S-1/A 1 ds1a.htm AMENDMENT NO. 7 TO FORM S-1 Amendment no. 7 to Form S-1
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As filed with the Securities and Exchange Commission on June 7, 2010

Registration No. 333-164471

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 7 TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Motricity, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3663   20-1059798
(State of incorporation)   (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

601 108th Avenue Northeast

Suite 800

Bellevue, WA 98004

(425) 957-6200

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

 

 

Richard E. Leigh, Jr.

601 108th Avenue Northeast

Suite 800

Bellevue, WA 98004

(425) 957-6200

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

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Mark D. Director

Christian O. Nagler

Kirkland & Ellis LLP

601 Lexington Avenue

New York, New York 10022

(212) 446-4800

(212) 446-4900 (facsimile)

  

William H. Hinman, Jr.

Simpson Thacher & Bartlett LLP

2550 Hanover Street

Palo Alto, California 94304

(650) 251-5000

(650) 251-5002 (facsimile)

 

 

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

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 of 1933, check the following box.  ¨

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨

   Accelerated filer   ¨

Non-accelerated filer  x  (Do not check if a smaller reporting company)

   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 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.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JUNE 7, 2010

6,750,000 Shares

LOGO

Motricity, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Motricity, Inc. Motricity is offering 6,750,000 shares in this offering.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $14.00 and $16.00. We have applied to list our common stock on the NASDAQ Global Market under the symbol “MOTR”.

See “Risk Factors” beginning on page 13 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share    Total

Initial public offering price

   $                $      

Underwriting discount

   $    $

Proceeds, before expenses, to Motricity

   $    $

To the extent that the underwriters sell more than 6,750,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,012,500 shares from the selling stockholders at the initial public offering price less the underwriting discount. Motricity will not receive any of the proceeds from the sale of the shares sold by the selling stockholders.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on or about             , 2010.

 

J.P. Morgan

  Goldman, Sachs & Co.

 

Deutsche Bank Securities   RBC Capital Markets

 

Baird   Needham & Company, LLC   Pacific Crest Securities

Prospectus dated                         , 2010.


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LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page

PROSPECTUS SUMMARY

   1

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

   8

RISK FACTORS

   13

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   32

USE OF PROCEEDS

   34

DIVIDEND POLICY

   35

CAPITALIZATION

   36

DILUTION

   38

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

   41

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   44

BUSINESS

   78

MANAGEMENT

   92

EXECUTIVE COMPENSATION

   98

PRINCIPAL AND SELLING STOCKHOLDERS

   132

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

   136

DESCRIPTION OF CAPITAL STOCK

   143

SHARES ELIGIBLE FOR FUTURE SALE

   151

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS TO NON-UNITED STATES HOLDERS

   154

UNDERWRITING (CONFLICTS OF INTEREST)

   157

LEGAL MATTERS

   162

EXPERTS

   162

WHERE YOU CAN FIND MORE INFORMATION

   163

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1

Through and including             , 2010 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

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PROSPECTUS SUMMARY

This summary highlights key information contained elsewhere in this prospectus. It does not contain all of the information that you should consider in making your investment decision. For a more complete understanding of us and this offering, you should read and consider the entire prospectus, including the information set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes thereto before deciding whether to invest in our common stock. Except as otherwise required by the context, references to “Company,” “we,” “us” and “our” are to Motricity, Inc. We use the term “wireless carrier” throughout this prospectus for simplicity, and by its use we intend to reference traditional carriers that provide mobile services over their own network as well as non-carrier mobile service providers that provide mobile services over the networks of others. We also use the phrases “4 of the top 10 global wireless carriers” and “4 of the top 10 global wireless data providers”; both refer to 4 of the top 10 wireless carriers by total wireless data revenue.

Motricity

Overview

We are a leading provider of mobile data solutions that enable wireless carriers to deliver high value mobile data services to their subscribers. We provide a comprehensive suite of hosted, managed service offerings, which include services to access the Internet using a mobile device, services to market and distribute a wide range of mobile content and applications, messaging services and billing support and settlement services. These services enable wireless carriers to deliver customized, carrier-branded mobile data services. Our mCore service delivery platform provides the tools for mobile subscribers to easily locate and access personally relevant and location-based content and services, engage in social networking and download content and applications. We also leverage our data-rich insights into subscriber behavior and our user interface expertise to provide a highly personalized mobile data experience and targeted mobile marketing solutions. By enabling wireless carriers to deliver a personalized subscriber experience, we enhance their ability to attract and retain mobile subscribers, increase the average revenue per user for mobile data services, or mobile data ARPU, and reduce network overhead and operating costs. We also facilitate effective monetization for mobile content and application providers by making it easier for them to reach millions of targeted subscribers with customized offerings.

Our mCore platform provides mobile subscribers with access to over 30 million unique pieces of third-party content or applications that we optimize and deliver to over 2,000 different mobile phone models, ranging from entry level feature phones to smartphones. We have access to more than 200 million mobile subscribers through our customers, and we currently provide mobile data services to approximately 35 million of these subscribers monthly. Our operations are predominantly based in the U.S., with international operations in the United Kingdom, the Netherlands, Indonesia and Singapore. Our customers include 4 of the top 10 global wireless carriers based on total wireless data revenue: Verizon Wireless, AT&T, Sprint and T-Mobile USA. Since 2005, Motricity has generated over $2.5 billion in gross revenue for our carrier customers through the sale of content and applications and powered over 50 billion page views through access to the mobile Internet. For the year ended December 31, 2009, we generated revenue of $113.7 million and incurred a net loss of $16.3 million. For the twelve months ended March 31, 2010, we generated revenue of $119.5 million and incurred a net loss of $10.9 million.

Industry Background

An extensive mobile data services ecosystem has developed, consisting of numerous industry participants including wireless carriers, mobile device manufacturers, operating system developers,

 

 

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and mobile content and application providers. This ecosystem is changing rapidly as new mobile devices and operating systems are introduced into the market, new mobile content and applications are developed, and as mobile subscribers demand an enhanced and personalized subscriber experience. Today’s mobile subscribers expect their mobile device to be able to do more than make phone calls or send a text message—they want to be able to access information, check email, keep up with their social networks, and download the latest content and applications.

Wireless carriers operate in a highly competitive market and face growing challenges to attract and retain mobile subscribers and increase total mobile data ARPU. Historically, many wireless carriers provided mobile data services directly to their mobile subscribers through internally developed proprietary solutions. Over time, the wireless ecosystem has become increasingly complex, with evolving technologies and a proliferation of mobile devices running different operating systems. Accordingly, it has become more difficult for wireless carriers to manage the rapid evolution of this wireless data ecosystem on their own. Additionally, the growth dynamics of the mobile data services market has attracted non-carrier participants, including Apple and Google, into the market, threatening carriers ability to monetize their significant marketing and capital investments. These relatively new entrants are offering access to mobile content and applications through their own solutions and are capturing an increasing portion of the market.

The Motricity Solution

Through our mCore service delivery platform, we provide a comprehensive suite of managed service offerings to access the Internet using a mobile device, to market and distribute a wide range of mobile content and applications, and for messaging services and billing support and settlement, which deliver numerous benefits to the following participants in the mobile data ecosystem:

Wireless Carriers.    We use customizable, modular solutions that help wireless carriers rapidly develop, deploy and bill for mobile data services. Our managed services platform reduces wireless carrier network overhead and operating costs, and simplifies the relationships between wireless carriers and content and application providers.

Mobile Content and Application Providers.    We facilitate effective monetization for mobile content and application providers by providing access to millions of mobile subscribers on a targeted and non-targeted basis across carriers. Our mCore platform also facilitates user-friendly uploading of content and applications, ensures efficient billing and settlement, and provides quality assurance for delivery of mobile content and applications.

Mobile Subscribers.    Wireless carriers can select from some or all of our services to construct and deliver a customized, carrier-branded, and highly personalized mobile data experience that allows their mobile subscribers to easily locate and access personally relevant, location-based content and services, engage in social networking, and download, send and receive digital media. In addition, the mCore service delivery platform allows mobile subscribers to manage the content and applications that they use most frequently.

Our Strengths

 

  Ÿ  

Strong Relationships with Wireless Carriers.    We have been an integral partner with our wireless carrier customers, assisting them with key phases of their mobile data services strategies, including design, development, deployment, provisioning, management, billing and customer support.

 

  Ÿ  

Deep Integration within the Mobile Data Ecosystem.    Through our deep integration with our wireless carrier customers’ systems, and our integration with a growing number of content and

 

 

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application providers, we facilitate the delivery of an enhanced mobile data experience to our customers’ mobile subscribers.

 

  Ÿ  

Highly Scalable Platform.    Our mCore service delivery platform has been built using flexible modular architecture that enables wireless carriers to deliver a highly scalable and highly reliable, carrier-branded subscriber experience.

 

  Ÿ  

Comprehensive Expertise in Managed Service Operations.    Through the delivery of MaaS, Mobile as a Service, solution, we develop, implement and operate a very large and complex managed service environment, servicing approximately 35 million non-messaging based users monthly across multiple carriers and geographies with a carrier-grade level of quality and reliability.

 

  Ÿ  

Expansive Device Portfolio and Onboarding Process.     We customize, test and maintain highly personalized mobile data experiences for an ever-expanding population of mobile devices ranging from entry level feature phones to smartphones utilizing advanced operating systems such as Symbian, Blackberry, Android, Windows Mobile and webOS.

 

  Ÿ  

Significant Insights into Subscriber Behavior and Effective User Experiences.    Our mCore platform can capture a wide range of subscriber behavior and usage patterns across multiple carriers.

 

  Ÿ  

Independence and Neutrality.    We are content, network, operating system and mobile device type independent, which enables our interests to be closely aligned with our wireless carrier customers’ interests.

Our Growth Strategy

 

  Ÿ  

Focus our efforts on expanding the breadth of our solutions with industry leading participants and leveraging our strong relationships with 4 of the top 10 global wireless carriers;

 

  Ÿ  

Expand our business into developed and emerging international markets such as those in Southeast Asia, India and Latin America;

 

  Ÿ  

Advance our technological leadership through the enhancement of the mCore platform, and the introduction of new solutions that increase the total value we provide to our carrier and enterprise customers;

 

  Ÿ  

Leverage our core competencies, technologies, and existing market position to broaden our offerings and customer base and advance into new market segments;

 

  Ÿ  

Enhance our smartphone solutions to fully capitalize on the extensive capabilities of these devices and their significant market adoption; and

 

  Ÿ  

Gain additional scale and technology through opportunistic acquisitions that expand our total market opportunity, provide complementary technologies and solutions, and aid our international expansion efforts.

Risk Factors

Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” beginning on page 13. You should consider carefully such risks before deciding to invest in our common stock. These risks include, among others:

 

  Ÿ  

we depend on a limited number of customers for a substantial portion of our revenues, and the loss of a key customer or any significant adverse change in the size or terms of a contract with a key customer could significantly reduce our revenues;

 

 

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  Ÿ  

the mobile data service industry is, and likely will continue to be, characterized by rapid technological changes, which will require us to develop new service enhancements, and could render our existing services obsolete;

 

  Ÿ  

the market in which we operate is highly competitive and many of our competitors have significantly greater resources; and

 

  Ÿ  

open mobile phone operating systems and new business models may reduce the wireless carriers’ influence over access to mobile data services, and may reduce the total size of our market opportunity.

Additional Information

Our company began as Power By Hand LLC, an Oklahoma limited liability company, formed in 2001. In 2003, PBH Holdings LLC, an Oklahoma limited liability company, acquired all of Power By Hand LLC’s membership interests and PBH Holdings, LLC subsequently reincorporated in Delaware in 2003. In 2004, we formed Power By Hand, Inc., a Delaware corporation, which merged with PBH Holdings, LLC, and PinPoint Networks, Inc. that same year, with Power By Hand, Inc. as the surviving entity. In 2004, we changed our name from Power By Hand, Inc. to Motricity, Inc.

On December 28, 2007, we acquired the mobile division of InfoSpace, Inc., which we refer to as InfoSpace Mobile, for a cash purchase price of $135 million and the assumption of certain liabilities. The acquisition was a key element in the broad strategic realignment of our business. We viewed InfoSpace Mobile as a competing provider of mobile content solutions and services for the wireless industry that had strong relationships with several large wireless carriers. Through its mCore platform, InfoSpace Mobile offered many of the same services we provided to our customers through our Fuel platform. InfoSpace Mobile also operated a large development organization, with an emphasis on professional services for their carrier customers. In the acquisition, in addition to acquiring the mCore platform and a number of leased U.S. datacenter facilities, we acquired a 224-person employee base, additional contracts with certain of our new and pre-existing customers, including AT&T and Verizon Wireless, and the Bellevue, Washington office facilities that we now use as our corporate headquarters.

