debt securities, including criteria for when to recognize a write-down through
earnings versus other comprehensive income. FSP FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments, expands the fair value disclosures required for all financial
instruments within the scope of SFAS No. 107 to interim periods. All of these FSPs are effective for us beginning April 1, 2009. As
a result of the adoption of these FSPs, we have included the appropriate disclosures in our
consolidated financial statements. These FSPs did not have a material
impact on our financial results.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general
standards of accounting for, and requires disclosure of, events that occur after the balance sheet
date but before financial statements are issued or are available to be issued. We adopted the
provisions of SFAS No. 165 for the quarter ended June 30, 2009. The adoption of SFAS No. 165 did
not have a material effect on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification™ and the Hierarchy of Generally Accepted Accounting Principles — a
replacement of FASB Statement No. 162. SFAS No. 168 replaces SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles and establishes the FASB Accounting Standard
Codification™ (“Codification”) as the source of authoritative accounting principles
recognized by the FASB to be applied by non-governmental entities in the preparation of financial
statements in conformity with generally accepted accounting principles in the United States. All
guidance contained in the Codification carries an equal level of authority. On the effective date
of SFAS No. 168, the Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not included in the
Codification will become non-authoritative. SFAS No. 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. We have evaluated this new
statement, and have determined that it will not have a significant impact on the determination or
reporting of our financial results.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
We conduct business internationally in several currencies, primarily the Australian dollar,
British pound, Canadian dollar, Danish krone, European Union euro, Japanese yen and Swedish krona.
As such, our results of operations and cash flows are subject to fluctuations due to changes in
exchange rates.
Our exposure to foreign exchange rate fluctuations arise in part from: (1) translation of the
financial results of foreign subsidiaries into U.S. dollars in consolidation; (2) the
re-measurement of non-functional currency assets, liabilities and intercompany balances into U.S.
dollars for financial reporting purposes; and (3) non-U.S. dollar denominated sales to foreign
customers. The primary effect on our results of operations from a strengthening U.S. dollar is a
decrease in revenue, partially offset by a decrease in expenses. Conversely, the primary effect of
foreign currency transactions on our results of operations from a weakening U.S. dollar is an
increase in revenues, partially offset by an increase in expenses.
During the six months ended June 30, 2009, we entered into foreign currency forward contracts
to limit our foreign currency transaction gains and losses primarily related to cash and accounts
receivable balances denominated in certain foreign currencies. These forward contracts were not
designated as accounting hedges under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. During the three months ended June 30, 2009, we recognized $2.4 million in
realized losses and $0.3 million in
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unrealized losses associated with these forward contracts. During the six months ended June 30,
2009, we recognized $2.2 million in realized losses and $0.3 million in unrealized losses
associated with these forward contracts. We expect to continue utilizing foreign currency forward
contracts to limit our exposure to foreign currency fluctuations. Although the use of foreign
currency forward contracts generally reduces the impact on our statement of operations from changes
in currency exchange rates, it does not entirely eliminate the impact of such changes. In the
future, we may also choose to increase our use of foreign currency forward contracts to limit
foreign currency exposures associated with our revenues and operating expenses denominated in
currencies other than the U.S. dollar.
Interest Rate Sensitivity
We had unrestricted cash and cash equivalents totaling $86.9 million and short-term
investments totaling $30.0 million at June 30, 2009. The cash and cash equivalents were invested
primarily in U.S. treasury bills, money market funds and high-quality commercial paper with
original maturities of less than 90 days. Our short-term investments were invested in U.S. treasury
bills and high-quality commercial paper with original maturities greater than 90 days. The
unrestricted cash and cash equivalents and short-term investments are held for general corporate
purposes. We do not enter into investments for trading or speculative purposes. Due to the
short-term nature of these investments, we believe that we do not have any material exposure to
changes in the fair value of our investment portfolio as a result of changes in interest rates.
Declines in interest rates, however, will reduce future investment income, if any.
We held AAA-rated municipal note investments with par values totaling $21.5 million and $16.5
million at March 31, 2009 and June 30, 2009, respectively, with an auction reset feature, or
auction rate securities, the underlying assets of which are generally student loans which are
substantially backed by the U.S. federal government. Auction rate securities are generally
long-term instruments that are intended to provide liquidity through a Dutch auction process that
resets the applicable interest rate at pre-determined calendar intervals, allowing holders of these
instruments to rollover their holdings and continue to own their respective securities or liquidate
their holdings by selling the auction rate securities at par. Beginning in February 2008, auctions
failed for our holdings because sell orders for these securities exceeded the amount of purchase
orders. The funds associated with these failed auctions will not be accessible until the issuer
calls the security, a successful auction occurs, a buyer is found outside the auction process, or
the security matures. During April 2009, $5.0 million in auction rate securities held by us at
March 31, 2009 were fully redeemed at their par value. Because there is no assurance we will be
able to liquidate our positions in the remaining $16.5 million of these securities within the next
12 months, we have classified this portion of our auction rate holdings as long-term investments on
our consolidated balance sheet. In addition, as there is currently no active market for these
remaining securities, we determined there to be a temporary impairment in the value of these
securities of $2.5 million and, accordingly, have recorded an unrealized loss on these securities,
which is included as a component of other comprehensive loss within stockholders’ equity on our
balance sheet at June 30, 2009. At June 30, 2009, we determined the impairment to be temporary,
because we believe these securities will ultimately be sold or redeemed at their par values, and at June 30,
2009, we believe that it is not more likely than not that we will be required to sell these
securities before this recovery in value, which could be the securities’ maturity dates. The
maturity dates of our auction rate holdings are between the years 2034 and 2042. Until the issuers
of our remaining auction rate securities are able to successfully close future auctions or if their
credit ratings deteriorate, we may in the future be required to record further impairment charges
on these investments, some or all of which we may determine at some point in the future to be
other-than-temporary, and our liquidity would be adversely affected to the extent that the cash we
would otherwise receive upon liquidation of the investments would not be available for use in the
growth of our business and other strategic opportunities.
ITEM 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Our management evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures pursuant to Rule
13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this
quarterly report on Form 10-Q. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives. In addition, the
design of disclosure controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating the benefits of
possible controls and procedures relative to their costs.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are designed at a reasonable assurance level and are
effective to provide reasonable assurance that information we are required to disclose in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within
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the time periods specified in SEC rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting
There has been no change in our internal controls over financial reporting during the three
months ended June 30, 2009, that has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Generally, we are involved in various legal proceedings arising from the normal course of
business activities. In accordance with SFAS No. 5, Accounting Contingencies, we make a provision
for liability when it is both probable that the liability has been incurred and the amount of the
loss can be reasonably estimated. We conduct quarterly reviews of any legal proceedings in which we
are involved to determine the impacts of negotiations, settlements, rulings, advice of legal
counsel, and other information and events pertaining to a particular case to assess whether any
provisions are required to reflect the impacts. We do not believe that ultimate disposition of
these matters will have a material adverse impact on our consolidated results of operations, cash
flows or financial position. However, litigation is inherently unpredictable, and depending on the
amount and timing, an unfavorable resolution of a matter could materially affect our future results
of operations, cash flows or financial position in a particular period. Also see risk factors “If a
third party asserts that we are infringing its intellectual property, whether successful or not, it
could subject us to costly and time-consuming litigation or expensive licenses, and our business
may be harmed” and “The success of our business depends in large part on our ability to protect and
enforce our intellectual property rights” in Part II. Item 1A of this quarterly report on Form
10-Q.
ITEM 1A. Risk Factors
Set forth below and elsewhere in this quarterly report on Form 10-Q, and in other documents we
file with the SEC, are descriptions of risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking statements contained in this
report. Because of the following factors, as well as other variables affecting our operating
results, past financial performance should not be considered a reliable indicator of future
performance and investors should not use historical trends to anticipate results or trends in
future periods. The risks and uncertainties described below are not the only ones facing us. Other
events that we do not currently anticipate or that we currently deem immaterial also may affect our
results of operations and financial condition.
Risks Related to Our Business
We have a history of significant net losses, may incur significant net losses in the future and
may not achieve or maintain profitability.
