S-1/A 1 f53797a4sv1za.htm S-1/A sv1za
Table of Contents

As filed with the Securities and Exchange Commission on February 2, 2010
Registration No. 333-163228
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Amendment No. 4
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
QuinStreet, Inc.
(Exact name of Registrant as specified in its charter)
 
 
 
 
         
Delaware   7389   77-0512121
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
1051 East Hillsdale Blvd., Suite 800
Foster City, CA 94404
(650) 578-7700
(Address, including zip code and telephone number, of Registrant’s principal executive offices)
 
 
 
 
Douglas Valenti
Chief Executive Officer and Chairman
1051 East Hillsdale Blvd., Suite 800
Foster City, CA 94404
(650) 578-7700
(Name, address, including zip code and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
     
Jodie Bourdet
David Peinsipp
Cooley Godward Kronish LLP
101 California Street, 5th
Floor
San Francisco, CA 94111
(415) 693-2000
  Alan Denenberg
Davis Polk & Wardwell LLP
1600 El Camino Real
Menlo Park, CA 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.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
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.  o
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 o
  Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
    (Do not check if a smaller reporting company)
 
 
 
 
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, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange 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 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 we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION. DATED FEBRUARY 2, 2010.
 
10,000,000 Shares
 
(QUINSTREET LOGO)
 
Common Stock
 
This is the initial public offering of our common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $17.00 and $19.00 per share.
 
We have applied to list our common stock on The NASDAQ Global Market under the symbol “QNST.”
 
The underwriters have an option to purchase a maximum of 1,500,000 additional shares of common stock from us to cover over-allotments, if any.
 
Investing in our common stock involves risks. See “Risk Factors” beginning on page 10.
 
             
        Underwriting
   
    Price to
  Discounts and
  Proceeds, Before
    Public   Commissions   Expenses, to us
 
Per Share
  $   $   $
Total
  $        $        $     
 
The underwriters have agreed to reimburse us for a portion of our out-of-pocket expenses.
 
Delivery of our shares of common stock will be made on or about          , 2010.
 
Neither the Securities and Exchange Commission nor any state securities commission 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.
 
Credit Suisse BofA Merrill Lynch J.P. Morgan
 
The date of this prospectus is          , 2010.


 

 
TABLE OF CONTENTS
 
         
    Page
 
    1  
    10  
    28  
    29  
    29  
    30  
    32  
    34  
    37  
    63  
    73  
    80  
    98  
    101  
    105  
    109  
    111  
    114  
    119  
    119  
    119  
    120  
 EX-23.2
 
You should rely only on the information contained in this prospectus or contained in any free writing prospectus filed with the Securities and Exchange Commission, or SEC. Neither we nor the underwriters have authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus filed with the SEC. We are offering to sell, and seeking offers to buy, our common stock only in jurisdictions where such offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.
 
For investors outside of the United States: Neither we 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. 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.
 
Until          , 2010 (25 days after commencement of this offering), all dealers that buy, sell or trade 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.


Table of Contents

 
PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this prospectus. Unless the context otherwise requires, we use the terms “QuinStreet,” “company,” “we,” “us” and “our” in this prospectus to refer to QuinStreet, Inc. and, where appropriate, its subsidiaries.
 
QUINSTREET, INC.
 
Overview
 
QuinStreet is a leader in vertical marketing and media on the Internet. Vertical marketing and media are focused on matching targeted segments of visitors with groupings of clients and product offerings of probable interest to them. Vertical visitor segments are defined by factors such as life stage, life events, income, career status, and expressed intent to buy or research a particular product. This approach is in contrast to marketing and media that are focused on general consumer interests and mass market audiences. We have built a strong set of capabilities to engage Internet visitors with targeted media and to connect our marketing clients with their potential customers online. We focus on serving clients in large, information-intensive industry categories, or verticals, where relevant, targeted media and offerings help visitors make informed choices, find the products that match their needs, and thus become qualified customer prospects for our clients. Our current primary client verticals are the education and financial services industries. We also have a presence in the home services, business-to-business, or B2B, and healthcare industries.
 
We generate revenue by delivering measurable online marketing results to our clients. These results are typically in the form of qualified leads or clicks, the outcomes of customer prospects submitting requests for information on, or to be contacted regarding, client products, or their clicking on or through to specific client offers. These qualified leads or clicks are generated from our marketing activities on our websites or on third-party websites with whom we have relationships. Clients primarily pay us for leads that they can convert into customers, typically in a call center or through other offline customer acquisition processes, or for clicks from our websites that they can convert into applications or customers on their websites. We are predominantly paid on a negotiated or market-driven “per lead” or “per click” basis. Media costs to generate qualified leads or clicks are borne by us as a cost of providing our services.
 
Founded in 1999, we have been a pioneer in the development and application of measurable marketing on the Internet. Clients pay us for the actual opt-in actions by prospects or customers that result from our marketing activities on their behalf, versus traditional impression-based advertising and marketing models in which an advertiser pays for more general exposure to an advertisement. We have been particularly focused on developing and delivering measurable marketing results in the search engine “ecosystem”, the entry point of the Internet for most of the visitors we convert into qualified leads or clicks for our clients. We own or partner with vertical content websites that attract Internet visitors from organic search engine rankings due to the quality and relevancy of their content to search engine users. We also acquire targeted visitors for our websites through the purchase of pay-per-click, or PPC, advertisements on search engines. We complement search engine companies by building websites with content and offerings that are relevant and responsive to their searchers, and by increasing the value of the PPC search advertising they sell by matching visitors with offerings and converting them into customer prospects for our clients.
 
Market Opportunity
 
Our clients are shifting more of their marketing budgets from traditional media channels such as direct mail, television, radio, and newspapers to the Internet because of increasing usage of the Internet by their potential customers. We believe that direct marketing is the most applicable and relevant marketing segment to us because it is targeted and measurable. According to the July 2009 research report, “Consumer Behavior Online: A 2009 Deep Dive,” by Forrester Research, Americans spend 33% of their time with media on the


1


Table of Contents

Internet, but online direct marketing was forecasted to represent only 16% of the $149 billion in total annual U.S. direct marketing spending in 2009, as reported by the Direct Marketing Association. The Internet is an effective direct marketing medium due to its targeting and measurability characteristics. If direct marketing budgets shift to the Internet in proportion to Americans’ share of time spent with media on the Internet — from 16% to 33% of the $149 billion in total spending in 2009 — that could represent an increased market opportunity of $25 billion. In addition, as traditional media categories such as television and radio shift from analog to digital formats, they then become channels for the targeted and measurable marketing techniques and capabilities we have developed for the Internet, thus expanding our addressable market opportunity. Further future market potential may also come from international markets.
 
Our Business Model
 
We deliver cost-effective marketing results to our clients, predictably and scalably, most typically in the form of a qualified lead or click. These leads or clicks can then convert into a customer or sale for the client at a rate that results in an acceptable marketing cost to them. We get paid by clients primarily when we deliver qualified leads or clicks as defined in our agreements with them. Because we bear the costs of media, our programs must deliver a value to our clients and a media yield, or our ability to generate an acceptable margin on our media costs, that provides a sound financial outcome for us. Our general process is:
 
  •  We own or access targeted media.
 
  •  We run advertisements or other forms of marketing messages and programs in that media to create visitor responses or clicks through to client offerings.
 
  •  We match these responses or clicks to client offerings or brands that meet visitor interests or needs, converting visitors into qualified leads or clicks.
 
  •  We optimize client matches and media yield such that we achieve desired results for clients and a sound financial outcome for us.
 
Our Competitive Advantages
 
Our competitive advantages include:
 
  •  Vertical focus and expertise
 
  •  Measurable marketing experience and expertise
 
  •  Targeted media
 
  •  Proprietary technology
 
  •  Client relationships
 
  •  Client-driven online marketing approach
 
  •  Acquisition strategy and success
 
  •  Scale
 
Our Strategy
 
We believe that we are in the early stages of a very large and long-term business opportunity. Our strategy for pursuing this opportunity includes the following key components:
 
  •  Focus on generating sustainable revenues by providing measurable value to our clients.
 
  •  Build QuinStreet and our industry sustainably by behaving ethically in all we do and by providing quality content and website experiences to Internet visitors.
 
  •  Remain vertically focused, choosing to grow through depth, expertise and coverage in our current industry verticals; enter new verticals selectively over time, organically and through acquisitions.
 
  •  Build a world class organization, with best-in-class capabilities for delivering measurable marketing results to clients and high yields or returns on media costs.


2


Table of Contents

 
  •  Develop and evolve the best technologies and platform for managing vertical marketing and media on the Internet; focus on technologies that enhance media yield, improve client results and achieve scale efficiencies.
 
  •  Build, buy and partner with vertical content websites that provide the most relevant and highest quality visitor experiences in the client and media verticals we serve.
 
  •  Be a client-driven organization; develop a broad set of media sources and capabilities to reliably meet client needs.
 
Risks Associated with Our Business
 
Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” immediately following this prospectus summary, that primarily represent challenges we face in connection with the successful implementation of our strategy and the growth of our business. We operate in an immature industry and have a rapidly-evolving business model, which make it difficult to predict our future operating results. In addition, we expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.
 
Corporate Information
 
We incorporated in California in April 1999. We reincorporated in Delaware in December 2009. Our principal executive offices are located at 1051 East Hillsdale Blvd., Suite 800, Foster City, California 94404, and our telephone number is (650) 578-7700. Our website address is www.quinstreet.com. We do not incorporate the information on or accessible through our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website as part of this prospectus, and investors should not rely on any such information in deciding whether to purchase our common stock. QuinStreet®, the QuinStreet logo design and other trademarks or service marks of QuinStreet appearing in this prospectus are the property of QuinStreet. This prospectus also contains trademarks and trade names of other businesses that are the property of their respective holders.


3


Table of Contents

THE OFFERING
 
Common stock offered by QuinStreet 10,000,000 shares
 
Common stock to be outstanding after this offering 44,912,597 shares
 
Over-allotment option 1,500,000 shares
 
Use of proceeds We expect the net proceeds to us from this offering, after deduction of the estimated underwriting discounts and commissions and estimated offering expenses, to be approximately $165.1 million at an assumed initial public offering price of $18.00 per share. We intend to use the net proceeds from this offering for working capital, capital expenditures and other general corporate purposes. We may also use a portion of the net proceeds to repay debt or to acquire other businesses, products or technologies. See “Use of Proceeds.”
 
Dividend policy We do not intend to pay cash dividends on our common stock for the foreseeable future.
 
Risk factors See “Risk Factors” beginning on page 10 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding whether to purchase shares of our common stock.
 
Proposed NASDAQ Global Market symbol QNST
 
Financial advisor Qatalyst Partners LP is acting as our financial advisor in connection with this offering. Qatalyst’s services consist of (i) analyzing our business, condition and financial position, (ii) preparing and implementing a plan for identifying and selecting appropriate participants in the underwriting syndicate, (iii) evaluating proposals that were received from potential underwriters, (iv) negotiating on our behalf the key terms of any contractual arrangements with members of the underwriting syndicate, and (v) determining various offering logistics. Qatalyst is not acting as an underwriter and will not sell or offer to sell any securities and will not identify, solicit or engage directly with potential investors. In addition, Qatalyst will not underwrite or purchase any of the offered securities or otherwise participate in any such undertaking.
 
The number of shares of common stock to be outstanding after this offering is based on 34,912,597 shares of common stock outstanding as of December 31, 2009, and excludes:
 
  •  an aggregate of 11,504,767 shares of common stock issuable upon the exercise of outstanding stock options as of December 31, 2009 pursuant to our 2008 Equity Incentive Plan and having a weighted-average exercise price of $9.3429 per share;
 
  •  an aggregate of 587,717 additional shares of common stock reserved for future issuance under our 2008 Equity Incentive Plan as of December 31, 2009; provided, however, that immediately upon the execution and delivery of the underwriting agreement for this offering, our 2008 Equity Incentive Plan will terminate so that no further awards may be granted under our 2008 Equity Incentive Plan and the shares then remaining and reserved for future issuance under our 2008 Equity Incentive Plan shall become reserved for issuance under our 2010 Equity Incentive Plan; and


4


Table of Contents

 
  •  the shares reserved for future issuance under our 2010 Equity Incentive Plan and up to 300,000 additional shares of common stock reserved for future issuance under our 2010 Non-Employee Directors’ Stock Award Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under each of these benefit plans, which will become effective immediately upon the execution and delivery of the underwriting agreement for this offering.
 
Unless we specifically state otherwise, the share information in this prospectus is as of December 31, 2009 and reflects or assumes:
 
  •  the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 21,176,533 shares of common stock effective immediately prior to the closing of this offering;
 
  •  that our amended and restated certificate of incorporation, which we will file in connection with the completion of this offering, is in effect; and
 
  •  no exercise of the underwriters’ over-allotment option to purchase up to an additional 1,500,000 shares of common stock from us.


5


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL DATA
 
The following table summarizes our consolidated financial data. We have derived the following summary of our consolidated statements of operations data for the fiscal years ended June 30, 2007, 2008 and 2009 from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statements of operations data for the six months ended December 31, 2008 and 2009 and consolidated balance sheet data as of December 31, 2009 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that should be expected in the future and our interim results are not necessarily indicative of the results that should be expected for the full fiscal year. The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes to those statements, as well as the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this prospectus.
 
                                         
          Six Months
 
    Fiscal Year Ended June 30,     Ended December 31,  
    2007     2008     2009     2008     2009  
    (In thousands, except per share data)  
 
Consolidated Statements of Operations Data:
                                       
Net revenue
  $ 167,370     $ 192,030     $ 260,527     $ 122,913     $ 155,515  
Cost of revenue(1)
    108,945       130,869       181,593       88,250       111,604  
                                         
Gross profit
    58,425       61,161       78,934       34,663       43,911  
Operating expenses:(1)
                                       
Product development
    14,094       14,051       14,887       7,480       9,209  
Sales and marketing
    8,487       12,409       16,154       8,423       7,615  
General and administrative
    11,440       13,371       13,172       6,907       9,644  
                                         
Total operating expenses
    34,021       39,831       44,213       22,810       26,468  
                                         
Operating income
    24,404       21,330       34,721       11,853       17,443  
                                         
Interest and other income (expense), net
    1,034       413       (3,538 )     (1,933 )     (1,327 )
                                         
Income before income taxes
    25,438       21,743       31,183       9,920       16,116  
Provision for taxes
    (9,828 )     (8,876 )     (13,909 )     (4,266 )     (7,193 )
                                         
Net income
  $ 15,610     $ 12,867     $ 17,274     $ 5,654     $ 8,923  
                                         
Basic:
                                       
Less: 8% non-cumulative dividends on convertible preferred stock
    (3,276 )     (3,276 )     (3,276 )     (1,638 )     (1,638 )
Undistributed earnings allocated to convertible preferred stock
    (7,690 )     (5,925 )     (8,599 )     (2,468 )     (4,454 )
                                         
Net income attributable to common stockholders — basic
  $ 4,644     $ 3,666     $ 5,399     $ 1,548     $ 2,831  
                                         
Diluted:
                                       
Net income attributable to common stockholders — basic
  $ 4,644     $ 3,666     $ 5,399     $ 1,548     $ 2,831  
Undistributed earnings re-allocated to common stock
    522       360       399       124       323  
                                         
Net income attributable to common stockholders — diluted
  $ 5,166     $ 4,026     $ 5,798     $ 1,672     $ 3,154  
                                         
Net income per share of common stock:
                                       
Basic
  $ 0.36     $ 0.28     $ 0.41     $ 0.12     $ 0.21  
                                         
Diluted
  $ 0.34     $ 0.26     $ 0.39     $ 0.11     $ 0.20  
                                         
Weighted average shares used in computing basic net income per share
    12,789       13,104       13,294       13,282       13,463  
Weighted average shares used in computing diluted net income per share
    15,263       15,325       14,971       15,103       16,169  


6


Table of Contents

                                         
          Six Months
 
    Fiscal Year Ended June 30,     Ended December 31,  
    2007     2008     2009     2008     2009  
    (In thousands, except per share data)  
 
Pro forma net income per share:
                                       
Basic
                  $ 0.50             $ 0.26  
                                         
Diluted
                  $ 0.48             $ 0.24  
                                         
Weighted average shares used in computing pro forma basic net income per share
                    34,471               34,640  
Weighted average shares used in computing pro forma diluted net income per share
                    36,148               37,346  
 
 
(1) Includes stock-based compensation expense as follows:
 
                                         
Cost of revenue
  $ 416     $ 1,112     $ 1,916     $ 1,007     $ 1,490  
Product development
    75       443       669       318       884  
Sales and marketing
    226       581       1,761       897       1,341  
General and administrative
    1,354       1,086       1,827       688       3,378  
 
                 
    December 31, 2009
        Pro Forma as
    Actual   Adjusted(1)
    (In thousands)
 
Consolidated Balance Sheets Data:
               
Cash and cash equivalents
  $ 34,139     $ 199,205  
Working capital
    31,527       196,593  
Total assets
    281,845       446,911  
Total liabilities
    147,410       147,410  
Total debt
    105,695       105,695  
Total stockholders’ equity
    91,032       299,501  
 
 
(1) The pro forma as adjusted consolidated balance sheet data gives effect to the conversion of all outstanding shares of convertible preferred stock into shares of common stock effective immediately prior to the closing of this offering and to the sale of 10,000,000 shares of our common stock in this offering at an assumed initial public offering price of $18.00 per share, the midpoint of the range reflected on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $18.00 per share would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $9.3 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. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $16.7 million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.
 

7


Table of Contents

                                         
        Six Months
    Fiscal Year Ended June 30,   Ended December 31,
    2007   2008   2009   2008   2009
    (In thousands)
 
Consolidated Statements of Cash Flows Data:
                                       
Net cash provided by operating activities
  $ 25,197     $ 24,751     $ 32,570     $ 9,371     $ 16,077  
Depreciation and amortization
    9,637       11,727       15,978       8,351       8,603  
Capital expenditures
    2,030       2,177       1,347       821       1,035  
                                         
                                         
        Six Months
    Fiscal Year Ended June 30,   Ended December 31,
    2007   2008   2009   2008   2009
    (In thousands)
 
Other Financial Data:
                                       
Adjusted EBITDA(1)
  $ 36,112     $ 36,279     $ 56,872     $ 23,114     $ 33,139  
 
 
(1)  We define Adjusted EBITDA as net income less interest income plus interest expense, provision for taxes, depreciation expense, amortization expense, stock-based compensation expense and foreign-exchange (loss) gain. Please see “— Adjusted EBITDA” for more information and for a reconciliation of Adjusted EBITDA to our net income calculated in accordance with U.S. generally accepted accounting principles, or GAAP.
 
Adjusted EBITDA
 
We include Adjusted EBITDA in this prospectus because (i) we seek to manage our business to a consistent level of Adjusted EBITDA as a percentage of net revenue, (ii) it is a key basis upon which our management assesses our operating performance, (iii) it is one of the primary metrics investors use in evaluating Internet marketing companies, (iv) it is a factor in the evaluation of the performance of our management in determining compensation, and (v) it is an element of certain maintenance covenants under our debt agreements. We define Adjusted EBITDA as net income less interest income plus interest expense, provision for taxes, depreciation expense, amortization expense, stock-based compensation expense and foreign-exchange (loss) gain.
 
We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items) and the impact of depreciation and amortization expense on definite-lived intangible assets. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use Adjusted EBITDA for business planning purposes, to incentivize and compensate our management personnel and in evaluating acquisition opportunities.
 
In addition, we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other interested parties in our industry as a measure of financial performance and debt-service capabilities. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
 
  •  Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;
 
  •  although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements;
 
  •  Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

8


Table of Contents

 
  •  Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees;
 
  •  Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;
 
  •  Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us; and
 
  •  other companies, including companies in our industry, may calculate Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure.
 
Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results.
 
The following table presents a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, for each of the periods indicated:
 
                                         
          Six Months
 
    Fiscal Year Ended June 30,     Ended December 31,  
    2007     2008     2009     2008     2009  
    (In thousands)  
 
Reconciliation of Adjusted EBITDA to net income:
                                       
Net income
  $ 15,610     $ 12,867     $ 17,274     $ 5,654     $ 8,923  
Interest and other income (expense), net
    (1,034 )     (413 )     3,538       1,933       1,327  
Provision for taxes
    9,828       8,876       13,909       4,266       7,193  
Depreciation and amortization
    9,637       11,727       15,978       8,351       8,603  
Stock-based compensation expense
    2,071       3,222       6,173       2,910       7,093  
                                         
Adjusted EBITDA
  $ 36,112     $ 36,279     $ 56,872     $ 23,114     $ 33,139  
                                         


9


Table of Contents

 
RISK FACTORS
 
Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should be aware that our business faces numerous financial and market risks, including those described below, as well as general economic and business risks. The following discussion provides information concerning the material risks and uncertainties that we have identified and believe may adversely affect our business, financial condition and results of operations. Before you decide whether to invest in our common stock, you should carefully consider these risks and uncertainties, together with all of the other information included in this prospectus.
 
Risks Related to Our Business and Industry
 
We operate in an immature industry and have a relatively new business model, which makes it difficult to evaluate our business and prospects.
 
We derive nearly all of our revenue from the sale of online marketing and media services, which is an immature industry that has undergone rapid and dramatic changes in its short history. The industry in which we operate is characterized by rapidly-changing Internet media, evolving industry standards, and changing user and client demands. Our business model is also evolving and is distinct from many other companies in our industry, and it may not be successful. As a result of these factors, the future revenue and income potential of our business is uncertain. Although we have experienced significant revenue growth in recent periods, we may not be able to sustain current revenue levels or growth rates. Any evaluation of our business and our prospects must be considered in light of these factors and the risks and uncertainties often encountered by companies in an immature industry with an evolving business model such as ours. Some of these risks and uncertainties relate to our ability to:
 
  •  maintain and expand client relationships;
 
  •  sustain and increase the number of visitors to our websites;
 
  •  sustain and grow relationships with third-party website publishers and other sources of web visitors;
 
  •  manage our expanding operations and implement and improve our operational, financial and management controls;
 
  •  raise capital at attractive costs, or at all;
 
  •  acquire and integrate websites and other businesses;
 
  •  successfully expand our footprint in our existing client verticals and enter new client verticals;
 
  •  respond effectively to competition and potential negative effects of competition on profit margins;
 
  •  attract and retain qualified management, employees and independent service providers;
 
  •  successfully introduce new processes and technologies and upgrade our existing technologies and services;
 
  •  protect our proprietary technology and intellectual property rights; and
 
  •  respond to government regulations relating to the Internet, personal data protection, email, software technologies and other aspects of our business.
 
If we are unable to address these risks, our business, results of operations and prospects could suffer.
 
If we do not effectively manage our growth, our operating performance will suffer and we may lose clients.
 
We have experienced rapid growth in our operations and operating locations, and we expect to experience continued growth in our business, both through acquisitions and internal growth. This growth has placed, and will continue to place, significant demands on our management and our operational and financial infrastructure. In particular, continued rapid growth and acquisitions may make it more difficult for us to accomplish the following:
 
  •  successfully scale our technology to accommodate a larger business and integrate acquisitions;
 
  •  maintain our standing with key vendors, including Internet search companies and third-party website publishers;


10


Table of Contents

 
  •  maintain our client service standards; and
 
  •  develop and improve our operational, financial and management controls and maintain adequate reporting systems and procedures.
 
In addition, our personnel, systems, procedures and controls may be inadequate to support our future operations. The improvements required to manage our growth will require us to make significant expenditures, expand, train and manage our employee base and allocate valuable management resources. If we fail to effectively manage our growth, our operating performance will suffer and we may lose clients, third-party website publishers and key personnel.
 
We depend upon Internet search companies to attract a significant portion of the visitors to our websites, and any change in the search companies’ search algorithms or perception of us or our industry could result in our websites being listed less prominently in either paid or algorithmic search result listings, in which case the number of visitors to our websites and our revenue could decline.
 
We depend in significant part on various Internet search companies, such as Google, Microsoft and Yahoo!, and other search websites to direct a significant number of visitors to our websites to provide our online marketing services to our clients. Search websites typically provide two types of search results, algorithmic and paid listings. Algorithmic, or organic, listings are determined and displayed solely by a set of formulas designed by search companies. Paid listings can be purchased and then are displayed if particular words are included in a user’s Internet search. Placement in paid listings is generally not determined solely on the bid price, but also takes into account the search engines’ assessment of the quality of website featured in the paid listing and other factors. We rely on both algorithmic and paid search results, as well as advertising on other websites, to direct a substantial share of the visitors to our websites.
 
Our ability to maintain the number of visitors to our websites from search websites and other websites is not entirely within our control. For example, Internet search websites frequently revise their algorithms in an attempt to optimize their search result listings or to maintain their internal standards and strategies. Changes in the algorithms could cause our websites to receive less favorable placements, which could reduce the number of users who visit our websites. We have experienced fluctuations in the search result rankings for a number of our websites. We may make decisions that are suboptimal regarding the purchase of paid listings or our proprietary bid management technologies may contain defects or otherwise fail to achieve their intended results, either of which could also reduce the number of visitors to our websites. We may also make decisions that are suboptimal regarding the placement of advertisements on other websites and pricing, which could increase our costs to attract such visitors or cause us to incur unnecessary costs. Our approaches may be deemed similar to those of our competitors and others in our industry that Internet search websites may consider to be unsuitable or unattractive. Internet search websites could deem our content to be unsuitable or below standards or less attractive or worthy than those of other or competing websites. In either such case, our websites may receive less favorable placement. Any reduction in the number of visitors to our websites would negatively affect our ability to earn revenue. If visits to our websites decrease, we may need to resort to more costly sources to replace lost visitors, and such increased expense could adversely affect our business and profitability.
 