Our corporate headquarters is located at 601 108th Avenue Northeast, Suite 800, Bellevue, Washington 98004. Our telephone number is (425) 957-6200. Our website address is www.motricity.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our common stock. “Motricity” and other trademarks of ours appearing in this prospectus are our property. This prospectus contains additional trade names and trademarks of ours and of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

 

 

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THE OFFERING

 

Common stock offered by us

6,750,000 shares

 

Underwriters’ option to purchase shares from the selling stockholders

1,012,500 shares

 

Total common stock to be outstanding after this offering

38,592,617 shares

 

Use of proceeds

We estimate that we will receive proceeds of approximately $86.2 million from our offering of our common stock, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, assuming the shares are offered at $15.00 per share, which is the midpoint of the estimated offering price range shown on the front cover page of this prospectus. We plan to use the net proceeds from this offering to fund investments and acquisitions. However, we currently have no commitments with respect to any such investments or acquisitions. In addition, we expect to use up to $1 million to pay a portion of the fees to be paid to Advanced Equities, Inc. for their advisory services provided to us in connection with this offering. One million dollars of the fee was paid previously. See “Use of Proceeds” for additional details. We will not receive any proceeds from the sale of shares by the selling stockholders. See “Principal and Selling Stockholders.”

 

Dividend Policy

We currently do not expect to pay dividends or make any other distribution on our common stock in the foreseeable future. Our ability to pay dividends on our common stock is also limited by the covenants of our credit facility and may be further restricted by the terms of any future debt or preferred securities. See “Dividend Policy” for additional details.

 

Proposed trading symbol on NASDAQ Global Market

“ MOTR ”

 

Risk Factors

Investment in our common stock involves a high degree of risk. You should read and consider the information set forth under the heading “Risk Factors” beginning on page 13 and all other information included in this prospectus before deciding to invest in our common stock.

 

Conflicts of Interest

Affiliates of Advanced Equities, Inc. beneficially own more than 10% of our company. Because of this beneficial ownership and because we agreed to pay Advanced Equities, Inc. an advisory fee of up to $2 million in connection with this offering, Advanced Equities, Inc. may be deemed a statutory underwriter. Since Advanced Equities, Inc.’s affiliates

 

 

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beneficially own more than 10% of our company, the underwriters are deemed to have a “conflict of interest” under Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc., which are overseen by the Financial Industry Regulatory Authority, Inc. Accordingly, this offering is being conducted in compliance with the applicable provisions of Rule 2720. Pursuant to that rule, the appointment of a “qualified independent underwriter” (as such term is defined in Rule 2720) is not necessary in connection with this offering as the members primarily responsible for managing the public offering do not have a conflict of interest, are not affiliates of any member that has a conflict of interest, and meet the requirements of paragraph (f)(12)(E) of Rule 2720.

The number of shares of our common stock that will be outstanding after this offering is based on 31,842,617 shares, the number of shares outstanding at March 31, 2010, and unless we specifically state otherwise, the information in this prospectus:

 

  Ÿ  

reflects a 15-for-1 reverse stock split of our common stock expected to be approved by our stockholders and effected prior to the effective date of the registration statement of which this prospectus is a part;

 

  Ÿ  

assumes that our common stock will be sold at $15.00 per share, which is the midpoint of the estimated offering price range shown on the front cover page of this prospectus;

 

  Ÿ  

assumes that the underwriters will not exercise their option to purchase additional shares;

 

  Ÿ  

reflects the conversion of all outstanding redeemable preferred stock and preferred stock, other than Series H, since we have received the necessary consents for such conversion, as of March 31, 2010 into 24,101,205 shares of common stock effective upon the consummation of this offering based on an assumed initial public offering price of $15.00 per share, the midpoint of the price range shown on the front cover page of this prospectus;

 

  Ÿ  

excludes 1,178,706 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2010, at a weighted average exercise price of $10.67 per share, and 1,471,567 shares of our common stock reserved for future grants under our 2004 Stock Incentive Plan;

 

  Ÿ  

excludes 1,986,288 shares of our common stock reserved for future grants under our 2010 Long Term Incentive Plan, 333,333 shares of common stock issuable upon the exercise of options granted under this plan at an exercise price of $20.40 that will be outstanding at the consummation of this offering and 446,000 shares of common stock issuable upon the exercise of options with an exercise price equal to the public offering price that will be granted under this plan and will be outstanding at the consummation of this offering;

 

  Ÿ  

excludes 2,973,911 shares of common stock issuable upon the exercise of warrants to purchase shares of common stock, at a weighted average exercise price of $16.23;

 

  Ÿ  

excludes 594,639 shares of common stock issuable upon the exercise of warrants to purchase 8,919,591 shares of Series I redeemable preferred stock at an exercise price of $0.97 that upon consummation of this offering will represent warrants to purchase shares of common stock at an exercise price of $14.54 per share;

 

 

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  Ÿ  

excludes a total of 33,154 shares of common stock issuable upon the exercise of warrants to purchase a combined 292,198 shares of Series A and B redeemable preferred stock (convertible into 13,676 shares of common stock) and 19,478 shares of common stock, respectively, that upon consummation of this offering will represent warrants to purchase shares of common stock at a combined weighted average exercise price of $3.26 per share. The common stock issuable upon conversion of the Series A and B redeemable preferred stock at the consummation of this offering has been determined using an assumed initial public offering price of $15.00 per share, the midpoint of the price range shown on the front cover page of this prospectus; and

 

  Ÿ  

excludes 2,188,748 shares of common stock issuable upon the conversion of our Series H preferred stock as of March 31, 2010.

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables summarize the consolidated financial data for our business. You should read these tables along with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and our consolidated financial statements and related notes included elsewhere in this prospectus.

We derived the summary consolidated statements of operations and cash flows data for 2007, 2008 and 2009, set forth below, from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations and cash flows data for the three months ended March 31, 2009 and 2010, and the consolidated balance sheet data as of March 31, 2010, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. In light of our acquisition of InfoSpace Mobile, on December 28, 2007, our financial statements only reflect the impact of the acquisition from that date, and therefore comparisons with prior periods are not necessarily meaningful. Our historical results do not necessarily indicate results that may be expected for any future period.

 

 

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     Years Ended December 31,     Three Months Ended
March 31,
 
     2007     2008     2009     2009     2010  
     (In thousands, except per share data)  

Consolidated Statement of Operations Data:

          

Revenue

          

Managed services

   $ 31,772      $ 85,677      $ 81,403      $ 20,222      $ 20,881   

Professional services

     3,399        17,474        32,292        3,054        8,199   
                                        

Total revenues

     35,171        103,151        113,695        23,276        29,080   
                                        

Operating expenses

          

Direct third-party expenses

     3,709        5,451        9,485        1,171        1,305   

Datacenter and network operations, excluding depreciation

     9,468        33,000        31,786        8,683        8,034   

Product development and sustainment, excluding depreciation

     16,229        52,261        31,389        7,677        8,182   

Sales and marketing, excluding depreciation

     7,119        10,228        11,900        2,989        3,655   

General and administrative, excluding depreciation

     10,334        26,052        20,841        5,175        5,264   

Depreciation and amortization(1)

     10,322        21,559        13,208        3,777        3,041   

Restructuring(2)

     1,283        3,236        2,058        235        407   

Goodwill and long-lived asset impairment charges(3)

     26,867        29,130        5,806        —          —     

Abandoned transaction charge(4)

     2,600        —          —          —          —     
                                        

Total operating expenses

     87,931        180,917        126,473        29,707        29,888   
                                        

Operating loss

     (52,760     (77,766     (12,778     (6,431     (808

Other income (expense), net

     1,155        2,714        (1,627     (96     (258

Provision for income taxes

     —          1,776        1,896        444        467   
                                        

Loss from continuing operations

     (51,605     (76,828     (16,301     (6,971     (1,533

Loss from discontinued operations(5)

     (24,928     (1,072     —          —          —     

Loss from sale of discontinued operations(5)

     (1,360     (127     —          —          —     
                                        

Net loss

     (77,893     (78,027     (16,301     (6,971     (1,533

Accretion of redeemable preferred stock and Series D1 preferred dividends

     (8,095     (22,427     (23,956     (5,987     (6,400
                                        

Net loss attributable to common stockholders

   $ (85,988   $ (100,454   $ (40,257   $ (12,958   $ (7,933
                                        

Basic and fully diluted net loss per share attributable to common stockholders(6)

     $(14.84)        $(17.19)        $(6.85)        $(2.20)        $(1.38)   

Weighted-average number of shares of common stock used in computing basic net loss per share attributable to common stockholders(6)

     5,796        5,843        5,878        5,887        5,753   

Pro forma net loss attributable to holders of common stock (unaudited)(6)

       $ (31,245     $ (17,815

Pro forma basic and fully diluted net loss per share (unaudited)(6)

       $ (0.84     $ (0.48

Weighted-average number of shares of common stock used in computing pro forma basic and fully diluted net loss per share (unaudited)(6)

         37,106          37,468   

 

 

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     As of March 31, 2010
     Actual     Pro Forma
As Adjusted(7)
     (In thousands)

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 25,408      $ 113,406

Working capital

     23,459        112,105

Total assets

     161,518        247,111

Total long-term debt and capital lease obligations

     —          —  

Total redeemable preferred stock

     423,624        51,028

Total stockholders’ equity (deficit)

     (296,162     167,949

 

     Years Ended December 31,     Three Months
Ended March 31,
 
     2007     2008     2009     2009     2010  
     (In thousands)  

Consolidated Statement of Cash Flows Data:

          

Cash flows from operating activities

   $ (41,499   $ (28,745   $ 33,101      $ (1,794   $ (8,028

Cash flows from investing activities

     (133,507     (14,735     408        92        (1,149

Cash flows from financing activities

     236,275        (9,644     (11,956     (833     (1,332

Investments in property and equipment included within investing activities

     (4,594     (8,389     (4,890     (2,243     (1,186
     Years Ended December 31,     Three Months
Ended March 31,
 
     2007     2008     2009     2009     2010  
     (In thousands)  

Other Financial Data (unaudited):

          

Adjusted EBITDA(8)

   $ (11,000   $ (21,497   $ 10,473      $ (1,887   $ 3,145   

 

(1) Depreciation and amortization by function:

 

      Years Ended December 31,    Three Months
Ended March 31,
     2007    2008    2009    2009    2010
     (In thousands)

Datacenter and network operations

   $ 7,310    $ 16,824    $ 8,890    $ 2,497    $ 1,992

Product development and sustainment

     1,548      2,237      1,962      586      428

Sales and marketing

     307      2,075      1,960      572      524

General and administrative

     1,157      423      396      122      97
                                  

Depreciation and amortization

   $ 10,322    $ 21,559    $ 13,208    $ 3,777    $ 3,041
                                  

 

(2) Our restructuring charges relate to costs associated with closing and relocating facilities, relocating certain key employees and severance costs following the acquisition of InfoSpace Mobile. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details.
(3) The impairments in 2008 and 2009 relate primarily to integration activities following our acquisition of InfoSpace Mobile in December 2007 and to certain non-core operating assets. The 2007 impairments relate to goodwill due primarily to changes in consumer purchase habits. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details.
(4) In 2007, we issued a warrant to purchase common stock to an affiliate of an existing investor as a fee for providing a financing commitment in connection with a proposed transaction that was not completed.

 

 

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(5) In connection with a business strategy reassessment initiated in 2007, we exited the direct to consumer business and a business we refer to as media and entertainment (“media and entertainment”) at various times during 2007 and 2008.
(6) See Note 13 to our consolidated financial statements for the method used to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share attributable to common stockholders.
(7) The Pro Forma As Adjusted column of this consolidated balance sheet data table reflects (a) the conversion of all outstanding shares of redeemable preferred stock and preferred stock, other than Series H, into 24,101,205 shares of common stock upon the closing of this offering, (b) the issuance and sale by us of 6,750,000 shares of common stock in this offering at an initial public offering price of $15.00 per share, (c) the receipt of proceeds of this offering after deducting estimated underwriting discounts and commissions and other offering expenses payable by us, (d) the reclassification of the redeemable preferred stock warrant liability to additional paid-in capital, and (e) the recording of stock-based compensation expense due to the vesting of restricted stock triggered by the closing of this offering is as if these events had occurred as of March 31, 2010. The Pro Forma As Adjusted Information set forth in this table is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) each of pro forma as adjusted cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $6.3 million, assuming 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 other offering expenses payable by us.
(8) See our discussion of Adjusted EBITDA as a non-GAAP financial measure immediately following these footnotes.

