S-1/A 1 ds1a.htm AMENDMENT NO. 3 TO REGISTRATION STATEMENT ON FORM S-1 Amendment No. 3 to Registration Statement on Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on April 4, 2011

Registration No. 333-171377

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3 to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Responsys, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7372   77-0476820

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification No.)

Responsys, Inc.

900 Cherry Avenue, 5th Floor

San Bruno, California 94066

(650) 745-1700

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Daniel D. Springer

Chief Executive Officer

Responsys, Inc.

900 Cherry Avenue, 5th Floor

San Bruno, California 94066

(650) 745-1700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Please send copies of all communications to:

 

Gordon K. Davidson, Esq.

Jeffrey R. Vetter, Esq.

Fenwick & West LLP

801 California Street

Mountain View, California 94041

(650) 988-8500

 

Julian K. Ong, Esq.

Responsys, Inc.

900 Cherry Avenue, 5th Floor

San Bruno, California 94066

(650) 745-1700

 

Sarah K. Solum, Esq.

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, California 94025

(650) 752-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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):

 

Large accelerated filer  ¨   Accelerated filer  ¨
Non-accelerated filer  x  (Do not check if a smaller reporting company)   Smaller reporting company  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount to be
Registered(1)

 

Proposed Maximum
Offering Price Per
Share(2)

 

Proposed Maximum
Aggregate

Offering Price(2)

 

Amount of
Registration

Fee(3)

Common Stock, $0.0001 par value

  7,612,602   $10.00   $76,126,020   $6,151
 
(1) Includes 992,948 shares that may be purchased pursuant to the over-allotment option to be granted to the underwriters.
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act.
(3) The registrant previously paid $4,278 with respect to a proposed maximum aggregate offering price of $60,000,000 at a rate of $71.30 per $1,000,000, which was the rate in effect at the time of payment. An additional $1,873 is being paid with respect to the additional $16,126,020 proposed maximum aggregate offering price at the rate currently in effect.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued April 4, 2011

6,619,654 Shares

LOGO

COMMON STOCK

 

 

Responsys, Inc. is offering 5,500,000 shares of common stock and the selling stockholders are offering 1,119,654 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price will be between $8.50 and $10.00 per share.

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 9.

 

 

We have applied to list our common stock on the NASDAQ Global Market under the symbol “MKTG.”

 

 

 

     Price to
Public
     Underwriting
Discounts and
Commissions
     Proceeds to
Responsys
     Proceeds to
Selling Stockholders
 

Per share

   $                    $                            $                        $                              

Total

   $                    $                            $                        $                              

The underwriters may also exercise their option to purchase up to an additional 992,948 shares of common stock from us and the selling stockholders at the public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2011.

 

 

 

Morgan Stanley   Credit Suisse

 

William Blair & Company    

 

JMP Securities

   Pacific Crest Securities

 

 

                    , 2011

 


Table of Contents

LOGO


Table of Contents

LOGO


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     9   

Special Note Regarding Forward-Looking Statements and Industry Data

     30   

Use of Proceeds

     31   

Dividend Policy

     31   

Capitalization

     32   

Dilution

     34   

Selected Consolidated Financial Data

     36   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     38   

Business

     61   

Management

     76   
 

 

 

Neither we, nor the selling stockholders, nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Until                     , 2011 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we, nor the selling stockholders, nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our common stock. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this prospectus.

RESPONSYS, INC.

Responsys is a leading provider of on-demand software that enables companies to engage in relationship marketing across the interactive channels that consumers are embracing today—email, mobile, social and the web. Our on-demand software, the Responsys Interact Suite, provides marketers with a set of applications to create, execute, optimize and automate marketing campaigns across these key interactive channels. Our solution consists of our on-demand software and professional services, all focused on enabling the marketing success of our customers. We sell our on-demand software and professional services primarily through a direct sales force and target enterprise and larger mid-market companies that seek to implement more advanced marketing programs across interactive channels. For the years ended December 31, 2008, 2009 and 2010, our total revenue was $50.1 million, $66.6 million and $94.1 million, respectively, representing year-over-year growth of 33% and 41% in 2009 and 2010, respectively. As of December 31, 2010, we had 277 customers of varied size across a wide variety of industries, including retail and consumer, travel, financial services and technology.

Marketing is undergoing a significant shift as rapid adoption of digital technology has dramatically changed consumer behavior. Interactive channels, including email, mobile, social and the web, are rapidly supplanting traditional media channels as consumers’ primary source of entertainment and information. This has created both an opportunity and an imperative for companies to market to their customers by engaging them across all of these interactive channels. According to Forrester Research, Inc., or Forrester, U.S. spending on interactive marketing is expected to increase to nearly $55 billion and represent 21% of all marketing spending by 2014, as marketers shift dollars away from traditional media toward interactive channels.(1) According to Forrester, U.S. interactive marketing spend on email, mobile and social media, the primary interactive channels currently used for relationship marketing, is expected to grow from $2.9 billion in 2010 to nearly $6.5 billion by 2014, representing a compound annual growth rate of 22%.(1)

Interactive channels enable marketers to substantially improve the effectiveness of their relationship marketing efforts by executing more relevant and timely campaigns to their customers and known prospects. However, this shift to interactive marketing has also caused the execution of marketing campaigns to become increasingly complex, real-time and dependent on technology. We believe that to capture the opportunity provided by interactive channels, they need a solution built for relationship marketing across those interactive channels. Our Interact Suite is a software-as-a-service, or SaaS, platform that empowers relationship marketers to effectively execute marketing campaigns across the key interactive channels—email, mobile, social and the web.

Our Solution

Our solution consists of our on-demand software, the Responsys Interact Suite, and professional services. The Responsys Interact Suite is comprised of several integrated applications that enable the design, management

 

(1) Source: Forrester, US Interactive Marketing Forecast 2009 to 2014, July 6, 2009, as updated January 11, 2010.

 

 

1


Table of Contents

and automation of tasks and processes for executing email and marketing campaigns across interactive channels, including:

 

   

Interact Campaign for marketing campaign creation and execution;

 

   

Interact Program for marketing program design and automation;

 

   

Interact Team for managing marketing workflow and approvals; and

 

   

Interact Insight for marketing reporting and analysis.

We also offer additional integration components for the Responsys Interact Suite that enable enhanced data and application automation, including:

 

   

Interact Connect for enabling customers to use data from other systems to improve the relevance of their marketing campaigns; and

 

   

Interact API for allowing customers to create customized functionality using our application programming interfaces.

In combination, these applications and components allow marketing teams to create, manage, and automate required tasks and processes for executing email and other marketing campaigns across interactive channels.

We complement our on-demand software with a range of professional services, including strategic, creative, deliverability, campaign and education services, that are designed to drive marketing success for our customers. Our experienced professional services team brings region- and industry-specific methodologies and best practices to help our customers accelerate the implementation and execution of their marketing efforts across interactive channels, or cross-channel marketing, increase their revenue from interactive channels and improve their return on overall marketing spend. Together, our on-demand software and professional services provide the technology and expertise to enable our customers to achieve success in their interactive marketing efforts.

The key benefits of our solution include:

 

   

Broad application suite.    The Responsys Interact Suite provides marketers with a set of applications for campaign management, automation of marketing programs, workflow management, tools for reporting and analysis, and data integration across the key interactive channels—email, mobile, social and the web.

 

   

Leading email and cross-channel campaign execution.    Interact Campaign, the core application in our Interact Suite, is designed to help marketers effectively execute campaigns across email and other interactive channels to consumers who have given them permission to send marketing communications through those channels. Our applications allow marketers to design and deliver personalized content across each channel and track and analyze the results. Forrester named Responsys as a leader in email marketing in The Forrester Wave™: Email Marketing Service Providers, Q4 2009, December 23, 2009.

 

   

Advanced campaign and program automation.    To manage the increased volume of communications and growing set of channels, Interact Program gives marketers the ability to design, orchestrate, and automate complex campaigns with multiple stages and across multiple interactive channels with minimal IT resources. We believe our Interact Program application is a key differentiator for us.

 

   

Data model flexibility.    Unlike most alternative solutions that often require that a company’s data be transformed into a predefined format, our open relational data model allows our customers to easily use and leverage data from their internal systems and those of third-party providers for improved targeting and automation of marketing campaigns.

 

 

2


Table of Contents
   

Commitment to the marketing success of our customers.    We complement our on-demand software with a range of professional services to help drive marketing success for our customers. Furthermore, to align our success with that of our customers, our account managers work closely with our customers to help them achieve their marketing goals.

 

   

On-demand software model.    We deliver our applications and functionality on demand over the internet, with no hardware or software installation required by our customers. In using an on-demand platform, we are able to provide a reliable, cost-effective solution to our customers, and relieve them of the costs and burdens that have often prevented marketers from executing complex, cross-channel marketing campaigns.

Our Growth Strategy

The key elements of our growth strategy are:

Expand our relationships with existing customers.    As our offerings become increasingly integral to our customers’ marketing success, we believe that we gain a variety of opportunities to grow our business with them.

 

   

Increasing messaging volumes.    We intend to grow messaging volume and increase messaging frequency from our customer base by helping them increase the number of people they can market to, the channels across which they market and the effectiveness of their marketing communications.

 

   

Cross-selling functionality.    We intend to cross-sell additional functionality and services to our customers as their marketing programs become more complex and extend from email into additional interactive marketing channels. For example, to date, our customers have primarily used email messages for their interactive marketing campaigns, but we plan to sell them functionality that will allow them to also use additional channels such as mobile, social and the web for their campaigns.

 

   

Expanding deployments with existing customers.    We intend to expand the adoption of our solution within existing customers’ organizations, particularly with divisions that have not previously used our platform.

Expand our customer base.    We believe that many organizations are still in the early stages of adopting relationship marketing across interactive channels, which provides us with a significant opportunity to acquire new customers.

 

   

Enabling new groups of customers.    We believe a significant portion of the market includes companies that either have not previously had a need for technology-based marketing or are currently using less sophisticated applications that were not designed for more advanced email and cross-channel interactive marketing.

 

   

Expanding into adjacent customer segments.    While we currently target enterprise and larger mid-market customers, we intend to expand our presence in the mid-market customer segment to target companies that, for example, are likely to send over one million email messages per month. We have added sales and lead generation personnel to target this additional customer segment.

 

   

Expanding international footprint.    We intend to increase our presence in international markets through additional investments in sales, marketing and support capabilities, and acquisitions of companies serving additional geographies. These investments will allow us to serve more English-speaking markets in Europe and Asia and to localize our on-demand software for use in other areas.

 

 

3


Table of Contents

Develop new capabilities and channels.    We believe there are many additional opportunities for growth beyond our current footprint.

 

   

Adding new capabilities and functionality.    We intend to develop new capabilities and functionality for the Responsys Interact Suite to enable marketing through channels such as web-based and social media display advertising and drive increased usage.

 

   

Expanding partnerships.    We believe we can drive additional efficiency in our business by expanding the breadth of our partner network and driving greater revenue from new indirect sales partnerships.

Summary Risk Factors

Our business is subject to numerous risks described in the section entitled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Some of these risks include:

 

   

we may not maintain profitability in the future;

 

   

the market in which we participate is intensely competitive, and our results could be adversely affected by pricing pressure or other competitive dynamics;

 

   

we may experience quarterly fluctuations in our operating results due to a number of factors which make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance;

 

   

our quarterly results reflect seasonality in the sale of our on-demand software and professional services, which could result in sequential revenue declines;

 

   

because we recognize subscription revenue from our customers over the terms of their agreements, downturns or upturns in sales may not be immediately reflected in our operating results;

 

   

if we are unable to attract new customers or sell additional functionality and services to our existing customers, our revenue growth will be adversely affected; and

 

   

our future growth could be constrained if mobile, social and the web do not become significant relationship marketing channels or if existing customers using our older platform do not want to migrate to our newer platform.

Corporate Information

We were incorporated in the state of California in 1998. In March 2011 we reincorporated in the state of Delaware and implemented a 1-for-4 reverse split of our outstanding capital stock. Unless expressly indicated or the context requires otherwise, the terms “Responsys,” “company,” “we,” “us” and “our” in this prospectus refer to Responsys, Inc., a Delaware corporation or, as applicable, its predecessor in California and, where appropriate, its wholly-owned subsidiaries. Our principal executive offices are located at 900 Cherry Avenue, 5th Floor, San Bruno, California 94066, and our telephone number is (650) 745-1700. Our website address is www.responsys.com. The information on, or that can be accessed through, our website is not part of this prospectus.

Responsys, the Responsys logo, Responsys Interact, Interact Campaign, Interact Program, Interact Team, Interact Insight, Interact Connect and Interact API are registered or common law trademarks, service marks, or trade names of Responsys, Inc. Other trademarks, service marks, or trade names appearing in this prospectus are the property of their respective owners.

 

 

4


Table of Contents

THE OFFERING

 

Common stock offered by us

5,500,000 shares

 

Common stock offered by the selling stockholders

1,119,654 shares

 

Total common stock offered

6,619,654 shares

 

Over-allotment option offered by us and the selling stockholders

992,948 shares (25,000 shares offered by a selling stockholder and the remaining 967,948 offered by us)

 

Common stock to be outstanding after this offering

44,106,658 shares (45,074,606 shares if the underwriters exercise their over-allotment in full)

 

Use of proceeds

We intend to use the net proceeds of this offering for general corporate purposes, including working capital and potential acquisitions. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. See “Use of Proceeds.”

 

Risk factors

You should read the “Risk Factors” section of this prospectus and the other information included in this prospectus for a discussion of factors you should consider carefully before investing in shares of our common stock.

 

Proposed NASDAQ Global Market Symbol

“MKTG”

The number of shares of common stock to be outstanding after this offering is based on 38,606,658 shares of our common stock outstanding as of December 31, 2010, and excludes:

 

   

10,937,216 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2010 under our 1999 Stock Plan, with a weighted-average exercise price of approximately $1.55 per share;

 

   

810,565 shares of common stock reserved for future issuances as of December 31, 2010 under our 1999 Stock Plan (which includes 15,000 shares of common stock issued and 305,125 shares of common stock issuable upon exercise of options granted at an exercise price of $9.25 per share between January 1, 2011 and March 31, 2011);

 

   

28,302 shares of convertible preferred stock issuable upon exercise of an outstanding warrant as of December 31, 2010 that will convert into a warrant to purchase the same number of shares of common stock upon closing of this offering, with an exercise price of $6.36 per share;

 

   

148,047 shares of common stock that are issued and outstanding but were subject to a right of repurchase by us as of December 31, 2010;

 

   

148,648 shares of common stock that were issued on January 3, 2011 in connection with our acquisition of the remaining equity interests in Responsys Pty Ltd (formerly Eservices Group Pty Ltd), or Eservices; and

 

 

5


Table of Contents
   

10,000,000 shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective at or prior to the closing of this offering and contains provisions that will automatically increase its share reserve each year, as more fully described in “Management—Employee Benefit Plans.”

Unless expressly indicated or the context requires otherwise, all information in this prospectus assumes:

 

   

the conversion of all outstanding shares of our convertible preferred stock into 30,158,928 shares of common stock in connection with this offering;

 

   

the conversion of an outstanding warrant to purchase shares of our convertible preferred stock into a warrant to purchase an aggregate of 28,302 shares of common stock in connection with this offering;

 

   

no exercise by the underwriters of their right to purchase up to an additional 992,948 shares of common stock to cover over-allotments (which includes 25,000 shares offered by a selling stockholder and the remaining 967,948 offered by us);

 

   

our reincorporation in Delaware and a 1-for-4 reverse split of our outstanding capital stock, which were effected in March 2011; and

 

   

the filing of our restated certificate of incorporation and the effectiveness of our restated bylaws in connection with this offering.

 

 

6


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the summary consolidated statements of income data for the years ended December 31, 2008, 2009 and 2010 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of our results to be expected in any future period. The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes, as well as the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this prospectus. In January 2011, we completed our acquisition of the remaining equity interests of Eservices. The audited consolidated financial statements of Eservices for the year ended June 30, 2010, unaudited condensed financial statements of Eservices for the six months ended December 31, 2009 and 2010 and unaudited pro forma condensed combined financial information have been included elsewhere in this prospectus.

 

    Year Ended December 31,  
          2008                 2009                 2010        
    (in thousands, except per share data)  

Consolidated Statements of Income Data:

     

Revenue:

     

Subscription

  $ 41,047      $ 53,044      $ 69,284   

Professional services

    9,067        13,599        24,787   
                       

Total revenue

    50,114        66,643        94,071   
                       

Cost of revenue:(1)

     

Subscription

    12,399        15,109        20,221   

Professional services

    8,926        12,478        20,697   
                       

Total cost of revenue

    21,325        27,587        40,918   
                       

Gross profit

    28,789        39,056        53,153   
                       

Operating expenses:

     

Research and development(1)

    5,068        8,052        10,597   

Sales and marketing(1)

    15,681        15,494        20,849   

General and administrative(1)

    4,639        5,746        8,225   
                       

Total operating expenses

    25,388        29,292        39,671   
                       

Operating income

    3,401        9,764        13,482   

Total other income (expense)

    (811     185        1,171   
                       

Income before income taxes

    2,590        9,949        14,653   

Benefit (provision) for income taxes

    17,857        (4,063     (5,821

Equity in net loss of unconsolidated affiliates

                  (234
                       

Net income

  $ 20,447      $ 5,886      $ 8,598   
                       

Net income attributable to common stockholders(2):

     

Basic

  $ 2,980      $ 186      $ 802   
                       

Diluted

  $ 5,009      $ 299      $ 1,179   
                       

Net income per share attributable to common stockholders(2):

     

Basic

  $ 0.43      $ 0.02      $ 0.09   
                       

Diluted

  $ 0.35      $ 0.02      $ 0.08   
                       

Shares used in computation of net income per share attributable to common stockholders(2):

     

Basic

    7,007        7,518        8,527   
                       

Diluted

    14,408        14,302        14,464   
                       

 

 

7


Table of Contents
    Year Ended December 31,  
          2008                 2009                 2010          
    (in thousands, except per share data)  

Pro forma net income per share attributable to common stockholders (unaudited)(2)(6):

     

Basic

      $ 0.22   
           

Diluted

      $ 0.19   
           

Pro forma weighted-average shares outstanding used in calculating net income per share attributable to common stockholders (unaudited)(2)(6):

     

Basic

        38,686   
           

Diluted

        44,623   
           

 

     As of December 31, 2010  
     Actual      Pro Forma(3)(5)      Pro
Forma  As
Adjusted(4)(5)
 
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents(7)

   $ 13,884       $ 13,884       $ 59,372   

Working capital

     27,047         27,047         72,535   

Total assets

     71,900         71,900         117,388   

Total liabilities

     18,725         18,725         18,725   

Total stockholders’ equity

     53,175         53,175         98,663   

 

(1) Total cost of revenue and operating expenses include stock-based compensation expense as follows:

 

     Year Ended December 31,  
       2008          2009          2010    
     (in thousands)  

Total cost of revenue

   $ 308       $ 332       $ 523   

Research and development

     264         280         331   

Sales and marketing

     400         461         694   

General and administrative

     478         563         958   

 

(2) See note 2 of the notes to our consolidated financial statements for a description of how we compute basic and diluted net income attributable to common stockholders and net income per share attributable to common stockholders and pro forma basic and diluted net income per share attributable to common stockholders.

 

(3) The pro forma balance sheet as of December 31, 2010 reflects the automatic conversion of all of our convertible preferred stock outstanding into shares of common stock in connection with this offering.

 

(4) The pro forma as adjusted balance sheet data reflects the items described in footnote (3) above and our receipt of estimated net proceeds from the sale of shares of common stock that we are offering at an assumed initial public offering price of $9.25 per share, which is the midpoint of the range listed on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $9.25 per share would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $5.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(5) The pro forma and pro forma as adjusted information discussed above is illustrative only and following the closing of this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

(6) The pro forma basic and diluted weighted-average shares outstanding in calculating net income per share attributable to common stockholders does not include 148,648 shares of common stock that were issued on January 3, 2011 in connection with our acquisition of the remaining equity interest in Eservices and 15,000 shares of common stock that were issued on March 11, 2011 under our 1999 Stock Plan.

 

(7) Cash and cash equivalents does not reflect the use of $7.1 million of cash to acquire the remaining equity interests in Eservices in January 2011.

 

 

8


Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that impair us. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose part or even all of your investment.

Risks Related to Our Business and Industry

We may not maintain profitability in the future.

Although we have been profitable in recent periods, as of December 31, 2010, our accumulated deficit was $22.8 million due to historical net losses. We expect to make significant future expenditures related to the development and expansion of our business which will reduce profitability compared to past periods. In addition, as a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. As a result of these increased expenditures, we will have to generate and sustain increased revenue to maintain future profitability. While our revenue has grown in recent periods, this growth may not be sustainable, and we may not achieve sufficient revenue to maintain profitability. You should not consider our revenue growth in recent periods as indicative of our future performance. In future periods, our revenue could decline or grow more slowly than we expect. We also may incur significant losses in the future for a number of reasons, including due to the other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors. Accordingly, we may not be able to maintain profitability, and we may incur losses in the future.

The market in which we participate is intensely competitive, and our results could be adversely affected by pricing pressure or other competitive dynamics.

