e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
June 30,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number:
001-34628
QuinStreet, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0512121
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1051 East Hillsdale Blvd., Suite 800
Foster City, California 94404
(Address of principal executive
offices, including zip code)
(650) 587-7700
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.001 per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of December 31, 2009, the last business day of the
registrants most recently completed second fiscal quarter,
the registrants common stock was not listed on any
exchange or
over-the-counter
market. The registrants common stock began trading on The
NASDAQ Global Select Market on February 11, 2010. The
aggregate market value of the voting stock held by
non-affiliates of the registrant was $139,026,376 based on the
number of shares held by non-affiliates of the registrant as of
June 30, 2010, and based on the closing sale price of
common stock as reported by the NASDAQ Global Select Market on
June 30, 2010. For purposes of this disclosure, shares of
common stock held by persons who hold more than 5% of the
outstanding shares of common stock and shares held by executive
officers and directors of the registrant have been excluded
because such persons may be deemed to be affiliates. This
determination of executive officer or affiliate status is not
necessarily a conclusive determination for other purposes.
Number of shares of common stock outstanding as of
August 31, 2010: 45,083,807
Documents
Incorporated by Reference:
Portions of the registrants definitive proxy statement
relating to its 2010 annual stockholders meeting are
incorporated by reference into Part III of this Annual
Report on
Form 10-K
where indicated.
QUINSTREET,
INC.
FOR THE
FISCAL YEAR ENDED JUNE 30, 2010
TABLE OF
CONTENTS
1
PART I
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. All statements
other than statements of historical facts, including statements
regarding our future financial condition, business strategy and
plans and objectives of management for future operations, are
forward-looking statements. Terminology such as
believe, may, might,
objective, estimate,
continue, anticipate,
intend, should, plan,
expect, predict, potential,
or the negative of these terms or other similar expressions is
intended to identify forward-looking statements. We have based
these forward-looking statements largely on our current
expectations and projections about future events and financial
trends that we believe may affect our financial condition,
results of operations, business strategy and financial needs.
These forward-looking statements are subject to a number of
risks, uncertainties and assumptions described under the section
titled Risk Factors and elsewhere in this report,
such as but not limited to:
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our immature industry and relatively new business model;
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our ability to manage our growth effectively;
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our dependence on Internet search companies to attract Internet
visitors;
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our ability to successfully manage any recent or future
acquisitions;
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our dependence on a small number of large clients and our
dependence on a small number of verticals for a majority of our
revenue;
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our ability to attract and retain qualified employees and key
personnel;
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changes in government regulation affecting our business or our
clients businesses;
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our ability to accurately forecast our operating results and
appropriately plan our expenses;
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our ability to compete in our industry;
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our ability to enhance and maintain our client and vendor
relationships;
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our ability to develop new services and enhancements and
features to meet new demands from our clients;
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our ability to raise additional capital in the future, if needed;
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general economic conditions in our domestic and potential future
international markets; and
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our ability to protect our intellectual property rights.
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The events and circumstances reflected in the forward-looking
statements may not be achieved or occur and actual results may
differ materially from those contained in any forward-looking
statements. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assume
responsibility for the accuracy and completeness of the
forward-looking statements. You should not place undue reliance
on any forward-looking statements.
Except as required by law, we undertake no obligation to update
publicly any forward-looking statements for any reason to
conform these statements to actual results or to changes in our
expectations. We qualify all of our forward-looking statements
by these cautionary statements.
2
Our
Company
QuinStreet is a leader in vertical marketing and media on the
Internet. We have built a strong set of capabilities to engage
Internet visitors with targeted media and to connect our
marketing clients with their potential customers online. We
focus on serving clients in large, information-intensive
industry verticals where relevant, targeted media and offerings
help visitors make informed choices, find the products that
match their needs, and thus become qualified customer prospects
for our clients. Our current primary client verticals are the
education and financial services industries. We also have a
presence in the home services,
business-to-business,
or B2B, and healthcare industries.
We generate revenue by delivering measurable online marketing
results to our clients. These results are typically in the form
of qualified leads or clicks, the outcomes of customer prospects
submitting requests for information on, or to be contacted
regarding, client products, or their clicking on or through to
specific client offers. These qualified leads or clicks are
generated from our marketing activities on our websites or on
third-party websites with whom we have relationships. Clients
primarily pay us for leads that they can convert into customers,
typically in a call center or through other offline customer
acquisition processes, or for clicks from our websites that they
can convert into applications or customers on their websites. We
are predominantly paid on a negotiated or market-driven
per lead or per click basis. Media costs
to generate qualified leads or clicks are borne by us as a cost
of providing our services.
Founded in 1999, we have been a pioneer in the development and
application of measurable marketing on the Internet. Clients pay
us for the actual opt-in actions by prospects or customers that
result from our marketing activities on their behalf, versus
traditional impression-based advertising and marketing models in
which an advertiser pays for more general exposure to an
advertisement. We have been particularly focused on developing
and delivering measurable marketing results in the search engine
ecosystem, the entry point of the Internet for most
of the visitors we convert into qualified leads or clicks for
our clients. We own or partner with vertical content websites
that attract Internet visitors from organic search engine
rankings due to the quality and relevancy of their content to
search engine users. We also acquire targeted visitors for our
websites through the purchase of
pay-per-click,
or PPC, advertisements on search engines. We complement search
engine companies by building websites with content and offerings
that are relevant and responsive to their searchers, and by
increasing the value of the PPC search advertising they sell by
matching visitors with offerings and converting them into
customer prospects for our clients.
Market
Opportunity
Our clients are shifting more of their marketing budgets from
traditional media channels such as direct mail, television,
radio, and newspapers to the Internet because of increasing
usage of the Internet by their potential customers. We believe
that direct marketing is the most applicable and relevant
marketing segment to us because it is targeted and measurable.
According to the July 2009 research report, Consumer
Behavior Online: A 2009 Deep Dive, by Forrester Research,
Americans spend 33% of their time with media on the Internet,
but online direct marketing was forecasted to represent only 16%
of the $149 billion in total annual U.S. direct
marketing spending in 2009, as reported by the Direct Marketing
Association. The Internet is an effective direct marketing
medium due to its targeting and measurability characteristics.
If direct marketing budgets shift to the Internet in proportion
to Americans share of time spent with media on the
Internet from 16% to 33% of the $149 billion in
total spending that could represent an increased
market opportunity of $25 billion. In addition, as
traditional media categories such as television and radio shift
from analog to digital formats, they can become channels for the
targeted and measurable marketing techniques and capabilities we
have developed for the Internet, thus expanding our addressable
market opportunity. Further future market potential will also
come from international markets.
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Change
in marketing strategy and approach
We believe that marketing approaches are changing as budgets
shift from offline, analog advertising media to digital
advertising media such as Internet marketing. These changing
approaches are fundamental, and require a shift to fundamentally
new competencies, including:
From
qualitative, impression-driven marketing to analytic,
data-driven marketing
We believe that the growth in Internet marketing is enabling a
more data-driven approach to advertising. The measurability of
online marketing allows marketers to collect a significant
amount of detailed data on the performance of their marketing
campaigns, including the effectiveness of ad format and
placement and user responses. This data can then be analyzed and
used to improve marketing campaign performance and
cost-effectiveness on substantially shorter cycle times than
with traditional offline media.
From
account management-based client relationships to results-based
client relationships
We believe that marketers are becoming increasingly focused on
strategies that deliver specific, measurable results. For
example, marketers are attempting to better understand how their
marketing spending produces measurable objectives such as
meeting their target marketing cost per new customer. As
marketers adopt more results-based approaches, the basis of
client relationships with their marketing services providers is
shifting from being more account management-based to being more
results-oriented.
From
marketing messages pushed on audiences to marketing messages
pulled by self-directed audiences
Traditional marketing messages such as television and radio
advertisements are broadcast to a broad audience. The Internet
is enabling more self-directed and targeted marketing. For
example, when Internet visitors click on PPC search
advertisements, they are expressing an interest in and
proactively engaging with information about a product or service
related to that advertisement. The growth of self-directed
marketing, primarily through online channels, allows marketers
to present more targeted and potentially more relevant marketing
messages to potential customers who have taken the first step in
the buying process, which can in turn increase the effectiveness
of marketers spending.
From
marketing spending focused on large media buys to marketing
spending optimized for fragmented media
We believe that media is becoming increasingly fragmented and
that marketing strategies are changing to adapt to this trend.
There are millions of Internet websites, tens of thousands of
which have significant numbers of visitors. While this
fragmentation can create challenges for marketers, it also
allows for improved audience segmentation and the delivery of
highly targeted marketing messages, but new technologies and
approaches are necessary to effectively manage marketing given
the increasing complexity resulting from more media
fragmentation.
Increasing
complexity of online marketing
Online marketing is a dynamic and increasingly complex
advertising medium. There are numerous online channels for
marketers to reach potential customers, including search
engines, Internet portals, vertical content websites, affiliate
networks, display and contextual ad networks, email, video
advertising, and social media. We refer to these and other
marketing channels as media. Each of these channels may involve
multiple ad formats and different pricing models, amplifying the
complexity of online marketing. We believe that this complexity
increases the demand for our vertical marketing and media
services due to our capabilities and to our experience managing
and optimizing online marketing programs across multiple
channels. Also marketers and agencies often lack our ability to
aggregate offerings from multiple clients in the same industry
vertical, an approach that allows us to cover a wide selection
of visitor segments and provide more potential matches to
Internet visitor needs. This approach can allow us to convert
more Internet visitors into qualified leads or clicks from
targeted media sources, giving us an advantage when buying or
monetizing that media.
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Our
Business Model
We deliver cost-effective marketing results to our clients,
predictably and scalably, most typically in the form of a
qualified lead or click. These leads or clicks can then convert
into a customer or sale for the client at a rate that results in
an acceptable marketing cost to them. We get paid by clients
primarily when we deliver qualified leads or clicks as defined
in our agreements. Because we bear the costs of media, our
programs must deliver a value to our clients and a media yield,
or our ability to generate an acceptable margin on our media
costs, that provides a sound financial outcome for us. Our
general process is:
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We own or access targeted media.
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We run advertisements or other forms of marketing messages and
programs in that media to create visitor responses or clicks
through to client offerings.
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We match these responses or clicks to client offerings or brands
that meet visitor interests or needs, converting visitors into
qualified leads or clicks.
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We optimize client matches and media yield such that we achieve
desired results for clients and a sound financial outcome for us.
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Media cost, or the cost to attract targeted Internet visitors,
is the largest cost input to producing the measurable marketing
results we deliver to clients. Balancing our clients cost
and conversion objectives, or the rate at which the leads or
clicks that we deliver to them convert into customers, with our
media costs and yield objectives, represents the primary
challenge in our business model. We have been able to
effectively balance these competing demands by focusing on our
media sources and capabilities, conversion optimization, and our
mix of offerings and client coverage. We also seek to mitigate
media cost risk by working with third-party website publishers
predominantly on a revenue-share basis; media purchased on a
non-revenue-share basis has represented a small minority of our
media costs and of the Internet visitors we convert into
qualified leads or clicks for clients.
Media
and Internet visitor mix
We are a client-driven organization. We seek to be one of the
largest providers of measurable marketing results on the
Internet in the client industry verticals we serve by meeting
the needs of clients for results, reliability and volume.
Meeting those client needs requires that we maintain a
diversified and flexible mix of Internet visitor sources due to
the dynamic nature of online media. Our media mix changes with
changes in Internet visitor usage patterns. We adapt to those
changes on an ongoing basis, and also proactively adjust our mix
of vertical media sources to respond to client or
vertical-specific circumstances and to achieve our financial
objectives. Our financial objectives are to achieve consistent,
sustainable financial performance, but can differ by client or
industry vertical, depending on factors such as our need to
invest in the development of media sources, marketing programs,
or client relationships. Generally, our Internet visitor sources
include:
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websites owned and operated by us, with content and offerings
that are relevant to our clients target customers;
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visitors acquired from PPC advertisements purchased on major
search engines and sent to our websites;
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revenue sharing agreements with third-party websites with whom
we have a relationship and whose content is relevant to our
clients target customers;
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email lists owned by third parties and warranted to us by their
owners to comply with the CAN-SPAM Act;
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email lists owned by us, and generated on an opt-in basis from
Internet visitors to our websites; and
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display ads run through online advertising networks or directly
with major websites or portals.
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Conversion
optimization
Once we acquire targeted Internet visitors from any of our
numerous online media sources, we seek to convert that media
into qualified leads or clicks at a rate that balances client
results with our media costs or yield objectives. We start by
defining the segments and interests of Internet visitors in our
client verticals, and by providing them with the information and
product offerings on our websites and in our marketing programs
that best meet their needs.
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Achieving acceptable client results and media yield then
requires ongoing testing, measuring, analysis, feedback, and
adaptation of the key components of our Internet marketing
programs. These components include the marketing or advertising
messaging, content mix, visitor navigation path, mix and
coverage of client offerings presented, and
point-of-sale
conversion messaging the content that is presented
to an Internet visitor immediately prior to converting that
individual into a lead or click for our clients. This data
complexity is managed by us with technology, data reporting,
marketing processes, and personnel. We believe that our scale
and ten-year track record give us an advantage, as managing this
complexity often implies a steep experience-based learning curve.
Offerings
and client coverage
The Internet is a self-directed medium. Internet visitors choose
the websites they visit and their online navigation paths, and
always have the option of clicking away to a different website
or web page. Having offerings or clients that match the
interests or needs of website visitors is key to providing
results and adequate media yield. Our vertical focus allows us
to continuously revise and improve this matching process, to
better understand the various segments of visitors and client
offerings available to be matched, and to ensure that we enable
Internet visitors to find what they seek.
Our
Competitive Advantages
Vertical
focus and expertise
We focus our efforts on large, attractive client market
verticals, and on building our depth of media and coverage of
clients and client offerings within them. We have been a pioneer
in developing vertical marketing and media on the Internet, and
in providing measureable marketing results to clients. We focus
on clients who are moving their marketing spending to measurable
online formats and on information-intensive client verticals
with large underlying market opportunities and high product or
customer lifetime values. This focus allows us to utilize
targeted media, in-depth industry and client knowledge, and
customer segmentation and breadth of client offerings, or
coverage, to deliver results for our clients and greater media
yield.
Measurable
marketing experience and expertise
We have substantial experience at designing and deploying
marketing programs that allow Internet visitors to find the
information or product offerings they seek, and that can deliver
economically attractive, measurable results to our clients,
cost-effectively for us. Such results require frequent testing
and balancing of numerous variables, including Internet visitor
sources, mix of content and of client and product offerings,
visitor navigation paths, prospect qualification, and
advertising creative design, among others. The complexity of
executing these marketing campaigns is challenging. Due to our
scale and ten-year track record, we have successfully executed
thousands of Internet marketing programs, and we have gained
significant experience managing and optimizing this complexity
to meet our clients volume, quality and cost objectives.
Targeted
media
Targeted media attracts Internet visitors who are relatively
narrowly focused demographically or in their interests. Targeted
media can deliver better measurable marketing results for our
clients, at lower media costs for us, due to higher rates of
conversion of Internet visitors into leads or clicks for
targeted offerings and, often, due to less competition from
display advertisers. We have significant experience at creating,
identifying, monetizing, and managing targeted media on the
Internet. Many of the targeted media sources for our marketing
programs are proprietary or more defensible because of our
direct ownership of websites in our client verticals, our
acquisition of targeted Internet visitors directly from search
engines to our websites, and our exclusive or long-term
relationships with media properties or sources owned by others.
Examples of websites that we own and operate include
WorldWideLearn.com, ArmyStudyGuide.com and Schools.com in our
education client vertical; CardRatings.com, MoneyRates.com,
Insurance.com and Insure.com in our financial services client
vertical; AllAboutLawns.com and OldHouseWeb.com in our home
services client vertical; Internet.com in our
business-to-business
client vertical; and ElderCarelink.com in our healthcare client
vertical.
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Proprietary
technology
We have developed a core technology platform and a common set of
applications for managing and optimizing measurable marketing
programs across multiple client verticals at scale. The primary
objectives and effects of our technologies are to achieve higher
media yield, deliver better results for our clients, and more
efficiently and effectively manage our scale and complexity. We
continuously strive to develop technologies that allow us to
better match Internet visitors in our client verticals to the
information, clients or product offerings they seek at scale. In
so doing, our technologies can allow us to simultaneously
improve visitor satisfaction, increase our media yield, and
achieve higher rates of conversions of leads or clicks for our
clients a virtuous cycle of increased value for
Internet visitors and our clients and competitive advantage for
us. Some of the key applications in our technology platform are:
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an ad server for tracking the placement and performance of
content, creative messaging, and offerings on our websites and
on those of publishers with whom we work;
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database-driven applications for dynamically matching content,
offers or brands to Internet visitors expressed needs or
interests;
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a platform for measuring and managing the performance of tens of
thousands of PPC search engine advertising campaigns;
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dashboards or reporting tools for displaying operating and
financial metrics for thousands of ongoing marketing campaigns;
and,
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a compliance tool capable of cataloging and filtering content
from the thousands of websites on which our marketing programs
appear to ensure adherence to client branding guidelines and to
regulatory requirements.
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Approximately one-third of our employees are engineers, focused
on building, maintaining and operating our technology platform.
Client
relationships
We believe we are a reliable source of measurably effective
marketing results for our clients. We endeavor to work
collaboratively and in a data-driven way with clients to improve
our results for them. We believe our high client retention and
per client growth rates are due to:
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our close, often direct, relationships with most of our large
clients;
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our ability to deliver measurable and attractive return on
investment, or ROI, on clients marketing spending;
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our ownership of, or exclusive access to large amounts of,
targeted media inventory and associated Internet visitors in the
client verticals on which we focus; and,
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our ability to consistently and reliably deliver large
quantities of qualified leads or clicks.
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We believe that our high client retention rates, combined with
our depth and breadth of online media in our primary client
verticals, indicate that we are becoming an important marketing
channel partner for our clients to reach their prospective
customers.
Client-driven
online marketing approach
We focus on providing measurable Internet marketing and media
services to our clients in a way that protects and enhances
their brands and their relationships with prospective customers.
The Internet marketing programs we execute are designed to
adhere to strict client branding and regulatory guidelines, and
are designed to match our clients brands and offers with
expressed customer interest. We have contractual arrangements
with third-party website publishers to ensure that they follow
our clients brand guidelines, and we utilize our
proprietary technologies and trained personnel to help ensure
compliance. In addition, we believe that providing relevant,
helpful content and client offers that match an Internet
visitors self-selected interest in a product or service,
such as
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requesting information about an education program or financial
product, makes that visitor more likely to convert into a
customer for our clients.
We do not engage in online marketing practices such as spyware
or deceptive promotions that do not provide value to Internet
visitors and that can undermine our clients brands. A
small minority of our Internet visitors reach our websites or
client offerings through advertisements in emails. We employ
practices to ensure that we comply with the CAN-SPAM Act
governing unsolicited commercial email.
Acquisition
strategy and success
We have successfully acquired vertical marketing and media
companies on the Internet, including vertical website
businesses, marketing services companies, and technologies. We
believe we can integrate and generate value from acquisitions
due to our scale, breadth of capabilities, and common technology
platform.
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Our ability to monetize Internet media, coupled with client
demand for our services, provides us with a particular advantage
in acquiring targeted online media properties in the client
verticals on which we focus.
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Our capabilities in online media can allow us to generate a
greater volume of leads or clicks, and therefore create more
value, than other owners of marketing services companies that
have aggregated client budgets or relationships.
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We can often apply technologies across our business volume to
create more value than previous owners of the technology.
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Scale
We are one of the largest Internet vertical marketing and media
companies in the world. Our scale allows us to better meet the
needs of large clients for reliability, volume and quality of
service. It allows us to invest more in technologies that
improve media yield, client results and our operating
efficiency. We are also able to invest more in other forms of
research and development, including determining and developing
new types of vertical media, new approaches to engaging website
visitors, and new segments of Internet visitors and client
budgets, all of which can lead to advantages in media costs,
effectiveness in delivering client results, and then to more
growth and greater scale.
Our
Strategy
Our goal is to be one of the largest and most successful
marketing and media companies on the Internet, and eventually in
other digitized media forms. We believe that we are in the early
stages of a very large and long-term business opportunity. Our
strategy for pursuing this opportunity includes the following
key components:
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Focus on generating sustainable revenues by providing
measurable value to our clients.
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Build QuinStreet and our industry sustainably by behaving
ethically in all we do and by providing quality content and
website experiences to Internet visitors.
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Remain vertically focused, choosing to grow through depth,
expertise and coverage in our current client verticals; enter
new client verticals selectively over time, organically and
through acquisitions.
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Build a world class organization, with
best-in-class
capabilities for delivering measurable marketing results to
clients and high yields or returns on media costs.
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Develop and evolve the best technologies and platform for
managing vertical marketing and media on the Internet; focus on
technologies that enhance media yield, improve client results
and achieve scale efficiencies.
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Build, buy and partner with vertical content websites that
provide the most relevant and highest quality visitor
experiences in the client and media verticals we serve.
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Be a client-driven organization; develop a broad set of media
sources and capabilities to reliably meet client needs.
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8
Our
Culture
Our values are the foundation of our successful business
culture. They represent the standards we strive to achieve and
the organization we continuously seek to become. These have been
our guiding principles since our founding in 1999. Our values
are:
1. Performance. We understand our
business objectives and apply a whatever it takes
approach to meeting them. We are driven to achieve. We are
committed to our own personal and professional development and
to that of our colleagues.
2. High Standards. We hold each other and
ourselves to the highest standards of performance,
professionalism and personal behavior. We act with the highest
of ethical standards. We tolerate and forgive mistakes, but not
patterns.
3. Teamwork. We deal with one another
openly, honestly and non-hierarchically in an atmosphere of
mutual trust and respect and in pursuit of common stretch goals.
We have an obligation to dissent in an effort to reach the best
answers. We smooth the way for effective, dynamic team
discussions by demonstrating care and concern for each
individual in all of our interactions. We support decisions,
once made.
4. Customer Empathy. We strive every day
to better understand and anticipate the needs of our customers,
including our website visitors, clients and publishers. We
leverage our unique insights into higher customer loyalty and
competitive advantage.
5. Prioritization. We always work on what
is most important to achieving Company objectives first. If we
do not know, we ask or discuss competing demands.
6. Urgency. We know our goals and measure
our progress toward them daily.
7. Progress. We are pioneers. We make
decisions based on facts and analysis, as well as intuition, but
we expect to make mistakes in the pursuit of rapid progress. We
learn from mistakes on short cycle times and iterate our way to
success.
8. Innovation and Flexibility. We prize
creativity. We embrace new ideas and approaches as opportunities
to improve our performance or work environment. We resist pride
of authorship; it limits progress. We actively benchmark and
work to understand and employ best practices.
9. Recognition. We are a meritocracy.
Advancement and recognition are earned through contribution and
performance. We celebrate each others victories and
efforts.
10. Fun. We believe that work, done well,
can and should be fun. We strive to create an upbeat, supportive
environment and try not to take ourselves too seriously. We do
not tolerate negativism, pessimism or nay saying...we dont
have time.
Clients
In fiscal years 2010, 2009 and 2008, our top 20 clients
accounted for 65%, 68% and 70% of net revenue, respectively. One
of our largest clients, DeVry Inc., accounted for 19% and 23% of
net revenue in fiscal years 2009 and 2008, respectively. In
fiscal year 2010, no client comprised more than 10% of annual
revenue. Since our service was first offered in 2001, we have
developed a broad client base with many multi-year
relationships. We enter into Internet marketing contracts with
our clients, most of which are cancelable with little or no
prior notice. In addition, these contracts do not contain
penalty provisions for cancellation before the end of the
contract term.
Sales and
Marketing
We have an internal sales team that consists of employees
focused on signing new clients and account managers who maintain
and seek to increase our business with existing clients. Our
sales people and account managers are each focused on a
particular client vertical so that they develop an expertise in
the marketing needs of our clients in that particular vertical.
Our marketing programs include attendance at trade shows and
conferences and limited advertising.
9
Technology
and Infrastructure
We have developed a suite of technologies to manage, improve and
measure the results of the marketing programs we offer our
clients. We use a combination of proprietary and third-party
software as well as hardware from established technology
vendors. We use specialized software for client management,
building and managing websites, acquiring and managing media,
managing our third-party publishers, and the matching of
Internet visitors to our marketing clients. We have invested
significantly in these technologies and plan to continue to do
so to meet the demands of our clients and Internet visitors, to
increase the scalability of our operations, and enhance
management information systems and analytics in our operations.
Our development teams work closely with our marketing and
operating teams to develop applications and systems that can be
used across our business. In fiscal years 2010, 2009 and 2008,
we spent $19.7 million, $14.9 million and
$14.1 million, respectively, on product development.
Our primary data center is at a third-party co-location center
in San Francisco, California. All of the critical
components of the system are redundant and we have a backup data
center in Las Vegas, Nevada. We have implemented these backup
systems and redundancies to minimize the risk associated with
earthquakes, fire, power loss, telecommunications failure, and
other events beyond our control.
Intellectual
Property
We rely on a combination of trade secret, trademark, copyright
and patent laws in the United States and other jurisdictions
together with confidentiality agreements and technical measures
to protect the confidentiality of our proprietary rights. We
currently have two patent applications pending in the United
States and no issued patents. We rely much more heavily on trade
secret protection than patent protection. To protect our trade
secrets, we control access to our proprietary systems and
technology and enter into confidentiality and invention
assignment agreements with our employees and consultants and
confidentiality agreements with other third parties. QuinStreet
is a registered trademark in the United States and other
jurisdictions. We also have registered and unregistered
trademarks for the names of many of our websites and we own the
domain registrations for our many website domains.