Reconciliation of Adjusted EBITDA to Net Loss From Continuing Operations

We define Adjusted EBITDA as net loss from continuing operations plus interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, restructuring, asset impairments and abandoned transaction charges, and less interest and other income (expense), net. Adjusted EBITDA is not a measure of liquidity calculated in accordance with accounting principles generally accepted in the U.S., referred to herein as GAAP, and should be viewed as a supplement to, not a substitute for, our results of operations presented on the basis of GAAP. Adjusted EBITDA does not purport to represent cash flow provided by, or used in, operating activities as defined by GAAP. Our statement of cash flows presents our cash flow activity in accordance with GAAP. Furthermore, Adjusted EBITDA is not necessarily comparable to similarly-titled measures reported by other companies.

We believe Adjusted EBITDA is used by and is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that:

 

  Ÿ  

EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and

 

  Ÿ  

investors commonly adjust EBITDA to eliminate the effect of restructuring and stock-based compensation expenses, which vary widely from company to company and impair comparability.

 

 

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We use Adjusted EBITDA:

 

  Ÿ  

as a measure of operating performance to assist in comparing performance from period to period on a consistent basis;

 

  Ÿ  

as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and

 

  Ÿ  

in communications with the board of directors, stockholders, analysts and investors concerning our financial performance.

A reconciliation of Adjusted EBITDA to net loss from continuing operations, the most directly comparable GAAP measure, for each of the fiscal periods indicated is as follows:

 

     Years Ended December 31,     Three Months
Ended March 31,
 
     2007     2008     2009     2009     2010  
     (Unaudited, in thousands)  

Loss from continuing operations

   $ (51,605   $ (76,828   $ (16,301   $ (6,971   $ (1,533

Other income (expense), net

     (1,155     (2,714     1,627        96        258   

Provision for income taxes

     —          1,776        1,896        444        467   

Depreciation and amortization

     10,322        21,559        13,208        3,777        3,041   

Restructuring, asset impairments and abandoned transaction charges

     30,750        32,366        7,864        235        407   

Stock-based compensation

     688        2,344        2,179        532        505   
                                        

Adjusted EBITDA

   $ (11,000   $ (21,497   $ 10,473      $ (1,887   $ 3,145   
                                        

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider and evaluate all of the information in this prospectus, including the risks and uncertainties described below, which we believe describe the most significant, but not all, risks of an investment in our common stock, before making a decision to invest in our common stock. The occurrence of any of the following risks and uncertainties could harm our business, financial condition, results of operations or growth prospects. As a result, the trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business and Operations

We depend on a limited number of customers for a substantial portion of our revenues. The loss of a key customer or any significant adverse change in the size or terms of a contract with a key customer could significantly reduce our revenues.

We depend, and expect to continue to depend, on a limited number of significant worldwide wireless carriers for a substantial portion of our revenues. Currently, 4 of the top 10 global wireless carriers use our services. In the event that one or more of these major wireless carriers decides to reduce or stop using our managed and professional services, we could be forced to shift our marketing focus to smaller wireless carriers, which could result in lower revenues than expected and increased business development, marketing and sales expenses. This could cause our business to be less profitable and our results of operations to be adversely affected.

In addition, a change in the timing or size of a purchase by any one of our key customers could result in significant variations in our revenue and operating results. Our operating results for the foreseeable future will continue to depend on our ability to effect sales to a small number of customers. Any revenue growth will depend on our success in selling additional services to our large customers and expanding our customer base to include additional customers that deploy our solutions in large-scale networks serving significant numbers of subscribers.

In 2009, we generated approximately 53% and 20% of our total revenue from contracts with AT&T Mobility LLC and its affiliates, or AT&T, and Verizon Wireless and its affiliates, respectively. For the three months ended March 31, 2010, we generated approximately 40% and 39% of our total revenue from contracts with AT&T and Verizon Wireless, respectively. No other customer accounted for more than 10% of our revenues in 2009 or in the first three months of 2010. Our current five largest customers accounted for approximately 84% of our revenues in 2009 and 90% of our revenues for the three months ended March 31, 2010. Certain of our customer agreements expire in mid to late 2010, including agreements with AT&T and Verizon Wireless. Failure to renew our agreements with AT&T, Verizon Wireless or our other large customers would materially reduce our revenue and have a material adverse effect on our business, operating results and financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview” and “Business—Customers and Vendors—Customers” for more information.

The mobile data services industry is, and likely will continue to be, characterized by rapid technological changes, which will require us to develop new service enhancements, and could render our existing services obsolete.

The market for content and applications for mobile devices is characterized by rapid technological change, with frequent variations in user requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices. Our success will depend, in part, on our ability to enhance and expand our existing services,

 

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develop new technology that addresses the increasingly sophisticated and varied needs of wireless carriers and their subscribers, respond to technological advances and emerging industry standards and practices and license leading technologies that will be useful in our business in a cost-effective and timely way. We may not be able to successfully use new technologies or adapt our current and planned services to new customer requirements or emerging industry standards. The introduction of new products embodying new technologies or the emergence of new industry standards could render our existing services obsolete, unmarketable or uncompetitive from a pricing standpoint.

The market in which we operate is highly competitive and many of our competitors have significantly greater resources.

The mobile data communications services market is rapidly evolving and intensely competitive. Our competitors include mobile device manufacturers, search engines, portals and directories, and wireless service integrators. Competition in the wireless industry throughout the world continues to increase at a rapid pace as consumers, businesses and governments realize the market potential of wireless communications products and services. In addition, new competitors or alliances among competitors could emerge and rapidly acquire significant market share, to our detriment. There may be additional competitive threats from companies introducing new and disruptive solutions. Some of our competitors may be better positioned than we are. Although we have attained a significant position in the industry, many of our current and potential competitors may have advantages over us, including:

 

  Ÿ  

longer operating histories and market presence;

 

  Ÿ  

greater name recognition;

 

  Ÿ  

access to larger customer bases;

 

  Ÿ  

single source solutions that deliver mobile devices, hardware, services and infrastructure;

 

  Ÿ  

economies of scale and cost structure advantages;

 

  Ÿ  

greater sales and marketing, manufacturing, distribution, technical, financial and other resources; and

 

  Ÿ  

government support.

These competitors also have established or may establish financial or strategic relationships among themselves or with our existing or potential customers or other third parties. In addition, some of our competitors have used and may continue to use aggressive pricing or promotional strategies, have stronger relationships on more favorable terms with wireless carriers and may devote substantially greater resources to system development than we do. These relationships may affect customers’ decisions to purchase services from us.

We also face competition from existing service providers in the international markets in which we already compete or may enter. For example, in India we compete with numerous companies, some of which are solely focused on the local mobile data services market, are directly owned and managed by local citizens. These factors could provide local competitors with advantages over us, particularly if the local government enacts laws or policies that favor local competitors or restrict or disadvantage us because our international operations are part of a U.S.-domiciled company. Other competitors in international markets are subsidiaries of larger companies with established local operations, and with greater experience and resources. In other countries that we may enter, there may be incumbent competitors presently selling data services products. These incumbents may have competitive advantages that could impede our expansion and growth in these countries.

 

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Competition for our employees is intense and failure to recruit and retain skilled personnel could negatively affect our financial results as well as our ability to maintain relationships with clients and drive future growth.

We provide sophisticated mobile data delivery platforms and services to our customers. To attract and retain customers, we believe we need to demonstrate professional acumen and build trust and strong relationships, and that we must identify, recruit, retain and motivate new hardware and software engineers, programmers, technical support personnel and marketing and sales representatives. Competition is intense for skilled personnel with engineering, product development, technical and marketing and sales experience, and we may not be able to identify individuals that possess the necessary skills and experience, or we may not be able to employ these individuals on acceptable terms and conditions, or at all. Moreover, competition has been increasing the cost of hiring and retaining skilled professionals, a trend which could adversely affect our operating margins and financial results. Our business and growth may suffer if we are unable to hire and retain skilled personnel.

We rely heavily on our executive officers and other key employees for the success of our business and the loss of our executive team whether to a competitor or otherwise could adversely impact our business.

We believe our success will depend in part upon retaining the services of executive officers and other key employees. Many of our executive officers joined our company within the last two years and we operate in a very competitive environment. Although we have employment agreements with many of our key employees, such employees may receive employment offers that are competitive with or more attractive than their existing employment terms with us. If our executive officers or non-executive key employees leave and we cannot replace them with suitable candidates quickly, we could experience difficulty in managing our business properly. This could harm our business prospects, client relationships, employee morale and financial results. We currently maintain a key-person life insurance policy on our chief executive officer.

Open mobile phone operating systems and new business models may reduce the wireless carriers’ influence over access to mobile data services, and may reduce the total size of our market opportunity.

The majority of our revenue is based on mobile subscribers accessing mobile content and applications through our customers’ carrier-branded mobile solutions. However, with the growth of the iPhone and smartphone business models, our customers’ services may be bypassed or become inaccessible. These business models, which exclude carrier participation beyond transport, along with the introduction of more mobile phones with open operating systems that allow mobile subscribers to browse the Internet and, in some cases, download applications from sources other than a carrier’s branded services, create a risk that some carriers will choose to allow this non-branded Internet access without offering a competitive value-added carrier-branded experience as part of their solution set. These so-called “open operating systems” include Symbian, BlackBerry, Android, Windows Mobile and webOS. We believe wireless carriers need to offer branded services that can compete head-to-head with the new business models and open technologies in order to retain mobile subscribers and increase ARPU. Although our solutions are designed to help wireless carriers deliver a high value, competitive mobile data experience, if mobile subscribers do not find these carrier-branded services compelling, there is a risk that mobile subscribers will use open operating systems to bypass carrier-branded services and access the mobile Internet. It is also possible one or more wireless carriers will adopt a non-carrier branded, third-party web portal model. To the extent this occurs, the total available market opportunity for providing our current services and solutions to carriers may be reduced.

 

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Our sales cycle can be long, which may make our revenues and operating results less predictable.

Wireless carriers must typically make substantial investments to deploy our mobile data services solution. As a result, the typical sales cycle for our services is long, averaging nine to twelve months per customer. Many of the potential customers for our services have only recently begun to evaluate the benefits of expanding their offerings of mobile services, and many have only recently designated personnel to evaluate, procure and implement new mobile services. We believe that we may be required to spend a significant amount of time and resources educating potential customers on the use and benefits of our services, and in turn, we expect potential customers to spend a significant amount of time performing internal reviews and obtaining authorization to purchase our services. Furthermore, the emerging and evolving nature of mobile data technological standards and services may lead potential customers to postpone purchasing decisions.

We have a history of net operating losses and may continue to suffer losses in the future.

For the years ended December 31, 2005, 2006, 2007, 2008, and 2009, we had net losses of approximately $22.5 million, $55.2 million, $77.9 million, $78.0 million and $16.3 million, respectively. For the three months ended and as of March 31, 2010, we had a net loss of approximately $1.5 million and an accumulated deficit of approximately $313.7 million. If we cannot become profitable, our financial condition will deteriorate, and we may be unable to achieve our business objectives.

We compete with in-house mobile data solutions similar to those we offer.

The mobile data service industry is evolving rapidly to address changing industry standards and the introduction of new technologies and network elements. Wireless carriers are constantly reassessing their approaches to delivering mobile data to their subscribers, and one or more of our customers could decide to deploy an in-house mobile data delivery service solution that competes with our services. Even if the mobile data delivery services offered by a mobile service provider’s in-house solution were more limited than those provided by our services, a wireless carrier may elect to accept limited functionality or services in lieu of providing a third party access to its network. An increase in the use of in-house solutions by wireless carriers could have an adverse effect on our business, operating results and financial condition.

We have a significant relationship with a development vendor, and changes to that relationship may result in delays or disruptions that could harm our business.

We rely upon development vendors to provide additional capacity for our technical development and quality assurance services. Our primary development vendor is GlobalLogic, Inc., a software research and development company providing software development services primarily from its offices in India and Ukraine. Our current agreement with GlobalLogic terminates on December 29, 2011. GlobalLogic may only terminate this agreement for cause. If GlobalLogic were, for any reason, to cease operations, we might be unable to replace it on a timely basis with a comparably priced provider. We would also have to expend time and resources to train any new development vendor that might replace GlobalLogic. If GlobalLogic were to suffer an interruption in its business, or experience delays, disruptions or quality control problems in its software development operations, or if we had to change development vendors, our ability to provide services to our customers would be delayed and our business, operating results and financial condition would be adversely affected.