The market for interactive marketing solutions is highly fragmented, highly competitive and rapidly changing. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our prices. We face intense competition from software companies that develop marketing technologies and from marketing services companies that provide interactive marketing services. Our primary competitors include: technology providers such as Aprimo, Inc., which has been acquired by Teradata Corporation, BlueHornet, a subsidiary of Digital River, Inc., Eloqua Corporation, ExactTarget, Inc., Silverpop Systems Inc., StrongMail Systems, Inc. and Unica Corporation, which has been acquired by International Business Machines Corporation, or IBM; and marketing services providers such as Acxiom Digital, Epsilon Data Management LLC, Experian CheetahMail and Yesmail, a division of infoGROUP Inc.

We may also face competition from new companies entering our market, which may include large established businesses, such as Google Inc., IBM, Microsoft Corporation, Oracle Corporation, salesforce.com, inc., SAP AG or Yahoo! Inc., each of which currently offers, or may in the future offer, email marketing or related applications such as applications for customer relationship management, analysis of internet data and marketing automation. If these companies decide to develop, market or resell competitive interactive marketing products or services, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed. We may also experience competition from the in-house information technology capabilities of current and prospective customers.

 

9


Table of Contents

Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, be able to devote greater resources to the development, promotion, sale and support of their products and services, have more extensive customer bases and broader customer relationships than we have, and may have longer operating histories and greater name recognition than we have. As a result, these competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. In some cases, these vendors may also be able to offer interactive marketing applications at little or no additional cost by bundling them with their existing applications. If we are unable to compete with such companies, the demand for our on-demand software could substantially decline.

We may experience quarterly fluctuations in our operating results due to a number of factors which make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.

Our quarterly operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as indicative of our future performance. If our revenue or operating results fall below the expectations of investors or securities analysts, or below any guidance we may provide to the market, the price of our common stock could decline substantially.

Our operating results have varied in the past. In addition to other risk factors listed in this section, factors that may affect our quarterly operating results include the following:

 

   

demand for our software and related services and the size and timing of sales;

 

   

the volume of email messages sent above contracted levels for a particular quarter and the amount of any associated additional charges;

 

   

customer renewal rates, and the pricing and volume commitments at which agreements are renewed;

 

   

customers delaying purchasing decisions in anticipation of new products or product enhancements by us or our competitors;

 

   

market acceptance of our current and future products and services;

 

   

changes in spending on interactive marketing or information technology and software by our current and/or prospective customers;

 

   

budgeting cycles of our customers;

 

   

changes in the competitive dynamics of our industry, including consolidation among competitors or customers;

 

   

our lengthy sales cycle;

 

   

lengthy or delayed implementation times for new customers or customers that upgrade to our current platform;

 

   

the timing of recognizing revenue in any given quarter as a result of revenue recognition rules;

 

   

the amount of services sold and the amount of fixed fee services, which can affect gross margin;

 

   

our ability to control costs, including our operating expenses;

 

   

the amount and timing of operating expenses, particularly sales and marketing, related to the maintenance and expansion of our business, operations and infrastructure;

 

   

network outages or security breaches and any associated expenses;

 

   

foreign currency exchange rate fluctuations;

 

   

write-downs, impairment charges or incurrence of unforeseen liabilities in connection with acquisitions;

 

10


Table of Contents
   

failure to successfully manage any acquisitions; and

 

   

general economic and political conditions in our domestic and international markets.

Based upon all of the factors described above, we have a limited ability to forecast the amount and mix of future revenue and expenses, and as a result, our operating results may from time to time fall below our estimates or the expectations of public market analysts and investors.

Our quarterly results reflect seasonality in the sale of our on-demand software and professional services, which can make it difficult to achieve sequential revenue growth or could result in sequential revenue declines.

We have historically experienced higher levels of revenue and gross profit during the fourth quarter, primarily due to our customers’ increased marketing activity during the holiday shopping season, as compared to the preceding and subsequent quarters, and we anticipate that this trend will continue for the first three quarters of 2011. Since the majority of our expenses is personnel-related and includes salaries, stock-based compensation, benefits and incentive-based compensation plan expenses, we have not experienced significant seasonal fluctuations in the timing of our expenses from period to period. Although these seasonal factors can be common in the marketing sector, historical patterns should not be considered indicative of our future sales activity or performance.

Because we recognize subscription revenue from our customers over the term of their agreements, downturns or upturns in sales may not be immediately reflected in our operating results.

We recognize subscription revenue over the term of our customer agreements, which are typically one year, with some up to three years. As a result, most of our quarterly subscription revenue results from agreements entered into during previous quarters. Consequently, a shortfall in demand for our on-demand software and related services in any quarter may not significantly reduce our subscription revenue for that quarter, but could negatively affect subscription revenue in future quarters. We may be unable to adjust our cost structure to compensate for this potential shortfall in subscription revenue. Accordingly, the effect of significant downturns in sales of subscriptions to our on-demand software and related services may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our subscription revenue through additional sales in any period, as subscription revenue from new customers must be recognized over the applicable subscription terms.

If we are unable to attract new customers or sell additional functionality and services to our existing customers, our revenue growth will be adversely affected.

To increase our revenue, we must add new customers, sell additional functionality to existing customers and encourage existing customers to renew their subscriptions on favorable terms. As the interactive marketing industry matures, as interactive channels develop further, or as competitors introduce lower cost and/or differentiated products or services that are perceived to compete with ours, our ability to compete with respect to pricing, technology and functionality could be impaired. In such event, we may be unable to renew our agreements with existing customers or attract new customers or new business from existing customers on terms that would be favorable or comparable to prior periods, which could have a material adverse effect on our revenue, gross margin and other operating results.

Our future growth could be constrained if mobile, social and the web do not become significant relationship marketing channels or if existing customers do not want to migrate to our newer platform.

The growth of our business depends in part on the acceptance and growth of mobile, social and the web as relationship marketing channels. While email has been used successfully for relationship marketing, relationship marketing via mobile, social and the web is just emerging. We released our mobile and social offerings on our

 

11


Table of Contents

newer platform in April 2010 and competitive solutions will continue to emerge. Even if mobile, social and the web become widely adopted relationship marketing channels, we cannot assure you that our mobile and social offerings will gain traction with current or new customers. The majority of our current customers became customers before we released our newer platform in late 2009 and would be required to migrate to our newer platform in order to execute fully integrated campaigns across mobile, social and web channels. These customers may not desire to expend the time and resources that would be required to effect this migration.

The market for interactive marketing software is at an early stage of development, and if it does not develop or develops more slowly than we expect, our business will be harmed.

It is uncertain whether businesses will make significant investments in interactive marketing software, and if they do, whether they will purchase subscriptions to on-demand software for this function. The market for on-demand software, in general, and for interactive marketing software, in particular, is relatively new, and it is uncertain whether such software will achieve and sustain high levels of demand and market acceptance. Our success will substantially depend on the willingness of enterprises to increase their use of on-demand software in general, and for marketing in particular. Many enterprises have invested substantial personnel and financial resources to integrate traditional on-premise enterprise software into their businesses and therefore may be reluctant or unwilling to migrate to on-demand software. Furthermore, some enterprises may be reluctant or unwilling to use on-demand software because they have concerns regarding the security and other risks associated with the technology delivery model. If enterprises do not perceive the overall benefits of on-demand software, then the market may develop more slowly than we expect, either of which would significantly and adversely affect our operating results. Accordingly, we cannot assure you that an on-demand model for interactive marketing software will achieve and sustain the high level of market acceptance that is critical for the success of our business

Our growth depends largely on our ability to sell our on-demand software and related services to new enterprise customers, which makes our sales cycle unpredictable, time-consuming and expensive.

The enterprise customers we target typically undertake a significant evaluation process in regard to purchases of enterprise software, which can last from several months to a year or longer. Events may occur during the sales cycle that could affect the size or timing of a purchase, and this may lead to more unpredictability in our business and operating results. We may spend substantial time, effort and money on our sales efforts without any assurance that our efforts will produce any sales.

In addition, we may face unexpected implementation challenges with some enterprise customers or more complicated implementations of our on-demand software. It may be difficult or expensive to implement our on-demand software if the customer has unexpected data, hardware or software technology issues, or complex or unanticipated business requirements. Any difficulties or delays in the initial implementation could cause customers to reject our on-demand software or delay or cancel future purchases, in which case our business, operating results and financial condition would be harmed. In addition, implementation delays may also require us to delay revenue recognition until the technical or implementation requirements have been met.

The forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you our business will grow at similar rates, or at all.

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. Forecasts relating to anticipated spending on the channels used for relationship marketing may prove to be inaccurate. Even if the forecasted growth occurs, we may not grow our business at a similar rate, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts included in this prospectus should not be taken as indicative of our future growth.

 

12


Table of Contents

We derive a significant percentage of our total revenue from the retail and consumer, travel, financial services and technology industries, and any downturn in these industries could harm our business.

A significant number of our customers are concentrated in the retail and consumer, travel, financial services and technology industries. In particular, we derived approximately half of our revenue from the retail and consumer industry for the year ended December 31, 2010. A substantial downturn in these industries may cause our customers to reduce their spending on information technology or interactive marketing. Customers in these industries may delay or cancel information technology or interactive marketing projects, seek to lower their costs by renegotiating vendor contracts, or decrease their usage of our services. Moreover, competitors may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our services.

A limited number of customers account for a significant portion of our revenue, and the loss of a major customer or group of customers could harm our operating results.

Our 20 largest customers accounted for approximately 35.1% and 37.0% of our total revenue for the years ended December 31, 2009 and 2010, respectively. We cannot be certain that customers that have accounted for significant revenue in past periods, individually or as a group, will renew, will not cancel or will not reduce their usage of our services and, therefore, continue to generate revenue in any future period. If we lose a major customer or group of customers, our revenue could decline.

Prolonged economic uncertainties or downturns could materially harm our business.

General worldwide economic conditions have experienced a significant downturn. These conditions make it extremely difficult for our customers and us to accurately forecast and plan future business activities, and they could cause our customers to slow spending on our on-demand software and professional services, which would delay and lengthen sales cycles, or stop purchasing altogether. Furthermore, during challenging economic times our customers may face issues in gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. If that were to occur, we may be required to increase our allowance for doubtful accounts and our financial results would be harmed.

We cannot predict the timing, strength or duration of any economic slowdown or recovery. If the condition of the general economy or markets in which we operate worsens from present levels, our business could be harmed. In addition, even if the overall economy improves, we cannot assure you that the market for interactive marketing software and professional services will experience growth or that we will experience growth.

We have been dependent on the use of email as a means for interactive marketing, and any decrease in the use of email for this purpose would harm our business.

Historically, our customers have primarily used our on-demand software for their email-based interactive marketing campaigns targeted at consumers who have given our customers permission to send them emails. We expect that email will continue to be the primary channel used by our customers for the foreseeable future. Government regulations and evolving practices regarding the use of email for marketing purposes could adversely affect the use of this channel for interactive marketing. Consumers’ use of email also depends on the ability of internet service providers, or ISPs, to prevent unsolicited bulk email, or “spam,” from overwhelming consumers’ inboxes. ISPs continually develop new technologies to filter messages deemed to be unwanted before they reach users’ inboxes, which may interfere with our customers’ marketing campaigns. If security problems become widespread, or if ISPs cannot effectively control spam, the use of email as a means of marketing communications may decline. Any decrease in the use of email would reduce demand for our email marketing services and harm our business.

 

13


Table of Contents

If our security measures are breached, our platform may be perceived as not being secure, customers may curtail or stop using our on-demand software, and we may incur significant liabilities.

Security breaches could expose us to a risk of loss or unauthorized disclosure of customer information, litigation, indemnity obligations and other liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to our system or customer information, our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose potential sales and existing customers.

Failure to effectively expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our on-demand software.

Increasing our customer base and achieving broader market acceptance of our on-demand software will depend to a significant extent on our ability to expand our sales and marketing operations and activities. We expect to be substantially dependent on our direct sales force to obtain new customers. We plan to continue to expand our direct sales force both domestically and internationally. We believe that there is significant competition for direct sales personnel with the sales skills and technical knowledge that we require. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of direct sales personnel. New hires require significant training and time before they achieve full productivity. Our recent hires and planned hires may not become as productive as quickly as we would like, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business. Our business will be seriously harmed if these expansion efforts do not generate a corresponding significant increase in revenue.

We may use third parties to grow our business. If we are unable to maintain successful relationships with them, our business could be harmed.

In addition to our direct sales force, we use third parties such as advertising agencies to help promote our on-demand software. Although we do not currently derive a significant amount of revenue through third parties, we may in the future seek to expand sales of subscriptions to our on-demand software through these and other indirect sales channels.

These third parties may offer customers the solutions of several different companies, including solutions that compete with ours. We also expect that these third parties will not have an exclusive relationship with us. Thus, we will not be certain that they will prioritize or provide adequate resources for selling our solution. In addition, establishing and retaining qualified third parties and training them in our on-demand software and services require significant time and resources. If we are unable to maintain successful relationships with any of these third parties, our business could be harmed.

We rely on third-party hardware, software and infrastructure that may be difficult to replace or which could cause errors or failures of our service.

We rely on hardware and infrastructure purchased or leased and software licensed from third parties in order to offer our on-demand software and related services. For example, we rely on third-party providers to support and provide our mobile messaging offerings. This hardware, software and infrastructure may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware, software or infrastructure could result in delays in the provisioning of affected components of our on-demand software until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated,

 

14


Table of Contents

which could harm our business. Furthermore, any errors or defects in third-party hardware, software or infrastructure could result in errors or a failure of our service which could harm our business.

If we are unable to integrate our on-demand software with certain third-party applications, the functionality of our software could be adversely affected.

The functionality of our on-demand software depends, in part, on our ability to integrate it with third-party applications and data management systems that our customers use and from which they obtain consumer data. In addition, we rely on access to third-party application programming interfaces, or APIs, to provide our social media channel offerings through social media platforms, which currently consist of Facebook and Twitter. Third-party providers of marketing applications and APIs may change the features of their applications and platforms, restrict our access to their applications and platforms or alter the terms governing use of their applications and APIs and access to those applications and platforms in an adverse manner. Such changes could functionally or financially limit or terminate our ability to use these third-party applications and platforms with our on-demand software, which could negatively impact our offerings and harm our business. Further, if we fail to integrate our software with new third-party applications and platforms that our customers use for marketing purposes, or to adapt to the data transfer requirements of such third-party applications and platforms, we may not be able to offer the functionality that our customers need, which would negatively impact our offerings and, as a result, harm our business.

Interruptions or delays in service from third-party data center hosting facilities and other third parties could impair the delivery of our service and harm our business.

We currently serve our customers from third-party data center hosting facilities located in Northern California and the United Kingdom. We also rely on bandwidth providers, ISPs and mobile networks to deliver messages to the customers of our customers. Any damage to, or failure of, the systems of our third-party providers could result in interruptions to our service. If for any reason our arrangement with one or more of our data centers is terminated we could experience additional expense in arranging for new facilities and support. In addition, the failure of our data centers to meet our capacity requirements could result in interruptions in the availability of our on-demand software, impair the functionality of our on-demand software or impede our ability to scale our operation. As we continue to add data centers, restructure our data management plans, and increase capacity in existing and future data centers, we may move or transfer our data and our customers’ data. For example, in 2011 we plan to wind down our use of the hosting facility in the United Kingdom. Despite precautions taken during such processes and procedures, any unsuccessful data transfers may impair the delivery of our service, and we may experience costs or downtime in connection with the transfer of data to other facilities. Interruptions in the availability of, or impaired functionality of, our on-demand software may reduce our revenue, cause us to issue credits, make refunds or pay penalties, harm our reputation, cause customers to terminate their subscriptions, and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.

Despite precautions taken at our data centers, the occurrence of a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close the facilities without adequate notice, or other unanticipated problems at these facilities could result in lengthy interruptions in the availability of our on-demand software. Even with current and planned disaster recovery arrangements, our business could be harmed.

As a result of our customers’ increased usage of our on-demand software, we will need to continually improve our computer network and infrastructure to avoid service interruptions or slower system performance.

As usage of our on-demand software grows and as customers use it for more complicated tasks, we will need to devote additional resources to improving our computer network, our application architecture and our infrastructure in order to maintain the performance of our platform. In addition, we typically experience

 

15


Table of Contents

increased system usage during the fourth quarter, with customers increasing their marketing activity for the holiday shopping season. Any failure or delays in our computer systems could cause service interruptions or slower system performance. If sustained or repeated, these performance issues could reduce the attractiveness of our platform to customers. This could result in lost customer opportunities and lower renewal rates, any of which could hurt our revenue growth, customer loyalty and our reputation. We may need to incur additional costs to upgrade or expand our computer systems and architecture in order to accommodate increased demand if our systems cannot handle current or higher volumes of usage.

Material defects or errors in the on-demand software we use to deliver our platform could harm our reputation, result in significant costs to us and impair our ability to sell our software.

The software applications underlying our platform are inherently complex and may contain material defects or errors, which may cause disruptions in availability or other performance problems. Any such errors, defects, disruptions in service or other performance problems with our platform, whether in connection with the day-to-day operation, upgrades or otherwise, could damage our customers’ businesses and cause harm to our reputation. If we have any errors, defects, disruptions in service or other performance problems with our software, customers could elect not to renew, or delay or withhold payment to us, we could lose future sales or customers may make warranty claims against us, which could result in an increase in our provision for doubtful accounts, an increase in the length of collection cycles for accounts receivable or costly litigation.

The costs incurred in correcting any material defects or errors in our software may be substantial and could adversely affect our operating results. After the release of our software, defects or errors may also be identified from time to time by our internal team and by our customers. We implement bug fixes and upgrades as part of our regularly scheduled system maintenance. If we do not complete this maintenance according to schedule or if customers are otherwise dissatisfied with the frequency and/or duration of our maintenance services and related system outages, customers could elect not to renew, or delay or withhold payment to us, or cause us to issue credits, make refunds or pay penalties.

Existing federal, state and foreign laws regulating email and text messaging marketing practices impose certain obligations on the senders of commercial emails and text messages, which could minimize the effectiveness of our on-demand software or increase our operating expenses to the extent financial penalties are triggered.

The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the CAN-SPAM Act, establishes certain requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future emails from the sender. In addition, some states have passed laws regulating commercial email practices that are, in some cases, significantly more punitive and difficult to comply with than the CAN-SPAM Act. Utah and Michigan, for example, have enacted do-not-email registries to protect minors from receiving unsolicited commercial email that markets certain covered content, such as adult or other products the minor cannot legally obtain. It is not settled whether all or a portion of such state laws may be preempted by the CAN-SPAM Act. In addition, certain foreign jurisdictions, such as Australia, Canada and the European Union, have enacted laws that regulate sending email, and some of these laws are more restrictive than U.S. laws. For example, some foreign laws prohibit sending unsolicited email unless the recipient has provided the sender advance consent to receipt of such email, or in other words has “opted-in” to receiving it. A requirement that recipients opt into, or the ability of recipients to opt out of, receiving commercial emails may minimize the effectiveness of our on-demand software. In addition, the CAN-SPAM Act and regulations implemented by the Federal Communications Commission pursuant to the CAN-SPAM Act, and the Telephone Consumer Protection Act, also known as the Federal Do-Not-Call law, among other requirements, prohibit companies from sending specified types of commercial text messages unless the recipient has given his or her prior express consent. Non-compliance with these laws and regulations carries significant financial penalties. If we were to be found in

 

16


Table of Contents

violation of federal law, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email or text messages, whether as a result of violations by our customers or any determination that we are directly subject to and in violation of these requirements, we could be required to pay penalties, which would adversely affect our financial performance and significantly harm our reputation and our business.

In addition, U.S., state or foreign jurisdictions may in the future enact legislation or laws restricting the ability to conduct interactive marketing activities in mobile, social and web channels. Any such restrictions could require us to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers or increase our operating costs or otherwise harm our business.

The standards that private entities use to regulate the use of email have in the past interfered with, and may in the future interfere with, the effectiveness of our on-demand software and our ability to conduct business.

Our customers rely on email to communicate with their customers. Various private entities attempt to regulate the use of email for commercial solicitation. These entities often advocate standards of conduct or practice that significantly exceed current legal requirements and classify certain email solicitations that comply with current legal requirements as spam. Some of these entities maintain “blacklists” of companies and individuals, and the websites, ISPs and internet protocol addresses associated with those entities or individuals that do not adhere to those standards of conduct or practices for commercial email solicitations that the blacklisting entity believes are appropriate. If a company’s internet protocol addresses are listed by a blacklisting entity, emails sent from those addresses may be blocked if they are sent to any internet domain or internet address that subscribes to the blacklisting entity’s service or purchases its blacklist.

From time to time, some of our internet protocol addresses may become listed with one or more blacklisting entities due to the messaging practices of our customers. There can be no guarantee that we will be able to successfully remove ourselves from those lists. Blacklisting of this type could interfere with our ability to market our on-demand software and services and communicate with our customers and, because we fulfill email delivery on behalf of our customers, could undermine the effectiveness of our customers’ email marketing campaigns, all of which could have a material negative impact on our business and results of operations.

Evolving regulations concerning data privacy may restrict our customers’ ability to solicit, collect, process, disclose and use data necessary to conduct effective marketing campaigns and analyze the results or may increase their costs, which could harm our business.