We cannot guarantee that our intellectual property rights will
provide competitive advantages to us; our ability to assert our
intellectual property rights against potential competitors or to
settle current or future disputes will not be limited by our
agreements with third parties; our intellectual property rights
will be enforced in jurisdictions where competition may be
intense or where legal protection may be weak; any of the trade
secrets, trademarks, copyrights, patents or other intellectual
property rights that we presently employ in our business will
not lapse or be invalidated, circumvented, challenged, or
abandoned; competitors will not design around our protected
systems and technology; or that we will not lose the ability to
assert our intellectual property rights against others.
Our
Competitors
Our primary competition falls into two categories: advertising
and direct marketing services agencies and online marketing and
media companies. We compete for business on the basis of a
number of factors including return on marketing expenditures,
price, access to targeted media, ability to deliver large
volumes or precise types of customer prospects, and reliability.
Advertising
and direct marketing services agencies
Online and offline advertising and direct marketing services
agencies control the majority of the large client marketing
spending for which we primarily compete. So, while they are
sometimes our competitors, agencies are also often our clients.
We compete with agencies to attract marketing budget or spending
from offline forms to the Internet or, once designated to be
spent online, to be spent with us versus the agency or by the
agency with others. When spending online, agencies spend with
QuinStreet and with portals, other websites and ad networks.
10
Online
marketing and media companies
We compete with other Internet marketing and media companies, in
many forms, for online marketing budgets. Most of these
competitors compete with us in one vertical. Examples include
BankRate in the financial services client vertical and Monster
Worldwide in the education client vertical. Some of our
competition also comes from agencies or clients spending
directly with larger websites or portals, including Google,
Yahoo!, MSN, and AOL.
Government
Regulation
Advertising and promotional information presented to visitors on
our websites and our other marketing activities are subject to
federal and state consumer protection laws that regulate unfair
and deceptive practices. There are a variety of state and
federal restrictions on the marketing activities conducted by
telephone, the mail or by email, or over the internet, including
the Telemarketing Sales Rule, state telemarketing laws, federal
and state privacy laws, the CAN-SPAM Act, and the Federal Trade
Commission Act and its accompanying regulations and guidelines.
In addition, some of our clients operate in regulated
industries, particularly in our financial services, education
and medical verticals. For example, the U.S. Real Estate
Settlement Procedures Act, or RESPA, regulates the payments that
may be made to mortgage brokers. While we do not engage in the
activities of a traditional mortgage broker, we are licensed as
a mortgage broker in 25 states for our online marketing
activities. In our education client vertical, our clients are
subject to the U.S. Higher Education Act, which, among
other things, prohibits incentive compensation in recruiting
students. On June 18, 2010, the U.S. Department of
Education issued a Notice of Proposed Rulemaking in which it has
proposed repealing all existing safe harbors regarding incentive
compensation in recruiting, including the Internet safe harbor.
The proposed regulations state that payment for contact
information or consumer clicks do not constitute
incentive compensation for purposes of the Higher Education Act
provided that there is no commission, bonus or other incentive
payment based directly or indirectly upon success in securing
enrollments. Notwithstanding the foregoing, results of the
rulemaking could impact how we are paid for leads by clients in
our education client vertical and could also impact our
education clients and their marketing practices. In addition,
other provisions of the proposed regulations, such as the
proposal on gainful employment that would restrict
Federal financial aid to students in programs where certain
debt-to-income
ratios and loan default rates are not satisfied, could limit our
clients businesses and, therefore, ours. In our medical
client vertical, our medical device and supplies clients are
subject to state and federal anti-kickback statutes that
prohibit payment for referrals. While we believe our matching of
prospective customers with our clients and the manner in which
we are paid for these activities complies with these and other
applicable regulations, these rules and regulations in many
cases were not developed with online marketing in mind and their
applicability is not always clear. The rules and regulations are
complex and may be subject to different interpretations by
courts or other governmental authorities. We might
unintentionally violate such laws, such laws may be modified and
new laws may be enacted in the future. Any such developments (or
developments stemming from enactment or modification of other
laws) or the failure to anticipate accurately the application or
interpretation of these laws could create liability to us,
result in adverse publicity and negatively affect our businesses.
Employees
As of June 30, 2010, we had 637 employees, which
included 184 employees in product development and
engineering, 69 in sales and marketing, 58 in general and
administration and 326 in operations. None of our employees is
represented by a labor union.
Available
Information
We file reports with the Securities and Exchange Commission
(SEC), including annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any other filings required by the SEC. We make available
free of charge on our website via the investor relations page
www.quinstreet.com our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the SEC. We also webcast our earnings calls and
certain events we may participate in or host with members of the
investment community on our investor relations page. The content
of our website is not intended to be incorporated by reference
into this report or in any other report or document we file and
any reference to this website is intended to be inactive textual
references only.
11
The public may read and copy any materials we file with the SEC
at the SECs Public Reference Room at
100 F Street, NE, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room
by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site
(http://www.sec.gov)
that contains reports, proxy and information statements, and
other information regarding issuers that file electronically
with the SEC.
Executive
Officers of the Registrant
The name of and certain information regarding each of our
current executive officers as of June 30, 2010 are set
forth below.
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Name
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Age
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Position
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Douglas Valenti
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50
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Chief Executive Officer and Chairman
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Bronwyn Syiek
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46
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President and Chief Operating Officer
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Kenneth Hahn
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43
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Chief Financial Officer
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Tom Cheli
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39
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Executive Vice President
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Scott Mackley
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37
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Executive Vice President
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Nina Bhanap
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37
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Chief Technology Officer
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Daniel Caul
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44
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General Counsel
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Timothy Stevens
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Senior Vice President
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Douglas Valenti has served as our Chief Executive Officer
and member of our board of directors since July 1999 and as our
Chairman and Chief Executive Officer since March 2004. Prior to
QuinStreet, Mr. Valenti served as a partner at Rosewood
Capital, a venture capital firm, for five years; at
McKinsey & Company as a strategy consultant and
engagement manager for three years; at Procter &
Gamble in various management roles for three years; and for the
U.S. Navy as a nuclear submarine officer for five years. He
holds a Bachelors degree in Industrial Engineering from the
Georgia Institute of Technology, where he graduated with highest
honors and was named the Georgia Tech Outstanding Senior in
1982, and an M.B.A. from the Stanford Graduate School of
Business, where he was an Arjay Miller Scholar.
Bronwyn Syiek has served as our President and Chief
Operating Officer since February 2007, as our Chief Operating
Officer from April 2004 to February 2007, as Senior Vice
President from September 2000 to April 2004, as Vice President
from her start date in March 2000 to September 2000 and as a
consultant to us from July 1999 to March 2000. Prior to joining
us, Ms. Syiek served as Director of Business Development
and member of the Executive Committee at De La Rue Plc, a
banknote printing and security product company, for three years.
She previously served as a strategy consultant and engagement
manager at McKinsey & Company for four years and held
various investment management and banking positions with Lloyds
Bank and Charterhouse Bank. She holds an M.A. in Natural
Sciences from Cambridge University in the United Kingdom.
Kenneth Hahn has served as our Chief Financial Officer
since September 2006. Prior to joining us, Mr. Hahn served
as Chief Financial Officer of Borland Software Corporation, a
public software company, from September 2002 to July 2006.
Previously, Mr. Hahn served in various roles, including
Chief Financial Officer, of Extensity, Inc., a public software
company, for five years; as a strategy consultant at the Boston
Consulting Group for three years; and as an audit manager at
Price Waterhouse, a public accounting firm, for five years. He
holds a B.A. in Business from California State University
Fullerton, summa cum laude, and an M.B.A. from the Stanford
Graduate School of Business, where he was an Arjay Miller
Scholar. Mr. Hahn is also a Certified Public Accountant
(inactive), licensed in the state of California.
Tom Cheli has served as our Executive Vice President
since February 2007, as Senior Vice President from December 2004
to February 2007, as Vice President of Sales from January 2001
to December 2004 and as Director of Sales from February 2000 to
January 2001. Prior to joining us, Mr. Cheli served as
Director of Inside Sales and Sales Operations at Collagen
Aesthetics Corporation, an aesthetic biomedical device company,
and as Regional Sales Manager at Akorn Ophthalmics, Inc., a
specialty pharmaceutical company. He holds a B.A. in Sports
Medicine from the University of the Pacific.
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Scott Mackley has served as our Executive Vice President
since February 2007, as Senior Vice President from December 2004
to February 2007, as Vice President from June 2003 to December
2004, as Senior Director from February 2002 to June 2003, as
Director from October 2000 to February 2002 and as Senior
Manager, Network Management from May 2000 to October 2000. Prior
to joining us, Mr. Mackley served at Salomon Brothers and
Salomon Smith Barney, in various roles in their Equity Trading
unit and Investment Banking and Equity Capital Markets divisions
over four years. He holds a B.A. in Economics from Washington
and Lee University.
Nina Bhanap has served as our Chief Technology Officer
since July 2009, as our Senior Vice President of Engineering
from November 2006 to July 2009, as Vice President of Product
Development from January 2004 to November 2006, as Senior
Director from January 2003 to January 2004 and as Director of
Product Management from October 2001 to January 2003. Prior to
joining us, Ms. Bhanap served as Head of Fixed Income Sales
Technology for Europe at Morgan Stanley for five years and as a
senior associate at Booz Allen Hamilton for one year. She holds
a B.S. in Computer Science with Honors from Imperial College,
University of London, and an M.B.A. from the London Business
School.
Daniel Caul has served as our General Counsel since
January 2008. Prior to joining us, Mr. Caul served as
General Counsel for the Search and Media division of
IAC/InterActiveCorp, an Internet search and advertising company,
from September 2006 to January 2008, and prior to the
acquisition by IAC/InterActiveCorp, he was Assistant General
Counsel of Ask Jeeves, Inc. from February 2003 to September
2006. Previously, Mr. Caul was an attorney with Howard,
Rice, Nemerovsky, Canady, Falk and Rabkin, a corporate law firm,
for four years and served as a U.S. District Court clerk.
He holds a B.A. in Political Science from Vanderbilt University,
summa cum laude, and a J.D. from the Harvard Law School, magna
cum laude. Mr. Caul was also a Fulbright Scholar.
Timothy Stevens has served as our Senior Vice President
since October 2008. Prior to joining us, Mr. Stevens served
as President and CEO of Doppelganger, Inc., an online social
entertainment studio, from January 2007 to October 2008. Prior
to Doppelganger, Mr. Stevens served as General Counsel for
Borland Software Corporation, a software company, from October
2003 to June 2006. Previously, he served in various executive
management roles, including most recently as Senior Vice
President of Corporate Development, at Inktomi Corporation, an
Internet infrastructure company, during his six year tenure.
Previously, Mr. Stevens was an attorney with Wilson Sonsini
Goodrich & Rosati, a corporate law firm, for six
years. He holds a B.S. in both Finance and Management from the
University of Oregon, summa cum laude, and a J.D. from the
University of California at Davis, Order of the Coif.
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks described below and the
other information in this report on
Form 10-K.
If any of such risks actually occur, our business, operating
results or financial condition could be adversely affected. In
those cases, the trading price of our common stock could decline
and you may lose all or part of your investment.
Risks
Related to Our Business and Industry
We
operate in an immature industry and have a relatively new
business model, which makes it difficult to evaluate our
business and prospects.
We derive nearly all of our revenue from the sale of online
marketing and media services, which is an immature industry that
has undergone rapid and dramatic changes in its short history.
The industry in which we operate is characterized by
rapidly-changing Internet media, evolving industry standards,
and changing user and client demands. Our business model is also
evolving and is distinct from many other companies in our
industry, and it may not be successful. As a result of these
factors, the future revenue and income potential of our business
is uncertain. Although we have experienced significant revenue
growth in recent periods, we may not be able to sustain current
revenue levels or growth rates. Any evaluation of our business
and our prospects must be considered in light of these factors
and the risks and uncertainties often encountered by companies
in an immature industry with an evolving business model such as
ours. Some of these risks and uncertainties relate to our
ability to:
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maintain and expand client relationships;
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sustain and increase the number of visitors to our websites;
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sustain and grow relationships with third-party website
publishers and other sources of web visitors;
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manage our expanding operations and implement and improve our
operational, financial and management controls;
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raise capital at attractive costs, or at all;
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acquire and integrate websites and other businesses;
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successfully expand our footprint in our existing client
verticals and enter new client verticals;
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respond effectively to competition and potential negative
effects of competition on profit margins;
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attract and retain qualified management, employees and
independent service providers;
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successfully introduce new processes and technologies and
upgrade our existing technologies and services;
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protect our proprietary technology and intellectual property
rights; and
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respond to government regulations relating to the Internet,
marketing in our client verticals, personal data protection,
email, software technologies and other aspects of our business.
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If we are unable to address these risks, our business, results
of operations and prospects could suffer.
We
depend upon Internet search companies to attract a significant
portion of the visitors to our websites, and any change in the
search companies search algorithms or perception of us or
our industry could result in our websites being listed less
prominently in either paid or algorithmic search result
listings, in which case the number of visitors to our websites
and our revenue could decline.
We depend in significant part on various Internet search
companies, such as Google, Microsoft and Yahoo!, and other
search websites to direct a significant number of visitors to
our websites to provide our online marketing services to our
clients. Search websites typically provide two types of search
results, algorithmic and paid listings. Algorithmic, or organic,
listings are determined and displayed solely by a set of
formulas designed by search companies. Paid listings can be
purchased and then are displayed if particular words are
included in a users Internet search. Placement in paid
listings is generally not determined solely on the bid price,
but also takes into account the search engines assessment
of the quality of website featured in the paid listing and other
factors. We rely on both algorithmic and paid search results, as
well as advertising on other websites, to direct a substantial
share of the visitors to our websites.
Our ability to maintain the number of visitors to our websites
from search websites and other websites is not entirely within
our control. For example, Internet search websites frequently
revise their algorithms in an attempt to optimize their search
result listings or to maintain their internal standards and
strategies. Changes in the algorithms could cause our websites
to receive less favorable placements, which could reduce the
number of users who visit our websites. Changes to search engine
user interfaces, such as Google Instant, may also adversely
impact the number of users we attract to our websites.
Throughout the years we have experienced fluctuations in the
search result rankings for a number of our websites. We may make
decisions that are suboptimal regarding the purchase of paid
listings or our proprietary bid management technologies may
contain defects or otherwise fail to achieve their intended
results, either of which could also reduce the number of
visitors to our websites or cause us to incur additional costs.
We may also make decisions that are suboptimal regarding the
placement of advertisements on other websites and pricing, which
could increase our costs to attract such visitors or cause us to
incur unnecessary costs. Our approaches may be deemed similar to
those of our competitors and others in our industry that
Internet search websites may consider to be unsuitable or
unattractive. Internet search websites could deem our content to
be unsuitable or below standards or less attractive or worthy
than those of other or competing websites. In either such case,
our websites may receive less favorable placement. Any reduction
in the number of visitors to our websites would negatively
affect our ability to earn revenue. If visits to our websites
decrease, we may need to resort to more costly sources to
replace lost visitors, and such increased expense could
adversely affect our business and profitability.
14
A
substantial portion of our revenue is generated from a limited
number of clients and, if we lose a major client, our revenue
will decrease and our business and prospects would be adversely
impacted.
A substantial portion of our revenue is generated from a limited
number of clients. Our top three clients accounted for 23% and
32% of our net revenue for the fiscal years 2010 and 2009,
respectively. Our clients can generally terminate their
contracts with us at any time, with limited prior notice or
penalty. DeVry Inc., one of our large clients, retained an
advertising agency and reduced its purchases of leads from us
beginning November 2009. DeVry and other clients may reduce
their level of business with us, leading to lower revenue. We
expect that a limited number of clients will continue to account
for a significant percentage of our revenue, and the loss of, or
material reduction in, their marketing spending with us could
decrease our revenue and harm our business.
There
is significant activity and uncertainty in the regulatory and
legislative environment for the for-profit education sector.
These regulatory or legislative changes could negatively affect
our clients businesses, marketing practices and budgets
and could impact demand, pricing or form of our services, any or
all of which could have a material adverse impact on our
financial results.
We generate nearly half of our revenue from our education client
vertical and nearly all of that revenue is generated from
for-profit educational institutions. There is intense
governmental interest in and scrutiny of the for-profit
education industry and a high degree of focus on marketing
practices in the industry. The Department of Education has
promulgated proposed regulations that could adversely impact us
and our education clients. The intense focus on the for-profit
education industry could result in further regulatory or
legislative action. We cannot predict whether this will happen
or what the impact could be on our financial results.
Over the past year, the Department of Education has been working
on revised regulations under the United States Higher Education
Act. The Higher Education Act, administered by the
U.S. Department of Education, provides that to be eligible
to participate in Federal student financial aid programs, an
educational institution must enter into a program participation
agreement with the Secretary of the Department of Education. The
agreement includes a number of conditions with which an
institution must comply to be granted initial and continuing
eligibility to participate. Among those conditions is a
prohibition on institutions providing to any individual or
entity engaged in recruiting or admission activities any
commission, bonus, or other incentive payment based directly or
indirectly on success in securing enrollments. The current
regulations promulgated under the Higher Education Act specify a
number of types of compensation, or safe harbors,
that do not constitute incentive compensation in violation of
this agreement. One of these safe harbors permits an institution
to award incentive compensation for Internet-based recruitment
and admission activities that provide information about the
institution to prospective students, refer prospective students
to the institution, or permit prospective students to apply for
admission online. From November 2009 until January 2010, the
U.S. Department of Education engaged in a negotiated
rulemaking process. Because the negotiated rulemaking did not
reach consensus on proposed regulations, the Department of
Education issued proposed regulations on June 18, 2010 on
incentive compensation and other matters. The Departments
proposed regulations would repeal all safe harbors regarding
incentive compensation, including the Internet safe harbor. The
statutory deadline for publication of final regulations is
November 1, 2010. The elimination of the safe harbors could
create uncertainty for us and our education clients and impact
the way in which we are paid by our clients and, accordingly,
could reduce the amount of revenue we generate from the
education client vertical.
In addition, other provisions of the proposed regulations, such
as the proposal on gainful employment that would
restrict or eliminate Federal financial aid to students in
programs where certain
debt-to-income
ratios and loan default rates are not satisfied, could affect or
reduce our clients businesses and, as a result, affect or
materially reduce the amount of revenue we generate from those
clients.
Moreover, some of our education clients have had and may in the
future have issues regarding their academic accreditation, which
could adversely affect their ability to offer certain degree
programs. If any of our significant education clients lose their
accreditation, they may reduce or eliminate their marketing
spending, which could adversely affect our financial results.
15
Any of the aforementioned regulatory or legislative risks could
cause some or all of our education clients to significantly
shrink or even to cease doing business, which could have a
material adverse effect on our financial results.
We are
dependent on two market verticals for a majority of our revenue.
Negative changes in the economic condition or regulatory
environment in one or both of these verticals could cause our
revenue to decline and our business and growth could
suffer.
To date, we have generated a majority of our revenue from
clients in our education and financial services client
verticals. We expect that a majority of our revenue in fiscal
year 2011 will be generated from clients in our education and
financial services client verticals. Changes in the market
conditions or the regulatory environment in these two
highly-regulated client verticals may negatively impact our
clients businesses, marketing practices and budgets and,
therefore, adversely affect our financial results.
Our
future growth depends in part on our ability to identify and
complete acquisitions.
Our growth over the past several years is in significant part
due to the large number of acquisitions we have completed. We
have completed a large number of acquisitions of third-party
website publishing businesses and other businesses that are
complementary to our own. We intend to pursue acquisitions of
complementary businesses and technologies to expand our
capabilities, client base and media. We have evaluated, and
expect to continue to evaluate, a wide array of potential
strategic transactions. However, we may not be successful in
identifying suitable acquisition candidates or be able to
complete acquisitions of such candidates. In addition, we may
not be able to obtain financing on favorable terms, or at all,
to fund acquisitions that we may wish to pursue.
Any
acquisitions that we complete will involve a number of risks. If
we are unable to address and resolve these risks successfully,
such acquisitions could harm our business, results of operations
and financial condition.
The anticipated benefit of any acquisitions that we complete may
not materialize. In addition, the process of integrating
acquired businesses or technologies may create unforeseen
operating difficulties and expenditures. Some of the areas where
we may face acquisition-related risks include:
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diversion of management time and potential business disruptions;
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difficulties integrating and supporting acquired products or
technologies;
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expenses, distractions and potential claims resulting from
acquisitions, whether or not they are completed;
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retaining and integrating employees from any businesses we may
acquire;
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issuance of dilutive equity securities, incurrence of debt or
reduction in cash balances;
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integrating various accounting, management, information, human
resource and other systems to permit effective management;
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incurring possible impairment charges, contingent liabilities,
amortization expense or write-offs of goodwill;
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unexpected capital expenditure requirements;
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insufficient revenue to offset increased expenses associated
with acquisitions;
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underperformance problems associated with acquisitions; and
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becoming involved in acquisition-related litigation.
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Foreign acquisitions would involve risks in addition to those
mentioned above, including those related to integration of
operations across different cultures and languages, currency
risks and the particular economic, political, administrative and
management, and regulatory risks associated with specific
countries. We may not be
16
able to address these risks successfully, or at all, without
incurring significant costs, delay or other operating problems.
Our inability to resolve such risks could harm our business and
results of operations.
If we
are unable to retain the members of our management team or
attract and retain qualified management team members in the
future, our business and growth could suffer.
Our success and future growth depend, to a significant degree,
on the continued contributions of the members of our management
team. Each member of our management team is an at-will employee
and may voluntarily terminate his or her employment with us at
any time with minimal notice. We also may need to hire
additional management team members to adequately manage our
growing business. We may not be able to retain or identify and
attract additional qualified management team members.
Competition for experienced management-level personnel in our
industry is intense. Qualified individuals are in high demand,
particularly in the Internet marketing industry, and we may
incur significant costs to attract and retain them. Members of
our management team have also become, or will soon become,
substantially vested in their stock option grants. Management
team members may be more likely to leave as a result of the
recent establishment of a public market for our common stock. If
we lose the services of any member of our management team or if
we are unable to attract and retain additional qualified senior
managers, our business and growth could suffer.
We
need to hire and retain additional qualified personnel to grow
and manage our business. If we are unable to attract and retain
qualified personnel, our business and growth could be seriously
harmed.
Our performance depends on the talents and efforts of our
employees. Our future success will depend on our ability to
attract, retain and motivate highly skilled personnel in all
areas of our organization and, in particular, in our
engineering/technology, sales and marketing, media, finance and
legal/regulatory teams. We plan to continue to grow our business
and will need to hire additional personnel to support this
growth. We have found it difficult from time to time to locate
and hire suitable personnel. If we experience similar
difficulties in the future, our growth may be hindered.
Qualified individuals are in high demand, particularly in the
Internet marketing industry, and we may incur significant costs
to attract and retain them. Many of our employees have also
become, or will soon become, substantially vested in their stock
option grants. Employees may be more likely to leave us as a
result of the recent establishment of a public market for our
common stock. If we are unable to attract and retain the
personnel we need to succeed, our business and growth could be
harmed.
We
depend on third-party website publishers for a significant
portion of our visitors, and any decline in the supply of media
available through these websites or increase in the price of
this media could cause our revenue to decline or our cost to
reach visitors to increase.
A significant portion of our revenue is attributable to visitors
originating from advertising placements that we purchase on
third-party websites. In many instances, website publishers can
change the advertising inventory they make available to us at
any time and, therefore, impact our revenue. In addition,
website publishers may place significant restrictions on our
offerings. These restrictions may prohibit advertisements from
specific clients or specific industries, or restrict the use of
certain creative content or formats. If a website publisher
decides not to make advertising inventory available to us, or
decides to demand a higher revenue share or places significant
restrictions on the use of such inventory, we may not be able to
find advertising inventory from other websites that satisfy our
requirements in a timely and cost-effective manner. In addition,
the number of competing online marketing service providers and
advertisers that acquire inventory from websites continues to
increase. Consolidation of Internet advertising networks and
website publishers could eventually lead to a concentration of
desirable inventory on a small number of websites or networks,
which could limit the supply of inventory available to us or
increase the price of inventory to us. We cannot assure you that
we will be able to acquire advertising inventory that meets our
clients performance, price and quality requirements. If
any of these things occur, our revenue could decline or our
operating costs may increase.
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If we
do not effectively manage our growth, our operating performance
will suffer and we may lose clients.
We have experienced rapid growth in our operations and operating
locations, and we expect to experience continued growth in our
business, both through acquisitions and internal growth. This
growth has placed, and will continue to place, significant
demands on our management and our operational and financial
infrastructure. In particular, continued rapid growth and
acquisitions may make it more difficult for us to accomplish the
following:
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successfully scale our technology to accommodate a larger
business and integrate acquisitions;
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maintain our standing with key vendors, including Internet
search companies and third-party website publishers;
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maintain our client service standards; and
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develop and improve our operational, financial and management
controls and maintain adequate reporting systems and procedures.
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In addition, our personnel, systems, procedures and controls may
be inadequate to support our future operations. The improvements
required to manage our growth will require us to make
significant expenditures, expand, train and manage our employee
base and allocate valuable management resources. If we fail to
effectively manage our growth, our operating performance will
suffer and we may lose clients, key vendors and key personnel.
We
have incurred a significant amount of debt, which may limit our
ability to fund general corporate requirements and obtain
additional financing, limit our flexibility in responding to
business opportunities and competitive developments and increase
our vulnerability to adverse economic and industry
conditions.