 

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Demand for our managed and professional services depends on increases in carrier subscribers’ use of mobile data services and mobile devices to access the mobile Internet and on our customers’ continued investment and improvement in wireless networks.

Our services comprise a mobile data service delivery platform that enables wireless carriers to monitor and charge their subscribers for access to mobile applications, content and programs that are developed by third parties and hosted by us. The majority of our revenue is based on mobile subscribers accessing mobile content and applications through our customers’ carrier-branded mobile solutions. Our ability to generate revenues from our services will depend on the extent to which businesses and consumers continue to adopt and use mobile devices to access the mobile Internet and to receive products and services via their mobile devices. While many consumers use mobile devices to communicate, the majority of consumers do not presently use mobile devices to access the mobile Internet or obtain other products or services. Consumers and businesses may not significantly increase their use of mobile data services and mobile devices to access the mobile Internet and to obtain products and services as quickly as our business model contemplates. If consumers do not continue to increase their use of mobile data services, our business, operating results and financial condition will be adversely impacted.

Further, increased demand by consumers for mobile data services delivered over wireless networks will be necessary to justify capital expenditure commitments by wireless carriers to invest in the improvement and expansion of their networks. Demand for mobile data services might not continue to increase if there is limited availability or market acceptance of mobile devices designed for such services; the multimedia content offered through wireless networks does not attract widespread interest; or the quality of service available through wireless networks does not meet consumer expectations. If long-term expectations for mobile data services are not realized or do not support a sustainable business model, wireless carriers may not commit significant capital expenditures to upgrade their networks to provide these services, the demand for our services will decrease, and we may not be able to increase our revenues or become profitable in the future.

If we are unable to protect the confidentiality of our proprietary information, the value of our technology could be adversely affected.

Our business relies upon certain unpatented or unregistered intellectual property rights and proprietary information, including the mCore platform. Consequently, although we take measures to keep our key intellectual property rights and proprietary information confidential, we may not be able to protect our technology from independent invention by third parties. We currently attempt to protect most of our key intellectual property through a combination of trade secret, copyright and other intellectual property laws and by entering into employee, contractor and business partner confidentiality agreements. Such measures, however, provide only limited protection, and under certain circumstances we may not be able to prevent the disclosure of our intellectual property, or the unauthorized use or reverse engineering or independent development of our technology. This may allow our existing and potential competitors to develop products and services that are competitive with, or superior to, our services.

Further, we intend to expand our international presence by targeting countries with large populations and propensities for adopting new technologies. However, many of these countries’ intellectual property laws are not as stringent as those of the U.S. Effective patent, copyright, trademark and trade secret protections may be unavailable or limited in some foreign countries. As a result, we may not be able to effectively prevent competitors in these countries from using or infringing our intellectual property rights, which would reduce our competitive advantage and ability to compete in these regions or otherwise harm our business. In the future, we may also have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and divert our management’s attention and resources. In addition, such litigation may not be successful.

 

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Consolidation in the telecommunications industry may reduce the number of our customers and negatively impact our financial performance.

The telecommunications industry continues to experience consolidation and an increased formation of alliances among telecommunications service providers and between telecommunications service providers and other entities. Should one of our significant customers consolidate with another company or enter into such an alliance and decide either to use a different mobile data service provider or to manage its transactions internally, it could have a negative material impact on our prospects. These consolidations and alliances may cause us to lose customers or require us to reduce prices as a result of enhanced customer leverage, which would have a material adverse effect on our business. We may not be able to offset the effects of any price reductions. We may not be able to expand our customer base to make up any decreases in revenue if we lose customers or if our transaction volumes decline.

We expect that our revenue will fluctuate, which could cause our stock price to decline.

Our revenue is subject to fluctuations due to the timing of sales of high-dollar professional services projects. Because these projects occur at irregular intervals and the dollar values vary based on customer needs, we may experience quarter-to-quarter fluctuations in revenue. In addition, any significant delays in the deployment of our services, unfavorable sales trends in our existing service categories, or changes in the spending behavior of wireless carriers could adversely affect our revenue growth. If our revenue fluctuates or does not meet the expectations of securities analysts and investors, our stock price would likely decline.

Our customer contracts lack uniformity and often are complex, which subjects us to business and other risks.

Our customers include some of the largest wireless carriers which have substantial purchasing power and negotiating leverage. As a result, we typically negotiate contracts on a customer- by­customer basis and sometimes accept contract terms not favorable to us in order to close a transaction, including indemnity, limitation of liability, refund, penalty or other terms that could expose us to significant financial or operating risk. If we are unable to effectively negotiate, enforce and accurately and timely account and bill for contracts with our key customers, our business and operating results may be adversely affected.

In addition, we have contractual indemnification obligations to our customers, most of which are unlimited in nature. If we are required to fulfill our indemnification obligations relating to third-party content or operating systems that we provide to our customers, we intend to seek indemnification from our suppliers, vendors, and content providers to the full extent of their responsibility. Even if the agreement with such supplier, vendor or content provider contains an indemnity provision, it may not cover a particular claim or type of claim or may be limited in amount or scope. As a result, we may or may not have sufficient indemnification from third parties to cover fully the amounts or types of claims that might be made against us. Any significant indemnification obligation to our customers could have a material adverse effect on our business, operating results and financial condition.

We provide service level commitments to our customers, which could cause us to incur financial penalties if the stated service levels are not met for a given period and could significantly reduce our revenue.

Our customer agreements provide service level commitments on a monthly basis. Our service level commitment varies by customer. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability and/or degraded performance of our service, we may incur financial penalties. Our revenue could be significantly impacted if we suffer unscheduled downtime that exceeds the allowed downtimes under our agreements with our customers. The failure to meet our

 

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contractual level of service availability may require us to credit affected customers for a significant portion of their monthly fees, not just the value for the period of the downtime. As a result, failure to deliver services for a relatively short duration could result in our incurring significant financial penalties. Service level penalties represented 4% of total revenue in 2008, 1% of total revenue in 2009 and 3% of total revenue for the three months ended March 31, 2010. Any system failure, extended service outages, errors, defects or other performance problems with our managed and professional services could harm our reputation and may damage our customers’ businesses.

We use datacenters to deliver our platform and services. Any disruption of service at these facilities could harm our business.

We host our services and serve all of our customers from five datacenter facilities located around the U.S. We operate two datacenter facilities located in Washington State. The other three facilities are operated by third parties in Georgia, Massachusetts and North Carolina. We do not control the operations at the third-party facilities. All of these facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, terrorist attacks, power losses, telecommunications failures and similar events. They also could be subject to break-ins, computer viruses, denial of service attacks, sabotage, intentional acts of vandalism and other misconduct. The occurrence of a natural disaster or an act of terrorism, a decision to close the third-party facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our services. Although we maintain off-site tape backups of our customers’ data, we do not currently operate or maintain a backup datacenter for any of our services, which increases our vulnerability to interruptions or delays in our service. Interruptions in our services might harm our reputation, reduce our revenue, cause us to incur financial penalties, subject us to potential liability and cause customers to terminate their contracts.

Capacity constraints could disrupt access to our services, which could affect our revenue and harm our reputation.

Our service goals of performance, reliability and availability require that we have adequate capacity in our computer systems to cope with the volume of traffic through our mCore service delivery platform. As our operations grow in size and scope, we will need to improve and upgrade our systems and infrastructure to offer our customers and their subscribers enhanced services, capacity, features and functionality. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of our business rises, with no assurance that our revenues will grow. If our systems cannot be expanded in a timely manner to cope with increased traffic we could experience disruptions in service, lower customer and subscriber satisfaction and delays in the introduction of new services. Any of these problems could impair our reputation and cause our revenue to decline.

Our research and development investments may not lead to successful new services or enhancements.

We will continue to invest in research and development for the introduction of new enhancements to existing services designed to improve the capacity, data processing rates and features of our services. We must also continue to develop new features and to improve functionality of our platform based on specific customer requests and anticipated market needs. Research and development in the mobile data services industry, however, is complex, expensive and uncertain. We believe that we must continue to dedicate a significant amount of resources to research and development efforts to maintain our competitive position. If we continue to expend a significant amount of resources on research and development, but our efforts do not lead to the successful introduction of service enhancements that are competitive in the marketplace, there could be a material adverse effect on our business, operating results, financial condition and market share.

 

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Our solutions are complex and may take longer to develop than anticipated, and we may not recognize revenue from new service enhancements until after we have incurred significant development costs.

Most of our services must be tailored to meet customer specifications. In addition, our international customers often require significant customization of our platform to meet local needs. As a result, we often develop new features and enhancements to our existing services. These new features and enhancements often take substantial time to develop because of their complexity and because customer specifications sometimes change during the development cycle. We often do not recognize revenue from new services or enhancements until we have incurred significant development costs. In addition to delayed recognition of revenue from such new services and enhancements, our operating results will suffer if the new services or enhancements fail to meet our customers’ expectations.

We believe our long-term success depends, in part, on our ability to expand the sales of our services to customers located outside of the U.S. As a result, our business is susceptible to risks associated with international sales and operations.

In addition to the U.S., we currently operate in the United Kingdom, the Netherlands, Indonesia and Singapore, and we intend to expand our offering of mobile data services into a number of additional international markets in the near future. As a result, we are subject to the additional risks of conducting business outside the U.S., which may include:

 

  Ÿ  

increased costs associated with localization of our services, including translations into foreign languages and adaptation to local practices and regulatory requirements;

 

  Ÿ  

longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

 

  Ÿ  

difficulties managing and staffing international operations;

 

  Ÿ  

delays resulting from difficulty in obtaining export licenses, tariffs and other trade barriers and restrictions on export or import of technology;

 

  Ÿ  

less stringent intellectual property protections;

 

  Ÿ  

unexpected changes in, or impositions of, legislative, regulatory or tax requirements and burdens of complying with a wide variety of foreign laws and other factors beyond our control;

 

  Ÿ  

general geopolitical risks in connection with international operations, such as political, social and economic instability;

 

  Ÿ  

compliance with anti-corruption and bribery laws, including the Foreign Corrupt Practices Act of 1977;

 

  Ÿ  

changes in diplomatic, trade or business relationships;

 

  Ÿ  

foreign currency fluctuations that may substantially affect the dollar value of our revenue and costs in foreign markets;

 

  Ÿ  

foreign exchange controls that may prevent or limit our ability to repatriate income earned in foreign markets; and

 

  Ÿ  

increased financial accounting and reporting burdens.

We have limited experience operating in foreign jurisdictions and are rapidly building our international operations. Operating in international markets requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.

 

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Our ability to use net operating and certain built-in losses to reduce future tax payments may be limited by provisions of the Internal Revenue Code, and may be subject to further limitation as a result of future transactions.

Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, contain rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and certain built-in losses recognized in the years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders who directly or indirectly own 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards and certain built-in losses is equal to the product of the applicable long term tax exempt rate and the value of the company’s stock immediately before the ownership change. As a result, we may be unable to offset our taxable income with losses, or our tax liability with credits, before such losses and credits expire.

In addition, it is possible that future transactions (including issuances of new shares of our common stock and sales of shares of our common stock) will cause us to undergo one or more additional ownership changes. In that event, we generally would not be able to use our pre-change loss or certain built-in losses prior to such ownership change to offset future taxable income in excess of the annual limitations imposed by Sections 382 and 383 and those attributes already subject to limitations (as a result of our prior ownership changes) may be subject to more stringent limitations.

Our ability to sell our services is highly dependent on the quality of our support and services offerings, and our failure to offer high quality support and services would have a material adverse effect on our sales and results of operations.

Our customers depend on our support organization to resolve issues relating to our mCore service delivery platform. We believe that a high level of support is critical for the successful marketing and sale of our services and future enhancements to mCore. Failure to effectively assist our customers in deploying their mobile data portals and storefronts, quickly resolve post-deployment issues, and otherwise provide effective ongoing support would adversely affect our ability to sell our services to existing customers and could harm our reputation among potential customers. In addition, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. As a result, our failure to maintain high quality support and services could have a material adverse effect on our business, operating results and financial condition.

We rely on the development of content and applications by third parties, and if wireless carriers and their subscribers do not find such content compelling, our sales could decline.

Our business is dependent on the availability of content and applications for mobile devices that wireless carriers and their subscribers find useful and compelling. A significant percentage of our revenue is derived from the sale of applications and content through storefronts and portals we operate for our wireless carrier customers. We also believe that demand for our services will increase as the number of applications and the volume of mobile content increases because our services facilitate the navigation and organization of large numbers of applications and large amounts of content. We do not develop applications or content; rather, we facilitate the sale and consumption of applications and content developed by third parties through our wireless carrier customers. If third-party developers fail to create content and applications that wireless carriers and their subscribers find useful and compelling, our sales would decline, and that would have a significant adverse effect on our business, operating results and financial condition.