Federal, state and foreign governments have enacted, and may in the future enact, laws and regulations concerning the solicitation, collection, processing, disclosure or use of consumers’ personal information. Such laws and regulations may require companies to implement privacy and security policies, permit users to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personal information for certain purposes. Other proposed legislation could, if enacted, impose additional requirements and prohibit the use of certain technologies that track individuals’ activities on web pages or that record when individuals click through to an internet address contained in an email message. Such laws and regulations could restrict our customers’ ability to collect and use email addresses, page viewing data, and personal information, which may reduce demand for our solution.

Our applications collect, store and report personal information, which raises privacy concerns and could result in liability to us or inhibit sales of subscriptions to our on-demand software.

Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. Because many of the

 

17


Table of Contents

features of our applications use, store and report on personal information from our customers, any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy laws, regulations and policies, could result in liability to us, damage our reputation, inhibit sales and harm our business. Furthermore, the costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of our on-demand software and reduce overall demand for it. Privacy concerns, whether or not valid, may inhibit market adoption of our on-demand software.

If our on-demand software is perceived to cause or is otherwise unfavorably associated with invasions of privacy, whether or not illegal, it may subject us or our customers to public criticism. Existing and potential future privacy laws and increasing sensitivity of consumers to unauthorized disclosures and use of personal information may create negative public reactions related to interactive marketing, including marketing practices of our customers. Public concerns regarding data collection, privacy and security may cause some of our customers’ customers to be less likely to visit their websites or otherwise interact with them. If enough consumers choose not to visit our customers’ websites or otherwise interact with them, our customers could stop using our on-demand software. This, in turn, would reduce the value of our service and inhibit or reverse the growth of our business.

Any decrease in opt in rates or usage habits could reduce the demand for our on-demand software.

It is our policy that our customers may only use our on-demand software to provide marketing content to recipients that have elected to receive marketing communications from them through specified interactive channels such as email, mobile and social. If recipients decrease their overall opt in rates for these marketing communications or reduce the extent to which they use, or otherwise cease use of, the channels over which these marketing communications are sent, our customers will have a smaller or less addressable group of potential customers to target and they may decide it is not cost effective for them to continue to use our on-demand software. Accordingly, if opt in rates decline for any reason, including privacy concerns, negative publicity or changes in laws or regulations, or consumer usage of certain interactive marketing channels declines, demand for our on-demand software could decline and our business could be harmed.

Our customers’ violation of our policies and misuse of our on-demand software to transmit negative messages or website links to harmful applications or engage in illegal activity could damage our reputation, and we may face liability for unauthorized, inaccurate or fraudulent information distributed via, or illegal activity conducted using, our on-demand software.

We rely on representations made to us by our customers that their use of our on-demand software will comply with our policies and applicable law. We do not audit our customers to confirm compliance with these representations. Our customers could use our on-demand software to engage in bad acts including transmitting negative messages or website links to harmful applications, sending unsolicited commercial email and reproducing and distributing copyrighted material without permission, reporting inaccurate or fraudulent data or engaging in illegal activity. Any such use of our on-demand software could damage our reputation and we could face claims for damages, copyright or trademark infringement, defamation, negligence or fraud. Moreover, our customers’ promotion of their products and services through our on-demand software may not comply with federal, state and foreign laws. We cannot predict whether our role in facilitating these activities would expose us to liability under these laws or subject us to other regulatory action.

Even if claims asserted against us do not result in liability, we may incur substantial costs in investigating and defending such claims. If we are found liable for our customers’ activities, we could be required to pay fines or penalties, redesign our on-demand software or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability.

 

18


Table of Contents

As internet commerce develops, federal, state and foreign governments may propose and implement new taxes and new laws to regulate internet commerce, which may negatively affect our business.

As internet commerce continues to evolve, increasing regulation by federal, state or foreign governments becomes more likely. Our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws applicable to interactive marketing. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to our customers in the form of increased subscription fees. In addition, federal, state and foreign governmental or regulatory agencies may decide to impose taxes on services provided over the internet or via email. Such taxes could discourage the use of the internet and email as a means of commercial marketing, which would adversely affect the viability of our on-demand software.

Our operating results may be harmed if we are required to collect sales taxes for our subscription services in jurisdictions where we have not historically done so or if our accruals for sales taxes are insufficient.

States and some local taxing jurisdictions have differing rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our subscription services in various jurisdictions is unclear. We have recorded sales tax liabilities of $0.4 million as of December 31, 2010 in respect of sales and use tax liabilities in various states and local jurisdictions. It is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as state tax authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. We could also be subject to audits with respect to states and international jurisdictions for which we have not accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our application or otherwise harm our business and operating results.

We have limited experience with non-volume based pricing models, which we use for some of our newer offerings. If we incorrectly structure these pricing models or are unable to price our offerings in a manner acceptable by our customers, our revenue and operating results may be harmed.

We currently utilize volume-based pricing models for our email and mobile messaging offerings. We have limited experience with non-volume based pricing models for our newer offerings such as our social offering. If our customers, which have historically used our offerings primarily for their email-based interactive marketing campaigns, do not accept the other pricing models that we utilize for certain of our newer offerings and may utilize for future offerings, our ability to sell additional functionality on a cost-effective and competitive basis may be hindered, and our revenue and operating results may be adversely affected.

If we fail to develop or protect our brand cost-effectively, our business may be harmed.

We believe that developing and maintaining awareness and integrity of our brand in a cost-effective manner are important to achieving widespread acceptance of our existing and future offerings and are important elements in attracting new customers. We believe that the importance of brand recognition will increase as competition in our market further intensifies. Successful promotion of our brand will depend on the effectiveness of our marketing efforts and on our ability to provide reliable and useful products and services at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, the increased revenue may not offset the expenses we incur in building our brand. If we fail to promote and maintain our brand successfully or to maintain loyalty among our customers, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract new customers or to retain our existing customers and our business may be harmed. We have registered certain of our trademarks worldwide. However, competitors may adopt similar trademarks to ours or purchase keywords that are confusingly similar to our brand names as terms

 

19


Table of Contents

in internet search engine advertising programs, which could impede our ability to build our brand identity and lead to confusion among potential customers of our services.

If we fail to respond to evolving technological changes, our on-demand software could become obsolete or less competitive.

Our industry is characterized by new and rapidly evolving technologies, standards, regulations, customer requirements and frequent product introductions. Accordingly, our future success depends upon, among other things, our ability to develop and introduce new products and services. The process of developing new technologies, products and services is complex, and if we are unable to develop enhancements to, and new features for, our existing on-demand software or acceptable new functionality that keeps pace with technological developments, industry standards, interactive marketing trends or customer requirements, our solution may become obsolete, less marketable and less competitive, and our business could be significantly harmed.

We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, our financial performance may suffer.

We have expanded our overall business, customer base, employee headcount and operations in recent periods. We increased our total number of regular full-time employees from 168 as of December 31, 2007 to 488 as of December 31, 2010. We recently completed our acquisition of Eservices in Australia, which allowed us to add more customers and significantly expanded our operations in the Asia Pacific region. We also have a fifty-percent owned unconsolidated affiliate with operations in Denmark. Our expansion has placed, and our expected future growth will continue to place, a significant strain on our managerial, customer operations, research and development, sales and marketing, administrative, financial and other resources. If we are unable to manage our growth successfully, our operating results could suffer.

We rely on our management team and other key employees, and need additional personnel, to grow our business, and the loss of one or more key employees, or our inability to attract and retain qualified personnel, could harm our business.

Our success and future growth depend on the skills, working relationships and continued services of our management team and other key personnel. The loss of any member of our senior management team, including our Chief Executive Officer, could adversely affect our business.

Our future success will also depend on our ability to attract, retain and motivate highly skilled research and development, operations, sales, technical and other personnel in the United States and abroad. Even in today’s economic climate, competition for these types of personnel is intense. All of our employees in the United States work for us on an at-will basis. As a result of these factors, we may be unable to attract or retain qualified personnel. Our inability to attract and retain the necessary personnel could adversely affect our business.

We are currently expanding and improving our information technology infrastructure and systems. If these implementations are not successful, our operations could be disrupted, which could cause our operating results to suffer.

We are currently expanding and improving our information technology infrastructure and systems to assist us in the management of our growing organizational operations and accommodate our employee, customer and business growth. We anticipate that these improvements will be a long-term investment and that the process will require management time, support and cost. Moreover, there are inherent risks associated with upgrading, improving and expanding information technology systems. We cannot be sure that the improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all. If we do not successfully implement upgrades and other changes on a timely basis or at all, our operations may be disrupted and our quality of service could decline. As a result, our operations and operating results could suffer. In

 

20


Table of Contents

addition, any new system deployments may not operate as we expect them to, and we may be required to expend significant resources to correct problems or find alternative sources for performing these functions.

Our independent registered public accounting firm noted a material weakness in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could result in our failure to accurately report our financial results.

During the audits of our financial statements for the years ended December 31, 2008, 2009 and 2010 our independent registered public accounting firm noted in its reports to our audit committee that we had a material weakness in the design and operating effectiveness of our internal control over financial reporting due primarily to insufficient personnel within our accounting function possessing an appropriate level of experience to provide reasonable assurance that transactions were being appropriately recorded and regarding the reliability of financial reporting and the preparation of financial statements. The material weakness resulted in a number of audit adjustments to our financial statements for the periods under audit.

We took steps during 2010 and 2011 intended to begin the remediation of this material weakness, which relates in large part to inadequate staffing. In 2010 we added seven staff members to our finance organization, including a director of technical accounting and a revenue controller to fill key roles, and implemented additional procedures and training programs for all personnel involved in the preparation of our financial statements. We are continuing to add additional headcount in 2011. Our corporate controller will be leaving in April 2011. We have appointed an interim controller and will be seeking to hire a permanent controller, as well as additional accounting personnel, to continue to address our material weakness. We will not be able to fully address this material weakness until these steps have been completed. If we fail to further increase and maintain the number and expertise of our staff for our accounting and finance functions and to improve and maintain internal control over financial reporting adequate to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, we may be unable to report our financial results accurately and prevent fraud.

Furthermore, SEC rules require that, as a publicly-traded company following completion of this offering, we file periodic reports containing our financial statements within a specified time following the completion of quarterly and annual periods. If we are not able to comply with the SEC reporting requirements in a timely manner, or if we or our independent registered public accounting firm continue to note or identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions, including delisting or investigations by The NASDAQ Stock Market, the SEC or other regulatory authorities, which would require additional financial and management resources.

Even if we are able to report our financial statements accurately and in a timely manner, if we do not make all the necessary improvements to address the material weakness, continued disclosure of a material weakness will be required in future filings with the SEC, which could cause our reputation to be harmed and our stock price to decline.

Our inability to acquire and integrate other businesses, products or technologies could seriously harm our competitive position.

In order to remain competitive, obtain key competencies or accelerate our time to market, we may seek to acquire additional businesses, products or technologies. To date, we have completed several small acquisitions of companies that provide professional services, and our larger acquisition of Eservices, in January 2011. We have limited experience in successfully acquiring and integrating businesses, products and technologies. If we identify an appropriate acquisition candidate, we may not be successful in negotiating the terms of the acquisition, financing the acquisition, or effectively integrating the acquired business, product or technology into our existing business and operations. For instance, we may not fully realize the anticipated benefits of our acquisition of Eservices, which will depend in part on combining service offerings and entering into new markets. Our due

 

21


Table of Contents

diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices, or employee or customer issues. Additionally, in connection with any acquisitions we are able to complete, we may not achieve the synergies or other benefits we expected to achieve and we may incur write-downs, impairment charges or unforeseen liabilities which could negatively affect our operating results or financial position or could otherwise harm our business. If we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which could affect the market price of our stock. Further, contemplating or completing an acquisition and integrating an acquired business, product or technology will significantly divert management and employee time and resources.

If we are unable to protect the confidentiality of our proprietary information, the value of our on-demand software could be adversely affected.

We rely largely on our unpatented technology and trade secrets to protect our proprietary information. We generally seek to protect this information by confidentiality, non-disclosure and assignment of invention agreements with our employees, contractors and parties with which we do business. These agreements may be breached and we may not have adequate remedies for any such breach. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse engineering of our technology. Moreover, our trade secrets may be disclosed to or otherwise become known or be independently developed by competitors. To the extent that our employees, contractors, or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it would harm our ability to protect our rights and have a material adverse effect on our business.

Our business may suffer if it is alleged or determined that our technology infringes the intellectual property rights of others.

Our industry is characterized by the existence of a large number of patents and by litigation based on allegations of infringement or other violations of intellectual property rights. Moreover, in recent years, individuals and groups have purchased patents and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements from companies like ours. From time to time, third parties have claimed and may continue to claim that we are infringing upon their patents or other intellectual property rights. In addition, we may be contractually obligated to indemnify our customers in the event of infringement of a third party’s intellectual property rights. Responding to such claims, regardless of their merit, can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand, and cause us to incur significant expenses. Even if we are indemnified against such costs, the indemnifying party may be unable to uphold its contractual obligations. Further, claims of intellectual property infringement might require us to redesign our application, delay releases, enter into costly settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling our on-demand software. If we cannot or do not license the infringed technology on reasonable terms or at all, or substitute similar technology from another source, our revenue and operating results could be adversely impacted. Additionally, our customers may not purchase our on-demand software if they are concerned that they may infringe third-party intellectual property rights. The occurrence of any of these events may have a material adverse effect on our business.

The success of our business depends on our ability to protect and enforce our intellectual property rights. We rely on a combination of trademark, trade dress, copyright, unfair competition and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights. These laws, procedures and restrictions provide only limited protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain

 

22


Table of Contents

jurisdictions, we may be unable to protect our proprietary technology adequately against unauthorized third party copying, infringement or use, which could adversely affect our competitive position.

In order to protect or enforce our intellectual property rights, we may initiate litigation against third parties. Litigation may be necessary to protect our trade secrets or know-how, or determine the enforceability, scope and validity of the proprietary rights of others. Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may have a material adverse effect on our business.

We use open source software in our on-demand software, which may subject us to litigation, require us to re-engineer our applications or otherwise divert resources away from our development efforts.

We use open source software in connection with our on-demand software. From time to time, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software and/or compliance with open source license terms. Therefore, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose the source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur and we may be required to release our proprietary source code, pay damages for breach of contract, re-engineer our applications, discontinue sales in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business.

We face risks associated with our international operations, including unfavorable regulatory, political, tax and labor conditions, which could limit our growth.

Our ability to grow our business and our future success will depend to a significant extent on our ability to expand our operations and customer base worldwide. We recently completed our acquisition of Eservices, located in Australia, commenced operations via a joint venture in Denmark, and commenced software development work via a subsidiary in India. Operating in foreign countries requires significant resources and management attention, and we have limited experience entering new geographic markets. We cannot assure you that our international efforts will be successful. International sales and operations may be subject to risks such as:

 

   

difficulties in staffing and managing foreign operations;

 

   

burdens of complying with a wide variety of laws and regulations;

 

   

adverse tax burdens and foreign exchange controls making it difficult to repatriate earnings and cash;

 

   

political instability;

 

   

terrorist activities;

 

   

currency exchange rate fluctuations;

 

   

generally longer receivable collection periods than in the United States;

 

   

trade restrictions;

 

   

differing employment practices and laws and labor disruptions;

 

   

preference for local vendors;

 

23


Table of Contents
   

technology compatibility;

 

   

the imposition of government controls;

 

   

lesser degrees of intellectual property protection;

 

   

a legal system subject to undue influence or corruption; and

 

   

a business culture in which improper sales practices may be prevalent.

We cannot assure you that these factors will not have a material adverse effect on our future international sales and, consequently, on our business.

Catastrophic events could disrupt and cause harm to our business.

We are located in California, an area susceptible to earthquakes. A major earthquake or other natural disaster, fire, act of terrorism or other catastrophic event that results in the destruction or disruption of any of our critical business operations or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be harmed.

Our business is subject to changing regulations regarding corporate governance, disclosure controls, internal control over financial reporting and other compliance areas that will increase both our costs and the risk of noncompliance.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and the rules and regulations of The NASDAQ Stock Market. The requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Commencing with our fiscal year ending December 31, 2012, 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. Our compliance with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant management efforts. Prior to this offering, we have never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner, particularly if material weaknesses or significant deficiencies persist.

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which would require additional financial and management resources.

Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that we will be required to include in our periodic reports filed with the SEC, beginning for our fiscal year ending December 31, 2012 under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures or internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.

 

24


Table of Contents

Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that we are not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.

A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, we have recently adopted and retroactively applied a new revenue recognition standard, which may in the future be subject to varying interpretations that could materially impact how we recognize revenue. Accounting for revenue from sales of subscriptions to software is particularly complex, is often the subject of intense scrutiny by the SEC, and will evolve as the Financial Accounting Standards Board, or FASB, continues to consider applicable accounting standards in this area.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings or enter into credit facilities for other reasons. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

Our cash balances are managed through various institutions and the value of these investments could decline.

We maintain our cash and cash equivalents with a number of financial institutions around the world. In the event that any of these institutions experiences financial difficulty, we could find it more difficult to quickly access these funds. In addition, our results could vary materially from expectations depending on gains or losses realized on the sale or exchange of investments, impairment charges related to debt securities as well as other investments, and interest rates. The volatility in the financial markets and overall economic conditions increases the risk that the actual amounts realized in the future on our investments could differ significantly from the fair values currently assigned to them.

 

25


Table of Contents

We may not be able to utilize a significant portion of our net operating loss or research tax credit carryforwards, which could adversely affect our operating results.

As of December 31, 2010, we had federal and state net operating loss carryforwards of $25.2 million and $22.9 million, respectively, due to prior period losses, which expire beginning in 2021 and 2015 for federal and state purposes, respectively. We also have federal research tax credit carryforwards of approximately $0.8 million that will begin to expire in 2012. Realization of these net operating loss and research tax credit carryforwards depends on many factors, including our future income and, for example, whether the State of California continues to suspend the use of California net operating loss carryforwards. There is a risk that due to regulatory changes or unforeseen reasons our existing carryforwards could expire or otherwise be unavailable to offset future income tax liabilities, which would adversely affect our operating results.

Changes in tax laws or regulations that are applied adversely to us or our customers could increase the costs of our on-demand software and professional services and adversely impact our business.

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Those enactments could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. These events could require us or our customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our customers to pay fines and/or penalties and interest for past amounts deemed to be due. If we raise our prices to offset the costs of these changes, existing and potential future customers may elect not to continue or purchase our on-demand software and professional services in the future. Additionally, new, changed, modified or newly interpreted or applied tax laws could increase our customers’ and our compliance, operating and other costs, as well as the costs of our on-demand software and professional services. Further, these events could decrease the capital we have available to operate our business. Any or all of these events could adversely impact our business and financial performance.

Risks Related to this Offering and Ownership of Our Common Stock

There has been no prior market for our common stock, our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon closing of this offering or, if it does develop, it may not be sustainable. The trading prices of the securities of technology companies have been highly volatile. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

   

actual or anticipated fluctuations in our revenue and other operating results;

 

   

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

   

failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

   

announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

26


Table of Contents
   

announcements by us of negative conclusions about our internal controls and our ability to accurately report our financial results; and

 

   

changes in operating performance and stock market valuations of software or other technology companies, or those in our industry in particular;

 

   

price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

   

lawsuits threatened or filed against us; and

 

   

other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.

Most of our total outstanding shares may be sold into the market when the “lock up” period ends. If there are substantial sales of shares of our common stock, the price of our common stock could decline.

The price of our common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, or if there is a large number of shares of our common stock available for sale. After this offering, we will have outstanding 44,106,658 shares of our common stock, based on the number of shares outstanding as of December 31, 2010. This includes the shares that we and the selling stockholders are selling in this offering, which may be resold in the public market immediately. The remaining 37,487,004 shares of our outstanding shares after this offering are currently restricted as a result of market standoff agreements. In addition, certain of these shares are also subject to lock-up agreements, as more fully described in “Underwriters.” In each case, these shares will become sellable 181 days after the date of this prospectus, subject to extension in some circumstances. Shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements.

After this offering, the holders of an aggregate of 32,494,245 shares of our common stock and 28,302 shares subject to a warrant to purchase our common stock outstanding as of December 31, 2010 will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. All of these shares are subject to market standoff and/or lock-up agreements restricting their sale for 180 days after the date of this prospectus subject to extension in some circumstances. We also intend to register shares of common stock that we have issued and may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing market standoff and/or lock-up agreements. Morgan Stanley & Co. Incorporated may, in its sole discretion, permit our officers, directors, employees and current stockholders who are subject to the contractual lock-up to sell shares prior to the expiration of the lock-up agreements. See “Underwriters” for more information.

The market price of the shares of our common stock could decline as a result of sales of a substantial number of our shares in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including working

 

27


Table of Contents

capital, possible acquisitions and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently do not have and may never obtain research coverage by securities analysts, and industry analysts that currently cover us may cease to do so. If no securities analysts commence coverage of our company, or if industry analysts cease coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities analyst coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

Our directors, executive officers and principal stockholders will continue to have substantial control over us after this offering and could delay or prevent a change in corporate control.

After this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate, 73% of our outstanding common stock. As a result, these stockholders, acting together, would have the ability to control 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, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:

 

   

delaying, deferring or preventing a change in control of us;

 

   

impeding a merger, consolidation, takeover or other business combination involving us; or

 

   

discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution in the pro forma net tangible book value per share after giving effect to this offering of $7.05 per share as of December 31, 2010, based on an assumed initial public offering price of $9.25 per share, which is the midpoint of the range set forth on the cover page of this prospectus, because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon exercise of any warrant, upon exercise of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under our equity incentive plans or if we otherwise issue additional shares of our common stock.