As of June 30, 2010, we had an outstanding term loan with a
principal balance of $34.2 million and a revolving credit
line pursuant to which we can borrow up to an additional
$140.0 million. As of such date, we had drawn
$41.8 million from our revolving credit line. As of
June 30, 2010, we also had outstanding notes to sellers
arising from numerous acquisitions in the total principal amount
of $19.5 million. As a result of our debt:
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we may not have sufficient liquidity to respond to business
opportunities, competitive developments and adverse economic
conditions;
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we may not have sufficient liquidity to fund all of these costs
if our revenue declines or costs increase; and
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we may not have sufficient funds to repay the principal balance
of our debt when due.
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Our debt obligations may also impair our ability to obtain
additional financing, if needed. Our indebtedness is secured by
substantially all of our assets, leaving us with limited
collateral for additional financing. Moreover, the terms of our
indebtedness restrict our ability to take certain actions,
including the incurrence of additional indebtedness, mergers and
acquisitions, investments and asset sales. In addition, even if
we are able to raise needed equity financing, we are required to
use a portion of the net proceeds of certain types of equity
financings to repay the outstanding balance of our term loan. A
failure to pay interest or indebtedness when due could result in
a variety of adverse consequences, including the acceleration of
our indebtedness. In such a situation, it is unlikely that we
would be able to fulfill our obligations under our credit
facility or repay the accelerated indebtedness or otherwise
cover our costs.
The
severe economic downturn in the United States poses additional
risks to our business, financial condition and results of
operations.
The United States has experienced, and is continuing to
experience, a severe economic downturn. The credit crisis,
deterioration of global economies, potential insolvency of one
or more countries globally, high unemployment and reduced equity
valuations all create risks that could harm our business. If
macroeconomic conditions worsen, we are not able to predict the
impact such worsening conditions will have on the online
marketing industry in general, and our results of operations
specifically. Clients in particular client verticals such as
financial services, particularly mortgage, credit cards and
deposits, small- and medium-sized business customers and home
services
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are facing very difficult conditions and their marketing spend
has been negatively affected. These conditions could also damage
our business opportunities in existing markets, and reduce our
revenue and profitability. While the effect of these and related
conditions poses widespread risk across our business, we believe
that it may particularly affect our efforts in the mortgage,
credit cards and deposits, small- and medium-sized business and
home services client verticals, due to reduced availability of
credit for households and business and reduced household
disposable income. Economic conditions may not improve or may
worsen.
Poor
perception of our business or industry as a result of the
actions of third parties could harm our reputation and adversely
affect our business, financial condition and results of
operations.
Our business is dependent on attracting a large number of
visitors to our websites and providing leads and clicks to our
clients, which depends in part on our reputation within the
industry and with our clients. There are companies within our
industry that regularly engage in activities that our
clients customers may view as unlawful or inappropriate.
These activities, such as spyware or deceptive promotions, by
third parties may be seen by clients as characteristic of
participants in our industry and, therefore, may have an adverse
effect on the reputation of all participants in our industry,
including us. Any damage to our reputation, including from
publicity from legal proceedings against us or companies that
work within our industry, governmental proceedings, consumer
class action litigation, or the disclosure of information
security breaches or private information misuse, could adversely
affect our business, financial condition and results of
operations.
Our
operating results have fluctuated in the past and may do so in
the future, which makes our results of operations difficult to
predict and could cause our operating results to fall short of
analysts and investors expectations.
While we have experienced continued revenue growth, our prior
quarterly and annual operating results have fluctuated due to
changes in our business, our industry and the general economic
climate. Similarly, our future operating results may vary
significantly from quarter to quarter due to a variety of
factors, many of which are beyond our control. Our fluctuating
results could cause our performance to be below the expectations
of securities analysts and investors, causing the price of our
common stock to fall. Because our business is changing and
evolving, our historical operating results may not be useful to
you in predicting our future operating results. Factors that may
increase the volatility of our operating results include the
following:
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changes in demand and pricing for our services;
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changes in our pricing policies, the pricing policies of our
competitors, or the pricing of Internet advertising or media;
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the addition of new clients or the loss of existing clients;
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changes in our clients advertising agencies or the
marketing strategies our clients or their advertising agencies
employ;
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changes in the regulatory environment for us or our clients;
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changes in the economic prospects of our clients or the economy
generally, which could alter current or prospective
clients spending priorities, or could increase the time or
costs required to complete sales with clients;
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changes in the availability of Internet advertising or the cost
to reach Internet visitors;
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changes in the placement of our websites on search engines;
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the introduction of new product or service offerings by our
competitors; and
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costs related to acquisitions of businesses or technologies.
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Our
quarterly revenue and operating results may fluctuate
significantly from quarter to quarter due to seasonal
fluctuations in advertising spending.
The timing of our revenue, particularly from our education and
business-to-business
client verticals, is affected by seasonal factors. For example,
in our education client vertical, the first quarter of each
fiscal year typically demonstrates seasonal strength and our
second fiscal quarter typically demonstrates seasonal weakness.
In our second fiscal quarter, our education clients often take
fewer leads due to holiday staffing and lower availability of
lead supply caused by higher media pricing for some forms of
media during the holiday period, causing our revenue to be
sequentially lower. Our fluctuating results could cause our
performance to be below the expectations of securities analysts
and investors, causing the price of our common stock to fall. To
the extent our rate of growth slows, we expect that the
seasonality in our business may become more apparent and may in
the future cause our operating results to fluctuate to a greater
extent.
We may
need additional capital in the future to meet our financial
obligations and to pursue our business objectives. Additional
capital may not be available or may not be available on
favorable terms and our business and financial condition could
therefore be adversely affected.
While we anticipate that our existing cash and cash equivalents,
together with availability under our existing credit facility,
cash balances and cash from operations, will be sufficient to
fund our operations for at least the next 12 months, we may
need to raise additional capital to fund operations in the
future or to finance acquisitions. If we seek to raise
additional capital in order to meet various objectives,
including developing future technologies and services,
increasing working capital, acquiring businesses and responding
to competitive pressures, capital may not be available on
favorable terms or may not be available at all. In addition,
pursuant to the terms of our credit facility, we are required to
use a portion of the net proceeds of certain equity financings
to repay the outstanding balance of our term loan. Lack of
sufficient capital resources could significantly limit our
ability to take advantage of business and strategic
opportunities. Any additional capital raised through the sale of
equity or debt securities with an equity component would dilute
our stock ownership. If adequate additional funds are not
available, we may be required to delay, reduce the scope of, or
eliminate material parts of our business strategy, including
potential additional acquisitions or development of new
technologies.
If we
fail to compete effectively against other online marketing and
media companies and other competitors, we could lose clients and
our revenue may decline.
The market for online marketing is intensely competitive. We
expect this competition to continue to increase in the future.
We perceive only limited barriers to entry to the online
marketing industry. We compete both for clients and for limited
high quality advertising inventory. We compete for clients on
the basis of a number of factors, including return on marketing
expenditures, price, and client service.
We compete with Internet and traditional media companies for a
share of clients overall marketing budgets, including:
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online marketing or media services providers such as Monster
Worldwide in the education client vertical and BankRate in the
financial services client vertical;
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offline and online advertising agencies;
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major Internet portals and search engine companies with
advertising networks such as Google, Yahoo!, MSN, and AOL;
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other online marketing service providers, including online
affiliate advertising networks and industry-specific portals or
lead generation companies;
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website publishers with their own sales forces that sell their
online marketing services directly to clients;
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in-house marketing groups at current or potential clients;
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offline direct marketing agencies; and
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television, radio and print companies.
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Competition for web traffic among websites and search engines,
as well as competition with traditional media companies, could
result in significant price pressure, declining margins,
reductions in revenue and loss of market share. In addition, as
we continue to expand the scope of our services, we may compete
with a greater number of websites, clients and traditional media
companies across an increasing range of different services,
including in vertical markets where competitors may have
advantages in expertise, brand recognition and other areas.
Large Internet companies with brand recognition, such as Google,
Yahoo!, MSN, and AOL, have significant numbers of direct sales
personnel and substantial proprietary advertising inventory and
web traffic that provide a significant competitive advantage and
have significant impact on pricing for Internet advertising and
web traffic. These companies may also develop more vertically
targeted products that match consumers with products and
services, such as Googles mortgage rate and credit card
comparison products, and thus compete with us more directly. The
trend toward consolidation in the Internet advertising arena may
also affect pricing and availability of advertising inventory
and web traffic. Many of our current and potential competitors
also enjoy other competitive advantages over us, such as longer
operating histories, greater brand recognition, larger client
bases, greater access to advertising inventory on high-traffic
websites, and significantly greater financial, technical and
marketing resources. As a result, we may not be able to compete
successfully. If we fail to deliver results that are superior to
those that other online marketing service providers achieve, we
could lose clients and our revenue may decline.
If the
market for online marketing services fails to continue to
develop, our future growth may be limited and our revenue may
decrease.
The online marketing services market is relatively new and
rapidly evolving, and it uses different measurements than
traditional media to gauge its effectiveness. Some of our
current or potential clients have little or no experience using
the Internet for advertising and marketing purposes and have
allocated only limited portions of their advertising and
marketing budgets to the Internet. The adoption of Internet
advertising, particularly by those entities that have
historically relied upon traditional media for advertising,
requires the acceptance of a new way of conducting business,
exchanging information and evaluating new advertising and
marketing technologies and services. In particular, we are
dependent on our clients adoption of new metrics to
measure the success of online marketing campaigns. We may also
experience resistance from traditional advertising agencies who
may be advising our clients. We cannot assure you that the
market for online marketing services will continue to grow. If
the market for online marketing services fails to continue to
develop or develops more slowly than we anticipate, our ability
to grow our business may be limited and our revenue may decrease.
Third-party
website publishers can engage in unauthorized or unlawful acts
that could subject us to significant liability or cause us to
lose clients.
We generate a significant portion of our web visitors from media
advertising that we purchase from third-party website
publishers. Some of these publishers are authorized to display
our clients brands, subject to contractual restrictions.
In the past, some of our third-party website publishers have
engaged in activities that certain of our clients have viewed as
harmful to their brands, such as displaying outdated
descriptions of a clients offerings or outdated logos. Any
activity by publishers that clients view as potentially damaging
to their brands can harm our relationship with the client and
cause the client to terminate its relationship with us,
resulting in a loss of revenue. In addition, the law is
unsettled on the extent of liability that an advertiser in our
position has for the activities of third-party website
publishers. We could be subject to costly litigation and, if we
are unsuccessful in defending ourselves, damages for the
unauthorized or unlawful acts of third-party website publishers.
Because
many of our client contracts can be cancelled by the client with
little prior notice or penalty, the cancellation of one or more
contracts could result in an immediate decline in our
revenue.
We derive our revenue from contracts with our Internet marketing
clients, most of which are cancelable with little or no prior
notice. In addition, these contracts do not contain penalty
provisions for cancellation before the end of the contract term.
The non-renewal, renegotiation, cancellation, or deferral of
large contracts, or a number of contracts that in the aggregate
account for a significant amount of our revenue, is difficult to
anticipate and could result in an immediate decline in our
revenue.
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Unauthorized
access to or accidental disclosure of consumer
personally-identifiable information that we collect may cause us
to incur significant expenses and may negatively affect our
credibility and business.
There is growing concern over the security of personal
information transmitted over the Internet, consumer identity
theft and user privacy. Despite our implementation of security
measures, our computer systems may be susceptible to electronic
or physical computer break-ins, viruses and other disruptions
and security breaches. Any perceived or actual unauthorized
disclosure of personally-identifiable information regarding
website visitors, whether through breach of our network by an
unauthorized party, employee theft, misuse or error or
otherwise, could harm our reputation, impair our ability to
attract website visitors and attract and retain our clients, or
subject us to claims or litigation arising from damages suffered
by consumers, and thereby harm our business and operating
results. In addition, we could incur significant costs in
complying with the multitude of state, federal and foreign laws
regarding the unauthorized disclosure of personal information.
If we
do not adequately protect our intellectual property rights, our
competitive position and business may suffer.
Our ability to compete effectively depends upon our proprietary
systems and technology. We rely on trade secret, trademark and
copyright law, confidentiality agreements, technical measures
and patents to protect our proprietary rights. We currently have
two patent applications pending in the United States and no
issued patents. Effective trade secret, copyright, trademark and
patent protection may not be available in all countries where we
currently operate or in which we may operate in the future. Some
of our systems and technologies are not covered by any
copyright, patent or patent application. We cannot guarantee
that: (i) our intellectual property rights will provide
competitive advantages to us; (ii) our ability to assert
our intellectual property rights against potential competitors
or to settle current or future disputes will not be limited by
our agreements with third parties; (iii) our intellectual
property rights will be enforced in jurisdictions where
competition may be intense or where legal protection may be
weak; (iv) any of the patents, trademarks, copyrights,
trade secrets or other intellectual property rights that we
presently employ in our business will not lapse or be
invalidated, circumvented, challenged, or abandoned;
(v) competitors will not design around our protected
systems and technology; or (vi) that we will not lose the
ability to assert our intellectual property rights against
others.
We are a party to a number of third-party intellectual property
license agreements and in the future, may need to obtain
additional licenses or renew existing license agreements. We are
unable to predict with certainty whether these license
agreements can be obtained or renewed on commercially reasonable
terms, or at all.
We have from time to time become aware of third parties who we
believe may have infringed on our intellectual property rights.
The use of our intellectual property rights by others could
reduce any competitive advantage we have developed and cause us
to lose clients, third-party website publishers or otherwise
harm our business. Policing unauthorized use of our proprietary
rights can be difficult and costly. In addition, litigation,
while it may be necessary to enforce or protect our intellectual
property rights or to defend litigation brought against us,
could result in substantial costs and diversion of resources and
management attention and could adversely affect our business,
even if we are successful on the merits.
Confidentiality
agreements with employees, consultants and others may not
adequately prevent disclosure of trade secrets and other
proprietary information.
We have devoted substantial resources to the development of our
proprietary systems and technology. In order to protect our
proprietary systems and technology, we enter into
confidentiality agreements with our employees, consultants,
independent contractors and other advisors. These agreements may
not effectively prevent unauthorized disclosure of confidential
information or unauthorized parties from copying aspects of our
services or obtaining and using information that we regard as
proprietary. Moreover, these agreements may not provide an
adequate remedy in the event of such unauthorized disclosures of
confidential information and we cannot assure you that our
rights under such agreements will be enforceable. In addition,
others may independently discover trade secrets and proprietary
information, and in such cases we could not assert any trade
secret rights against such parties. Costly and time-consuming
litigation could be necessary to enforce and determine the scope
of our
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proprietary rights, and failure to obtain or maintain trade
secret protection could reduce any competitive advantage we have
and cause us to lose clients, publishers or otherwise harm our
business.
Third
parties may sue us for intellectual property infringement which,
if successful, could require us to pay significant damages or
curtail our offerings.
We cannot be certain that our internally-developed or acquired
systems and technologies do not and will not infringe the
intellectual property rights of others. In addition, we license
content, software and other intellectual property rights from
third parties and may be subject to claims of infringement if
such parties do not possess the necessary intellectual property
rights to the products they license to us. We have in the past
and may in the future be subject to legal proceedings and claims
that we have infringed the patent or other intellectual property
rights of a third-party. These claims sometimes involve patent
holding companies or other adverse patent owners who have no
relevant product revenue and against whom our own patents, if
any, may therefore provide little or no deterrence. In addition,
third parties have asserted and may in the future assert
intellectual property infringement claims against our clients,
which we have agreed in certain circumstances to indemnify and
defend against such claims. Any intellectual property related
infringement claims, whether or not meritorious, could result in
costly litigation and could divert management resources and
attention. Moreover, should we be found liable for infringement,
we may be required to enter into licensing agreements, if
available on acceptable terms or at all, pay substantial
damages, or limit or curtail our systems and technologies.
Moreover, we may need to redesign some of our systems and
technologies to avoid future infringement liability. Any of the
foregoing could prevent us from competing effectively and
increase our costs.
Additionally, the laws relating to use of trademarks on the
Internet are currently unsettled, particularly as they apply to
search engine functionality. For example, other Internet
marketing and search companies have been sued in the past for
trademark infringement and other intellectual property-related
claims for the display of ads or search results in response to
user queries that include trademarked terms. The outcomes of
these lawsuits have differed from jurisdiction to jurisdiction.
For this reason, it is conceivable that certain of our
activities could expose us to trademark infringement, unfair
competition, misappropriation or other intellectual property
related claims which could be costly to defend and result in
substantial damages or otherwise limit or curtail our
activities, and adversely affect our business or prospects.
Our
proprietary technologies may include design or performance
defects and may not achieve their intended results, either of
which could impair our future revenue growth.
Our proprietary technologies are relatively new, and they may
contain design or performance defects that are not yet apparent.
The use of our proprietary technologies may not achieve the
intended results as effectively as other technologies that exist
now or may be introduced by our competitors, in which case our
business could be harmed.
If we fail to keep pace with rapidly-changing technologies
and industry standards, we could lose clients or advertising
inventory and our results of operations may suffer.
The business lines in which we currently compete are
characterized by rapidly-changing Internet media and marketing
standards, changing technologies, frequent new product and
service introductions, and changing user and client demands. The
introduction of new technologies and services embodying new
technologies and the emergence of new industry standards and
practices could render our existing technologies and services
obsolete and unmarketable or require unanticipated investments
in technology. Our future success will depend in part on our
ability to adapt to these rapidly-changing Internet media
formats and other technologies. We will need to enhance our
existing technologies and services and develop and introduce new
technologies and services to address our clients changing
demands. If we fail to adapt successfully to such developments
or timely introduce new technologies and services, we could lose
clients, our expenses could increase and we could lose
advertising inventory.
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Changes
in government regulation and industry standards applicable to
the Internet and our business could decrease demand for our
technologies and services or increase our costs.
Laws and regulations that apply to Internet communications,
commerce and advertising are becoming more prevalent. These
regulations could increase the costs of conducting business on
the Internet and could decrease demand for our technologies and
services.
In the United States, federal and state laws have been enacted
regarding copyrights, sending of unsolicited commercial email,
user privacy, search engines, Internet tracking technologies,
direct marketing, data security, childrens privacy,
pricing, sweepstakes, promotions, intellectual property
ownership and infringement, trade secrets, export of encryption
technology, taxation and acceptable content and quality of
goods. Other laws and regulations may be adopted in the future.
Laws and regulations, including those related to privacy and use
of personal information, are changing rapidly outside the United
States as well which may make compliance with such laws and
regulations difficult and which may negatively affect our
ability to expand internationally. This legislation could:
(i) hinder growth in the use of the Internet generally;
(ii) decrease the acceptance of the Internet as a
communications, commercial and advertising medium;
(iii) reduce our revenue; (iv) increase our operating
expenses; or (v) expose us to significant liabilities.
The laws governing the Internet remain largely unsettled, even
in areas where there has been some legislative action. While we
actively monitor this changing legal and regulatory landscape to
stay abreast of changes in the laws and regulations applicable
to our business, we are not certain how our business might be
affected by the application of existing laws governing issues
such as property ownership, copyrights, encryption and other
intellectual property issues, libel, obscenity and export or
import matters to the Internet advertising industry. The vast
majority of such laws were adopted prior to the advent of the
Internet. As a result, they do not contemplate or address the
unique issues of the Internet and related technologies. Changes
in laws intended to address such issues could create uncertainty
in the Internet market. It may take years to determine how
existing laws apply to the Internet and Internet marketing. Such
uncertainty makes it difficult to predict costs and could reduce
demand for our services or increase the cost of doing business
as a result of litigation costs or increased service delivery
costs.
In particular, a number of U.S. federal laws impact our
business. The Digital Millennium Copyright Act, or DMCA, is
intended, in part, to limit the liability of eligible online
service providers for listing or linking to third-party websites
that include materials that infringe copyrights or other rights.
Portions of the Communications Decency Act, or CDA, are intended
to provide statutory protections to online service providers who
distribute third-party content. We rely on the protections
provided by both the DMCA and CDA in conducting our business. In
addition, the United States Higher Education Act provides that
to be eligible to participate in Federal student financial aid
programs, an educational institution must enter into a program
participation agreement with the Secretary of the Department of
Education. The agreement includes a number of conditions with
which an institution must comply to be granted initial and
continuing eligibility to participate. Among those conditions is
a prohibition on institutions providing to any individual or
entity engaged in recruiting or admission activities any
commission, bonus, or other incentive payment based directly or
indirectly on success in securing enrollments. The regulations
promulgated under the Higher Education Act specify a number of
types of compensation, or safe harbors, that do not
constitute incentive compensation in violation of this
agreement. One of these safe harbors permits an institution to
award incentive compensation for Internet-based recruitment and
admission activities that provide information about the
institution to prospective students, refer prospective students
to the institution, or permit prospective students to apply for
admission online. From November 2009 until January 2010, the
U.S. Department of Education engaged in a negotiated
rulemaking process. Because the negotiated rulemaking did not
reach consensus on proposed regulations, the Department of
Education issued proposed regulations on June 18, 2010 on
incentive compensation and other matters. The Departments
proposed regulations would repeal all safe harbors regarding
incentive compensation, including the Internet safe harbor. They
would also restrict Title IV funding for programs not
meeting prescribed
income-to-debt
ratios (i.e., programs not leading to gainful
employment as defined under the proposed regulation).
These provisions, if adopted and as enforced, could negatively
affect our business with education clients. The statutory
deadline for publication of final regulations is
November 1, 2010. Any changes in these laws or judicial
interpretations narrowing their protections will subject us to
greater risk of liability and may increase our costs of
compliance with these regulations or limit our ability to
operate certain lines of business.
24
The financial services, education and medical industries are
highly regulated and our marketing activities on behalf of our
clients in those industries are also regulated. As described
above, and for example, the proposed regulations from the
Department of Education on incentive compensation, gainful
employment and other matters could limit our clients
businesses and limit the revenue we receive from our education
clients. As an additional example, our mortgage websites and
marketing services we offer are subject to various federal,
state and local laws, including state mortgage broker licensing
laws, federal and state laws prohibiting unfair acts and
practices, and federal and state advertising laws. Any failure
to comply with these laws and regulations could subject us to
revocation of required licenses, civil, criminal or
administrative liability, damage to our reputation or changes to
or limitations on the conduct of our business. Any of the
foregoing could cause our business, operations and financial
condition to suffer.
Increased
taxation of companies engaged in Internet commerce may adversely
affect the commercial use of our marketing services and our
financial results.
The tax treatment of Internet commerce remains unsettled, and we
cannot predict the effect of current attempts to impose sales,
income or other taxes on commerce conducted over the Internet.
Tax authorities at the international, federal, state and local
levels are currently reviewing the taxation of Internet
commerce, particularly as many governmental agencies seek to
address fiscal concerns and budgetary shortfalls by introducing
new taxes or expanding the applicability of existing tax laws.
We have experienced certain states taking expansive positions
with regard to their taxation of our services. The imposition of
new laws requiring the collection of sales or other
transactional taxes on the sale of our services via the Internet
could create increased administrative burdens or costs,
discourage clients from purchasing services from us, decrease
our ability to compete or otherwise substantially harm our
business and results of operations.
Limitations
on our ability to collect and use data derived from user
activities could significantly diminish the value of our
services and cause us to lose clients and revenue.
When a user visits our websites, we use technologies, including
cookies, to collect information such as the
users Internet Protocol, or IP, address, offerings
delivered by us that have been previously viewed by the user and
responses by the user to those offerings. In order to determine
the effectiveness of a marketing campaign and to determine how
to modify the campaign, we need to access and analyze this
information. The use of cookies has been the subject of
regulatory scrutiny and litigation and users are able to block
or delete cookies from their browser. Periodically, certain of
our clients and publishers seek to prohibit or limit our
collection or use of this data. Interruptions, failures or
defects in our data collection systems, as well as privacy
concerns regarding the collection of user data, could also limit
our ability to analyze data from our clients marketing
campaigns. This risk is heightened when we deliver marketing
services to clients in the financial and medical services client
verticals. If our access to data is limited in the future, we
may be unable to provide effective technologies and services to
clients and we may lose clients and revenue.
As a
creator and a distributor of Internet content, we face potential
liability and expenses for legal claims based on the nature and
content of the materials that we create or distribute. If we are
required to pay damages or expenses in connection with these
legal claims, our operating results and business may be
harmed.
We create original content for our websites and marketing
messages and distribute third-party content on our websites and
in our marketing messages. As a creator and distributor of
original content and third-party provided content, we face
potential liability based on a variety of theories, including
defamation, negligence, deceptive advertising, copyright or
trademark infringement or other legal theories based on the
nature, creation or distribution of this information. It is also
possible that our website visitors could make claims against us
for losses incurred in reliance upon information provided on our
websites. In addition, as the number of users of forums and
social media features on our websites increases, we could be
exposed to liability in connection with material posted to our
websites by users and other third parties. These claims, whether
brought in the United States or abroad, could divert management
time and attention away from our business and result in
significant costs to investigate and defend,
25
regardless of the merit of these claims. In addition, if we
become subject to these types of claims and are not successful
in our defense, we may be forced to pay substantial damages.
Wireless
devices and mobile phones are increasingly being used to access
the Internet, and our online marketing services may not be as
effective when accessed through these devices, which could cause
harm to our business.
The number of people who access the Internet through devices
other than personal computers has increased substantially in the
last few years. Our online marketing services were designed for
persons accessing the Internet on a desktop or laptop computer.