 

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Our solutions may contain undetected software errors, which could harm our reputation and adversely affect our business.

Our solutions are highly technical and have contained and may contain undetected errors, defects or security vulnerabilities. Some errors in our solutions may only be discovered after a solution has been deployed and used by our wireless carrier customers. Any errors, defects or security vulnerabilities discovered in our solutions after commercial release could result in loss of revenue or delay in revenue recognition, loss of customers and increased service cost, any of which could adversely affect our business, operating results and financial condition. In addition, we could face claims for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention away from the business and adversely affect the market’s perception of us and our services. In addition, if our business liability insurance coverage is inadequate or future coverage is unavailable on acceptable terms or at all, our operating results and financial condition could be adversely impacted.

We may engage in acquisitions that could disrupt our business, cause dilution to our stockholders and harm our business, operating results or financial condition.

We expect to make selective domestic and international acquisitions of, and investments in, businesses that offer complementary products, services and technologies, augment our market coverage, and/or enhance our technological capabilities. We may also enter into strategic alliances or joint ventures to achieve these goals. We may not be able to identify suitable acquisition, investment, alliance, or joint venture opportunities or consummate any such transactions or relationships on terms and conditions acceptable to us. Such transactions or relationships that we enter into may not be successful. In addition, acquisitions and investments outside of the U.S. involve unique risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.

These transactions or any other acquisitions or dispositions involve risks and uncertainties, which may have a material adverse effect on our business. The integration of acquired businesses may not be successful and could result in disruption to other parts of our business. In addition, the integration may require that we incur significant restructuring charges. To integrate acquired businesses, we must implement our management information systems, operating systems and internal controls, and assimilate and manage the personnel of the acquired operations. The difficulties of the integrations may be further complicated by such factors as geographic distances, lack of experience operating in the geographic market or industry sector of the acquired business, delays and challenges associated with integrating the business with our existing businesses, diversion of management’s attention from daily operations of the business, potential loss of key employees and customers of the acquired business, the potential for deficiencies in internal controls at the acquired business, performance problems with the acquired business’ technology, difficulties in entering markets in which we have no or limited direct prior experience, exposure to unanticipated liabilities of the acquired business, insufficient revenues to offset increased expenses associated with the acquisition, and our ability to achieve the growth prospects and synergies expected from any such acquisition. Even when an acquired business has already developed and marketed products and services, there can be no assurance that product or service enhancements will be made in a timely fashion or that all pre-acquisition due diligence will have identified all possible issues that might arise with respect to such acquired assets.

Any acquisition may also cause us to assume liabilities, record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential impairment charges, incur amortization expense related to certain intangible assets, increase our expenses and working capital requirements, and subject us to litigation, which would reduce our return on invested capital. Failure to

 

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manage and successfully integrate the acquisitions we make could materially harm our business and operating results.

Any future acquisitions may require additional debt or equity financing, which in the case of debt financing, will increase our leverage and, in the case of equity financing, would be dilutive to our existing stockholders. Any decline in our perceived credit-worthiness associated with an acquisition could adversely affect our ability to borrow and result in more restrictive borrowing terms. As a result of the foregoing, we also may not be able to complete acquisitions or strategic transactions in the future to the same extent as in the past, or at all. These and other factors could harm our ability to achieve anticipated levels of profitability at acquired operations or realize other anticipated benefits of an acquisition, and could adversely affect our business, financial condition and results of operations.

If we fail to manage future growth effectively, our business could be harmed.

We have experienced, and expect to continue to experience, rapid growth. Our revenue from continuing operations grew from $17.9 million during the year ended December 31, 2005 to $119.5 million during the twelve months ended March 31, 2010. We also increased the number of our full-time employees from 272 at December 31, 2005 to 355 at March 31, 2010. This growth has placed significant demands on our management, operational and financial infrastructure. To manage growth effectively, we must continue to improve and enhance our managerial, operational and financial controls, and train and manage our employees, and expand our employee base. We must also manage new and existing relationships with customers, suppliers, business partners and other third parties. These activities will require significant expenditures and allocation of valuable management resources. If we fail to maintain the efficiency of our organization as we grow, our profit margins may decrease, and we may be unable to achieve our business objectives.

In recent years, we have recognized significant impairment losses related to our goodwill, intangible assets and property and equipment. Additional impairment losses may be recognized which would adversely affect our financial results.

We are required under GAAP to test goodwill for impairment annually and to assess our amortizable intangible assets and long-lived assets, as well as goodwill, for impairment when events or changes in circumstance indicate the carrying value may not be recoverable. Such impairment losses totaled $26.9 million, $29.1 million and $5.8 million in 2007, 2008 and 2009, respectively. Factors which have led to impairments in the past include changes in business strategy, restructuring of the business in connection with acquisitions, actual performance of acquired businesses below our expectations and expiration of customer contracts. Unanticipated events or changes in circumstances could impact our ability to recover the carrying value of some or all of these assets. In addition, we expect to make additional acquisitions in the future which would increase the amount of such assets on our books that would be subject to potential future impairment. In the event any of our current or future assets became impaired, the associated impairment charge could adversely impact our results of operations.

Our business involves the use, transmission and storage of confidential information, and the failure to properly safeguard such information could result in significant reputational harm and monetary damages.

Our business activities involve the use, transmission and storage of confidential information. We believe that we take commercially reasonable steps to protect the security, integrity and confidentiality of the information we collect and store, but there is no guarantee that inadvertent or unauthorized disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. If such unauthorized disclosure or access does occur, we may be required, under existing and proposed laws, to notify persons whose information was disclosed or accessed. We may

 

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also be subject to claims of breach of contract for such disclosure, investigation and penalties by regulatory authorities and potential claims by persons whose information was disclosed. The unauthorized disclosure of information may result in the termination of one or more of our commercial relationships and/or a reduction in customer confidence and usage of our services, which would have a material adverse effect on our business, operating results and financial condition.

We may be subject to liability for our use or distribution of information that we receive from third parties.

As part of our business, we obtain content and commercial information from third parties. When we distribute this information, we may be liable for the data contained in that information. There is a risk that we may be subject to claims related to the distribution of such content such as defamation, negligence, intellectual property infringement, violation of privacy or publicity rights and product or service liability, among others. Laws or regulations of certain jurisdictions may also deem some content illegal, which may expose us to additional legal liability. We also gather personal information from subscribers in order to provide personalized services. Gathering and processing this personal information may subject us to legal liability for, among other things, defamation, negligence, invasion of privacy and product or service liability. We are also subject to laws and regulations, both in the U.S. and abroad, regarding the collection and use of subscriber information. If we do not comply with these laws and regulations, we may be exposed to legal liability.

Some of the agreements by which we obtain content do not contain indemnity provisions in our favor. Even if a given contract does contain indemnity provisions, they may not cover a particular claim or type of claim or the party granting indemnity may not have the financial resources to cover the claim. Our insurance coverage may be inadequate to cover fully the amounts or types of claims that might be made. Any liability that we incur as a result of content we receive from third parties could adversely impact our results of operations.

Actual or perceived security vulnerabilities in mobile devices could negatively affect our business.

The security of mobile devices and wireless networks is critical to our business. Individuals or groups may develop and deploy viruses, worms and other malicious software programs that attack mobile devices and wireless networks. Security experts have identified computer worms targeted specifically at mobile devices. Security threats could lead some mobile subscribers to reduce or delay their purchases of mobile content and applications in an attempt to reduce the security threat posed by viruses, worms and other malicious software. Wireless carriers and device manufacturers may also spend more on protecting their wireless networks and mobile devices from attack, which could delay adoption of new mobile devices that tend to include more features and functionalities that facilitate increased use of mobile data services. Actual or perceived security threats, and reactions to such threats, could reduce our revenue or require unplanned expenditures on new security initiatives.

If we fail to maintain proper and effective internal controls or are unable to remediate the deficiencies in our internal controls, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. We are in the process of documenting and reviewing our internal controls and procedures. Beginning with fiscal year 2011, we will be required to comply with

 

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Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which requires annual management assessment of the effectiveness of our internal control over financial reporting and a report by our independent auditors addressing this assessment. Our compliance with Section 404 will require that we incur additional expense and expend management time on compliance-related issues. If we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market’s confidence in our financial statements could decline and the market price of our common stock could be adversely impacted.

With respect to fiscal year 2007, we and our independent registered public accounting firm identified a material weakness in our internal controls over financial reporting. The material weakness related to insufficient personnel within our accounting function and inadequate accounting policies and procedures documentation. With respect to fiscal years 2008 and 2009, we and our independent registered public accounting firm identified significant deficiencies in our internal controls over financial reporting but they did not create a material weakness. While we have made efforts to improve our accounting policies and procedures, additional deficiencies and weaknesses may be identified. If material weaknesses or deficiencies in our internal controls exist and go undetected, our financial statements could contain material misstatements that, when discovered in the future could cause us to fail to meet our future reporting obligations and cause the price of our common stock to decline.

Claims by others that we infringe their intellectual property rights could force us to incur significant costs.

We cannot be certain that our services do not and will not infringe the intellectual property rights of others. Many parties in the telecommunications and software industries have begun to apply for and obtain patent protection for innovative proprietary technologies and business methods. Given that our platform interacts with various participants in the mobile data ecosystem, existing or future patents protecting certain proprietary technology and business methods may preclude us from using such proprietary technology or business methods, or may require us to pay damages for infringement or fees to obtain a license to use the proprietary technology or business methods (which may not be available or, if available, may be on terms that are unacceptable), or both, which would increase our cost of doing business. In addition, litigation concerning intellectual property rights and the infringement of those rights, including patents, trademarks and copyrights, has grown significantly over the last several years and is likely to grow further in the future. If we become the subject of infringement claims, we may be forced into litigation, which will require us to devote significant resources and management time and attention to defend against such infringement claims. If it is determined that our services infringe the intellectual property rights of a third party, we may be required to pay damages or enjoined from using that technology or forced to obtain a license (which may not be available or, if available, may be on terms that are unacceptable) and/or pay royalties to continue using that technology. The assertion of intellectual property infringement claims against our technology could have a material adverse effect on our business, operating results and financial condition.

Government regulation of the mobile industry is evolving, and unfavorable changes or our failure to comply with regulations could harm our business and operating results.

As the mobile industry continues to evolve, we believe greater regulation by federal, state or foreign governments or regulatory authorities becomes more likely. For example, we believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information, could affect our customers’ ability to use and share data, potentially reducing our ability to utilize this information for the purpose of continued improvement of the overall mobile subscriber experience. In addition, any regulation of the requirement to treat all content and application provider services the same over the mobile Internet,

 

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sometimes referred to as net neutrality regulation, could reduce our customers’ ability to make full use of the value of our services. Further, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations to access the Internet may be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the mobile Internet and the viability of mobile data service providers, which could harm our business and operating results. Finally, any further or more restrictive regulation of the ability of wireless carriers to include charges for goods and services in a mobile subscriber’s bill or their ability to offer up these capabilities to third parties, such as ourselves, on a bill-on-behalf-of basis could negatively impact our business.

Our use of open source software could limit our ability to commercialize our services.

We have incorporated open source software into our services. Although we closely monitor our use of open source software, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our services. In that event, we could be required to seek licenses from third parties in order to continue offering our services, to re-engineer our products or to discontinue sales of our services, any of which could materially adversely affect our business.

Our failure to raise additional capital or generate the cash flows necessary to expand our operations and invest in our services could reduce our ability to compete successfully.

In the future, we may require additional amounts of capital to execute our business plan. We may require capital to complete planned upgrades and enhancements to our products and services, increase our investment in capital equipment to support new and existing customers, extend our marketing and sales efforts, expand internationally and make strategic acquisitions if attractive opportunities become available. Our future capital requirements will depend on many factors, including the time and cost of our service enhancements, the rate of mobile data subscriber growth, the acceptance rate of mobile devices as multi-functional computing platforms, the demand for wireless applications, the time and cost of successfully entering into new customer contracts and the amount of investment needed to achieve our sales and marketing objectives.

Based on our current cash balances and projected revenues, and taking into account the additional capital we expect to receive from this offering, we estimate that we will have sufficient capital to execute our near term business plans and maintain positive cash flow. However, this may not be the case. Further, we may not have sufficient capital to take advantage of opportunities for strategic acquisitions of significant complementary or competitive businesses that could enhance our business and operating results. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. If we engage in debt financing, we may be required to accept terms that further restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or other ratios. We may not be able to raise any additional capital that we may require on terms acceptable to us or at all. If we cannot obtain financing on commercially reasonable terms when needed, we may not be able to pursue some elements of our current strategy and business plan, and we may not be able to achieve our financial objectives.