Our future growth depends in part on our ability to identify and complete acquisitions.
 
Our growth over the past several years is in significant part due to the large number of acquisitions we have completed. Since the beginning of fiscal year 2007, we have completed over 100 acquisitions of third-party website publishing businesses and other businesses that are complementary to our own for an aggregate purchase price of approximately $189.5 million. We intend to pursue acquisitions of complementary businesses and technologies to expand our capabilities, client base and media. We have evaluated, and expect to continue to evaluate, a wide array of potential strategic transactions. However, we may not be successful in identifying suitable acquisition candidates or be able to complete acquisitions of such candidates. In addition, we may not be able to obtain financing on favorable terms, or at all, to fund acquisitions that we may wish to pursue.


11


Table of Contents

Any acquisitions that we complete will involve a number of risks. If we are unable to address and resolve these risks successfully, such acquisitions could harm our business, results of operations and financial condition.
 
The anticipated benefit of any acquisitions that we complete may not materialize. In addition, the process of integrating acquired businesses or technologies may create unforeseen operating difficulties and expenditures. Some of the areas where we may face acquisition-related risks include:
 
  •  diversion of management time and potential business disruptions;
 
  •  expenses, distractions and potential claims resulting from acquisitions, whether or not they are completed;
 
  •  retaining and integrating employees from any businesses we may acquire;
 
  •  issuance of dilutive equity securities, incurrence of debt or reduction in cash balances;
 
  •  integrating various accounting, management, information, human resource and other systems to permit effective management;
 
  •  incurring possible impairment charges, contingent liabilities, amortization expense or write-offs of goodwill;
 
  •  difficulties integrating and supporting acquired products or technologies;
 
  •  unexpected capital expenditure requirements;
 
  •  insufficient revenue to offset increased expenses associated with acquisitions;
 
  •  underperformance problems associated with acquisitions; and
 
  •  becoming involved in acquisition-related litigation.
 
Foreign acquisitions would involve risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political, administrative and management, and regulatory risks associated with specific countries. We may not be able to address these risks successfully, or at all, without incurring significant costs, delay or other operating problems. Our inability to resolve such risks could harm our business and results of operations.
 
A substantial portion of our revenue is generated from a limited number of clients and, if we lose a major client, our revenue will decrease and our business and prospects would be adversely impacted.
 
A substantial portion of our revenue is generated from a limited number of clients. Our top three clients accounted for 32% and 23% of our net revenue for the fiscal year 2009 and the first half of fiscal year 2010, respectively. Our clients can generally terminate their contracts with us at any time, with limited prior notice or penalty. DeVry Inc., our largest client, accounted for approximately 19% and 12% of our net revenue for fiscal year 2009 and the first half of fiscal year 2010, respectively. DeVry has recently retained an advertising agency and has reduced its purchases of leads from us. DeVry and other clients may reduce their current level of business with us, leading to lower revenue. We expect that a limited number of clients will continue to account for a significant percentage of our revenue, and the loss of, or material reduction in, their marketing spending with us could decrease our revenue and harm our business.
 
We are dependent on two market verticals for a majority of our revenue.
 
To date, we have generated a majority of our revenue from clients in our education vertical. We expect that a majority of our revenue in fiscal year 2010 will be generated from clients in our education and financial services verticals. A downturn in economic or market conditions adversely affecting the education industry or the financial services industry would negatively impact our business and financial condition. Over the past year, education marketing spending has remained relatively stable, but this stability may not continue. Marketing budgets for clients in our education vertical are impacted by a number of factors, including the availability of student financial aid, the regulation of for-profit financial institutions and economic conditions. Over the past year, some segments of the financial services industry, particularly mortgages, credit cards and deposits, have seen declines in marketing budgets given the difficult market conditions. These declines may continue or worsen. In addition, the education and financial services industries are highly regulated. Changes


12


Table of Contents

in regulations or government actions may negatively impact our clients’ marketing practices and budgets and, therefore, adversely affect our financial results.
 
The United States Higher Education Act, administered by the U.S. Department of Education, provides that to be eligible to participate in Federal student financial aid programs, an educational institution must enter into a program participation agreement with the Secretary of the Department of Education. The agreement includes a number of conditions with which an institution must comply to be granted initial and continuing eligibility to participate. Among those conditions is a prohibition on institutions providing any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments to any individual or entity engaged in recruiting or admission activities. The regulations promulgated under the Higher Education Act specify a number of types of compensation, or “safe harbors,” that do not constitute incentive compensation in violation of this agreement. One of these safe harbors permits an institution to award incentive compensation for Internet-based recruitment and admission activities that provide information about the institution to prospective students, refer prospective students to the institution, or permit prospective students to apply for admission online. The U.S. Department of Education is currently engaged in a negotiated rulemaking process in which it has suggested repealing all existing safe harbors regarding incentive compensation in recruiting, including the Internet safe harbor. While we do not believe that compensation for services constitutes incentive compensation under the Higher Education Act, the elimination of the safe harbor could create uncertainty for our education clients and impact the way in which we are paid by our clients and, accordingly, could reduce the amount of net revenue we generate from the education client vertical.
 
In addition, some of our clients have had and may in the future have issues regarding their academic accreditation, which can adversely affect their ability to offer certain degree programs. If any of our significant education clients lose their accreditation, they may reduce or eliminate their marketing spending, which could adversely affect our financial results.
 
If we are unable to retain the members of our management team or attract and retain qualified management team members in the future, our business and growth could suffer.
 
Our success and future growth depend, to a significant degree, on the continued contributions of the members of our management team. Each member of our management team is an at-will employee and may voluntarily terminate his or her employment with us at any time with minimal notice. We also may need to hire additional management team members to adequately manage our growing business. We may not be able to retain or identify and attract additional qualified management team members. Competition for experienced management-level personnel in our industry is intense. Qualified individuals are in high demand, particularly in the Internet marketing industry, and we may incur significant costs to attract and retain them. If we lose the services of any of our senior managers or if we are unable to attract and retain additional qualified senior managers, our business and growth could suffer.
 
We need to hire and retain additional qualified personnel to grow and manage our business. If we are unable to attract and retain qualified personnel, our business and growth could be seriously harmed.
 
Our performance depends on the talents and efforts of our employees. Our future success will depend on our ability to attract, retain and motivate highly skilled personnel in all areas of our organization and, in particular, in our engineering/technology, sales and marketing, media, finance and legal/regulatory teams. We plan to continue to grow our business and will need to hire additional personnel to support this growth. We have found it difficult from time to time to locate and hire suitable personnel. If we experience similar difficulties in the future, our growth may be hindered. Qualified individuals are in high demand, particularly in the Internet marketing industry, and we may incur significant costs to attract and retain them. Many of our employees have also become, or will soon become, substantially vested in their stock option grants. Employees may be more likely to leave us following our initial public offering as a result of the establishment of a public market for our common stock. If we are unable to attract and retain the personnel we need to succeed, our business and growth could be harmed.


13


Table of Contents

We depend on third-party website publishers for a significant portion of our visitors, and any decline in the supply of media available through these websites or increase in the price of this media could cause our revenue to decline or our cost to reach visitors to increase.
 
A significant portion of our revenue is attributable to visitors originating from advertising placements that we purchase on third-party websites. In many instances, website publishers can change the advertising inventory they make available to us at any time and, therefore, impact our revenue. In addition, website publishers may place significant restrictions on our offerings. These restrictions may prohibit advertisements from specific clients or specific industries, or restrict the use of certain creative content or formats. If a website publisher decides not to make advertising inventory available to us, or decides to demand a higher revenue share or places significant restrictions on the use of such inventory, we may not be able to find advertising inventory from other websites that satisfy our requirements in a timely and cost-effective manner. In addition, the number of competing online marketing service providers and advertisers that acquire inventory from websites continues to increase. Consolidation of Internet advertising networks and website publishers could eventually lead to a concentration of desirable inventory on a small number of websites or networks, which could limit the supply of inventory available to us or increase the price of inventory to us. We cannot assure you that we will be able to acquire advertising inventory that meets our clients’ performance, price and quality requirements. If any of these things occur, our revenue could decline or our operating costs may increase.
 
We have incurred a significant amount of debt, which may limit our ability to fund general corporate requirements and obtain additional financing, limit our flexibility in responding to business opportunities and competitive developments and increase our vulnerability to adverse economic and industry conditions.
 
As of December 31, 2009, we had an outstanding term loan with a principal balance of approximately $27.0 million and a revolving credit facility pursuant to which we can borrow up to an additional $100.0 million. As of December 31, 2009, we had drawn $49.8 million from our revolving credit facility. In January 2010, we replaced our existing credit facility with a credit facility with a total borrowing capacity of $175.0 million. The new facility consists of a $35.0 million four-year term loan, with principal amortization of 10%, 15%, 35% and 40% annually, and a $140.0 million four-year revolving credit facility. As of December 31, 2009, we also had outstanding notes to sellers arising from numerous acquisitions in the total principal amount of $29.8 million. As a result of our debt:
 
  •  we may not have sufficient liquidity to respond to business opportunities, competitive developments and adverse economic conditions;
 
  •  we may not have sufficient liquidity to fund all of these costs if our revenue declines or costs increase; and
 
  •  we may not have sufficient funds to repay the principal balance of our debt when due.
 
Our debt obligations may also impair our ability to obtain additional financing, if needed. Our indebtedness is secured by substantially all of our assets, leaving us with limited collateral for additional financing. Moreover, the terms of our indebtedness restrict our ability to take certain actions, including the incurrence of additional indebtedness, mergers and acquisitions, investments and asset sales. In addition, even if we are able to raise needed equity financing, we are required to use a portion of the net proceeds of certain types of equity financings to repay the outstanding balance of our term loan. A failure to pay interest or indebtedness when due could result in a variety of adverse consequences, including the acceleration of our indebtedness. In such a situation, it is unlikely that we would be able to fulfill our obligations under our credit facilities or repay the accelerated indebtedness or otherwise cover our costs.
 
The severe economic downturn in the United States poses additional risks to our business, financial condition and results of operations.
 
The United States has experienced, and is continuing to experience, a severe economic downturn. The credit crisis, deterioration of global economies, rising unemployment and reduced equity valuations all create risks that could harm our business. If macroeconomic conditions worsen, we are not able to predict the impact such worsening conditions will have on the online marketing industry in general, and our results of operations


14


Table of Contents

specifically. Clients in particular verticals such as financial services, particularly mortgage, credit cards and deposits, small- to medium-sized business customers and home services are facing very difficult conditions and their marketing spend has been negatively affected. These conditions could also damage our business opportunities in existing markets, and reduce our revenue and profitability. While the effect of these and related conditions poses widespread risk across our business, we believe that it may particularly affect our efforts in the mortgage, credit cards and deposits, small- to medium-sized business and home services verticals, due to reduced availability of credit for households and business and reduced household disposable income. Economic conditions may not improve or may worsen.
 
Our operating results have fluctuated in the past and may do so in the future, which makes our results of operations difficult to predict and could cause our operating results to fall short of analysts’ and investors’ expectations.
 
While we have experienced continued revenue growth, our prior quarterly and annual operating results have fluctuated due to changes in our business, our industry and the general economic climate. Similarly, our future operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. Our fluctuating results could cause our performance to be below the expectations of securities analysts and investors, causing the price of our common stock to fall. Because our business is changing and evolving, our historical operating results may not be useful to you in predicting our future operating results. Factors that may increase the volatility of our operating results include the following:
 
  •  changes in demand and pricing for our services;
 
  •  changes in our pricing policies, the pricing policies of our competitors, or the pricing of Internet advertising or media;
 
  •  the addition of new clients or the loss of existing clients;
 
  •  changes in our clients’ advertising agencies or the marketing strategies our clients or their advertising agencies employ;
 
  •  changes in the economic prospects of our clients or the economy generally, which could alter current or prospective clients’ spending priorities, or could increase the time or costs required to complete sales with clients;
 
  •  changes in the availability of Internet advertising or the cost to reach Internet visitors;
 
  •  changes in the placement of our websites on search engines;
 
  •  the introduction of new product or service offerings by our competitors; and
 
  •  costs related to acquisitions of businesses or technologies.
 
Our quarterly revenue and operating results may fluctuate significantly from quarter to quarter due to seasonal fluctuations in advertising spending.
 
The timing of our revenue, particularly from our education client vertical, is affected by seasonal factors. For example, the first quarter of each fiscal year typically demonstrates seasonal strength and our second fiscal quarter typically demonstrates seasonal weakness. In our second fiscal quarter, our education clients often take fewer leads due to holiday staffing and lower availability of lead supply caused by higher media pricing for some forms of media during the holiday period, causing our revenue to be sequentially lower. Our fluctuating results could cause our performance to be below the expectations of securities analysts and investors, causing the price of our common stock to fall. To the extent our rate of growth slows, we expect that the seasonality in our business may become more apparent and may in the future cause our operating results to fluctuate to a greater extent.
 
We may need additional capital in the future to meet our financial obligations and to pursue our business objectives. Additional capital may not be available or may not be available on favorable terms and our business and financial condition could therefore be adversely affected.
 
While we anticipate the net proceeds of this offering, together with availability under our existing credit facility, cash balances and cash from operations, will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to finance acquisitions. If


15


Table of Contents

we seek to raise additional capital in order to meet various objectives, including developing future technologies and services, increasing working capital, acquiring businesses and responding to competitive pressures, capital may not be available on favorable terms or may not be available at all. In addition, pursuant to the terms of our credit facility, we are required to use a portion of the net proceeds of any equity financing, other than this offering and any other public equity offerings, to repay the outstanding balance of our term loan. Lack of sufficient capital resources could significantly limit our ability to take advantage of business and strategic opportunities. Any additional capital raised through the sale of equity or debt securities with an equity component would dilute our stock ownership. If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of our business strategy, including potential additional acquisitions or development of new technologies.
 
If we fail to compete effectively against other online marketing and media companies and other competitors, we could lose clients and our revenue may decline.
 
The market for online marketing is intensely competitive. We expect this competition to continue to increase in the future. We perceive only limited barriers to entry to the online marketing industry. We compete both for clients and for limited high quality advertising inventory. We compete for clients on the basis of a number of factors, including return on marketing expenditures, price, and client service.
 
We compete with Internet and traditional media companies for a share of clients’ overall marketing budgets, including:
 
  •  online marketing or media services providers such as Monster Worldwide in the education vertical and Bankrate in financial services;
 
  •  offline and online advertising agencies;
 
  •  major Internet portals and search engine companies with advertising networks such as Google, Yahoo!, MSN, and AOL;
 
  •  other online marketing service providers, including online affiliate advertising networks and industry-specific portals or lead generation companies;
 
  •  website publishers with their own sales forces that sell their online marketing services directly to clients;
 
  •  in-house marketing groups at current or potential clients;
 
  •  offline direct marketing agencies; and
 
  •  television, radio and print companies.
 
Competition for web traffic among websites and search engines, as well as competition with traditional media companies, could result in significant price pressure, declining margins, reductions in revenue and loss of market share. In addition, as we continue to expand the scope of our services, we may compete with a greater number of websites, clients and traditional media companies across an increasing range of different services, including in vertical markets where competitors may have advantages in expertise, brand recognition and other areas. Large Internet companies with brand recognition, such as Google, Yahoo!, MSN, and AOL, have significant numbers of direct sales personnel and substantial proprietary advertising inventory and web traffic that provide a significant competitive advantage and have significant impact on pricing for Internet advertising and web traffic. The trend toward consolidation in the Internet advertising arena may also affect pricing and availability of advertising inventory and web traffic. Many of our current and potential competitors also enjoy other competitive advantages over us, such as longer operating histories, greater brand recognition, larger client bases, greater access to advertising inventory on high-traffic websites, and significantly greater financial, technical and marketing resources. As a result, we may not be able to compete successfully. If we fail to deliver results that are superior to those that other online marketing service providers achieve, we could lose clients and our revenue may decline.


16


Table of Contents

If the market for online marketing services fails to continue to develop, our future growth may be limited and our revenue may decrease.
 
The online marketing services market is relatively new and rapidly evolving, and it uses different measurements than traditional media to gauge its effectiveness. Some of our current or potential clients have little or no experience using the Internet for advertising and marketing purposes and have allocated only limited portions of their advertising and marketing budgets to the Internet. The adoption of Internet advertising, particularly by those entities that have historically relied upon traditional media for advertising, requires the acceptance of a new way of conducting business, exchanging information and evaluating new advertising and marketing technologies and services. In particular, we are dependent on our clients’ adoption of new metrics to measure the success of online marketing campaigns. We may also experience resistance from traditional advertising agencies who may be advising our clients. We cannot assure you that the market for online marketing services will continue to grow. If the market for online marketing services fails to continue to develop or develops more slowly than we anticipate, our ability to grow our business may be limited and our revenue may decrease.
 
Third-party website publishers can engage in unauthorized or unlawful acts that could subject us to significant liability or cause us to lose clients.
 
We generate a significant portion of our web visitors from media advertising that we purchase from third-party website publishers. Some of these publishers are authorized to display our clients’ brands, subject to contractual restrictions. In the past, some of our third-party website publishers have engaged in activities that certain of our clients have viewed as harmful to their brands, such as displaying outdated descriptions of a client’s offerings or outdated logos. Any activity by publishers that clients view as potentially damaging to their brands can harm our relationship with the client and cause the client to terminate its relationship with us, resulting in a loss of revenue. In addition, the law is unsettled on the extent of liability that an advertiser in our position has for the activities of third-party website publishers. We could be subject to costly litigation and, if we are unsuccessful in defending ourselves, damages for the unauthorized or unlawful acts of third-party website publishers.
 
Poor perception of our business or industry as a result of the actions of third parties could harm our reputation and adversely affect our business, financial condition and results of operations.
 
Our business is dependent on attracting a large number of visitors to our websites and providing leads and clicks to our clients, which depends in part on our reputation within the industry and with our clients. There are companies within our industry that regularly engage in activities that our clients’ customers may view as unlawful or inappropriate. These activities, such as spyware or deceptive promotions, by third parties may be seen by clients as characteristic of participants in our industry and, therefore, may have an adverse effect on the reputation of all participants in our industry, including us. Any damage to our reputation, including from publicity from legal proceedings against us or companies that work within our industry, governmental proceedings, consumer class action litigation, or the disclosure of information security breaches or private information misuse, could adversely affect our business, financial condition and results of operations.
 
Because many of our client contracts can be cancelled by the client with little prior notice or penalty, the cancellation of one or more contracts could result in an immediate decline in our revenue.
 
We derive our revenue from contracts with our Internet marketing clients, most of which are cancelable with little or no prior notice. In addition, these contracts do not contain penalty provisions for cancellation before the end of the contract term. The non-renewal, renegotiation, cancellation, or deferral of large contracts, or a number of contracts that in the aggregate account for a significant amount of our revenue, is difficult to anticipate and could result in an immediate decline in our revenue.
 
Unauthorized access to or accidental disclosure of consumer personally-identifiable information that we collect may cause us to incur significant expenses and may negatively impact our credibility and business.
 
There is growing concern over the security of personal information transmitted over the Internet, consumer identity theft and user privacy. Despite our implementation of security measures, our computer systems may be


17


Table of Contents

susceptible to electronic or physical computer break-ins, viruses and other disruptions and security breaches. Any perceived or actual unauthorized disclosure of personally-identifiable information regarding website visitors, whether through breach of our network by an unauthorized party, employee theft, misuse or error or otherwise, could harm our reputation, impair our ability to attract website visitors and attract and retain our clients, or subject us to claims or litigation arising from damages suffered by consumers, and thereby harm our business and operating results. In addition, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding the unauthorized disclosure of personal information.
 
If we do not adequately protect our intellectual property rights, our competitive position and business may suffer.
 
Our ability to compete effectively depends upon our proprietary systems and technology. We rely on trade secret, trademark and copyright law, confidentiality agreements, technical measures and patents to protect our proprietary rights. We currently have one patent application pending in the United States and no issued patents. Effective trade secret, copyright, trademark and patent protection may not be available in all countries where we currently operate or in which we may operate in the future. Some of our systems and technologies are not covered by any copyright, patent or patent application. We cannot guarantee that: (i) our intellectual property rights will provide competitive advantages to us; (ii) our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties; (iii) our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; (iv) any of the patents, trademarks, copyrights, trade secrets or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged, or abandoned; (v) competitors will not design around our protected systems and technology; or (vi) that we will not lose the ability to assert our intellectual property rights against others.
 
We are a party to a number of third-party intellectual property license agreements and in the future, may need to obtain additional licenses or renew existing license agreements. We are unable to predict with certainty whether these license agreements can be obtained or renewed on commercially reasonable terms, or at all.
 
We have from time to time become aware of third parties who we believe may have infringed on our intellectual property rights. The use of our intellectual property rights by others could reduce any competitive advantage we have developed and cause us to lose clients, third-party website publishers or otherwise harm our business. Policing unauthorized use of our proprietary rights can be difficult and costly. In addition, litigation, while it may be necessary to enforce or protect our intellectual property rights or to defend litigation brought against us, could result in substantial costs and diversion of resources and management attention and could adversely affect our business, even if we are successful on the merits.
 
Confidentiality agreements with employees, consultants and others may not adequately prevent disclosure of trade secrets and other proprietary information.
 
We have devoted substantial resources to the development of our proprietary systems and technology. In order to protect our proprietary systems and technology, we enter into confidentiality agreements with our employees, consultants, independent contractors and other advisors. These agreements may not effectively prevent unauthorized disclosure of confidential information or unauthorized parties from copying aspects of our services or obtaining and using information that we regard as proprietary. Moreover, these agreements may not provide an adequate remedy in the event of such unauthorized disclosures of confidential information and we cannot assure you that our rights under such agreements will be enforceable. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could reduce any competitive advantage we have and cause us to lose clients, publishers or otherwise harm our business.


18


Table of Contents

Third parties may sue us for intellectual property infringement which, if successful, could require us to pay significant damages or curtail our offerings.
 
We cannot be certain that our internally-developed or acquired systems and technologies do not and will not infringe the intellectual property rights of others. In addition, we license content, software and other intellectual property rights from third parties and may be subject to claims of infringement if such parties do not possess the necessary intellectual property rights to the products they license to us. We have in the past and may in the future be subject to legal proceedings and claims that we have infringed the patent or other intellectual property rights of a third-party. These claims sometimes involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents, if any, may therefore provide little or no deterrence. In addition, third parties have asserted and may in the future assert intellectual property infringement claims against our clients, which we have agreed in certain circumstances to indemnify and defend against such claims. Any intellectual property related infringement claims, whether or not meritorious, could result in costly litigation and could divert management resources and attention. Moreover, should we be found liable for infringement, we may be required to enter into licensing agreements, if available on acceptable terms or at all, pay substantial damages, or limit or curtail our systems and technologies. Moreover, we may need to redesign some of our systems and technologies to avoid future infringement liability. Any of the foregoing could prevent us from competing effectively and increase our costs.
 
Additionally, the laws relating to use of trademarks on the Internet are currently unsettled, particularly as they apply to search engine functionality. For example, other Internet marketing and search companies have been sued in the past for trademark infringement and other intellectual property-related claims for the display of ads or search results in response to user queries that include trademarked terms. The outcomes of these lawsuits have differed from jurisdiction to jurisdiction. For this reason, it is conceivable that certain of our activities could expose us to trademark infringement, unfair competition, misappropriation or other intellectual property related claims which could be costly to defend and result in substantial damages or otherwise limit or curtail our activities, and adversely affect our business or prospects.
 
Our proprietary technologies may include design or performance defects and may not achieve their intended results, either of which could impair our future revenue growth.
 
Our proprietary technologies are relatively new, and they may contain design or performance defects that are not yet apparent. The use of our proprietary technologies may not achieve the intended results as effectively as other technologies that exist now or may be introduced by our competitors, in which case our business could be harmed.
 
If we are unable to price our services appropriately, our margins and revenue may decline.
 
Our clients purchase our services according to a variety of pricing formulae, the vast majority of which are based on pay for performance, meaning clients pay only after we have delivered the desired result to them. Regardless of how a given client pays us, we ordinarily pay the vast majority of the costs associated with delivering our services to our clients according to contracts and other arrangements that do not always condition payment to vendors upon receipt of payments from our clients. This means we typically pay for the costs of providing our marketing services before we receive payment from clients. Additionally, certain of our marketing services costs are highly variable and may fluctuate significantly during each calendar month. Accordingly, we run the risk of not being able to recover the entire cost of our services from clients if pricing or other terms negotiated prior to the performance of services prove less than the cost of performing such services. We have experienced situations in the past where we incurred losses in the delivery of our services to specific clients. If we are unable to avoid recurrence of similar situations in the future through negotiation of profitable pricing and other terms, our results of operations will suffer.
 
If we fail to keep pace with rapidly-changing technologies and industry standards, we could lose clients or advertising inventory and our results of operations may suffer.
 
The business lines in which we currently compete are characterized by rapidly-changing Internet media and marketing standards, changing technologies, frequent new product and service introductions, and changing


19


Table of Contents

user and client demands. The introduction of new technologies and services embodying new technologies and the emergence of new industry standards and practices could render our existing technologies and services obsolete and unmarketable or require unanticipated investments in technology. Our future success will depend in part on our ability to adapt to these rapidly-changing Internet media formats and other technologies. We will need to enhance our existing technologies and services and develop and introduce new technologies and services to address our clients’ changing demands. If we fail to adapt successfully to such developments or timely introduce new technologies and services, we could lose clients, our expenses could increase and we could lose advertising inventory.
 