We have incurred significant losses in recent periods, including net losses of $7.7 million in
2006, $9.4 million in 2007, $44.8 million in 2008 and $13.1 million for the six months ended June
30, 2009, primarily as a result of significant investments that we have made in our network
infrastructure and sales and marketing organization, as well as stock-based compensation expense
associated with the issuance of stock awards and amortization of intangible assets acquired in our
acquisitions. At June 30, 2009, we had an accumulated deficit of $106.1 million. We may not be able
to achieve or maintain profitability and we may continue to incur significant losses in the future.
In addition, over time we expect to continue to increase operating expenses as we implement
initiatives to continue to grow our business, which include, among other things, plans for
continued international expansion, increasing our sales force, expansion of our infrastructure to
manage our growth and increased complexity of our business, investments to acquire and integrate
companies and technologies, the development of new services and general and administrative
expenses. If our revenues do not increase to offset these expected increases in costs and operating
expenses, we will not be profitable. You should not consider our revenue growth in recent periods
as indicative of our future performance. In fact, we expect our rate of revenue growth to decline
in future periods, and our revenues could also decline. Accordingly, we cannot assure you that we
will be able to achieve or maintain profitability in the future.
Our quarterly results of operations may fluctuate in the future. As a result, we may fail to meet
or exceed the expectations of securities analysts or investors, which could cause our stock price
to decline.
Our quarterly results of operations may fluctuate as a result of a variety of factors, many of
which are outside of our control. If our quarterly results of operations fall below the
expectations of securities analysts or investors, the price of our common stock could decline
substantially. Fluctuations in our quarterly results of operations may result from a number of
factors, including, but not limited to, those listed below:
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We believe our quarterly revenues and results of operations may vary significantly in the
future and that period-to-period comparisons of our operating results may not be meaningful. You
should not rely on the results of one quarter as an indication of future performance.
The ongoing economic downturn and continued uncertainty in the financial markets in the U.S. and
internationally may adversely affect our business and our financial results.
The ongoing economic downturn and continued uncertainty in the financial markets in the U.S.
and internationally may adversely affect our business and our financial results. If economies in
the U.S. and internationally remain unstable or weaken, or if businesses
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or consumers perceive that these economic conditions may continue or weaken, we may experience
declines in the sales or renewals of our online business optimization services, as customers delay
or defer buying or renewal decisions and as consumers curtail their level of online spending
activity. Moreover, these economic conditions and uncertain financial markets have caused companies
across many of the industries we serve, particularly in the financial services, automotive and
retail sectors, to experience downturns in their businesses, which may cause our customers in these
industries to reduce the level of services they purchase from us, to delay payments for our
services beyond the stated payment terms or even to go out of business. As a result, we cannot
predict what impact the ongoing economic downturn and continued uncertainty of the financial
markets will have on our business, but expect that such events may have an adverse effect on our
business and our financial results in the current quarter and future periods.
We have derived a majority of our subscription revenues from sales of our Omniture SiteCatalyst
service. If our Omniture SiteCatalyst service is not widely accepted by new customers, our
operating results will be harmed.
We derive a majority of our revenues from subscriptions to our Omniture SiteCatalyst service,
and we expect that we will continue to derive a majority of our revenues from our Omniture
SiteCatalyst service in the future. Omniture SiteCatalyst was responsible for 78%, 64% and 58% of
our total revenue during 2007, 2008 and for the six months ended June 30, 2009, including revenues
from Omniture SiteCatalyst HBX, respectively. In 2007, 2008 and the six months ended June 30, 2009,
22%, 36% and 42% of our revenue, respectively, was derived from products and services other than
our Omniture SiteCatalyst service. We expect that we will continue to be highly dependent on the
success of our Omniture SiteCatalyst service for the foreseeable future. If our Omniture
SiteCatalyst service is unable to remain competitive and provide value to our customers, our
ability to achieve widespread acceptance of our Omniture SiteCatalyst service may be hindered and
our revenue growth and business will be harmed. Further, if our Omniture SiteCatalyst service
experiences unanticipated pricing pressure, our revenues and margins may be adversely affected.
If we are unable to develop or acquire new services, or if the new services that we develop or
acquire do not achieve market acceptance, our revenue growth will be harmed.
Our ability to attract new customers and increase revenues from existing customers will depend
in large part on our ability to enhance and improve existing services and to introduce new or
acquired services in the future. The success of any enhancement or new service depends on several
factors, including the timely completion, introduction and market acceptance of the enhancement or
service. Any new service we develop or acquire may not be introduced in a timely or cost-effective
manner and may not achieve the broad market acceptance necessary to generate significant revenues.
For example, we have introduced Omniture Genesis, Omniture Survey and Omniture Recommendations, but
we have not yet received significant revenues from these services. We acquired Offermatica and
Visual Sciences and certain of the assets of Mercado in the last two years resulting in an
expansion of our product and service offerings; however, we may experience difficulties in
integrating those acquired products and services into our online marketing suite, and we may not be
successful in selling the acquired or integrated products and services into our customer base.
Additionally, our existing and prospective customers may develop their own competing technologies,
purchase competitive products or services or engage third-party providers. If we are unable to
successfully develop or acquire new services or enhance our existing services to meet customer
requirements, or if we are unsuccessful in increasing revenue from sales of our new or acquired
products and services, our revenue growth will decline and our business and operating results will
be adversely affected.
Our business depends substantially on customers renewing their subscriptions for our online
business optimization services. Any decline in our customer renewals would harm our future
operating results.
We sell our online business optimization services pursuant to service agreements that are
generally one to three years in length. Although many of our service agreements contain automatic
renewal terms, our customers have no obligation to renew their subscriptions for our services after
the expiration of their initial subscription period (and may provide timely notice of non-renewal)
and we cannot provide assurance that these subscriptions will be renewed at the same or higher
level of service, if at all. Some of our customers have elected not to renew their agreements with
us. Moreover, under some circumstances, some of our customers have the right to cancel their
service agreements prior to the expiration of the terms of their agreements. We cannot assure you
that we will be able to accurately predict future customer renewal rates. Our customers’ renewal
rates may decline or fluctuate as a result of a number of factors, including their satisfaction or
dissatisfaction with our services, the prices of our services, the prices of services offered by
our competitors, mergers and acquisitions affecting our customer base, reductions in our customers’
spending levels, or declines in consumer internet activity as a result of economic downturns or
uncertainty in financial markets. If our customers do not renew their subscriptions for our
services or if they renew on less favorable terms to us, our revenues may decline and our business
will suffer.
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If we are unable to attract new customers or to sell additional services to our existing
customers, our revenue growth will be adversely affected.
To increase our revenues, we must regularly add new customers, sell additional services to
existing customers and encourage existing customers to increase their minimum commitment levels. If
our existing and prospective customers do not perceive our services to be of sufficiently high
value and quality, we may not be able to attract new customers or increase sales to existing
customers and our operating results will be adversely affected. We have incurred significant
expenses and made investments in connection with the internal development and acquisition of new
products or services, such as Omniture Genesis, Omniture Test&Target, Omniture Discover, Omniture
Insight, Omniture Insight for Retail, Omniture Merchandising, Omniture SiteSearch, Omniture Survey
and Omniture Recommendations, that are integrated into our Omniture Online Marketing Suite. Many of
these products or services have only recently been commercially introduced by us and we may have
difficulty selling these products to new and existing customers and these products or services may
not achieve broad commercial acceptance. In that event, our operating results may be adversely
affected and we may be unable to grow our revenue or achieve or maintain profitability.
If we do not successfully integrate our recent acquisitions, or if we do not otherwise achieve
the expected benefits of the acquisitions, our growth rate may decline and our operating results
may be materially harmed.
Since 2007, we have acquired five businesses. If we fail to successfully integrate the
business and operations of these acquired companies and assets, we may not realize the potential
benefits of those acquisitions. The integration of these acquisitions, particularly the integration
of the Visual Sciences acquisition, will be a time-consuming and expensive process, has resulted in
the incurrence of significant ongoing expenses, including the addition of a number of personnel to
manage and oversee our integration efforts, and may disrupt our operations if it is not completed
in a timely and efficient manner. If our integration effort is not successful, our results of
operations could be harmed, employee morale could decline, key employees could leave, and customers
could cancel existing orders or choose not to place new ones. In addition, we may not achieve
anticipated synergies or other benefits of these acquisitions. We must operate as a combined
organization utilizing common information and communication systems, operating procedures,
financial controls and human resources practices. We may encounter difficulties, costs and delays
involved in integrating these operations, including the following:
If we do not meet the expectations of our existing customers or those of the acquired
companies, particularly those of Visual Sciences, Offermatica or Mercado, then these customers may
cease doing business with us altogether, which would harm our results of operations and financial
condition.