 

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Risks Related to this Offering and Ownership of Our Common Stock

There is no established trading market for our common stock, and the market price of our common stock may be highly volatile or may decline regardless of our operating performance.

There has been no public market for our common stock prior to this offering. If you purchase shares of our common stock in this offering, you will pay a price that was not established in the public trading markets. The initial public offering price for our shares will be determined through negotiations among the underwriters, the selling stockholders and us. This initial public offering price may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell your shares above the initial public offering price, and you may suffer a loss on your investment. In addition, an active trading market for our common stock following this offering may not develop or, if developed, may not be sustained. An inactive market may also impair our ability to raise capital to continue to fund operations by selling stock and may impair our ability to acquire other companies or assets by using our common stock as consideration.

Broad market and industry factors also may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause wide fluctuations in the stock price may include, among other things:

 

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actual or anticipated variations in our financial condition and operating results;

 

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overall conditions or trends in our industry;

 

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addition or loss of significant customers;

 

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competition from existing or new products;

 

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changes in the market valuations of companies perceived by investors to be comparable to us;

 

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announcements by us or our competitors of technological innovations, new services or service enhancements;

 

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announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures or capital commitments;

 

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announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

 

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additions or departures of key personnel;

 

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changes in the estimates of our operating results or changes in recommendations by any securities or industry analysts that elect to follow our common stock; and

 

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sales of our common stock by us or our stockholders, including sales by our directors and officers.

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. These fluctuations may be even more pronounced in the trading market for our common stock immediately 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. We may be the target of this type of litigation in the future. Securities litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources, whether or not we are successful in such litigation.

 

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Requirements associated with being a public company will increase our costs, as well as divert company resources and management’s attention, and affect our ability to attract and retain qualified board members and executive officers.

Prior to this offering, we have not been subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, or the other rules and regulations of the SEC or any securities exchange relating to public companies. We will comply with Section 404(a) (management’s report on financial reporting) under the Sarbanes-Oxley Act for the year ending December 31, 2010 and will comply with Section 404(b) (auditor’s attestation) no later than the year ending December 31, 2011. We are working with our legal, independent accounting, and financial advisors to identify those areas in which changes or enhancements should be made to our financial and management control systems to manage our growth and obligations as a public company. Some such areas include corporate governance, corporate control, internal audit, disclosure controls and procedures, and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. However, the expenses that will be required in order to prepare adequately for becoming a public company could be material. Compliance with the various reporting and other requirements applicable to public companies will also require considerable time and attention of management. We cannot predict or estimate the amount of the additional costs we may incur, the timing of such costs or the impact that our management’s attention to these matters will have on our business. In addition, the changes we make may not be sufficient to satisfy our obligations as a public company on a timely basis or at all.

In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ 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 events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees and our executive team.

Our principal stockholders may exert substantial influence over us and may exercise their control in a manner adverse to your interests.

Upon completion of this offering and assuming no exercise of an option to purchase additional shares by the underwriters, funds affiliated with Advanced Equities, Inc., Koala Holding LP and other entities affiliated with Carl C. Icahn, funds affiliated with Technology Crossover Ventures and New Enterprise Associates, Inc., will own 9,439,226, 4,529,888, 3,222,114 and 3,143,939 shares, respectively, or approximately 23.7%, 11.4%, 8.4% and 8.1%, respectively, of our outstanding common stock. Koala Holding LP owns substantially all of our outstanding shares of Series H preferred stock. Because a limited number of persons may exert substantial influence over us, transactions could be difficult or impossible to complete without the support of those persons. It is possible that these persons will exercise control over us in a manner adverse to your interests.

In our amended and restated certificate of incorporation, we renounce and provide for a waiver of the corporate opportunity doctrine as it relates to the funds affiliated with New Enterprise Associates, Inc., Technology Crossover Ventures, Koala Holding LP and any person or entity affiliated with these investors, we refer to all such persons as exempted persons. As a result, these exempted persons will have no fiduciary duty to present corporate opportunities to us. These exempted persons are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. They may also pursue, for their own accounts, acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. So long as these exempted persons continue to own a significant amount of our common stock, they will continue to be able to strongly influence or effectively control our decisions, including director and officer appointments, potential mergers or

 

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acquisitions, asset sales and other significant corporate transactions. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are directed by the exempted persons to themselves or their other affiliates instead of to us.

So long as 10% of the Series H preferred stock remains outstanding, without the consent of at least a majority of the then outstanding shares of Series H preferred stock, we may not, among other things, (i) amend or waive any provision of our certificate of incorporation or bylaws so as to affect the Series H preferred stock adversely; (ii) incur indebtedness other than with respect to (x) vendors, service providers, trade creditors, employees, independent contractors and equipment lessors, in each case, in the ordinary course of business, (y) intercompany indebtedness, and (z) indebtedness not to exceed $42 million outstanding under credit facilities; (iii) pay dividends or make certain stock repurchases; or (iv) issue capital stock ranking senior or pari passu to the Series H preferred stock. In addition, holders of our Series H preferred stock will have the right to designate two members to our board of directors. The Series H preferred stock will provide for cumulative dividends at a rate of 8% per annum, accruing daily from the date of the consummation of this offering, to be paid quarterly in additional shares of Series H preferred stock. The holders of Series H preferred stock will have one vote for each share of common stock into which such holders’ shares could then be converted at the time, and with respect to such vote, will have voting rights and powers equal to the voting rights and powers of the holders of our common stock. As long as the Series H preferred stock remains outstanding and receives dividends, the voting rights for holders of the Series H preferred stock will increase by approximately 2% every quarter.

For more information regarding ownership of our outstanding stock by our principal and selling stockholders and the rights associated with our Series H preferred stock, see the sections of this prospectus entitled “Principal and Selling Stockholders” and “Description of Capital Stock.”

Future sales of our common stock may cause our stock price to decline.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline. These sales might also make it more difficult for us to sell additional equity securities at a time and price that we deem appropriate. Based on 7,741,412 shares of common stock outstanding as of March 31, 2010, upon completion of this offering, we will have 38,592,617 shares of common stock outstanding (excluding 2,188,748 shares of common stock issuable upon the conversion of our Series H preferred stock as of March 31, 2010). Of these outstanding shares, all of the shares of our common stock sold in this offering will be freely tradable in the public market, except for any shares held by our affiliates as defined in Rule 144 of the Securities Act.

We, our directors and executive officers and substantially all of our stockholders, including the selling stockholders, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any shares of our common stock or any securities convertible into, or exercisable or exchangeable for, shares of our common stock for a period of 180 days from the date of this prospectus, which may be extended upon the occurrence of specified events, except with the prior written consent of J.P. Morgan Securities Inc. and Goldman, Sachs & Co. However, J.P. Morgan Securities Inc. and Goldman, Sachs & Co., in their sole discretion, may release any of the securities subject to these lock-up agreements at any time without notice.

After the expiration of the lock-up agreements and other contractual restrictions that prohibit transfers for at least 180 days after the date of this prospectus, up to 31,842,617 restricted securities may be sold into the public market in the future without registration under the Securities Act to the extent permitted under Rule 144. Of these restricted securities, approximately 20 million shares will be available for sale approximately 180 days after the date of this prospectus subject to volume or other

 

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limits under Rule 144. In addition, once the lock-up agreements and the other contractual restrictions expire, stockholders holding approximately 27 million shares of these restricted securities will have registration rights that could allow those holders to sell their shares freely through a future registration statement filed under the Securities Act. See the section of this prospectus entitled “Certain Relationships and Related Party Transactions—Registration Rights Agreement” for more information on these registration rights.

Furthermore, 1,986,288 shares of common stock reserved for issuance pursuant to stock options that will be outstanding immediately following the closing of this offering and 3,457,855 shares available for grant under our equity incentive plans following the closing of this offering, if issued or granted, will become eligible for sale in the public market once permitted by provisions of various vesting agreements, lock-up agreements and Rule 144, as applicable. We intend to file a registration statement on Form S-8 under the Securities Act to register approximately 6 million shares of our common stock for issuance under these equity incentive plans. For additional information, see the section of this prospectus entitled “Shares Eligible for Future Sale.” If these additional shares of common stock are, or if it is perceived that they will be, sold in the public market, the trading price of our common stock could decline.

Our historical financial statements may not be indicative of future performance.

In light of our acquisition of the mobile division of InfoSpace on December 28, 2007, our operating results only reflect the impact of the acquisition from that date, and therefore comparisons with prior periods are difficult. As a result, our limited historical financial performance as owners of the mobile division of InfoSpace may make it difficult for stockholders to evaluate our business and results of operations to date and to assess our future prospects and viability. Furthermore, our brief operating history has resulted in revenue and profitability growth rates that may not be indicative of our future results of operations. As a result, the price of our common stock may be volatile.

In addition, we exited two lines of business in 2007 and 2008, our direct to consumer business, which was sold in two transactions in 2007 and 2008, and a business we refer to as media and entertainment, which was discontinued in 2008. The loss from discontinued operations in the 2008 period includes losses from these discontinued businesses.

As a result of the foregoing factors, our historical results of operations are not necessarily indicative of the operating results to be expected in the future.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our common stock, or if our operating results do not meet their expectations, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these reports or analysts. If any of the analysts who cover our company downgrades our stock, or if our operating results do not meet the analysts’ expectations, our stock price could decline. Moreover, if any of these analysts ceases coverage of our company or fails to publish regular reports on our business, we could lose visibility in the financial markets, which in turn could cause our stock price and trading volume to decline.

We currently do not intend to pay dividends on our common stock and, as a result, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We have never declared or paid any dividends on our common stock and currently do not expect to declare or pay dividends on our common stock in the foreseeable future. Instead, we anticipate that all of

 

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our earnings in the foreseeable future will be used in the operation and growth of our business. Any determination to pay dividends in the future will be at the discretion of our board of directors. In addition, our ability to pay dividends on our common stock is currently limited by the covenants of our credit facility and may be further restricted by the terms of any future debt or preferred securities. Accordingly, your only opportunity to achieve a return on your investment in our company may be if the market price of our common stock appreciates and you sell your shares at a profit. The market price for our common stock may never exceed, and may fall below, the price that you pay for such common stock.

You will experience immediate and substantial dilution in the book value of your common stock as a result of this offering.

The initial public offering price of our common stock is considerably more than the pro forma, net tangible book value per share of our outstanding common stock. This reduction in the value of your equity is known as dilution. This dilution occurs in large part because our earlier investors paid substantially less than the initial public offering price when they purchased their shares. Investors purchasing common stock in this offering will incur immediate dilution of $11.56 in pro forma, net tangible book value per share of common stock, based on the assumed initial public offering price of $15.00 per share, which is the midpoint of the price range listed on the front cover page of this prospectus. In addition, following this offering, purchasers in the offering will have contributed 21.6% of the total consideration paid by our stockholders to purchase shares of common stock. The exercise of outstanding options and warrants and the conversion of our Series H preferred stock (including additional shares of Series H preferred stock paid as dividends to the holders of such Series H preferred stock after the consummation of this offering) into common stock will result in 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.” In addition, if we raise funds by issuing additional securities, the newly-issued shares will further dilute your percentage ownership of our company.

Our management will have broad discretion over the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use our net proceeds from this offering, and you will be relying on their judgment regarding the application of these proceeds. Our management might not apply our net proceeds of this offering in ways that increase the value of your investment. We expect to use the net proceeds from this offering to fund investments in, or acquisitions of, complementary businesses, services or products. However, we currently have no commitments with respect to any such investments or acquisitions. In addition, we expect to use up to $1 million to pay a portion of the fees to be paid to Advanced Equities, Inc. for their advisory services provided to us in connection with this offering. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

Congress has enacted new legislation that affects the taxation of common stock held by or through foreign entities.

Recently enacted legislation generally will impose a withholding tax of 30% on dividend income from our common stock and the gross proceeds of a disposition of our common stock paid to certain foreign entities after December 31, 2012, unless the foreign entity complies with certain conditions or an exception applies. Please see “Material United States Federal Income Tax Considerations to Non-United States Holders—New Legislation Affecting Taxation of Common Stock Held By or Through Foreign Entities” for more information.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains statements that do not directly or exclusively relate to historical facts. As a general matter, forward-looking statements reflect our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. We generally identify forward looking statements by terminology such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of those words or other comparable words, but the absence of these words does not necessarily mean that a statement is not forward-looking. Examples of forward-looking statements include, but are not limited to, statements we make regarding “our expectation that international revenue will increase in absolute dollars and as a percentage of our total revenue” and “our anticipated levels of capital expenditures during the next year.”