 

28


Table of Contents

Delaware law and provisions in our restated certificate of incorporation and bylaws that will be in effect at the closing of this offering could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.

Following the closing of this offering, our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and bylaws that will be in effect at the closing of this offering will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including the following:

 

   

our board of directors will be classified into three classes of directors with staggered three-year terms;

 

   

only our chairperson of the board, our chief executive officer, our president or a majority of our board of directors will be authorized to call a special meeting of stockholders;

 

   

our stockholders will only be able to take action at a meeting of stockholders and not by written consent;

 

   

vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;

 

   

directors may be removed from office only for cause;

 

   

our restated certificate of incorporation will authorize undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval; and

 

   

advance notice procedures will apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

For information regarding these and other provisions, see “Description of Capital Stock.”

 

29


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus includes forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend” and “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. 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. We are under no duty to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.

This prospectus also contains estimates and information concerning our industry, including market position, market size and growth rates of the markets in which we participate, that are based on industry publications and reports, including those generated by Forrester Research, Inc., the Direct Marketing Association and Gartner, Inc. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates as there is no assurance that any of them will be achieved. Although we have not independently verified the accuracy or completeness of the data contained in these industry publications and reports, based on our industry experience we believe that the publications and reports are reliable and that the conclusions contained in the publications and reports are reasonable. A variety of factors, including those described in the “Risk Factors” section could cause results to differ materially from those expressed in these publications and reports.

 

30


Table of Contents

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the common stock that we are offering will be approximately $45.5 million, or approximately $53.8 million if the underwriters exercise their right to purchase additional shares to cover over-allotments in full, assuming an initial public offering price of $9.25 per share, the midpoint of the range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $9.25 per share would increase (decrease) the net proceeds to us from this offering by $5.1 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.

The principal purposes of this offering are to create a public market for our common stock, obtain additional capital, facilitate our future access to the public equity markets, increase awareness of our company among potential customers and improve our competitive position. We intend to use the net proceeds to us from this offering for working capital and other general corporate purposes such as expanding our international operations, product development, sales and marketing, and general and administrative matters. Additionally, we may choose to expand our current business through acquisitions of or investments in other businesses, products or technologies, using cash or shares of our common stock. However, we have no commitments with respect to any such acquisitions or investments at this time.

Pending the use of the proceeds from this offering, we intend to invest the proceeds in short-term, interest-bearing, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers relevant.

 

31


Table of Contents

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2010:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the automatic conversion of all outstanding shares of our convertible preferred stock into common stock; and

 

   

on a pro forma as adjusted basis to give effect to (1) the issuance and sale by us of 5,500,000 shares of common stock in this offering, and the receipt of the net proceeds from our sale of these shares at an assumed initial public offering price of $9.25 per share, the midpoint of the range listed on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (2) the restatement of our certificate of incorporation in connection with this offering.

You should read this table in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of December 31, 2010  
     Actual     Pro
Forma
    Pro Forma
As Adjusted(1)
 
     (in thousands, except per share data)  

Stockholders’ equity:

      

Convertible preferred stock, $.0001 par value, 38,729 shares authorized; 30,159 shares issued and outstanding (actual); 5,000 shares authorized and no shares issued or outstanding (pro forma and pro forma as adjusted)

   $ 62,028      $ —        $ —     

Common stock, $.0001 par value, 62,500 shares authorized and 8,448 shares issued and outstanding (actual); 62,500 shares authorized and 38,607 shares issued and outstanding (pro forma); and 250,000 shares authorized and 44,107 shares issued and outstanding (pro forma as adjusted)

     1        4        4   

Additional paid-in capital

     12,860        74,885        120,373   

Accumulated deficit

     (22,765     (22,765     (22,765

Accumulated other comprehensive income

     1,051        1,051        1,051   
                        

Total stockholders’ equity

     53,175        53,175        98,663   
                        

Total capitalization

   $ 53,175      $ 53,175      $ 98,663   
                        

 

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $9.25 per share would increase (decrease) each of additional paid-in capital, total stockholders’ equity and total capitalization by $5.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares to cover over-allotments is exercised in full, the pro forma as adjusted amount of each of additional paid-in capital, total stockholders’ equity and total capitalization would increase by approximately $8.3 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and we would have 44,106,658 shares of our common stock issued and outstanding, pro forma as adjusted. The pro forma and pro forma as adjusted information discussed above is illustrative only and following the closing of this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

32


Table of Contents

The table above excludes the following shares:

 

   

10,937,216 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2010 under our 1999 Stock Plan, with a weighted-average exercise price of approximately $1.55 per share;

 

   

810,565 shares of common stock reserved for future issuance as of December 31, 2010 under our 1999 Stock Plan (which includes 15,000 shares of common stock issued and 305,125 shares of common stock issuable upon exercise of options granted at an exercise price of $9.25 per share between January 1, 2011 and March 31, 2011);

 

   

28,302 shares of convertible preferred stock issuable upon exercise of an outstanding warrant as of December 31, 2010 that will convert into a warrant to purchase the same number of shares of common stock in connection with this offering, with an exercise price of $6.36 per share;

 

   

148,047 shares of common stock that are issued and outstanding but were subject to a right of repurchase by us as of December 31, 2010;

 

   

148,648 shares of common stock that were issued on January 3, 2011 in connection with our acquisition of the remaining equity interests in Eservices; and

 

   

10,000,000 shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective at or prior to the closing of this offering.

 

33


Table of Contents

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

Our pro forma net tangible book value as of December 31, 2010 was $51.3 million, or $1.33 per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of December 31, 2010, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into common stock in connection with this offering.

After giving effect to our sale in this offering of 5,500,000 shares of common stock at an assumed initial public offering price of $9.25 per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of December 31, 2010 would have been approximately $96.8 million, or $2.20 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $0.87 per share to our existing stockholders and immediate dilution of $7.05 per share to investors purchasing shares in this offering. The following table illustrates this per share dilution.

 

Assumed initial offering price per share

      $ 9.25   

Pro forma net tangible book value per share as of December 31, 2010

   $ 1.33      

Increase in pro forma net tangible book value per share attributable to investors purchasing shares in this offering

     0.87      
           

Pro forma as adjusted net tangible book value per share after this offering

        2.20   
           

Dilution in pro forma net tangible book value per share to investors in this offering

      $ 7.05   
           

A $1.00 increase (decrease) in the assumed initial public offering price of $9.25 per share would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $0.12, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share after giving effect to this offering would be approximately $2.33 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be approximately $6.92 per share.

The following table summarizes, as of December 31, 2010, the differences between the number of shares of common stock purchased from us, after giving effect to the conversion of our convertible preferred stock into common stock, the total cash consideration paid and the average price per share paid by our existing stockholders and by our new investors purchasing shares in this offering at the assumed initial public offering price of $9.25 per share (the midpoint of the range set forth on the cover page of this prospectus), before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     38,606,658         88   $ 64,412,654         56   $ 1.67   

New investors

     5,500,000         12        50,875,000         44        9.25   
                                    

Totals

     44,106,658         100   $ 115,287,654         100  
                                    

 

34


Table of Contents

A $1.00 increase (decrease) in the assumed initial public offering price of $9.25 per share would increase (decrease) total consideration paid by new investors by $5.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, our existing stockholders would own 83% and our new investors would own 17% of the total number of shares of our common stock outstanding after this offering.

Sales of shares of common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to 37,487,004, or approximately 85% of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to 6,619,654, or approximately 15% of the total shares of common stock outstanding after this offering.

The above table and discussion are based on 38,606,658 shares of our common stock outstanding as of December 31, 2010, and exclude the following shares:

 

   

10,937,216 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2010 under our 1999 Stock Plan, with a weighted-average exercise price of approximately $1.55 per share;

 

   

810,565 shares of common stock reserved for future issuance as of December 31, 2010 under our 1999 Stock Plan (which includes 15,000 shares of common stock issued and 305,125 shares of common stock issuable upon exercise of options granted at an exercise price of $9.25 per share between January 1, 2011 and March 31, 2011);

 

   

28,302 shares of convertible preferred stock issuable upon exercise of an outstanding warrant as of December 31, 2010 that will convert into a warrant to purchase the same number of shares of common stock in connection with this offering, with an exercise price of $6.36 per share;

 

   

148,047 shares of common stock that are issued and outstanding but were subject to a right of repurchase by us as of December 31, 2010;

 

   

148,648 shares of common stock that were issued on January 3, 2011 in connection with our acquisition of the remaining equity interests in Eservices; and

 

   

10,000,000 shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective at or prior to the closing of this offering.

To the extent that any outstanding options or warrants are exercised, there will be further dilution to new investors.

 

35


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated statements of income data for each of the years ended December 31, 2008, 2009 and 2010 and the consolidated balance sheet data as of December 31, 2009 and 2010 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of income data for the year ended December 31, 2007 and the consolidated balance sheet data as of December 31, 2008 are derived from our audited consolidated financial statements not included in this prospectus. The consolidated statements of income data for the years ended December 31, 2006 and the consolidated balance sheet data as of December 31, 2006 and 2007 are derived from our unaudited consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of our results to be expected in any future period.

In January 2011, we completed our acquisition of the remaining equity interests of Eservices. The audited consolidated financial statements of Eservices for the year ended June 30, 2010, unaudited condensed financial statements of Eservices for the six months ended December 31, 2009 and 2010 and our unaudited pro forma condensed combined financial information have been included elsewhere in this prospectus.

You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Year Ended December 31,  
     2006     2007     2008     2009     2010  
Consolidated Statements of Income Data:    (in thousands, except per share data)  

Revenue

          

Subscription

   $ 17,864      $ 29,930      $ 41,047      $ 53,044      $ 69,284   

Professional services

     5,391        7,674        9,067        13,599        24,787   
                                        

Total revenue

     23,255        37,604        50,114        66,643        94,071   
                                        

Cost of revenue

          

Subscription

     5,030        8,466        12,399        15,109        20,221   

Professional services

     5,052        6,314        8,926        12,478        20,697   
                                        

Total cost of revenue(1)

     10,082        14,780        21,325        27,587        40,918   
                                        

Gross profit

     13,173        22,824        28,789        39,056        53,153   
                                        

Operating expenses:

          

Research and development(1)

     3,486        3,308        5,068        8,052        10,597   

Sales and marketing(1)

     7,977        11,098        15,681        15,494        20,849   

General and administrative(1)

     1,944        3,181        4,639        5,746        8,225   
                                        

Total operating expenses

     13,407        17,587        25,388        29,292        39,671   
                                        

Operating income (loss)

     (234     5,237        3,401        9,764        13,482   

Total other income (expense), net

     223        298        (811     185        1,171   
                                        

Income (loss) before income taxes

     (11     5,535        2,590        9,949        14,653   

Benefit (provision) for income taxes

     —          (109     17,857        (4,063     (5,821

Equity in net loss of unconsolidated affiliates

     —          —          —          —          (234
                                        

Net income (loss)

   $ (11   $ 5,426      $ 20,447      $ 5,886      $ 8,598   
                                        

Net income (loss) attributable to common stockholders:(2)

          

Basic

   $ (11   $ 85      $ 2,980      $ 186      $ 802   
                                        

Diluted

   $ (11   $ 146      $ 5,009      $ 299      $ 1,179   
                                        

Net income (loss) per share attributable to common stockholders:(2)

          

Basic

   $ (0.00   $ 0.01      $ 0.43      $ 0.02      $ 0.09   
                                        

Diluted

   $ (0.00   $ 0.01      $ 0.35      $ 0.02      $ 0.08   
                                        

Shares used in computation of net income (loss) per share attributable to common stockholders:(2)

          

Basic

     5,297        6,304        7,007        7,518        8,527   
                                        

Diluted

     5,297        13,857        14,408        14,302        14,464   
                                        

 

36


Table of Contents
     Year Ended December 31,  
     2006      2007      2008      2009      2010  
Consolidated Statements of Income Data:    (in thousands, except per share data)  

Pro forma net income per share attributable to common stockholders (unaudited):(2)(3)

              

Basic

               $ 0.22   
                    

Diluted

               $ 0.19   
                    

Pro forma weighted-average shares outstanding used in calculating net income per share attributable to common stockholders (unaudited):(2)(3)

              

Basic

                 38,686   
                    

Diluted

                 44,623   
                    

 

(1) Total cost of revenue and operating expenses include stock-based compensation expense as follows:

 

     Year Ended December 31,  
     2006      2007      2008      2009      2010  
     (in thousands)  

Total cost of revenue

   $ 112       $ 111       $ 308       $ 332       $ 523   

Research and development

     8         41         264         280         331   

Sales and marketing

     43         119         400         461         694   

General and administrative

     34         91         478         563         958   

 

(2) See note 2 of the notes to our consolidated financial statements for a description of how we compute basic and diluted net income (loss) attributable to common stockholders and net income (loss) per share attributable to common stockholders and pro forma basic and diluted net income (loss) per share attributable to common stockholders.

 

(3) The pro forma basic and diluted weighted-average shares outstanding in calculating net income per share attributable to common stockholders does not include 148,648 shares of common stock that were issued on January 3, 2011 in connection with our acquisition of the remaining equity interest in Eservices and 15,000 shares of common stock that were issued on March 11, 2011 under our 1999 Stock Plan.

 

     As of
December 31,
 
     2006      2007      2008      2009      2010  
     (in thousands)  

Consolidated Balance Sheet Data:

              

Cash and cash equivalents(1)

   $ 4,645       $ 8,350       $ 7,130       $ 15,750       $ 13,884   

Working capital

     4,384         7,277         12,724         26,489         27,047   

Total assets

     14,619         23,810         47,373         57,995         71,900   

Total liabilities

     6,777         10,151         11,336         13,178         18,725   

Total stockholders’ equity

     7,842         13,659         36,037         44,817         53,175   

 

(1) Cash and cash equivalents as of December 31, 2010 does not reflect the use of $7.1 million of cash to acquire the remaining equity interests in Eservices in January 2011.

 

37


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this prospectus. In January 2011, we completed our acquisition of the remaining equity interests of Eservices. The audited consolidated financial statements of Eservices for the year ended June 30, 2010, unaudited condensed financial statements of Eservices for the six months ended December 31, 2009 and 2010 and unaudited pro forma condensed combined financial information are included elsewhere in this prospectus. In addition to historical consolidated financial information, 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 prospectus, particularly in “Risk Factors.”

Overview

We are a leading provider of on-demand software that enables companies to engage in relationship marketing across the interactive channels that consumers are embracing today—email, mobile, social and the web. The Responsys Interact Suite, the core element of our solution, provides marketers with a set of integrated applications to create, execute, optimize and automate marketing campaigns. Our solution is comprised of our on-demand software and our professional services, all focused on enabling the marketing success of our customers.

The following is a timeline of significant milestones in our corporate history:

 

   

We were founded in 1998 to provide on-demand software designed to enable marketers to design, execute and manage email campaigns. Our core product, Interact Campaign, was commercially released in 1999.

 

   

In 2004, under a new management team, we broadened our strategy from solely an email campaign management platform to a set of integrated applications for creating, executing, optimizing and automating email marketing campaigns.

 

   

In 2006, we acquired Inbox Marketing, Inc., a professional services firm, to increase the size and breadth of our professional services organization.

 

   

In 2007, we launched Interact Team to help marketers manage the campaign creation and deployment process by automating the design and tracking of campaign materials, communications, handoffs and approvals.

 

   

In 2008, we launched Interact Connect, which enables marketers to automate the transfer of data to and from our on-demand software platform and their customer data management systems and those of third parties.

 

   

In 2009, we achieved a key technology milestone by releasing our next-generation on-demand software platform, which integrated all of our core applications into one platform, the Responsys Interact Suite. Substantially all of our new customers added since this time are on this platform and we are migrating our other existing customers to this platform over time. This suite includes a new application, Interact Program, for visually designing, managing and automating complex marketing programs with multiple stages across multiple channels. In 2009, we also acquired Smith-Harmon, Inc. to increase the size and breadth of our professional services organization.

 

   

In April 2010, we added mobile and social functionality to Interact Campaign to coordinate the creation, scheduling, automation and tracking of short message service, or text message, marketing campaigns and promotions to consumers who engage with our customers’ brands as Facebook fans or Twitter followers.

 

   

In July 2010, we acquired a non-controlling, fifty-percent equity interest in Eservices Group Pty Ltd, or Eservices, a privately-held company headquartered in Melbourne, Australia, and in January 2011 we

 

38


Table of Contents
 

acquired the remaining equity interests in Eservices. Following the acquisition, the company was renamed Responsys Pty Ltd. As of and for the year ended December 31, 2010, the investment is reflected in our consolidated financial statements using the equity method. We have consolidated our results with those of Eservices beginning in January 2011. We acquired Eservices to expand the scope of our business internationally, increase our customer base and grow our professional services and sales teams.

We derive revenue from subscriptions to our on-demand software and related professional services. As part of a subscription, a customer commits to a minimum monthly or quarterly fee that permits a customer to send up to a specified number of email messages. If a customer sends additional messages above the contracted level, the customer is required to pay additional per-message fees. No refunds or credits are given if a customer sends fewer messages than the contracted level. Customer agreements are non-cancellable for a minimum period, generally one year but ranging up to three years. Revenue from messages sent above contracted levels during the last three years has historically ranged from approximately 20% to 25% of our subscription revenue in any given 12-month period but varies from quarter to quarter due to seasonal, macroeconomic and other factors. We have historically had higher subscription revenue in our fourth quarter than other quarters in a given 12-month period, primarily due to revenue from messages sent above contracted levels. Subscription revenue accounted for 79.6% and 73.7% of our total revenue during the years ended December 31, 2009 and 2010, respectively. Subscription revenue is driven primarily by the number of customers, demand from existing customers, contracted value of the subscription agreements and number of messages sent above contracted levels. To date, our customers have primarily used email messages for their marketing campaigns, and email will continue to be the primary driver of our subscription revenue in the foreseeable future. However, if customers increase their use of other interactive channels in the future, we anticipate that revenue associated with email campaigns will decrease as a percentage of subscription revenue. Although revenue associated with our mobile, social and web channels has not been material to date, we believe that our cross-channel capabilities have been important factors in our new customers’ purchasing decisions.

Deferred revenue primarily consists of the unearned portion of billed professional services fees or fees for our on-demand software. As we bill nearly all our customers on a monthly or quarterly basis, our deferred revenue balance does not serve as a primary source of our future subscription revenue.

We sell subscriptions to our on-demand software and professional services primarily through a direct sales force. We target enterprise and larger mid-market companies that seek to implement more advanced marketing programs across interactive channels. Our customers are of varied size across a wide variety of industries, including retail and consumer, travel, financial services and technology. Our revenue from outside the United States as a percentage of total revenue was 15.4%, 13.5% and 10.8% for the years ended December 31, 2008, 2009 and 2010, respectively.

Our revenue growth over these periods has been driven by an increased number of customers with higher subscription fees. Although the overall number of customers has not changed substantially over the past three years, we have added larger enterprise customers with higher subscription commitments, higher messaging volumes and greater professional services demands. Our subscription revenue fluctuates as a result of seasonal variations in our business, principally due to timing of our customers’ sales and marketing cycles. We have historically had higher subscription revenue in our fourth quarter than in other quarters during a given 12-month period, primarily due to revenue from messages sent above contracted levels by our retail and consumer customers, and we currently anticipate that subscription revenue for the quarter ending March 31, 2011 will be between 10% and 15% lower than subscription revenue for the quarter ended December 31, 2010. Our cost of revenue and operating expenses have increased in absolute dollars over this period due to our need to increase bandwidth and capacity to support larger messaging volumes and the overall increased size of our business. Our 2008 net income reflects a one-time benefit of approximately $20.0 million from the release of our valuation allowance related to our deferred tax assets. We expect that our cost of revenue and operating expenses will continue to increase in absolute dollars and as a percentage of total revenue as we continue to invest in our growth and incur additional costs as a public company.

 

39


Table of Contents

Key Metrics

We regularly review a number of metrics to evaluate growth trends, measure our performance, establish budgets and make strategic decisions. We discuss revenue, gross margin, and the components of operating income and margin below under “Basis of Presentation,” and we discuss other key metrics below.

Subscription Dollar Retention Rate

We believe that our ability to retain our customers and expand their use of our software over time is an indicator of the stability of our revenue base and the long-term value of our customer relationships. We assess our performance in this area using a metric we refer to as our Subscription Dollar Retention Rate. Our Subscription Dollar Retention Rate metric is calculated by dividing (a) Retained Subscription Revenue by (b) Retention Base Revenue. We define Retention Base Revenue as subscription revenue from all customers in the prior period, and we define Retained Subscription Revenue as subscription revenue from that same group of customers in the current period. Our Subscription Dollar Retention Rate has averaged above 100% over the four quarters in each of the last three years.

Number of Customers

We believe that our ability to expand our customer base is an indicator of our market penetration and growth of our business as we continue to invest in our direct sales force and marketing initiatives. We define our number of customers as of the end of a particular quarter as the number of direct-billed subscription customers with $3,000 or more in committed subscription revenue for that quarter. We had 277 customers as of December 31, 2010. For more information about our customers, see “Business—Customers.”