We intend to continue making acquisitions of, or investments in, other companies and
technologies, which could divert our management’s attention, result in additional dilution to our
stockholders and otherwise disrupt our operations and harm our operating results.
As part of our business strategy, we expect to continue to make acquisitions of, or
investments in, complementary services, technologies or businesses to address the need to develop
new products and enhance existing products. We also may enter into
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relationships with other businesses in order to expand our service offerings, which could
involve preferred or exclusive licenses, additional channels of distribution or discount pricing or
investments in other companies.
Negotiating these transactions can be time-consuming, difficult and expensive, and our ability
to close these transactions may often be subject to approvals, such as government regulation, which
are beyond our control. Consequently, we can make no assurances that these transactions, once
undertaken and announced, will close.
Acquisitions may also disrupt our ongoing business, divert our resources and require
significant management attention that would otherwise be available for ongoing development of our
business, as well as cause difficulties in completing projects associated with in-process research
and development. Acquisitions also involve risks associated with difficulties in entering markets
in which we have no or limited direct prior experience and where competitors in such markets have
stronger market positions. In addition, the revenue of an acquired business may be insufficient to
offset increased expenses associated with the acquisition. Acquisitions can also lead to large and
immediate charges that can have an adverse effect on our results of operations as a result of
write-offs for items such as impairment of in-process research and development, acquired intangible
assets, goodwill, the recording of stock-based compensation and transaction-related costs and
restructuring charges associated with these acquisitions. In addition, we may lack experience
operating in the geographic market of the businesses that we acquire. Further, international
acquisitions and acquisitions of companies with significant international operations, such as our
two European acquisitions and our acquisition of Visual Sciences, as well as our recent acquisition
of certain assets, some of which are located in Israel, from Mercado, increase our exposure to the
risks associated with international operations. Moreover, we cannot assure you that the anticipated
benefits of any future acquisition, investment or business relationship would be realized or that
we would not be exposed to unknown liabilities. In connection with one or more of those
transactions, we may:
The significant network equipment requirements of our business model make it more difficult to
achieve positive cash flow and profitability if we continue to grow rapidly.
Our business model involves our making significant upfront and ongoing capital expenditures
and incurring lease expense for network operations equipment, such as servers and other network
devices. Because the time frame for evaluating and implementing our services, particularly for
larger implementations, can be lengthy, taking up to 90 days or longer, and because we begin to
invoice our customers only after the service implementation is complete, generally we make these
expenditures well before we receive any cash from the customer. Consequently, it takes a number of
months or longer to achieve positive cash flow for a customer. As a result, rapid growth in
customers would require substantial amounts of cash. In addition, because of the lengthy
implementation periods for new customers, we experience a delay between the increase in our
operating expenses and the generation of corresponding revenues. We depreciate our capital
equipment over a period of approximately four years and incur lease expense associated with
equipment acquired under operating leases over the lease term, which is generally three years, with
depreciation and lease expense being included in our cost of subscription revenues beginning
immediately upon our receipt of the equipment. We recognize revenue, at the earliest,
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only when we complete implementation of our services and invoice the customer. Thus, it can
take us a number of months or longer to become profitable with respect to any given new customer.
Our growth depends upon our ability to add new and retain existing large customers; however, to
the extent we are successful in doing so, our gross margins and ability to achieve profitability
and positive cash flow may be impaired.
Our success depends on our ability to sell our online business optimization services to large
customers and on those customers continuing to renew their subscriptions with us in successive
years. We derive a significant percentage of our total revenues from a relatively small number of
large customers, and the loss of any one or more of those customers could decrease our revenues and
harm our current and future operating results. However, the addition of new large customers or
increases in minimum commitment levels by large existing customers requires particularly large
capital expenditures and long implementation periods, resulting in longer than usual time periods
to profitability and positive cash flow with respect to these customers. In addition, we generally
sell our services to our large customers at a price per transaction lower than we do for other
customers due to their larger transaction commitments. Finally, some of our customers have in the
past required us to allocate dedicated personnel to provide our services as a condition to entering
into service agreements with us. As a result, new large customers or increased usage of our
services by large customers may cause our gross margins to decline and negatively impact our
profitability and cash flows in the near term.
Because we recognize subscription revenue over the term of the applicable agreement, the lack of
subscription renewals or new service agreements may not immediately be reflected in our operating
results.
The majority of our quarterly revenues represents revenues attributable to service agreements
entered into during previous quarters. As a result, a decline in new or renewed service agreements
in any one quarter will not be fully reflected in our revenues for the corresponding quarter but
will negatively affect our revenues in future quarters. Additionally, the effect of significant
downturns in sales and market acceptance of our services in a particular quarter may not be fully
reflected in our results of operations until future periods. Our business model would also make it
difficult for any rapid increase in new or renewed service agreements to increase our revenues in
any one period because revenues from new customers must be recognized over the applicable service
agreement term.
We have limited experience with respect to our pricing model and if the prices we charge for our
services are unacceptable to our customers, our revenues and operating results may experience
volatility or be harmed.
We have limited experience with respect to determining the appropriate prices for our services
that our existing and potential customers will find acceptable. As the market for our services
matures, or as new competitors introduce new products or services that compete with ours, we may be
unable to renew our agreements with existing customers or attract new customers at the same price
or based on the same pricing model as we have used historically. For example, we face competition
from businesses that offer their services at substantially lower prices than our services or for
free. In addition, we have only recently commercially introduced certain of our services and other
services that we offer have only recently been acquired or integrated into our online marketing
suite. The price at which our customers may be willing to purchase our recently introduced or
acquired services may be lower or different than we expect, which may cause our revenue or
operating results to be adversely affected. As a result, in the future it is possible that
competitive dynamics in our market may require us to change our pricing model or reduce our prices,
which could have a material adverse effect on our revenues, gross margin and operating results.
The market for on-demand services, in general, and for online business optimization services, in
particular, is at an early stage of development, and if it does not develop or develops more
slowly than we expect, our business will be harmed.
The market for on-demand services, in general, and for online business optimization services,
in particular, is at an early stage of development, and it is uncertain whether these services will
achieve and sustain high levels of demand and market acceptance. Our success will depend to a
substantial extent on the willingness of companies to increase their use of on-demand services, in
general, and for online business optimization services, in particular. Many companies have invested
substantial personnel and financial resources to integrate traditional enterprise software into
their businesses, and therefore may be reluctant or unwilling to migrate to on-demand services.
Other factors that may affect market acceptance include:
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The market for these services may not develop further, or it may develop more slowly than we
expect, either of which would harm our business.
We operate in a highly competitive market, which could make it difficult for us to acquire and
retain customers.
We compete in a rapidly evolving and highly competitive market. A significant portion of our
business competes with third-party, on-demand services, software vendors and online marketing
service providers, as well as multivariate testing providers, intra-site search vendors,
merchandising solutions providers, channel analytics providers, product recommendations providers
and survey providers.
Our current principal competitors include:
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Many of the companies that offer Web analytics software offer other products or services and
as a result could also bundle their products or services, which may result in these companies
effectively selling their products or services at or below market prices.
Some of our current and potential competitors have longer operating histories, greater name
recognition, access to larger customer bases and substantially greater resources, including sales
and marketing, financial and other resources. As a result, these competitors may be able to:
In addition, large software, Internet and database management companies may enter the market
or enhance their Web analytics capabilities, either by developing competing services or by
acquiring existing competitors or strategic partners of ours, and compete against us effectively as
a result of their significant resources and preexisting relationships with our current and
potential customers. For example, Google offers a Web analytics service free of charge, and
acquired DoubleClick, one of our strategic partners, in March 2008. Also, Microsoft offers a Web
analytics service free of charge, and it acquired aQuantive in August 2007. Further, Yahoo! also
offers a Web analytics service based on its 2008 acquisition of IndexTools.