Changes in government regulation and industry standards applicable to the Internet and our business could decrease demand for our technologies and services or increase our costs.
 
Laws and regulations that apply to Internet communications, commerce and advertising are becoming more prevalent. These regulations could increase the costs of conducting business on the Internet and could decrease demand for our technologies and services.
 
In the United States, federal and state laws have been enacted regarding copyrights, sending of unsolicited commercial email, user privacy, search engines, Internet tracking technologies, direct marketing, data security, children’s privacy, pricing, sweepstakes, promotions, intellectual property ownership and infringement, trade secrets, export of encryption technology, taxation and acceptable content and quality of goods. Other laws and regulations may be adopted in the future. Laws and regulations, including those related to privacy and use of personal information, are changing rapidly outside the United States as well which may make compliance with such laws and regulations difficult and which may negatively affect our ability to expand internationally. This legislation could: (i) hinder growth in the use of the Internet generally; (ii) decrease the acceptance of the Internet as a communications, commercial and advertising medium; (iii) reduce our revenue; (iv) increase our operating expenses; or (v) expose us to significant liabilities.
 
The laws governing the Internet remain largely unsettled, even in areas where there has been some legislative action. While we actively monitor this changing legal and regulatory landscape to stay abreast of changes in the laws and regulations applicable to our business, we are not certain how our business might be affected by the application of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, libel, obscenity and export or import matters to the Internet advertising industry. The vast majority of such laws were adopted prior to the advent of the Internet. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws intended to address such issues could create uncertainty in the Internet market. It may take years to determine how existing laws apply to the Internet and Internet marketing. Such uncertainty makes it difficult to predict costs and could reduce demand for our services or increase the cost of doing business as a result of litigation costs or increased service delivery costs.
 
In particular, a number of U.S. federal laws impact our business. The Digital Millennium Copyright Act, or DMCA, is intended, in part, to limit the liability of eligible online service providers for listing or linking to third-party websites that include materials that infringe copyrights or other rights. Portions of the Communications Decency Act, or CDA, are intended to provide statutory protections to online service providers who distribute third-party content. We rely on the protections provided by both the DMCA and CDA in conducting our business. In addition, the United States Higher Education Act provides that to be eligible to participate in Federal student financial aid programs, an educational institution must enter into a program participation agreement with the Secretary of the Department of Education. The agreement includes a number of conditions with which an institution must comply to be granted initial and continuing eligibility to participate. Among those conditions is a prohibition on institutions providing any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments to any individual or entity engaged in recruiting or admission activities. The regulations promulgated under the Higher Education Act specify a number of types of compensation, or “safe harbors,” that do not constitute incentive compensation in violation of this agreement. One of these safe harbors permits an institution to award incentive compensation for Internet-based recruitment and admission activities that provide information about the institution to prospective students, refer prospective students to the institution, or permit prospective students to apply for


20


Table of Contents

admission online. The U.S. Department of Education is currently engaged in a negotiated rulemaking process in which it has suggested repealing all existing safe harbors regarding incentive compensation in recruiting, including the Internet safe harbor. Any changes in these laws or judicial interpretations narrowing their protections will subject us to greater risk of liability and may increase our costs of compliance with these regulations or limit our ability to operate certain lines of business.
 
The financial services, education and medical industries are highly regulated and our marketing activities on behalf of our clients in those industries are also regulated. For example, our mortgage websites and marketing services we offer are subject to various federal, state and local laws, including state mortgage broker licensing laws, federal and state laws prohibiting unfair acts and practices, and federal and state advertising laws. Any failure to comply with these laws and regulations could subject us to revocation of required licenses, civil, criminal or administrative liability, damage to our reputation or changes to or limitations on the conduct of our business. Any of the foregoing could cause our business, operations and financial condition to suffer.
 
New tax treatment of companies engaged in Internet commerce may adversely affect the commercial use of our marketing services and our financial results.
 
Due to the global nature of the Internet, it is possible that, although our services and the Internet transmissions related to them originate in California and Nevada, and in some cases, England, governments of other states or foreign countries might attempt to regulate our transmissions or levy sales, income or other taxes relating to our activities. We have experienced certain states taking expansive positions with regard to their taxation of our services. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate tax treatment of companies engaged in Internet commerce. New or revised state tax regulations may subject us or our affiliates to additional state sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet. New or revised taxes and, in particular, sales taxes, would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over the Internet. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.
 
Limitations on our ability to collect and use data derived from user activities could significantly diminish the value of our services and cause us to lose clients and revenue.
 
When a user visits our websites, we use technologies, including “cookies”, to collect information such as the user’s Internet Protocol, or IP, address, offerings delivered by us that have been previously viewed by the user and responses by the user to those offerings. In order to determine the effectiveness of a marketing campaign and to determine how to modify the campaign, we need to access and analyze this information. The use of cookies has been the subject of regulatory scrutiny and users are able to block or delete cookies from their browser. Periodically, certain of our clients and publishers seek to prohibit or limit our collection or use of this data. Interruptions, failures or defects in our data collection systems, as well as privacy concerns regarding the collection of user data, could also limit our ability to analyze data from our clients’ marketing campaigns. This risk is heightened when we deliver marketing services to clients in the financial and medical services client verticals. If our access to data is limited in the future, we may be unable to provide effective technologies and services to clients and we may lose clients and revenue.
 
As a creator and a distributor of Internet content, we face potential liability and expenses for legal claims based on the nature and content of the materials that we create or distribute. If we are required to pay damages or expenses in connection with these legal claims, our operating results and business may be harmed.
 
We create original content for our websites and marketing messages and distribute third-party content on our websites and in our marketing messages. As a creator and distributor of original content and third-party provided content, we face potential liability based on a variety of theories, including defamation, negligence, copyright or trademark infringement or other legal theories based on the nature, creation or distribution of this information. It is also possible that our website visitors could make claims against us for losses incurred in


21


Table of Contents

reliance upon information provided on our websites. In addition, as the number of users of forums and social media features on our websites increases, we could be exposed to liability in connection with material posted to our websites by users and other third parties. These claims, whether brought in the United States or abroad, could divert management time and attention away from our business and result in significant costs to investigate and defend, regardless of the merit of these claims. In addition, if we become subject to these types of claims and are not successful in our defense, we may be forced to pay substantial damages.
 
Wireless devices and mobile phones are increasingly being used to access the Internet, and our online marketing services may not be as effective when accessed through these devices, which could cause harm to our business.
 
The number of people who access the Internet through devices other than personal computers has increased substantially in the last few years. Our online marketing services were designed for persons accessing the Internet on a desktop or laptop computer. The smaller screens, lower resolution graphics and less convenient typing capabilities of these devices may make it more difficult for visitors to respond to our offerings. In addition, the cost of mobile advertising is relatively high and may not be cost-effective for our services. If our services continue to be less effective or economically attractive for clients seeking to engage in marketing through these devices and this segment of web traffic grows at the expense of traditional computer Internet access, we will experience difficulty attracting website visitors and attracting and retaining clients and our operating results and business will be harmed.
 
We may not succeed in expanding our businesses outside the United States, which may limit our future growth.
 
One potential area of growth for us is in the international markets. However, we have limited experience in marketing, selling and supporting our services outside of the United States and we may not be successful in introducing or marketing our services abroad. There are risks inherent in conducting business in international markets, such as:
 
  •  the adaptation of technologies and services to foreign clients’ preferences and customs;
 
  •  application of foreign laws and regulations to us, including marketing and privacy regulations;
 
  •  changes in foreign political and economic conditions;
 
  •  tariffs and other trade barriers, fluctuations in currency exchange rates and potentially adverse tax consequences;
 
  •  language barriers or cultural differences;
 
  •  reduced or limited protection for intellectual property rights in foreign jurisdictions;
 
  •  difficulties and costs in staffing and managing or overseeing foreign operations; and
 
  •  education of potential clients who may not be familiar with online marketing.
 
If we are unable to successfully expand and market our services abroad, our business and future growth may be harmed and we may incur costs that may not lead to future revenue.
 
We rely on Internet bandwidth and data center providers and other third parties for key aspects of the process of providing services to our clients, and any failure or interruption in the services and products provided by these third parties could harm our business.
 
We rely on third-party vendors, including data center and Internet bandwidth providers. Any disruption in the network access or co-location services provided by these third-party providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm our business. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. We license technology and related databases from third parties to facilitate analysis and storage of data and delivery of offerings. We have experienced interruptions and delays in service and availability for data centers, bandwidth and other technologies in the


22


Table of Contents

past. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and services could adversely affect our business and could expose us to liabilities to third parties.
 
Our systems also heavily depend on the availability of electricity, which also comes from third-party providers. If we or third-party data centers which we utilize were to experience a major power outage, we would have to rely on back-up generators. These back-up generators may not operate properly through a major power outage and their fuel supply could also be inadequate during a major power outage or disruptive event. Furthermore, we do not currently have backup generators at our Foster City, California headquarters. Information systems such as ours may be disrupted by even brief power outages, or by the fluctuations in power resulting from switches to and from back-up generators. This could give rise to obligations to certain of our clients which could have an adverse effect on our results for the period of time in which any disruption of utility services to us occurs.
 
Interruption or failure of our information technology and communications systems could impair our ability to effectively deliver our services, which could cause us to lose clients and harm our operating results.
 
Our delivery of marketing and media services depends on the continuing operation of our technology infrastructure and systems. Any damage to or failure of our systems could result in interruptions in our ability to deliver offerings quickly and accurately and/or process visitors’ responses emanating from our various web presences. Interruptions in our service could reduce our revenue and profits, and our reputation could be damaged if people believe our systems are unreliable. Our systems and operations are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, break-ins, hardware or software failures, telecommunications failures, computer viruses or other attempts to harm our systems, and similar events.
 
We lease or maintain server space in various locations, including in San Francisco, California. Our California facilities are located in areas with a high risk of major earthquakes. Our facilities are also subject to break-ins, sabotage and intentional acts of vandalism, and to potential disruptions if the operators of these facilities have financial difficulties. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons or other unanticipated problems at our facilities could result in lengthy interruptions in our service.
 
Any unscheduled interruption in our service would result in an immediate loss of revenue. If we experience frequent or persistent system failures, the attractiveness of our technologies and services to clients and website publishers could be permanently harmed. The steps we have taken to increase the reliability and redundancy of our systems are expensive, reduce our operating margin, and may not be successful in reducing the frequency or duration of unscheduled interruptions.
 
Any constraints on the capacity of our technology infrastructure could delay the effectiveness of our operations or result in system failures, which would result in the loss of clients and harm our business and results of operations.
 
Our future success depends in part on the efficient performance of our software and technology infrastructure. As the numbers of websites and Internet users increase, our technology infrastructure may not be able to meet the increased demand. A sudden and unexpected increase in the volume of user responses could strain the capacity of our technology infrastructure. Any capacity constraints we experience could lead to slower response times or system failures and adversely affect the availability of websites and the level of user responses received, which could result in the loss of clients or revenue or harm to our business and results of operations.
 
We could lose clients if we fail to detect click-through or other fraud on advertisements in a manner that is acceptable to our clients.
 
We are exposed to the risk of fraudulent clicks or actions on our websites or our third-party publishers’ websites. We may in the future have to refund revenue that our clients have paid to us and that was later attributed to, or suspected to be caused by, fraud. Click-through fraud occurs when an individual clicks on an


23


Table of Contents

ad displayed on a website or an automated system is used to create such clicks with the intent of generating the revenue share payment to the publisher rather than to view the underlying content. Action fraud occurs when on-line forms are completed with false or fictitious information in an effort to increase the compensable actions in respect of which a web publisher is to be compensated. From time to time we have experienced fraudulent clicks or actions and we do not charge our clients for such fraudulent clicks or actions when they are detected. It is conceivable that this activity could negatively affect our profitability, and this type of fraudulent act could hurt our reputation. If fraudulent clicks or actions are not detected, the affected clients may experience a reduced return on their investment in our marketing programs, which could lead the clients to become dissatisfied with our campaigns, and in turn, lead to loss of clients and the related revenue. Additionally, we have from time to time had to terminate relationships with web publishers who we believed to have engaged in fraud and we may have to do so in future. Termination of such relationships entails a loss of revenue associated with the legitimate actions or clicks generated by such web publishers.
 
We will incur significant increased costs as a result of operating as a public company, which may adversely affect our operating results and financial condition.
 
As a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. We will incur costs associated with our public company reporting requirements. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, as well as rules implemented by the SEC and The NASDAQ Global Market. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Furthermore, these laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
 
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, for the fiscal year ending June 30, 2011, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404. Our compliance with Section 404 will require that we incur substantial expense and expend significant management time on compliance-related issues.
 
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our ability to operate our business.
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. We may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our internal control over financial reporting will not prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected. If we are unable to maintain proper and effective internal controls, we may not be able to produce accurate financial


24


Table of Contents

statements on a timely basis, which could adversely affect our ability to operate our business and could result in regulatory action.
 
Risks Related to This Offering and Ownership of Our Common Stock
 
Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid.
 
Prior to this offering there has been no public market for shares of our common stock, and an active public market for our shares may not develop or be sustained after this offering. We and the representatives of the underwriters will determine the offering price of our common stock through negotiation. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. In addition, the trading price of our common stock following this offering could be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this “Risk Factors” section of this prospectus and others such as:
 
  •  changes in earnings estimates or recommendations by securities analysts;
 
  •  announcements by us or our competitors of new services, significant contracts, commercial relationships, acquisitions or capital commitments;
 
  •  developments with respect to intellectual property rights;
 
  •  our ability to develop and market new and enhanced products on a timely basis;
 
  •  our commencement of, or involvement in, litigation;
 
  •  changes in governmental regulations or in the status of our regulatory approvals; and
 
  •  a slowdown in our industry or the general economy.
 
In recent years, the stock market in general, and the market for technology and Internet-based companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
 
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
 
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us issue an adverse opinion regarding our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
 
Our directors, executive officers and principal stockholders and their respective affiliates 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, approximately 59% of our outstanding


25


Table of Contents

common stock, assuming no exercise of the underwriters’ option to purchase additional shares of our common stock in this offering. As a result, these stockholders, acting together, will continue to have substantial control over the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, will continue to have significant influence over the management and affairs of our company. Accordingly, this concentration of ownership may have the effect of:
 
  •  delaying, deferring or preventing a change in corporate control;
 
  •  impeding a merger, consolidation, takeover or other business combination involving us; or
 
  •  discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
 
Future sales of shares by existing stockholders could cause our stock price to decline.
 
If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up, which period may be extended in certain limited circumstances, and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. Based on shares outstanding as of December 31, 2009, upon the completion of this offering, we will have outstanding 44,912,597 shares of common stock, assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options. Of these shares, 10,000,000 shares of common stock, plus any shares sold upon exercise of the underwriters’ over-allotment option, will be immediately freely tradable, without restriction, in the public market. The underwriters may, in their sole discretion, permit our officers, directors, employees and current stockholders to sell shares prior to the expiration of the lock-up agreements.
 
After the lock-up agreements pertaining to this offering expire and based on shares outstanding as of December 31, 2009, the remaining 34,912,597 shares will be eligible for sale in the public market. In addition, (i) the 11,504,767 shares subject to outstanding options under our equity incentive plans as of December 31, 2009 and (ii) the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the price of our common stock could decline substantially.
 
Purchasers of common stock in this offering will experience immediate and substantial dilution in the book value of their investment.
 
The initial offering price of our common stock is substantially higher than the expected net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $15.53 in net tangible book value per share from the price you paid, based on our shares outstanding as of December 31, 2009. In addition, following this offering, purchasers in the offering will have contributed approximately 80% of the total consideration paid by stockholders to us to purchase shares of our common stock, based on our shares outstanding as of December 31, 2009. In addition, if the underwriters exercise their option to purchase additional shares or if outstanding options are exercised, you will experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see the section of this prospectus entitled “Dilution.”
 
We have broad discretion to determine how to use the funds raised in this offering, and may use them in ways that may not enhance our operating results or the price of our common stock.
 
Our management will have broad discretion over the use of proceeds from this offering, and we could spend the proceeds from this offering in ways our stockholders may not agree with or that do not yield a favorable return. We intend to use the net proceeds from this offering for working capital, capital expenditures and other general corporate purposes. We may also use a portion of the net proceeds to make repayments on our debt or acquire other businesses, products or technologies. If we do not invest or apply the proceeds of


26


Table of Contents

this offering in ways that improve our operating results, we may fail to achieve expected financial results, which could cause our stock price to decline.
 
Provisions in our charter documents following this offering, under Delaware law and in contractual obligations, could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.
 
Our amended and restated certificate of incorporation and bylaws that will be in effect as of the closing of this offering will contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors. These provisions will include:
 
  •  a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;
 
  •  no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
 
  •  the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
 
  •  the ability of our board of directors to determine to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
 
  •  a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
 
  •  the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
 
  •  advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.
 
We are subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. For a description of our capital stock, see “Description of Capital Stock.”
 
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
 
We do not intend to declare and pay dividends on our capital stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our credit facility restrict our ability to pay dividends. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future.


27


Table of Contents

 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
 
This prospectus, particularly in the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “may,” “might,” “objective,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described under the section titled “Risk Factors” and elsewhere in this prospectus, regarding, among other things:
 
  •  our immature industry and relatively new business model;
 
  •  our ability to manage our growth effectively;
 
  •  our dependence on Internet search companies to attract Internet visitors;
 
  •  our ability to successfully manage any future acquisitions;
 
  •  our dependence on a small number of large clients and our dependence on a small number of client verticals for a majority of our revenue;
 
  •  our ability to attract and retain qualified employees and key personnel;
 
  •  our ability to accurately forecast our operating results and appropriately plan our expenses;
 
  •  our ability to compete in our industry;
 
  •  our ability to enhance and maintain our client and vendor relationships;
 
  •  our ability to develop new services and enhancements and features to meet new demands from our clients;
 
  •  our ability to raise additional capital in the future, if needed;
 
  •  general economic conditions in our domestic and potential future international markets;
 
  •  our ability to protect our intellectual property rights; and
 
  •  our expectations regarding the use of proceeds from this offering.
 
These risks are not exhaustive. Other sections of this prospectus may include additional factors that could adversely impact our business and financial performance. These statements reflect our current views with respect to future events and are based on assumptions and subject to risk and uncertainties. Moreover, we operate in a very competitive and rapidly-changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, 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.
 
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. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.
 
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement on Form S-1, of which this prospectus is a part, that we have filed with the SEC with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.


28


Table of Contents

 
USE OF PROCEEDS
 
We estimate that the net proceeds to us from the sale of our common stock in this offering will be approximately $165.1 million, or approximately $190.2 million if the underwriters exercise their right to purchase additional shares of common stock from us to cover over-allotments in full, based upon an assumed initial public offering price of $18.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses. Each $1.00 increase (decrease) in the assumed initial public offering price of $18.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $9.3 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $16.7 million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our uses of the net proceeds from this offering, although it may impact the amount of time prior to which we may need to seek additional capital.
 
We currently intend to use our net proceeds from this offering for working capital, capital expenditures and other general corporate purposes. We may also use a portion of the net proceeds to repay debt, including our credit facility, or acquire other businesses, products or technologies.
 
The expected use of net proceeds of this offering represents our current intentions based upon our present plans and business conditions. The amounts we actually expend in these areas may vary significantly from our current intentions and will depend upon a number of factors, including future sales growth, success of our engineering efforts, cash generated from future operations, if any, and actual expenses to operate our business. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering. Accordingly, our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the net proceeds of this offering.
 
The amount and timing of our expenditures will depend on several factors, including the amount and timing of our spending on sales and marketing activities and research and development activities, as well as our use of cash for other corporate activities. Pending the uses described above, we intend to invest the net proceeds in a variety of capital preservation instruments, including 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 any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors. The loan agreement for our credit facility contains a prohibition on the payout of cash dividends.


29


Table of Contents

 
CAPITALIZATION
 
The following table sets forth our cash, cash equivalents, current debt and capitalization as of December 31, 2009 (unaudited):
 
  •  on an actual basis;
 
  •  on a pro forma basis after giving effect to the conversion of all outstanding shares of our convertible preferred stock into 21,176,533 shares of common stock effective immediately prior to the closing of this offering; and
 
  •  on a pro forma as adjusted basis to reflect, in addition, the filing of our amended and restated certificate of incorporation and the sale of 10,000,000 shares of common stock that we are offering at an assumed initial public offering price of $18.00 per share, which is 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.
 
You should read the information in this table together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.
 
                         
    As of December 31, 2009  
                Pro Forma as
 
    Actual     Pro Forma     Adjusted(1)  
    (In thousands, except share data)  
 
Cash and cash equivalents
  $ 34,139     $ 34,139     $ 199,205  
                         
Debt, current
  $ 16,208     $ 16,208     $ 16,208  
                         
Debt, noncurrent
  $ 89,487     $ 89,487     $ 89,487  
Convertible preferred stock, $0.001 par value, 35,500,000 shares authorized, 21,176,533 shares issued and outstanding, actual; 35,500,000 shares authorized, no shares issued and outstanding, pro forma; no shares authorized, no shares issued and outstanding, pro forma as adjusted
    43,403              
Stockholders’ equity:
                       
Preferred stock, $0.001 par value, no shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma; 5,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted
                 
Common stock, $0.001 par value, 50,500,000 shares authorized, 15,913,516 shares issued and 13,736,064 shares outstanding, actual; 50,500,000 shares authorized, 37,090,049 shares issued and 34,912,597 shares outstanding, pro forma; 100,000,000 shares authorized, 47,090,049 shares issued and 44,912,597 shares outstanding, pro forma as adjusted
    16       37       47  
Additional paid-in capital
    30,279       73,661       238,717  
Treasury stock, at cost (2,177,452 shares)
    (7,779 )     (7,779 )     (7,779 )
Accumulated other comprehensive income
    13       13       13  
Retained earnings
    68,503       68,503       68,503  
Total stockholders’ equity
    91,032       134,435       299,501  
                         
Total capitalization
  $ 223,922     $ 223,922     $ 388,988  
                         


30


Table of Contents

 
(1) Each $1.00 increase (decrease) in the assumed public offering price of $18.00 per share, the midpoint of the range reflected on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $9.3 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. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $16.7 million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.
 
The outstanding share information in the table above is based on 34,912,597 shares of common stock outstanding as of December 31, 2009, and excludes:
 
  •  an aggregate of 11,504,767 shares of common stock issuable upon the exercise of outstanding stock options as of December 31, 2009 pursuant to our 2008 Equity Incentive Plan and having a weighted-average exercise price of $9.3429 per share;
 
  •  an aggregate of 587,717 additional shares of common stock reserved for future issuance under our 2008 Equity Incentive Plan as of December 31, 2009; provided, however, that immediately upon the execution and delivery of the underwriting agreement for this offering, our 2008 Equity Incentive Plan will terminate so that no further awards may be granted under our 2008 Equity Incentive Plan, and the shares then remaining and reserved for future issuance under our 2008 Equity Incentive Plan shall become available for future issuance under our 2010 Equity Incentive Plan; and
 
  •  the shares reserved for future issuance under our 2010 Equity Incentive Plan and up to 300,000 additional shares of common stock reserved for future issuance under our 2010 Non-Employee Directors’ Stock Award Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under each of these benefit plans, which will become effective immediately upon the execution and delivery of the underwriting agreement for this offering.


31


Table of Contents

 
DILUTION
 
If you invest in our common stock in this offering, 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 after this offering. As of December 31, 2009, our pro forma net tangible book value was $(54.1 million), or $(1.55) 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, 2009, after giving effect to the automatic conversion of all outstanding shares of convertible preferred stock into shares of common stock immediately prior to the closing of this offering. After giving effect to our sale in this offering of 10,000,000 shares of common stock at the assumed initial public offering price of $18.00 per share, the midpoint of the range reflected on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2009 would have been approximately $111.0 million, or $2.47 per share. This represents an immediate increase of net tangible book value of $4.02 per share to our existing stockholders and an immediate dilution of $15.53 per share to investors purchasing common stock in this offering. The following table illustrates this per share dilution:
 
                 
Assumed initial public offering price per share
                   $ 18.00  
Pro forma as adjusted net tangible book value per share as of December 31, 2009, before giving effect to this offering
  $ (1.55 )        
Increase in pro forma as adjusted net tangible book value per share attributed to new investors purchasing shares in this offering
    4.02          
                 
Pro forma net tangible book value per share after giving effect to this offering
            2.47  
                 
Dilution per share to new investors in this offering
          $ 15.53  
                 
 
Each $1.00 increase (decrease) in the assumed initial public offering price of $18.00 per share would increase (decrease) our pro forma as adjusted net tangible book value by $9.3 million, or $0.21 per share, and the pro forma as adjusted dilution per share to investors in this offering by $0.79 per share, 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. We may also increase or decrease the number of shares we are offering. An increase of 1,000,000 shares in the number of shares offered by us would increase our pro forma as adjusted net tangible book value by approximately $16.7 million, or $0.31 per share, and the pro forma as adjusted dilution per share to investors in this offering would be $15.22 per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a decrease of 1,000,000 shares in the number of shares offered by us would decrease our pro forma as adjusted net tangible book value by approximately $16.7 million, or $0.32 per share, and the pro forma as adjusted dilution per share to investors in this offering would be $15.85 per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.
 