The smaller screens, lower resolution graphics and less
convenient typing capabilities of these devices may make it more
difficult for visitors to respond to our offerings. In addition,
the cost of mobile advertising is relatively high and may not be
cost-effective for our services. If our services continue to be
less effective or economically attractive for clients seeking to
engage in marketing through these devices and this segment of
web traffic grows at the expense of traditional computer
Internet access, we will experience difficulty attracting
website visitors and attracting and retaining clients and our
operating results and business will be harmed.
We may
not succeed in expanding our businesses outside the United
States, which may limit our future growth.
One potential area of growth for us is in the international
markets. However, we have limited experience in marketing,
selling and supporting our services outside of the United States
and we may not be successful in introducing or marketing our
services abroad. There are risks inherent in conducting business
in international markets, such as:
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the adaptation of technologies and services to foreign
clients preferences and customs;
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application of foreign laws and regulations to us, including
marketing and privacy regulations;
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changes in foreign political and economic conditions;
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tariffs and other trade barriers, fluctuations in currency
exchange rates and potentially adverse tax consequences;
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language barriers or cultural differences;
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reduced or limited protection for intellectual property rights
in foreign jurisdictions;
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difficulties and costs in staffing, managing or overseeing
foreign operations; and
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education of potential clients who may not be familiar with
online marketing.
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If we are unable to successfully expand and market our services
abroad, our business and future growth may be harmed and we may
incur costs that may not lead to future revenue.
We
rely on Internet bandwidth and data center providers and other
third parties for key aspects of the process of providing
services to our clients, and any failure or interruption in the
services and products provided by these third parties could harm
our business.
We rely on third-party vendors, including data center and
Internet bandwidth providers. Any disruption in the network
access or co-location services provided by these third-party
providers or any failure of these third-party providers to
handle current or higher volumes of use could significantly harm
our business. Any financial or other difficulties our providers
face may have negative effects on our business, the nature and
extent of which we cannot predict. We exercise little control
over these third-party vendors, which increases our
vulnerability to problems with the services they provide. We
license technology and related databases from third parties to
facilitate analysis and storage of data and delivery of
offerings. We have experienced interruptions and delays in
service and availability for data centers, bandwidth and other
technologies in the past. Any errors, failures, interruptions or
delays experienced in connection with these third-party
technologies and services could adversely affect our business
and could expose us to liabilities to third parties.
26
Our systems also heavily depend on the availability of
electricity, which also comes from third-party providers. If we
or third-party data centers which we utilize were to experience
a major power outage, we would have to rely on
back-up
generators. These
back-up
generators may not operate properly through a major power outage
and their fuel supply could also be inadequate during a major
power outage or disruptive event. Furthermore, we do not
currently have backup generators at our Foster City, California
headquarters. Information systems such as ours may be disrupted
by even brief power outages, or by the fluctuations in power
resulting from switches to and from
back-up
generators. This could give rise to obligations to certain of
our clients which could have an adverse effect on our results
for the period of time in which any disruption of utility
services to us occurs.
Interruption
or failure of our information technology and communications
systems could impair our ability to effectively deliver our
services, which could cause us to lose clients and harm our
operating results.
Our delivery of marketing and media services depends on the
continuing operation of our technology infrastructure and
systems. Any damage to or failure of our systems could result in
interruptions in our ability to deliver offerings quickly and
accurately
and/or
process visitors responses emanating from our various web
presences. Interruptions in our service could reduce our revenue
and profits, and our reputation could be damaged if people
believe our systems are unreliable. Our systems and operations
are vulnerable to damage or interruption from earthquakes,
terrorist attacks, floods, fires, power loss, break-ins,
hardware or software failures, telecommunications failures,
computer viruses or other attempts to harm our systems, and
similar events.
We lease or maintain server space in various locations,
including in San Francisco, California. Our California
facilities are located in areas with a high risk of major
earthquakes. Our facilities are also subject to break-ins,
sabotage and intentional acts of vandalism, and to potential
disruptions if the operators of these facilities have financial
difficulties. Some of our systems are not fully redundant, and
our disaster recovery planning cannot account for all
eventualities. The occurrence of a natural disaster, a decision
to close a facility we are using without adequate notice for
financial reasons or other unanticipated problems at our
facilities could result in lengthy interruptions in our service.
Any unscheduled interruption in our service would result in an
immediate loss of revenue. If we experience frequent or
persistent system failures, the attractiveness of our
technologies and services to clients and website publishers
could be permanently harmed. The steps we have taken to increase
the reliability and redundancy of our systems are expensive,
reduce our operating margin, and may not be successful in
reducing the frequency or duration of unscheduled interruptions.
Any
constraints on the capacity of our technology infrastructure
could delay the effectiveness of our operations or result in
system failures, which would result in the loss of clients and
harm our business and results of operations.
Our future success depends in part on the efficient performance
of our software and technology infrastructure. As the numbers of
websites and Internet users increase, our technology
infrastructure may not be able to meet the increased demand. A
sudden and unexpected increase in the volume of user responses
could strain the capacity of our technology infrastructure. Any
capacity constraints we experience could lead to slower response
times or system failures and adversely affect the availability
of websites and the level of user responses received, which
could result in the loss of clients or revenue or harm to our
business and results of operations.
We
could lose clients if we fail to detect click-through or other
fraud on advertisements in a manner that is acceptable to our
clients.
We are exposed to the risk of fraudulent clicks or actions on
our websites or our third-party publishers websites. We
may in the future have to refund revenue that our clients have
paid to us and that was later attributed to, or suspected to be
caused by, fraud. Click-through fraud occurs when an individual
clicks on an ad displayed on a website or an automated system is
used to create such clicks with the intent of generating the
revenue share payment to the publisher rather than to view the
underlying content. Action fraud occurs when on-line forms are
completed with false or fictitious information in an effort to
increase the compensable actions in respect of which a web
27
publisher is to be compensated. From time to time we have
experienced fraudulent clicks or actions and we do not charge
our clients for such fraudulent clicks or actions when they are
detected. It is conceivable that this activity could negatively
affect our profitability, and this type of fraudulent act could
hurt our reputation. If fraudulent clicks or actions are not
detected, the affected clients may experience a reduced return
on their investment in our marketing programs, which could lead
the clients to become dissatisfied with our campaigns, and in
turn, lead to loss of clients and the related revenue.
Additionally, we have from time to time had to terminate
relationships with web publishers who we believed to have
engaged in fraud and we may have to do so in the future.
Termination of such relationships entails a loss of revenue
associated with the legitimate actions or clicks generated by
such web publishers.
We
incur significant costs as a result of operating as a public
company, which may adversely affect our operating results and
financial condition.
As a public company, we incur significant accounting, legal and
other expenses that we did not incur as a private company. We
incur costs associated with our public company reporting
requirements. We also incur costs associated with corporate
governance requirements, including requirements under the
Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, as well as
rules implemented by the SEC and NASDAQ. We expect these rules
and regulations to continue to increase our legal and financial
compliance costs and to make some activities more time-consuming
and costly. Our management and other personnel will need to
continue to devote a substantial amount of time to these
compliance initiatives. Furthermore, these laws and regulations
could make it more difficult or more costly for us to obtain
certain types of insurance, including director and officer
liability insurance, and we may be forced to accept reduced
policy limits and coverage or incur substantially higher costs
to obtain the same or similar coverage. The impact of these
requirements could also make it more difficult for us to attract
and retain qualified persons to serve on our board of directors,
our board committees or as executive officers. These additional
costs may adversely affect our operating results and financial
condition.
In addition, the Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal control over
financial reporting and disclosure controls and procedures. In
particular, for the fiscal year ending June 30, 2011, we
must perform system and process evaluation and testing of our
internal control over financial reporting to allow management
and our independent registered public accounting firm to report
on the effectiveness of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act, or Section 404. Our compliance with Section 404
will require that we incur substantial expense and expend
significant management time on compliance-related issues.
If we
fail to maintain proper and effective internal controls, our
ability to produce accurate financial statements on a timely
basis could be impaired, which would adversely affect our
ability to operate our business.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally
accepted accounting principles. We may in the future discover
areas of our internal financial and accounting controls and
procedures that need improvement. Our internal control over
financial reporting will not prevent or detect all error and all
fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
that the control systems objectives will be met. Because
of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all
control issues and instances of fraud will be detected. If we
are unable to maintain proper and effective internal controls,
we may not be able to produce accurate financial statements on a
timely basis, which could adversely affect our ability to
operate our business and could result in regulatory action.
28
Risks
Related to the Ownership of Our Common Stock
Our
stock price may be volatile, and you may not be able to resell
shares of our common stock at or above the price you
paid.
Prior to our initial public offering there was no public market
for shares of our common stock, and an active public market for
our shares may not be sustained. The trading price of our common
stock has been highly volatile since our initial public offering
and may continue to be subject to wide fluctuations in response
to various factors, some of which are beyond our control. These
factors include those discussed in this Risk Factors
section of this report on
Form 10-K
and others such as:
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changes in earnings estimates or recommendations by securities
analysts;
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changes in governmental regulations;
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announcements by us or our competitors of new services,
significant contracts, commercial relationships, acquisitions or
capital commitments;
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changes in the search engine rankings of our sites or our
ability to access PPC advertising;
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developments with respect to intellectual property rights;
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our ability to develop and market new and enhanced products on a
timely basis;
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our commencement of, or involvement in, litigation;
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negative publicity about us, our industry, our clients or our
clients industries; and
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a slowdown in our industry or the general economy.
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In recent years, the stock market in general, and the market for
technology and Internet-based companies in particular, has
experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of those companies. Broad market and industry
factors may seriously affect the market price of our common
stock, regardless of our actual operating performance. In
addition, in the past, following periods of volatility in the
overall market and the market price of a particular
companys securities, securities class action litigation
has often been instituted against these companies. Such
litigation, if instituted against us, could result in
substantial costs and a diversion of our managements
attention and resources.
If
securities or industry analysts do not publish research or
reports about our business, or if they issue an adverse or
misleading opinion regarding our stock, our stock price and
trading volume could decline.
The trading market for our common stock is influenced by the
research and reports that industry or securities analysts
publish about us or our business. If any of the analysts who
cover us issue an adverse opinion regarding our stock, our stock
price would likely decline. If one or more of these analysts
ceases coverage of our company or fail to publish reports on us
regularly, we could lose visibility in the financial markets,
which in turn could cause our stock price or trading volume to
decline.
Our
directors, executive officers and principal stockholders and
their respective affiliates have substantial control over us and
could delay or prevent a change in corporate
control.
As of June 30, 2010, our directors, executive officers and
holders of more than 5% of our common stock, together with their
affiliates, beneficially owned, in the aggregate the majority of
our outstanding common stock. As a result, these stockholders,
acting together, have substantial control over the outcome of
matters submitted to our stockholders for approval, including
the election of directors and any merger, consolidation or sale
of all or substantially all of our assets. In addition, these
stockholders, acting together, have significant influence over
the management and affairs of our company. Accordingly, this
concentration of ownership may have the effect of:
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delaying, deferring or preventing a change in corporate control;
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impeding a merger, consolidation, takeover or other business
combination involving us; or
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29
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discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
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Future
sales of shares by existing stockholders could cause our stock
price to decline.
If our existing stockholders sell, or indicate an intent to
sell, substantial amounts of our common stock in the public
market the trading price of our common stock could decline
significantly. We had 45,069,695 shares of common stock
outstanding as of June 30, 2010. In August 2010,
35,069,695 shares became eligible for sale in the public
market due to the expiration of contractual lockup agreements
entered into in connection with our initial public offering. In
addition, (i) the 11,796,062 shares subject to
outstanding options under our equity incentive plans as of
June 30, 2010 and (ii) the shares reserved for future
issuance under our equity incentive plans will become eligible
for sale in the public market in the future, subject to certain
legal and contractual limitations. If these additional shares
are sold, or if it is perceived that they will be sold, in the
public market, the price of our common stock could decline
substantially.
We
have broad discretion to determine how to use the funds raised
in our initial public offering and may use them in ways that may
not enhance our operating results or the price of our common
stock.
Our management has broad discretion over the use of proceeds
from our initial public offering, and we could spend the
proceeds from the initial public offering in ways our
stockholders may not agree with or that do not yield a favorable
return. We have been using and intend to continue to use the net
proceeds from our initial public offering for working capital,
capital expenditures and other general corporate purposes. We
may also use and continue to use a portion of the net proceeds
to make repayments on our debt or acquire other businesses,
products or technologies. If we do not invest or apply the
proceeds of our initial public offering in ways that improve our
operating results, we may fail to achieve expected financial
results, which could cause our stock price to decline.
Provisions
in our charter documents under Delaware law and in contractual
obligations, could discourage a takeover that stockholders may
consider favorable and may lead to entrenchment of
management.
Our amended and restated certificate of incorporation and bylaws
contain provisions that could have the effect of delaying or
preventing changes in control or changes in our management
without the consent of our board of directors. These provisions
include:
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a classified board of directors with three-year staggered terms,
which may delay the ability of stockholders to change the
membership of a majority of our board of directors;
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no cumulative voting in the election of directors, which limits
the ability of minority stockholders to elect director
candidates;
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the exclusive right of our board of directors to elect a
director to fill a vacancy created by the expansion of the board
of directors or the resignation, death or removal of a director,
which prevents stockholders from being able to fill vacancies on
our board of directors;
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the ability of our board of directors to determine to issue
shares of preferred stock and to determine the price and other
terms of those shares, including preferences and voting rights,
without stockholder approval, which could be used to
significantly dilute the ownership of a hostile acquirer;
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a prohibition on stockholder action by written consent, which
forces stockholder action to be taken at an annual or special
meeting of our stockholders;
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the requirement that a special meeting of stockholders may be
called only by the chairman of the board of directors, the chief
executive officer or the board of directors, which may delay the
ability of our stockholders to force consideration of a proposal
or to take action, including the removal of directors; and
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advance notice procedures that stockholders must comply with in
order to nominate candidates to our board of directors or to
propose matters to be acted upon at a stockholders
meeting, which may discourage or deter a potential acquiror from
conducting a solicitation of proxies to elect the
acquirors own slate of directors or otherwise attempting
to obtain control of us.
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We are subject to certain anti-takeover provisions under
Delaware law. Under Delaware law, a corporation may not, in
general, engage in a business combination with any holder of 15%
or more of its capital stock unless the
30
holder has held the stock for three years or, among other
things, the board of directors has approved the transaction. For
a description of our capital stock, see Description of
Capital Stock.
We do
not currently intend to pay dividends on our common stock and,
consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our
common stock.
We do not intend to declare and pay dividends on our capital
stock for the foreseeable future. We currently intend to invest
our future earnings, if any, to fund our growth. Additionally,
the terms of our credit facility restrict our ability to pay
dividends. Therefore, you are not likely to receive any
dividends on your common stock for the foreseeable future.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our principal executive offices are located in a leased facility
in Foster City, California, consisting of approximately
53,877 square feet of office space under a lease that
expires in October 2010. This facility accommodates our
principal engineering, sales, marketing, operations and finance
and administrative activities. We also lease buildings in
Arkansas, Connecticut, Massachusetts, Nevada, New Jersey, New
York, North Carolina, Oklahoma, Oregon, India and the United
Kingdom.
Beginning November 1, 2010, we will move our principal
executive offices and our principal engineering, sales,
marketing, operations and finance and administrative activities
to another leased facility in Foster City, California with
approximately 63,998 square feet of office space under a
lease that expires in October 2018 with the option to extend the
lease term.
We may add new facilities and expand our existing facilities as
we add employees and expand our markets, and we believe that
suitable additional or substitute space will be available as
needed to accommodate any such expansion of our operations.
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Item 3.
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Legal
Proceedings
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On September 8, 2010, a patent infringement lawsuit was
filed against us by LendingTree, LLC (LendingTree)
in the United States District Court for the Western District of
North Carolina, seeking a judgment that we have infringed a
certain patent held by LendingTree, an injunctive order against
the alleged infringing activities and an award for damages. If
an injunction is granted, it could force us to stop or alter
certain of our business activities, such as our lead generation
in the mortgage client vertical. While we intend to vigorously
defend our position, neither the outcome of the litigation nor
the amount and range of potential damages or exposure associated
with the litigation can be assessed with certainty.
From time to time, we may become involved in other legal
proceedings and claims arising in the ordinary course of our
business.
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Item 4.
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(Removed
and Reserved)
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31
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Our common stock has been traded on the NASDAQ Global Select
Market under the symbol QNST since our initial
public offering on February 11, 2010. Prior to this time,
there was no public market for our common stock. The following
table shows the high and low sale prices per share of our common
stock as reported on the NASDAQ Global Select Market for the
periods indicated:
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High
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Low
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Third quarter ended March 31, 2010 (beginning February 11,
2010)
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$
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17.74
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$
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12.77
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Fourth quarter ended June 30, 2010
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$
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18.25
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$
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11.37
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On August 31, 2010, the closing price as reported on the
NASDAQ Global Select Market of our common stock was
$10.73 per share. As of August 31, 2010, we had
approximately 299 stockholders of record of our common stock.
We have never declared or paid, and do not anticipate declaring
or paying, any cash dividends on our common stock. Any future
determination as to the declaration and payment of dividends, if
any, will be at the discretion of our board of directors and
will depend on then existing conditions, including our financial
condition, operating results, contractual restrictions, capital
requirements, business prospects and other factors our board of
directors may deem relevant.
For equity compensation plan information refer to Item 12
in Part III of this Annual Report on
Form 10-K.
32
Performance
Graph
This performance graph shall not be deemed soliciting
material or to be filed with the Securities
and Exchange Commission for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or the Exchange
Act, or otherwise subject to the liabilities under that Section,
and shall not be deemed to be incorporated by reference into any
filing of QuinStreet, Inc. under the Securities Act of 1933, as
amended, or the Exchange Act.
The following graph shows a comparison from February 11,
2010 (the date our common stock commenced trading on the NASDAQ
Global Select Market) through June 30, 2010 of cumulative
total return for our common stock, the NASDAQ Composite Index
and the RDG Internet Composite Index. Such returns are based on
historical results and are not intended to suggest future
performance. Data for the NASDAQ Composite Index and the RDG
Internet Composite Index assume reinvestment of dividends.
COMPARISON
OF CUMULATIVE TOTAL RETURN*
Among
QuinStreet, Inc., the NASDAQ Composite Index
and the RDG Internet Composite Index
* $100 invested on
2/11/10 in
stock or index, including reinvestment of dividends.
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2/11/10
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2/28/10
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3/31/10
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4/30/10
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5/31/10
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6/30/10
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QuinStreet, Inc.
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100.00
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97.33
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113.40
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112.60
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92.60
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76.73
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NASDAQ Composite
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100.00
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102.87
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110.26
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113.22
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103.96
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97.21
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RDG Internet Composite
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100.00
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|
101.84
|
|
|
|
110.32
|
|
|
|
112.73
|
|
|
|
103.18
|
|
|
|
95.57
|
|
Recent
Sales of Unregistered Securities
During the twelve months ended June 30, 2010, we granted
options in unregistered transactions to purchase an aggregate of
3,576,155 shares of common stock at a weighted average
exercise price of $13.07 per share to our employees. During such
period, options were exercised in unregistered transactions to
purchase 555,528 shares for cash consideration in the
aggregate amount of $1.5 million. The sales of the above
securities were exempt from registration under rule 701
promulgated under Section 3(b) under the Securities Act as
transactions pursuant to a compensatory benefit plan or a
written contract relating to compensation.
Use of
Proceeds
On February 10, 2010, our registration statement on
Form S-1
(File
No. 333-163228)
was declared effective for our initial public offering, pursuant
to which we registered the offering and sale of
10,000,000 shares of common
33
stock at a public offering price of $15.00 per share and an
aggregate offering price of $150.0 million. The managing
underwriters were Credit Suisse Securities (USA) LLC, Merrill
Lynch, Pierce Fenner & Smith Incorporated and
J.P. Morgan Securities Inc. The offering was completed on
February 17, 2010.
As a result of the offering, we received net proceeds of
$136.8 million, after underwriting discounts and
commissions of $10.5 million and other offering costs of
$2.7 million. None of such payments were a direct or
indirect payment to any of our directors or officers or their
associates, to persons owning ten percent or more of our common
stock or any of our other affiliates.
The net offering proceeds have been invested in money market
accounts.
There has been no material change in the planned use of proceeds
from our initial public offering as described in our final
prospectus filed with the SEC pursuant to Rule 424(b).
34
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following selected consolidated financial data should be
read together with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and with the consolidated financial statements and accompanying
notes appearing elsewhere in this report. The selected
consolidated financial data in this section is not intended to
replace our consolidated financial statements and the
accompanying notes. The results of the acquired businesses have
been included in our consolidated financial statements since
their respective dates of acquisition. Our historical results
are not necessarily indicative of our future results and any
interim results are not necessarily indicative of the results
for a full fiscal year.
We derived the consolidated statements of operations data for
the fiscal years ended June 30, 2010, 2009 and 2008 and the
consolidated balance sheets data as of June 30, 2010 and
2009 from our audited consolidated financial statements
appearing elsewhere in this report. The consolidated statements
of operations data for the fiscal years ended June 30, 2007
and 2006 and the consolidated balance sheets data as of
June 30, 2008, 2007 and 2006 are derived from our audited
consolidated financial statements, which are not included in
this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
334,835
|
|
|
$
|
260,527
|
|
|
$
|
192,030
|
|
|
$
|
167,370
|
|
|
$
|
142,408
|
|
Cost of revenue(1)
|
|
|
240,730
|
|
|
|
181,593
|
|
|
|
130,869
|
|
|
|
108,945
|
|
|
|
85,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
94,105
|
|
|
|
78,934
|
|
|
|
61,161
|
|
|
|
58,425
|
|
|
|
56,588
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
19,726
|
|
|
|
14,887
|
|
|
|
14,051
|
|
|
|
14,094
|
|
|
|
17,265
|
|
Sales and marketing
|
|
|
16,698
|
|
|
|
16,154
|
|
|
|
12,409
|
|
|
|
8,487
|
|
|
|
7,166
|
|
General and administrative
|
|
|
18,464
|
|
|
|
13,172
|
|
|
|
13,371
|
|
|
|
11,440
|
|
|
|
6,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
54,888
|
|
|
|
44,213
|
|
|
|
39,831
|
|
|
|
34,021
|
|
|
|
31,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
39,217
|
|
|
|
34,721
|
|
|
|
21,330
|
|
|
|
24,404
|
|
|
|
25,322
|
|
Interest income
|
|
|
97
|
|
|
|
245
|
|
|
|
1,482
|
|
|
|
1,905
|
|
|
|
1,341
|
|
Interest expense
|
|
|
(3,977
|
)
|
|
|
(3,544
|
)
|
|
|
(1,214
|
)
|
|
|
(732
|
)
|
|
|
(427
|
)
|
Other income (expense), net
|
|
|
1,523
|
|
|
|
(239
|
)
|
|
|
145
|
|
|
|
(139
|
)
|
|
|
(874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
(2,357
|
)
|
|
|
(3,538
|
)
|
|
|
413
|
|
|
|
1,034
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
36,860
|
|
|
|
31,183
|
|
|
|
21,743
|
|
|
|
25,438
|
|
|
|
25,362
|
|
Provision for taxes
|
|
|
(16,276
|
)
|
|
|
(13,909
|
)
|
|
|
(8,876
|
)
|
|
|
(9,828
|
)
|
|
|
(9,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
20,584
|
|
|
|
17,274
|
|
|
|
12,867
|
|
|
|
15,610
|
|
|
|
15,589
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,584
|
|
|
$
|
17,274
|
|
|
$
|
12,867
|
|
|
$
|
15,610
|
|
|
$
|
13,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: 8% non-cumulative dividends on convertible preferred stock
|
|
|
(2,018
|
)
|
|
|
(3,276
|
)
|
|
|
(3,276
|
)
|
|
|
(3,276
|
)
|
|
|
(3,276
|
)
|
Less: Undistributed earnings allocated to convertible preferred
stock
|
|
|
(5,784
|
)
|
|
|
(8,599
|
)
|
|
|
(5,925
|
)
|
|
|
(7,690
|
)
|
|
|
(6,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders Basic
|
|
$
|
12,782
|
|
|
$
|
5,399
|
|
|
$
|
3,666
|
|
|
$
|
4,644
|
|
|
$
|
3,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings re-allocated to common stock
|
|
|
419
|
|
|
|
399
|
|
|
|
360
|
|
|
|
522
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income attributable to common stockholders
Diluted
|
|
$
|
13,201
|
|
|
$
|
5,798
|
|
|
$
|
4,026
|
|
|
$
|
5,166
|
|
|
$
|
4,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.50
|
|
|
$
|
0.41
|
|
|
$
|
0.28
|
|
|
$
|
0.36
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.46
|
|
|
$
|
0.39
|
|
|
$
|
0.26
|
|
|
$
|
0.34
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net income per share
attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,616
|
|
|
|
13,294
|
|
|
|
13,104
|
|
|
|
12,789
|
|
|
|
12,411
|
|
Diluted
|
|
|
28,429
|
|
|
|
14,971
|
|
|
|
15,325
|
|
|
|
15,263
|
|
|
|
15,295
|
|
|
|
|
(1) |
|
Cost of revenue and operating expenses include stock-based
compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
3,111
|
|
|
$
|
1,916
|
|
|
$
|
1,112
|
|
|
$
|
416
|
|
|
$
|
66
|
|
Product development
|
|
|
2,176
|
|
|
|
669
|
|
|
|
443
|
|
|
|
75
|
|
|
|
(7
|
)
|
Sales and marketing
|
|
|
3,463
|
|
|
|
1,761
|
|
|
|
581
|
|
|
|
226
|
|
|
|
10
|
|
General and administrative
|
|
|
4,621
|
|
|
|
1,827
|
|
|
|
1,086
|
|
|
|
1,354
|
|
|
|
20
|
|
See Note 3 to our consolidated financial statements
included in this report for an explanation of the method used to
calculate basic and diluted net income per share of common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
155,770
|
|
|
$
|
25,182
|
|
|
$
|
24,953
|
|
|
$
|
26,765
|
|
|
$
|
30,593
|
|
Working capital
|
|
|
155,164
|
|
|
|
16,426
|
|
|
|
17,022
|
|
|
|
42,769
|
|
|
|
36,294
|
|
Total assets
|
|
|
434,630
|
|
|
|
212,878
|
|
|
|
179,746
|
|
|
|
118,536
|
|
|
|
101,203
|
|
Total liabilities
|
|
|
144,608
|
|
|
|
96,289
|
|
|
|
86,032
|
|
|
|
37,831
|
|
|
|
39,567
|
|
Total debt
|
|
|
93,608
|
|
|
|
57,240
|
|
|
|
51,654
|
|
|
|
10,250
|
|
|
|
9,216
|
|
Total stockholders equity
|
|
|
290,022
|
|
|
|
73,186
|
|
|
|
50,311
|
|
|
|
37,312
|
|
|
|
18,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Consolidated Statements of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
38,509
|
|
|
$
|
32,570
|
|
|
$
|
24,751
|
|
|
$
|
25,197
|
|
|
$
|
21,659
|
|
Depreciation and amortization
|
|
|
18,791
|
|
|
|
15,978
|
|
|
|
11,727
|
|
|
|
9,637
|
|
|
|
7,208
|
|
Capital expenditures
|
|
|
2,710
|
|
|
|
1,347
|
|
|
|
2,177
|
|
|
|
2,030
|
|
|
|
1,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
71,379
|
|
|
$
|
56,872
|
|
|
$
|
36,279
|
|
|
$
|
36,112
|
|
|
$
|
32,619
|
|
36
|
|
|
(1) |
|
We define Adjusted EBITDA as net income less provision for
taxes, depreciation expense, amortization expense, stock-based
compensation expense, interest and other income (expense), net.