If our services achieve broader commercial acceptance and as we introduce additional services,
we expect that we will experience competition from additional companies.
If we are not able to compete successfully against our current and future competitors, it will
be difficult to acquire and retain customers, and we may experience limited revenue growth, reduced
revenues and operating margins and loss of market share.
We rely on third-party service providers to host and deliver our services, and any interruptions
or delays in services from these third parties could impair the delivery of our services and harm
our business.
We primarily host our services, and serve our customers from 22 third-party data center
facilities located in the United States, Europe and Australia. We do not control the operation of
any of these facilities, and depending on service level requirements, we may not operate or
maintain redundant data center facilities for all of our services or for all of our customers’
data, which increases our vulnerability. These facilities are vulnerable to damage or interruption
from earthquakes, hurricanes, floods, fires, power loss, telecommunications failures and similar
events. They are also subject to break-ins, computer viruses, sabotage, intentional acts of
vandalism and other misconduct. The occurrence of a natural disaster or an act of terrorism, a
decision to close the facilities without adequate notice or other unanticipated problems could
result in lengthy interruptions in our services. Additionally, our data center facility agreements
are of limited durations, and our data facilities have no obligation to renew their agreements with
us on commercially reasonable terms, or at all. Some of our data center facility agreements require
that we pay for a variable component of power costs and provides for discretionary increases, up to
a maximum amount, to the price we pay for use of the facility, thereby potentially subjecting us to
variations in the cost of power and hosting fees. In addition, data centers suitable for the
hosting of our services have become limited in supply and availability and, in the future, it may
be difficult to obtain additional data center capacity and related hardware to accommodate our
growth or we may be required to incur significant expenditures to acquire or develop capacity that
meets our future needs. If we are unable to renew our agreements with the facilities on
commercially reasonable terms, we may experience delays in the provisioning of our services until
an agreement with another data center facility can be arranged or may be required to incur
significant expenditures, either of which scenario would adversely impact our financial condition
or operating results.
We depend on access to the Internet through third-party bandwidth providers to operate our
business. If we lose the services of one or more of our bandwidth providers for any reason, we
could experience disruption in our services or we could be required to retain the services of a
replacement bandwidth provider.
Our operations rely heavily on the availability of electricity, which also comes from
third-party providers. If we or the third-party data center facilities that we use to deliver our
services were to experience a major power outage or if the cost of electricity increases
significantly, our operations would be harmed. If we or our third-party data centers were to
experience a major power outage, we
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would have to rely on back-up generators, which may not work properly, and their supply might
be inadequate during a major power outage. Such a power outage could result in a disruption of our
business.
Any errors, defects, interruptions, delays, disruptions or other performance problems with our
services could harm our reputation and may damage our customers’ businesses. Interruptions in our
services might reduce our revenues, cause us to issue credits to customers, cause customers to
terminate their subscriptions and adversely affect our renewal rates. Our business would be harmed
if our customers and potential customers believe our services are unreliable.
If we fail to respond to rapidly changing technological developments or evolving industry
standards, our services may become obsolete or less competitive.
The market for our services is characterized by rapid technological advances, changes in
customer requirements, changes in protocols and evolving industry standards. If we are unable to
develop enhancements to, and new features for, our existing services or acceptable new services
that keep pace with rapid technological developments, our services may become obsolete, less
marketable and less competitive and our business will be harmed.
We have experienced rapid growth in recent periods organically and through acquisitions. If we
fail to manage our growth effectively, we may be unable to execute our business plan, maintain
high levels of service or address competitive challenges adequately.
We have substantially expanded our overall business, customer base, headcount and operations
in recent periods both domestically and internationally. Our total number of full-time employees
increased from 353 at December 31, 2006 to 1,208 at June 30, 2009. In addition, during this same
period, we made substantial investments in our network infrastructure operations, research and
development and sales and marketing as a result of our growth, and have significantly expanded our
geographic presence with the acquisition of two European companies and two companies based in the
United States, one of which in particular had significant international reach in its operations, as
well as certain of the assets of an additional business, many of which were located in Israel. We
will need to continue to expand our business. We anticipate that this expansion will require
substantial management effort and significant additional investment in our infrastructure. In
addition, we will be required to continue to improve our operational, financial and management
controls and our reporting procedures, particularly in view of the complexities associated with
more geographically dispersed operations. As such, we may be unable to manage our expenses
effectively in the future, which may negatively impact our gross margins or cause our operating
expenses to increase in any particular quarter. Our historic expansion has resulted in increased
responsibilities and has placed, and our expected future growth will continue to place, a
significant strain on our managerial, administrative, operational, financial and other resources
and will result in new and increased responsibilities for management personnel. There can be no
assurance that our management, personnel, systems, procedures, and controls are, or will be,
adequate to support our existing and future operations or that we will continue to grow. If we fail
to recruit and retain sufficient and qualified managerial, operational, or financial personnel or
to implement or maintain internal systems that enable us to effectively manage our growing business
and operations worldwide, our financial results in any given period may be adversely affected and
our business and financial condition could be materially harmed. If we are unable to otherwise
manage our growth successfully, we may experience unanticipated business problems or service delays
or interruptions, which may damage our reputation or adversely affect the operating results of our
business.
Failure to cost-effectively utilize and expand our sales and marketing capabilities could harm
our ability to increase our customer base and achieve broader market acceptance of our services.
Increasing our customer base and profitably achieving broader market acceptance of our
services will depend to a significant extent on our ability to cost-effectively improve the
effectiveness of and expand our sales and marketing operations and our ability to effectively
consolidate our sales channels to achieve efficiencies. We expect to be substantially dependent on
our direct sales force to obtain new customers. We have recently significantly expanded the size of
our direct sales force and plan in the near future to consolidate our sales channels to increase
efficiency and in the long term to continue to incrementally expand our direct sales force both
domestically and internationally over time. We believe that there is significant competition for
direct sales personnel with the sales skills and technical knowledge that we require. Our ability
to achieve significant growth in revenues in the future will depend, in large part, on our
effectively utilizing our existing direct sales force and our success in recruiting, training and
retaining sufficient numbers of direct sales personnel over time. Moreover, new hires require
significant training and, in most cases, take a significant period of time before they achieve full
productivity. Our recent hires, sales personnel added through our recent business acquisitions and
future planned hires may not become as productive as we would like, and we may be unable to hire or
retain sufficient numbers of
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qualified individuals in the future in the markets where we do business. Our business will be
seriously harmed if these expansion efforts do not generate a corresponding significant increase in
revenues and we are unable to achieve the efficiencies we anticipate.
Our growth depends in part on the success of our strategic relationships with third parties,
including technology integration, channel partners and resellers of our services.
We may not be able to develop or maintain strategic relationships with third parties with
respect to either technology integration or channel development for a number of reasons, including
because of relationships with our competitors or prospective competitors. For example, we launched
Omniture Genesis as part of our strategy to broaden our online marketing suite. Further, we
recently established a strategic partner relationship with WPP, one of the world’s largest
communications services companies, and we also expect to enter into similar relationships with
other companies. If we are unsuccessful in establishing or maintaining our strategic relationships
with these and other third parties, our ability to compete in the marketplace or to grow our
revenues would be impaired and our operating results would suffer. Further, if search engine or
other online marketing providers restrict access to their networks or increase the prices they
charge for the use of their application programming interfaces, our ability to deliver services of
sufficiently high value to our customers at a profitable price will be negatively affected. Even if
we are successful in establishing and maintaining these relationships, we cannot assure you that
these will result in increased customers or revenues.
Because our long-term success depends, in part, on our ability to expand the sales of our
services to customers located outside of the United States, our business will be susceptible to
risks associated with international operations.
We currently maintain offices outside of the United States and currently have operations,
sales personnel or independent consultants in several countries. Since 2007, we have acquired five
businesses, two of which are based in Europe, one which has significant international reach in its
operations and one which has assets and operations in Israel. These acquisitions significantly
increased the scope and complexity of our international operations. We have limited experience
operating in foreign jurisdictions at such scale. Our inexperience in operating our business
outside of the United States increases the risk that our current and any future international
expansion efforts will not be successful. In addition, conducting international operations subjects
us to new risks that we have not generally faced in the United States. These include:
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The occurrence of any one of these risks could negatively affect our international business
and, consequently, our results of operations generally.