Basis of Presentation

Revenue

Subscription Revenue

We derive our subscription revenue from subscriptions to our on-demand software. Subscription revenue primarily consists of revenue from contractually committed messaging and other fees and revenue from messages sent above contracted levels. Customer agreements are non-cancellable for a minimum period, generally one year but ranging up to three years. Our contracts provide our customers with access to our on-demand software and the ability to send up to a specified number of messages during each month or quarter in the contract term. If customers exceed the specified messaging volume, per-message fees are billed for the excess volume, generally at rates equal to or greater than the contracted minimum per-message fee. If customers send less than the specified number of messages, no rollover credit or refunds are given.

We recognize the aggregate minimum subscription fee payable ratably on a straight-line basis over the subscription term, provided that an enforceable contract has been signed by both parties, access to our software has been granted to the customer, the fee for the subscription is fixed or determinable and collection is reasonably assured. We do not recognize revenue in excess of the amount we have the right to invoice. Revenue for messages sent above contracted levels is recognized in the period in which the messages are sent. We also derive revenue from setup fees when the services are first activated. The setup fees are recorded as deferred revenue and recognized as revenue ratably over the estimated life of the customer relationship.

For a discussion of how we expect seasonal factors to affect our subscription revenue, see “—Quarterly Results of Operations” below.

Professional Services Revenue

Professional services revenue consists primarily of fees associated with campaign services, creative and strategic marketing services, technical services and education services. For more information about our professional services, see “Business—Our Services.” Our professional services are not required for customers to

 

40


Table of Contents

begin using our on-demand software. Our professional services engagements are typically billed on a fixed fee, time and materials or unit basis.

Cost of Revenue

Cost of Subscription Revenue

Cost of subscription revenue primarily consists of hosting costs, data communications expenses, personnel and related costs, including salaries and employee benefits, allocated overhead, software license fees, costs associated with website development activities, amortization expenses associated with capitalized software and depreciation and amortization expenses associated with computer equipment. To date, the expenses associated with capitalized software have not been material to our cost of subscription revenue. Expenses related to hosting and data communications are affected by the number of customers using our on-demand software, the complexity and frequency of their use, the volume of messages sent and the amount of data processed and stored. We plan to continue to significantly expand our capacity to support our growth, which will result in higher cost of subscription revenue in absolute dollars and as a percentage of subscription revenue.

Cost of Professional Services Revenue

Cost of professional services revenue primarily consists of personnel and related costs and allocated overhead. Our cost associated with providing professional services is significantly higher as a percentage of revenue than our cost of subscription revenue due to the labor costs associated with providing professional services. As it takes several months to ramp up a productive professional consultant, we generally increase our professional services capacity ahead of associated professional services revenue, which can result in lower margins in the given investment period. We expect the number of professional services personnel to increase in the future, which will result in higher cost of professional services revenue in absolute dollars and as a percentage of professional services revenue.

Operating Expenses

Research and Development

Research and development expenses primarily consist of personnel and related costs for our product development and product management personnel and allocated overhead. Our research and development efforts have been devoted primarily to increasing the functionality and enhancing the ease of use of our on-demand software and to improving scalability and performance. We expect that in the future, research and development expenses will increase as we extend our on-demand software offerings and develop new technologies and capabilities.

Sales and Marketing

Sales and marketing expenses primarily consist of personnel and related costs for our sales and marketing employees, including bonuses and commissions, the cost of marketing programs, promotional events and webinars, amortization of our acquired customer lists and allocated overhead. We expense sales commissions when the customer contract is signed because our obligation to pay a sales commission arises at that time. We plan to continue to invest in sales and marketing by increasing the number of direct sales personnel in order to add new customers and increase penetration within our existing customer base, expanding our domestic and international sales and marketing activities, building brand awareness and sponsoring additional marketing events. We expect that in the future, sales and marketing expenses will increase and continue to be our largest cost.

General and Administrative

General and administrative expenses consist primarily of personnel and related costs for administrative personnel and allocated overhead. In addition, general and administrative expenses include professional fees, bad

 

41


Table of Contents

debt expenses, sales and use tax expense and other corporate expenses. We anticipate that we will incur additional costs for personnel, systems and external professional services as we grow and operate as a public company, including higher legal, insurance and financial reporting expenses, and the additional costs to achieve and maintain compliance with Section 404 of the Sarbanes-Oxley Act. Accordingly, we expect that in the future, general and administrative expenses will increase.

Other Income (Expense)

Other income (expense) primarily consists of interest income, interest expense, foreign exchange gains (losses) and, for the year ended December 31, 2009, fair market value adjustments of our preferred stock warrant liability, and for the year ended December 31, 2010, fair value adjustments of our call and put options to purchase the remaining equity interests in Eservices. Interest income represents interest received on our cash and cash equivalents. Interest expense is associated with our outstanding capital leases. Foreign exchange gains (losses) relate to expenses and transactions denominated in currencies other than our functional currency.

Equity in Net Loss of Unconsolidated Affiliates

Equity in net loss of unconsolidated affiliates represents our proportionate share of operating results from our non-controlling equity investments in Eservices and Responsys Denmark A/S.

Results of Operations

The following tables set forth selected consolidated statements of income data for each of the periods indicated.

 

     Year Ended December 31,  
             2008                     2009                     2010          
     (in thousands)  

Revenue:

      

Subscription

   $ 41,047      $ 53,044      $ 69,284   

Professional services

     9,067        13,599        24,787   
                        

Total revenue

     50,114        66,643        94,071   
                        

Cost of revenue:(1)

      

Subscription

     12,399        15,109        20,221   

Professional services

     8,926        12,478        20,697   
                        

Total cost of revenue

     21,325        27,587        40,918   
                        

Gross profit

     28,789        39,056        53,153   
                        

Operating expenses:

      

Research and development(1)

     5,068        8,052        10,597   

Sales and marketing(1)

     15,681        15,494        20,849   

General and administrative(1)

     4,639        5,746        8,225   
                        

Total operating expenses

     25,388        29,292        39,671   
                        

Operating income

     3,401        9,764        13,482   

Total other income (expense), net

     (811     185        1,171   
                        

Income before income taxes

     2,590        9,949        14,653   

Benefit (provision) for income taxes

     17,857        (4,063     (5,821

Equity in net loss of unconsolidated affiliates

     —          —          (234
                        

Net income

   $ 20,447      $ 5,886      $ 8,598   
                        

 

42


Table of Contents

 

(1) Total cost of revenue and operating expenses include the following amounts related to stock-based compensation:

 

     Year Ended December 31,  
         2008              2009                  2010          
     (in thousands)  

Total cost of revenue

   $ 308       $ 332       $ 523   

Research and development

     264         280         331   

Sales and marketing

     400         461         694   

General and administrative

     478         563         958   

The following tables set forth selected consolidated statements of income data for each of the periods indicated as a percentage of total revenue.

 

     Year Ended December 31,  
         2008             2009                 2010          

Revenue:

      

Subscription

     81.9     79.6     73.7

Professional services

     18.1        20.4        26.3   
                        

Total revenue

     100.0        100.0        100.0   
                        

Cost of revenue:

      

Subscription

     24.7        22.7        21.5   

Professional services

     17.8        18.7        22.0   
                        

Total cost of revenue

     42.5        41.4        43.5   
                        

Gross profit

     57.5        58.6        56.5   
                        

Operating expenses:

      

Research and development

     10.1        12.1        11.3   

Sales and marketing

     31.3        23.2        22.2   

General and administrative

     9.3        8.6        8.7   
                        

Total operating expenses

     50.7        43.9        42.2   
                        

Operating income

     6.8        14.7        14.3   

Total other income (expense), net

     (1.6     0.3        1.2   
                        

Income before income taxes

     5.2        15.0        15.5   

Benefit (provision) for income taxes

     35.6        (6.1     (6.2

Equity in net loss of unconsolidated affiliates

     —          —          (0.2
                        

Net income

     40.8     8.9     9.1
                        

Comparison of Years Ended December 31, 2008, 2009 and 2010

Revenue

 

     Year Ended December 31,  
         2008             2009             2010      
     (dollars in thousands)  

Subscription revenue

   $ 41,047      $ 53,044      $ 69,284   

Percentage of total revenue

     81.9     79.6     73.7

Professional services revenue

   $ 9,067      $ 13,599      $ 24,787   

Percentage of total revenue

     18.1     20.4     26.3

 

43


Table of Contents

Subscription revenue. Subscription revenue for the year ended December 31, 2010 increased by $16.2 million, or 30.6%, over the year ended December 31, 2009. The increase was primarily due to a $7.4 million increase from new customers and a $5.4 million increase from existing customers. In addition, revenue from messages sent above contracted levels increased in absolute dollars from $12.8 million to $15.9 million, but decreased from 24.0% of subscription revenue to 22.9% of subscription revenue, for the years ended December 31, 2009 and 2010, respectively. Among our existing customers, approximately 26.1% of the increase was due to increased demand from a large customer that was added in early 2009 that continued to increase its use of our on-demand software in 2010.

Subscription revenue for the year ended December 31, 2009 increased by $12.0 million, or 29.2%, over the year ended December 31, 2008. The increase was primarily due to a $5.2 million increase from new customers and a $2.3 million increase from existing customers. In addition, revenue from messages sent above contracted levels increased from $8.5 million, or 20.8% of subscription revenue, to $12.8 million, or 24% of subscription revenue, for the years ended December 31, 2008 and 2009, respectively.

Professional services revenue. Professional services revenue for the year ended December 31, 2010 increased by $11.2 million, or 82.3%, over the year ended December 31, 2009. The increase was primarily due to an $8.0 million increase from existing customers increasing their use of our professional services generally and a $2.8 million increase from new customers. Among our existing customers, approximately 56.6% of the increase was due to increased demand from three large customers that were added in early and mid-2009 and that continued to ramp their use of our professional services in 2010.

Professional services revenue for the year ended December 31, 2009 increased by $4.5 million, or 50.0%, over the year ended December 31, 2008. The increase was primarily due to a $3.5 million increase from new customers and a $0.8 million increase from existing customers.

Cost of Revenue

 

     Year Ended December 31,  
         2008             2009             2010      
     (dollars in thousands)  

Cost of subscription revenue

   $ 12,399      $ 15,109      $ 20,221   

Percentage of subscription revenue

     30.2     28.5     29.2

Gross margin

     69.8     71.5     70.8

Cost of professional services revenue

   $ 8,926      $ 12,478      $ 20,697   

Percentage of professional services revenue

     98.4     91.8     83.5

Gross margin

     1.6     8.2     16.5

Cost of subscription revenue. Cost of subscription revenue for the year ended December 31, 2010 increased by $5.1 million, or 33.8%, over the year ended December 31, 2009. The increase was primarily due to a $2.5 million increase in personnel expenses due to the addition of employees, a $1.2 million increase in bandwidth expenses due to an expansion of our capacity in order to accommodate growth, a $1.0 million increase in depreciation and maintenance expenses associated with equipment for our data center and a $0.3 million increase in information technology expenses to support our larger operations team.

Cost of subscription revenue for the year ended December 31, 2009 increased by $2.7 million, or 21.9%, over the year ended December 31, 2008. The increase was primarily due to a $1.7 million increase in depreciation and maintenance expense associated with equipment for our data center, a $0.7 million increase in bandwidth expenses as a result of expansion of our capacity to accommodate growth and increased activity by existing customers and a $0.7 million increase in personnel expenses due to the addition of employees. The increases were partially offset by a $0.7 million decrease in outside consulting expenses as we decreased the use of outside consultants.

 

44


Table of Contents

Cost of professional services revenue. Cost of professional services revenue for the year ended December 31, 2010 increased by $8.2 million, or 65.9%, over the year ended December 31, 2009. The increase was primarily due to a $5.8 million increase in personnel expenses due to the addition of employees, a $0.8 million increase in outside consulting expenses due to an increased demand for our services, a $0.7 million increase in information technology expenses to support our larger professional services team and a $0.5 million increase in travel and entertainment expenses.

Cost of professional services revenue for the year ended December 31, 2009 increased by $3.6 million, or 39.8%, over the year ended December 31, 2008. The increase was primarily due to an increase of $3.5 million in personnel expenses due to the addition of employees, a $0.3 million increase in information technology to support our larger professional services team and a $0.2 million increase in facilities expenses.

Operating Expenses

Research and Development

 

     Year Ended December 31,  
     2008     2009     2010  
     (dollars in thousands)  

Research and development

   $ 5,068      $ 8,052      $ 10,597   

Percentage of total revenue

     10.1     12.1     11.3

Research and development expenses for the year ended December 31, 2010 increased by $2.5 million, or 31.6%, over the year ended December 31, 2009. The increase was primarily due to a $1.7 million increase in personnel expenses due to the addition of employees, a $0.3 million increase in hardware and software expenses and a $0.2 million increase in outside consulting services expenses.

Research and development expenses for the year ended December 31, 2009 increased by $3.0 million, or 58.9%, over the year ended December 31, 2008. The increase was primarily due to a $2.1 million increase in personnel expenses due to the addition of employees and a $0.5 million decrease in capitalized research and development costs.

Sales and Marketing

 

     Year Ended December 31,  
     2008     2009     2010  
     (dollars in thousands)  

Sales and marketing

   $ 15,681      $ 15,494        20,849   

Percentage of total revenue

     31.3     23.2     22.2

Sales and marketing expenses for the year ended December 31, 2010 increased by $5.4 million, or 34.6%, over the year ended December 31, 2009. The increase was primarily due to a $2.4 million increase in personnel expenses due to the addition of employees, a $0.8 million increase in commission and bonus expenses as a result of an increase in new customers and increased revenue from existing customers, a $0.5 million increase in advertising and promotion expenses due to expansion of our domestic and international sales and marketing activities, a $0.7 million increase in travel and entertainment expenses, a $0.2 million increase in information technology expenses and a $0.2 million increase in stock-based compensation.

Sales and marketing expenses for the year ended December 31, 2009 decreased by $0.2 million from the year ended December 31, 2008. The decrease was primarily due to a $0.2 million decrease in amortization expense for certain intangible assets that became fully amortized at the beginning of 2009.

 

45


Table of Contents

General and Administrative

 

     Year Ended December 31,  
     2008     2009     2010  
     (dollars in thousands)  

General and administrative

   $ 4,639      $ 5,746      $ 8,225   

Percentage of total revenue

     9.3     8.6     8.7

General and administrative expenses for the year ended December 31, 2010 increased by $2.5 million, or 43.1%, over the year ended December 31, 2009. The increase was primarily due to a $1.4 million increase in legal and accounting expenses as a result of a multi-year audit and legal activity to support company growth, a $0.5 million increase in personnel expenses due to the addition of employees, a $0.4 million increase in expenses due to the acquisition of a non-controlling interest in Eservices, a $0.4 million increase in stock-based compensation and a $0.5 million increase in outside consulting expenses, partially offset by a $0.9 million decrease in sales and use tax liability.

General and administrative expenses for the year ended December 31, 2009 increased by $1.1 million, or 23.9%, over the year ended December 31, 2008. The increase was primarily due to a $0.5 million increase in bad debt expense and a $0.3 million increase in personnel expenses due to an increase in headcount.

Total Other Income (Expense), Net

 

     Year Ended December 31,  
     2008     2009      2010  
     (dollars in thousands)  

Total other income (expense), net

   $ (811   $ 185       $ 1,171   

Other income (expense), net for the year ended December 31, 2010 increased by $1.0 million over the year ended December 31, 2009. The increase was primarily due to a $1.5 million adjustment in the fair value of our call and put options to purchase the remaining equity interest in Eservices.

Other income (expense), net for the year ended December 31, 2009 decreased by $1.0 million over the year ended December 31, 2008. The change in total other income (expense), net was primarily due to favorable Euro and British Pound Sterling currency exchange fluctuations.

Benefit (Provision) for Income Taxes

 

     Year Ended December 31,  
     2008      2009     2010  
     (dollars in thousands)  

Benefit (provision) for income taxes

   $ 17,857       $ (4,063   $ (5,821

Effective tax rate

     *         40.8     39.7

 

* Not meaningful

Provision for income taxes for the year ended December 31, 2010 increased by $1.8 million over the year ended December 31, 2009. The effective tax rate was 40.8% and 39.7% for the years ended December 31, 2009 and 2010, respectively.

Provision for income taxes for the year ended December 31, 2009 was $4.1 million compared to a benefit for income taxes for the year ended December 31, 2008 of $17.9 million. The provision for income taxes for the year ended December 31, 2009 is comprised primarily of U.S. federal and state taxes. In 2008, we determined that it was more likely than not that deferred tax assets would be realized and adjusted the valuation allowance, which resulted in an income tax benefit of $20.0 million.

 

46


Table of Contents

Equity in Net Loss of Unconsolidated Affiliates

 

     Year Ended December 31,  
     2008      2009      2010  
     (dollars in thousands)  

Equity in Net Loss of Unconsolidated Affiliates

   $       $       $ (234

We recognized an equity loss in unconsolidated affiliates for the year ended December 31, 2010 of $0.2 million as a result of our non-controlling equity investments made in Eservices and Responsys Denmark A/S.

Quarterly Results of Operations

The following tables set forth selected unaudited quarterly consolidated statements of income data for the eight most recent quarters in the period ended December 31, 2010, as well as the percentage of total revenue for each line item shown. The financial information presented for the interim periods has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the results of operations for such periods. This data should be read in conjunction with the audited consolidated financial statements and the related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results to be expected for any future period.

 

     Three Months Ended,  
     Mar. 31,
2009
    June 30,
2009
    Sep. 30,
2009
    Dec. 31,
2009
    Mar. 31,
2010
    June 30,
2010
    Sep. 30,
2010
    Dec. 31,
2010
 
     (in thousands)  

Revenue:

                

Subscription

   $ 11,793      $ 12,625      $ 13,038      $ 15,588      $ 14,853      $ 15,479      $ 16,606      $ 22,346   

Professional services

     3,025        3,041        3,231        4,302        4,528        6,097        5,836        8,326   
                                                                

Total revenue

     14,818        15,666        16,269        19,890        19,381        21,576        22,442        30,672   
                                                                

Cost of revenue(1):

                

Subscription

     3,638        3,750        3,729        3,992        4,321        4,884        5,348        5,668   

Professional services

     3,080        2,985        2,984        3,429        4,247        4,426        5,291        6,733   
                                                                

Total cost of revenue

     6,718        6,735        6,713        7,421        8,568        9,310        10,639        12,401   
                                                                

Gross profit

     8,100        8,931        9,556        12,469        10,813        12,266        11,803        18,271   
                                                                

Operating expenses:

                

Research and development(1)

     1,716        1,936        2,370        2,030        2,162        2,628        2,695        3,112   

Sales and marketing(1)

     3,565        3,549        3,515        4,865        4,739        5,025        5,355        5,730   

General and administrative(1)

     1,241        1,351        1,476        1,678        1,687        1,936        2,789        1,813   
                                                                

Total operating expenses

     6,522        6,836        7,361        8,573        8,588        9,589        10,839        10,655   
                                                                

Operating income

     1,578        2,095        2,195        3,896        2,225        2,677        964        7,616   

Total other income (expense), net

     (34     359        (100     (40     (218     (70     (241     1,700   
                                                                

Income before income taxes

     1,544        2,454        2,095        3,856        2,007        2,607        723        9,316   

Provision for income taxes

     (627     (928     (865     (1,643     (877     (984     (200     (3,760

Equity in net loss of unconsolidated affiliates

                                               (171     (63
                                                                

Net income

   $ 917      $ 1,526      $ 1,230      $ 2,213      $ 1,130      $ 1,623      $ 352      $ 5,493   
                                                                

 

47


Table of Contents

 

(1) Total cost of revenue and operating expenses include the following amounts related to stock-based compensation:

 

     Three Months Ended,  
     Mar. 31,
2009
     June 30,
2009
     Sep. 30,
2009
     Dec. 31,
2009
     Mar. 31,
2010
     June 30,
2010
     Sep. 30,
2010
     Dec. 31,
2010
 
     (in thousands)  

Total cost of revenue

   $ 69       $ 76       $ 92       $ 95       $ 108       $ 104       $ 106       $
205
  

Research and development

     68         64         74         74         82         78         79         92   

Sales and marketing

     95         94         133         139         141         134         140         279   

General and administrative

     116         116         163         168         205         192         202         359   

The following tables set forth selected consolidated statements of income data for each of the periods indicated as a percentage of total revenue.