Please see the Adjusted EBITDA section below for
more information. |
The following table presents a reconciliation of Adjusted EBITDA
to net income calculated in accordance with U.S. generally
accepted accounting principles (GAAP), the most comparable GAAP
measure, for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
20,584
|
|
|
$
|
17,274
|
|
|
$
|
12,867
|
|
|
$
|
15,610
|
|
|
$
|
13,769
|
|
Interest and other (income) expense, net
|
|
|
2,357
|
|
|
|
3,538
|
|
|
|
(413
|
)
|
|
|
(1,034
|
)
|
|
|
(40
|
)
|
Provision for taxes
|
|
|
16,276
|
|
|
|
13,909
|
|
|
|
8,876
|
|
|
|
9,828
|
|
|
|
9,773
|
|
Depreciation and amortization
|
|
|
18,791
|
|
|
|
15,978
|
|
|
|
11,727
|
|
|
|
9,637
|
|
|
|
7,208
|
|
Stock-based compensation expense
|
|
|
13,371
|
|
|
|
6,173
|
|
|
|
3,222
|
|
|
|
2,071
|
|
|
|
89
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
71,379
|
|
|
$
|
56,872
|
|
|
$
|
36,279
|
|
|
$
|
36,112
|
|
|
$
|
32,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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37
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
You should read the following discussion of our financial
condition and results of operations in conjunction with the
consolidated financial statements and the notes thereto included
elsewhere in this report. The following discussion contains
forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could
cause or contribute to these differences include those discussed
below and elsewhere in this report, particularly in the sections
titled Special Note Regarding Forward-Looking
Statements and Risk Factors.
Management
Overview
QuinStreet is a leader in vertical marketing and media online.
We have built a strong set of capabilities to engage Internet
visitors with targeted media and to connect our marketing
clients with their potential customers online. We focus on
serving clients in large, information-intensive industry
verticals where relevant, targeted media and offerings help
visitors make informed choices, find the products that match
their needs, and thus become qualified customer prospects for
our clients.
We deliver cost-effective marketing results to our clients most
typically in the form of a qualified lead or click. These leads
or clicks can then convert into a customer or sale for the
client at a rate, that results in an acceptable marketing cost
to them. We get paid by clients primarily when we deliver
qualified leads or clicks as defined by our agreements with
them. Because we bear the costs of media, our programs must
deliver a value to our clients and provide for a media yield, or
our ability to generate an acceptable margin on our media costs
that provides a sound financial outcome, for us. Our general
process is:
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We own or access targeted media;
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|
We run advertisements or other forms of marketing messages and
programs in that media to create visitor responses or clicks
through to client offerings;
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|
We match these responses or clicks to client offerings or brands
that meet visitor interests or needs, converting visitors into
qualified leads or clicks; and
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|
We optimize client matches and media yield such that we achieve
desired results for clients and a sound financial outcome for us.
|
Our primary financial objective has been and remains creating
revenue growth from sustainable sources, at target levels of
profitability. Our primary financial objective is not to
maximize profits, but rather to achieve target levels of
profitability while investing in various growth initiatives, as
we believe we are in the early stages of a large, long-term
market.
Our Direct Marketing Services, or DMS, business accounted for
99%, 99% and 98% of our net revenue in fiscal years 2010, 2009
and 2008, respectively. Our DMS business derives substantially
all of its net revenue from fees earned through the delivery of
qualified leads and clicks to our clients. Through a vertical
focus, targeted media presence and our technology platform, we
are able to deliver targeted, measurable marketing results to
our clients.
Our two largest client verticals are education and financial
services. Our education client vertical represented 45%, 58% and
74% of net revenue in fiscal years 2010, 2009 and 2008,
respectively. Our financial services client vertical represented
43%, 31% and 11% of net revenue in fiscal years 2010, 2009 and
2008, respectively. Other DMS client verticals, consisting
primarily of home services,
business-to-business,
or B2B, and medical, represented 11%, 10% and 13% of net revenue
in fiscal years 2010, 2009 and 2008, respectively.
In addition, we derived 1%, 1% and 2% of our net revenue in
fiscal years 2010, 2009 and 2008, respectively, from the
provision of a hosted solution and related services for clients
in the direct selling industry, also referred to as our Direct
Selling Services, or DSS, business.
We generated substantially all of our revenue from sales to
clients in the United States.
One of our largest clients retained an advertising agency and
reduced its purchases of leads from us beginning November 2009.
This client accounted for 19% and 23% of our net revenue in
fiscal years 2009 and 2008,
38
respectively. In fiscal year 2010, this client comprised less
than 10% of our net revenue. We have been addressing this
challenge by working with this client and the agency to
understand their evolving needs and strategies and understand
how we can best serve them going forward. In addition, we have
been expanding our business with other clients in our education
client vertical. We are also expanding our client base in
education to replace visitor matches previously delivered to
this client.
Trends
Affecting our Business
Seasonality
Our results are subject to significant fluctuation as a result
of seasonality. In particular, our quarters ending December 31
(our second fiscal quarter) typically demonstrate seasonal
weakness. In our second fiscal quarters, there is lower
availability of lead supply from some forms of media during the
holiday period on a cost effective basis and some of our clients
often request fewer leads due to holiday staffing. For example,
in the quarters ended December 31, 2009 and 2008 net
revenue from our education clients declined 10% and 13%,
respectively, from the previous quarter. In our quarters ending
March 31 (our third fiscal quarter), this trend generally
reverses with better lead availability and often new budgets at
the beginning of the year for our clients with fiscal years
ending December 31.
Acquisitions
Acquisitions
in Fiscal Year 2010
In November 2009, we acquired the website business Internet.com,
a division of WebMediaBrands, Inc., or Internet.com, a New
York-based Internet media company, in exchange for
$15.9 million in cash and the issuance of a
$1.7 million non-interest-bearing promissory note payable,
to broaden our media access and client base in the B2B market.
In October 2009, we acquired the website business Insure.com
from Life Quotes, Inc., or Insure.com, an Illinois-based online
insurance quote service and brokerage business, in exchange for
$15.0 million in cash and the issuance of a
$1.0 million non-interest-bearing promissory note payable,
for its capacity to generate online visitors in the financial
services market. During fiscal year 2010, in addition to the
acquisitions of Internet.com and Insure.com, we acquired an
aggregate of 31 online publishing businesses.
Also, in July 2010, we acquired the website business
Insurance.com from Insurance.com Group, Inc., or Insurance.com,
an Ohio-based online insurance business, in exchange for
$33.0 million in cash and the issuance of a
$2.6 million non-interest-bearing promissory note payable,
for its capacity to generate online visitors in the financial
services market.
Acquisitions
in Fiscal Year 2009
In August 2008, we acquired 100% of the outstanding shares of
U.S. Citizens for Fair Credit Card Terms, Inc., or
CardRatings, an Arkansas-based online marketing company, in
exchange for $10.4 million in cash and the issuance of
$5.0 million in non-interest-bearing, secured promissory
notes payable, for its capacity to generate online visitors in
the financial services market. During fiscal year 2009, in
addition to the acquisition of CardRatings, we acquired an
aggregate of 33 online publishing businesses.
Acquisitions
in Fiscal Year 2008
In April 2008, we acquired 100% of the outstanding shares of
Cyberspace Communication Corporation, or SureHits, an
Oklahoma-based online marketing company, in exchange for
$28.4 million in cash and $18.0 million in potential
earn-out payments, in an effort to broaden our media access and
client base in the financial services market. In each of fiscal
year 2010 and 2009, we paid $4.5 million in earn-out
payments upon the achievement of specified financial targets. In
February 2008, we acquired 100% of the outstanding shares of
ReliableRemodeler.com, Inc., or ReliableRemodeler, an
Oregon-based company specializing in online home renovation and
contractor referrals, in exchange for $17.5 million in cash
and the issuance of $8.0 million in non-interest-bearing,
unsecured promissory notes payable, in an effort to broaden our
media access and client base in the home services market. In May
2008, we acquired the assets of Vendorseek, a New Jersey-based
provider of online matching services for businesses that connect
Internet visitors with vendors, in exchange for
$10.7 million in cash
39
and the issuance of $3.8 million in interest-bearing,
unsecured promissory notes payable, to broaden our media access
and client base in the B2B market. During fiscal year 2008, in
addition to the acquisitions of Surehits, ReliableRemodeler and
Vendorseek, we acquired an aggregate of 20 online publishing
businesses.
Our acquisition strategy may result in significant fluctuations
in our available working capital from period to period and over
the years. We may use cash, stock or promissory notes to acquire
various businesses or technologies, and we cannot accurately
predict the timing of those acquisitions or the impact on our
cash flows and balance sheet. Large acquisitions or multiple
acquisitions within a particular period may significantly affect
our financial results for that period. We may utilize debt
financing to make acquisitions, which could give rise to higher
interest expense and more restrictive operating covenants. We
may also utilize our stock as consideration, which could result
in substantial dilution.
Client
Verticals
To date, we have generated the majority of our revenue from
clients in our education and financial services client
verticals. We expect that a majority of our revenue in fiscal
year 2011 will be generated from clients in our education and
financial services client verticals. Marketing budgets for
clients in our education client vertical are affected by a
number of factors, including the availability of student
financial aid, the regulation of for-profit financial
institutions and economic conditions. Over the past year, some
segments of the financial services industry, particularly
mortgages, credit cards and deposits, have seen declines in
marketing budgets given the difficult market conditions. In
addition, the education and financial services industries are
highly regulated. Changes in regulations or government actions
may negatively affect our clients businesses and marketing
practices and therefore, adversely affect our financial results.
Development
and Acquisition of Vertical Media
One of the primary challenges of our business is finding or
creating media that is targeted enough to attract prospects
economically for our clients and at costs that work for our
business model. In order to continue to grow our business, we
must be able to continue to find or develop quality vertical
media on a cost-effective basis. Our inability to find or
develop vertical media could impair our growth or adversely
affect our financial performance.
Basis of
Presentation
General
We operate in two segments: DMS and DSS. For further discussion
or financial information about our reporting segments, see
note 14 to our consolidated financial statements.
Net
Revenue
DMS. We derive substantially all of our
revenue from fees earned through the delivery of qualified leads
or paid clicks. We deliver targeted and measurable results
through a vertical focus that we classify into the following
client verticals: education, financial services and
other (which includes home services, B2B and
medical).
DSS. We derived approximately 1% of net
revenue from our DSS business in fiscal year 2010. We expect DSS
to continue to represent an immaterial portion of our business.
Cost
of Revenue
Cost of revenue consists primarily of media costs, personnel
costs, amortization of acquisition-related intangible assets,
depreciation expense and amortization of internal software
development costs on revenue-producing technologies. Media costs
consist primarily of fees paid to website publishers that are
directly related to a revenue-generating event and
pay-per-click,
or PPC, ad purchases from Internet search companies. We pay
these Internet search companies and website publishers on a
cost-per-lead,
or CPL,
cost-per-click,
or CPC,
cost-per-thousand-impressions,
or CPM and revenue-share basis. Personnel costs include
salaries, bonuses, stock-based compensation expense and employee
benefit costs. Personnel costs are primarily related to
individuals associated with maintaining our servers and
websites, our editorial staff, client management, creative team,
compliance group and media purchasing analysts.
40
Costs associated with software incurred in the development phase
or obtained for internal use are capitalized and amortized in
cost of revenue over the softwares estimated useful life.
We anticipate that our cost of revenue will increase in absolute
dollars as we continue to increase our revenue base and product
offerings
Operating
Expenses
We classify our operating expenses into three categories:
product development, sales and marketing, and general and
administrative. Our operating expenses consist primarily of
personnel costs and, to a lesser extent, professional services
fees, rent and allocated costs. Personnel costs for each
category of operating expenses generally include salaries,
bonuses and commissions, stock-based compensation expense and
employee benefit costs.
Product Development. Product development
expenses consist primarily of personnel costs and professional
services fees associated with the development and maintenance of
our technology platforms, development and launching of our
websites, product-based quality assurance and testing. We
believe that continued investment in technology is critical to
attaining our strategic objectives and, as a result, we expect
technology development and enhancement expenses to increase in
absolute dollars in future periods.
Sales and Marketing. Sales and marketing
expenses consist primarily of personnel costs and, to a lesser
extent, allocated overhead costs, professional services fees,
travel advertising and marketing materials. We expect sales and
marketing expenses to increase in absolute dollars as we hire
additional personnel in sales and marketing to support our
increasing revenue base and product offerings.
General and Administrative. General and
administrative expenses consist primarily of personnel costs of
our executive, finance, legal, corporate and business
development, employee benefits and compliance, and other
administrative personnel, as well as accounting and legal
professional services fees and other corporate expenses. We
expect general and administrative expenses to increase in
absolute dollars in future periods as we continue to invest in
corporate infrastructure and incur additional expenses
associated with being a public company, including increased
legal and accounting costs, higher insurance premiums, investor
relations costs and compliance costs associated with
Section 404 of the Sarbanes-Oxley Act of 2002.
Interest
and Other Income (Expense), Net
Interest and other income (expense), net, consists of interest
income, interest expense and other income and expense. Interest
expense is related to our credit facility and promissory notes
issued in connection with our acquisitions and includes imputed
interest. The outstanding balance of our credit facility and
acquisition-related promissory notes was $75.9 million and
$19.5 million, respectively, as of June 30, 2010.
Borrowings under our credit facility and related interest
expense could increase as we continue to implement our
acquisition strategy. Interest income represents interest
received on our cash and cash equivalents, which may decrease
depending on market interest rates and the amount of our
invested cash and cash equivalents.
Other income (expense), net, includes gains or losses from the
early extinguishment of debt when we settle acquisition related
promissory notes before their maturity and exchange gains and
losses.
Income
Tax Expense
We are subject to tax in the United States as well as other tax
jurisdictions or countries in which we conduct business.
Earnings from our limited
non-U.S. activities
are subject to local country income tax and may be subject to
current U.S. income tax.
As of June 30, 2010, we did not have net operating loss
carryforwards for federal income tax purposes and had
approximately $2.5 million in California state net
operating loss carryforwards that begin to expire in March 2011
and that we expect to utilize in an amended return. The
California net operating loss carryforwards will not offset
future taxable income, but may instead result in a refund of
historical taxes paid.
41
As of June 30, 2010, we had net deferred tax assets of
$12.5 million. Our net deferred tax assets consist
primarily of accruals, reserves and stock-based compensation
expense not currently deductible for tax purposes. We assess the
need for a valuation allowance on the deferred tax assets by
evaluating both positive and negative evidence that may exist.
Any adjustment to the deferred tax asset valuation allowance
would be recorded in the income statement in the periods that
the adjustment is determined to be required.
On July 1, 2007, we adopted the authoritative accounting
guidance on uncertainties in income tax. The cumulative effect
of adoption to the opening balance of retained earnings was
$1.7 million.
Results
of Operations
The following table sets forth our consolidated statement of
operations for the periods indicated:
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|
|
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|
|
|
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|
|
Fiscal Year Ended June 30,
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2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
334,835
|
|
|
|
100.0
|
%
|
|
$
|
260,527
|
|
|
|
100.0
|
%
|
|
$
|
192,030
|
|
|
|
100.0
|
%
|
Cost of revenue(1)
|
|
|
240,730
|
|
|
|
71.9
|
|
|
|
181,593
|
|
|
|
69.7
|
|
|
|
130,869
|
|
|
|
68.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
94,105
|
|
|
|
28.1
|
|
|
|
78,934
|
|
|
|
30.3
|
|
|
|
61,161
|
|
|
|
31.8
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
19,726
|
|
|
|
5.9
|
|
|
|
14,887
|
|
|
|
5.7
|
|
|
|
14,051
|
|
|
|
7.3
|
|
Sales and marketing
|
|
|
16,698
|
|
|
|
5.0
|
|
|
|
16,154
|
|
|
|
6.2
|
|
|
|
12,409
|
|
|
|
6.5
|
|
General and administrative
|
|
|
18,464
|
|
|
|
5.5
|
|
|
|
13,172
|
|
|
|
5.1
|
|
|
|
13,371
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
39,217
|
|
|
|
11.7
|
|
|
|
34,721
|
|
|
|
13.3
|
|
|
|
21,330
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
97
|
|
|
|
0.0
|
|
|
|
245
|
|
|
|
0.1
|
|
|
|
1,482
|
|
|
|
0.8
|
|
Interest expense
|
|
|
(3,977
|
)
|
|
|
(1.2
|
)
|
|
|
(3,544
|
)
|
|
|
(1.4
|
)
|
|
|
(1,214
|
)
|
|
|
(0.6
|
)
|
Other income (expense), net
|
|
|
1,523
|
|
|
|
0.5
|
|
|
|
(239
|
)
|
|
|
(0.1
|
)
|
|
|
145
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
36,860
|
|
|
|
11.0
|
|
|
|
31,183
|
|
|
|
12.0
|
|
|
|
21,743
|
|
|
|
11.3
|
|
Provision for taxes
|
|
|
(16,276
|
)
|
|
|
(4.9
|
)
|
|
|
(13,909
|
)
|
|
|
(5.3
|
)
|
|
|
(8,876
|
)
|
|
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,584
|
|
|
|
6.1
|
%
|
|
$
|
17,274
|
|
|
|
6.6
|
%
|
|
$
|
12,867
|
|
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cost of revenue and operating expenses include stock-based
compensation expense as follows: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
3,111
|
|
|
|
0.9
|
%
|
|
$
|
1,916
|
|
|
|
0.7
|
%
|
|
$
|
1,112
|
|
|
|
0.6
|
%
|
Product development
|
|
|
2,176
|
|
|
|
0.6
|
|
|
|
669
|
|
|
|
0.3
|
|
|
|
443
|
|
|
|
0.2
|
|
Sales and marketing
|
|
|
3,463
|
|
|
|
1.0
|
|
|
|
1,761
|
|
|
|
0.7
|
|
|
|
581
|
|
|
|
0.3
|
|
General and administrative
|
|
|
4,621
|
|
|
|
1.4
|
|
|
|
1,827
|
|
|
|
0.7
|
|
|
|
1,086
|
|
|
|
0.6
|
|
Net
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2010 - 2009
|
|
|
2009 - 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
334,835
|
|
|
$
|
260,527
|
|
|
$
|
192,030
|
|
|
|
29
|
%
|
|
|
36
|
%
|
Cost of revenue
|
|
|
240,730
|
|
|
|
181,593
|
|
|
|
130,869
|
|
|
|
33
|
%
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
94,105
|
|
|
$
|
78,934
|
|
|
$
|
61,161
|
|
|
|
19
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue increased $74.3 million, or 29%, in fiscal year
2010 compared to fiscal year 2009, attributable to an increase
in revenue from our financial services client vertical and, to a
lesser extent, our other client verticals. Financial services
client vertical revenue increased $64.2 million, or 81%.
The increase in financial services client vertical revenue was
driven by lead and click volume increases at relatively steady
prices. Our other client verticals
42
revenue increased $9.3 million, or 31%. The increase in our
other client vertical revenue was primarily affected by growth
in our B2B client vertical revenue resulting from our
acquisition of Internet.com in November 2009 and, to a lesser
extent, due to growth in our medical client vertical resulting
from our acquisition of the website business of ElderCareLink in
April 2009. Our education client vertical revenue remained
relatively flat, increasing $863,000, or 1%. The slight increase
was driven by growth from a majority of our education clients,
almost entirely offset by revenue decline from a single client.
Net revenue increased $68.5 million, or 36%, in fiscal year
2009 compared to fiscal year 2008, attributable primarily to
growth in our financial services and education client verticals,
offset in part by a decline in our DSS business. Financial
services client vertical revenue increased $57.8 million,
or 264%. Revenue growth in our financial services client
vertical was driven by lead and click volume increases at
relatively steady prices and the full effect of the acquisition
of SureHits in the fourth quarter of fiscal year 2008. Our
education client vertical revenue increased $9.1 million,
or 6%, due to lead volume increases and price increases. Our
other client verticals revenue increased
$2.0 million, or 8%, due primarily to the full effect of
the acquisition of the assets of Vendorseek, within our B2B
client vertical in the fourth quarter of fiscal year 2008. The
revenue increase in our B2B client vertical was partially offset
by a decline in our home services client vertical due to both a
challenging economic environment and lack of available consumer
credit.
Cost
of Revenue
Cost of revenue increased $59.1 million, or 33%, in fiscal
year 2010 compared to fiscal year 2009, driven by a
$41.2 million increase in media costs due to lead and click
volume increases, increased personnel costs of
$10.7 million and increased amortization of
acquisition-related intangible assets of $3.2 million
resulting from acquisitions in fiscal year 2009 and 2010. The
increase in personnel costs was attributable to a 17% increase
in average headcount and related compensation expense increases,
resulting from the acquisition of the website business of
Internet.com, as well as the expansion of our business. Gross
margin, which is the difference between net revenue and cost of
revenue as a percentage of net revenue, declined from 30% in
fiscal year 2009 to 28% in fiscal year 2010, due to the
above-mentioned increase in headcount and related compensation
expense, as well as due to a higher mix of traffic from third
parties.
Cost of revenue increased $50.7 million, or 39%, in fiscal
year 2009 compared to fiscal year 2008, driven by a
$43.3 million increase in media costs due to lead and click
volume increases and, to a lesser extent, increased amortization
of acquisition-related intangible assets of $4.2 million
resulting from acquisitions in the previous twelve months. Gross
margin declined from 32% in fiscal year 2008 to 30% in fiscal
year 2009 due primarily to a higher mix of traffic from third
parties.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2010 - 2009
|
|
|
2009 - 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Product development
|
|
$
|
19,726
|
|
|
$
|
14,887
|
|
|
$
|
14,051
|
|
|
|
33
|
%
|
|
|
6
|
%
|
Sales and marketing
|
|
|
16,698
|
|
|
|
16,154
|
|
|
|
12,409
|
|
|
|
3
|
%
|
|
|
30
|
%
|
General and administrative
|
|
|
18,464
|
|
|
|
13,172
|
|
|
|
13,371
|
|
|
|
40
|
%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
54,888
|
|
|
$
|
44,213
|
|
|
$
|
39,831
|
|
|
|
24
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Development Expenses
Product development expenses increased $4.8 million, or
33%, in fiscal year 2010 compared to fiscal year 2009, due to
increased personnel costs of $4.2 million and, to a lesser
extent, increased professional services fees of $433,000. The
increase in personnel costs was attributable to increased
compensation expense of $2.7 million and increased
stock-based compensation expense of $1.5 million. The
increase in compensation expense was due to a 20% increase in
average headcount affected by additional hiring in connection
with software development projects, as well as increased
performance bonus expense due to the achievement of specified
financial metrics during fiscal
43
year 2010 and an increase in the number of individuals eligible
for such bonus. Professional services fees also increased due to
these development projects.
Product development expenses increased $836,000, or 6%, in
fiscal year 2009 compared to fiscal year 2008, due to increased
personnel costs of $1.0 million. The increase in personnel
costs was due to increased performance bonuses and increased
stock-based compensation expense. The increased performance
bonuses were paid in connection with our achievement of
specified financial metrics during fiscal year 2009 that were
not achieved in the corresponding prior year period, as well as
an increase in the number of individuals eligible for such
bonuses. The increase in bonus and stock-based compensation
expense was partially offset by lower compensation expense from
a reduction in workforce in the third quarter of fiscal year
2009.
Sales and
Marketing Expenses
Sales and marketing expenses increased $544,000, or 3%, in
fiscal year 2010 compared to fiscal year 2009, due to increased
personnel costs of $1.0 million partially offset by
decreases in various smaller items. The increase in personnel
costs was due to increased stock-based compensation expense of
$1.7 million, partially offset by a decline in compensation
expense of $730,000 due to a decrease of 18% in average
headcount and related compensation expense affected by a
reduction in workforce since the third quarter of fiscal year
2009, while bonuses and commissions increased due to the
achievement of specified financial metrics during fiscal year
2010.