If the underwriters exercise their option to purchase additional shares of our common stock from us in full in this offering, the pro forma as adjusted net tangible book value per share after the offering would be $2.93 per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $4.48 per share and the dilution to new investors purchasing shares in this offering would be $15.07 per share.


32


Table of Contents

 
The following table summarizes on a pro forma as adjusted basis as of December 31, 2009:
 
  •  the total number of shares of common stock purchased from us by our existing stockholders and by new investors purchasing shares in this offering;
 
  •  the total approximate consideration paid to us by our existing stockholders and by new investors purchasing shares in this offering, assuming an initial public offering price of $18.00 per share (before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering); and
 
  •  the average price per share paid by existing stockholders and by new investors purchasing shares in this offering.
 
                                         
                            Average
 
    Shares Purchased     Total Consideration     Price per
 
    Number     Percent     Amount     Percent     Share  
 
Existing stockholders
    34,912,597       78 %   $ 44,543,000       20 %   $ 1.28  
New investors
    10,000,000       22       180,000,000       80       18.00  
                                         
Total
    44,912,597       100.0 %   $ 224,543,000       100.0 %        
                                         
 
If the underwriters exercise their option to purchase additional shares of our common stock in full, our existing stockholders would own 75% and our new investors would own 25% of the total number of shares of common stock outstanding upon completion of this offering. The total consideration paid to us by our existing stockholders would be approximately $44.5 million, or 18%, and the total consideration paid to us by our new investors would be $207.0 million, or 82%.
 
If all outstanding options under our equity incentive plans were exercised, then our existing stockholders, including the holders of these options, would own 82% and our new investors would own 18% of the total number of shares of our common stock outstanding upon the closing of this offering. In such event, the total consideration paid by our existing stockholders, including the holders of these options, would be approximately $152.0 million, or 46%, the total consideration paid by our new investors would be $180.0 million, or 54%, the average price per share paid by our existing stockholders would be $3.28 and the average price per share paid by our new investors would be $18.00.
 
The above discussion and tables are based on 34,912,597 shares of common stock outstanding as of December 31, 2009, and excludes:
 
  •  an aggregate of 11,504,767 shares of common stock issuable upon the exercise of outstanding stock options as of December 31, 2009 pursuant to our 2008 Equity Incentive Plan and having a weighted-average exercise price of $9.3429 per share;
 
  •  an aggregate of 587,717 additional shares of common stock reserved for future issuance under our 2008 Equity Incentive Plan as of December 31, 2009; provided, however, that immediately upon the execution and delivery of the underwriting agreement for this offering, our 2008 Equity Incentive Plan will terminate so that no further awards may be granted under our 2008 Equity Incentive Plan, and the shares then remaining and reserved for future issuance under our 2008 Equity Incentive Plan shall become available for future issuance under our 2010 Non-Employee Directors’ Stock Award Plan; and
 
  •  the shares reserved for future issuance under our 2010 Equity Incentive Plan and up to 300,000 additional shares of common stock reserved for future issuance under our 2010 Non-Employee Directors’ Stock Award Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under each of these benefit plans, which will become effective immediately upon the execution and delivery of the underwriting agreement for this offering.


33


Table of Contents

 
SELECTED CONSOLIDATED FINANCIAL DATA
 
The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The selected consolidated financial data in this section is not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarily indicative of our future results and our interim results are not necessarily indicative of the results that should be expected for the full fiscal year.
 
We derived the consolidated statements of operations data for the fiscal years ended June 30, 2007, 2008 and 2009 and the consolidated balance sheets data as of June 30, 2008 and 2009 from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statements of operations data for the fiscal years ended June 30, 2005 and 2006 and the consolidated balance sheets data as of June 30, 2005, 2006 and 2007 are derived from our audited consolidated financial statements, which are not included in this prospectus. The consolidated statements of operations data for the six months ended December 31, 2008 and 2009 and the consolidated balance sheet data as of December 31, 2009 are derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus.
 
                                                         
          Six Months Ended
 
    Fiscal Year Ended June 30,     December 31,  
    2005     2006     2007     2008     2009     2008     2009  
    (In thousands, except per share data)  
 
Consolidated Statements of Operations Data:
                                                       
Net revenue
  $ 109,556     $ 142,408     $ 167,370     $ 192,030     $ 260,527     $ 122,913     $ 155,515  
Cost of revenue(1)
    65,653       85,820       108,945       130,869       181,593       88,250       111,604  
                                                         
Gross profit
    43,903       56,588       58,425       61,161       78,934       34,663       43,911  
Operating expenses:(1)
                                                       
Product development
    12,644       17,265       14,094       14,051       14,887       7,480       9,209  
Sales and marketing
    5,734       7,166       8,487       12,409       16,154       8,423       7,615  
General and administrative
    4,842       6,835       11,440       13,371       13,172       6,907       9,644  
                                                         
Total operating expenses
    23,220       31,266       34,021       39,831       44,213       22,810       26,468  
                                                         
Operating income
    20,683       25,322       24,404       21,330       34,721       11,853       17,443  
Interest income
    553       1,341       1,905       1,482       245       177       17  
Interest expense
    (9 )     (427 )     (732 )     (1,214 )     (3,544 )     (1,870 )     (1,629 )
Other income (expense), net
    (31 )     (874 )     (139 )     145       (239 )     (240 )     285  
                                                         
Interest and other income (expense), net
    513       40       1,034       413       (3,538 )     (1,933 )     (1,327 )
                                                         
Income before income taxes
    21,196       25,362       25,438       21,743       31,183       9,920       16,116  
Provision for taxes
    (8,136 )     (9,773 )     (9,828 )     (8,876 )     (13,909 )     (4,266 )     (7,193 )
                                                         
Income from continuing operations
    13,060       15,589       15,610       12,867       17,274       5,654       8,923  
Cumulative effect of change in accounting principle
          (1,820 )                              
                                                         
Net income
  $ 13,060     $ 13,769     $ 15,610     $ 12,867     $ 17,274     $ 5,654     $ 8,923  
                                                         
Basic:
                                                       
Less: 8% non-cumulative dividends on convertible preferred stock
    (3,218 )     (3,276 )     (3,276 )     (3,276 )     (3,276 )     (1,638 )     (1,638 )
Undistributed earnings allocated to convertible preferred stock
    (6,240 )     (6,591 )     (7,690 )     (5,925 )     (8,599 )     (2,468 )     (4,454 )
                                                         
Net income attributable to common stockholders — basic
  $ 3,602     $ 3,902     $ 4,644     $ 3,666     $ 5,399     $ 1,548     $ 2,831  
                                                         


34


Table of Contents

                                                         
          Six Months Ended
 
    Fiscal Year Ended June 30,     December 31,  
    2005     2006     2007     2008     2009     2008     2009  
    (In thousands, except per share data)  
 
Diluted:
                                                       
Net income attributable to common stockholders — basic
  $ 3,602     $ 3,902     $ 4,644     $ 3,666     $ 5,399     $ 1,548     $ 2,831  
Undistributed earnings re-allocated to common stock
    436       525       522       360       399       124       323  
                                                         
Net income applicable to common stockholders — diluted
  $ 4,038     $ 4,427     $ 5,166     $ 4,026     $ 5,798     $ 1,672     $ 3,154  
                                                         
Net income per share:(2)
                                                       
Basic
  $ 0.30     $ 0.31     $ 0.36     $ 0.28     $ 0.41     $ 0.12     $ 0.21  
                                                         
Diluted
  $ 0.28     $ 0.29     $ 0.34     $ 0.26     $ 0.39     $ 0.11     $ 0.20  
                                                         
Weighted average shares used in computing basic net income per share
    12,069       12,411       12,789       13,104       13,294       13,282       13,463  
Weighted average shares used in computing diluted net income per share
    14,543       15,295       15,263       15,325       14,971       15,103       16,169  
                                                         
                                                         
Pro forma net income per share:(2)
                                                       
Basic
                                  $ 0.50             $ 0.26  
                                                         
Diluted
                                  $ 0.48             $ 0.24  
                                                         
Weighted average shares used in computing pro forma basic net income per share
                                    34,471               34,640  
Weighted average shares used in computing pro forma diluted net income per share
                                    36,148               37,346  
 
 
(1) Includes stock-based compensation expense as follows:
 
                                                         
        Six Months Ended
    Fiscal Year Ended June 30,   December 31,
    2005   2006   2007   2008   2009   2008   2009
    (In thousands)
 
Cost of revenue
  $ 48     $ 66     $ 416     $ 1,112     $ 1,916     $ 1,007     $ 1,490  
Product development
    3       (7 )     75       443       669       318       884  
Sales and marketing
    43       10       226       581       1,761       897       1,341  
General and administrative
    47       20       1,354       1,086       1,827       688       3,378  
 
(2) See Note 4 to our consolidated financial statements included in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share and pro forma basic and diluted net loss per share of common stock.
 

35


Table of Contents

                                                 
    June 30,   December 31,
    2005   2006   2007   2008   2009   2009
    (In thousands)
 
Consolidated Balance Sheets Data:
                                               
Cash and cash equivalents
  $ 19,418     $ 30,593     $ 26,765     $ 24,953     $ 25,182     $ 34,139  
Working capital
    39,859       36,294       42,769       17,022       16,426       31,527  
Total assets
    71,350       101,203       118,536       179,746       212,878       281,845  
Total liabilities
    26,657       39,567       37,831       86,032       96,289       147,410  
Total debt
          9,216       10,250       51,654       57,240       105,695  
Total stockholders’ equity
    4,246       18,350       37,312       50,311       73,186       91,032  
 
                                                         
        Six Months Ended
    Fiscal Year Ended June 30,   December 31,
    2005   2006   2007   2008   2009   2008   2009
    (In thousands)
 
Consolidated Statements of Cash Flows Data:
                                                       
Net cash provided by operating activities
  $ 23,200     $ 21,659     $ 25,197     $ 24,751     $ 32,570     $ 9,371     $ 16,077  
Depreciation and amortization
    3,466       7,208       9,637       11,727       15,978       8,351       8,603  
Capital expenditures
    5,671       1,104       2,030       2,177       1,347       821       1,035  
 
                                                         
        Six Months Ended
    Fiscal Year Ended June 30,   December 31,
    2005   2006   2007   2008   2009   2008   2009
    (In thousands)
 
Other Financial Data:
                                                       
Adjusted EBITDA(1)
  $ 24,290     $ 32,619     $ 36,112     $ 36,279     $ 56,872     $ 23,114     $ 33,139  
 
 
(1) We define Adjusted EBITDA as net income less interest income plus interest expense, provision for taxes, depreciation expense, amortization expense, stock-based compensation expense and foreign-exchange (loss) gain. Please see “Summary Consolidated Financial Data — Adjusted EBITDA” for more information and for a reconciliation of Adjusted EBITDA to our net income calculated in accordance with U.S. generally accepted accounting principles.

36


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this prospectus. 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 the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
 
Overview
 
QuinStreet is a leader in vertical marketing and media on the Internet. We have built a strong set of capabilities to engage Internet visitors with targeted media and to connect our marketing clients with their potential customers online. We focus on serving clients in large, information-intensive industry verticals where relevant, targeted media and offerings help visitors make informed choices, find the products that match their needs, and thus become qualified customer prospects for our clients.
 
We deliver cost-effective marketing results to our clients, predictably and scalably, most typically in the form of a qualified lead or click. These leads or clicks can then convert into a customer or sale for the client at a rate that results in an acceptable marketing cost to them. We get paid by clients primarily when we deliver qualified leads or clicks as defined by our agreements with them. Because we bear the costs of media, our programs must deliver a value to our clients and a media yield, or our ability to generate an acceptable margin on our media costs, that provides a sound financial outcome for us. Our general process is:
 
  •  We own or access targeted media;
 
  •  We run advertisements or other forms of marketing messages and programs in that media to create visitor responses or clicks through to client offerings;
 
  •  We match these responses or clicks to client offerings or brands that meet visitor interests or needs, converting visitors into qualified leads or clicks; and
 
  •  We optimize client matches and media yield such that we achieve desired results for clients and a sound financial outcome for us.
 
Our primary financial objective has been and remains creating revenue growth, from sustainable sources, at target levels of profitability. Our primary financial objective is not to maximize profits, but rather to achieve target levels of profitability while investing in various growth initiatives, as we believe we are in the early stages of a large, long-term market. We have been successful in increasing revenue each year since our inception. We became profitable in 2002 and have remained so since that time.
 
Our Direct Marketing Services, or DMS, business accounted for 95%, 98%, 99% and 99% of our net revenue in fiscal years 2007, 2008 and 2009 and the first six months of fiscal year 2010, respectively. Our DMS business derives substantially all of its net revenue from fees earned through the delivery of qualified leads and clicks to our clients. Through a deep vertical focus, targeted media presence and our technology platform, we are able to reliably deliver targeted, measurable marketing results to our clients.
 
Our two largest client verticals are education and financial services. Our education vertical has historically been our largest vertical, representing 78%, 74%, 58% and 49% of net revenue in fiscal years 2007, 2008 and 2009 and the first six months of fiscal year 2010, respectively. DeVry Inc., a for-profit education company and our largest client, accounted for 22%, 23%, 19%, and 12% of total net revenue for fiscal years 2007, 2008 and 2009 and the first six months of fiscal year 2010, respectively. Our financial services vertical, which we have grown both organically and through acquisitions, represented 7%, 11%, 31% and 41% of net revenue in fiscal years 2007, 2008 and 2009 and the first six months of fiscal year 2010, respectively. Other DMS verticals, consisting primarily of home services, business-to-business, or B2B, and


37


Table of Contents

healthcare, represented 10%, 13%, 10% and 9% of net revenue in fiscal years 2007, 2008 and 2009 and the first six months of fiscal year 2010, respectively.
 
In addition, we derived 5%, 2%, 1% and 1% of our net revenue in fiscal years 2007, 2008 and 2009 and the first six months of fiscal year 2010, respectively, from the provision of a hosted solution and related services for clients in the direct selling industry, also referred to as our Direct Selling Services, or DSS, business.
 
We have generated substantially all of our revenue from sales to clients in the United States.
 
We are subject to economic or business factors that affect our client verticals. For instance, presently, clients in particular verticals such as financial services, particularly mortgage, credit cards and deposits, small- to medium-sized business customers and home services are facing very difficult conditions and their marketing spending has been negatively affected. In general, we address challenges created by these adverse economic or business conditions by shifting investment and resources to other client verticals that might be less challenged or by focusing on opportunities with specific clients and subsets of client verticals that might be less affected by those challenges. However, we also invest in client verticals that may face near-term challenges but present long-term growth potential.
 
We face an additional challenge with regard to DeVry, our largest client, which accounted for approximately 19% and 12% of our net revenue for fiscal year 2009 and the first six months of fiscal year 2010, respectively. DeVry has recently retained an advertising agency and has reduced its purchases of leads from us. We have been addressing this challenge by working with DeVry and the agency to understand their evolving needs and strategies and how we can best serve them going forward. In addition, we have been expanding our business with other clients in our education client vertical. We are also expanding our client base in education to replace visitor matches previously delivered to DeVry.
 
Trends Affecting our Business
 
Seasonality
 
Our results from our education client vertical are subject to significant fluctuation as a result of seasonality. In particular, our quarters ending December 31 (our second fiscal quarter) typically demonstrate seasonal weakness. In those quarters, there is lower availability of lead supply from some forms of media during the holiday period and our education clients often request fewer leads due to holiday staffing. In our quarters ending March 31, this trend generally reverses with better lead availability and often new budgets at the beginning of the year for our clients with financial years ending December 31. For example, in the quarters ended December 31, 2008 and 2009 net revenue from our education clients declined 13% and 10%, respectively, from the previous quarter.
 
Acquisitions
 
Beginning in fiscal year 2008, we executed on our strategy to increase the depth within our existing verticals and diversify our business among these verticals by substantially increasing our spending on acquisitions of businesses and technologies. For example, in February 2008, we acquired ReliableRemodeler.com, Inc., or ReliableRemodeler, an Oregon-based company specializing in online home renovation and contractor referrals for $17.5 million in cash and $8.0 million in non-interest-bearing, unsecured promissory notes, in an effort to increase our presence within our home services vertical. In April 2008, we acquired Cyberspace Communication Corporation, an Oklahoma-based online marketing company doing business as SureHits, for $27.5 million in cash and $18.0 million in potential earn-out payments, in an effort to increase our presence within the financial services vertical. During fiscal years 2008 and 2009, in addition to the acquisitions mentioned above, we acquired an aggregate of 21 and 34 online publishing businesses, respectively.
 
In October 2009, we acquired the website business Insure.com from Life Quote, Inc. for $15.0 million in cash and a $1.0 million non-interest bearing, unsecured promissory note. In November 2009, we acquired the website assets of the Internet.com division of WebMediaBrands, Inc. for $16.0 million in cash and a $2.0 million non-interest-bearing, unsecured promissory note.


38


Table of Contents

 
Our acquisition strategy may result in significant fluctuations in our available working capital from period to period and over the years. We may use cash, stock or promissory notes to acquire various businesses or technologies, and we cannot accurately predict the timing of those acquisitions or the impact on our cash flows and balance sheet. Large acquisitions or multiple acquisitions within a particular period may significantly impact our financial results for that period. We may utilize debt financing to make acquisitions, which could give rise to higher interest expense and more restrictive operating covenants. We may also utilize our stock as consideration, which could result in substantial dilution.
 
Client Verticals
 
To date, we have generated the majority of our revenue from clients in our educational vertical. We expect that a majority of our revenue in fiscal year 2010 will be generated from clients in our education and financial services client verticals. A downturn in economic or market conditions adversely affecting the education industry or the financial services industry would negatively impact our business and financial condition. Over the past year, education marketing spending has remained relatively stable, but we cannot assure you that this stability will continue. Marketing budgets for clients in our education vertical are impacted by a number of factors, including the availability of student financial aid, the regulation of for-profit financial institutions and economic conditions. Over the past year, some segments of the financial services industry, particularly mortgages, credit cards and deposits, have seen declines in marketing budgets given the difficult market conditions. These declines may continue or worsen. In addition, the education and financial services industries are highly regulated. Changes in regulations or government actions may negatively impact our clients’ marketing practices and budgets and, therefore, adversely affect our financial results.
 
Development and Acquisition of Vertical Media
 
One of the primary challenges of our business is finding or creating media that is targeted enough to attract prospects economically for our clients and at costs that work for our business model. In order to continue to grow our business, we must be able to continue to find or develop quality vertical media on a cost-effective basis. Our inability to find or develop vertical media could impair our growth or adversely affect our financial performance.
 
Basis of Presentation
 
General
 
We operate in two segments: DMS and DSS. For further discussion or financial information about our reporting segments, see Note 2 to our consolidated financial statements included in this prospectus.
 
Net Revenue
 
DMS.  We derive substantially all of our revenue from fees earned through the delivery of qualified leads or paid clicks. We deliver targeted and measurable results through a vertical focus that we classify into the following key client verticals: education, financial services, home services, B2B and healthcare.
 
DSS.  We derived approximately 5%, 2%, 1% and 1% of our net revenue in fiscal years 2007, 2008 and 2009 and the first six months of fiscal year 2010, respectively. We expect DSS to continue to represent an immaterial portion of our business.
 
Cost of Revenue
 
Cost of revenue consists primarily of media costs, personnel costs, amortization of acquisition-related intangible assets, depreciation expense and amortization of internal software development costs on revenue-producing technologies. Media costs consist primarily of fees paid to website publishers that are directly related to a revenue-generating event and PPC ad purchases from Internet search companies. We pay these Internet search companies and website publishers on a revenue-share, cost-per-lead, or CPL, cost-per-click, or CPC, and cost-per-thousand-impressions, or CPM, basis. Personnel costs include salaries, bonuses, stock-based compensation expense and employee benefit costs. Compensation expense is primarily related to individuals associated with maintaining our servers and websites, our editorial staff, client management, creative team, compliance group and media purchasing analysts. We capitalize costs associated with software developed or obtained for internal use.


39


Table of Contents

Costs incurred in the development phase are capitalized and amortized in cost of revenue over the product’s estimated useful life. We anticipate that our cost of revenue will increase in absolute dollars.
 
Operating Expenses
 
We classify our operating expenses into three categories: product development, sales and marketing and general and administrative. Our operating expenses consist primarily of personnel costs and, to a lesser extent, professional fees, rent and allocated costs. Personnel costs for each category of operating expenses generally include salaries, bonuses and commissions, stock-based compensation expense and employee benefit costs.
 
Product Development.  Product development expenses consist primarily of personnel costs and professional services fees associated with the development and maintenance of our technology platforms, development and launching of our websites, product-based quality assurance and testing. We believe that continued investment in technology is critical to attaining our strategic objectives and, as a result, we expect technology development and enhancement expenses to increase in absolute dollars in future periods.
 
Sales and Marketing.  Sales and marketing expenses consist primarily of personnel costs (including commissions) and, to a lesser extent, allocated overhead, professional services, advertising, travel and marketing materials. We expect sales and marketing expenses to increase in absolute dollars as we hire additional personnel in sales and marketing to support our increasing revenue base and product offerings.
 
General and Administrative.  General and administrative expenses consist primarily of personnel costs of our executive, finance, legal, employee benefits and compliance and other administrative personnel, as well as accounting and legal professional services fees and other corporate expenses. We expect general and administrative expenses to increase in absolute dollars in future periods as we continue to invest in corporate infrastructure and incur additional expenses associated with being a public company, including increased legal and accounting costs, investor relations costs, higher insurance premiums and compliance costs associated with Section 404 of the Sarbanes-Oxley Act of 2002.
 
Interest and Other Income (Expense), Net
 
Interest and other income (expense), net, consists primarily of interest income and interest expense. Interest expense is related to our credit facilities and the promissory notes issued in connection with our acquisitions. The outstanding balance of our credit facilities and acquisition-related promissory notes was $76.8 million and $29.8 million, respectively, as of December 31, 2009. We expect interest expense to increase in the near future as we entered into a new credit facility in January 2010 with a larger borrowing capacity and a higher rate of interest. Borrowings under our credit facility could also subsequently increase as we continue to implement our acquisition strategy. Interest income represents interest received on our cash and cash equivalents, which we expect will increase in the near term with the investment of the net proceeds of this offering.
 
Income Tax Expense
 
We are subject to tax in the United States as well as other tax jurisdictions or countries in which we conduct business. Earnings from our limited non-U.S. activities are subject to local country income tax and may be subject to current U.S. income tax.
 
As of December 31, 2009, we did not have net operating loss carryforwards for federal income tax purposes and had approximately $2.8 million in California net operating loss carryforwards that begin to expire in March 2011, and that we expect to utilize in an amended return. The California net operating loss carryforwards will not offset future taxable income, but may instead result in a refund of historical taxes paid. As of December 31, 2009, our Japanese subsidiary had net operating loss carryforwards of approximately $370,000 that will begin to expire in 2011. These net operating loss carryforwards were fully reserved as of December 31, 2009.
 
As of December 31, 2009, we had net deferred tax assets of $5.5 million. Our net deferred tax assets consist primarily of accruals, reserves and stock-based compensation expense not currently deductible for tax


40


Table of Contents

purposes. We assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the deferred tax asset valuation allowance would be recorded in the income statement of the periods that the adjustment is determined to be required.
 
On July 1, 2007, we adopted the authoritative accounting guidance prescribing a threshold and measurement attribute for the financial statement 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.
 
Effective July 1, 2007, we adopted the accounting guidance on uncertainties in income tax. The cumulative effect of adoption to the opening balance of the retained earnings account was $1,705.
 
Critical Accounting Policies and Estimates
 
In presenting our consolidated financial statements in conformity with U.S. generally accepting accounting principals, or GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures.
 
Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. Actual results may differ significantly from these estimates.
 
We believe that the critical accounting policies listed below involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our consolidated financial statements. In addition, we believe that a discussion of these policies is necessary to understand and evaluate the consolidated financial statements contained in this prospectus.
 
For further information on our critical and other significant accounting policies, see Note 2 of our consolidated financial statements included in this prospectus.
 
Revenue Recognition
 
We derive revenue from two segments: DMS and DSS. DMS revenue, which constituted 95%, 98% and 99% of our net revenue for fiscal years 2007, 2008 and 2009, respectively, is derived primarily from fees that are earned through the delivery of qualified leads or paid clicks. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured. Delivery is deemed to have occurred at the time a lead or click is delivered to the client, provided that no significant obligations remain.
 
From time to time, we may agree to credit clients for certain leads or clicks if they fail to meet the contractual or other guidelines of a particular client. We have established a sales reserve based on historical experience. To date, our reserve has been adequate for these credits. The adequacy of this reserve depends on our ability to estimate the number of credits that we will grant to our clients. If we were to change any of the assumptions or judgments made in calculating the amount of the reserve, it could cause a material change in the net revenue that we report in a particular period. Our assessment of the likelihood of collection is also a critical element in determining the timing of revenue recognition. If we do not believe that collection is reasonably assured, revenue will be recognized on the earlier of the date that the collection is reasonably assured or collection is made.


41


Table of Contents

For a portion of our revenue, we have agreements with publishers of online media used in the generation of leads or clicks. We receive a fee from our clients and pay a fee to our publishers either on a revenue-share, CPL, CPC or CPM basis. We are the primary obligor in the transaction. As a result, the fees paid by our clients are recognized as revenue and the fees paid to our publishers are included in cost of revenue.
 
DSS revenue consists of (i) set-up and professional services fees and (ii) usage and hosting fees. Set-up and professional service fees that do not provide stand-alone value to our clients are recognized over the contractual term of the agreement or the expected client relationship period, whichever is longer, effective when the application reaches the “go-live” date. We define the “go-live” date as the date when the application enters into a production environment or all essential functionalities have been delivered. We recognize usage and hosting fees on a monthly basis as earned. Deferred revenue consists of billings or payments in advance of reaching all the above revenue recognition criteria, primarily comprising deferred DSS revenue.
 