Any forward-looking statements contained in this prospectus are based upon our historical performance, current plans, estimates, expectations and other factors we believe are appropriate under the circumstances. The inclusion of this forward-looking information should not be regarded as a representation by us, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these statements.

The following uncertainties and factors, among others (including the factors described in the section entitled “Risk Factors” in this prospectus), could affect our future performance and cause actual results to differ materially from those expressed or implied by forward-looking statements:

 

  Ÿ  

our expectations regarding our revenues, expenses and operations and our ability to sustain profitability;

 

  Ÿ  

our anticipated cash needs and our estimates regarding our capital requirements;

 

  Ÿ  

our ability to expand our customer base and relationships with wireless carriers and content and application providers;

 

  Ÿ  

our ability to expand our service offerings;

 

  Ÿ  

our anticipated growth strategies and sources of new revenues;

 

  Ÿ  

unanticipated trends and challenges in our business and the markets in which we operate;

 

  Ÿ  

our ability to recruit and retain qualified employees and staff our operations appropriately;

 

  Ÿ  

our ability to estimate accurately for purposes of preparing our consolidated financial statements;

 

  Ÿ  

our international expansion plans;

 

  Ÿ  

compliance with governmental regulations; and

 

  Ÿ  

our spending of the net proceeds from this offering.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus.

Any forward-looking statement made by us in this prospectus speaks only as of the date on which it is made. Unless required by law, we do not undertake any obligation to update or review any

 

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forward-looking statement, whether as a result of new information, future developments or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the Securities and Exchange Commission, after the date of this prospectus.

This prospectus contains statistical data that was derived from industry publications and reports, including the Yankee Group’s “Global Mobile Forecast,” December 2009; “Content Delivery Platforms: The Multimedia Service Delivery Vehicle,” February 2007; “North America ConnectedView Forecast,” March 2010; “Link Data: North America Mobile Carrier Monitor,” March 2010; “Link Data: Asia-Pacific Mobile Carrier Monitor,” March 2010; and “Link Data: Europe Mobile Carrier Monitor,” March 2010. In the fourth quarter of 2009, Yankee Group updated its Content Delivery Platform report and intends to issue the updated report in the first half of 2010. These industry publications generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. Although we have not independently verified the data contained in these industry publications and reports, based on our industry experience we believe that the publications are reliable and the conclusions contained in the publications and reports are reasonable.

In addition, this prospectus contains statistical data on pages 78-79 from a custom report prepared by Yankee Group at our request. We have filed a consent from Yankee Group to use this information as an exhibit to this registration statement.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $86.2 million from the sale of 6,750,000 shares of common stock in this offering at the assumed initial public offering price of $15.00 per share, the midpoint of the range set forth on the front cover page of this prospectus, after deducting underwriting commissions and discounts of $7.1 million and estimated expenses of $7.9 million. We will not receive any proceeds from the sale of shares by the selling stockholders. See “Principal and Selling Stockholders.”

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, the midpoint of the range set forth on the front cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by $6.3 million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We plan to use the net proceeds of the offering to fund investments in, and acquisitions of, competitive and complementary businesses, products or technologies. We do not, however, have agreements or commitments for any specific investments or acquisitions at this time. In addition, we expect to use up to $1 million to pay a portion of the fees to be paid to Advanced Equities, Inc. for their advisory services provided to us in connection with this offering. One million dollars of the fee was paid previously. See “Certain Relationships and Related Party Transactions—Series F, G, H and I Financing Rounds.”

Pending use of the net proceeds from this offering, we intend to invest the remaining net proceeds in short-term, interest-bearing investment grade securities.

 

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DIVIDEND POLICY

We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. Our ability to pay cash dividends on our common stock is limited by the covenants of our credit facility and may be further restricted by the terms of any future debt or preferred securities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility” and “Description of Capital Stock—Preferred Stock.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2010:

 

  Ÿ  

on an actual basis; and

 

  Ÿ  

on a pro forma, as adjusted, basis to give effect to:

 

  Ÿ  

the sale by us of 6,750,000 shares of our common stock at an assumed initial public offering price of $15.00 per share, the midpoint of the range set forth on the front cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us;

 

  Ÿ  

the conversion of 247,111,155 shares of our preferred and redeemable preferred stock (other than shares of Series H preferred stock) to 18,343,903 common shares at fixed conversion rates;

 

  Ÿ  

the conversion of 64,102,881 shares of our redeemable preferred stock to 5,757,302 common shares based on an assumed initial public offering price of $15.00 per share, the midpoint of the range set forth on the front cover page of this prospectus;

 

  Ÿ  

the reclassification of the redeemable preferred stock warrant liability to additional paid-in capital; and

 

  Ÿ  

the recording of approximately $16.3 million stock-based compensation expense due to the vesting of restricted stock triggered by the closing of this offering.

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

 

     As of March 31, 2010  
     Actual     Pro Forma,
As Adjusted(1)
 
           (Unaudited)  
     (In millions)  

Cash and cash equivalents

   $ 25.4      $ 113.4   
                

Debt:

    

Current portion of long-term debt

   $ —        $ —     

Long-term debt, less current portion

     —          —     
                

Total debt

     —          —     
                

Redeemable preferred stock, $0.001 par value; 334,793,787 shares authorized, 324,959,604 shares issued and outstanding, actual, 40,000,000 shares authorized, 21,084,337 shares issued and outstanding, pro forma as adjusted

     423.6        51.0   
                

Stockholders’ equity (deficit)

    

Preferred stock, $0.001 par value; 7,613,944 shares authorized, 7,338,769 shares issued and outstanding, actual, 310,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted

     17.4        —     

Common stock, $0.001 par value; 625,000,000 shares authorized, 7,741,412 shares issued and outstanding, actual, 625,000,000 shares authorized, 38,592,617 shares issued and outstanding, pro forma as adjusted

     0.1        0.2   

Additional paid-in capital

     —          497.8   

Accumulated deficit

     (313.7     (330.0

Accumulated other comprehensive income

     —          —     
                

Total stockholders’ equity (deficit)

     (296.2     168.0   
                

Total capitalization

   $ 127.4      $ 219.0   
                

 

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(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease), respectively, the amount of additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $6.3 million, assuming the number of shares offered by us, as set forth on the front cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The outstanding share information set forth above is as of March 31, 2010 and:

 

  Ÿ  

excludes 1,178,706 shares of common stock issuable upon the exercise of stock options, at a weighted average exercise price of $10.67 per share and 1,471,567 shares of our common stock reserved for future grants under our 2004 Stock Incentive Plan;

 

  Ÿ  

excludes 1,986,288 shares of our common stock reserved for future grants under our 2010 Long Term Incentive Plan, 333,333 shares of common stock issuable upon the exercise of options granted under this plan at an exercise price of $20.40 that will be outstanding at the consummation of this offering and 446,000 shares of common stock issuable upon the exercise of options with an exercise price equal to the public offering price that will be granted under this plan and will be outstanding at the consummation of this offering;

 

  Ÿ  

excludes 2,973,911 shares of common stock issuable upon the exercise of warrants to purchase shares of common stock, at a weighted average exercise price of $16.23;

 

  Ÿ  

excludes 594,639 shares of common stock issuable upon the exercise of warrants to purchase 8,919,591 shares of Series I redeemable preferred stock at an exercise price of $0.97 that upon consummation of this offering will represent warrants to purchase shares of common stock at an exercise price of $14.54 per share;

 

  Ÿ  

excludes a total of 33,154 shares of common stock issuable upon the exercise of warrants to purchase a combined 292,198 shares of Series A and B redeemable preferred stock (convertible into 13,676 shares of common stock) and 19,478 shares of common stock that upon consummation of this offering will represent warrants to purchase shares of common stock at a combined weighted average exercise price of $3.26 per share. The common stock issuable upon conversion of the Series A and B redeemable preferred stock at the consummation of this offering has been determined using an assumed initial public offering price of $15.00 per share, the midpoint of the price range shown on the front cover page of this prospectus; and

 

  Ÿ  

excludes 2,188,748 shares of common stock issuable upon the conversion of our Series H preferred stock.

 

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DILUTION

As of March 31, 2010, our net tangible book value was $41.3 million or $5.34 per share of common stock. If you invest in our common stock, your investment will be diluted immediately to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of March 31, 2010 was approximately $46.6 million, or $1.46 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets, less our total liabilities, divided by the number of shares of common stock outstanding as of March 31, 2010, after giving effect to the conversion of all outstanding shares of our redeemable preferred stock and preferred stock, other than Series H, into 24,101,205 shares of common stock immediately prior to the closing of this offering and a 15-for-1 reverse stock split of our common stock expected to be approved by our stockholders and effected prior to the effective date of the registration statement of which this prospectus is a part.

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to our sale of shares of common stock in this offering at the initial public offering price of $15.00 per share and deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of March 31, 2010 would have been $132.9 million, or $3.44 per share. This represents an immediate increase in net tangible book value of $1.98 per share to existing stockholders and an immediate dilution in net tangible book value of $11.56 per share to investors purchasing common stock in this offering, as illustrated by the following table:

 

Initial public offering price per share

   $ 15.00

Pro forma net tangible book value per share prior to this offering as of March 31, 2010

     1.46

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

     1.98
      

Pro forma net tangible book value per share after this offering

     3.44
      

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

   $ 11.56
      

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the front cover page of this prospectus, would increase (decrease) our pro forma net tangible book value after this offering by $6.3 million, our pro forma net tangible book value per share after this offering by $0.19 per share, and the dilution to new investors in this offering by $0.81 per share, assuming the number of shares of common stock offered by us, as set forth on the front cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.

 

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The following table summarizes, on the same pro forma basis as of March 31, 2010, the differences between the existing stockholders and the new stockholders in this offering with respect to the number of shares purchased from us, the total consideration paid, and the average price per share paid before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The calculations, with respect to shares purchased by new investors in this offering, reflect an assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the front cover page of this prospectus.

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
      Number    Percentage     Amount
(in millions)
   Percentage    

Existing stockholders

   31,842,617    82.5   $ 366.6    78.4   $ 11.51

New investors

   6,750,000    17.5        101.3    21.6      $ 15.00
                          

Total

   38,592,617    100.0   $ 467.9    100.0  
                          

If the underwriters’ option to purchase additional shares is exercised in full, sales by the selling stockholders in this offering will cause the number of shares owned by existing stockholders to be reduced to 30,830,117 shares or approximately 79.9% of the total number of shares of our common stock outstanding after this offering.

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the front cover page of this prospectus, would increase (decrease) total consideration paid by new investors in this offering and by all investors by $6.8 million and would increase (decrease) the percentage of total consideration paid by new investors to 22.8% before deducting the estimated underwriting discounts and commissions and offering expenses payable by us in connection with this offering.

To the extent any outstanding options and warrants are exercised, new investors will experience further dilution. From the date of consummation of this offering, the outstanding Series H preferred stock will receive cumulative dividends at a rate of 8% per annum, accruing daily, to be paid quarterly in additional shares of Series H preferred stock. As a result, upon the conversion of our Series H preferred stock into common stock, new investors will experience further dilution.

If all stock options and warrants to purchase shares of our common stock with exercise prices less than the initial public offering price are exercised, the number of shares held by existing stockholders will increase to 36,247,252 shares of our common stock, or 84.3% of the total number of shares of our common stock outstanding after this offering.

If all shares of our Series H preferred stock outstanding as of March 31, 2010 are converted into common stock, the number of shares held by existing stockholders will increase to 34,031,365 shares of our common stock, or 83.4% of the total number of shares of our common stock outstanding after this offering.