Sales and marketing expenses increased $3.7 million, or
30%, in fiscal year 2009 compared to fiscal year 2008, due to
increased personnel costs of $2.1 million, increased
consulting fees of $340,000 and increased advertising and
marketing expenses associated with marketing campaigns of
$331,000. The increase in personnel costs was due to increased
stock-based compensation expense of $1.2 million, increased
compensation expense of $888,000 due to an 18% increase in
average headcount and related compensation expenses driven by
the acquisition of ReliableRemodeler in the third quarter of
fiscal year 2008. Increased consulting, advertising and
marketing expenses were due to overall increases in sales and
marketing activities associated with the growth of our business
in fiscal year 2009 as compared to the prior year period.
General
and Administrative Expenses
General and administrative expenses increased $5.3 million,
or 40%, in fiscal year 2010 compared to fiscal year 2009, due to
increased personnel costs of $3.9 million, increased
professional services fees of $832,000, increased direct
acquisition costs of $323,000 and various smaller increases in
general and administrative expenses, partially offset by a
decline in legal fees of $551,000. The increase in personnel
costs was due to increased stock-based compensation expense of
$2.8 million and increased compensation expense of
$1.1 million. The increase in stock-based compensation
expense was driven by the grant of fully-vested options to
certain members of our board of directors in conjunction with an
increase in the fair value our common stock. The increase in
compensation expense was due to a 21% increase in average
headcount due to our continued investment in corporate
infrastructure, as well as increased performance bonus expense
associated with the achievement of specified financial metrics.
Professional services fees increased due to our continued
investment in corporate infrastructure and related expenses
associated with being a public company, including increased
accounting and tax fees, higher insurance premiums, investor
relations and compliance costs. The decline in legal fees was
due to the settlement of an ongoing legal matter prior to the
fourth quarter of fiscal year 2009.
General and administrative expenses remained relatively flat in
fiscal year 2009 compared to fiscal year 2008. The slight
decline consisted of a decrease in legal expenses of $987,000,
partially offset by an increase in stock-based compensation
expense of $741,000. The decline in legal expenses was
attributable to a decrease in expenses related to an ongoing
legal matter which was settled prior to the fourth quarter of
fiscal year 2009. In connection with the settlement, we paid a
one-time, non-refundable fee of $850,000. We recognized an
intangible asset of $226,000 related to the estimated fair value
of a license received by us as part of the settlement and
expensed the remaining $624,000 as a settlement expense.
44
Interest
and Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2010 - 2009
|
|
|
2009 - 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
97
|
|
|
$
|
245
|
|
|
$
|
1,482
|
|
|
|
(60
|
)%
|
|
|
(83
|
)%
|
Interest expense
|
|
|
(3,977
|
)
|
|
|
(3,544
|
)
|
|
|
(1,214
|
)
|
|
|
12
|
%
|
|
|
192
|
%
|
Other income (expense), net
|
|
|
1,523
|
|
|
|
(239
|
)
|
|
|
145
|
|
|
|
(737
|
)%
|
|
|
(265
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
$
|
(2,357
|
)
|
|
$
|
(3,538
|
)
|
|
$
|
413
|
|
|
|
(33
|
)%
|
|
|
(957
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net increased
$1.2 million, or 33%, in fiscal year 2010 compared to
fiscal year 2009, due to an increase in other income (expense),
net of $1.8 million, partially offset by an increase in
interest expense of $433,000 and a decline in interest income of
$148,000. Other income (expense), net increased due to a gain on
the extinguishment of acquisition-related notes payable of
$1.2 million, which were paid off before their maturity and
to a lesser extent, a gain recorded in connection with a payment
received for a legal settlement, as well as reduced foreign
exchange losses. The increase in interest expense is
attributable to the draw down on our credit facility, partially
offset by lower non-cash imputed interest on acquisition-related
notes payable. The decline in interest income is attributable to
lower interest rates on our investments.
Interest and other income (expense), net declined
$4.0 million in fiscal year 2009 compared to fiscal year
2008 due to increased interest expense of $2.3 million,
lower interest income of $1.2 million and other income
(expense), net of $384,000. The increase in interest expense is
due to an increase in non-cash imputed interest on
acquisition-related notes payable and a draw down on our credit
facility. Decreased interest income is due to a decline in our
invested cash balances. The decline in other income (expense),
net was due to foreign currency losses driven by the weakening
of the Canadian dollar against the U.S. dollar.
Provision
for Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Provision for taxes
|
|
$
|
16,276
|
|
|
$
|
13,909
|
|
|
$
|
8,876
|
|
Effective tax rate
|
|
|
44.2
|
%
|
|
|
44.6
|
%
|
|
|
40.8
|
%
|
Our effective tax rate remained largely unchanged in fiscal year
2010 compared to fiscal year 2009 as higher non-deductible
stock-based compensation expense was largely offset by a tax
benefit in foreign jurisdictions and the release of
ASC 740-10
reserves.
The increase in our effective tax rate in fiscal year 2009
compared to fiscal year 2008 was affected by increased state
income tax expense in connection with our acquisitions of
businesses in various jurisdictions within the U.S. in
which we did not previously have a presence and, to a lesser
extent, increased foreign income taxes and non-deductible
stock-based compensation expense. The increase in our effective
tax rate was partially offset by increased research and
development tax credits recorded in connection with the
Emergency Economic Stabilization Act of 2008, or the
Act. On October 3, 2008, the Act, which contains the
Tax Extenders and Alternative Minimum Tax Relief Act of
2008 was signed into law. Under the Act, the research
credit was retroactively extended for amounts paid or incurred
after December 31, 2007 and before January 1, 2010.
45
Selected
Quarterly Financial Data
The following table sets forth our unaudited quarterly
consolidated statements of operations data for the eight
quarters ended June 30, 2010. We have prepared the
statements of operations for each of these quarters on the same
basis as the audited consolidated financial statements included
elsewhere in this report and, in the opinion of the management,
each statement of operations includes all adjustments,
consisting solely of normal recurring adjustments, necessary for
the fair statement of the results of operations for these
periods. This information should be read in conjunction with the
audited consolidated financial statements and related notes
included elsewhere in this report. These quarterly operating
results are not necessarily indicative of our operating results
for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Sept 30,
|
|
|
Dec 31,
|
|
|
Mar 31,
|
|
|
June 30,
|
|
|
Sept 30,
|
|
|
Dec 31,
|
|
|
Mar 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
63,678
|
|
|
$
|
59,235
|
|
|
$
|
69,813
|
|
|
$
|
67,801
|
|
|
$
|
78,552
|
|
|
$
|
76,963
|
|
|
$
|
90,773
|
|
|
$
|
88,547
|
|
Costs of revenue
|
|
|
45,281
|
|
|
|
42,969
|
|
|
|
46,780
|
|
|
|
46,563
|
|
|
|
55,047
|
|
|
|
56,557
|
|
|
|
66,268
|
|
|
|
62,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
18,397
|
|
|
|
16,266
|
|
|
|
23,033
|
|
|
|
21,238
|
|
|
|
23,505
|
|
|
|
20,406
|
|
|
|
24,505
|
|
|
|
25,689
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
3,757
|
|
|
|
3,723
|
|
|
|
3,512
|
|
|
|
3,895
|
|
|
|
4,470
|
|
|
|
4,739
|
|
|
|
5,325
|
|
|
|
5,192
|
|
Sales and marketing
|
|
|
4,259
|
|
|
|
4,164
|
|
|
|
3,594
|
|
|
|
4,137
|
|
|
|
3,625
|
|
|
|
3,990
|
|
|
|
4,575
|
|
|
|
4,508
|
|
General and administrative
|
|
|
3,736
|
|
|
|
3,171
|
|
|
|
2,865
|
|
|
|
3,400
|
|
|
|
3,441
|
|
|
|
6,203
|
|
|
|
4,467
|
|
|
|
4,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
6,645
|
|
|
|
5,208
|
|
|
|
13,062
|
|
|
|
9,806
|
|
|
|
11,969
|
|
|
|
5,474
|
|
|
|
10,138
|
|
|
|
11,636
|
|
Interest income
|
|
|
90
|
|
|
|
87
|
|
|
|
44
|
|
|
|
24
|
|
|
|
9
|
|
|
|
8
|
|
|
|
16
|
|
|
|
64
|
|
Interest expense
|
|
|
(763
|
)
|
|
|
(1,107
|
)
|
|
|
(879
|
)
|
|
|
(795
|
)
|
|
|
(748
|
)
|
|
|
(881
|
)
|
|
|
(1,302
|
)
|
|
|
(1,046
|
)
|
Other income (expense), net
|
|
|
51
|
|
|
|
(291
|
)
|
|
|
(16
|
)
|
|
|
17
|
|
|
|
120
|
|
|
|
165
|
|
|
|
(64
|
)
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6,023
|
|
|
|
3,897
|
|
|
|
12,211
|
|
|
|
9,052
|
|
|
|
11,350
|
|
|
|
4,766
|
|
|
|
8,788
|
|
|
|
11,956
|
|
Provision for taxes
|
|
|
(2,719
|
)
|
|
|
(1,547
|
)
|
|
|
(5,818
|
)
|
|
|
(3,825
|
)
|
|
|
(4,837
|
)
|
|
|
(2,356
|
)
|
|
|
(3,538
|
)
|
|
|
(5,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,304
|
|
|
$
|
2,350
|
|
|
$
|
6,393
|
|
|
$
|
5,227
|
|
|
$
|
6,513
|
|
|
$
|
2,410
|
|
|
$
|
5,250
|
|
|
$
|
6,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
|
$
|
0.16
|
|
|
$
|
0.05
|
|
|
$
|
0.12
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.15
|
|
|
$
|
0.12
|
|
|
$
|
0.16
|
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
12,157
|
|
|
$
|
10,957
|
|
|
$
|
18,571
|
|
|
$
|
15,187
|
|
|
$
|
18,150
|
|
|
$
|
14,989
|
|
|
$
|
18,339
|
|
|
$
|
19,901
|
|
|
|
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(1) |
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Net income per share for the four quarters of each fiscal year
may not sum to the total for the fiscal year because of the
different number of shares outstanding during each period. |
Adjusted
EBITDA
Our use of Adjusted EBITDA. We include
Adjusted EBITDA in this report because (i) we seek to
manage our business to a consistent level of Adjusted EBITDA as
a percentage of net revenue, (ii) it is a key basis upon
which our management assesses our operating performance,
(iii) it is one of the primary metrics investors use in
evaluating Internet marketing companies, (iv) it is a
factor in the evaluation of the performance of our management in
determining compensation, and (v) it is an element of
certain financial covenants under our debt agreements. We define
Adjusted EBITDA as net income less provision for taxes,
depreciation expense, amortization expense, stock-based
compensation expense, interest and other income (expense), net.
We use Adjusted EBITDA as a key performance measure because we
believe it facilitates operating performance comparisons from
period to period by excluding potential differences caused by
variations in capital
46
structures (affecting interest expense), tax positions (such as
the impact on periods or companies of changes in effective tax
rates or fluctuations in permanent differences or discrete
quarterly items) and the non-cash impact of depreciation and
amortization and stock-based compensation expense. Because
Adjusted EBITDA facilitates internal comparisons of our
historical operating performance on a more consistent basis, we
also use Adjusted EBITDA for business planning purposes, to
incentivize and compensate our management personnel and in
evaluating acquisition opportunities.
In addition, we believe Adjusted EBITDA and similar measures are
widely used by investors, securities analysts, ratings agencies
and other interested parties in our industry as a measure of
financial performance and debt-service capabilities. Our use of
Adjusted EBITDA has limitations as an analytical tool, and it
should not be considered in isolation or as a substitute for
analysis of our results as reported under GAAP. Some of these
limitations are:
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Adjusted EBITDA does not reflect our cash expenditures for
capital equipment or other contractual commitments;
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although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized may have to be replaced
in the future, and Adjusted EBITDA does not reflect cash capital
expenditure requirements for such replacements;
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|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
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|
Adjusted EBITDA does not consider the potentially dilutive
impact of issuing stock-based compensation to our management
team and employees;
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Adjusted EBITDA does not reflect the significant interest
expense or the cash requirements necessary to service interest
or principal payments on our indebtedness;
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Adjusted EBITDA does not reflect certain tax payments that may
represent a reduction in cash available to us; and
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other companies, including companies in our industry, may
calculate Adjusted EBITDA measures differently, which reduces
their usefulness as a comparative measure.
|
Because of these limitations, Adjusted EBITDA should not be
considered as a measure of discretionary cash available to us to
invest in the growth of our business. When evaluating our
performance, Adjusted EBITDA should be considered alongside
other financial performance measures, including various cash
flow metrics, net income and our other GAAP results.
The following table presents a reconciliation of Adjusted EBITDA
to net income, the most comparable GAAP measure, for each of the
periods indicated:
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Three Months Ended
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Sept 30,
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Dec 31,
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Mar 31,
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June 30,
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Sept 30,
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Dec 31,
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Mar 31,
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June 30,
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2008
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2008
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2009
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2009
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2009
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2009
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2010
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2010
|
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(In thousands)
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Net income
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$
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3,304
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$
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2,350
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$
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6,393
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$
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5,227
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$
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6,513
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$
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2,410
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$
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5,250
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$
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6,411
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Interest and other (income) expense, net
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622
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1,311
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851
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754
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619
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708
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1,350
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(320
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)
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Provision for taxes
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2,719
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1,547
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5,818
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3,825
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4,837
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2,356
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3,538
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5,545
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Depreciation and amortization
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4,114
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4,237
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4,035
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3,592
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3,952
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4,651
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5,075
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5,113
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Stock-based compensation expense
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1,398
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1,512
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1,474
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1,789
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2,229
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4,864
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3,126
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3,152
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Adjusted EBITDA
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$
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12,157
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$
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10,957
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$
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18,571
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$
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15,187
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$
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18,150
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$
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14,989
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$
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18,339
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$
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19,901
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Adjusted EBITDA quarterly trends. We seek to
manage our business to a consistent level of Adjusted EBITDA as
a percentage of net revenue. We do so on a fiscal year basis by
varying our operations to balance
47
revenue growth and costs throughout the fiscal year. We do not
seek to manage our business to a consistent level of Adjusted
EBITDA on a quarterly basis.
For quarterly periods ending from September 30, 2008 to
June 30, 2010, Adjusted EBITDA as a percentage of revenue
was 19%, 18%, 27%, 22%, 23%, 19%, 20% and 22%, respectively. In
general, Adjusted EBITDA as a percentage of revenue tends to be
seasonally weaker in the quarters ending September 30 and,
particularly, December 31, and stronger in quarters ending
March 31 and June 30. For the three months ended
March 31, 2009, Adjusted EBITDA as a percentage of revenue
was 27% due to a reduction in work force undertaken at the
beginning of that period based on concerns held by our
management team regarding the deteriorating economic climate at
that time. We manage our business to a desired Adjusted EBITDA
margin level on a fiscal year basis, not on a quarterly basis,
and investors should expect our Adjusted EBITDA margins to vary
from quarter to quarter.
Liquidity
and Capital Resources
Our primary operating cash requirements include the payment of
media costs, personnel costs, costs of information technology
systems and office facilities.
Our principal sources of liquidity as of June 30, 2010,
consisted of cash and cash equivalents of $155.8 million
and our credit facility which had $98.2 million available
for borrowing. We believe that our existing cash and cash
equivalents, available borrowings under the credit facility and
cash generated from operations will be sufficient to satisfy our
currently anticipated cash requirements through at least the
next 12 months.
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Fiscal Year Ended June 30,
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2010
|
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2009
|
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2008
|
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(In thousands)
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Cash flows from operating activities
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$
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38,509
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$
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32,570
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$
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24,751
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Cash flows from investing activities
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(72,233
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)
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(27,326
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)
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(49,248
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)
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Cash flows from financing activities
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164,324
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(5,012
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)
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22,756
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Net
Cash Provided by Operating Activities
Our net cash provided by operating activities is primarily the
result of our net income adjusted for non-cash expenses such as
depreciation and amortization, stock-based compensation expense
and changes in working capital components, and is influenced by
the timing of cash collections from our clients and cash
payments for purchases of media and other expenses.
Net cash provided by operating activities in fiscal 2010 was due
to net income of $20.6 million, non-cash depreciation,
amortization and stock-based compensation expense of
$32.2 million and an increase in accounts payable and
accrued liabilities of $11.3 million, partially offset by
an increase in accounts receivable of $14.4 million, an
increase in deferred taxes of $6.8 million, an increase in
excess tax benefits from the exercise of stock options of
$1.9 million, as well as a gain from the early
extinguishment of debt of $1.2 million. The increase in
accounts payable and accrued liabilities is due to timing of
payments and increased cost of sales associated with increased
revenue. The increase in accounts receivable is attributable to
increased revenue, as well as timing of receipts. The increase
in deferred taxes is primarily due to larger temporary
differences between the financial statement carrying amount and
the tax basis of certain existing assets and liabilities. The
increase in excess tax benefits is attributable to exercises of
stock options resulting in tax deductions in excess of recorded
stock-based compensation expense.
Net cash provided by operating activities in fiscal 2009 was due
to net income of $17.3 million, non-cash depreciation,
amortization and stock-based compensation expense of
$22.2 million and increased accounts payable and accrued
liabilities of $5.9 million, partially offset by an
increase in accounts receivable of $9.0 million and
increased deferred taxes of $4.1 million. The increase in
accounts payable and accrued liabilities is due to timing of
payments. The increase in accounts receivable is due to
increased revenue, as well as due to timing of receipts. The
increase in deferred taxes is due to larger temporary
differences between the financial statement carrying amount and
the tax basis of certain existing assets and liabilities.
48
Net cash provided by operating activities in fiscal 2008 was due
to net income of $12.9 million, non-cash depreciation,
amortization and stock-based compensation expense of
$14.9 million and increased accounts payable and accrued
liabilities of $3.0 million, partially offset by an
increase in deferred taxes of $3.8 million and excess tax
benefits from exercise of stock options of $1.7 million.
The increase in accounts payable and accrued liabilities is due
to timing of payments. The increase in deferred taxes is due to
larger temporary differences between the financial statement
carrying amount and the tax basis of certain existing assets and
liabilities. The increase in excess tax benefits is attributable
to exercises of stock options resulting in tax deductions in
excess of recorded stock-based compensation expense.
Net
Cash Used in Investing Activities
Our investing activities include acquisitions of media websites
and businesses; purchases, sales and maturities of marketable
securities; capital expenditures; and capitalized internal
development costs.
Cash used in investing activities in fiscal year 2010 was
primarily due to our acquisitions of Internet.com, Insure.com
and HSH. We acquired the website business of the Internet.com
division of WebMediaBrands, Inc., a New York-based Internet
media company, for an initial cash payment of
$15.9 million. We acquired the website business of
Insure.com from LifeQuotes, Inc., an Illinois-based online
insurance quote service and brokerage business, for an initial
cash payment of $15.0 million. We acquired HSH, a New
Jersey-based online company providing comprehensive mortgage
rate information, for an initial cash payment of
$6.0 million. Cash used in investing activities in fiscal
year 2010 was also affected by purchases of the operations of 30
other website publishing businesses for an aggregate of
$31.2 million in cash payments, which included
$4.5 million of contingent consideration related to the
acquisition of SureHits in fiscal year 2008. Capital
expenditures and internal software development costs totaled
$4.1 million in fiscal year 2010.
Cash used in investing activities in fiscal year 2009 was
affected by the acquisition of CardRatings for an initial cash
payment of $10.4 million, as well as purchases of the
operations of 33 other website publishing businesses for an
aggregate of $14.6 million in cash payments. Capital
expenditures and internal software development costs totaled
$2.4 million in fiscal year 2009. Cash used in investing
activities in fiscal year 2009 was partially offset by proceeds
from sales and maturities of marketable securities of
$2.3 million.
Cash used in investing activities in fiscal year 2008 was driven
by the acquisitions of SureHits, ReliableRemodeler and
Vendorseek for an aggregate initial cash payment of
$54.7 million, as well as purchases of the operations of 20
website publishing businesses for an aggregate of
$9.5 million in cash payments. Capital expenditures and
internal software development costs totaled $3.6 million in
fiscal year 2008. Cash used in investing activities in fiscal
year 2008 was partially offset by proceeds from sales and
maturities of marketable securities, net of purchases of
marketable securities, of $17.5 million.
Net
Cash Provided by or Used in Financing Activities
Cash provided by financing activities in fiscal year 2010 was
primarily due to proceeds from our IPO, net of issuance costs,
of $136.8 million, draw-down of our credit facility, net of
principal payments, of $40.2 million, proceeds from stock
option exercises of $1.6 million and excess tax benefits of
$1.9 million, partially offset by $15.5 million of
principal payments on acquisition-related notes payable.
Cash used in financing activities in fiscal year 2009 was due to
principal payments on acquisition-related notes payable and our
term loan of $13.1 million and stock repurchases of
$1.3 million, partially offset by proceeds from a draw-down
of our revolving credit line of $8.6 million.
Cash provided by financing activities in fiscal year 2008 was
driven by proceeds from our term loan of $29.0 million and
proceeds from stock option exercises of $2.6 million,
partially offset by payments of $5.6 million in common
stock repurchases and $4.9 million of principal payments on
acquisition-related notes payable.
Off-Balance
Sheet Arrangements
During the periods presented, we did not have any relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have
49
been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes.
Contractual
Obligations
Our contractual obligations relate primarily to borrowings under
the credit facility, notes payables, operating leases and
purchase obligations.
The following table sets forth payments due under our
contractual obligations as of June 30, 2010:
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|
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|
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|
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Payments Due by Period
|
|
|
|
Total
|
|
|
Less Than 1 Year
|
|
|
1 to 3 Years
|
|
|
3 to 5 Years
|
|
|
More Than 5 Years
|
|
|
|
(In thousands)
|
|
|
Credit facility
|
|
$
|
75,904
|
|
|
$
|
3,963
|
|
|
$
|
19,688
|
|
|
$
|
52,253
|
|
|
$
|
|
|
Notes payable
|
|
|
19,544
|
|
|
|
12,278
|
|
|
|
5,143
|
|
|
|
2,123
|
|
|
|
|
|
Operating lease obligations
|
|
|
17,641
|
|
|
|
1,442
|
|
|
|
3,219
|
|
|
|
4,711
|
|
|
|
8,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
113,089
|
|
|
$
|
17,683
|
|
|
$
|
28,050
|
|
|
$
|
59,087
|
|
|
$
|
8,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
The above table does not include approximately $2.5 million
of long-term income tax liabilities for uncertainty in income
taxes due to the fact that we are unable to reasonably estimate
the timing of these potential future payments.
In connection with the acquisition of SureHits, we may be
required to make certain earn-out payments in the aggregate
amount of $9.0 million, payable in increments in the amount
of $4.5 million annually in January of 2011 and 2012,
contingent upon the achievement of specified financial targets.
New
Credit Facility
In January 2010, we replaced our existing credit facility with a
credit facility totaling $175.0 million. The new facility
consists of a $35.0 million four-year term loan, with
principal amortization of 10%, 15%, 35% and 40% annually, and a
$140.0 million four-year revolving credit line with an
optional increase of $50.0 million. Borrowings under the
credit facility are collateralized by our assets and interest is
payable quarterly at specified margins above either LIBOR or the
Prime Rate. The interest rate varies dependent upon the ratio of
funded debt to adjusted EBITDA and ranges from LIBOR + 2.125% to
2.875% or Prime + 1.00% to 1.50% for the revolving credit line
and from LIBOR + 2.50% to 3.25% or Prime + 1.00% to 1.50% for
the term loan. Adjusted EBITDA is defined as net income less
provision for taxes, depreciation expense, amortization expense,
stock-based compensation expense, interest and other income
(expense), net and acquisition costs for business combinations.
The revolving credit line also requires a quarterly facility fee
of 0.375% of the revolving credit line capacity. The credit
facility expires in January 2014. The credit facility agreement
restricts our ability to raise additional debt financing and pay
dividends. In addition, we are required to maintain financial
ratios computed as follows:
1. Quick ratio: ratio of (i) the sum of unrestricted
cash and cash equivalents and trade receivables less than
90 days from invoice date to (ii) current liabilities
and face amount of any letters of credit less the current
portion of deferred revenue.
2. Fixed charge coverage: ratio of (i) trailing twelve
months of adjusted EBITDA to (ii) the sum of capital
expenditures, net cash interest expense, cash taxes, cash
dividends and trailing twelve months payments of indebtedness.
Payment of unsecured indebtedness is excluded to the degree that
sufficient unused revolving credit line exists such that the
relevant debt payment could be made from the credit facility.
3. Funded debt to adjusted EBITDA: ratio of (i) the
sum of all obligations owed to lending institutions, the face
amount of any letters of credit, indebtedness owed in connection
with acquisition-related notes and indebtedness owed in
connection with capital lease obligations to (ii) trailing
twelve months of adjusted EBITDA.
Under the terms of the credit facility we must maintain a
minimum quick ratio of 1.15 to 1.00, a minimum fixed charge
coverage ratio of 1.15 to 1.00 and a maximum funded debt to
adjusted EBITDA ratio of 2.75 to 1.00 through
50
December 31, 2010 and 2.50 to 1.00 for all fiscal quarters
thereafter and we must comply with other non-financial
covenants. We were in compliance with the financial ratios and
other covenants as of June 30, 2010 and 2009.