Stock-Based Compensation
 
Through June 30, 2006, we accounted for our stock-based employee compensation arrangements in accordance with the intrinsic value provisions of Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and related interpretations and complied with the disclosure provisions of SFAS No. 123, Accounting for Stock Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure. Under the intrinsic value method, compensation expense is measured on the date of the grants as the difference between the fair value of our common stock and the exercise or purchase price multiplied by the number of stock options granted.
 
Effective July 1, 2006, we adopted SFAS 123(R), which requires non-public companies that used the minimum value method under SFAS 123 for either recognition or pro forma disclosures to apply SFAS 123(R) using the prospective-transition method. As such, we continue to apply the intrinsic value method to equity awards outstanding at the date of adoption of SFAS 123(R) that were measured using the minimum value method. In accordance with SFAS 123(R), we recognize the compensation cost of employee stock-based awards granted subsequent to June 30, 2006 in the statement of operations using the straight-line method over the vesting period of the award.
 
The following table sets forth the total stock-based compensation expense included in the related financial statement line items:
 
                                         
    Fiscal Year Ended June 30,     Six Months Ended December 31,  
    2007     2008     2009     2008     2009  
    (In thousands)  
 
Cost of revenue
  $ 416     $ 1,112     $ 1,916     $ 1,007     $ 1,490  
Product development
    75       443       669       318       884  
Sales and marketing
    226       581       1,761       897       1,341  
General and administrative
    1,354       1,086       1,827       688       3,378  
                                         
Total
  $ 2,071     $ 3,222     $ 6,173     $ 2,910     $ 7,093  
                                         
 
We estimated the fair value of each option granted using the Black-Scholes option-pricing method using the following assumptions for the periods presented in the table below:
 
                     
        Six Months Ended
    Fiscal Year Ended June 30,   December 31,
    2007   2008   2009   2008   2009
 
Weighted average stock price volatility
  48%   52%   62%   60%   68%
Expected term (in years)
  4.6 - 6.1   4.6   4.6   4.6   4.6
Expected dividend yield
         
Risk-free interest rate
  4.6% - 4.9%   2.8% - 4.5%   1.8% - 3.1%   2.18% - 3.11%   2.25% - 2.47%


42


Table of Contents

As of each stock option grant date, we considered the fair value of the underlying common stock, determined as described below, in order to establish the options exercise price.
 
As there has been no public market for our common stock prior to this offering, and therefore a lack of company-specific historical and implied volatility data, we have determined the share price volatility for options granted based on an analysis of reported data for a peer group of companies that granted options with substantially similar terms. The expected volatility of options granted has been determined using an average of the historical volatility measures of this peer group of companies for a period equal to the expected life of the option. We intend to continue to consistently apply this process using the same or similar entities until a sufficient amount of historical information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified entities are no longer similar to us. In this latter case, more suitable entities whose share prices are publicly available would be utilized in the calculation.
 
The expected life of options granted has been determined utilizing the “simplified” method as prescribed by the SEC’s Staff Accounting Bulletin, or SAB, No. 107, Share-Based Payment, or SAB 107. The risk-free interest rate is based on a daily treasury yield curve rate whose term is consistent with the expected life of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero.
 
In addition, SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates, whereas SFAS 123 permitted companies to record forfeitures based on actual forfeitures. We apply an estimated forfeiture rate based on our historical forfeiture experience.
 
Since the beginning of fiscal year 2007 through December 31, 2009, we granted stock options with exercise prices as follows:
 
                                 
            Common Stock Fair
   
            Value per Share
   
    Number of Shares
      for Financial
   
    Underlying Options
  Exercise Price
  Reporting Purposes at
  SFAS 123R
Grant Dates
  Granted   per Share   Grant Date   Fair Value
 
July 20, 2006
    88,100     $ 9.01     $ 9.01     $ 428,034  
September 28, 2006
    133,794       9.40       9.40       678,175  
December 1, 2006
    713,000       9.40       9.40       3,590,525  
January 31, 2007(1)
    165,000       10.34       9.40       831,617  
January 31, 2007
    81,550       9.40       9.40       391,412  
March 23, 2007
    35,100       9.40       9.40       176,908  
May 31, 2007
    1,161,400       10.28       10.28       5,226,881  
September 27, 2007
    116,700       10.28       10.28       560,720  
January 30, 2008
    729,200       10.28       10.28       3,330,840  
April 25, 2008
    469,500       10.28       10.28       2,365,294  
July 25, 2008
    1,780,600       10.28       10.28       9,554,343  
October 2, 2008
    277,900       10.28       10.28       1,385,081  
January 28, 2009
    331,800       9.01       9.01       1,686,738  
April 29, 2009
    184,800       9.01       9.01       957,467  
August 7, 2009
    1,875,050       9.01       13.93       17,716,410  
August 7, 2009(1)
    87,705       9.91       13.93       805,939  
October 6, 2009
    210,600       11.08       16.88       2,505,529  
November 17, 2009
    1,080,500       19.00       19.00       10,159,077  
 
 
(1) Options granted with an exercise price per share equal to 110% of the fair market value of one share of our common stock, as determined by our board of directors on the date of grant.


43


Table of Contents

 
We have historically granted stock options at exercise prices equal to or greater than the fair market value as determined by our board of directors on the date of grant, with input from management. Because our common stock is not publicly traded, our board of directors exercises significant judgment in determining the fair value of our common stock on the date of grant based on a number of objective and subjective factors. Factors considered by our board of directors included:
 
  •  company performance, our growth rate and financial condition at the approximate time of the option grant;
 
  •  the value of companies that we consider peers based on a number of factors including, but not limited to, similarity to us with respect to industry, business model, stage of growth, financial risk or other factors;
 
  •  changes in the company and our prospects since the last time the board approved option grants and made a determination of fair value;
 
  •  amounts recently paid by investors for our common stock and convertible preferred stock in arm’s-length transactions with stockholders;
 
  •  the rights, preferences and privileges of preferred stock relative to those of our common stock;
 
  •  future financial projections; and
 
  •  valuations completed in conjunction with, and at the time of, each option grant.
 
We prepared contemporaneous valuations at each of the grant dates consistent with the method outlined in the AICPA Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, for all option grant dates in fiscal years 2008 and 2009 and the six months ended December 31, 2009. The methodology we used derived equity values utilizing a probability-weighted expected return method, or PWERM, that weighs various potential liquidity outcomes with each outcome assigned a probability to arrive at the weighted equity value. For each of the possible events, a range of future equity values is estimated, based on the market, income or cost approaches and over a range of possible event dates, all plus or minus a standard deviation for value and timing. The timing of these events is based on discussion with our management. For each future equity value scenario, the rights and preferences of each stockholder class are considered in order to determine the appropriate allocation of value to common shares. The value of each common share is then multiplied by a discount factor derived from the calculated discount rate and the expected timing of the event (plus or minus a standard deviation of time). The value per common share is then multiplied by an estimated probability for each of the possible events based on discussion with our management. The calculated value per common share under each scenario is then discounted for a lack of marketability. A probability-weighted value per share of common stock is then determined. Under the PWERM, the value of our common stock is estimated based upon an analysis of values for our common stock assuming the following various possible future events for the company:
 
  •  initial public offering;
 
  •  strategic merger or sale;
 
  •  dissolution/no value to common stockholders; and
 
  •  remaining a private company.
 
When using the PWERM, a market-comparable approach, an income approach and a cost approach were used to estimate our aggregate enterprise value at each valuation date. The market-comparable approach estimates the fair market value of a company by applying market multiples of publicly-traded firms in the same or similar lines of business to the results and projected results of the company being valued. When choosing the market-comparable companies to be used for the market-comparable approach, we focused on companies operating within the online marketing and lead generation space. The comparable companies remained largely unchanged during the valuation process. The income approach involves applying an appropriate risk-adjusted discount rate to projected debt free cash flows, based on forecasted revenue and


44


Table of Contents

costs. The cost approach involves identifying a company’s significant tangible assets, estimating the individual current market values of each and then totaling them to derive the value of the business as a whole. We used the cost approach method under an assumption of dissolution.
 
We also prepared financial forecasts for each valuation report date used in the computation of the enterprise value for both the market-comparable approach and the income approach. The financial forecasts were based on assumed revenue growth rates that took into account our past experience and contemporaneous future expectations. The risks associated with achieving these forecasts were assessed in selecting the appropriate cost of capital, which ranged from 15% to 17%.
 
We have performed these valuations since December 2003.
 
As an additional indicator of fair value, we note in the individual valuation discussions below pricing of all sales of our common stock for transactions occurring during the quarter of the respective grant dates. Over the past several years, a number of investors have purchased, or attempted to purchase, shares from employees, former employees and other stockholders. In some instances, we have exercised our right of first refusal with regard to such proposed purchases and, accordingly, purchased the shares for the price proposed by the investors, and in other instances, we have chosen not to exercise our right of first refusal and have permitted the proposed buyers to complete the transactions with the sellers on the terms disclosed to us.
 
While these transactions were not consummated in a highly liquid market, we do believe that the transactions provide an additional indicator of fair value based on the volume and number of buyers. These transaction prices have indicated, as additional support to our valuation analyses, that we have not historically determined fair market values below the indications of value for transactions in our common stock.
 
Discussion of specific valuation inputs from July 2008 through November 2009
 
July 25, 2008.  On July 25, 2008, our board of directors determined a fair value of our common stock of $10.28 per share, based on the factors described above as well as a contemporaneous valuation report dated July 17, 2008. The valuation used a risk-adjusted discount of 16%, a non-marketability discount of 23.4% and an estimated time to an initial public offering or a strategic merger or sale of greater than 12 months. The expected outcomes were weighted 50% toward an initial public offering, 30% towards a strategic merger or sale, 18% towards remaining a private company and 2% towards a liquidation scenario. This valuation indicated a fair value of $9.42 per share for our common stock. We determined to set the fair value per share of our common stock at $10.28 per share as of July 25, 2008, above the $9.42 per share valuation as of July 17, 2008, since these valuations by their nature involve estimates and judgments and, in our opinion, the relatively small difference did not justify reducing the fair market value determination for our common stock. During the three months ended September 30, 2008, we exercised our right of first refusal to repurchase 115,275 shares of common stock at an average price of $8.47, with a low price of $8.00 and a high price of $8.60. During this same period, we chose not to exercise our right of first refusal for transactions totaling 30,000 shares of common stock at an average price of $8.75, with a low price of $8.50 and a high price of $9.00.
 
October 2, 2008.  On October 2, 2008, our board of directors determined a fair value of our common stock of $10.28 per share, based on the factors described above as well as a contemporaneous valuation report dated September 24, 2008. The valuation used a risk-adjusted discount of 16%, a non-marketability discount of 26.8%, an estimated time to an initial public offering of greater than 12 months and an estimated time to a strategic merger or sale of less than 12 months. The expected outcomes were weighted 50% toward an initial public offering, 30% towards a strategic merger or sale, 18% towards remaining a private company and 2% towards a liquidation scenario. This valuation indicated a fair value of $9.94 per share for our common stock. We determined to set the fair value per share of our common stock at $10.28 per share as of October 2, 2008, above the $9.94 per share valuation as of September 24, 2008, since these valuations by their nature involve estimates and judgments and, in our opinion, the relatively small difference did not justify reducing the fair market value determination for our common stock. During the three months ended December 31, 2009, we exercised our right of first refusal to repurchase 8,000 shares of common stock at a price of $8.50. During this


45


Table of Contents

same period, we chose not to exercise our right of first refusal for transactions totaling 57,000 shares of common stock at a price of $8.50.
 
January 28, 2009.  On January 28, 2008, our board of directors determined a fair value of our common stock of $9.01 per share, based on the factors described above as well as a contemporaneous valuation report dated December 31, 2008. The valuation used a risk-adjusted discount of 15%, a non-marketability discount of 25%, an estimated time to an initial public offering of 12 months and an estimated time to a strategic merger or sale of more than 12 months. The expected outcomes were weighted 50% toward an initial public offering, 30% towards a strategic merger or sale, 18% towards remaining a private company and 2% towards a liquidation scenario. This valuation indicated a fair value of $9.01 per share for our common stock. During the three months ended March 30, 2009, we exercised our right of first refusal to repurchase 40,000 shares of common stock at an average price of $7.31, with a low price of $6.25 and a high price of $8.00. During this same period, there were no transactions in our stock in which we chose not to exercise our right of first refusal.
 
April 29, 2009.  On April 29, 2009, our board of directors determined a fair value of our common stock of $9.01 per share, based on the factors described above as well as a contemporaneous valuation report dated March 31, 2009. The valuation used a risk-adjusted discount of 15%, a non-marketability discount of 20%, an estimated time to an initial public offering of more than 12 months and an estimated time to a strategic merger or sale of more than 12 months. The expected outcomes were weighted 50% toward an initial public offering, 30% towards a strategic merger or sale, 18% towards remaining a private company and 2% towards a liquidation scenario. This valuation indicated a fair value of $8.29 per share for our common stock. We determined to set the fair value per share of our common stock at $9.01 per share as of April 29, 2009, above the $8.29 per share valuation as of March 31, 2009, since these valuations by their nature involve estimates and judgments and, in our opinion, the relatively small difference did not justify reducing the fair market value determination for our common stock. During the three months ended June 30, 2009, we did not exercise our right of first refusal to repurchase any common stock. During this same period, we chose not to exercise our right of first refusal for transactions totaling 30,000 shares of common stock at a price of $8.00.
 
August 7, 2009.  On August 7, 2009, our board of directors determined a fair value of our common stock of $9.01 per share, based on the factors described above as well as a contemporaneous valuation report dated June 30, 2009. The valuation used a risk-adjusted discount of 15%, a non-marketability discount of 20%, an estimated time to an initial public offering of more than 12 months and an estimated time to a strategic merger or sale of more than 12 months. The expected outcomes were weighted 50% toward an initial public offering, 30% towards a strategic merger or sale, 18% towards remaining a private company and 2% towards a liquidation scenario. This valuation indicated a fair value of $9.00 per share for our common stock. During the three months ended September 30, 2009, we exercised our right of first refusal to repurchase 71,895 shares of common stock at an average price of $8.03, with a low price of $7.00 and a high price of $8.80. During this same period, we chose not to exercise our right of first refusal for transactions totaling 144,583 shares of common stock at an average price of $8.09, with a low price of $8.00 and a high price of $8.50.
 
Prior to the issuance of our financial statements for the three month period ended September 30, 2009 in connection with the initial filing of our registration statement on Form S-1, we decided to revise our estimate of fair value of our common stock as of August 7, 2009. In reassessing the estimate of fair value of our common stock, we considered the preliminary estimated valuation range communicated by our underwriters as well as the results of our contemporaneous valuation performed on November 17, 2009, immediately prior to the initial filing of our registration statement on Form S-1. The revised fair value as of August 7, 2009 was derived based on a linear increase of our valuation between April 29, 2008 (date of our last fair value determination prior to issuance of our audited financial statements) and November 17, 2009 (date of our initial filing of our registration statement on Form S-1). We also compared the results of the calculation described above with an estimate of fair value as of August 7, 2009 based on the estimated fair value at November 17, 2009 adjusted for the increase of the NASDAQ composite index between these two dates, and noted no material differences. As a result of reassessing the fair value of our common stock, we expect to record additional compensation expense, excluding the effect of forfeitures, of $8.1 million, of which $0.4 million was recorded in our financial statements for the three months ended September 30, 2009.


46


Table of Contents

 
October 6, 2009.  On October 6, 2009, our board of directors determined a fair value of our common stock of $11.08 per share, based on the factors described above as well as a contemporaneous valuation report dated September 15, 2009. The valuation used a risk-adjusted discount of 15%, a non-marketability discount of 15%, an estimated time to an initial public offering of less than 9 months and an estimated time to a strategic merger or sale of more than 12 months. The expected outcomes were weighted 50% toward an initial public offering, 30% towards a strategic merger or sale, 18% towards remaining a private company and 2% towards a liquidation scenario. This valuation indicated a fair value of $11.08 per share for our common stock. Consistent with our August 7, 2009 grant, we reassessed the fair value of our common stock as of October 6, 2009. Given the relatively immaterial number of shares issued, we derived the revised estimate of fair value of $16.88 as of October 6, 2009 assuming a linear increase of our valuation between April 29, 2009 and November 17, 2009. We expect to record compensation expense associated with the October 6, 2009 grants of $997,000 through the end of fiscal year 2010.
 
Significant events occurring between the October 6, 2009 and November 17, 2009 grants.  Subsequent to the October 6, 2009 board of directors meeting, we initiated a process to evaluate underwriters for a potential initial public offering. On November 2, 2009, our board of directors approved management’s recommendation of an underwriting group and its recommendation to attempt an initial public offering on an accelerated time line. On November 5, 2009, management, the underwriters, Qatalyst Partners, our independent registered public accounting firm and external legal counsel for the company and the underwriters held an “organizational” meeting to formally begin the initial public offering process and the process of underwriter “due diligence.”
 
November 17, 2009.  On November 17, 2009, our board of directors determined a fair value of our common stock of $19.00 per share, based on a contemporaneous valuation report dated October 31, 2009 and the preliminary estimated valuation range communicated by our underwriters. The valuation used a risk-adjusted discount of 15%, a non-marketability discount of 5%, an estimated time to an initial public offering of less than 4 months and an estimated time to a strategic merger or sale of more than 12 months. The expected outcomes were weighted 80% toward an initial public offering, 10% towards a strategic merger or sale and 10% towards remaining a private company. This valuation indicated a fair value of $17.87 per share for our common stock. We determined the fair value per share of our common stock to be $19.00 as of November 17, 2009, which was higher than the $17.87 per share value indicated by our valuation analysis as of October 31, 2009, based upon preliminary indications of potential pricing ranges for our initial public offering. We expect to record compensation expense associated with the November 17, 2009 grants of $3.4 million through the end of fiscal year 2010.
 
Based on an estimated initial public offering price of $18.00 per share, the fair value of the options outstanding at December 31, 2009 was $139 million, of which $75 million related to vested options and $64 million related to unvested options.
 
Recoverability of Intangible Assets, Including Goodwill
 
Intangible assets consist primarily of content, domain names, customer and publisher relationships, non-compete agreements, and other intangible assets. Intangible assets acquired in a business combination are measured at fair value at the date of acquisition. We amortize all intangible assets on a straight line basis over their expected lives. As of June 30, 2009 and December 31, 2009, we had $106.7 million and $139.3 million of goodwill, respectively, and $34.0 million and $49.2 million of other intangible assets, respectively, with estimable useful lives on our consolidated balance sheets.
 
We review our indefinite-lived intangible assets for impairment at least annually or as indicators of impairment exist based on comparing the fair value of the asset to the carrying value of the asset. Goodwill is currently our only indefinite-lived intangible asset. We perform our annual goodwill impairment test in the fourth quarter for each of our DMS and DSS reporting units. Our goodwill impairment test requires the use of fair-value techniques, which are inherently subjective.
 
We performed our goodwill impairment test on our DMS reporting unit by comparing the fair value of the business enterprise as adjusted for the value of the DSS reporting unit to its carrying value. The business enterprise value as a whole calculated on April 20, 2009 for our goodwill impairment test in the fourth quarter of 2009 differs from the implied market capitalization based on the fair value of an individual share of our


47


Table of Contents

common stock used for granting stock options as March 31, 2009, as described below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Stock-Based Compensation,” because the business enterprise value is the estimated value that would be received for the sale of the company as a whole in an orderly transaction between market participants, whereas the estimated value used to determine the fair value of an individual share of common stock was determined on the basis of a non-marketable minority share of a non-public company. The calculation of the non-marketable minority interest of an individual share takes into consideration interest bearing debt, the fair value of stock options issued, shares outstanding and a marketability discount on common stock that is not freely tradable in a public market. Fair value of our DSS reporting unit was estimated in April 2009 using the income approach. Under the income approach, we calculated the fair value of our DSS reporting unit based on the present value of estimated future cash flows.
 
The valuation of goodwill could be affected if actual results differ substantially from our estimates. Circumstances that could affect the valuation of goodwill include, among other things, a significant change in our business climate and buying habits of our subscriber base along with increased costs to provide systems and technologies required to support our content and search capabilities. Based on our analysis in the fourth quarter of 2009, no impairment of goodwill was indicated. We have determined that a 10% change in our cash flow assumptions or a marginal change in our discount rate as of the date of our most recent goodwill impairment test would not have changed the outcome of the test.
 
We evaluate the recoverability of our long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, or SFAS 144. SFAS 144 requires recognition of impairment of long-lived assets in the event that the net book value of such assets exceeds the future undiscounted net cash flows attributable to such assets. In accordance with SFAS 144, we recognize impairment, if any, in the period of identification to the extent the carrying amount of an asset exceeds the fair value of such asset. Based on our analysis, no impairment was recorded in fiscal year 2009.
 
Results of Operations
 
The following table sets forth our consolidated statement of operations for the periods indicated:
 
                                                                                 
          Six Months
 
    Fiscal Year Ended June 30,     Ended December 31,  
    2007     2008     2009     2008     2009  
    (In thousands)  
 
Net revenue
  $ 167,370       100.0 %   $ 192,030       100.0 %   $ 260,527       100.0 %   $ 122,913       100.0 %   $ 155,515       100.0 %
Cost of revenue(1)
    108,945       65.1       130,869       68.2       181,593       69.7       88,250       71.8       111,604       71.8  
                                                                                 
Gross profit
    58,425       34.9       61,161       31.8       78,934       30.3       34,663       28.2       43,911       28.2  
Operating expenses:(1)
                                                                               
Product development
    14,094       8.4       14,051       7.3       14,887       5.7       7,480       6.1       9,209       5.9  
Sales and marketing
    8,487       5.1       12,409       6.5       16,154       6.2       8,423       6.9       7,615       4.9  
General and administrative
    11,440       6.8       13,371       7.0       13,172       5.1       6,907       5.6       9,644       6.2  
                                                                                 
Operating income
    24,404       14.6       21,330       11.1       34,721       13.3       11,853       9.6       17,443       11.2  
                                                                                 
Interest income
    1,905       1.1       1,482       0.8       245       0.1       177       0.1       17        
Interest expense
    (732 )     (0.4 )     (1,214 )     (0.6 )     (3,544 )     (1.4 )     (1,870 )     (1.5 )     (1,629 )     (1.0 )
Other income (expense), net
    (139 )     (0.1 )     145       0.1       (239 )     (0.1 )     (240 )     (0.2 )     285       0.2  
                                                                                 
Income before income taxes
    25,438       15.2       21,743       11.3       31,183       12.0       9,920       8.1       16,116       10.4  
Provision for income taxes
    (9,828 )     (5.9 )     (8,876 )     (4.6 )     (13,909 )     (5.3 )     (4,266 )     (3.5 )     (7,193 )     (4.6 )
                                                                                 
Net income
  $ 15,610       9.3 %   $ 12,867       6.7 %   $ 17,274       6.6 %   $ 5,654       4.6 %   $ 8,923       5.7 %
                                                                                 


48


Table of Contents

 
(1) Includes stock-based compensation expense as follows:
 
                                                                                 
Cost of revenue
  $ 416       0.2 %   $ 1,112       0.6 %   $ 1,916       0.7 %   $ 1,007       0.8 %   $ 1,490       1.0 %
Product development
    75       0.0       443       0.2       669       0.3       318       0.3       884       0.6  
Sales and marketing
    226       0.1       581       0.3       1,761       0.7       897       0.7       1,341       0.9  
General and administrative
    1,354       0.8       1,086       0.6       1,827       0.7       688       0.6       3,378       2.2  
 
Six Months Ended December 31, 2008 and 2009
 
Net Revenue
 
                         
    Six Months Ended
   
    December 31,   2008-2009
    2008   2009   % Change
    (In thousands)    
 
Net revenue
  $ 122,913     $ 155,515       27 %
Cost of revenue
    88,250       111,604       26 %
 
Net revenue increased $32.6 million, or 27%, from the six months ended December 31, 2008 to the six months ended December 31, 2009. Substantially all of this increase was attributable to an increase in net revenue from our financial services client vertical and, to a lesser extent, our education client vertical. Financial services client vertical net revenue increased from $33.1 million in the six months ended December 31, 2008 to $63.5 million in the corresponding 2009 period, an increase of $30.4 million, or 92%. The increase in financial services client vertical net revenue was driven by lead and click volume increases at relatively steady prices. Our education client vertical net revenue increased from $73.4 million in the six months ended December 31, 2008 to $76.8 million in the corresponding 2009 period, an increase of $3.4 million, or 5%, due to lead volume increases. Our other client verticals’ net revenue declined from $14.8 million in the six months ended December 31, 2008 to $14.1 million in the corresponding 2009 period, a decline of $703,000, or 5%, due primarily to a decline in our home services client vertical due to both a challenging economic environment and lack of available consumer credit. The decline in our other client verticals’ net revenue was partially offset by increases in our healthcare and B2B client verticals’ net revenue due to acquisitions of online publishing businesses within each of our healthcare and B2B client verticals.
 
Cost of Revenue
 
Cost of revenue increased $23.4 million, or 26%, from the six months ended December 31, 2008 to the six months ended December 31, 2009. The increase in cost of revenue was driven by a $19.2 million increase in media costs due to lead and click volume increases. Gross margin, which is the difference between net revenue and cost of revenue as a percentage of net revenue, remained flat at 28.2% in both the six months ended December 31, 2008 and the six months ended December 31, 2009.
 