Additionally, operating in international markets also requires significant management
attention and financial resources. We cannot be certain that the investment and additional
resources required in establishing, acquiring or integrating operations in other countries will
produce desired levels of revenues or profitability.
As we expand our international operations, we will be required to recruit and retain
experienced management, sales and technical personnel in our international offices, and we expect
that the identification, recruitment, training and retention of such personnel will require
significant management time and effort and resources. Competition for employees with the skills
required, particularly management, engineering and other technical personnel, is intense, and there
can be no assurance that we will be able to attract and retain highly skilled employees in
sufficient numbers to sustain our current business or to support future growth. We may need to pay
recruiting or agency fees and offer additional compensation or incentives to attract and retain
these and other employees, resulting in an increase to our operating expenses.
Because we conduct business internationally in several countries, our results of operations
and cash flows are subject to fluctuations due to changes in currency exchange rates, primarily
related to the Australian dollar, British pound, Canadian dollar, Danish krone, European Union
euro, Japanese yen and Swedish krona.
Our exposure to foreign exchange rate fluctuations arise in part from: (1) translation of the
financial results of foreign subsidiaries into U.S. dollars in consolidation; (2) the
re-measurement of non-functional currency assets, liabilities and intercompany balances into U.S.
dollars for financial reporting purposes; and (3) non-U.S. dollar denominated sales to foreign
customers. The primary effect on our results of operations from a strengthening U.S. dollar is a
decrease in revenue, partially offset by a decrease in expenses. Conversely, the primary effect of
foreign currency transactions on our results of operations from a weakening U.S. dollar is an
increase in revenues, partially offset by an increase in expenses. As a result, fluctuations in the
value of the United States dollar and foreign currencies may make our services more expensive for
international customers or increase the cost of our international operations, which could harm our
business.
We may be liable to our customers and may lose customers if we provide poor service, if our
services do not comply with our agreements or if we are unable to collect customer data or
otherwise lose customer data.
Because of the large amount of data that we collect and manage on behalf of our customers, it
is possible that hardware failures or errors in our systems could result in data loss or corruption
or cause the information that we collect to be incomplete or contain inaccuracies that our
customers regard as significant. Furthermore, our ability to collect and report data may be delayed
or interrupted by a number of factors, including access to the Internet, the failure of our network
or software systems, security breaches or significant variability in visitor traffic on customer
Web sites. In addition, computer viruses may harm our systems causing us to lose data, and the
transmission of computer viruses could expose us to litigation. We may also find, on occasion, that
we cannot deliver data and reports to our customers in near real time because of a number of
factors, including significant spikes in consumer activity on their Web sites or failures of our
network or software. We may be liable to our customers for damages they may incur resulting from
these events, such as loss of business, loss of future revenues, breach of contract or for the loss
of goodwill to their business. In addition to potential liability, if we supply inaccurate
information or experience interruptions in our ability to capture, store and supply information in
near real time or at all, our reputation could be harmed and we could lose customers.
Our errors and omissions insurance may be inadequate or may not be available in the future on
acceptable terms, or at all. In addition, our policy may not cover any claim against us for loss of
data or other indirect or consequential damages and defending a suit, regardless of its merit,
could be costly and divert management’s attention.
A rapid expansion of our network and systems could cause us to lose customer data or cause our
network or systems to fail.
In the future, we may need to expand our network and systems at a more rapid pace than we have
in the past. For example, if we secure a large customer or a group of customers with extraordinary
volumes of information to collect and process, we may suddenly require additional bandwidth and our
existing systems may not be able to process the information. Our network or systems may not be
capable of meeting the demand for increased capacity, or we may incur additional unanticipated
expenses to accommodate these capacity demands. In addition, we may lose valuable data, be able to
provide it only on a delayed basis, or our network may temporarily shut down if we fail to expand
our network to meet future requirements. Many of these risks are exacerbated as a result of our
recent acquisitions, which have and will continue to require us to integrate network operations
involving different operational procedures, security applications and hardware configurations. Any
lapse in our ability to collect or transmit data will decrease the value of the data, prevent us
from providing the complete data that may be requested by our customers and may affect some of our
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customers’ Web pages. Any disruption in our network processing or loss of data may damage our
reputation and result in the loss of customers.
A security incident could subject us to liability and may result in loss of customers.
Because we hold large amounts of customer data and host such data in third-party facilities, a
security incident may compromise the integrity or availability of customer data, or customer data
may be exposed to unauthorized access. Security incidents may result from failure to follow
security policies or procedures; inadequate security policies, procedures or controls; failure of
physical security controls by us or a third-party provider; security vulnerability in our code,
operating systems, firmware or protocols; administrator error(s) that expose(s) data or allow(s)
for successful exploitation of an otherwise unavailable vulnerability; malicious intent by an
employee or a third party with access to our systems; or vulnerabilities where the risk was
accepted by management.
Depending upon the nature of the security incident, the scope and duration of the exposure of
customer data may vary. This can depend upon many factors, including the attack vector,
vulnerability exploited, our ability to detect the incident, and the ability of the attacker.
Incidents may be isolated to a single customer, multiple customers at the same site or within a
product, or all customers.
Because our services include content that is served on behalf of customers, code that delivers
content that is malicious or destructive in nature, or that is not in agreement with our customer
contracts, is possible. It is also possible that our services could be misused to launch an attack
against others, either by exploiting a flaw in our system, or by using our systems to directly
attack others.
It is possible that unauthorized access to customer data may be obtained through inadequate
use of security controls by customers. While strong password controls, IP restriction and account
controls are provided and supported, their use is controlled by the customer. For example, this could allow
accounts to be created with weak passwords, which could result in allowing an attacker
to gain access to customer data. Additionally, failure by customers to remove accounts of their own
employees, or granting of accounts by the customer in an uncontrolled manner, may allow for access
by former or unauthorized customer employees.
We may be liable to our customers for damages they may incur resulting from these events, such
as loss of business, loss of future revenues, breach of contract or for the loss of goodwill to
their business. In addition to potential liability, if we expose customer data to unauthorized
access or otherwise experience a security incident, our reputation could be harmed and we could
lose customers.
Our errors and omissions insurance may be inadequate or may not be available in the future on
acceptable terms, or at all. In addition, our policy may not cover any claim against us for
exposure of customer data or other indirect or consequential damages and defending a suit,
regardless of its merit, could be costly and divert management’s attention.
If a third party asserts that we are infringing its intellectual property, whether successful or
not, it could subject us to costly and time-consuming litigation or expensive licenses, and our
business may be harmed.
The Internet, software and technology industries are characterized by the existence of a large
number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on
allegations of infringement or other violations of intellectual property rights. As we face
increasing competition, the possibility of intellectual property rights claims against us grows.
Our technologies may not be able to withstand any third-party claims or rights against their use.
Additionally, although we have numerous patents within our own portfolio and have licensed from
other parties proprietary technology covered by patents, we cannot be certain that any such patents
will not be challenged, invalidated or circumvented. Many of our service agreements require us to
indemnify our customers for third-party intellectual property infringements claims, which would
increase our costs as a result of defending such claims and may require that we pay damages if
there were an adverse ruling in any such claims. We, and certain of our customers, have in the past
received correspondence from third parties alleging that certain of our services, or customers’ use
of our services, violate such third parties’ patent rights. For example, we are aware that several
of our customers have received letters from third parties alleging, among other things, that these
customers’ online activities, including the use of our services, infringe its patents. Some of
these customers have requested that we indemnify them against these allegations. Other customers
may receive similar allegations of infringement and make similar requests for indemnification under
our service agreement with them or third parties may make claims directly against us. These types
of correspondence and future claims could harm our relationships with our customers and might deter
future customers from subscribing to our services or could expose us to litigation with respect to
these claims. Even if we are not a party to any litigation between a customer and a third party, an
adverse outcome in any such litigation could make it more difficult for us to defend our
intellectual property in any subsequent litigation in which we are a named party. Any of these
results could harm our brand and operating results.