New
Lease
As the existing lease for our corporate headquarters located at
1051 Hillsdale Boulevard, Foster City, California expires in
October 2010, we entered into a new lease agreement in February
2010 for approximately 63,998 square feet of office space
located at 950 Tower Lane, Foster City, California. The term of
the lease begins on November 1, 2010 and expires on the
last day of the 96th full calendar month commencing on or
after November 1, 2010. The monthly base rent will be
abated for the first 12 calendar months under the lease.
Thereafter the base rent will be $118,000 through the
24th calendar month of the term of the lease, after which
the monthly base rent will increase to $182,000 for the
subsequent 12 months. In the following years the monthly
base rent will increase approximately 3% after each
12-month
anniversary during the term of the lease, including any
extensions under our options to extend.
We have two options to extend the term of the lease for one
additional year for each option following the expiration date of
the lease or renewal term, as applicable.
Critical
Accounting Policies and Estimates
We have prepared our consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America (GAAP). In doing so, we are required to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenue and expenses during the reporting period.
Some of the estimates and assumptions we are required to make
relate to matters that are inherently uncertain as they pertain
to future events. We base these estimates and assumptions on
historical experience or on various other factors that we
believe to be reasonable and appropriate under the
circumstances. On an ongoing basis, we reconsider and evaluate
our estimates and assumptions. Actual results may differ
significantly from these estimates.
We believe that the critical accounting policies listed below
involve our more significant judgments, estimates and
assumptions and, therefore, could have the greatest potential
impact on our consolidated financial statements. In addition, we
believe that a discussion of these policies is necessary to
understand and evaluate the consolidated financial statements
contained in this report.
For further information on our critical and other significant
accounting policies, see Note 2 of our consolidated
financial statements included in this report.
Revenue
Recognition
We derive our revenue from two sources: Direct Marketing
Services (DMS) and Direct Selling Services
(DSS).
DMS revenue is derived primarily from fees which are earned
through the delivery of qualified leads or clicks. We recognize
revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and
collectability is reasonably assured. Delivery is deemed to have
occurred at the time a qualified lead or click is delivered to
the client provided that no significant obligations remain.
From time to time, we may agree to credit a client for certain
leads or clicks if they fail to meet the contractual or other
guidelines of a particular client. We have established a sales
reserve based on historical experience. To date, such credits
have been immaterial and within our expectations.
For a portion of our revenue, we have agreements with providers
of online media or traffic (Publishers) used in the
generation of leads or clicks. We receive a fee from our clients
and pay a fee to Publishers either on a cost per lead, cost per
click or cost per thousand impressions basis. We are the primary
obligor in the transaction. As a result, the fees paid by our
clients are recognized as revenue and the fees paid to our
Publishers are included in cost of revenue.
51
DSS revenue comprises
(i) set-up
and professional services fees and (ii) usage fees.
Set-up and
professional service fees that do not provide stand-alone value
to a client are recognized over the contractual term of the
agreement or the expected client relationship period, whichever
is longer, effective when the application reaches the
go-live date. We define the go-live date
as the date when the application enters into a production
environment or all essential functionalities have been
delivered. Usage fees are recognized on a monthly basis as
earned.
Deferred revenue is comprised of contractual billings in excess
of recognized revenue and payments received in advance of
revenue recognition.
Stock-Based
Compensation
We record stock-based compensation expense for employee stock
options granted or modified on or after July 1, 2006 based
on estimated fair values for these stock options. We continue to
account for stock options granted to employees prior to
July 1, 2006 based on the intrinsic value of those stock
options.
We measure and record the expense related to share-based
transactions based on the fair values of the awards as
determined on the date of grant using an option-pricing model.
We have selected the Black-Scholes option pricing model to
estimate the fair value of our stock options awards to
employees. In applying the Black-Scholes option pricing model,
our determination of fair value of the share-based payment award
on the date of grant is affected by our estimated fair value of
common shares for grants made prior to our IPO, as well as
assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, the
expected stock price volatility over the term of the stock
options awards and the employees actual and projected
stock option exercise and pre-vesting employment termination
behaviors. We recognize stock-based compensation expense over
the requisite service period using the straight-line method,
based on awards ultimately expected to vest. We estimate future
forfeitures at the date of grant and revise the estimates, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates.
Goodwill
Goodwill is tested for impairment at the reporting unit level on
an annual basis and whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable.
Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assigning
assets and liabilities to reporting units, assigning goodwill to
reporting units, and determining the fair value of each
reporting unit. Significant judgments required to estimate the
fair value of reporting units include estimating future cash
flows and determining appropriate discount rates, growth rates
and other assumptions. Changes in these estimates and
assumptions could materially affect the determination of fair
value for each reporting unit which could trigger impairment.
We concluded that DMS and DSS constitute two separate reporting
units. We determined the fair value of our DMS reporting unit by
adjusting the fair value of the business enterprise based on our
market capitalization for the fair value of the DSS reporting
unit. The fair value of our DSS reporting unit was estimated
using the income approach. Under the income approach, we
calculated the fair value of our DSS reporting unit based on the
present value of estimated future cash flows. We performed our
annual goodwill impairment test in the fourth quarter for our
DMS and DSS reporting units. Our assessment of goodwill
impairment indicated that the fair value of our DMS reporting
unit was substantially in excess of its carrying value. The
estimated fair value of our DSS reporting unit also exceeded its
carrying value as of June 30, 2010. The carrying value of
our DSS reporting unit includes allocated goodwill of
$1.2 million which represents less than 1% of our total
goodwill balance.
The fair value of the reporting units and hence the valuation of
goodwill could be affected if actual results differ
substantially from our estimates. Circumstances that could
affect the valuation of goodwill include, among other things, a
significant change in our market capitalization, the business
climate and buying habits of our subscriber base and with
respect to the DSS reporting unit the loss of a significant
customer.
Long-Lived
Assets
We evaluate long-lived assets, such as property and equipment
and purchased intangible assets with finite lives, for
impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may
52
not be recoverable. We apply judgment when assessing the fair
value of the assets based on the undiscounted future cash flows
the assets are expected to generate and recognize an impairment
loss if estimated undiscounted future cash flows expected to
result from the use of the asset plus net proceeds expected from
disposition of the asset, if any, are less than the carrying
value of the asset. When we identify an impairment, we reduce
the carrying amount of the asset to its estimated fair value
based on a discounted cash flow approach or, when available and
appropriate, to comparable market values.
Income
Taxes
We account for income taxes using an asset and liability
approach to record deferred taxes. Our deferred income tax
assets represent temporary differences between the financial
statement carrying amount and the tax basis of existing assets
and liabilities that will result in deductible amounts in future
years, including net operating loss carry forwards. Based on
estimates, the carrying value of our net deferred tax assets
assumes that it is more likely than not that we will be able to
generate sufficient future taxable income in certain tax
jurisdictions. Our judgment regarding future profitability may
change due to future market conditions, changes in U.S. or
international tax laws and other factors.
On July 1, 2007, we adopted the authoritative accounting
guidance prescribing a threshold and measurement attribute for
the financial recognition and measurement of a tax position
taken or expected to be taken in a tax return. The guidance also
provides for de-recognition of tax benefits, classification on
the balance sheet, interest and penalties, accounting in interim
periods, disclosure and transition. The guidance utilizes a
two-step approach for evaluating uncertain tax positions. Step
one, Recognition, requires a company to determine if the weight
of available evidence indicates that a tax position is more
likely than not to be sustained upon audit, including resolution
of related appeals or litigation processes, if any. If a tax
position is not considered more likely than not to
be sustained then no benefits of the position are to be
recognized. Step two, Measurement, is based on the largest
amount of benefit, which is more likely than not to be realized
on ultimate settlement. The cumulative effect of adoption to the
opening balance of retained earnings was $1.7 million.
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
(FASB) issued a new accounting standard that changes
the accounting for business combinations, including the
measurement of acquirer shares issued in consideration for a
business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss
contingencies, the recognition of capitalized in-process
research and development, the accounting for acquisition-related
restructuring cost accruals, the treatment of
acquisition-related transaction costs and the recognition of
changes in the acquirers income tax valuation allowance.
The new standard applies prospectively to business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008 and to changes in valuation allowances
for deferred tax assets and acquired income tax uncertainties
arising from past business combinations. The adoption of the new
standard on July 1, 2009 did not have a material effect on
our consolidated financial statements.
In October 2009, the FASB amended the accounting standards for
revenue recognition to remove tangible products containing
software components and non-software components that function
together to deliver the products essential functionality
from the scope of industry-specific software revenue recognition
guidance. In October 2009, the FASB also amended the accounting
standards for multiple deliverable revenue arrangements to
|
|
|
|
|
provide updated guidance on whether multiple deliverables exist,
how the deliverables in an arrangement should be separated, and
how the consideration should be allocated;
|
|
|
|
require an entity to allocate revenue in an arrangement using
estimated selling price (ESP) of deliverables if a
vendor does not have vendor-specific objective evidence
(VSOE) of selling price or third-party evidence
(TPE) of selling price;
|
|
|
|
and eliminate the use of the residual method and require an
entity to allocate revenue using the relative selling price
method.
|
53
Both standards should be applied on a prospective basis for
revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, with
early adoption permitted. We do not anticipate the adoption of
these standards in the first quarter of fiscal year 2011 to have
a material impact on our consolidated financial statements.
In January 2010, the FASB issued a new fair value accounting
standard update. This update requires additional disclosures
about (i) the different classes of assets and liabilities
measured at fair value, (ii) the valuation techniques and
inputs used, (iii) the activity in Level 3 fair value
measurements, and (iv) the transfers between Levels 1,
2, and 3. This update is effective for interim and annual
reporting periods beginning after December 15, 2009. The
adoption of the new standard in the third quarter of fiscal 2010
did not have a material effect on our consolidated financial
statements.
In February 2010, the FASB amended its accounting guidance for
the accounting and disclosure of events that occur after the
balance sheet date but before financial statements are issued.
In particular, the new amendment sets forth that a registrant is
no longer required to disclose the date through which it has
evaluated subsequent events. The amended guidance became
effective in February 2010 and was adopted by us in the third
quarter of fiscal 2010. The adoption of the new standard did not
have a material effect on our consolidated financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to market risks in the ordinary course of our
business. These risks include primarily foreign currency
exchange and interest rate risks.
Foreign
Currency Exchange Risk
To date, our international client agreements have been
predominately denominated in U.S. dollars, and accordingly,
we have limited exposure to foreign currency exchange rate
fluctuations related to client agreements, and do not currently
engage in foreign currency hedging transactions. As the local
accounts for some of our foreign operations are maintained in
the local currency of the respective country, we are subject to
foreign currency exchange rate fluctuations associated with the
remeasurement to U.S. dollars. A hypothetical change of 10%
in foreign currency exchange rates would not have a material
effect on our consolidated financial condition or results of
operations.
Interest
Rate Risk
We invest our cash equivalents and short-term investments
primarily in money market funds and short-term deposits with
original maturities of less than three months. Unrestricted
cash, cash equivalents and short-term investments are held for
working capital purposes and acquisition financing. We do not
enter into investments for trading or speculative purposes. We
believe that we do not have material exposure to changes in the
fair value as a result of changes in interest rates due to the
short-term nature of our investments. Declines in interest rates
may reduce future investment income. However, a hypothetical
decline of 1% in the interest rate on our investments would not
have a material effect on our consolidated financial condition
or results of operations.
As of June 30, 2010, we had an outstanding credit facility
with a total borrowing capacity of $175.0 million. Interest
on borrowings under the credit facility is payable quarterly at
specified margins above either LIBOR or the Prime Rate. Our
exposure to interest rate risk under the credit facility will
depend on the extent to which we utilize such facility. As of
June 30, 2010, we had $75.9 million outstanding under
our credit facility. A hypothetical increase of 1% in the
LIBOR-based interest rate on our credit facility would result in
an increase in our interest expense of $0.8 million per
year, assuming constant borrowing levels.
54
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
QUINSTREET,
INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
55
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
of QuinStreet, Inc.
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of QuinStreet,
Inc. and its subsidiaries at June 30, 2010 and
June 30, 2009, and the results of their operations and
their cash flows for each of the three years in the period ended
June 30, 2010 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted the new accounting standard for
business combinations in 2010.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
September 13, 2010
56
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
155,770
|
|
|
$
|
25,182
|
|
Accounts receivable, net
|
|
|
51,466
|
|
|
|
33,283
|
|
Deferred tax assets
|
|
|
8,528
|
|
|
|
5,543
|
|
Prepaid expenses and other assets
|
|
|
3,123
|
|
|
|
1,228
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
218,887
|
|
|
|
65,236
|
|
Property and equipment, net
|
|
|
5,419
|
|
|
|
4,741
|
|
Goodwill
|
|
|
158,582
|
|
|
|
106,744
|
|
Other intangible assets, net
|
|
|
47,156
|
|
|
|
33,990
|
|
Deferred tax assets, noncurrent
|
|
|
3,972
|
|
|
|
1,525
|
|
Other assets, noncurrent
|
|
|
614
|
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
434,630
|
|
|
$
|
212,878
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,776
|
|
|
$
|
13,408
|
|
Accrued liabilities
|
|
|
30,144
|
|
|
|
21,794
|
|
Deferred revenue
|
|
|
1,241
|
|
|
|
718
|
|
Debt
|
|
|
15,562
|
|
|
|
12,890
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
63,723
|
|
|
|
48,810
|
|
Deferred revenue, noncurrent
|
|
|
305
|
|
|
|
820
|
|
Debt, noncurrent
|
|
|
78,046
|
|
|
|
44,350
|
|
Other liabilities, noncurrent
|
|
|
2,534
|
|
|
|
2,309
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
144,608
|
|
|
|
96,289
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (See Note 10)
|
|
|
|
|
|
|
|
|
Convertible preferred stock: $0.001 par value; 5,000,000
and 30,000,000 shares authorized; 0 and
21,176,533 shares issued and outstanding at June 30,
2010 and 2009, respectively; liquidation value of $0 and $69,564
at June 30, 2010 and 2009, respectively
|
|
|
|
|
|
|
43,403
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Common stock: $0.001 par value; 100,000,000 and
45,000,000 shares authorized; 47,247,147 and
15,413,000 shares issued, and 45,069,695 and 13,315,348
shares outstanding at June 30, 2010 and 2009, respectively
|
|
|
47
|
|
|
|
15
|
|
Additional paid-in capital
|
|
|
217,581
|
|
|
|
20,634
|
|
Treasury stock, at cost (2,177,452 and 2,097,652 shares at
June 30, 2010 and 2009, respectively)
|
|
|
(7,779
|
)
|
|
|
(7,064
|
)
|
Accumulated other comprehensive income
|
|
|
9
|
|
|
|
21
|
|
Retained earnings
|
|
|
80,164
|
|
|
|
59,580
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
290,022
|
|
|
|
73,186
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible preferred stock and
stockholders equity
|
|
$
|
434,630
|
|
|
$
|
212,878
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
57
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
$
|
334,835
|
|
|
$
|
260,527
|
|
|
$
|
192,030
|
|
Cost of revenue(1)
|
|
|
240,730
|
|
|
|
181,593
|
|
|
|
130,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
94,105
|
|
|
|
78,934
|
|
|
|
61,161
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
19,726
|
|
|
|
14,887
|
|
|
|
14,051
|
|
Sales and marketing
|
|
|
16,698
|
|
|
|
16,154
|
|
|
|
12,409
|
|
General and administrative
|
|
|
18,464
|
|
|
|
13,172
|
|
|
|
13,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
39,217
|
|
|
|
34,721
|
|
|
|
21,330
|
|
Interest income
|
|
|
97
|
|
|
|
245
|
|
|
|
1,482
|
|
Interest expense
|
|
|
(3,977
|
)
|
|
|
(3,544
|
)
|
|
|
(1,214
|
)
|
Other income (expense), net
|
|
|
1,523
|
|
|
|
(239
|
)
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
36,860
|
|
|
|
31,183
|
|
|
|
21,743
|
|
Provision for taxes
|
|
|
(16,276
|
)
|
|
|
(13,909
|
)
|
|
|
(8,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,584
|
|
|
$
|
17,274
|
|
|
$
|
12,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
12,782
|
|
|
$
|
5,399
|
|
|
$
|
3,666
|
|
Diluted
|
|
$
|
13,201
|
|
|
$
|
5,798
|
|
|
$
|
4,026
|
|
Net income per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.50
|
|
|
$
|
0.41
|
|
|
$
|
0.28
|
|
Diluted
|
|
$
|
0.46
|
|
|
$
|
0.39
|
|
|
$
|
0.26
|
|
Weighted average shares used in computing net income per share
attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,616
|
|
|
|
13,294
|
|
|
|
13,104
|
|
Diluted
|
|
|
28,429
|
|
|
|
14,971
|
|
|
|
15,325
|
|
|
|
|
(1) |
|
Cost of revenue and operating expenses include stock-based
compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
3,111
|
|
|
$
|
1,916
|
|
|
$
|
1,112
|
|
Product development
|
|
|
2,176
|
|
|
|
669
|
|
|
|
443
|
|
Sales and marketing
|
|
|
3,463
|
|
|
|
1,761
|
|
|
|
581
|
|
General and administrative
|
|
|
4,621
|
|
|
|
1,827
|
|
|
|
1,086
|
|
See notes to consolidated financial statements
58
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Shareholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Equity
|
|
|
Income
|
|
Balance at June 30, 2007
|
|
|
21,176,533
|
|
|
$
|
43,403
|
|
|
|
|
14,350,087
|
|
|
$
|
14
|
|
|
|
(1,375,647
|
)
|
|
$
|
(121
|
)
|
|
$
|
6,180
|
|
|
$
|
95
|
|
|
$
|
31,144
|
|
|
$
|
37,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
893,197
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
2,575
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,222
|
|
|
|
|
|
|
|
|
|
|
|
3,222
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,707
|
|
|
|
|
|
|
|
|
|
|
|
1,707
|
|
|
|
|
|
Repurchase of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(558,730
|
)
|
|
|
(5,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,606
|
)
|
|
|
|
|
Cumulative effect of adoption of accounting for uncertain tax
positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,705
|
)
|
|
|
(1,705
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,867
|
|
|
|
12,867
|
|
|
|
12,867
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
(71
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
21,176,533
|
|
|
$
|
43,403
|
|
|
|
|
15,243,284
|
|
|
$
|
15
|
|
|
|
(1,934,377
|
)
|
|
$
|
(5,727
|
)
|
|
$
|
13,683
|
|
|
$
|
34
|
|
|
$
|
42,306
|
|
|
$
|
50,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
169,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,173
|
|
|
|
|
|
|
|
|
|
|
|
6,173
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163,275
|
)
|
|
|
(1,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,337
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,274
|
|
|
|
17,274
|
|
|
|
17,274
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
|
21,176,533
|
|
|
$
|
43,403
|
|
|
|
|
15,413,000
|
|
|
$
|
15
|
|
|
|
(2,097,652
|
)
|
|
$
|
(7,064
|
)
|
|
$
|
20,634
|
|
|
$
|
21
|
|
|
$
|
59,580
|
|
|
$
|
73,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
657,614
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1,639
|
|
|
|
|
|
|
|
|
|
|
|
1,640
|
|
|
|
|
|
Issuance of common stock in connection with initial public
offering, net of issuance costs of $13,215
|
|
|
|
|
|
|
|
|
|
|
|
10,000,000
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
136,775
|
|
|
|
|
|
|
|
|
|
|
|
136,785
|
|
|
|
|
|
Conversion of preferred stock to common stock in connection with
initial public offering
|
|
|
(21,176,533
|
)
|
|
|
(43,403
|
)
|
|
|
|
21,176,533
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
43,382
|
|
|
|
|
|
|
|
|
|
|
|
43,403
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,371
|
|
|
|
|
|
|
|
|
|
|
|
13,371
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,780
|
|
|
|
|
|
|
|
|
|
|
|
1,780
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,800
|
)
|
|
|
(715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(715
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,584
|
|
|
|
20,584
|
|
|
|
20,584
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
47,247,147
|
|
|
$
|
47
|
|
|
|
(2,177,452
|
)
|
|
$
|
(7,779
|
)
|
|
$
|
217,581
|
|
|
$
|
9
|
|
|
$
|
80,164
|
|
|
$
|
290,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
59
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,584
|
|
|
$
|
17,274
|
|
|
$
|
12,867
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
18,791
|
|
|
|
15,978
|
|
|
|
11,727
|
|
Provision for sales returns and doubtful accounts receivable
|
|
|
(751
|
)
|
|
|
1,473
|
|
|
|
1,146
|
|
Stock-based compensation
|
|
|
13,371
|
|
|
|
6,173
|
|
|
|
3,222
|
|
Excess tax benefits from stock-based compensation
|
|
|
(1,859
|
)
|
|
|
(474
|
)
|
|
|
(1,707
|
)
|
(Gain) loss, net on early extinguishment of debt
|
|
|
(1,179
|
)
|
|
|
|
|
|
|
|
|
Other non-cash adjustments, net
|
|
|
(443
|
)
|
|
|
563
|
|
|
|
369
|
|
Changes in assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(14,403
|
)
|
|
|
(9,042
|
)
|
|
|
(921
|
)
|
Prepaid expenses and other assets
|
|
|
29
|
|
|
|
485
|
|
|
|
(228
|
)
|
Other assets, noncurrent
|
|
|
11
|
|
|
|
(710
|
)
|
|
|
(555
|
)
|
Deferred taxes
|
|
|
(6,771
|
)
|
|
|
(4,081
|
)
|
|
|
(3,772
|
)
|
Accounts payable
|
|
|
3,363
|
|
|
|
3,359
|
|
|
|
(4,977
|
)
|
Accrued liabilities
|
|
|
7,900
|
|
|
|
2,491
|
|
|
|
8,020
|
|
Deferred revenue
|
|
|
(112
|
)
|
|
|
(720
|
)
|
|
|
(954
|
)
|
Other liabilities, noncurrent
|
|
|
(22
|
)
|
|
|
(199
|
)
|
|
|
514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
38,509
|
|
|
|
32,570
|
|
|
|
24,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
14
|
|
|
|
711
|
|
|
|
(23
|
)
|
Proceeds from sales of property and equipment
|
|
|
53
|
|
|
|
|
|
|
|
44
|
|
Capital expenditures
|
|
|
(2,710
|
)
|
|
|
(1,347
|
)
|
|
|
(2,177
|
)
|
Business acquisitions, net of notes payable and cash acquired
|
|
|
(68,176
|
)
|
|
|
(27,932
|
)
|
|
|
(63,244
|
)
|
Internal software development costs
|
|
|
(1,414
|
)
|
|
|
(1,060
|
)
|
|
|
(1,378
|
)
|
Purchases of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(11,642
|
)
|
Proceeds from sales and maturities of marketable securities
|
|
|
|
|
|
|
2,302
|
|
|
|
29,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(72,233
|
)
|
|
|
(27,326
|
)
|
|
|
(49,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
136,790
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock options
|
|
|
1,640
|
|
|
|
304
|
|
|
|
2,575
|
|
Proceeds from bank debt
|
|
|
43,300
|
|
|
|
8,607
|
|
|
|
29,000
|
|
Principal payments on bank debt
|
|
|
(3,100
|
)
|
|
|
(3,500
|
)
|
|
|
|
|
Principal payments on acquisition-related notes payable
|
|
|
(15,450
|
)
|
|
|
(9,560
|
)
|
|
|
(4,920
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
1,859
|
|
|
|
474
|
|
|
|
1,707
|
|
Repurchases of common stock
|
|
|
(715
|
)
|
|
|
(1,337
|
)
|
|
|
(5,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
164,324
|
|
|
|
(5,012
|
)
|
|
|
22,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(12
|
)
|
|
|
(3
|
)
|
|
|
(71
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
130,588
|
|
|
|
229
|
|
|
|
(1,812
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
25,182
|
|
|
|
24,953
|
|
|
|
26,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
155,770
|
|
|
$
|
25,182
|
|
|
$
|
24,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
3,860
|
|
|
|
2,269
|
|
|
|
1,193
|
|
Cash paid for taxes
|
|
|
22,109
|
|
|
|
20,354
|
|
|
|
8,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock
|
|
|
43,403
|
|
|
|
|
|
|
|
|
|
Notes payable issued in connection with business acquisitions
|
|
|
14,501
|
|
|
|
8,151
|
|
|
|
16,910
|
|
See notes to consolidated financial statements
60
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share data)
QuinStreet, Inc. (the Company) is an online media
and marketing company. The Company was incorporated in
California on April 16, 1999 and reincorporated in Delaware
on December 31, 2009. The Company provides vertically
oriented customer acquisition programs for its clients. The
Company also provides hosted solutions for direct selling
companies. The corporate headquarters are located in Foster
City, California, with offices in Arkansas, Connecticut,
Massachusetts, Nevada, New Jersey, New York, North Carolina,
Oklahoma, Oregon, India and the United Kingdom.
Initial
Public Offering
In connection with the Companys reincorporation in
Delaware in December 2009, the Company increased its number of
authorized shares of common and preferred stock to 50,500,000
and 35,500,000, respectively, and established the par value of
each share of common and preferred stock to be $0.001. The
previously outstanding 5,367,756 shares of Series A
convertible preferred stock were converted on a
two-for-one
basis into 10,735,512 shares of Series A convertible
preferred stock of the reincorporated company. Common stock and
additional paid-in capital amounts in these financial statements
have been adjusted to reflect the par value of common stock.