Operating Expenses
 
                         
    Six Months Ended
       
    December 31,     2008-2009%
 
    2008     2009     Change  
    (In thousands)        
 
Product development
  $ 7,480     $ 9,209       23 %
Sales and marketing
    8,423       7,615       (10 )%
General and administrative
    6,907       9,644       40 %
                         
Operating expenses
  $ 22,810     $ 26,468       16 %
                         


49


Table of Contents

 
Product Development Expenses
 
Product development expenses increased $1.7 million, or 23%, from the six months ended December 31, 2008 to the six months ended December 31, 2009. The increase is attributable to increased performance bonuses and compensation expense of $782,000 from the six months ended December 31, 2008 to the corresponding 2009 period, increased stock-based compensation expense of $566,000 and an increase in professional services fees of $239,000 associated with the development of our technology platforms. The increase in performance bonuses and compensation expense is due to salary increases in the six months ended December 31, 2009 as compared to the corresponding 2008 period.
 
Sales and Marketing Expenses
 
Sales and marketing expenses declined $808,000, or 10%, from the six months ended December 31, 2008 to the six months ended December 31, 2009. The decline is due to a 23% decrease in our sales and marketing headcount and related compensation expense of $1.2 million, partially offset by increased stock-based compensation expense of $444,000. The decline in headcount and related compensation expense is driven by a reduction in workforce in the third quarter of fiscal year 2009.
 
General and Administrative Expenses
 
General and administrative expenses increased $2.7 million, or 40%, from the six months ended December 31, 2008 to the six months ended December 31, 2009. The increase is driven by an increase in stock-based compensation expense of $2.7 million due to the increase in fair value of our common stock and the grant of fully-vested options to certain members of our board of directors. Our legal expense declined $698,000, or 43%, from the six months ended December 31, 2008 to the corresponding 2009 period due to the settlement of an ongoing legal matter in the fourth quarter of fiscal year 2009. The decline in legal expense was entirely offset by a 6% increase in general and administrative headcount and related compensation expense of $296,000, increased direct business acquisition costs of $256,000 and various smaller increases in general and administrative expenses.
 
Interest and Other Income (Expense), Net
 
                         
    Six Months Ended
       
    December 31,     2008-2009%
 
    2008     2009     Change  
    (In thousands)        
 
Interest income
  $ 177     $ 17       (90 )%
Interest expense
    (1,870 )     (1,629 )     (13 )%
Other income (expense), net
    (240 )     285       (219 )%
                         
    $ (1,933 )   $ (1,327 )     (31 )%
                         
 
Interest and other income (expense), net declined $606,000, or 31%, from the six months ended December 31, 2008, to the six months ended December 31, 2009. Other income (expense), net increased $525,000, or 219%, from the six months ended December 31, 2008 to the corresponding 2009 period due to a legal settlement payment received in the three months ended December 31, 2009, as well as foreign exchange gains recorded in connection with the weakening of the U.S. dollar against the Canadian dollar. The decline in interest expense is attributable to a decline in average interest rates on our credit facility and the decrease in interest income is due to a decline in our invested cash balances.


50


Table of Contents

 
Provision for Taxes
 
                 
    Six Months Ended
    December 31,
    2008   2009
    (In thousands)
 
Provision for taxes
  $ 4,266     $ 7,193  
Effective tax rate
    43.0 %     44.6 %
 
The increase in our effective tax rate from the six months ended December 31, 2008 to the six months ended December 31, 2009 was driven by an increase in non-deductible stock-based compensation expense and, to a lesser extent, due to the reinstatement of research and development tax credits and the corresponding benefit received in the six months ended December 31, 2008.
 
Comparison of Fiscal Years Ended June 30, 2007, 2008 and 2009
 
Net Revenue
 
                                         
    Fiscal Year Ended June 30,   2007-2008
  2008-2009
    2007   2008   2009   % Change   % Change
    (In thousands)        
 
Net revenue
  $ 167,370     $ 192,030     $ 260,527       15 %     36 %
Cost of revenue
    108,945       130,869       181,593       20 %     39 %
 
Net revenue increased $68.5 million, or 36%, from fiscal year 2008 to fiscal year 2009, attributable primarily to an increase in our financial services and education client verticals, offset in part by a decline in our DSS business. Financial services client vertical net revenue increased from $21.9 million in fiscal year 2008 to $79.7 million in fiscal year 2009, an increase of $57.8 million, or 264%. Revenue growth in our financial services client vertical was driven by lead and click volume increases at relatively steady prices and the full effect of the acquisition of SureHits in the fourth quarter of fiscal year 2008. Our education client vertical net revenue increased from $142.2 million in fiscal year 2008 to $151.4 million in fiscal year 2009, an increase of $9.1 million, or 6%, half due to lead volume increases and half due to pricing increases. Our other client verticals’ net revenue increased from $24.3 million in fiscal year 2008 to $26.3 million in fiscal year 2009, an increase of $2.0 million, or 8%, due primarily to the full effect of the acquisition of the assets of Vendorseek L.L.C., within our B2B client vertical in the fourth quarter of fiscal year 2008. The revenue increase in our other client verticals was partially offset by declines in our home services client vertical due to both a challenging economic environment and lack of available consumer credit.
 
Net revenue increased $24.7 million, or 15%, from fiscal year 2007 to fiscal year 2008, attributable primarily to increases in our education, financial services and other client verticals, partially offset by declines in our DSS business. Education client vertical net revenue increased from $131.0 million to $142.2 million, an increase of $11.2 million, or 9%, due to lead volume increases at relatively steady prices. Financial services client vertical net revenue increased from $12.2 million to $21.9 million, an increase of $9.7 million, or 80%. Revenue growth in our financial services client vertical was driven by the acquisition of SureHits in the fourth quarter of fiscal year 2008. Net revenue from our other client verticals increased from $16.6 million in fiscal year 2007 to $24.3 million in fiscal year 2008, an increase of $7.7 million, or 46%, due to a $6.0 million increase in our home services client vertical primarily resulting from the acquisition of ReliableRemodeler in the third quarter of fiscal year 2008 and, to a lesser extent, organic growth.
 
Cost of Revenue
 
Cost of revenue increased $50.7 million, or 39%, from fiscal year 2008 to fiscal year 2009, driven by a $43.3 million increase in media costs due to lead and click volume increases and, to a lesser extent, increased amortization of acquisition-related intangible assets of $4.2 million resulting from acquisitions in fiscal years 2008 and 2009. Our gross margin declined from 31.8% in fiscal year 2008 to 30.3% in fiscal year 2009 due primarily to the acquisition of SureHits, which is characterized by lower gross margins.


51


Table of Contents

Cost of revenue increased $21.9 million, or 20%, from fiscal year 2007 to fiscal year 2008, driven by a $14.0 million increase in media costs due to lead volume increases and, to a lesser extent, increased personnel costs of $2.7 million due to an 11% increase in average headcount and related compensation expense increases, as well as increased amortization of acquisition-related intangible assets resulting from acquisitions in fiscal year 2008. Gross margin declined from 34.9% in fiscal year 2007 to 31.8% in fiscal year 2008 due to increases in both the above mentioned headcount and related compensation expense (including stock-based compensation expense), as well as increases in fixed costs, and increased amortization of acquired intangible assets associated with acquisitions during fiscal year 2008.
 
Operating Expenses
 
                                         
    Fiscal Year Ended June 30,     2007-2008
    2008-2009
 
    2007     2008     2009     % Change     % Change  
    (In thousands)              
 
Product development
  $ 14,094     $ 14,051     $ 14,887             6 %
Sales and marketing
    8,487       12,409       16,154       46 %     30 %
General and administrative
    11,440       13,371       13,172       17 %     (1 )%
                                         
Operating expenses
  $ 34,021     $ 39,831     $ 44,213       17 %     11 %
                                         
 
Product Development Expenses
 
Product development expenses increased $836,000, or 6%, from fiscal year 2008 to fiscal year 2009, due to increased management performance bonuses and increased stock-based compensation expense. The increased management performance bonuses were paid in connection with our achievement of specified financial metrics during fiscal year 2009 that were not achieved in the corresponding prior year period, as well as an increase in the number of individuals eligible for such bonuses. The increase in product development expenses was partially offset by a reduction in workforce in the third quarter of fiscal year 2009. Product development expenses remained flat from fiscal year 2007 to fiscal year 2008.
 
Sales and Marketing Expenses
 
Sales and marketing expenses increased $3.7 million, or 30%, from fiscal year 2008 to fiscal year 2009, due to increased stock-based compensation expense of $1.2 million, increased personnel costs of $888,000, increased consulting fees of $340,000, increased advertising and marketing expenses associated with marketing campaigns of $331,000 and increased depreciation and amortization of $193,000. The increase in personnel costs was due to an 18% increase in average headcount and related compensation expenses driven by the acquisition of ReliableRemodeler in the third quarter of fiscal year 2008. Increased consulting, advertising and marketing expenses was due to overall increases in sales and marketing activities associated with the increased volume of business in fiscal year 2009 as compared to the prior year period. The increase was partially offset by a reduction in workforce in the third quarter of fiscal year 2009.
 
Sales and marketing expenses increased $3.9 million, or 46%, from fiscal year 2007 to fiscal year 2008, due to increased personnel costs of $3.9 million driven by a 47% increase in average headcount and a one-time payout of a management retention bonus in the second quarter of fiscal year 2008, and, to a lesser extent, increased stock-based compensation expense. The increase in personnel costs was driven by the acquisition of ReliableRemodeler in the third quarter of fiscal year 2008.
 
General and Administrative Expenses
 
General and administrative expenses remained relatively flat in fiscal year 2009 compared to fiscal year 2008. The slight decline consisted of a decrease in legal expenses of $987,000, partially offset by an increase in stock-based compensation expense of $741,000. The decline in legal expenses is attributable to a decrease in expenses related to an ongoing legal matter which was settled prior to the fourth quarter of fiscal year 2009. In connection with the settlement, we paid a one-time, non-refundable fee of $850,000. We recognized an


52


Table of Contents

intangible asset of $226,000 related to the estimated fair value of the license and expensed the remaining $624,000 as a settlement expense.
 
General and administrative expenses increased $1.9 million, or 17%, from fiscal year 2007 to fiscal year 2008. The increase was driven by increased legal fees of $973,000 associated with the legal matter discussed above, increased personnel costs of $1.2 million due to a 6% increase in average headcount and a one-time payout of management retention bonuses in the second quarter of fiscal year 2008.
 
Interest and Other Income (Expense), Net
 
                                         
    Fiscal Year Ended June 30,     2007-2008
    2008-2009
 
    2007     2008     2009     % Change     % Change  
    (In thousands)              
 
Interest income
  $ 1,905     $ 1,482     $ 245       (22 )%     (83 )%
Interest expense
    (732 )     (1,214 )     (3,544 )     66 %     192 %
Other income (expense), net
    (139 )     145       (239 )     (204 )%     (265 )%
                                         
Interest and other income (expense), net
  $ 1,034     $ 413     $ (3,538 )     (60 )%     (957 )%
                                         
 
Interest and other income (expense), net declined $4.0 million from fiscal year 2008 to fiscal year 2009 due to increased interest expense, lowered interest income and foreign currency losses. The increase in interest expense is due to an increase in non-cash imputed interest on acquisition-related notes payable and a draw down on our credit facilities. Decreased interest income is due to a decline in our invested cash balances. The decline in other income (expense), net was due to foreign currency losses driven by weakening of the Canadian dollar against the U.S. dollar.
 
Interest and other income (expense), net declined $621,000 from fiscal year 2007 to fiscal year 2008 due to increased non-cash imputed interest expense associated with an increase in acquisition-related notes payable and the draw down on our credit facilities, reduced interest income due to lower average investment balances and declining average interest rates. The increase in other income (expense), net relates to a change in the functional currency of one of our subsidiaries and the resulting reclassification of an unrealized currency translation gain from other comprehensive income to other income (expense), net.
 
Provision for Taxes
 
                         
    Fiscal Year Ended June 30,
    2007   2008   2009
    (In thousands)
 
Provision for taxes
  $ 9,828     $ 8,876     $ 13,909  
Effective tax rate
    38.6 %     40.8 %     44.6 %
 
The increase in our effective tax rate from fiscal year 2008 to fiscal year 2009 was impacted by increased state income tax expense in connection with our acquisitions of businesses in various jurisdictions within the U.S. in which we did not previously have a presence and, to a lesser extent, increased foreign income taxes and non-deductible stock-based compensation expense. The increase in our effective tax rate was partially offset by increased research and development tax credits recorded in connection with the “Emergency Economic Stabilization Act of 2008,” or the Act. On October 3, 2008, the Act, which contains the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008” was signed into law. Under the Act, the research credit was retroactively extended for amounts paid or incurred after December 31, 2007 and before January 1, 2010.
 
The increase in our effective tax rate from fiscal year 2007 to fiscal year 2008 was due to increased non-deductible stock-based compensation expense and a decline in federal research and development tax credits in fiscal year 2008 due to the expiration of research and development credit laws in December 31, 2007.


53


Table of Contents

Quarterly Results of Operations
 
The following table sets forth our unaudited quarterly consolidated statements of operations data for fiscal year 2008, fiscal year 2009 and the first half of fiscal year 2010. We have prepared the statements of operations for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in the opinion of the management, each statement of operation includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.
 
                                                                                 
    Three Months Ended  
    Sept. 30,
    Dec. 31,
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
 
    2007     2007     2008     2008     2008     2008     2009     2009     2009     2009  
    (In thousands)  
 
Net revenue
  $ 44,383     $ 40,806     $ 49,739     $ 57,102     $ 63,678     $ 59,235     $ 69,813     $ 67,801     $ 78,552     $ 76,963  
Cost of revenue
    30,551       28,623       32,840       38,855       45,281       42,969       46,780       46,563       55,047       56,557  
Gross profit
    13,832       12,183       16,899       18,247       18,397       16,266       23,033       21,238       23,505       20,406  
Operating expenses:
                                                                               
Product development
    3,696       3,524       3,355       3,476       3,757       3,723       3,512       3,895       4,470       4,739  
Sales and marketing
    1,952       4,122       2,948       3,387       4,259       4,164       3,594       4,137       3,625       3,990  
General and administrative
    3,542       3,217       3,242       3,370       3,736       3,171       2,865       3,400       3,441       6,203  
Operating income
    4,642       1,320       7,354       8,014       6,645       5,208       13,062       9,806       11,969       5,474  
Interest income
    546       489       282       165       90       87       44       24       9       8  
Interest expense
    (164 )     (143 )     (242 )     (665 )     (763 )     (1,107 )     (879 )     (795 )     (748 )     (881 )
Other income (expense), net
    (13 )     10       74       74       51       (291 )     (16 )     17       120       165  
Income before income taxes
    5,011       1,676       7,468       7,588       6,023       3,897       12,211       9,052       11,350       4,766  
Provision for taxes
    (2,123 )     (750 )     (2,799 )     (3,204 )     (2,719 )     (1,547 )     (5,818 )     (3,825 )     (4,837 )     (2,356 )
Net income
  $ 2,888     $ 926     $ 4,669     $ 4,384     $ 3,304     $ 2,350     $ 6,393     $ 5,227     $ 6,513     $ 2,410  
                                                                                 
Other data:
                                                                               
Adjusted EBITDA
  $ 8,420     $ 4,424     $ 10,335     $ 13,100     $ 12,157     $ 10,956     $ 18,571     $ 15,188     $ 18,150     $ 14,989  
                                                                                 
 
Quarterly Revenue Trends
 
Our quarterly net revenue decreased $3.6 million, or 8%, from $44.4 million for the three months ended September 30, 2007 to $40.8 million for the three months ended December 31, 2007. For these respective periods, our education client vertical revenue decreased by $1.9 million due to seasonality; our financial services client vertical revenue decreased by $501,000; our other client verticals revenue decreased by $1.2 million due to a decrease in revenue from our home services client vertical; and our DSS business revenue was flat.
 
Our quarterly net revenue increased $8.9 million, or 22%, from $40.8 million for the three months ended December 31, 2007 to $49.7 million for the three months ended March 31, 2008. For these respective periods, our education client vertical revenue increased by $4.4 million due to seasonality; our financial services client vertical revenue increased by $1.1 million due to organic growth; our other client verticals revenue increased by $3.5 million due to growth in our home services client vertical as a result of the acquisition of Reliable Remodeler and organic growth; and our DSS business revenue was flat.
 
Our quarterly net revenue increased $7.4 million, or 15%, from $49.7 million for the three months ended March 31, 2008 to $57.1 million for the three months ended June 30, 2008. For these respective periods, our education client vertical revenue decreased by $193,000; our financial services client vertical revenue increased by $6.4 million due to the acquisition of SureHits and organic growth; our other client verticals revenue increased by $1.2 million due to growth in our home services client vertical as a result of the acquisition of ReliableRemodeler; and our DSS business revenue was flat.


54


Table of Contents

Our quarterly net revenue increased $6.6 million, or 12%, from $57.1 million for the three months ended June 30, 2008 to $63.7 million for the three months ended September 30, 2008. For these respective periods, our education client vertical revenue increased by $2.2 million due to organic growth; our financial services client vertical revenue increased by $4.5 million due to organic growth; our other client verticals revenue was flat and our DSS business revenue decreased by $228,000.
 
Our quarterly net revenue decreased $4.4 million, or 7%, from $63.7 million for the three months ended September 30, 2008 to $59.2 million for the three months ended December 31, 2008. For these respective periods, our education client vertical revenue decreased by $5.3 million due to seasonality; our financial services client vertical revenue increased by $2.8 million due to organic growth; our other client verticals revenue decreased by $2.2 million due to a decline in our home services client vertical as a result of difficult economic conditions; and our DSS business revenues increase by $262,000.
 
Our quarterly net revenue increased $10.6 million, or 18%, from $59.2 million for the three months ended December 31, 2008 to $69.8 million for the three months ended March 31, 2009. For these respective periods, our education client vertical revenue increased by $4.5 million due to seasonality; our financial services client vertical revenue increased by $6.6 million due to organic growth; our other client verticals revenue decreased by $482,000; and our DSS business revenue was flat.
 
Our quarterly net revenue decreased $2.0 million, or 3%, from $69.8 the three months ended March 31, 2009 to $67.8 million the three months ended June 30, 2009. For these respective periods, our education client vertical revenue increased by $860,000; our financial services client vertical revenue decreased by $2.6 million due to decreased marketing spend by one of our clients; our other client verticals revenue was flat and our DSS business revenue decreased by $299,000.
 
Our quarterly net revenue increased $10.8 million, or 16%, from $67.8 million for the three months ended June 30, 2009 to $78.6 million for the three months ended September 30, 2009. For these respective periods, our education client vertical revenue increased by $938,000; our financial services client vertical revenue increased by $9.0 million due to organic growth; our other client verticals revenue increased by $987,000; and our DSS business revenue decreased by $194,000.
 
Our quarterly net revenue declined $1.6 million, or 2%, from $78.6 million for the three months ended September 30, 2009 to $77.0 million for the three months ended December 31, 2009. For these respective periods, our education client vertical revenue declined by $3.9 million due to seasonality and a decline in the purchase of leads by one of our largest clients; our financial services client vertical revenue increased by $1.4 million due to organic growth; our other client verticals’ revenue increased by $475,000; and our DSS business revenue increased by $396,000.
 
Adjusted EBITDA
 
Our use of Adjusted EBITDA.  We include Adjusted EBITDA in this prospectus because (i) we seek to manage our business to a consistent level of Adjusted EBITDA as a percentage of net revenue, (ii) it is a key basis upon which our management assesses our operating performance, (iii) it is one of the primary metrics investors use in evaluating Internet marketing companies, (iv) it is a factor in the evaluation of the performance of our management in determining compensation, and (v) it is an element of certain maintenance covenants under our debt agreements. We define Adjusted EBITDA as net income less interest and other income plus interest and other expense, provision for taxes, depreciation expense, amortization expense, stock-based compensation expense and foreign-exchange (loss) gain. Restructuring charges have not been expensed and have not been adjusted for in our Adjusted EBITDA.
 
We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items) and the impact of depreciation and amortization expense on definite-lived intangible assets. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis,


55


Table of Contents

we also use Adjusted EBITDA for business planning purposes, to incentivize and compensate our management personnel and in evaluating acquisition opportunities.
 
In addition, we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other interested parties in our industry as a measure of financial performance and debt-service capabilities. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
 
  •  Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;
 
  •  although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements;
 
  •  Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
 
  •  Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees;
 
  •  Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;
 
  •  Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us; and
 
  •  other companies, including companies in our industry, may calculate Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure.
 
Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
 
The following table presents a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, for each of the periods indicated:
 
                                                                                 
    Three Months Ended,  
    Sept. 30,
    Dec. 31,
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
 
    2007     2007     2008     2008     2008     2008     2009     2009     2009     2009  
    (In thousands)  
 
Net income
  $ 2,888     $ 926     $ 4,669     $ 4,384     $ 3,304     $ 2,350     $ 6,393     $ 5,227     $ 6,513     $ 2,410  
Interest and other income (expense), net
    (369 )     (356 )     (114 )     426       622       1,311       851       754       619       708  
Provision for taxes
    2,123       750       2,799       3,204       2,719       1,547       5,818       3,825       4,837       2,356  
Depreciation and amortization
    2,577       2,501       2,500       4,149       4,114       4,237       4,035       3,592       3,952       4,651  
Stock-based compensation expense
    1,201       603       481       937       1,398       1,512       1,474       1,790       2,229       4,864  
                                                                                 
Adjusted EBITDA
  $ 8,420     $ 4,424     $ 10,335     $ 13,100     $ 12,157     $ 10,957     $ 18,571     $ 15,188     $ 18,150     $ 14,989  
                                                                                 
 
Adjusted EBITDA quarterly trends.  We seek to manage our business to a consistent level of Adjusted EBITDA as a percentage of net revenue. We do so on a fiscal year basis by varying our operations to balance revenue growth and costs throughout the fiscal year. We do not seek to manage our business to a consistent level of Adjusted EBITDA on a quarterly basis. For fiscal years 2003 to 2009, Adjusted EBITDA as a percentage of revenue was 22%, 20%, 22%, 23%, 22%, 19% and 22%, respectively.
 
For quarterly periods from September 30, 2007 to December 31, 2009, Adjusted EBITDA as a percentage of revenue was 19%, 11%, 21%, 23%, 19%, 18%, 27%, 22%, 23% and 19%, respectively. In general, Adjusted EBITDA as a percentage of revenue tends to be seasonally weaker in the quarters ending September 30 and,


56


Table of Contents

particularly, December 31 and stronger in quarters ending March 31 and June 30. For the three months ended December 31, 2007, Adjusted EBITDA as a percentage of revenue was 11%. This was due to typical seasonal weakness and a one-time management tenure bonus. For the three months ended March 31, 2009, Adjusted EBITDA as a percentage of revenue was 27%. This was due to a reduction in work force undertaken at the beginning of that period based on concerns held by our management team regarding the deteriorating economic climate. The economic climate did not have a negative effect on us in a fashion that impacted our revenue growth, and our reduced cost basis resulting from our work force reduction, combined with our revenue growth, resulted in an Adjusted EBITDA margin for the period that exceeded our historical quarterly Adjusted EBITDA margin performance. We manage our business to a desired Adjusted EBITDA margin level on a fiscal year basis, not on a quarterly basis, and investors should expect our Adjusted EBITDA margins to vary from quarter to quarter.
 
Liquidity and Capital Resources
 
Our primary operating cash requirements include the payment of media costs, personnel costs, costs of information technology systems and office facilities.
 
Since our inception, we have financed our operations and acquisitions primarily through cash flow from operations, private placements of our convertible preferred stock and borrowing under our bank credit facilities and seller notes. Through December 31, 2009, we have generated approximately $140.7 million in cash flows from operations and have received a total of approximately $37.4 million from private share placements and an additional $6.4 million from the exercise of stock options to purchase shares of our common stock. Our principal sources of liquidity as of December 31, 2009, consisted of cash and cash equivalents of $34.1 million and our revolving credit facility which had $50.2 million available for borrowing as of such date.
 
Net Cash Provided by Operating Activities
 
Net cash provided by operating activities was $9.4 million in the six months ended December 31, 2008, $16.1 million in the six months ended December 31, 2009 and $25.2 million, $24.8 million and $32.6 million in fiscal years 2007, 2008 and 2009, respectively. Our net cash provided by or used in operating activities is primarily a result of our net income adjusted by non-cash expenses such as depreciation and amortization, stock-based compensation expense, provision for sales returns and changes in working capital components, and is influenced by the timing of cash collections from our clients and cash payments for purchases of media and other expenses.
 
Net cash provided by operating activities in the six months ended December 31, 2009, was the result of net income of $8.9 million, non-cash depreciation, amortization and stock-based compensation expense of $15.7 million and an increase in accounts payable and accrued liabilities of $2.7 million, partially offset by an increase in prepaid expenses and other assets of $4.4 million and an increase in accounts receivable of $4.1 million. The increase in accounts payable and accrued liabilities is due to timing of payments. The increase in prepaid expenses and other assets is due to timing of payments. The increase in accounts receivable is attributable to increased revenue, as well as timing of receipts.
 
Net cash provided by operating activities in the six months ended December 31, 2008 was driven by net income of $5.7 million, non-cash depreciation, amortization and stock-based compensation expense of $11.3 million and an increase in our provision for sales returns of $1.4 million. Net cash provided by operating activities was partially offset by a decline in accounts payable and accrued liabilities of $4.9 million and an increase in accounts receivable of $4.0 million. The increase in our provision for sales returns is due to a significant increase in net revenue. The decline in accounts payable and accrued liabilities is due to timing of payments. The increase in accounts receivable is attributable to increased revenue and timing of receipts.
 