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Any intellectual property rights claim against us or our customers, with or without merit,
could be time consuming, expensive to litigate or settle and could divert management resources and
attention. An adverse determination also could prevent us from offering our services to our
customers and may require that we procure or develop substitute services that do not infringe.
With respect to any intellectual property rights claim against us or our customers, we may
have to pay damages or stop using technology found to be in violation of a third party’s rights. We
may have to seek a license for the technology, which may not be available on reasonable terms, may
significantly increase our operating expenses or require us to restrict our business activities in
one or more respects. The technology also may not be available for license at all. As a result, we
may also be required to develop alternative non-infringing technology, which could require
significant effort and expense. For example, in February 2006, we entered into a settlement and
patent cross-license agreement with NetRatings, to resolve a patent infringement lawsuit that
NetRatings filed against us in May 2005 and to obtain a non-exclusive, worldwide license to
NetRatings’ entire patent portfolio. Under the terms of the agreement, we agreed to pay license
fees to NetRatings. Additionally, Visual Sciences, Inc. (formerly known as WebSideStory, Inc.) and
Visual Sciences, LLC (now known as Visual Sciences Technologies, LLC) also entered into settlement
and license agreements with NetRatings, pursuant to which they agreed to pay license fees to
NetRatings in exchange for non-exclusive, worldwide licenses to NetRatings’ patents.
Our exposure to risks associated with the use of intellectual property may be increased as a
result of acquisitions, as we have a lower level of visibility into the development process with
respect to such technology or the care taken to safeguard against infringement risks. In addition,
third parties may make infringement and similar or related claims after we have acquired technology
that had not been asserted prior to our acquisition.
The success of our business depends in large part on our ability to protect and enforce our
intellectual property rights.
We rely on a combination of patent, copyright, service mark, trademark and trade secret laws,
as well as confidentiality procedures and contractual restrictions, to establish and protect our
proprietary rights, all of which provide only limited protection. We have 32 issued patents in the
United States, 3 issued patents in Australia, 1 issued patent in China, and 1 issued patent in the
United Kingdom. In addition, we currently have 63 United States and 94 related international patent
applications pending. We cannot assure that any patents will issue with respect to our current
patent applications in a manner that gives us the protection that we seek, if at all, or that any
future patents issued to us will not be challenged, invalidated or circumvented. Our currently
issued patents and any patents that may issue in the future with respect to pending or future
patent applications may not provide sufficiently broad protection or they may not prove to be
enforceable in actions against alleged infringers. Also, we cannot assure that any future service
mark registrations will be issued with respect to pending or future applications or that any
registered service marks will be enforceable or provide adequate protection of our proprietary
rights.
We endeavor to enter into agreements with our employees and contractors and agreements with
parties with whom we do business in order to limit access to and disclosure of our proprietary
information. We cannot be certain that the steps we have taken will prevent unauthorized use of our
technology or the reverse engineering of our technology. Moreover, others may independently develop
technologies that are competitive to ours or infringe our intellectual property. The enforcement of
our intellectual property rights also depends on our legal actions against these infringers being
successful, but we cannot be sure these actions will be successful, even when our rights have been
infringed.
Furthermore, effective patent, trademark, service mark, copyright and trade secret protection
may not be available in every country in which our services are available over the Internet. In
addition, the legal standards relating to the validity, enforceability and scope of protection of
intellectual property rights in Internet-related industries are uncertain and still evolving.
We rely on our management team and need additional personnel to grow our business, and the loss
of one or more of our key employees or the inability to attract and retain qualified personnel
could harm our business.
Our success and future growth depends to a significant degree on the skills and continued
services of our management team. Our future success also depends on our ability to attract and
retain and motivate highly skilled technical, managerial, marketing and customer service personnel,
including members of our management team. Our employees work for us on an at-will basis, however,
the laws of some of the international jurisdictions where we have employees may require us to make
statutory severance payments in the event of termination of employment. Over time, we generally
plan to hire additional personnel in all areas of our business, particularly for our sales,
marketing and technology development areas, both domestically and internationally. Competition for
these types of personnel is intense, particularly in the Internet and software industries. As a
result, we may be unable to successfully attract or retain qualified personnel. Our inability to
retain and attract the necessary personnel could adversely affect our business.
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Material defects or errors in our software we use to deliver our services could harm our
reputation, result in significant costs to us and impair our ability to sell our services.
The software applications underlying our services are inherently complex and may contain
material defects or errors. Any defects that cause delays or interruptions to the availability of
our services could result in:
The costs incurred in correcting any material defects or errors in our services may be
substantial and could adversely affect our operating results. After the release of our services,
defects or errors may also be identified from time to time by our internal team and by our
customers. These defects or errors may occur in the future.
Changes in financial accounting standards or practices may cause adverse, unexpected financial
reporting fluctuations and affect our reported results of operations.
A change in accounting standards or practices can have a significant effect on our reported
results and may even affect our reporting of transactions completed before the change is effective.
New accounting pronouncements and varying interpretations of accounting pronouncements have
occurred and are likely to occur in the future. Changes to existing rules or the questioning of
current practices may adversely affect our reported financial results or the way we conduct our
business. For example, on December 16, 2004, FASB issued SFAS No. 123R. SFAS No. 123R, which we
adopted on January 1, 2006, requires that employee stock-based compensation be measured based on
its fair value on the grant date and treated as an expense that is reflected in the financial
statements over the related service period. As a result of SFAS No. 123R, our results of operations
in 2006, 2007, 2008 and 2009 reflect expenses that are not reflected in prior periods, potentially
making it more difficult for investors to evaluate our 2006, 2007, 2008 and 2009 results of
operations relative to prior periods.
We might require additional capital to support business growth, which might not be available on
acceptable terms, or at all.
We intend to continue to make investments to support our business growth and may require
additional funds to respond to business challenges, including the need to develop new services or
enhance our existing services, enhance our operating infrastructure and acquire complementary
businesses and technologies. Accordingly, we may need to engage in equity or debt financings to
secure additional funds. If we raise additional funds through further issuances of equity or
convertible debt securities, our existing stockholders could suffer significant dilution, and any
new equity securities we issue could have rights, preferences and privileges superior to those of
holders of our common stock. Our credit agreement contains restrictive covenants relating to our
capital raising activities and other financial and operational matters, including restrictions on
the amount of capital expenditures in any one year, which may make it more difficult for us to
obtain additional capital and to pursue business opportunities, including potential acquisitions.
In addition, we may not be able to obtain additional financing on terms favorable to us, if at all,
particularly in view of the uncertainty in the U.S. and global financial markets and corresponding
liquidity crisis, which may cause us to be unable to access capital from the capital markets. If we
are unable to obtain adequate financing or financing on terms satisfactory to us, when we require
it, our ability to continue to support our business growth and to respond to business challenges
could be significantly limited.
If we fail to maintain proper and effective internal controls, our ability to produce accurate
financial statements could be impaired, which could adversely affect our operating results, our
ability to operate our business and investors’ views of us.
Under Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, on an on-going basis both we
and our external auditors are required to assess the effectiveness of our internal control over
financial reporting. The requirements of SOX 404 first became
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applicable to us on December 31, 2007. Our efforts to comply with SOX 404 have resulted in,
and are likely to continue to result in, increased general and administrative expenses and the
commitment of significant financial and personnel resources.
Although we believe that our efforts will enable us to remain compliant under SOX 404, we can
give no assurance that in the future such efforts will be successful. Our business is complex and
involves significant judgments and estimates as described in “Part 1. Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting
Policies.” Any failure to adequately maintain effective internal control over our financial
reporting, or consequently our inability to produce accurate financial statements on a timely
basis, could increase our operating costs and could materially impair our ability to operate our
business. In addition, investors’ perceptions that our internal controls are inadequate or that we
are unable to produce accurate financial statements may seriously affect our stock price.
Our investments in auction rate securities are subject to risks which may adversely affect our
liquidity and cause losses.