In February 2010, the Company completed its initial public
offering (IPO) of its common stock in which it sold
and issued 10,000,000 shares of common stock at an issue
price of $15.00 per share. A total of $150,000 in gross proceeds
were raised from the IPO and $136,785 in net proceeds after
deducting underwriting discounts and commissions of $10,500 and
other offering costs of $2,715. Upon the closing of the
offering, all shares of the Companys then-outstanding
convertible preferred stock automatically converted into
21,176,533 shares of common stock.
After the completion of the IPO in February 2010, the Company
amended its certificate of incorporation and increased its
number of authorized shares of common stock to 100,000,000 and
reduced the number of authorized shares of preferred stock to
5,000,000.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Consolidation
The consolidated financial statements include the accounts of
the Company and its subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and
expenses during the reporting period. These estimates are based
on information available as of the date of the financial
statements; therefore, actual results could differ from those
estimates.
Revenue
Recognition
The Company derives its revenue from two sources: Direct
Marketing Services (DMS) and Direct Selling Services
(DSS). DMS revenue, which constituted 99%, 99% and
98% of net revenue in fiscal year 2010, 2009 and 2008,
respectively, is derived primarily from fees which are earned
through the delivery of qualified leads or clicks. The Company
recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the
61
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
fee is fixed or determinable and collectability is reasonably
assured. Delivery is deemed to have occurred at the time a
qualified lead or click is delivered to the client provided that
no significant obligations remain.
From time to time, the Company may agree to credit a client for
certain leads or clicks if they fail to meet the contractual or
other guidelines of a particular client. The Company has
established a sales reserve based on historical experience. To
date, such credits have been immaterial and within
managements expectations.
For a portion of its revenue, the Company has agreements with
providers of online media or traffic (Publishers)
used in the generation of leads or clicks. The Company receives
a fee from its clients and pays a fee to Publishers either on a
cost per lead, cost per click or cost per thousand impressions
basis or as a portion of revenue generated. The Company is the
primary obligor in the transaction. As a result, the fees paid
by the Companys clients are recognized as revenue and the
fees paid to its Publishers are included in cost of revenue.
DSS revenue, which constituted 1%, 1% and 2% of net revenue in
fiscal year 2010, 2009 and 2008, respectively, comprises
(i) set-up
and professional services fees and (ii) usage fees.
Set-up and
professional service fees that do not provide stand-alone value
to a client are recognized over the contractual term of the
agreement or the expected client relationship period, whichever
is longer, effective when the application reaches the
go-live date. The Company defines the
go-live date as the date when the application enters
into a production environment or all essential functionalities
have been delivered. Usage fees are recognized on a monthly
basis as earned.
Deferred revenue is comprised of contractual billings in excess
of recognized revenue and payments received in advance of
revenue recognition.
Concentrations
of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash and cash equivalents and accounts receivable. Cash and cash
equivalents are deposited with financial institutions that
management believes are creditworthy. The deposits exceed
federally insured amounts. To date, the Company has not
experienced any losses of its deposits of cash and cash
equivalents.
The Companys accounts receivable are derived from clients
located principally in the United States. The Company performs
ongoing credit evaluation of its clients, does not require
collateral, and maintains allowances for potential credit losses
on client accounts when deemed necessary. To date, such losses
have been within managements expectations.
Clients accounting for over 10% of total net revenue, all of
which were from our DMS segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Client A
|
|
|
*
|
|
|
|
19
|
%
|
|
|
23
|
%
|
Client B
|
|
|
*
|
|
|
|
*
|
|
|
|
12
|
%
|
Client C
|
|
|
*
|
|
|
|
*
|
|
|
|
11
|
%
|
|
|
|
* |
|
indicates less than 10% of total net revenue for the period. |
One client accounted for 12% of the net accounts receivable as
of June 30, 2009.
62
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Fair
Value of Financial Instruments
The Companys financial instruments consist principally of
cash equivalents, accounts receivable, accounts payable,
acquisition-related notes payable, a term loan and a revolving
credit line. The fair value of the Companys cash
equivalents is determined based on quoted prices in active
markets for identical assets. The recorded values of the
Companys accounts receivable and accounts payable
approximate their current fair values due to the relatively
short-term nature of these accounts. The fair value of
acquisition-related notes payable approximates their recorded
amounts as the interest rates on similar financing arrangements
available to the Company at June 30, 2010 approximates the
interest rates implied when these acquisition-related notes
payable were originally issued and recorded. The Company
believes that the fair values of the term loan and revolving
credit line approximate their recorded amounts at June 30,
2010 as the interest rates on these instruments are variable and
based on market interest rates.
Cash
and Cash Equivalents
All highly liquid investments with maturities of three months or
less at the date of purchase are classified as cash equivalents.
Cash equivalents consist primarily of money market funds and
time deposits with original maturities of three months or less.
Cash equivalents amounted to $135,630 and $9,395 at
June 30, 2010 and 2009.
Restricted
Cash
At June 30, 2010 and 2009, the Company had $6 and $20,
respectively, of cash restricted from withdrawal and held by a
bank in certificate of deposits.
Property
and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization, and are depreciated on a
straight-line basis over the estimated useful lives of the
assets, as follows:
|
|
|
Computer equipment
|
|
3 years
|
Software
|
|
3 years
|
Furniture and fixtures
|
|
3 to 5 years
|
Leasehold improvements
|
|
the shorter of the lease term or the estimated useful lives of
the improvements
|
Internal
Software Development Costs
The Company incurs costs to develop software for internal use.
The Company expenses all costs that relate to the planning and
post-implementation phases of development as product development
expense. Costs incurred in the development phase are capitalized
and amortized over the products estimated useful life if
the product is expected to have a useful life beyond six months.
Costs associated with repair or maintenance of existing sites or
the developments of website content are included in cost of
revenue in the accompanying statements of operations. The
Companys policy is to amortize capitalized internal
software development costs on a
product-by-product
basis using the straight-line method over the estimated economic
life of the application, which is generally two years. The
Company capitalized $1,414, $1,060, and $1,378 in fiscal years
2010, 2009 and 2008, respectively. Amortization of internal
software development costs is reflected in cost of revenue.
Goodwill
Goodwill is tested for impairment at the reporting unit level on
an annual basis and whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable.
Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assigning
assets and liabilities to
63
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
reporting units, assigning goodwill to reporting units, and
determining the fair value of each reporting unit. Significant
judgments required to estimate the fair value of reporting units
include estimating future cash flows and determining appropriate
discount rates, growth rates and other assumptions. Changes in
these estimates and assumptions could materially affect the
determination of fair value for each reporting unit which could
trigger impairment.
The Company has determined that DMS and DSS constitute two
separate reporting units. The Company performs its annual
goodwill impairment review during its fourth fiscal quarter and
concluded that goodwill was not impaired. No impairment charges
were recorded in the periods presented.
Long-Lived
Assets
The Company evaluates long-lived assets, such as property and
equipment and purchased intangible assets with finite lives, for
impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. The
Company applies judgment when assessing the fair value of the
assets based on the undiscounted future cash flows the assets
are expected to generate and recognizes an impairment loss if
estimated undiscounted future cash flows expected to result from
the use of the asset plus net proceeds expected from disposition
of the asset, if any, are less than the carrying value of the
asset. When the Company identifies an impairment, it reduces the
carrying amount of the asset to its estimated fair value based
on a discounted cash flow approach or, when available and
appropriate, to comparable market values. No impairment charges
were recorded in the periods presented.
Advertising
Costs
The Company expenses advertising costs as they are incurred.
Advertising expenses for fiscal years 2010, 2009 and 2008 were
$139, $185 and $67, respectively.
Income
Taxes
The Company accounts for income taxes using an asset and
liability approach to record deferred taxes. The Companys
deferred income tax assets represent temporary differences
between the financial statement carrying amount and the tax
basis of existing assets and liabilities that will result in
deductible amounts in future years, including net operating loss
carry forwards. Based on estimates, the carrying value of the
Companys net deferred tax assets assumes that it is more
likely than not that the Company will be able to generate
sufficient future taxable income in certain tax jurisdictions.
The Companys judgments regarding future profitability may
change due to future market conditions, changes in U.S. or
international tax laws and other factors.
On July 1, 2007, the Company adopted the authoritative
accounting guidance prescribing a threshold and measurement
attribute for the financial recognition and measurement of a tax
position taken or expected to be taken in a tax return. The
guidance also provides for de-recognition of tax benefits,
classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure and transition. The
guidance utilizes a two-step approach for evaluating uncertain
tax positions. Step one, Recognition, requires a company to
determine if the weight of available evidence indicates that a
tax position is more likely than not to be sustained upon audit,
including resolution of related appeals or litigation processes,
if any. If a tax position is not considered more likely
than not to be sustained then no benefits of the position
are to be recognized. Step two, Measurement, is based on the
largest amount of benefit, which is more likely than not to be
realized on ultimate settlement. The cumulative effect of
adoption to the opening balance of retained earnings was $1,705.
64
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Foreign
Currency Translation
The Companys foreign operations are subject to exchange
rate fluctuations. The majority of the Companys sales is
denominated in U.S. dollars. The functional currency for
the majority of the Companys foreign subsidiaries is the
U.S. dollar. For these subsidiaries, assets and liabilities
denominated in foreign currency are remeasured into
U.S. dollars at current exchange rates for monetary assets
and liabilities and historical exchange rates for nonmonetary
assets and liabilities. Net revenue, cost of revenue and
expenses are generally remeasured at average exchange rates in
effect during each period. Gains and losses from foreign
currency remeasurement are included in net earnings. Certain
foreign subsidiaries designate the local currency as their
functional currency. For those subsidiaries, the assets and
liabilities are translated into U.S. dollars at exchange
rates in effect at the balance sheet date. Income and expense
items are translated at average exchange rates for the period.
The foreign currency translation adjustments are included in
accumulated other comprehensive income (loss) as a separate
component of stockholders equity. Foreign currency
transaction gains or losses are recorded in other income
(expense), net and were not material for any period presented.
Comprehensive
Income
Comprehensive income consists of two components, net income and
other comprehensive income (loss). Other comprehensive income
(loss) refers to revenue, expenses, gains, and losses that under
GAAP are recorded as an element of stockholders equity but
are excluded from net income. The Companys comprehensive
income (loss) and accumulative other comprehensive income (loss)
consists of foreign currency translation adjustments from those
subsidiaries not using the U.S. dollar as their functional
currency and unrealized gains and losses on marketable
securities categorized as
available-for-sale.
Total accumulated other comprehensive income (loss) is displayed
as a separate component of stockholders equity.
Loss
Contingencies
The Company is subject to the possibility of various loss
contingencies arising in the ordinary course of business.
Management considers the likelihood of loss or impairment of an
asset or the incurrence of a liability, as well as its ability
to reasonably estimate the amount of loss, in determining loss
contingencies. An estimated loss contingency is accrued when it
is probable that an asset has been impaired or a liability has
been incurred and the amount of loss can be reasonably
estimated. The Company regularly evaluates current information
available to its management to determine whether such accruals
should be adjusted and whether new accruals are required.
From time to time, the Company is involved in disputes,
litigation and other legal actions. The Company records a charge
equal to at least the minimum estimated liability for a loss
contingency only when both of the following conditions are met:
(i) information available prior to issuance of the
financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date
of the financial statements, and (ii) the range of loss can
be reasonably estimated. The actual liability in any such
matters may be materially different from the Companys
estimates, which could result in the need to adjust the
liability and record additional expenses.
Stock-Based
Compensation
The Company measures and records the expense related to
share-based transactions based on the fair values of share-based
payment awards as determined on the date of grant using an
option-pricing model. The Company has selected the Black-Scholes
option pricing model to estimate the fair value of its stock
options awards to employees. In applying the Black-Scholes
option pricing model, the Companys determination of fair
value of the share-based payment award on the date of grant is
affected by the Companys estimated fair value of common
stock for stock options granted prior to the Companys IPO,
as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not
limited to, the Companys expected stock price volatility
65
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
over the term of the stock options and the employees
actual and projected stock option exercise and pre-vesting
employment termination behaviors.
For awards with graded vesting the Company recognizes
stock-based compensation expense over the requisite service
period using the straight-line method, based on awards
ultimately expected to vest. The Company estimates future
forfeitures at the date of grant and revises the estimates, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates.
See Note 11 for further information.
401(k)
Savings Plan
The Company sponsors a 401(k) defined contribution plan covering
all U.S. employees. Contributions made by the Company are
determined annually by the Board of Directors. There were no
employer contributions under this plan for the fiscal years
2010, 2009 and 2008.
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
(FASB) issued a new accounting standard that changes
the accounting for business combinations, including the
measurement of acquirer shares issued in consideration for a
business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss
contingencies, the recognition of capitalized in-process
research and development, the accounting for acquisition-related
restructuring cost accruals, the treatment of
acquisition-related transaction costs and the recognition of
changes in the acquirers income tax valuation allowance.
The new standard applies prospectively to business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008 and to changes in valuation allowances
for deferred tax assets and acquired income tax uncertainties
arising from past business combinations. The adoption of the new
standard on July 1, 2009 did not have a material effect on
the Companys consolidated financial statements.
In October 2009, the FASB amended the accounting standards for
revenue recognition to remove tangible products containing
software components and non-software components that function
together to deliver the products essential functionality
from the scope of industry-specific software revenue recognition
guidance. In October 2009, the FASB also amended the accounting
standards for multiple deliverable revenue arrangements to
|
|
|
|
|
provide updated guidance on whether multiple deliverables exist,
how the deliverables in an arrangement should be separated, and
how the consideration should be allocated;
|
|
|
|
require an entity to allocate revenue in an arrangement using
estimated selling price (ESP) of deliverables if a
vendor does not have vendor-specific objective evidence
(VSOE) of selling price or third-party evidence
(TPE) of selling price;
|
|
|
|
and eliminate the use of the residual method and require an
entity to allocate revenue using the relative selling price
method.
|
Both standards should be applied on a prospective basis for
revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, with
early adoption permitted. The Company does not anticipate the
adoption of these standards in the first quarter of fiscal year
2011 will have a material impact on its consolidated financial
statements.
In January 2010, the FASB issued a new fair value accounting
standard update. This update requires additional disclosures
about (i) the different classes of assets and liabilities
measured at fair value, (ii) the valuation techniques and
inputs used, (iii) the activity in Level 3 fair value
measurements, and (iv) the transfers between Levels 1,
2, and 3. This update is effective for interim and annual
reporting periods beginning after December 15, 2009. The
66
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
adoption of the new standard in the third quarter of fiscal 2010
did not have a material effect on the Companys
consolidated financial statements.
In February 2010, the FASB amended its accounting guidance for
the accounting and disclosure of events that occur after the
balance sheet date but before financial statements are issued.
In particular, the new amendment sets forth that a registrant is
no longer required to disclose the date through which it has
evaluated subsequent events. The amended guidance is effective
immediately and was adopted by the Company in the third quarter
of fiscal 2010. The adoption of the new standard did not have a
material effect on the Companys consolidated financial
statements.
|
|
3.
|
Net
Income Attributable to Common Stockholders and Net Income per
Share
|
Basic and diluted net income per share attributable to common
stockholders is presented in conformity with the two-class
method required for participating securities. In February
2010, all of the Companys outstanding convertible
preferred stock converted into common stock in connection with
the IPO. Prior to the conversion, holders of Series A,
Series B and Series C convertible preferred stock were
each entitled to receive 8% per annum non-cumulative dividends,
payable prior and in preference to any dividends on any other
shares of the Companys capital stock. No such dividends
were paid.
For periods prior to the conversion of the convertible preferred
stock, net income per share information is computed using the
two-class method. Under the two-class method, basic net income
per share attributable to common stockholders is computed by
dividing the net income attributable to common stockholders by
the weighted average number of common shares outstanding during
the period. Net income attributable to common stockholders is
computed by subtracting from net income the portion of earnings
generated for the period through the IPO that the preferred
stockholders would have been entitled to receive pursuant to
their dividend rights had this portion of net income been
distributed. Diluted net income per share is computed by using
the weighted-average number of common shares outstanding,
including potential dilutive shares of common stock assuming the
dilutive effect of outstanding stock options using the treasury
stock method.
67
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
The following table presents the calculation of basic and
diluted net income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,584
|
|
|
$
|
17,274
|
|
|
$
|
12,867
|
|
8% non-cumulative dividends on convertible preferred stock
|
|
|
(2,018
|
)
|
|
|
(3,276
|
)
|
|
|
(3,276
|
)
|
Undistributed earnings allocated to convertible preferred stock
|
|
|
(5,784
|
)
|
|
|
(8,599
|
)
|
|
|
(5,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic
|
|
$
|
12,782
|
|
|
$
|
5,399
|
|
|
$
|
3,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic
|
|
$
|
12,782
|
|
|
$
|
5,399
|
|
|
$
|
3,666
|
|
Undistributed earnings re-allocated to common stock
|
|
|
419
|
|
|
|
399
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
diluted
|
|
$
|
13,201
|
|
|
$
|
5,798
|
|
|
$
|
4,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing basic
net income per share
|
|
|
25,616
|
|
|
|
13,294
|
|
|
|
13,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing basic
net income per share
|
|
|
25,616
|
|
|
|
13,294
|
|
|
|
13,104
|
|
Add weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,813
|
|
|
|
1,677
|
|
|
|
2,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing
diluted net income per share
|
|
|
28,429
|
|
|
|
14,971
|
|
|
|
15,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.50
|
|
|
$
|
0.41
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.46
|
|
|
$
|
0.39
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities excluded from weighted average shares used in
computing diluted net income per share because the effect would
have been anti-dilutive:(1)
|
|
|
2,918
|
|
|
|
4,740
|
|
|
|
2,286
|
|
|
|
|
(1) |
|
These weighted shares relate to anti-dilutive stock options as
calculated using the treasury stock method and could be dilutive
in the future. |
|
|
4.
|
Investments
and Fair Value Measurements
|
Investments
The Company recognized proceeds of $2,302 and $29,172 from the
sale and maturities of its investments in marketable securities
for fiscal years 2009 and 2008, respectively.
68
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Fair
Value Measurements
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (i.e., the
exit price) in an orderly transaction between market
participants at the measurement date. A hierarchy for inputs
used in measuring fair value has been defined to minimize the
use of unobservable inputs by requiring the use of observable
market data when available. Observable inputs are inputs that
market participants would use in pricing the asset or liability
based on active market data. Unobservable inputs are inputs that
reflect the Companys assumptions about the assumptions
market participants would use in pricing the asset or liability
based on the best information available in the circumstances.
The fair value hierarchy prioritizes the inputs into three broad
levels:
Level 1 Inputs are unadjusted quoted prices in
active markets for identical assets or liabilities.
Level 2 Inputs are quoted prices for similar
assets and liabilities in active markets or inputs that are
observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the
full term of the financial instrument.
Level 3 Inputs are unobservable inputs based on
the Companys assumptions.
As of June 30, 2010 and 2009, the Company did not hold
marketable securities other than money market funds. Money
market funds are classified as cash equivalents on the balance
sheet and are categorized as follows in the fair value hierarchy
as of June 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
Active Markets
|
|
|
|
|
|
|
for Identical Assets
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
133,128
|
|
|
$
|
133,128
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
133,128
|
|
|
$
|
133,128
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
8,054
|
|
|
$
|
8,054
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
8,054
|
|
|
$
|
8,054
|
|
|
|
|
|
|
|
|
|
|
5. Balance
Sheet Components
Accounts
Receivable, Net
Accounts receivable, net balances are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accounts receivable
|
|
$
|
54,224
|
|
|
$
|
36,792
|
|
Less: Allowance for doubtful accounts
|
|
|
(324
|
)
|
|
|
(506
|
)
|
Less: Allowance for sales returns
|
|
|
(2,434
|
)
|
|
|
(3,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,466
|
|
|
$
|
33,283
|
|
|
|
|
|
|
|
|
|
|
69
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Property
and Equipment, Net
Property and equipment, net balances are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Computer equipment
|
|
$
|
11,506
|
|
|
$
|
10,295
|
|
Software
|
|
|
5,946
|
|
|
|
4,955
|
|
Furniture and fixtures
|
|
|
1,976
|
|
|
|
1,992
|
|
Leasehold improvements
|
|
|
917
|
|
|
|
694
|
|
Internal software development costs
|
|
|
14,870
|
|
|
|
13,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,215
|
|
|
|
31,392
|
|
Less: Accumulated depreciation and amortization
|
|
|
(29,796
|
)
|
|
|
(26,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,419
|
|
|
$
|
4,741
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $2,227, $2,742 and $2,400 for fiscal
years 2010, 2009 and 2008, respectively. Amortization expense
related to internal software development costs was $1,275,
$1,500 and $1,816 for fiscal years 2010, 2009 and 2008,
respectively.
Accrued
liabilities
Accrued liabilities are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accrued media costs
|
|
$
|
15,760
|
|
|
$
|
12,920
|
|
Accrued compensation and related expenses
|
|
|
11,872
|
|
|
|
6,457
|
|
Accrued taxes payable
|
|
|
642
|
|
|
|
430
|
|
Accrued professional service and other business expenses
|
|
|
1,870
|
|
|
|
1,987
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
30,144
|
|
|
$
|
21,794
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
in Fiscal Year 2010
Acquisition
of Internet.com
On November 30, 2009, the Company acquired the website
business of Internet.com, a division of WebMediaBrands, Inc., a
New York-based Internet media company, in exchange for $16,000
in cash paid upon closing of the acquisition and the issuance of
a $2,000 non-interest-bearing promissory note payable in one
installment. The Company received $357 in a working capital
adjustment following the closing of the acquisition. The
adjustment reduced the face value of the note payable by $300
and the cash paid by $57. The results of Internet.coms
operations have been included in the consolidated financial
statements since the acquisition date.
70
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
The Company acquired Internet.com to broaden its media access
and client base in the
business-to-business
market. The total purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
15,943
|
|
Fair value of debt (net of $46 of imputed interest)
|
|
|
1,654
|
|
|
|
|
|
|
|
|
$
|
17,597
|
|
|
|
|
|
|
The acquisition was accounted for as a purchase business
combination. The Company allocated the purchase price to
tangible assets acquired, liabilities assumed and identifiable
intangible assets acquired based on their estimated fair values.
The excess of the purchase price over the aggregate fair values
was recorded as goodwill. The goodwill is deductible for tax
purposes. The following table summarizes the allocation of the
purchase price and the estimated useful lives of the
identifiable intangible assets acquired as of the date of the
acquisition:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Tangible assets acquired
|
|
$
|
3,136
|
|
|
|
Liabilities assumed
|
|
|
(503
|
)
|
|
|
Advertiser relationships
|
|
|
1,300
|
|
|
5 - 7 years
|
Website/trade/domain names
|
|
|
2,500
|
|
|
5 years
|
Content
|
|
|
2,400
|
|
|
4 years
|
Noncompete agreements
|
|
|
200
|
|
|
2 years
|
Goodwill
|
|
|
8,564
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
17,597
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Insure.com
On October 8, 2009, the Company acquired the website
business Insure.com, an Illinois-based online marketing company,
in exchange for $15,000 in cash paid upon closing of the
acquisition and the issuance of a $1,000 non-interest-bearing
promissory note payable in one installment. The results of
Insure.coms acquired operations have been included in the
consolidated financial statements since the acquisition date.
The Company acquired Insure.com for its capacity to generate
online visitors in the financial services market. The total
purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
15,000
|
|
Fair value of debt (net of $24 of imputed interest )
|
|
|
976
|
|
|
|
|
|
|
|
|
$
|
15,976
|
|
|
|
|
|
|
The acquisition was accounted for as a purchase business
combination. The Company allocated the purchase price to
identifiable intangible assets acquired based on their estimated
fair values. The excess of the purchase price over the aggregate
fair values was recorded as goodwill. The goodwill is deductible
for tax purposes. The following
71
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
table summarizes the allocation of the purchase price and the
estimated useful lives of the identifiable intangible assets
acquired as of the date of the acquisition:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Advertiser relationships
|
|
$
|
900
|
|
|
3 years
|
Website/trade/domain names
|
|
|
1,250
|
|
|
8 years
|
Content
|
|
|
3,900
|
|
|
8 years
|
Goodwill
|
|
|
9,926
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
15,976
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Payler Corp. D/B/A HSH Associates Financial Publishers
(HSH)
On September 14, 2009, the Company acquired 100% of the
outstanding shares of HSH, a New Jersey-based online marketing
business, in exchange for $6,000 in cash paid upon closing of
the acquisition and the issuance of $4,000 in
non-interest-bearing promissory notes payable in five
installments over the next five years. The results of HSHs
acquired operations have been included in the consolidated
financial statements since the acquisition date. The Company
acquired HSH for its capacity to generate online visitors in the
financial services market. The total purchase price recorded was
as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
6,000
|
|
Fair value of debt (net of $241 of imputed interest)
|
|
|
3,759
|
|
|
|
|
|
|
|
|
$
|
9,759
|
|
|
|
|
|
|
The acquisition was accounted for as a purchase business
combination. The Company allocated the purchase price to
tangible assets acquired, liabilities assumed and identifiable
intangible assets acquired based on their estimated fair values.
The excess of the purchase price over the aggregate fair values
was recorded as goodwill. The goodwill is not deductible for tax
purposes. The following table summarizes the allocation of the
purchase price and the estimated useful lives of the
identifiable intangible assets acquired as of the date of the
acquisition:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Tangible assets acquired
|
|
$
|
50
|
|
|
|
Liabilities assumed
|
|
|
(1,695
|
)
|
|
|
Advertiser relationships
|
|
|
1,100
|
|
|
3 years
|
Website/trade/domain names
|
|
|
800
|
|
|
6 years
|
Content
|
|
|
1,400
|
|
|
6 years
|
Goodwill
|
|
|
8,104
|
|
|
Indefinite
|
|
|
|
|