Net cash provided by operating activities in fiscal 2009 was due to net income of $17.3 million, non-cash depreciation, amortization and stock-based compensation expense of $22.2 million, partially offset by an increase in accounts receivable of $9.0 million and increased deferred tax assets of $4.1 million. The increase in accounts receivable is due to increased revenue of 36% associated with the growth of our business, as well as due to timing of receipts. The increase in deferred tax assets is due to temporary differences between the financial statement carrying amount and the tax basis of existing assets and liabilities.


57


Table of Contents

 
Net cash provided by operating activities in fiscal 2008 was due to net income of $12.9 million, non-cash depreciation, amortization and stock-based compensation expense of $14.9 million and increased accounts payable and accrued liabilities of $3.0 million, partially offset by an increase in deferred tax assets of $3.8 million and excess tax benefits from exercise of stock options of $1.7 million. The increase in accounts payable and accrued liabilities is due to timing of payments. The increase in deferred tax assets is due to temporary differences between the financial statement carrying amount and the tax basis of existing assets and liabilities. The increase in excess tax benefits is attributable to exercises of stock options resulting in tax deductions in excess of recorded stock-based compensation expense.
 
Net cash provided by operating activities in fiscal 2007 was largely due to net income of $15.6 million and non-cash depreciation, amortization and stock-based compensation expense of $11.7 million.
 
Net Cash Used in Investing Activities
 
Our investing activities include acquisitions of media websites and businesses; purchases, sales and maturities of marketable securities; capital expenditures; and capitalized internal development costs. Net cash used in investing activities was $13.0 million and $47.6 million in the six months ended December 31, 2008 and 2009, respectively, and was $26.4 million, $49.2 million and $27.3 million in fiscal years 2007, 2008 and 2009, respectively. Capital expenditures and internal software development costs totaled $1.5 million and $1.7 million in the six months ended December 31, 2008 and 2009, respectively, and $3.5 million, $3.6 million and $2.4 million in fiscal years 2007, 2008 and 2009, respectively.
 
Cash used in investing activities in the six months ended December 31, 2009 was impacted by our acquisition of Internet.com, Insure.com and Payler Corp. D/B/A HSH Associates Financial Publishers, or HSH. We acquired the website business of the Internet.com division of WebMediaBrands, Inc. for an initial $16.0 million cash payment. We acquired the website business of Insure.com from LifeQuotes, Inc., an Illinois-based online insurance quote service and brokerage business, for an initial $15.0 million cash payment. We acquired HSH, a New Jersey-based online company providing comprehensive mortgage rate information, for an initial $6.0 million cash payment. Cash used in investing activities in the six months ended December 31, 2009 was also impacted by purchases of the operations of 19 other website publishing businesses for an aggregate of approximately $7.7 million in cash payments. Cash used in investing activities in the six months ended December 31, 2008 was impacted by the acquisition of U.S. Citizens for Fair Credit Card Terms, Inc, or CardRatings, an Arkansas-based online marketing company, for an initial cash payment of $10.4 million, as well as purchases of the operations of 20 other website publishing businesses for approximately $4.2 million in cash payments.
 
Cash used in investing activities in fiscal year 2009 was impacted by the acquisition of CardRatings for an initial cash payment of $10.4 million, as well as purchases of the operations of 33 other website publishing businesses for an aggregate of approximately $14.6 million in cash payments. Cash used in investing activities in fiscal year 2008 was driven by the acquisitions of SureHits, ReliableRemodeler and Vendorseek amounting to total cash payments of $54.7 million, as well as purchases of the operations of 20 website publishing businesses for an aggregate of approximately $9.5 million in cash payments. Cash used in investing activities in fiscal year 2008 was partially offset by proceeds from sales and maturities of marketable securities, net of purchases of marketable securities, of $17.5 million. Cash used in investing activities in fiscal year 2007 was driven by purchases of the operations of 32 website publishing businesses for an aggregate of approximately $11.8 million in cash payments, as well as purchases of marketable securities, net of proceeds from sales and maturities or marketable securities, of $11.0 million.
 
Net Cash Provided by or Used in Financing Activities
 
Cash provided by financing activities was $2.0 million and $40.5 million in the six months ended December 31, 2008 and 2009, respectively. Cash provided by financing activities in the six months ended December 31, 2009 was due to proceeds from a draw-down of our revolving credit facility of $43.3 million, partially offset by $4.3 million in principal payments on acquisition-related notes payable and our term loan. Cash provided by financing activities in the six months ended December 31, 2008 was due to proceeds from a


58


Table of Contents

draw-down of our revolving credit facility of $8.6 million, partially offset by $6.1 million in principal payments on acquisition-related notes payable.
 
Cash used in financing activities was $5.0 million and $2.8 million in fiscal years 2009 and 2007, respectively, and cash provided by financing activities was $22.8 million in fiscal year 2008. Cash used in financing activities in fiscal year 2009 was due to principal payments on acquisition-related notes payable and our term loan of $13.1 million and stock repurchases of $1.3 million, partially offset by proceeds from a draw down of our revolving credit facility of $8.6 million. Cash provided by financing activities in fiscal year 2008 was driven by proceeds from our term loan of $29.0 million and proceeds from issuance of common stock as a result of stock option exercises of $2.6 million, partially offset by $5.6 million in stock repurchases and principal payments on acquisition-related notes payable of $4.9 million. Cash used in financing activities in fiscal year 2007 was driven by principal payments on acquisition-related notes payable of $3.9 million, partially offset by proceeds from issuance of common stock as a result of stock option exercises of $0.7 million.
 
Capital Resources
 
We believe that our cash and cash equivalents, funds generated from our operations and available amounts under our credit facilities, together with the net proceeds of this offering, will be sufficient to meet our working capital and non-acquisition related capital expenditure requirements for at least the next 12 months. In order to expand our business or acquire additional complementary businesses or technologies, we may need to raise additional funds through equity or debt financings. If required, additional financing may not be available on terms that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to our stockholders and us.
 
During the last three years, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
 
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 purpose.
 
Contractual Obligations
 
The following table summarizes our contractual obligations at June 30, 2009 and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
 
                                         
    Payments Due by Period  
    Total     Less Than 1 Year     1 to 3 Years     3 to 5 Years     More Than 5 Years  
                (In thousands)              
 
Debt
  $ 34,757     $ 3,000     $ 11,250     $ 20,507     $  
Notes payable
    25,069       10,214       12,005       2,850        
Operating lease obligations
    1,368       1,104       264              
                                         
    $ 61,194     $ 14,318     $ 23,519     $ 23,357     $  
                                         
 
In connection with the acquisition of SureHits, we also may be required to make certain earn-out payments in the aggregate amount of $13.5 million, payable in increments in the amount of $4.5 million annually on January 26 of 2010, 2011 and 2012, contingent upon the achievement of specified financial targets.


59


Table of Contents

In August 2006, we entered into a loan and security agreement which makes available a $30 million revolving credit facility from a financial institution. In January 2008, we signed an amendment to this loan and security agreement, expanding the revolving credit availability to $60 million.
 
In September 2008, we replaced our existing revolving credit facility of $60 million with credit facilities totaling $100 million and in November 2009, we extended that capacity to $130 million. As of December 31, 2009, the facilities consisted of a $30 million five-year term loan, with principal amortization of 10%, 10%, 20%, 25% and 35% annually, and a $100 million revolving credit facility. Borrowings under the credit facilities are collateralized by our assets and interest is payable quarterly at specified margins above either LIBOR or the Prime Rate. As of December 31, 2009, the interest rate varied dependent upon the ratio of funded debt to adjusted EBITDA and ranged from LIBOR + 1.875% to 2.625% or Prime + 0.75% to 1.25% for the revolving credit facility and from LIBOR + 2.25% to 3.0% or Prime + 0.75% to 1.25% for the term loan. Adjusted EBITDA, as defined in our bank credit facility, is substantially similar to our measure of Adjusted EBITDA set forth under “Prospectus Summary — Summary Consolidated Financial Data.” As of December 31, 2009, $27.0 million was outstanding under the term loan and $49.8 million was outstanding under the revolving credit facility. Under this loan and revolving credit facility agreement, we are required to maintain certain minimum financial ratios computed as follows:
 
  •  Quick ratio: ratio of (a) the sum of unrestricted cash and cash equivalents and trade receivables less than 90 days from invoice date to (b) current liabilities and face amount of any letters of credit less the current portion of deferred revenue.
 
  •  Fixed charge coverage: ratio of (a) trailing 12 months of adjusted EBITDA to (b) the sum of capital expenditures, net cash interest expense, cash taxes, cash dividends and trailing 12 months payments of indebtedness. Payment of unsecured indebtedness is excluded to the degree that sufficient unused revolving credit facility exists such that the relevant debt payment could have been made from the credit facility.
 
  •  Funded debt to adjusted EBITDA: ratio of (a) the sum of all obligations owing to lending institutions, the face amount of any letters of credit, indebtedness owing in connection with seller notes and indebtedness owing in connection with capital lease obligations to (b) trailing 12-month adjusted EBITDA.
 
We were in compliance with these minimum financial ratios as of June 30, 2008 and 2009 and as of December 31, 2009.
 
In January 2010, we replaced our existing credit facility with a credit facility with a total borrowing capacity of $175.0 million. The new facility consists of a $35.0 million four-year term loan, with principal amortization of 10%, 15%, 35% and 40% annually, and a $140.0 million four-year revolving credit facility. Interest on borrowings under the new credit facility is payable quarterly at specified margins above either LIBOR or the Prime Rate. The interest rate varies dependent upon the ratio of funded debt to adjusted EBITDA and ranges from LIBOR + 2.125% to 2.875% or Prime + 1.00% to 1.50% for the revolving credit facility and from LIBOR + 2.50% to 3.25% or Prime + 1.00% to 1.50% for the term loan. We are not required to repay any portion of this new facility from the proceeds of this offering; however, we may choose to do so at a future date. The minimum financial ratios have not changed under the new facility. The new credit facility expires in January 2014.
 
The operating lease obligations reflected in the table above primarily include our corporate office leases.
 
The notes payable reflected in the table above consist of non-interest-bearing, unsecured promissory notes issued in connection with acquisitions.
 
Guarantees
 
We have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The term of the indemnification period is for the officer or director’s lifetime. The maximum potential amount of future payments we could be


60


Table of Contents

required to make under these indemnification agreements is unlimited; however, we have a director and officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements.
 
In the ordinary course of our business, we enter into standard indemnification provisions in our agreements with our clients. Pursuant to these provisions, we indemnify our clients for losses suffered or incurred in connection with certain third-party claims that our product infringed any United States patent, copyright or other intellectual property rights. With respect to our DSS products, we also indemnify our clients for losses incurred in connection with third-party claims that the items and content we provide infringe upon the intellectual property rights of any third party. In some cases we are also obligated to either secure the rights to use, replace or modify the items and content, and, in the event that we are unable to achieve the foregoing, the client is entitled to terminate the agreement and receive a refund of certain payments made to us. Each of these agreements contain general limitations on our liability.
 
The potential amount of future payments to defend lawsuits or settle indemnified claims under these indemnification provisions may be unlimited; however, we believe the estimated fair value of these indemnity provisions is minimal, and accordingly, we have not recorded any liabilities for these agreements.
 
Recent Accounting Pronouncements
 
In December 2007, the Financial Accounting Standards Board, or FASB, issued a new accounting standard that changes the accounting for business combinations, including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition-related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. The new standard applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and to changes in valuation allowances for deferred tax assets and acquired income tax uncertainties arising from past business combinations. The adoption of the new standard on July 1, 2009 did not have a material impact on our consolidated financial statements.
 
In May 2009, the FASB issued a new accounting standard that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In particular, the new standard sets forth (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. We applied the requirement of this standard effective June 30, 2009 and included additional disclosures in the notes to our consolidated financial statements.
 
In June 2009, the FASB issued a new accounting standard that provides for a codification of accounting standards to be the authoritative source of generally accepted accounting principles in the United States. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. We adopted the provisions of the authoritative accounting guidance for the interim reporting period ended September 30, 2009. The adoption did not have a material effect on our consolidated results of operations or financial condition.
 
In October 2009, the FASB issued a new accounting standard that changes the accounting for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In addition, the new standard eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables. In October 2009, the FASB also issued a new accounting standard that changes revenue recognition for tangible products


61


Table of Contents

containing software and hardware elements. Specifically, if certain requirements are met, revenue arrangements that contain tangible products with software elements that are essential to the functionality of the products are scoped out of the existing software revenue recognition accounting guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards will be effective for us in the first quarter of fiscal year 2011. Early adoption is permitted. We do not anticipate the adoption of these standards to have a material impact on our consolidated financial statements.
 
Quantitative and Qualitative Disclosures about Market Risk
 
Foreign Currency Exchange Risk
 
To date, our international client agreements have been denominated solely in U.S. dollars, and accordingly, we have not been exposed to foreign currency exchange rate fluctuations related to client agreements, and do not currently engage in foreign currency hedging transactions. However, as the local accounts for our India and Canada operations are maintained in the local currency of India and Canada, we are subject to foreign currency exchange rate fluctuations associated with remeasurement to U.S. dollars. A hypothetical change of 10% in foreign currency exchange rates would not have a material impact on our consolidated financial condition or results of operations.
 
Interest Rate Risk
 
We had cash, cash equivalents and short-term investments totaling $34.1 million, $25.2 million and $27.3 million at December 31, 2009, June 30, 2009 and June 30, 2008, respectively. These amounts were invested primarily in money market funds, short-term deposits and marketable securities with original maturities of less than three months. The unrestricted cash, cash equivalents and short-term investments are held for working capital purposes and short-term acquisitions financing. We do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in the fair value as a result of changes in interest rates due to the short-term nature of our cash equivalents and short-term investments. Declines in interest rates, however, would reduce future investment income.
 
As of December 31, 2009, we had outstanding a credit facility consisting of a term loan, with principal amortization of 10%, 10%, 20%, 25% and 35% annually, and a $100 million revolving credit facility. As of December 31, 2009, we had $27.0 million outstanding on our term loan and $49.8 million outstanding on our revolving credit facility. Interest on the credit facility is payable quarterly at specified margins above either LIBOR or the Prime Rate. The interest rate varies dependent upon the ratio of funded debt to adjusted EBITDA and ranges from LIBOR + 1.875% to 2.625% or Prime + 0.75% to 1.25% for the revolving credit facility and from LIBOR + 2.25% to 3.0% or Prime + 0.75% to 1.25% for the term loan. A hypothetical change of 1% in the interest rate on our credit facility would lead to higher interest expense, but we do not believe it would materially affect our overall consolidated financial condition or results of operations.
 
In January 2010, we replaced our existing credit facility with a credit facility with a total borrowing capacity of $175.0 million. The new facility consists of a $35.0 million four-year term loan, with principal amortization of 10%, 15%, 35% and 40% annually, and a $140.0 million four-year revolving credit facility. Interest on borrowings under the new credit facility is payable quarterly at specified margins above either LIBOR or the Prime Rate. The interest rate varies dependent upon the ratio of funded debt to adjusted EBITDA and ranges from LIBOR + 2.125% to 2.875% or Prime + 1.00% to 1.50% for the revolving credit facility and from LIBOR + 2.50% to 3.25% or Prime + 1.00% to 1.50% for the term loan. The interest rates on the new credit facility are higher than on the previous credit facility. Our exposure to interest rate risk under the new credit facility will depend on the extent to which we utilize such facility. If our borrowings under the new facility are comparable to our borrowings under the previous credit facility, we do not believe our exposure to interest rate risk will be materially different.
 


62


Table of Contents

 
BUSINESS
 
Our Company
 
QuinStreet is a leader in vertical marketing and media on the Internet. We have built a strong set of capabilities to engage Internet visitors with targeted media and to connect our marketing clients with their potential customers online. We focus on serving clients in large, information-intensive industry verticals where relevant, targeted media and offerings help visitors make informed choices, find the products that match their needs, and thus become qualified customer prospects for our clients. Our current primary client verticals are the education and financial services industries. We also have a presence in the home services, business-to-business, or B2B, and healthcare industries.
 
We generate revenue by delivering measurable online marketing results to our clients. These results are typically in the form of qualified leads or clicks, the outcomes of customer prospects submitting requests for information on, or to be contacted regarding, client products, or their clicking on or through to specific client offers. These qualified leads or clicks are generated from our marketing activities on our websites or on third-party websites with whom we have relationships. Clients primarily pay us for leads that they can convert into customers, typically in a call center or through other offline customer acquisition processes, or for clicks from our websites that they can convert into applications or customers on their websites. We are predominantly paid on a negotiated or market-driven “per lead” or “per click” basis. Media costs to generate qualified leads or clicks are borne by us as a cost of providing our services.
 
Founded in 1999, we have been a pioneer in the development and application of measurable marketing on the Internet. Clients pay us for the actual opt-in actions by prospects or customers that result from our marketing activities on their behalf, versus traditional impression-based advertising and marketing models in which an advertiser pays for more general exposure to an advertisement. We have been particularly focused on developing and delivering measurable marketing results in the search engine “ecosystem”, the entry point of the Internet for most of the visitors we convert into qualified leads or clicks for our clients. We own or partner with vertical content websites that attract Internet visitors from organic search engine rankings due to the quality and relevancy of their content to search engine users. We also acquire targeted visitors for our websites through the purchase of pay-per-click, or PPC, advertisements on search engines. We complement search engine companies by building websites with content and offerings that are relevant and responsive to their searchers, and by increasing the value of the PPC search advertising they sell by matching visitors with offerings and converting them into customer prospects for our clients.
 
Market Opportunity
 
Our clients are shifting more of their marketing budgets from traditional media channels such as direct mail, television, radio, and newspapers to the Internet because of increasing usage of the Internet by their potential customers. We believe that direct marketing is the most applicable and relevant marketing segment to us because it is targeted and measurable. According to the July 2009 research report, “Consumer Behavior Online: A 2009 Deep Dive,” by Forrester Research, Americans spend 33% of their time with media on the Internet, but online direct marketing was forecasted to represent only 16% of the $149 billion in total annual U.S. direct marketing spending in 2009, as reported by the Direct Marketing Association. The Internet is an effective direct marketing medium due to its targeting and measurability characteristics. If direct marketing budgets shift to the Internet in proportion to Americans’ share of time spent with media on the Internet — from 16% to 33% of the $149 billion in total spending — that could represent an increased market opportunity of $25 billion. In addition, as traditional media categories such as television and radio shift from analog to digital formats, they can become channels for the targeted and measurable marketing techniques and capabilities we have developed for the Internet, thus expanding our addressable market opportunity. Further future market potential will also come from international markets.


63


Table of Contents

Change in marketing strategy and approach
 
We believe that marketing approaches are changing as budgets shift from offline, analog advertising media to digital advertising media such as Internet marketing. These changing approaches are fundamental, and require a shift to fundamentally new competencies, including:
 
From qualitative, impression-driven marketing to analytic, data-driven marketing
 
We believe that the growth in Internet marketing is enabling a more data-driven approach to advertising. The measurability of online marketing allows marketers to collect a significant amount of detailed data on the performance of their marketing campaigns, including the effectiveness of ad format and placement and user responses. This data can then be analyzed and used to improve marketing campaign performance and cost-effectiveness on substantially shorter cycle times than with traditional offline media.
 
From account management-based client relationships to results-based client relationships
 
We believe that marketers are becoming increasingly focused on strategies that deliver specific, measurable results. For example, marketers are attempting to better understand how their marketing spending produces measurable objectives such as meeting their target marketing cost per new customer. As marketers adopt more results-based approaches, the basis of client relationships with their marketing services providers is shifting from being more account management-based to being more results-oriented.
 
From marketing messages pushed on audiences to marketing messages pulled by self-directed audiences
 
Traditional marketing messages such as television and radio advertisements are broadcast to a broad audience. The Internet is enabling more self-directed and targeted marketing. For example, when Internet visitors click on PPC search advertisements, they are expressing an interest in and proactively engaging with information about a product or service related to that advertisement. The growth of self-directed marketing, primarily through online channels, allows marketers to present more targeted and potentially more relevant marketing messages to potential customers who have taken the first step in the buying process, which can in turn increase the effectiveness of marketers’ spending.
 
From marketing spending focused on large media buys to marketing spending optimized for fragmented media
 
We believe that media is becoming increasingly fragmented and that marketing strategies are changing to adapt to this trend. There are millions of Internet websites, tens of thousands of which have significant numbers of visitors. While this fragmentation can create challenges for marketers, it also allows for improved audience segmentation and the delivery of highly targeted marketing messages, but new technologies and approaches are necessary to effectively manage marketing given the increasing complexity resulting from more media fragmentation.
 
Increasing complexity of online marketing
 
Online marketing is a dynamic and increasingly complex advertising medium. There are numerous online channels for marketers to reach potential customers, including search engines, Internet portals, vertical content websites, affiliate networks, display and contextual ad networks, email, video advertising, and social media. We refer to these and other marketing channels as media. Each of these channels may involve multiple ad formats and different pricing models, amplifying the complexity of online marketing. We believe that this complexity increases the demand for our vertical marketing and media services due to our capabilities and to our experience managing and optimizing online marketing programs across multiple channels. Also marketers and agencies often lack our ability to aggregate offerings from multiple clients in the same industry vertical, an approach that allows us to cover a wide selection of visitor segments and provide more potential matches to Internet visitor needs. This approach can allow us to convert more Internet visitors into qualified leads or clicks from targeted media sources, giving us an advantage when buying or monetizing that media.


64


Table of Contents

Our Business Model
 
We deliver cost-effective marketing results to our clients, predictably and scalably, most typically in the form of a qualified lead or click. These leads or clicks can then convert into a customer or sale for the client at a rate that results in an acceptable marketing cost to them. We get paid by clients primarily when we deliver qualified leads or clicks as defined in our agreements. Because we bear the costs of media, our programs must deliver a value to our clients and a media yield, or our ability to generate an acceptable margin on our media costs, that provides a sound financial outcome for us. Our general process is:
 
  •  We own or access targeted media.
 
  •  We run advertisements or other forms of marketing messages and programs in that media to create visitor responses or clicks through to client offerings.
 
  •  We match these responses or clicks to client offerings or brands that meet visitor interests or needs, converting visitors into qualified leads or clicks.
 
  •  We optimize client matches and media yield such that we achieve desired results for clients and a sound financial outcome for us.
 
Media cost, or the cost to attract targeted Internet visitors, is the largest cost input to producing the measurable marketing results we deliver to clients. Balancing our clients’ cost and conversion objectives, or the rate at which the leads or clicks that we deliver to them convert into customers, with our media costs and yield objectives, represents the primary challenge in our business model. We have been able to effectively balance these competing demands by focusing on our media sources and capabilities, conversion optimization, and our mix of offerings and client coverage. We also seek to mitigate media cost risk by working with third-party website publishers predominantly on a revenue-share basis; media purchased on a non-revenue-share basis has represented a small minority of our media costs and of the Internet visitors we convert into qualified leads or clicks for clients.
 
Media and Internet visitor mix
 
We are a client-driven organization. We seek to be one of the largest providers of measurable marketing results on the Internet in the client industry verticals we serve by meeting the needs of clients for results, reliability and volume. Meeting those client needs requires that we maintain a diversified and flexible mix of Internet visitor sources due to the dynamic nature of online media. Our media mix changes with changes in Internet visitor usage patterns. We adapt to those changes on an ongoing basis, and also proactively adjust our mix of vertical media sources to respond to client or vertical-specific circumstances and to achieve our financial objectives. Our financial objectives are to achieve consistent, sustainable financial performance, but can differ by client or industry vertical, depending on factors such as our need to invest in the development of media sources, marketing programs, or client relationships. Generally, our Internet visitor sources include:
 
  •  websites owned and operated by us, with content and offerings that are relevant to our clients’ target customers;
 
  •  visitors acquired from PPC advertisements purchased on major search engines and sent to our websites;
 
  •  revenue sharing agreements with third-party websites with whom we have a relationship and whose content is relevant to our clients’ target customers;
 
  •  email lists owned by third parties and warranted to us by their owners to comply with the CAN-SPAM Act;
 
  •  email lists owned by us, and generated on an opt-in basis from Internet visitors to our websites; and
 
  •  display ads run through online advertising networks or directly with major websites or portals.


65


Table of Contents

 
Conversion optimization
 
Once we acquire targeted Internet visitors from any of our numerous online media sources, we seek to convert that media into qualified leads or clicks at a rate that balances client results with our media costs or yield objectives. We start by defining the segments and interests of Internet visitors in our verticals, and by providing them with the information and product offerings on our websites and in our marketing programs that best meet their needs. Achieving acceptable client results and media yield then requires ongoing testing, measuring, analysis, feedback, and adaptation of the key components of our Internet marketing programs. These components include the marketing or advertising messaging, content mix, visitor navigation path, mix and coverage of client offerings presented, and point-of-sale conversion messaging — the content that is presented to an Internet visitor immediately prior to converting that individual into a lead or click for our clients. This data complexity is managed by us with technology, data reporting, marketing processes, and personnel. We believe that our scale and ten-year track record give us an advantage, as managing this complexity often implies a steep experience-based learning curve.
 