 

     Three Months Ended,  
     Mar. 31,
2009
    June 30,
2009
    Sep. 30,
2009
    Dec. 31,
2009
    Mar. 31,
2010
    June 30,
2010
    Sep. 30,
2010
    Dec. 31,
2010
 

Revenue:

                

Subscription

     79.6     80.6     80.1     78.4     76.6     71.7     74.0     72.9

Professional services

     20.4        19.4        19.9        21.6        23.4        28.3        26.0        27.1   
                                                                

Total revenue

     100.0        100.0        100.0        100.0        100.0        100.0        100.0        100.0   
                                                                

Cost of revenue:

                

Subscription

     24.6        23.9        22.9        20.1        22.3        22.6        23.8        18.5   

Professional services

     20.8        19.1        18.3        17.2        21.9        20.5        23.6        22.0   
                                                                

Total cost of revenue

     45.4        43.0        41.2        37.3        44.2        43.1        47.4        40.5   
                                                                

Gross profit

     54.6        57.0        58.8        62.7        55.8        56.9        52.6        59.5   
                                                                

Operating expenses:

                

Research and development

     11.6        12.4        14.6        10.2        11.2        12.2        12.0        10.1   

Sales and marketing

     24.1        22.7        21.6        24.5        24.5        23.3        23.9        18.7   

General and administrative

     8.4        8.6        9.1        8.4        8.7        9.0        12.4        5.9   
                                                                

Total operating expenses

     44.1        43.7        45.3        43.1        44.4        44.5        48.3        34.7   
                                                                

Operating income

     10.5        13.3        13.5        19.6        11.4        12.4        4.3       
24.8
  

Total other income (expense), net

     (0.2     2.3        (0.6     (0.2     (1.1     (0.3     (1.1     5.5   
                                                                

Income before income taxes

     10.3        15.6        12.9        19.4        10.3        12.1        3.2        30.3   

Provision for income taxes

     (4.2     (5.9     (5.3     (8.3     (4.5     (4.6     (0.9     (12.3

Equity in net loss of unconsolidated affiliates

                                               (0.8     (0.2
                                                                

Net income

     6.1     9.7     7.6     11.1     5.8     7.5     1.5     17.8
                                                                

In general, our revenue has increased as a result of an increase in customers, increased demand from existing customers, increases in revenue from messages sent above contracted levels and expansion of our professional services activity. In most of the quarters presented, we added sales personnel to focus on adding new customers and increasing penetration within our existing customer base and added services personnel to support our growth in professional services.

Our subscription revenue fluctuates as a result of seasonal variations in our business, principally due to timing of our customers’ sales and marketing cycles. Based on our mix of customers in the retail and consumer industry, we have historically had higher subscription revenue in our fourth quarter than other quarters in a given 12-month period, primarily due to revenue from messages sent above contracted levels. In accordance with this trend, our subscription revenue in the fourth quarter of 2009 exceeded subscription revenue in the preceding three

 

48


Table of Contents

quarters as well as the first and second quarters of 2010. Our subscription revenue continued to grow in each quarter of 2010 and grew significantly more in the fourth quarter due to the seasonality noted above. We expect to experience seasonality in the future and subscription revenue in the fourth quarter of 2010 may be higher than in each of the first three quarters of 2011.

Our gross profit in absolute dollars increased sequentially in all but two quarters presented. Gross margin has generally increased as we realized improved economies of scale in our operations and professional services organizations, with the exception of the first and third quarters of 2010, which primarily resulted from additions of employees in our professional services organization. Investments in the professional services organization can increase the costs of professional services without a commensurate increase in revenue as newly hired employees ramp in productivity.

Total operating expenses have increased in absolute dollars in seven of the eight quarters presented, primarily due to increased salaries and benefits associated with additions of employees to support the growth of our business. Research and development expenses for the quarter ended December 31, 2009 decreased by $0.3 million as we capitalized additional development costs in accordance with FASB ASC No. 350-40. Sales and marketing expenses increased in the fourth quarter of 2009 due to an increase in sales commissions, and an increase in advertising and promotion expenses due primarily to our annual customer conference. General and administrative expenses decreased for the fourth quarter of 2010 due to a $0.9 million decrease in sales tax liability.

See “—Overview” and “—Basis of Presentation” for a discussion of trends and planned investments in our growth that will impact our future quarterly results.

Liquidity and Capital Resources

 

     Year Ended December 31,  
     2008     2009         2010      
     (in thousands)  

Net cash provided by operating activities

   $ 5,255      $ 12,902      $ 19,420   

Net cash used in investing activities

     (6,390     (3,960     (15,685

Net cash provided by (used in) financing activities

     106        (341     (5,715

Effect of foreign exchange rate changes on cash and cash equivalents

     (191     19        114   
                        

Net increase (decrease) in cash and cash equivalents

   $ (1,220   $ 8,620      $ (1,866
                        

To date, we have financed our operations primarily through private placements of preferred stock and common stock and cash from operating activities. As of December 31, 2010, we had $13.9 million of cash and cash equivalents and $27.0 million of working capital.

Net cash provided by operating activities. Cash provided by operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business, the increase in the number of customers using our on-demand software and professional services and the amount and timing of customer payments. Cash provided by operations has historically resulted from net income driven by sales of subscriptions to our on-demand software and professional services and adjusted for non-cash expense items such as depreciation and amortization of property and equipment, stock-based compensation and changes in our deferred tax assets.

For the year ended December 31, 2010, net cash provided by operating activities was a result of $8.6 million of net income primarily due to the increased growth of our revenue derived from sales of subscriptions to our on-demand software and professional services, and $11.5 million from non-cash items, partially offset by a $0.7 million decrease due to changes in our operating assets and liabilities. As a result of our growth, we experienced an increase in our accounts receivable balance in the amount of $4.4 million, which was partially offset by an increase of $3.4 million in our deferred revenue balance.

 

49


Table of Contents

For the year ended December 31, 2009, net cash provided by operating activities was the result of $5.9 million of net income primarily due to the increased growth of our revenue derived from sales of subscriptions to our on-demand software and professional services, increased by $9.6 million for non-cash items. In addition, we had a decrease in net cash provided by operating activities due to changes in our operating assets and liabilities in the amount of $2.6 million, which was primarily the result of an increase in our accounts receivable balance in the amount of $4.0 million due to our growth, partially offset by an increase of $0.5 million in deferred revenue for amounts billed but not yet recognized. This was partially offset by an increase in accrued compensation in the amount of $1.3 million, which was caused by an increase in employee bonuses and sales commissions.

For the year ended December 31, 2008, net cash provided by operating activities was the result of $20.4 million of net income primarily due to the increased growth of our revenue derived from sales of subscriptions to our on-demand software and professional services, reduced by $13.2 million for non-cash items. The non-cash items for the year ended December 31, 2008 primarily consisted of $18.1 million from the release of our valuation allowance on our deferred tax assets. In addition, we had a decrease in net cash provided by operating activities due to changes in our operating assets and liabilities in the amount of $2.0 million, which was primarily the result of an increase in our accounts receivable balance in the amount of $2.0 million due to our growth.

Net cash used in investing activities. For the year ended December 31, 2010, cash used in investing activities consisted of $7.9 million for purchases of property and equipment, $7.0 million used to make equity investments in unconsolidated affiliates, $0.4 million of capitalized software costs and $0.3 million for an additional payment on the Smith-Harmon acquisition. In general, our purchases of property and equipment are primarily for data center equipment and network infrastructure to support our customer base, as well as equipment for supporting our increasing employee headcount.

For the year ended December 31, 2009, cash used in investing activities consisted of $2.2 million for purchases of property and equipment, $0.8 million of capitalized software costs and $0.9 million for the initial payment for the Smith-Harmon acquisition.

For the year ended December 31, 2008, cash used in investing activities consisted of $4.8 million for purchases of property and equipment, $1.3 million of capitalized software costs and $0.3 million for the final payment for the acquisition of Loyalty Matrix.

Net cash provided by (used in) financing activities. For the year ended December 31, 2010, cash provided by (used in) financing activities consisted of $5.7 million in payments for the repurchase of our common stock, $0.7 million in payments for direct costs incurred in connection with the preparation of this registration statement, and $0.4 million in payments in connection with our capital lease obligations, partially offset by $0.3 million in proceeds from the issuance of our common stock in connection with stock option exercises, $0.6 million in proceeds from the early exercise of stock options and $0.2 million from excess tax benefits from our stock-based compensation.

For the year ended December 31, 2009, cash provided by (used in) financing activities consisted of $(0.5) million in payments on our capital lease obligations and $0.2 million in proceeds from the issuance of our common stock in connection with stock option exercises.

For the year ended December 31, 2008, cash provided by financing activities consisted of $0.1 million in proceeds from the issuance of our common stock in connection with stock option exercises.

Capital resources. We believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities and the timing and extent of spending to

 

50


Table of Contents

support product development efforts and expansion into new territories, the timing of introductions of new features and enhancements to our on-demand software. To the extent that existing cash and cash equivalents and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. We may also seek to invest in, or acquire complementary businesses, applications or technologies, any of which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Commitments

We generally do not enter into long-term minimum purchase commitments. Our principal commitments consist of obligations under capital leases for equipment and operating leases for our facilities. The following table summarizes our commitments to settle contractual obligations in cash under capital and operating leases as of December 31, 2010.

 

     Total      Payment Due by Period  
        Less than
1 Year
     1-3
Years
     3-5
Years
     More than
5 Years
 
     (in thousands)   

Operating lease obligations

   $ 5,161       $ 2,176       $ 2,911       $ 74       $   

Capital lease obligations

     417         417                           
                                            

Total contractual obligations

   $ 5,578       $ 2,593       $ 2,911       $ 74       $   
                                            

Subsequent to December 31, 2010, we acquired an operating lease as part of our acquisition of Eservices and we entered into a lease agreement for a new office space in Chicago, Illinois with lease payments of approximately $0.6 million and $0.5 million, respectively, over the terms of the leases. The remaining term of the Eservices lease is approximately 2 years and the Chicago lease is for approximately 2 years.

In July 2010, we acquired 50% of the common shares of Eservices, a privately-held company headquartered in Melbourne, Australia for $6.7 million (AUD $7.8 million) in cash, of which, $0.4 million was unpaid as of December 31, 2010. On January 3, 2011, we completed the acquisition of the remaining equity interests of Eservices. The acquisition was consummated pursuant to the Share Sale and Shareholders Agreement dated as of July 1, 2010, as amended January 1, 2011, which accelerated the purchase of the remaining 50% of the common shares of Eservices for $8.3 million (AUD $8.0 million), which consisted of $7.1 million paid in cash and 148,648 shares of our common stock valued at approximately $1.2 million.

From time to time, in the normal course of business, we indemnify third parties with whom we enter into contractual relationships, including customers, lessors, and parties to other transactions, with respect to certain matters. We have agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third-party claims that our on-demand software when used for its intended purpose infringes the intellectual property rights of such other third parties, or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to our limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, payments made under these obligations have not been material.

We have established a reserve for sales and use taxes. A variety of factors could affect the liability, which factors include recovery of amounts from customers and any changes in relevant statutes in the various states in which we have done business. To the extent that the actual amount of our liabilities for sales and use taxes materially differs from the amount we have reserved on our consolidated balance sheet, our future results of operations and cash flows could be negatively affected. We plan to begin invoicing our customers in certain states for sales and use taxes.

 

51


Table of Contents

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 been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in note 2 to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our condensed consolidated financial condition and results of operations.

Revenue Recognition

We recognize revenue in accordance with ASC No. 605-25, Revenue Recognition. Our revenue is primarily derived from sales of subscriptions to our on-demand software. Subscription revenue primarily consists of revenue from contractually committed messaging and revenue from messages sent above contracted levels. Customers do not have the contractual right to take possession of our on-demand software. Accordingly, we recognize the aggregate minimum subscription fee on a straight-line basis over the subscription term, provided that an enforceable contract has been signed by both parties, access to our software has been granted to the customer, the fee for the subscription is fixed or determinable and collection is reasonably assured. We do not recognize revenue in excess of the amount we have the right to invoice. Should a customer exceed the specified contractual messaging volume, per-message fees are billed for the excess volume. We recognize revenue for messages sent above contracted levels in the period in which the messages are sent. We also derive revenue from setup fees when the services are first activated. The setup fees are recorded as deferred revenue and recognized as revenue ratably over the estimated life of the customer relationship.

We also derive revenue from professional services. Professional services revenue consists primarily of fees associated with campaign services, creative and strategic marketing services, technical services and education services. Revenue from professional services is recognized as services are rendered for time and material engagements or using a proportional performance model based on services performed for fixed fee consulting engagements. Education services revenue is recognized after the services are performed. Professional services, when sold with on-demand software subscriptions, are accounted for separately when these services have value to the customer on a standalone basis.

At the inception of a customer contract, we make an assessment as to that customer’s ability to pay for the services provided. We base our assessment on a combination of factors, including the successful completion of a credit check or financial review, our collection experience with the customer, and other forms of payment assurance. If we subsequently determine that collection from the customer is not reasonably assured, we record an allowance for doubtful accounts and bad debt expense for all of that customer’s unpaid invoices and cease recognizing revenue for continued services provided until cash is received from the customer. Changes in our estimates and judgments about whether collection is reasonably assured would change the timing of revenue or the amount of bad debt expense that we recognize.

 

52


Table of Contents

Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred revenue consists of the unearned portion of professional services fees or the unearned portion of fees from subscriptions to our on-demand software.

Retrospective adoption of new accounting principle. In October 2009, the FASB amended the accounting standards for multiple deliverable revenue arrangements to:

 

   

provide updated guidance regarding 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 its best estimate of selling price, or BESP, of deliverables if a vendor does not first have vendor-specific objective evidence, or VSOE, of selling price or does not have third-party evidence, or 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.

We elected to adopt this accounting guidance on a retrospective basis. We believe retrospective adoption provides the most comparable and useful financial information for financial statement users, is more consistent with the information our management uses to evaluate our business, and better reflects the underlying economic performance of our company. Our consolidated financial statements and the notes to our consolidated financial statements presented herein reflect the retrospective adoption of the new accounting principle.

Revenue recognition for arrangements with multiple deliverables. A multiple-element arrangement includes the sale of a subscription to our on-demand software with one or more associated professional service offerings, each of which are individually considered separate units of accounting. In determining whether professional services represent a separate unit of accounting we consider the availability of the services from other vendors. We allocate revenue to each element in a multiple-element arrangement based upon the relative selling price of each deliverable.

We are not able to demonstrate VSOE or TPE of selling price with respect to sales of subscriptions to our on-demand software. We do not have sufficient instances of separate sales of subscriptions nor are we able to demonstrate sufficient pricing consistency with respect to such sales. We also considered that no other vendor sells similar subscriptions given the unique nature and functionality of our service offering, and therefore have determined that we are not able to establish TPE of selling price. Therefore, we have determined the BESP of subscriptions to our on-demand software based on the following:

 

   

The list price, which represents a component of our current go-to market strategy, as established by senior management taking into consideration factors such as the competitive and economic environment.

 

   

An analysis of the historical pricing with respect to both our bundled and standalone arrangements to subscriptions to our on-demand software.

We have established VSOE of selling price of professional services based on an analysis of separate sales of such professional services.

Accounting for Income Taxes

We account for income taxes using an asset and liability approach to record deferred income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes, and such amounts recognized for income tax purposes, net of operating loss carry forwards and other tax credits, measured by applying currently enacted tax laws. Valuation allowances are provided when necessary to reduce deferred tax assets to an amount that is more-likely-than-not to be realized.

 

53


Table of Contents

On January 1, 2007, we adopted the authoritative guidance in ASC 740, Income Taxes, 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. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. In 2008, we determined that it was more likely than not that the deferred tax assets would be realized and adjusted the valuation allowance, which resulted in an income tax benefit of $20.0 million.

With the adoption of the guidance, companies are required to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustment would be recorded directly to retained earnings and reported as a change in accounting principle as of the date of adoption. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Our policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. See note 11 for additional information, including the effects of adoption on our consolidated financial position, results of operations and cash flows.

Goodwill

Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net tangible and identifiable intangible assets acquired. In accordance with FASB ASC No. 350-10, IntangiblesGoodwill and Other, goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We have determined that we operate in one reporting unit and have selected November 30 as the date to perform our annual impairment test. In the valuation of our goodwill, we must make assumptions regarding estimated future cash flows to be derived from our reporting unit. If these estimates or their related assumptions change in the future, we may be required to record impairment for these assets. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of our company to its net book value, including goodwill. If the net book value exceeds its fair value, then we perform the second step of the goodwill impairment test to determine the amount of the impairment loss. The impairment loss would be calculated by comparing the implied fair value of our company to its net book value. In calculating the implied fair value of our goodwill, the fair value of our company is allocated to all of the other assets and liabilities based on their fair values. The excess of the fair value of a company over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized when the carrying amount of goodwill exceeds its implied fair value. As of December 31, 2010, the goodwill balance was $1.3 million. No impairment of goodwill was recorded for the years ended December 31, 2008, 2009 or 2010.

Long-lived Assets, Purchased Intangible Assets and Equity Method Investments

Purchased intangible assets with a determinable economic life and long-lived assets are carried at cost, less accumulated amortization and depreciation. Amortization and depreciation is computed over the estimated useful life of each asset on a straight-line basis. Equity method investments are carried at cost and are adjusted for our share in the equity method investment earnings. We review our long-lived assets, purchased intangible assets and equity method investments for impairment in accordance with FASB ASC No. 360-10, Property, Plant and Equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value of the assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their

 

54


Table of Contents

eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, we would recognize an impairment loss based on the fair value of our assets.

Accounting for Stock-based Awards

On January 1, 2006, we adopted FASB ASC No. 718-20, Compensation—Stock Compensation, or ASC 718, which required us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. We elected to use the prospective transition method such that ASC 718 applies to new awards and to awards modified, repurchased, or canceled after the effective date.

Generally, stock options granted to employees vest 25% one year from the vesting commencement date and 1/48th each month thereafter, and have a contractual term of 10 years. We recognize stock-based compensation expense over the requisite service period of the individual grant, generally, equal to the vesting period.

Prior to January 1, 2006, we accounted for an award of equity instruments using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and FASB Interpretation (FIN) No. 44, Accounting for Certain Transactions involving Stock Compensation—an interpretation of APB Opinion No. 25. Under this method, for grants prior to January 1, 2006, no compensation expense was recognized for employee stock options granted with exercise prices greater than or equal to the fair value of the underlying common stock at date of grant. If the exercise price is less than the market value at the date of grant, the difference is recognized as deferred compensation expense, which is amortized over the vesting period. Compensation costs for the portion of awards for which the required service period has not been rendered (such as unvested options) that were outstanding as of January 1, 2006, continue to be accounted for under the provisions of APB Opinion No. 25 and were recognized as the remaining required services are rendered.

The Black-Scholes pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable; these characteristics are not present in our option grants. Existing valuation models, including the Black-Scholes model, may not provide reliable measures of the fair value of our stock-based compensation. Consequently, there is a risk that our estimates of the fair value of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon exercise. Stock options may expire or result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements.

As of December 31, 2010, we had approximately $5.1 million of unrecognized stock-based compensation expense related to non-vested stock option awards that we expect to be recognized over a weighted-average period of 1.76 years.

We calculated the fair value of options granted using the Black-Scholes pricing model with the following assumptions:

 

     Year Ended December 31,  
     2008     2009         2010      
                    

Dividend yield(1)

     —       —       —  

Risk-free rate(2)

     2.94 -3.48     2.94 - 3.48     2.12-2.52

Expected volatility(3)

     48.89 - 56.02     48.89 - 50.94     50.00-51.02

Expected term—in years(4)

     6.06 - 8.00        3.77 - 6.06        6.06   

 

(1) We have not issued dividends to date and do not anticipate issuing dividends.

 

55


Table of Contents
(2) The risk-free interest rate is based on the implied yield then currently available on U.S. Treasury zero coupon issues with an equivalent remaining term.

 

(3) We estimated volatility for option grants by evaluating the average historical volatility of companies we believe to be in our peer group for the period immediately preceding the option grant for a term that is approximately equal to the options’ expected life.

 

(4) The expected term of our options represents the period that the stock-based awards are expected to be outstanding. We have elected to use the simplified method described in SAB No. 107 to compute expected term. Our stock plan provides for options that have a 10-year term.

Our board of directors has historically set the exercise price of options to purchase our common stock on a price per share not less than the fair value of the underlying common stock at the time of grant. To determine the fair value of our common stock, our board of directors considered many factors, including but not limited to:

 

   

independent third-party valuations using the methodologies described below;

 

   

our current and historical operating performance;

 

   

our expected future operating performance;

 

   

our financial condition at the grant date;

 

   

the liquidation rights and other preferences of our preferred stock;

 

   

our then-current book value per share;

 

   

input from management;

 

   

the lack of marketability of our common stock;

 

   

the potential future marketability of our common stock; and

 

   

the business risks inherent in our business and in high technology companies generally.

The following table summarizes all option grants from January 1, 2009 through the date of this prospectus:

 

Grant Date

   Number of
Options Granted
     Per Share
Exercise Price
     Common Stock
Fair Value Per
Share
at Grant Date
 

March 11, 2009

     213,750       $ 2.28       $ 2.28   

July 22, 2009(1)

     2,784,874         2.60         2.60   

December 8, 2009(2)

     366,250         3.08         3.08   

December 30, 2009

     49,999         3.08         3.08   

June 8, 2010

     362,375         4.48         4.48   

December 15, 2010

     587,062         7.40         7.40   

March 29, 2011

     305,125         9.25         9.25   

 

(1) Includes previously granted options to purchase 2,562,500 shares of our common stock that were exchanged for six members of our management team. The exchange altered and extended the vesting term of the options and modified the performance criteria required for the options to become fully vested. The new option grants vest over a 119-month service period, or earlier upon achievement of a revenue milestone or a change in control of the company. We accounted for the change in terms as a stock option modification, which requires the unrecognized stock compensation expense associated with the previous grant to be added to the incremental compensation cost of the new grants. The incremental compensation cost is equal to the difference between the fair value of the modified stock options on the date of modification and their fair values immediately prior to modification. The total amount is then recognized over the remaining service period.

 

(2) Includes fully-vested options to purchase 25,000 shares of our common stock issued in connection with the acquisition of Smith-Harmon.