At June 30, 2009, we held AAA-rated municipal note investments with par values totaling $16.5
million with an auction reset feature, or auction rate securities, the underlying assets of which
are generally student loans which are substantially backed by the U.S. federal government. Auction
rate securities are generally long-term instruments that are intended to provide liquidity through
a Dutch auction process that resets the applicable interest rate at pre-determined calendar
intervals, allowing holders of these instruments to rollover their holdings and continue to own
their respective securities or liquidate their holdings by selling the auction rate securities at
par. Beginning in February 2008, auctions failed for our holdings because sell orders for these
securities exceeded the amount of purchase orders. The funds associated with these failed auctions
will not be accessible until the issuer calls the security, a successful auction occurs, a buyer is
found outside the auction process, or the security matures. During April 2009, $5.0 million in
auction rate securities held by us at March 31, 2009, were fully redeemed at their par value.
Because there is no assurance we will be able to liquidate our positions in the remaining $16.5
million of these securities within the next 12 months, we have classified this portion of our
auction rate holdings as long-term investments on our consolidated balance sheet. In addition, as
there is currently no active market for these remaining securities, we determined there to be a
temporary impairment in the value of these securities of $2.5 million and, accordingly, have
recorded an unrealized loss on these securities, which is included as a component of other
comprehensive loss within stockholders’ equity on our balance sheet at June 30, 2009. At June 30,
2009, we determined the impairment to be temporary, because we believe these securities will
ultimately be sold or redeemed at their par values, and at June 30, 2009, we believe that it is not more likely
than not that we will be required to sell these securities before this recovery in value, which
could be the securities’ maturity dates. The maturity dates of our auction rate holdings are
between the years 2034 and 2042. Until the issuers of our remaining auction rate securities are
able to successfully close future auctions or if their credit ratings deteriorate, we may in the
future be required to record further impairment charges on these investments, some or all of which
we may determine at some point in the future to be other-than-temporary, and our liquidity would be
adversely affected to the extent that the cash we would otherwise receive upon liquidation of the
investments would not be available for use in the growth of our business and other strategic
opportunities.
Our net operating loss carryforwards may expire unutilized, which could prevent us from
offsetting future taxable income.
During 2008, we utilized $23.4 million in net operating loss carryforwards to reduce our
provision for income taxes for the year. We may utilize additional net operating loss carryforwards
to reduce our 2009 provision for income taxes. At December 31, 2008, we had approximately $102.9
million in net operating loss carryforwards for federal income tax purposes, which will begin to
expire in 2020, and approximately $2.5 million in federal tax credit carryforwards, which will
begin to expire in 2020. These carryforwards will be subject to annual limitations that result in
their expiration before some portion of them has been fully utilized. For fiscal years beginning on
or after January 1, 2008, through years ending on December 31, 2009, the state of California
suspended the utilization of net operating loss carryforwards by taxpayers to reduce their state
income taxes. Changes in ownership have occurred that have resulted in limitations in our net
operating loss carryforwards under Section 382 of the Internal Revenue Code. As a result of these
Section 382 limitations, we can only utilize a portion of the net operating loss carryforwards that
were generated prior to the ownership changes to offset future taxable income generated in U.S.
federal and state jurisdictions. At December 31, 2008, we also had approximately $25.0 million in
net operating loss carryforwards in the United Kingdom, part or all of which may not be available
to reduce our future taxable income in the United Kingdom should there be a change in the nature or
conduct of our business in the United Kingdom within the three years subsequent to the date of our
acquisition of Touch Clarity. In addition, the timing of when we achieve profitability, if ever,
and the dollar amount of such profitability will impact our ability to utilize these net operating
loss carryforwards. We may not be able to achieve sufficient profitability to utilize some or all
of our net operating loss carryforwards prior to their expiration.
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If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork
and focus that we believe our culture fosters, and our business may be harmed.
We believe that a critical contributor to our success has been our corporate culture, which we
believe fosters innovation and teamwork. As we grow and change, including the changes resulting
from the integration of the employees and businesses acquired in connection with our previous
acquisitions and that may join us in connection with future acquisitions, we may find it difficult
to maintain important aspects of our corporate culture, which could negatively affect our ability
to retain and recruit personnel, and otherwise adversely affect our future success.
Risks Related to Our Industry
Widespread blocking or erasing of cookies or other limitations on our ability to use cookies or
other technologies that we employ may impede our ability to collect information and reduce the
value of our services.
Our services currently use “cookies,” which are small files of information placed on a Web
site visitor’s computer in connection with that visitor’s browsing activity on one of our
customer’s Web site(s), and “clear GIFs” (also known as pixel tags or Web beacons), which are small
images placed on a Web page to facilitate the collection of visitor browsing data on such
customer’s Web site(s). These technologies help us to aggregate and analyze the Web site usage
patterns of visitors to our customers’ Web sites. The use of third-party cookies may be construed
as obscure in the eyes of the public or governmental agencies, including non-U.S. regulators. We
encourage our customers to send our cookies from their own Web sites and, when they are unwilling
to do so, we mark all newly implemented third-party cookies with their dual origin to indicate that
they are both from our customer’s Web site and from us. However, we cannot assure you that these
measures will succeed in reducing any risks relating to the use of third-party cookies.
Most currently available Web browsers allow site visitors to modify their settings to prevent
or delete cookies. Additionally, widely available software allows site visitors to sweep all
cookies from their computers at once. Similarly, several software programs, sometimes marketed as
ad-ware or spyware detectors, may misclassify the cookies our customers are using as objectionable
and prompt site visitors to delete or block them. Several of these same software programs may
target the use of clear GIFs. If a large number of site visitors refuse, disable or delete their
cookies or clear GIFs or if we are otherwise unable to use cookies or clear GIFs, and if
alternative methods or technologies are not developed in a timely manner, the quality of the data
we collect for our customers and the value of our services based on that data may be substantially
diminished.
We interact with consumers through our customers, so we may be held accountable for our
customers’ handling of the consumers’ personal information.
On behalf of our customers, we collect and use anonymous and personal information and
information derived from the activities of Web site visitors. This enables us to provide our
customers with reports on aggregated anonymous or personal information from and about the visitors
to their Web sites in the manner specifically directed by such customers. Federal, state and
foreign government bodies and agencies have adopted or are considering adopting laws regarding the
collection, use and disclosure of this information. Therefore our compliance with privacy laws and
regulations and our reputation among the public body of Web site visitors depend on our customers’
adherence to privacy laws and regulations and their use of our services in ways consistent with
consumers’ expectations.
We also rely on representations made to us by our customers that their own use of our services
and the information we provide to them via our services do not violate any applicable privacy laws,
rules and regulations or their own privacy policies. Our customers also represent to us that they
provide their Web site visitors the opportunity to “opt-out” of the information collection
associated with our services. We do not regularly and formally audit our customers to confirm
compliance with these representations. If these representations are false or if our customers do
not otherwise comply with applicable privacy laws, we could face potentially adverse publicity and
possible legal or other regulatory action.
Domestic or foreign laws or regulations may limit our ability to collect and use Web site visitor
information, resulting in a decrease in the value of our services and having an adverse impact on
the sales of our services.
State attorneys general, governmental and non-governmental entities and private persons may
bring legal actions asserting that our methods of collecting, using and distributing Web site
visitor information are illegal or improper, which could require us to spend significant time and
resources defending these claims. The costs of compliance with, and the other burdens imposed by,
laws or regulatory actions may prevent us from offering services or otherwise limit the growth of
our services. In addition, some companies
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have been the subject of class-action lawsuits and governmental investigations based on their
collection, use and distribution of Web site visitor information. Any such legal action, even if
unsuccessful, may distract our management’s attention, divert our resources, negatively affect our
public image and harm our business.
Various state legislatures have enacted legislation designed to protect consumers’ privacy by
prohibiting the distribution of “spyware” over the Internet. Such anti-spyware laws typically focus
on restricting the proliferation of certain kinds of downloadable software, or spyware, that, when
installed on an end user’s computer, are used to intentionally and deceptively take control of the
end user’s machine. We do not believe that the data collection methods employed by our technology
constitute “spyware” or that such methods are prohibited by such legislation. Similar legislation
has been proposed federally. This legislation, if drafted broadly enough, could be deemed to apply
to the technology we use and could potentially restrict our information collection methods. Any
restriction or change to our information collection methods would cause us to expend substantial
resources to make changes and could decrease the amount and utility of the information that we
collect.