Offerings and client coverage
 
The Internet is a self-directed medium. Internet visitors choose the websites they visit and their online navigation paths, and always have the option of clicking away to a different website or web page. Having offerings or clients that match the interests or needs of website visitors is key to providing results and adequate media yield. Our vertical focus allows us to continuously revise and improve this matching process, to better understand the various segments of visitors and client offerings available to be matched, and to ensure that we enable Internet visitors to find what they seek.
 
Our Competitive Advantages
 
Vertical focus and expertise
 
We focus our efforts on large, attractive market verticals, and on building our depth of media and coverage of clients and client offerings within them. We have been a pioneer in developing vertical marketing and media on the Internet, and in providing measureable marketing results to clients. We focus on clients who are moving their marketing spending to measurable online formats and on information-intensive verticals with large underlying market opportunities and high product or customer lifetime values. This focus allows us to utilize targeted media, in-depth industry and client knowledge, and customer segmentation and breadth of client offerings, or coverage, to deliver results for our clients and greater media yield.
 
Measurable marketing experience and expertise
 
We have substantial experience at designing and deploying marketing programs that allow Internet visitors to find the information or product offerings they seek, and that can deliver economically attractive, measurable results to our clients, cost-effectively for us. Such results require frequent testing and balancing of numerous variables, including Internet visitor sources, mix of content and of client and product offerings, visitor navigation paths, prospect qualification, and advertising creative design, among others. The complexity of executing these marketing campaigns is challenging. Due to our scale and ten-year track record, we have successfully executed thousands of Internet marketing programs, and we have gained significant experience managing and optimizing this complexity to meet our clients’ volume, quality and cost objectives.
 
Targeted media
 
Targeted media attracts Internet visitors who are relatively narrowly focused demographically or in their interests. Targeted media can deliver better measurable marketing results for our clients, at lower media costs for us, due to higher rates of conversion of Internet visitors into leads or clicks for targeted offerings and, often, due to less competition from display advertisers. We have significant experience at creating, identifying, monetizing, and managing targeted media on the Internet. Many of the targeted media sources for our marketing programs are proprietary or more defensible because of our direct ownership of websites in our verticals, our acquisition of targeted Internet visitors directly from search engines to our websites, and our exclusive or long-term relationships


66


Table of Contents

with media properties or sources owned by others. Examples of websites that we own and operate include WorldWideLearn.com, ArmyStudyGuide.com and Chef2Chef.com in our education client vertical; CardRatings.com, MoneyRates.com and Insure.com in our financial services client vertical; AllAboutLawns.com and OldHouseWeb.com in our home services client vertical; and ElderCarelink.com in our healthcare client vertical.
 
Proprietary technology
 
We have developed a core technology platform and a common set of applications for managing and optimizing measurable marketing programs across multiple verticals at scale. The primary objectives and effects of our technologies are to achieve higher media yield, deliver better results for our clients, and more efficiently and effectively manage our scale and complexity. We continuously strive to develop technologies that allow us to better match Internet visitors in our verticals to the information, clients or product offerings they seek at scale. In so doing, our technologies can allow us to simultaneously improve visitor satisfaction, increase our media yield, and achieve higher rates of conversions of leads or clicks for our clients — a virtuous cycle of increased value for Internet visitors and our clients and competitive advantage for us. Some of the key applications in our technology platform are:
 
  •  an ad server for tracking the placement and performance of content, creative messaging, and offerings on our websites and on those of publishers with whom we work;
 
  •  database-driven applications for dynamically matching content, offers or brands to Internet visitors’ expressed needs or interests;
 
  •  a platform for measuring and managing the performance of tens of thousands of PPC search engine advertising campaigns;
 
  •  dashboards or reporting tools for displaying operating and financial metrics for thousands of ongoing marketing campaigns; and,
 
  •  a compliance tool capable of cataloging and filtering content from the thousands of websites on which our marketing programs appear to ensure adherence to client branding guidelines and to regulatory requirements.
 
Approximately one-third of our employees are engineers, focused on building, maintaining and operating our technology platform.
 
Client relationships
 
We believe we are a reliable source of measurably effective marketing results for our clients. We endeavor to work collaboratively and in a data-driven way with clients to improve our results for them. Our client retention rate is high. We experienced no attrition among clients that individually accounted for over $100,000 in monthly revenue to us for the one-year period ended December 31, 2009. Those clients represented 75% of our revenue over that time period. In addition, most of our revenue growth comes from existing clients; 66% of our year-over-year revenue growth in the quarter ended December 31, 2009 came from incremental revenue from existing clients, defined as clients we had worked with for at least one year. We believe our high client retention and per client growth rates are due to:
 
  •  our close, often direct, relationships with most of our large clients;
 
  •  our ability to deliver measurable and attractive return on investment, or ROI, on clients’ marketing spending;
 
  •  our ownership of, or exclusive access to large amounts of, targeted media inventory and associated Internet visitors in the industry verticals on which we focus; and,
 
  •  our ability to consistently and reliably deliver large quantities of qualified leads or clicks.


67


Table of Contents

 
We believe that our high client retention rates, combined with our depth and breadth of online media in our primary client verticals, indicate that we are becoming an important marketing channel partner for our clients to reach their prospective customers.
 
Client-driven online marketing approach
 
We focus on providing measurable Internet marketing and media services to our clients in a way that protects and enhances their brands and their relationships with prospective customers. The Internet marketing programs we execute are designed to adhere to strict client branding and regulatory guidelines, and are designed to match our clients’ brands and offers with expressed customer interest. We have contractual arrangements with third-party website publishers to ensure that they follow our clients’ brand guidelines, and we utilize our proprietary technologies and trained personnel to help ensure compliance. In addition, we believe that providing relevant, helpful content and client offers that match an Internet visitor’s self-selected interest in a product or service, such as requesting information about an education program or financial product, makes that visitor more likely to convert into a customer for our clients.
 
We do not engage in online marketing practices such as spyware or deceptive promotions that do not provide value to Internet visitors and that can undermine our clients’ brands. A small minority of our Internet visitors reach our websites or client offerings through advertisements in emails. We employ practices to ensure that we comply with the CAN-SPAM Act governing unsolicited commercial email.
 
Acquisition strategy and success
 
We have successfully acquired vertical marketing and media companies on the Internet, including vertical website businesses, marketing services companies, and technologies. We believe we can integrate and generate value from acquisitions due to our scale, breadth of capabilities, and common technology platform.
 
  •  Our ability to monetize Internet media, coupled with client demand for our services, provides us with a particular advantage in acquiring targeted online media properties in the verticals on which we focus.
 
  •  Our capabilities in online media can allow us to generate a greater volume of leads or clicks, and therefore create more value, than other owners of marketing services companies that have aggregated client budgets or relationships.
 
  •  We can often apply technologies across our business volume to create more value than previous owners of the technology.
 
Scale
 
We are one of the largest Internet vertical marketing and media companies in the world. Our scale allows us to better meet the needs of large clients for reliability, volume and quality of service. It allows us to invest more in technologies that improve media yield, client results and our operating efficiency. We are also able to invest more in other forms of research and development, including determining and developing new types of vertical media, new approaches to engaging website visitors, and new segments of Internet visitors and client budgets, all of which can lead to advantages in media costs, effectiveness in delivering client results, and then to more growth and greater scale.
 
Our Strategy
 
Our goal is to be one of the largest and most successful marketing and media companies on the Internet, and eventually in other digitized media forms. We believe that we are in the early stages of a very large and long-term business opportunity. Our strategy for pursuing this opportunity includes the following key components:
 
  •  Focus on generating sustainable revenues by providing measurable value to our clients.
 
  •  Build QuinStreet and our industry sustainably by behaving ethically in all we do and by providing quality content and website experiences to Internet visitors.


68


Table of Contents

 
  •  Remain vertically focused, choosing to grow through depth, expertise and coverage in our current industry verticals; enter new verticals selectively over time, organically and through acquisitions.
 
  •  Build a world class organization, with best-in-class capabilities for delivering measurable marketing results to clients and high yields or returns on media costs.
 
  •  Develop and evolve the best technologies and platform for managing vertical marketing and media on the Internet; focus on technologies that enhance media yield, improve client results and achieve scale efficiencies.
 
  •  Build, buy and partner with vertical content websites that provide the most relevant and highest quality visitor experiences in the client and media verticals we serve.
 
  •  Be a client-driven organization; develop a broad set of media sources and capabilities to reliably meet client needs.
 
Our Culture
 
Our values are the foundation of our successful business culture. They represent the standards we strive to achieve and the organization we continuously seek to become. These have been our guiding principles since our founding in 1999. Our values are:
 
   1.  Performance.  We understand our business objectives and apply a “whatever it takes” approach to meeting them. We are driven to achieve. We are committed to our own personal and professional development and to that of our colleagues.
 
   2.  High Standards.  We hold each other and ourselves to the highest standards of performance, professionalism and personal behavior. We act with the highest of ethical standards. We tolerate and forgive mistakes, but not patterns.
 
   3.  Teamwork.  We deal with one another openly, honestly and non-hierarchically in an atmosphere of mutual trust and respect and in pursuit of common stretch goals. We have an obligation to dissent in an effort to reach the best answers. We smooth the way for effective, dynamic team discussions by demonstrating care and concern for each individual in all of our interactions. We support decisions, once made.
 
   4.  Customer Empathy.  We strive every day to better understand and anticipate the needs of our customers, including our website visitors, clients and publishers. We leverage our unique insights into higher customer loyalty and competitive advantage.
 
   5.  Prioritization.  We always work on what is most important to achieving Company objectives first. If we do not know, we ask or discuss competing demands.
 
   6.  Urgency.  We know our goals and measure our progress toward them daily.
 
   7.  Progress.  We are pioneers. We make decisions based on facts and analysis, as well as intuition, but we expect to make mistakes in the pursuit of rapid progress. We learn from mistakes on short cycle times and iterate our way to success.
 
   8.  Innovation and Flexibility.  We prize creativity. We embrace new ideas and approaches as opportunities to improve our performance or work environment. We resist pride of authorship; it limits progress. We actively benchmark and work to understand and employ best practices.
 
   9.  Recognition.  We are a meritocracy. Advancement and recognition are earned through contribution and performance. We celebrate each other’s victories and efforts.
 
  10.  Fun.  We believe that work, done well, can and should be fun. We strive to create an upbeat, supportive environment and try not to take ourselves too seriously. We do not tolerate negativism, pessimism or nay saying...we don’t have time.


69


Table of Contents

 
Clients
 
In fiscal years 2007, 2008 and 2009 and the six months ended December 31, 2009, our top 20 clients accounted for 76%, 70%, 68% and 67% of net revenue, respectively. Our largest client, DeVry Inc., accounted for 22%, 23%, 19% and 12% of net revenue in these periods, respectively. Since our service was first offered in 2001, we have developed a broad client base with many multi-year relationships. We enter into Internet marketing contracts with our clients, most of which are cancelable with little or no prior notice. In addition, these contracts do not contain penalty provisions for cancellation before the end of the contract term.
 
Sales and Marketing
 
We have an internal sales team that consists of employees focused on signing new clients and account managers who maintain and seek to increase our business with existing clients. Our sales people and account managers are each focused on a particular client business vertical so that they develop an expertise in the marketing needs of our clients in that particular vertical.
 
Our marketing programs include attendance at trade shows and conferences and limited advertising.
 
Technology and Infrastructure
 
We have developed a suite of technologies to manage, improve and measure the results of the marketing programs we offer our clients. We use a combination of proprietary and third-party software as well as hardware from established technology vendors. We use specialized software for client management, building and managing websites, acquiring and managing media, managing our third-party publishers, and the matching of Internet visitors to our marketing clients. We have invested significantly in these technologies and plan to continue to do so to meet the demands of our clients and Internet visitors, to increase the scalability of our operations, and enhance management information systems and analytics in our operations. Our development teams work closely with our marketing and operating teams to develop applications and systems that can be used across our business. For the fiscal years 2007, 2008 and 2009 and the six months ended December 31, 2009, we spent $14.1 million, $14.1 million, $14.9 million and $9.2 million, respectively, on product development.
 
Our primary data center is at a third-party co-location center in San Francisco, California. All of the critical components of the system are redundant and we have a backup data center in Las Vegas, Nevada. We have implemented these backup systems and redundancies to minimize the risk associated with earthquakes, fire, power loss, telecommunications failure, and other events beyond our control.
 
Intellectual Property
 
We rely on a combination of trade secret, trademark, copyright and patent laws in the United States and other jurisdictions together with confidentiality agreements and technical measures to protect the confidentiality of our proprietary rights. We currently have one patent application pending in the United States and no issued patents. We rely much more heavily on trade secret protection than patent protection. To protect our trade secrets, we control access to our proprietary systems and technology and enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties. QuinStreet is a registered trademark in the United States and other jurisdictions. We also have registered and unregistered trademarks for the names of many of our websites and we own the domain registrations for our many website domains.
 
We cannot guarantee that our intellectual property rights will provide competitive advantages to us; our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties; our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; any of the trade secrets, trademarks, copyrights, patents or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged, or abandoned; competitors will not


70


Table of Contents

design around our protected systems and technology; or that we will not lose the ability to assert our intellectual property rights against others.
 
Our Competitors
 
Our primary competition falls into two categories: advertising and direct marketing services agencies and online marketing and media companies. We compete for business on the basis of a number of factors including return on marketing expenditures, price, access to targeted media, ability to deliver large volumes or precise types of customer prospects, and reliability.
 
Advertising and direct marketing services agencies
 
Online and offline advertising and direct marketing services agencies control the majority of the large client marketing spending for which we primarily compete. So, while they are sometimes our competitors, agencies are also often our clients. We compete with agencies to attract marketing budget or spending from offline forms to the Internet or, once designated to be spent online, to be spent with us versus the agency or by the agency with others. When spending online, agencies spend with QuinStreet and with portals, other websites and ad networks.
 
Online marketing and media companies
 
We compete with other Internet marketing and media companies, in many forms, for online marketing budgets. Most of these competitors compete with us in one vertical. Examples include BankRate in the financial services vertical and Monster Worldwide in the education vertical. Some of our competition also comes from agencies or clients spending directly with larger websites or portals, including Google, Yahoo!, MSN, and AOL.
 
Government Regulation
 
Advertising and promotional information presented to visitors on our websites and our other marketing activities are subject to federal and state consumer protection laws that regulate unfair and deceptive practices. There are a variety of state and federal restrictions on the marketing activities conducted by telephone, the mail or by email, or over the internet, including the Telemarketing Sales Rule, state telemarketing laws, federal and state privacy laws, the CAN-SPAM Act, and the Federal Trade Commission Act and its accompanying regulations and guidelines. In addition, some of our clients operate in regulated industries, particularly in our financial services, education and medical verticals. For example, the U.S. Real Estate Settlement Procedures Act, or RESPA, regulates the payments that may be made to mortgage brokers. While we do not engage in the activities of a traditional mortgage broker, we are licensed as a mortgage broker in 25 states for our online marketing activities. In our education vertical, our clients are subject to the U.S. Higher Education Act, which, among other things, prohibits incentive compensation in recruiting students. The U.S. Department of Education is currently engaged in a negotiated rulemaking process in which it has suggested repealing all existing safe harbors regarding incentive compensation in recruiting, including the Internet safe harbor. While we believe that our fee per lead model does not constitute incentive compensation for purposes of the Higher Education Act, the results of the negotiated rulemaking could impact how we are paid for leads by clients in our education vertical and could also impact our education clients and their marketing practices. In our medical vertical, our medical device and supplies clients are subject to state and federal anti-kickback statutes that prohibit payment for referrals. While we believe our matching of prospective customers with our clients and the manner in which we are paid for these activities complies with these and other applicable regulations, these rules and regulations in many cases were not developed with online marketing in mind and their applicability is not always clear. The rules and regulations are complex and may be subject to different interpretations by courts or other governmental authorities. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future. Any such developments (or developments stemming from enactment or modification of other laws) or the failure to anticipate accurately the application or interpretation of these laws could create liability to us, result in adverse publicity and negatively affect our businesses.


71


Table of Contents

Employees
 
As of December 31, 2009, we had 568 employees, which included 162 employees in product development and engineering, 80 in sales and marketing, 52 in general and administration and 274 in operations. None of our employees is represented by a labor union.
 
Facilities
 
Our principal executive offices are located in a leased facility in Foster City, California, consisting of approximately 53,877 square feet of office space under a lease that expires in October 2010. This facility accommodates our principal engineering, sales, marketing, operations and finance and administrative activities. As of December 31, 2009, we also lease buildings in Arkansas, Colorado, Connecticut, Massachusetts, Nevada, New Jersey, New York, North Carolina, Oklahoma, Oregon, India and the United Kingdom. These facilities total approximately 54,587 square feet. We believe that our current facilities are sufficient for our current needs. We intend to add new facilities and expand our existing facilities as we add employees and expand our markets, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.
 
Legal Proceedings
 
From time to time, we may become involved in legal proceedings and claims arising in the ordinary course of our business. We are not currently a party to any material litigation.


72


Table of Contents

 
MANAGEMENT
 
Officers and Directors
 
Our officers and directors and their respective ages and positions as of December 31, 2009 were as follows:
 
             
Name
 
Age
 
Position
 
Douglas Valenti
    50     Chief Executive Officer and Chairman
Bronwyn Syiek
    45     President and Chief Operating Officer
Kenneth Hahn
    43     Chief Financial Officer
Tom Cheli
    38     Executive Vice President
Scott Mackley
    37     Executive Vice President
Nina Bhanap
    36     Chief Technology Officer
Daniel Caul
    44     General Counsel
Christopher Mancini
    37     Senior Vice President
Patrick Quigley
    34     Senior Vice President
Timothy Stevens
    43     Senior Vice President
William Bradley(1)
    66     Director
John G. McDonald(2)
    72     Director
Gregory Sands(1)(2)
    43     Director
James Simons(1)(3)
    46     Director
Glenn Solomon(3)
    40     Director
Dana Stalder(2)(3)
    41     Director
 
 
(1) Member of the nominating and corporate governance committee.
 
(2) Member of the compensation committee.
 
(3) Member of the audit committee.
 
Officers
 
Douglas Valenti has served as our Chief Executive Officer since July 1999 and as our Chairman and Chief Executive Officer since March 2004. Prior to QuinStreet, Mr. Valenti served as a partner at Rosewood Capital, a venture capital firm, for five years; at McKinsey & Company as a strategy consultant and engagement manager for three years; at Procter & Gamble in various management roles for three years; and for the U.S. Navy as a nuclear submarine officer for five years. He holds a Bachelors degree in Industrial Engineering from the Georgia Institute of Technology, where he graduated with highest honors and was named the Georgia Tech Outstanding Senior in 1982, and an M.B.A. from the Stanford Graduate School of Business, where he was an Arjay Miller Scholar.
 
Bronwyn Syiek has served as our President and Chief Operating Officer since February 2007, as our Chief Operating Officer from April 2004 to February 2007, as Senior Vice President from September 2000 to April 2004, as Vice President from her start date in March 2000 to September 2000 and as a consultant to us from July 1999 to March 2000. Prior to joining us, Ms. Syiek served as Director of Business Development and member of the Executive Committee at De La Rue Plc, a banknote printing and security product company, for three years. She previously served as a strategy consultant and engagement manager at McKinsey & Company for four years and held various investment management and banking positions with Lloyds Bank and Charterhouse Bank. She holds an M.A. in Natural Sciences from Cambridge University in the United Kingdom.
 
Kenneth Hahn has served as our Chief Financial Officer since September 2006. Prior to joining us, Mr. Hahn served as Chief Financial Officer of Borland Software Corporation, a public software company,


73


Table of Contents

from September 2002 to July 2006. Previously, Mr. Hahn served in various roles, including Chief Financial Officer, of Extensity, Inc., a public software company, for five years; as a strategy consultant at the Boston Consulting Group for three years; and as an audit manager at Price Waterhouse, a public accounting firm, for five years. He holds a B.A. in Business from California State University Fullerton, summa cum laude, and an M.B.A. from the Stanford Graduate School of Business, where he was an Arjay Miller Scholar. Mr. Hahn is also a Certified Public Accountant (inactive), licensed in the state of California.
 
Tom Cheli has served as our Executive Vice President since February 2007, as Senior Vice President from December 2004 to February 2007, as Vice President of Sales from January 2001 to December 2004 and as Director of Sales from February 2000 to January 2001. Prior to joining us, Mr. Cheli served as Director of Inside Sales and Sales Operations at Collagen Aesthetics Corporation, an aesthetic biomedical device company, and as Regional Sales Manager at Akorn Ophthalmics, Inc., a specialty pharmaceutical company. He holds a B.A. in Sports Medicine from the University of the Pacific.
 
Scott Mackley has served as our Executive Vice President since February 2007, as Senior Vice President from December 2004 to February 2007, as Vice President from June 2003 to December 2004, as Senior Director from February 2002 to June 2003, as Director from October 2000 to February 2002 and as Senior Manager, Network Management from May 2000 to October 2000. Prior to joining us, Mr. Mackley served at Salomon Brothers and Salomon Smith Barney, in various roles in their Equity Trading unit and Investment Banking and Equity Capital Markets divisions over four years. He holds a B.A. in Economics from Washington and Lee University.
 
Nina Bhanap has served as our Chief Technology Officer since July 2009, as our Senior Vice President of Engineering from November 2006 to July 2009, as Vice President of Product Development from January 2004 to November 2006, as Senior Director from January 2003 to January 2004 and as Director of Product Management from October 2001 to January 2003. Prior to joining us, Ms. Bhanap served as Head of Fixed Income Sales Technology for Europe at Morgan Stanley for five years and as a senior associate at Booz Allen Hamilton for one year. She holds a B.S. in Computer Science with Honors from Imperial College, University of London, and an M.B.A. from the London Business School.
 
Daniel Caul has served as our General Counsel since January 2008. Prior to joining us, Mr. Caul served as General Counsel for the Search and Media division of IAC/InterActiveCorp, an Internet search and advertising company, from September 2006 to January 2008, and prior to the acquisition by IAC/InterActiveCorp, he was Assistant General Counsel of Ask Jeeves, Inc. from February 2003 to September 2006. Previously, Mr. Caul was an attorney with Howard, Rice, Nemerovsky, Canady, Falk and Rabkin, a corporate law firm, for four years and served as a U.S. District Court clerk. He holds a B.A. in Political Science from Vanderbilt University, summa cum laude, and a J.D. from the Harvard Law School, magna cum laude. Mr. Caul was also a Fulbright Scholar.
 
Christopher Mancini has served as our Senior Vice President since October 2007, as Vice President from January 2006 to October 2007, as Senior Director from July 2004 to January 2006, as Director from December 2003 to July 2004 and as Senior Sales Manager from November 2000 to February 2003. Prior to joining us, Mr. Mancini served in various sales and operational roles at Eli Lilly & Company, NeuroScience Division, for six years. He holds a B.S. from the Duquesne University School of Pharmacy.
 
Patrick Quigley has served as our Senior Vice President since November 2007. Prior to rejoining us, Mr. Quigley served at BEA Systems, a software company, from June 2002 to November 2007, as Vice President of Strategic Sales and Operations from February 2007 to November 2007, Vice President of Sales Operations from February 2005 to February 2007, and Director of Solutions Marketing from October 2003 to February of 2005. Mr. Quigley initially joined QuinStreet in July 1999 and served in various positions for two years; previously, he served as a consultant at McKinsey & Company for two years. He holds a B.S. in Engineering, summa cum laude, from Duke University. He holds an M.B.A. with Honors from The Wharton School at the University of Pennsylvania.
 
Timothy Stevens has served as our Senior Vice President since October 2008. Prior to joining us, Mr. Stevens served as President and CEO of Doppelganger, Inc., an online social entertainment studio, from


74


Table of Contents

January 2007 to October 2008. Prior to Doppelganger, Mr. Stevens served as General Counsel for Borland Software Corporation, a software company, from October 2003 to June 2006. Previously, he served in various executive management roles, including most recently as Senior Vice President of Corporate Development, at Inktomi Corporation, an Internet infrastructure company, during his six year tenure. Previously, Mr. Stevens was an attorney with Wilson Sonsini Goodrich & Rosati, a corporate law firm, for six years. He holds a B.S. in both Finance and Management from the University of Oregon, summa cum laude, and a J.D. from the University of California at Davis, Order of the Coif.
 
Board of Directors
 
William Bradley has served as a member of our board of directors since August 2004. Former Senator Bradley is a Managing Director of Allen & Company LLC, an investment bank, which he joined in November 2000. From April 2001 to June 2004, Former Senator Bradley also served as chief outside advisor to the nonprofit practice of McKinsey & Company. Former Senator Bradley served in the U.S. Senate from 1979 to 1997, representing the state of New Jersey, and previously was a professional basketball player with the New York Knicks from 1967 to 1977. Former Senator Bradley also serves on the boards of directors of Seagate Technology, Starbucks Coffee Company and Willis Group Holdings. Former Senator Bradley received a B.A. in American History from Princeton University and an M.A. in American History from Oxford University, where he was a Rhodes Scholar.
 
John G. (Jack) McDonald has served as a member of our board of directors since September 2004. Professor McDonald is the Stanford Investors Professor in the Stanford Graduate School of Business, where he has been a faculty member since 1968, specializing in investment management, entrepreneurial finance, principal investing, venture capital, and private equity investing. Professor McDonald also serves on the boards of directors of Varian, Inc., Plum Creek Timber Company, Scholastic Corporation, iStar Financial, Inc., and nine mutual funds managed by Capital Research and Management Company. He holds a B.A. in Engineering, an M.B.A., and a Ph.D. in Business and Finance from Stanford University. He is a retired officer in the U.S. Army and was a Fulbright Scholar.