 

56


Table of Contents

In order to determine the fair value of our common stock underlying all option grants accounted for under ASC 718 and ASC 505-50, we have considered contemporaneous valuations of our common stock utilizing the discounted cash flow method and the comparable company method as well as an appropriate equity allocation model. As part of the comparable company method we analyzed a population of possible comparable companies and selected those companies that we considered to be the most comparable to us in terms of industry, revenues, growth and margins. We weighted the discounted cash flow and comparable company methods equally as we determined both methods relevant in estimating the value of our common stock. After estimating the value, the equity was allocated between the preferred and common stock using the option pricing model. For our valuations dated May 31, 2010 and December 1, 2010, we utilized the probability-weighted method which took into consideration the likelihood of an initial public offering and other scenarios.

The significant assumptions used in the valuation model are based on subjective future expectations combined with management judgment, which are described as follows.

Assumptions utilized in the discounted cash flow method include:

 

   

our revenue, operating margins, cash flow and EBITDA for the current and future years, determined as of the valuation date, based on our estimates;

 

   

a discount rate, which is applied to forecasted future cash flows in order to calculate the present value of those cash flows; and

 

   

a terminal value multiple, which is applied to our last projected fiscal year EBITDA to calculate the residual value of our future cash flows.

Assumptions in the comparable company method include:

 

   

our revenue, operating margins, cash flow and EBITDA for the current and future years, determined as of the valuation date based on our estimates;

 

   

multiples of market value to trailing 12 months revenue, determined as of the valuation date, based on a group of comparable companies we identified; and

 

   

multiples of market value of future revenue, determined as of the valuation date, based on third-party estimates for a group of comparable companies we identified.

Significant factors contributing to changes in common stock fair value at the date of each grant beginning in fiscal year 2009 were as follows:

March 2009. In March 2009, our revenue and net income continued to grow despite an adverse economic environment. In estimating the value as of March 2009, key assumptions included a 16% discount rate, a 15 times earnings terminal value multiple, market multiples using current and future revenue as well as future earnings estimates based on current market conditions. In addition, this analysis used a 23% lack of marketability discount. In this analysis, the option pricing model was utilized to estimate the common stock with key assumptions including a 65% volatility and a 1.5 year time to liquidity. In the absence of a public trading market for our common stock, our board of directors, with input from management, on March 11, 2009 determined the fair value of our common stock to be $2.28 per share.

July 2009. From April 2009 to July 2009, our revenue continued to grow and operating margins were higher than previous estimates. In June 2009 we had a limited production release of Responsys Interact Suite which integrated all of our core applications into one platform. This suite also included the first release of Interact Program for visually designing, managing, and automating complex marketing programs with multiple stages and across multiple channels. In estimating the value as of July 2009, key assumptions included a 17% discount rate, a 15 times earnings terminal value multiple, market multiples using current and future revenue as well as future earnings estimates based on current market conditions. In addition, this analysis used a 23% lack of marketability discount. In this analysis, the option pricing model was utilized to estimate the common stock with

 

57


Table of Contents

key assumptions including a 65% volatility and a 1.5 year time to liquidity. In the absence of a public trading market for our common stock, our board of directors, with input from management, on July 22, 2009 determined the fair value of our common stock to be $2.60 per share, an increase of 14% from the prior valuation date.

December 2009. From August 2009 to December 2009, our revenue and operating income continued to improve. We released Responsys Interact Suite for general availability in October 2009. In addition, we acquired Smith-Harmon in November 2009. With this acquisition we acquired a knowledgeable work force as well as the opportunity to increase our market share through the acquisition of the Smith-Harmon customer list. In estimating the value as of December 2009, key assumptions include a 15% discount rate, a 15 times earnings terminal value multiple, market multiples using current and future revenue as well as future earnings estimates based on current market conditions. In addition, this analysis used a 23% lack of marketability discount. In this analysis, the option pricing model was utilized to estimate the common stock with key assumptions including a 65% volatility, a 1.5 year time to liquidity and a long-term growth rate of 5%. In the absence of a public trading market for our common stock, our board of directors, with input from management, on December 8, 2009 determined the fair value of our common stock to be $3.08 per share, an increase of 18% from the prior valuation date.

June 2010. Our revenue declined in the first quarter of 2010 compared to the previous quarter due to the seasonality of some of our customer activity in the fourth quarter of the year. In the June 2010 quarter, revenue continued to grow. In February 2010, we released Interact Campaign for social to create, schedule, automate and track promotions to people who engage with their brands via Facebook and Twitter. In estimating the value as of June 2010, key assumptions included a 15% discount rate, a 5% long-term growth rate, market multiples using current and future revenue as well as future earnings estimates based on current market conditions. In addition, this analysis used a 22% lack of marketability discount. In this analysis, the probability-weighted method was utilized to estimate the common stock value due to the expected timing of a liquidity event. For this analysis, we assumed a 47.5% probability of an initial public offering, a 17.5% probability of a strategic sale and a 35% probability of remaining an independent private company. In the absence of a public trading market for our common stock, our board of directors, with input from management, on June 8, 2010 determined the fair value of our common stock to be $4.48 per share, an increase of 45% from the prior valuation date.

December 2010. From June 2010 to December 2010, our revenue continued to grow and it became more likely that we would pursue an initial public offering. In estimating the value as of December 2010, key assumptions included a 14% discount rate, a 5% long-term growth rate, and market multiples using current and future revenue as well as future earnings estimates based on current market conditions. In addition, this analysis used a 15% lack of marketability discount. In this analysis, the probability-weighted method was utilized to estimate the common stock value due to the expected timing of a liquidity event. For this analysis, we assumed a 70% probability of an initial public offering, a 20% probability of a strategic sale and a 10% probability of remaining an independent private company. In the absence of a public trading market for our common stock, our board of directors, with input from management, on December 15, 2010 determined the fair value of our common stock to be $7.40 per share, an increase of 65% from the prior valuation date.

March 2011. In March 2011, we determined the fair value of our common stock to be $9.25, the mid point of the range listed on the cover page of this prospectus, an increase of 25% from the prior valuation date.

New Accounting Pronouncements

Effective January 1, 2009, we adopted three accounting standard updates which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC 320-10-65, changes accounting requirements for other-than-temporary-impairment for debt securities by replacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it is not more likely-than-not that it will be required to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair

 

58


Table of Contents

value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates did not have a material impact on our consolidated financial statements.

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue Recognition), or ASU 2009-13 (formerly Emerging Issues Task Force Issue 08-1), and ASU 2009-14, Certain Arrangements That Include Software Elements, (amendments to FASB ASC Topic 985, Software), or ASU 2009-14 (formerly Emerging Issues Task Force Issue 09-3). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 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 have adopted the new accounting principle on a retrospective basis.

In December 2010, the FASB issued Accounting Standards Update 2010-29, “Business Combinations Topic (805): Disclosure of supplementary pro forma Information for Business Combinations”, or ASU 2010-29. ASU 2010-29 provides clarification on the presentation of pro forma information for business combinations and applies to public entities. ASU 2010-29 specifies that the pro forma disclosure should include revenue and earnings of the combined entity as though the business combination(s) during the current year had occurred as of the beginning of the comparable prior annual reporting period only if comparative financial statements are presented. It also expands the supplemental pro forma disclosures to include a description of the nature and amount of the material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective on a prospective basis for 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, 2010. We adopted this update as of January 1, 2011, and its adoption resulted in additional disclosures over our business combination acquisition of Eservices that was completed in January 2011.

Qualitative and Quantitative Disclosures about Market Risk

Foreign Currency Exchange Risk

We believe that there is no material risk of exposure to our results of operations and cash flows due to changes in foreign currency exchange rates. We do not engage in any foreign currency hedging to manage our exposure to fluctuations in foreign currency exchange rates.

Interest Rate Sensitivity

Interest income and expenses are sensitive to changes in the general level of U.S. interest rates. However, based on the nature and current level of our investments, which are primarily cash and money market accounts, we believe that we have no material risk of exposure to changes in interest rates.

Controls and Procedures

In connection with the audits of our financial statements for the years ended December 31, 2008, 2009 and 2010, our independent registered public accounting firm reported to our audit committee a material weakness in the design and operating effectiveness of our internal controls over financial reporting as defined by the standards established by the Public Company Accounting Oversight Board. A material weakness is a deficiency, or combination of deficiencies, that creates a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected in a timely manner.

 

59


Table of Contents

The material weakness reported by our independent registered public accounting firm was that we did not have sufficient personnel within our accounting function that possessed an appropriate level of experience to effectively perform the following:

 

   

identify, select and apply GAAP sufficient to provide reasonable assurance that transactions were being appropriately recorded; and

 

   

design control activities over the financial close and reporting process necessary to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements.

As a result, we experienced difficulties in reporting timely and accurate financial statements in compliance with GAAP and certain accounting transactions were not identified or properly assessed. As a result of this material weakness, we recorded material post-closing adjustments to our financial statements.

We are addressing the material weakness through process improvements and the hiring of additional finance personnel. In 2010, we added seven staff members to our finance organization, including a director of technical accounting and a revenue controller. We are also implementing additional procedures and training programs for all personnel involved in the preparation of our financial statements. We are continuing to add additional headcount in 2011. Our corporate controller will be leaving in April 2011. We have appointed an interim controller and will be seeking to hire a permanent controller, as well as additional accounting personnel, to continue to address our material weakness. We will not be able to fully address this material weakness until these steps have been completed.

We will not be able to assess whether the steps we are taking will fully remedy the material weakness in our internal control over financial reporting until we have fully implemented them and sufficient time passes in order to evaluate their effectiveness.

 

60


Table of Contents

BUSINESS

Overview

Responsys is a leading provider of on-demand software that enables companies to engage in relationship marketing across the interactive channels that consumers are embracing today—email, mobile, social and the web. Our on-demand software, the Responsys Interact Suite, provides marketers with a set of integrated applications to create, execute, optimize and automate marketing campaigns. Our solution consists of our on-demand software and professional services, all focused on enabling the marketing success of our customers.

The Responsys Interact Suite is an open and flexible software-as-a-service, or SaaS, platform. Our Interact Suite is comprised of several integrated applications that enable the design, management and automation of tasks and processes for executing email and cross-channel marketing campaigns. Our platform can also be used with third-party applications and data from real-time sources, allowing our customers to deliver targeted content to their customers and known prospects as part of their interactive marketing campaigns. We sell our on-demand software and professional services primarily through a direct sales force and target enterprise and larger mid-market companies that seek to implement more advanced marketing programs across interactive channels. As of December 31, 2010, we had 277 customers of varied size across a wide variety of industries, including retail and consumer, travel, financial services and technology.

For the years ended December 31, 2008, 2009 and 2010, our revenue was $50.1 million, $66.6 million and $94.1 million, representing year-over-year growth of 33% and 41% in 2009 and 2010, respectively. In addition, we generated net income of $20.4 million, $5.9 million and $8.6 million for the years ended December 31, 2008, 2009 and 2010, respectively.

Industry

Marketing is Undergoing a Significant Shift.

Marketing through traditional media, such as broadcast and print, has for many years been the primary means for large organizations to reach their consumer audiences. However, a number of interrelated trends in technology and information consumption are changing the way organizations market to their customers.

 

   

Adoption of digital technology has dramatically changed consumer behavior.    Today, rather than watching live television, an increasing number of consumers are watching recorded programming and fast-forwarding through commercials with the use of digital video recorders. The effectiveness of telemarketers is declining due to call-screening technologies, such as caller ID, the implementation of the National Do Not Call Registry and the decreasing role of the home telephone. The addressable audiences of traditional newspaper advertising are shrinking due to declines in newspaper circulation. Meanwhile, interactive channels, including email, mobile, social and the web, are rapidly supplanting traditional media channels as consumers’ primary entertainment and information sources for everything from news, sports and weather to the products and services they consume and the brands they choose.

 

   

The change in consumer behavior is driving marketers to shift spending from traditional media channels to interactive channels.    With this shift in consumer behavior, the role of marketing organizations has moved towards a focus on leveraging interactive channels to drive transactions for direct revenue generation, as opposed to simply branding and awareness. According to Forrester, spending on interactive marketing, which includes internet search and display advertising as well as email, mobile, and social media marketing, is expected to increase to nearly $55 billion and represent 21% of all U.S. marketing spend by 2014, as marketers shift dollars away from traditional media.(1) According to a survey conducted by Forrester, nearly 60% of respondents indicated they will increase their budgets for interactive marketing by shifting money away from traditional marketing channels.(1)

 

 

(1) Source: Forrester, US Interactive Marketing Forecast 2009 to 2014, July 6, 2009, as updated January 11, 2010.

 

61


Table of Contents
   

Within interactive spending, marketers are turning more to interactive channels, such as email, mobile, social and the web, to increase conversion, retention and lifetime value.    As spending shifts from traditional to interactive channels, relationship marketing offers a compelling value proposition relative to acquisition marketing.

 

   

Acquisition marketing.    Acquisition marketing focuses on acquiring new, unknown customers by driving them towards a potential purchase or sale. A common type of acquisition marketing is driving website traffic sourced from internet search engine links, effectively spending dollars in targeted search advertising to drive revenue from online transactions. With this type of acquisition marketing alone, which focuses on generating new business from new customers, additional search spending is required to generate additional sales. According to Forrester, in 2010, U.S. interactive marketing spend was approximately $26 billion in the primary acquisition marketing channels of search marketing and display advertising.(1)

 

   

Relationship marketing.    Relationship marketing focuses on building and maintaining a longer-term relationship with customers once they have been identified through acquisition marketing. Once the customer is known and has given the marketing organization permission to communicate with the customer, the marketer is able to send relevant and timely communications that have a greater propensity to generate a response. One example of relationship marketing is to deliver a text message to a customer’s mobile phone regarding a particular travel deal based on historical data that would suggest that the customer would potentially be interested in such a deal. According to Forrester, in 2010, U.S. interactive marketing spend was approximately $2.9 billion on email, mobile and social media, the primary interactive channels currently used for relationship marketing.(1)

With an increasing focus on delivering greater revenue from their marketing investments, marketing organizations are looking at relationship marketing channels as an important component of their broader arsenal of interactive marketing strategies. According to the Direct Marketing Association, in 2009, email had the highest return on investment of any marketing channel, returning $43.62 for every dollar spent, while the second highest return on investment was search marketing, which returned $21.85 for every dollar spent.(2) As a result of relationship marketing’s compelling value proposition, we believe organizations will be increasingly focused on obtaining permission from their customers to market to them across email, mobile and social channels. This will reduce their reliance on acquisition marketing and increase conversion, retention and lifetime value of their customers.

 

   

Spending on relationship marketing channels is expected to grow significantly.    According to Forrester, U.S. interactive marketing spend on email, mobile and social media, the primary interactive channels currently used for relationship marketing, is expected to grow from $2.9 billion in 2010 to nearly $6.5 billion by 2014, representing a compound annual growth rate of 22%, while spending on the primarily acquisition marketing channels is expected to grow at a compound annual growth rate of 17% during the same period.(1)

 

   

Email.    Despite the growth of other interactive channels, email remains the primary channel for an interactive marketer given its compelling return on investment. According to Forrester, U.S. email marketing spend is expected to grow from $1.4 billion in 2010 to $2.1 billion in 2014, representing a compound annual growth rate of 11%.(1)

 

   

Mobile.    According to Gartner, the number of mobile phones worldwide is expected to grow to over 4.9 billion in 2014.(1) The mobile channel provides marketers compelling benefits, such as location-based data as well as a channel for real time engagement with customers. Given mobile’s ability to generate immediate response, it can be an effective way to acquire new customers and capture permission for other marketing channels. According to Forrester, U.S. mobile marketing spend is expected to grow from $561 million in 2010 to $1.3 billion in 2014, representing a compound annual growth rate of 23%.(2)

 

 

 

(1)

Source: Forrester, US Interactive Marketing Forecast 2009 to 2014, July 6, 2009, as updated January 11, 2010.

(2)

Source: Direct Marketing Association, The Power of Direct Marketing: 2009-2010 Edition, October 2009.

 

62


Table of Contents
   

Social.    Facebook has announced it has over 500 million active users and Twitter has announced it has 175 million members, all connecting with friends, colleagues, causes and companies they like. In particular, according to Facebook, users spend an average of 55 minutes on Facebook daily. According to Forrester, U.S. social media marketing spend is expected to grow from $935 million in 2010 to $3.1 billion in 2014, representing a compound annual growth rate of 35%.(1)

 

   

Web.    While the majority of interactive marketing spend on the web is focused on acquisition-oriented internet search and display advertising, the web channel can also serve as an effective relationship marketing channel. Email, mobile and social media campaigns drive website visits, which are a critical component of interactive marketing campaigns as they not only enable permission capture, but also provide the means by which user conversion occurs to generate sales. Websites can build relationships using tools such as web forms to collect customer information, conversion-tracking tools to track customer web behavior, and customer data-driven targeting rules to personalize landing pages and content.

LOGO

Marketing Organizations Need a Next-generation On-demand Marketing Platform.

The shift from traditional to interactive marketing has caused marketing activities to become increasingly complex and dependent on technology. We believe marketing organizations need a next-generation marketing platform to effectively execute their campaigns across email and other interactive channels to consumers who have given them permission to send marketing communications through those channels.

 

   

Effective marketing requires an integrated cross-channel strategy.    With the increasing consumer use of these new relationship marketing channels, companies need to interact with their customers across these channels in an integrated fashion in order to market effectively. Therefore, marketing organizations need a platform to orchestrate campaigns across email, mobile, social and the web to provide an optimized and consistent customer experience.

 

   

There are now too many channels for marketers to manage without being heavily technology-enabled.    With the recent, rapid rise of the mobile and social channels and consumer demand for

 

 

 

(1)

Source: Forrester, US Interactive Marketing Forecast 2009 to 2014, July 6, 2009, as updated January 11, 2010.

 

63


Table of Contents
 

relevant and real-time interactions, marketers need the ability to execute and automate all of their campaigns across email and other interactive channels efficiently on a single platform.

 

   

There has been a proliferation in the amount of data on customer behavior and preferences across the interactive channels.    With the growth of e-commerce and interactive channels, marketers can track digital customer interactions in increasing detail. This wealth of information, when leveraged across a single platform, empowers marketers to increase relevance, and deepen customer relationships, which can help to drive better engagement and increased sales.

Existing Alternatives Are Inadequate.

Organizations have recognized the need for software that can manage customer relationships and be used for cross-channel marketing. The two most common alternatives are to use traditional “on-premise” software installed and customized at the customer’s location to manage marketing campaigns, or to assemble a collection of disparate software products designed to address specific marketing functions or channels. Both of these alternatives are increasingly inefficient and inadequate for the interactive marketer.

On-premise alternatives are not built to handle the demands of the interactive marketer and we believe suffer from the following key limitations:

 

   

Offline channel focused.    On-premise alternatives have traditionally been designed to support offline campaigns, primarily print and catalog, and not the real-time, interactive campaigns that today’s marketers increasingly need to deploy in order to reach their target customer base.

 

   

Limited campaign execution.    Traditional on-premise alternatives focus primarily on analyzing consumer data and grouping, or segmenting, consumers based on their interests or characteristics. These alternatives generally do not focus on executing the personalized campaigns that today’s marketers require to effectively communicate with consumers.

 

   

Batch-oriented focus.    Traditional on-premise alternatives focus on acquisition marketing with campaigns that deliver content to batches of consumers with little to no differentiation in preferences. These campaigns lack the personalized information needed to enhance messaging relevancy. Today’s marketers require the ability to deploy customized programs across interactive channels for existing customers.

 

   

Higher cost and implementation.    Traditional on-premise alternatives are built to be deployed with large IT teams over a multi-week to multi-month period, and require large up front investments by marketing organizations. Such a deployment process is ineffective for today’s marketer, who needs to execute quickly with minimal upfront capital investment and without the need to maintain any IT infrastructure.

The other common alternative is to patch together a series of disparate products that are each designed for either a single channel or only one aspect of marketing execution. For example, marketers can use one software product for email, another for mobile, another for social, and yet another to target content on their website. This approach brings with it the costs and inefficiencies of learning a variety of products and managing multiple vendor relationships. Furthermore, there can be significant limitations in coordinating data integration between disparate systems, an important step required to manage communications across different interactive channels and maintain a consistent experience for consumers. As a result, marketing strategies remain focused on specific interactive channels and marketing teams struggle to gain efficiencies marketing to their customers across an increasingly integrated and digital customer lifecycle.

Our Solution

We are a leading provider of on-demand software that enables companies to engage in relationship marketing across the interactive channels that consumers are embracing today—email, mobile, social and the

 

64


Table of Contents

web. Our on-demand software, the Responsys Interact Suite, provides marketers with a set of integrated applications to create, execute, optimize and automate marketing campaigns across key interactive channels.

Our on-demand software enables marketing organizations to automate, coordinate and efficiently execute interactive marketing activities, enabling timely and relevant communications with their customers throughout the customer lifecycle. Our focus on relationship marketing helps to enhance the revenue generation potential of our customers’ marketing investments. Our platform can be used with a variety of third-party applications and data sources and to help marketing organizations utilize a wide range of customer data in their marketing campaigns. Marketers can use this customer data to be more timely and relevant in their messaging, which can lead to a higher response rate and a greater return on their marketing investments.

To help maximize results, we also provide a range of professional services to assist, augment, and provide strategic guidance to our customers’ marketing organizations. Together, our on-demand software and professional services provide the technology and expertise to enable successful relationship marketing.