Both existing and proposed laws regulate and restrict the collection and use of information
over the Internet that personally identifies the Web site visitor. These laws continue to change
and vary among domestic and foreign jurisdictions, but certain information such as names,
addresses, telephone numbers, credit card numbers and e-mail addresses are widely considered
personally identifying. The scope of information collected over the Internet that is considered
personally identifying may become more expansive, and it is possible that current and future
legislation may apply to information that our customers currently collect without the explicit
consent of Web site visitors. If information that our customers collect and use without explicit
consent is considered to be personally identifying, their ability to collect and use this
information will be restricted and they would have to change their methods, which could lead to
decreased use of our services.
Domestic and foreign governments are also considering restricting the collection and use of
Internet usage data generally. Some privacy advocates argue that even anonymous data, individually
or when aggregated, may reveal too much information about Web site visitors. If governmental
authorities were to enact laws that limit data collection practices, our customers would likely
have to obtain the express consent of a visitor to its Web sites before it could collect, share or
use any of that visitor’s information in connection with our services. Any requirement that a
customer must obtain consent from its Web site visitors would reduce the amount and value of the
information that we provide to customers, which might cause some existing customers to discontinue
using our services. We would also need to expend considerable effort and resources to develop new
information collection procedures to comply with an express consent requirement. Even if our
customers succeeded in developing new procedures, they might be unable to convince their Web site
visitors to agree to the collection and use of such visitors’ information. This could negatively
impact our revenues, growth and potential for expanding our business.
We may face liability for the unauthorized disclosure or theft of private information, which
could expose us to liabilities and harm our stock price.
Unauthorized disclosure of personally identifiable information regarding Web site visitors,
whether through breach of our secure network by an unauthorized party, employee theft or misuse, or
otherwise, could harm our business. If there were even an inadvertent disclosure of personally
identifiable information, or if a third party were to gain unauthorized access to the personally
identifiable information we possess, our operations could be seriously disrupted, our reputation
could be harmed and we could be subject to claims (including claims for substantial liquidated
damages) pursuant to our agreements with our customers or other liabilities. In addition, if a
person penetrates our network security or otherwise misappropriates data, we could be subject to
liability. Such perceived or actual unauthorized disclosure of the information we collect or breach
of our security could harm our business.
We may face public relations problems as a result of violations of privacy laws and perceived
mistreatment of personal information, and these public relations problems may harm our reputation
and thereby lead to a reduction in customers and lower revenues.
Any perception of our practices as an invasion of privacy, whether or not illegal, may subject
us to public criticism. Existing and potential future privacy laws and increasing sensitivity of
consumers to unauthorized disclosures and use of personal information may create negative public
reactions related to our business practices. Public concerns regarding data collection, privacy and
security may cause some Web site visitors to be less likely to visit Web sites that subscribe to
our services. If enough visitors choose not to visit our customers’ Web sites, our ability to
collect sufficient amounts of information and provide our services effectively would be adversely
affected, and those Web sites could stop using our services. This, in turn, could reduce the value
of our services and inhibit the growth of our business.
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Internet-related and other laws could adversely affect our business.
Laws and regulations that apply to communications and commerce over the Internet are becoming
more prevalent. In particular, the growth and development of the market for online commerce has
prompted calls for more stringent tax, consumer protection and privacy laws, both in the United
States and abroad, that may impose additional burdens on companies conducting business online. This
could negatively affect the businesses of our customers and reduce their demand for our services.
Internet-related laws, however, remain largely unsettled, even in areas where there has been some
legislative action. The adoption or modification of laws or regulations relating to the Internet or
our operations, or interpretations of existing law, could adversely affect our business.
Risks Related to the Securities Markets and Ownership of Our Common Stock
The trading price of our common stock may be subject to significant fluctuations and volatility,
and our stockholders may be unable to resell their shares at a profit.
The stock markets, in general, and the markets for high technology stocks in particular, have
experienced high levels of volatility. The market for technology stocks has been extremely volatile
and frequently reaches levels that bear no relationship to the past or present operating
performance of those companies. These broad market fluctuations have in the past and may in the
future adversely affect the trading price of our common stock. In addition, the trading price of
our common stock has been subject to significant fluctuations and may continue to fluctuate or
decline. Since our initial public offering, which was completed in July 2006, the price of our
common stock has ranged from an intra-day low of $5.60 to an intra-day high of $38.57 through
August 5, 2009. Factors that could cause fluctuations in the trading price of our common stock
include the following:
These factors, as well as the announcement of proposed and completed acquisitions or other
significant transactions, or any difficulties associated with such transactions, by us or our
strategic partners, customers or our current competitors, may materially adversely affect the
market price of our common stock in the future. In the past, following periods of volatility in the
market price of a company’s securities, securities class action litigation has often been
instituted against that company. Such litigation could result in substantial cost and a diversion
of management’s attention and resources. In addition, volatility, lack of positive performance in
our
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stock price or changes to our overall compensation program, including our equity incentive
program, may adversely affect our ability to retain key employees.
If securities analysts stop publishing research or reports about our business, or if they
downgrade our stock, the price of our stock could decline.
The trading market for our common stock relies in part on the research and reports that
industry or financial analysts publish about us. We do not control these analysts. If one or more
of the analysts who do cover us downgrade our stock, our stock price would likely decline. Further,
if one or more of these analysts cease coverage of our company, we could lose visibility in the
market, which in turn could cause our stock price to decline.
The concentration of our capital stock ownership with insiders will likely limit your ability to
influence the outcome of key transactions, including a change of control.
Our executive officers, directors, five percent or greater stockholders and affiliated
entities together beneficially own a substantial amount of the outstanding shares of our common
stock. As a result, these stockholders, if acting together, would be able to exert significant
influence over most matters requiring approval by our stockholders, including the election of
directors and the approval of significant corporate transactions, even if other stockholders oppose
them. This concentration of ownership may have the effect of delaying, preventing or deterring a
change of control of our company that other stockholders may view as beneficial, could deprive our
stockholders of an opportunity to receive a premium for their common stock as part of a sale of our
company and might ultimately affect the market price of our common stock.
Provisions in our certificate of incorporation and bylaws under Delaware law might discourage,
delay or prevent a change of control of our company or changes in our management and, therefore,
depress the trading price of our common stock.
Our certificate of incorporation and bylaws contain provisions that could depress the trading
price of our common stock by acting to discourage, delay or prevent a change of control of our
company or changes in our management that the stockholders of our company may deem advantageous.
These provisions:
Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which
generally prohibits a Delaware corporation from engaging in any of a broad range of business
combinations with any “interested” stockholder for a period of three years following the date on
which the stockholder became an “interested” stockholder and which may discourage, delay or prevent
a change of control of our company.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Stock Repurchases
During the three months ended June 30, 2009, we repurchased the following shares of common
stock in connection with certain employee restricted stock awards issued under the WebSideStory,
Inc. 2004 Equity Incentive Award Plan that we assumed in connection with our acquisition of Visual
Sciences:
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For the majority of the restricted stock units that vested during the three months ended on
June 30, 2009, the shares issued at the time of vesting were net of the shares forfeited by the
employee to cover the employee’s minimum statutory withholding taxes due upon vesting. These
forfeited shares are not included within the tables above.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders at our annual meeting of
stockholders held on May 13, 2009:
Proposal One:
To elect three Class III directors to the board of directors to hold office for a three-year
term, expiring in 2012:
In addition to the three directors elected at the annual meeting of stockholders, the
following individuals will continue to serve as Class I directors, whose terms will expire at the
2010 annual meeting of stockholders: D. Fraser Bullock and Mark P. Gorenberg. Further, the
following individuals will continue to serve as Class II directors, whose terms will expire at the
2011 annual meeting of stockholders: Gregory S. Butterfield and John R. Pestana.
Proposal Two
To ratify the appointment of Ernst & Young LLP as our independent registered public accounting
firm for the current fiscal year ending December 31, 2009:
ITEM 5. Other Information
On August 3, 2009, the Compensation Committee of our Board of Directors approved and ratified
incentive bonus payouts to our executive officers in the amounts set forth below:
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ITEM 6. Exhibits
The following exhibits are filed or furnished herewith or are incorporated by reference to
exhibits previously filed with the SEC:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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INDEX TO EXHIBITS
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