The key benefits of our solution include:

 

   

Broad application suite.    The Responsys Interact Suite provides marketers with a set of integrated applications for campaign management, automation of marketing programs, workflow management, tools for reporting and analysis, and data integration across the key interactive channels—email, mobile, social and the web.

 

   

Leading email and cross-channel campaign execution.    Interact Campaign, the core application in our Interact Suite, is designed to help marketers effectively execute campaigns across email and other interactive channels to consumers who have given them permission to send marketing communications through those channels. Our applications allow marketers to design and deliver personalized content across each channel, and track and analyze the results. Forrester named Responsys as a leader in email marketing in The Forrester Wave™: Email Marketing Service Providers, Q4 2009, December 23, 2009.

 

   

Advanced campaign and program automation.    To manage the increased volume of communications and growing set of interactive channels, Interact Program gives marketers the ability to design, orchestrate, and automate complex campaigns with multiple stages and across multiple channels with minimal IT resources. We believe our Interact Program application is a key differentiator for us.

 

   

Data model flexibility.    Unlike most alternative solutions that often require that a company’s data be transformed into a predefined format, our open relational data model allows our customers to easily use data from their internal systems and those of third-party providers for improved targeting and automation of marketing campaigns.

 

   

Commitment to the marketing success of our customers.    We complement our on-demand software with a range of professional services to help drive marketing success for our customers. Furthermore, to align our success with that of our customers, our account managers work closely with our customers to help them achieve their marketing goals.

 

   

On-demand software model.    We deliver our applications and functionality on demand over the internet, with no hardware or software installation required by our customers. In using an on-demand platform, we are able to provide a reliable, cost-effective solution to our customers, and relieve them of the costs and burdens that have often prevented marketers from executing complex, cross-channel marketing campaigns.

Our Products

The Responsys Interact Suite is provided as a software-as-a-service platform that helps companies engage in relationship marketing across the interactive channels that consumers are embracing today—email, mobile, social and the web. Unlike software that requires a company’s data to be transformed into a predefined format, our on-

 

65


Table of Contents

demand software is built on an open data model that allows our customers to use their existing data from their original sources and in their native formats to create more relevant and timely marketing programs.

Our Interact Suite is comprised of several integrated applications that enable the design, management and automation of tasks and processes for executing marketing campaigns across interactive channels such as email, mobile, social and the web. Customers have the option to purchase access to the entire Responsys Interact Suite or to specific applications within the suite. All of our components are delivered on-demand over the internet, with no hardware or software installation required by our customers. Our on-demand software platform can also be used with third-party applications and data from a variety of sources, allowing our customers to leverage existing data in their interactive marketing activities targeted to their existing customers.

The following diagram illustrates the key interactive channels and the various components of the Responsys Interact Suite:

LOGO

In combination, these components allow marketing teams to create, manage, and automate required tasks and processes for executing email and other marketing campaigns across interactive channels.

Applications

Each application in the Responsys Interact Suite performs a critical function for the interactive marketer.

Interact Campaign: Campaign Creation and Execution

Interact Campaign enables marketers to design campaign content, define rules for personalization, select a target audience and schedule the delivery of that campaign. Key features and capabilities include:

 

   

an interface that can be used to build a target audience for each campaign by selecting from various demographic, behavioral, and customer profile attributes;

 

   

a feature that enables each message to include unique content tailored to each recipient;

 

   

an ability to automatically add content generated by third-party applications, such as product recommendation and marketing effectiveness testing products;

 

   

detailed scheduling and launching options that control when messages are delivered to recipients;

 

66


Table of Contents
   

a content quality, preview, and campaign monitoring tools; and

 

   

an interface for creating and publishing content to Facebook and Twitter.

Interact Program: Program Design and Automation

Interact Program enables marketers to visually design, manage, and automate marketing programs that have multiple stages and are designed to produce an ongoing relationship with consumers. This application is designed for more complex and sophisticated interactions that involve multiple waves of content in a sequence, or that change dynamically in response to customer behavior. Key features and capabilities include:

 

   

a library of pre-built program templates, based on industry-specific best practices, that can be used to create marketing communications designed to achieve a range of business objectives; examples include encouraging customers who abandon a shopping cart to purchase the abandoned items and producing repeat customers;

 

   

a visual design interface that presents users with a menu of elements that they can use to design a marketing campaign by placing elements onto a blank screen, or canvas, and linking them together; examples of these elements include timers that indicate when to send an email and branching elements that allow communications to be individualized to a particular audience;

 

   

an ability to orchestrate the sending of messages to a recipient across different channels;

 

   

segmentation tools that allow for audiences within a marketing program to be split for testing or optimization purposes; and

 

   

real-time monitoring reports that display how customers are responding to programs.

Interact Team: Marketing Process Workflow and Approvals

Interact Team provides a set of management tools to help marketing teams collaborate, stay organized and stay on schedule. This application is especially useful when marketing efforts involve multiple contributors and sub-projects. Key features and capabilities include:

 

   

tools for defining how a marketing process will be executed within an organization, including a tool to create visual diagrams that portray the sequence of steps to complete a marketing project, methods for assigning tasks to members of the organization, and a shared calendar for defining and tracking timelines and milestones;

 

   

a notification system that alerts individuals to tasks awaiting action;

 

   

a library that allows contributors to share materials, such as files, images, and copy; and

 

   

an approval system that allows the launching of campaigns immediately following a final approval step.

Interact Insight: Marketing Reporting and Analytics

Interact Insight provides marketers with tools to understand, analyze, measure and optimize their marketing campaigns. Through a combination of standard reports and more advanced analysis capabilities, Interact Insight helps marketers understand their marketing performance, make informed changes and discover new opportunities to increase their revenue and achieve deeper customer engagement. Key features and capabilities include:

 

   

summary reports that can be customized to provide snapshots of key business metrics;

 

   

tools to help marketers graphically view trends and patterns in their campaign results;

 

   

pre-built reports that provide a quick overview of key performance metrics, such as average revenue per campaign and customer response rates, for all campaigns across all channels;

 

67


Table of Contents
   

features that allow users to perform rapid and detailed analysis of performance metrics; and

 

   

an ability to share results across the organization through scheduled report distribution.

Data and Application Integration

Interact Connect: Data Transfer and Automation

Interact Connect enables marketers to automate the transfer of data to and from the Responsys Interact Suite and their customer data management systems or those of third parties. This helps marketing teams benefit from the wealth of data captured across a variety of systems to improve the relevance of their marketing campaigns. Interact Connect includes the following features and capabilities:

 

   

an interface to configure and schedule an exchange of data between Interact and a third-party application or a company’s internal systems;

 

   

tools that allow marketers to define which external data should be inserted into records within the customer’s data tables; and

 

   

integrations with select Responsys partners.

Interact API: Application Control and Development

The Interact API, or application programming interface, gives developers access to a framework that they can use to create customized software programs to suit their needs and that can, for example, trigger marketing activities or automatically integrate data into our platform. This gives companies more control over the marketing interactions with their customers by synchronizing their internal systems with the capabilities of the Responsys Interact Suite. The Interact API can be used to:

 

   

automatically trigger a marketing message or series of messages to a recipient when an event occurs on a company’s website, such as a purchase or registration;

 

   

continuously synchronize customer data between internal databases and our platform;

 

   

load content from internal systems into our platform for use in subsequent campaigns; and

 

   

automatically update properties or settings of upcoming campaigns.

Our Services

We complement our on-demand software platform with a range of professional services that are designed to drive marketing success for our customers. Our experienced team brings region- and industry-specific methodologies and best practices to help our customers accelerate the implementation and execution of their marketing efforts, increase their revenue from interactive channels and improve their return on overall marketing spend. Our technical services include a variety of capabilities such as setting up our platform for use by new customers, data architecture design, program design and content management, all of which help our customers implement and use our products.

Our professional services include:

 

   

Strategic services.    Our team helps companies add structure to the art of marketing. For example, we help our customers design their marketing strategy, prepare marketing plans that align specific, actionable tactics with these strategies at every stage and assist with the measurement and analyses of the effectiveness of their marketing programs.

 

   

Creative services.    Our team of designers, developers and copywriters works directly with marketing strategists, technical specialists, and account managers to provide creative services such as copywriting and design services for marketing programs.

 

68


Table of Contents
   

Deliverability services.    We assist our customers in navigating the wide variety of factors that determine whether an email reaches an inbox, is diverted by filters or bounces back. For example, our email delivery audit service provides a comprehensive review of opt-in, opt-out, and privacy policies, deliverability metrics and the creative structure and content of emails. We also work with internet service providers on a regular basis to maintain high deliverability rates for all Responsys customers.

 

   

Campaign services.    Our campaign execution and deployment services support the full campaign development lifecycle and provide services such as software programming, testing, live campaign launches and reporting.

 

   

Education services.    Our education services include classroom training, live online training or private sessions to help our customers successfully launch campaigns and multi-stage programs. We also offer advanced education programs for experienced users.

We offer several services models to provide our customers with flexibility in selecting the level of service that best meets their needs, ranging from collaborating on individual marketing program elements, such as strategy consulting or creative design, to completely outsourcing the execution of their interactive marketing programs.

How Customers Engage with Responsys

We believe that a highly collaborative relationship with our customers is an important element of enabling marketing success. The following illustrates how our customers typically interact with us:

Onboarding and consulting.    At the inception of the customer relationship, our services consultants lead the customer through a thorough process to define their requirements, establish an appropriate data model, configure campaign options and train their users. Additionally, Responsys’ professional services consultants can be engaged to help customers establish their marketing objectives, define the highest impact marketing programs and recommend campaign best practices.

Data.    Our customers frequently use data such as customer names, contact information, purchase history and other attributes from a variety of different sources in our platform. This data is taken from their own or third-party, data management systems. Our services consultants often assist with the integration between these systems and our platform as well as the process of importing the data. Customers can then access and manage that data using web-based tools within the Responsys Interact Suite to create target lists for outbound marketing campaigns, or to enable more relevant delivery of content.

Campaign content.    Our customers can upload digital content into our platform from their own systems, or they can utilize tools provided within the Responsys Interact Suite. Some of our customers have in-house personnel that generate this content, and others use our professional services consultants to produce graphic designs, copy and campaign templates for them.

Campaign execution.    Our customers can use the capabilities of the Responsys Interact Suite to design, schedule and execute marketing campaigns, or we can manage these tasks for them. Campaigns may range from simple one-time campaigns to complex campaigns with multiple stages across multiple interactive channels, spanning the customer lifecycle. By leveraging the functionality with the Responsys Interact Suite, customers can automate complex programs.

Reporting and analysis.    Our platform provides standard, pre-configured reports as well as tools to create customized reports and download data for analysis in third-party systems. They may also engage our professional services consultants to create and customize reports and assist in analyzing the data and identifying opportunities to improve campaign performance.

 

69


Table of Contents

Our Growth Strategy

The key elements of our growth strategy are:

Expand our relationships with existing customers.    As our offerings become increasingly integral to our customers’ marketing success, we believe that we gain a variety of opportunities to grow our business with them.

 

   

Increasing messaging volumes.    We intend to grow messaging volume and increase messaging frequency from our customer base by helping them increase the number of people they can market to, the channels across which they market and the effectiveness of their marketing communications.

 

   

Cross-selling functionality.    We intend to cross-sell additional functionality to our customers as their marketing programs become more complex and extend from email into additional interactive marketing channels. For example, to date, our customers have primarily used email messages for their interactive marketing campaigns, but we plan to sell them functionality that will allow them to also use additional channels such as mobile, social and the web for their campaigns.

 

   

Expanding deployments with existing customers.    We intend to expand the adoption of our solution within existing customers’ organizations, particularly with divisions that have not previously used our platform.

Expand our customer base.    We believe that many organizations are still in the early stages of adopting relationship marketing across interactive channels, which provides us with a significant opportunity to acquire new customers.

 

   

Enabling new groups of customers.    We believe a significant portion of the market includes companies that either have not previously had a need for technology-based marketing or are currently using less sophisticated applications that were not designed for more advanced email and cross-channel interactive marketing.

 

   

Expanding into adjacent customer segments.    While we currently target enterprise and larger mid-market customers, we intend to expand our presence in the mid-market customer segment to target companies that, for example, are likely to send over one million email messages per month. We have added sales and lead generation personnel to target this additional customer segment.

 

   

Expanding international footprint.    We intend to increase our presence in international markets through additional investments in sales, marketing and support capabilities, and acquisitions of companies serving additional geographies. These investments would allow us to serve more English-speaking markets in Europe and Asia and to localize our on-demand software for use in other areas.

Develop new capabilities and channels.    We believe there are many additional opportunities for growth.

 

   

Adding new capabilities and functionality.    We intend to develop new capabilities and functionality for the Responsys Interact Suite to enable marketing through channels such as web-based and social media display advertising and drive increased usage.

 

   

Expanding partnerships.    We believe we can drive additional efficiency in our business by expanding the breadth of our partner network and driving greater revenue from new indirect sales partnerships.

Customers

Our customers are of varied size across a wide variety of industries, including retail and consumer, travel, financial services and technology. Our customers also include advertising agencies who partner with us to use our on-demand software on behalf of their customers. We had 212, 239, 246 and 277 customers as of December 31, 2007, 2008, 2009 and 2010, respectively. We define our number of customers as of the end of a particular quarter as direct-billed subscription customers with $3,000 or more in committed subscription revenue in that quarter. Some of our customers are divisions or subsidiaries of larger organizations that have purchased

 

70


Table of Contents

our solution. Given the independent nature of our engagement across sales, support, billing and services, as well as their segmented usage of our product, we treat these components of an organization as separate customers. If we did not treat these independent purchasing units as separate customers, we would have had 250 customers as of December 31, 2010.

Some of our largest customers by industry, based on total revenue per customer for the year ended December 31, 2010, include:

 

Retail and Consumer

Lands’ End, Inc.

LEGO Brand Retail, Inc.

Newegg, Inc.

PHE, Inc.

Sears Holdings Management Corporation

StubHub, Inc.

Williams-Sonoma, Inc.

 

Travel

Carlson

Continental Airlines, Inc.

Deutsche Lufthansa AG

Dollar Thrifty Automotive Group, Inc.

Intrawest ULC

Orbitz, LLC

Southwest Airlines Co.

Financial Services

AccountNow, Inc.

American Family Mutual Insurance Company

Bank of the West

KeyBank National Association

Metropolitan Property and Casualty Insurance Company

MORE TH>N, an affiliate of RSA Insurance Group plc

Quicken Loans Inc.

 

Technology

Epson America, Inc.

Lenovo

salesforce.com, inc.

Snapfish by HP

Thomson Reuters E-Channel, an affiliate of West Services, Inc.

Trend Micro Inc.

YouSendIt, Inc.

For the years ended December 31, 2008, 2009 and 2010 no single customer accounted for more than 10% of our total revenue.

Sales and Marketing

We sell our on-demand software and services primarily through our direct sales force. As of December 31, 2010, we had 36 employees in our direct sales force, which includes field sales representatives, sales management and sales consultants. Our sales force is organized by the size of the target customer as well as by geographic region. We primarily target enterprise and larger mid-market customers that seek to implement more advanced marketing programs across interactive channels. Our typical sales cycle with a prospective customer begins with the generation of a sales lead, which is followed by an assessment of the customer’s requirements, sales presentations and product demonstrations. Our sales cycle can vary substantially from customer to customer, but typically requires four to six months depending on the size and complexity of the opportunity.

In addition to new customer sales, our account management organization actively sells additional solutions and services to our existing customers to enable them to refine and expand their interactive marketing programs.

Our marketing efforts and lead generation activities consist primarily of customer referrals, internet advertising, telemarketing, social, trade shows and industry events and press releases. Within the customer organization, our marketing programs target company executives, marketing professionals and senior business leaders. We also host frequent conferences where customers both participate in and present a variety of programs designed to help accelerate marketing success with our integrated platform.

 

71


Table of Contents

Account Management and Customer Support

We provide account management and customer support services focused on making our customers’ marketing programs successful.

Account management.    Our account managers serve as the primary point of contact for our customers and work closely with them to perform assessments of their interactive marketing programs, benchmark their programs against industry best practices, develop action plans for achieving their objectives and execute on those plans. Our account managers are also responsible for cross-selling additional functionality to our customers.

Customer support.    Our customer support services provide our customers with product support by phone or email from multiple offices worldwide. We offer a multi-tier support structure that provides varying levels of service level commitments depending on the customer’s requirements. We also provide an online customer portal called Responsys Share, that contains information, insights and interactive tools to help customers answer questions and share best practices information in order to improve the speed, effectiveness and return on investment of their interactive marketing programs.

Technology

The Responsys Interact Suite is delivered over the internet using a technology platform designed to meet the demands of email and cross-channel interactive marketers. Our technology platform has several key design elements:

Scalability.    Our platform supports hundreds of millions of email, mobile, social and web site addresses, generates and sends billions of messages per month, and is designed to accommodate significant seasonal increases in transaction volumes.

Flexibility.    Our open data model enables our customers to use existing consumer data from a variety of sources, including their own and third-party customer data management systems in their marketing campaigns. It also allows them to organize the data using tables, filters and field names.

High availability.    Our platform supports ongoing, carefully coordinated marketing programs that require delivery of targeted messages across multiple channels at specified times or in response to specific actions; the availability of personalized web site landing pages when a consumer clicks on a message; and real-time measurement, tracking and reporting.

Security.    Our platform is multi-tenant with each customer’s data partitioned to prevent comingling. The infrastructure is continually monitored by several layers of network security including a variety of intrusion detection systems. Customer communications to and from our platform are SSL-encrypted.

Ease of use.    Our applications use visual design tools to simplify the creation and management of complex marketing campaigns and programs.

Low cost.    Because our platform is accessed through the web, our on-demand software does not require our customers to implement or install additional IT infrastructure.

Deliverability.    Our infrastructure is also designed to ensure optimal performance in the delivery of content to users. The delivery mechanisms vary by channel:

 

   

for email, messages are assembled within our platform and delivered to ISPs from our own simple mail transfer protocol and mail transfer agent layer;

 

72


Table of Contents
   

for mobile messages, content is assembled within our platform and delivered to mobile handsets through a partnership with a third-party mobile aggregator who maintains direct connections with mobile carriers worldwide;

 

   

for social networks, content is assembled within our platform and delivered to Facebook and Twitter via APIs;

 

   

for website pages including forms and landing pages, content is assembled within our platform and served using our own content serving engine; and

 

   

for the millions of images displayed, this content is cached on our content delivery network partner’s thousands of data centers.

Operations

We serve our customers primarily from a third-party data center located in San Jose, California. The current term of our services agreement for this data center expires in January 2013. We also use another third-party data center located in Sacramento, California. We use a variety of methods to provide physical, personnel, network, application, and data security. Our infrastructure is continuously monitored using a variety of tools to minimize the risk of failure. We conduct regular system tests and vulnerability assessments and provide advance notice when maintenance is performed. However, in the event of a failure, we have engineered our data centers with backup and redundancy programs designed to ensure business continuity.

Research and Development

We devote a substantial portion of our resources to developing new solutions and enhancing existing solutions, conducting software and quality assurance testing and improving our core technology. We continually enhance our existing software platform and develop new applications to meet our customers’ changing interactive marketing needs.

Our technical staff monitors and tests our software on a regular basis, and we maintain a regular release process to refine, update, and enhance our existing solutions. We typically deploy new releases of our on-demand software three to four times per year, although software patches may be released more frequently as needed.

Research and development expense totaled $5.1 million, $8.1 million and $10.6 million for the years ended December 31, 2008, 2009 and 2010, respectively.

Competition

The overall market for interactive marketing software is fragmented and highly competitive, with a wide variety of customer requirements depending on the size and profile of the customer. Barriers to entry can be low, particularly in segments focused on a single marketing channel. We provide on-demand, cross-channel interactive marketing applications and services targeting primarily enterprise and larger mid-market companies. We face significant competition from both technology providers and marketing services providers, some of which have broader software and services offerings and greater name recognition and resources than we have. To a lesser extent, we compete with internally developed and maintained solutions.

Our primary competitors include:

 

   

technology providers such as Aprimo, Inc., which has been acquired by Teradata Corporation, BlueHornet, a subsidiary of Digital River, Inc., Eloqua Corporation, ExactTarget, Inc., Silverpop Systems Inc., StrongMail Systems, Inc. and Unica Corporation, which has been acquired by IBM; and

 

   

marketing services providers such as Acxiom Digital, Epsilon Data Management LLC and Experian CheetahMail and Yesmail, a division of infoGROUP Inc.

 

73


Table of Contents

We believe the principal competitive factors in our markets include:

 

   

product features, effectiveness, interoperability and reliability;

 

   

strength of professional services organization;

 

   

cross-channel integration;

 

   

ability to scale;

 

   

pace of innovation and product roadmap;

 

   

domain expertise in interactive marketing;

 

   

price of products and services;

 

   

customer support and training;

 

   

integration with third-party applications and data sources;

 

   

return on investment;

 

   

ease of use; and

 

   

size and financial stability of operations.

Government Regulation

Consumer Protection Regulations

Our customers use our on-demand software to generate marketing campaigns that send messages to consumers across email, mobile, social and/or web-based channels. Commercial communications using these channels are governed by certain U.S. and foreign laws and regulations. With respect to email campaigns, for example, in the United States, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the CAN-SPAM Act, establishes certain requirements for the distribution of “commercial” email messages and provides for penalties for transmission of commercial email messages that are intended to deceive the recipient as to source or content.

Although the CAN-SPAM