The outstanding share information set forth in the table above is as of March 31, 2010 and:

 

  Ÿ  

excludes 1,178,706 shares of common stock issuable upon the exercise of stock options, at a weighted average exercise price of $10.67 per share and 1,471,567 shares of our common stock reserved for future grants under our 2004 Stock Incentive Plan;

 

  Ÿ  

excludes 1,986,288 shares of our common stock reserved for future grants under our 2010 Long Term Incentive Plan, 333,333 shares of common stock issuable upon the exercise of options granted under this plan at an exercise price of $20.40 that will be outstanding at the

 

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consummation of this offering and 446,000 shares of common stock issuable upon the exercise of options with an exercise price equal to the public offering price that will be granted under this plan and will be outstanding at the consummation of this offering;

 

  Ÿ  

excludes 2,973,911 shares of common stock issuable upon the exercise of warrants to purchase shares of common stock, at a weighted average exercise price of $16.23;

 

  Ÿ  

excludes 594,639 shares of common stock issuable upon the exercise of warrants to purchase 8,919,591 shares of Series I redeemable preferred stock at an exercise price of $0.97 that upon consummation of this offering will represent warrants to purchase shares of common stock at an exercise price of $14.54 per share;

 

  Ÿ  

excludes a total of 33,154 shares of common stock issuable upon the exercise of warrants to purchase a combined 292,198 shares of Series A and B redeemable preferred stock (convertible into 13,676 shares of common stock) and 19,478 shares of common stock, respectively, that upon consummation of this offering will represent warrants to purchase shares of common stock at a combined weighted average exercise price of $3.26 per share. The common stock issuable upon conversion of the Series A and B redeemable preferred stock at the consummation of this offering has been determined using an assumed initial public offering price of $15.00 per share, the midpoint of the price range shown on the front cover page of this prospectus; and

 

  Ÿ  

excludes 2,188,748 shares of common stock issuable upon the conversion of our Series H preferred stock.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The selected historical consolidated financial data set forth below as of December 31, 2008 and 2009 and for the years ended December 31, 2007, 2008 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected historical financial data as of December 31, 2007 and for the year ended December 31, 2006 have been derived from our audited consolidated financial statements not included in this prospectus. The selected historical financial data as of December 31, 2005 and 2006 and for the year ended December 31, 2005 have been derived from our unaudited consolidated financial statements not included in this prospectus. In light of our acquisition of InfoSpace Mobile, on December 28, 2007, our financial statements only reflect the impact of that acquisition since that date, and therefore comparisons with prior periods are difficult.

The selected consolidated financial data as of and for the three months ended March 31, 2009 and 2010 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the operating results to be expected for the full fiscal year.

The unaudited information was prepared on a basis consistent with that used in preparing our audited consolidated financial statements and includes all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of our financial position, results of operations and cash flows for the unaudited periods.

The following selected consolidated financial data is not necessarily indicative of the results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

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    Years Ended December 31,     Three Months Ended
March 31,
 
    2005     2006     2007     2008     2009     2009     2010  
    (Unaudited)                            

(Unaudited)

 
   

(In thousands, except per share data)

 

Condensed Consolidated Statement of Operations Data:

             

Total revenues

  $ 17,875      $ 21,903      $ 35,171      $ 103,151      $ 113,695      $ 23,276      $ 29,080   

Operating expenses

             

Direct third-party expenses

    3,797        2,201        3,709        5,451        9,485        1,171        1,305   

Datacenter and network operations(1)

    2,625        9,561        9,468        33,000        31,786        8,683        8,034   

Product development and sustainment(1)

    8,190        24,617        16,229        52,261        31,389        7,677        8,182   

Sales and marketing(1)

    8,717        8,403        7,119        10,228        11,900        2,989        3,655   

General and administrative(1)

    9,632        11,239        10,334        26,052        20,841        5,175        5,264   

Depreciation and amortization(1)

    2,997        5,925        10,322        21,559        13,208        3,777        3,041   

Restructuring(2)

    180        1,084        1,283        3,236        2,058        235        407   

Goodwill and long-lived asset impairment charges(3)

    —          —          26,867        29,130        5,806        —          —     

Abandoned transaction charge(4)

    —          —          2,600        —          —          —          —     
                                                       

Total operating expenses

    36,138        63,030        87,931        180,917        126,473        29,707        29,888   
                                                       

Operating loss

    (18,263     (41,127     (52,760     (77,766     (12,778     (6,431     (808

Other income (expense), net

    124        (1,110     1,155        2,714        (1,627     (96     (258
                                                       

Loss from continuing operations, before income tax

    (18,139     (42,237     (51,605     (75,052     (14,405     (6,527     (1,066

Provision for income taxes

    —          —          —          1,776        1,896        444        467   
                                                       

Loss from continuing operations

    (18,139     (42,237     (51,605     (76,828     (16,301     (6,971     (1,533

Cumulative effect of accounting change

    (235     —          —          —          —          —          —     

Loss from discontinued operations(5)

    (4,081     (12,960     (24,928     (1,072     —          —          —     

Loss from sale of discontinued operations(5)

    —          —          (1,360     (127     —          —          —     
                                                       

Net loss

    (22,455     (55,197     (77,893     (78,027     (16,301     (6,971     (1,533

Accretion of redeemable preferred stock and Series D1 preferred dividends

    (2,784     (5,942     (8,095     (22,427     (23,956     (5,987     (6,400
                                                       

Net loss attributable to common stockholders

  $ (25,239   $ (61,139   $ (85,988   $ (100,454   $ (40,257   $ (12,958   $ (7,933
                                                       

Net loss per share attributable to common stockholders – basic and diluted

             

Continuing operations

  $ (3.79   $ (8.42   $ (10.30   $ (16.99   $ (6.85   $ (2.20   $ (1.38

Discontinued operations

    (0.73     (2.26     (4.54     (0.20     —          —          —     
                                                       

Total net loss per share attributable to common stockholders

  $ (4.52   $ (10.68   $ (14.84   $ (17.19   $ (6.85   $ (2.20   $ (1.38
                                                       

Weighted average common shares outstanding – basic and diluted (6)

    5,583        5,726        5,796        5,843        5,878        5,887        5,753   

Pro forma net loss attributable to holders of common stock (unaudited)(6)

          $ (31,245     $ (17,815
                         

Pro forma basic and fully diluted net loss per share (unaudited)(6)

          $ (0.84     $ (0.48
                         

Weighted average number of shares of common stock used in computing pro forma basic and fully diluted net loss per share (unaudited)(6)

            37,106          37,468   
                         
Consolidated Balance Sheet Data:   (Unaudited)     (Unaudited)                                

Cash and cash equivalents

  $ 21,958      $ 6,143      $ 67,418      $ 14,299      $ 35,945      $ 11,730      $ 25,408   

Working capital

    17,688        5,769        74,478        30,698        28,303        26,441        23,459   

Total assets

    68,611        114,599        289,391        195,447        174,176        182,844        161,518   

Total long-term debt and capital lease obligations, less current portion

    4,031        5,344        16,295        3,234        —          2,389        —     

Total redeemable preferred stock

    77,450        164,037        372,406        394,135        417,396        399,951        423,624   

Total stockholders’ deficit

    (30,084     (88,142     (152,510     (249,867     (288,821     (261,916     (296,162

 

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(1) Depreciation and amortization is not included in each respective operating expense category. The allocation by function is as follows:

 

      Years Ended December 31,    Three Months
Ended March 31,
     2005    2006    2007    2008    2009    2009    2010
     (Unaudited)             

(Unaudited)

         

(In thousands)

              

Datacenter and network operations

   $ 487    $ 2,938    $ 7,310    $ 16,824    $ 8,890    $ 2,497    $ 1,992

Product development and sustainment

     —        1,462      1,548      2,237      1,962      586      428

Sales and marketing

     —        4      307      2,075      1,960      572      524

General and administrative

     2,510      1,521      1,157      423      396      122      97
                                                

Depreciation and amortization

   $ 2,997    $ 5,925    $ 10,322    $ 21,559    $ 13,208    $ 3,777    $ 3,041
                                                

 

(2) Our restructuring charges relate to costs associated with closing and relocating facilities, relocating certain key employees and severance costs following the acquisition of InfoSpace Mobile. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details.
(3) The impairments in 2008 and 2009 relate primarily to integration activities following our acquisition of InfoSpace Mobile in December 2007 and to certain non-core operating assets. The 2007 impairments relate to goodwill due primarily to changes in consumer purchase habits. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details.
(4) In 2007, we issued a warrant to purchase common stock to an affiliate of an existing investor as a fee for providing a financing commitment in connection with a proposed transaction that was not completed.
(5) In connection with a business strategy reassessment initiated in 2007, we exited the direct to consumer and media and entertainment businesses at various times during 2007 and 2008.
(6) See Note 13 to our consolidated financial statements for a description of the method used to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share attributable to common stockholders.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and opinions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Overview

We are a leading provider of mobile data solutions and services that enable wireless carriers to deliver high value mobile data services to their subscribers. We provide a comprehensive suite of hosted, managed service offerings, including mobile web portal, storefront, messaging, and billing support and settlement, which enables wireless carriers to deliver customized, carrier-branded mobile data services to their wireless subscribers. Our mCore service delivery platform provides the tools for mobile subscribers to easily locate and access personally relevant and location-based content and services, engage in social networking and download content and applications. We also leverage our data-rich insights into subscriber behavior and our user interface expertise to provide a highly personalized subscriber experience and targeted mobile marketing solutions. Our mCore platform provides mobile subscribers with access to over 30 million unique pieces of third-party content or applications that we optimize for delivery to over 2,000 different mobile phone models, ranging from entry level feature phones to smartphones. Since 2005, Motricity has generated over $2.5 billion in gross revenue for our carrier customers through the sale of content and applications and powered over 50 billion page views through access to the mobile Internet. For the year ended December 31, 2009, we generated revenue of $113.7 million and incurred a net loss of $16.3 million. For the three months ended March 31, 2010, we generated revenue of $29.1 million and incurred a net loss of $1.5 million. We have access to over 200 million mobile subscribers through our U.S. wireless carrier customers, and we currently provide mobile data services to approximately 35 million of these subscribers monthly.

The majority of our revenue consists of managed services revenue, charged on a monthly basis to our wireless carrier and other customers under contracts with initial terms ranging from one to three years in duration. Managed services revenue consists of fees we charge to manage, host and support our solutions and to provide other related services to our customers, and includes both fixed fees and variable, activity-based charges. In addition, we charge professional service fees to customize, implement, and enhance our solutions. Our wireless carrier customers include the five largest providers in the U.S., by number of subscribers. Revenue from these customers accounted for 84% of our total revenue for the year ended December 31, 2009, with AT&T and Verizon Wireless accounting for 53% and 20% of total revenue, respectively. Revenue from these five customers accounted for 90% of our total revenue for the three months ended March 31, 2010, with AT&T and Verizon Wireless accounting for 40% and 39% of that revenue, respectively. In addition to wireless carriers, our customers include content and application providers. We generated approximately 95% and 96% of our total revenue in the U.S. during the year ended December 31, 2009 and the three months ended March 31, 2010, respectively. As we pursue expansion opportunities with international wireless carriers, we expect international revenue to increase in absolute dollars and as a percentage of our total revenue.

We expect our growth to be heavily dependent upon our ability to maintain strong relationships with 4 of the top 10 global wireless carriers, which represent our largest customers, as well as our ability to develop new relationships with wireless carriers in developed and emerging markets, such as Southeast Asia, India and Latin America. In addition, we expect our growth to depend upon the increased adoption of our mCore service delivery platform by our customers and an increase in the

 

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activity conducted on our platform by our customers’ subscribers. The failure of any of our significant carrier customers to renew existing contracts on favorable terms, such as Verizon Wireless, which has a contract up for renewal in 2010 that represents all of our 2009 revenue from Verizon, and AT&T, which has a contract up for renewal in 2010 that represents 23% of our 2009 revenue from AT&T, would have a material adverse impact on our results of operations and future growth prospects. Our ability to achieve and sustain profitability will be affected as we incur additional expenses to expand our sales, marketing, development and general and administrative capabilities. As we establish and expand our operational capabilities internationally, we will incur additional operating expenses and capital-related costs.

We were founded in 2001 with a mission to develop a mobile data services business, and our strategy has evolved as the mobile data services industry has developed and expanded. We focused originally on Palm-based technology and related solutions which dominated the mobile data services market before wireless data services based on cellular telephony technology were developed and widely deployed by the wireless carriers. As the wireless data services market has developed we expanded the scope and nature of our data services to support wireless carriers and their subscribers. Since 2003, we have completed eight acquisitions as part of the process of developing and expanding our mobile services business. These included initial acquisitions of companies primarily engaged in the Palm-based data services market and subsequent acquisitions of companies engaged in the wireless data services market, as the wireless carriers and handset manufacturers came to dominate the mobile data services market. In December 2007, in our largest acquisition to date, we acquired the assets of the mobile division of InfoSpace, Inc., which we refer to as InfoSpace Mobile, a competing provider of mobile content solutions and services for the wireless industry. Due to the rapidly evolving nature of the mobile data services market and changes in our business strategy over time, in each of the last several years we have recognized impairment charges related to both acquired and internally developed assets. In addition, we have exited our direct to consumer and media and entertainment businesses, which are reflected as discontinued operations in our consolidated financial statements. These discontinued businesses include our original mobile data services business and several of our earlier acquisitions. As a consequence of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of revenue and operating results are not necessarily meaningful and should not be relied upon as indications of future performance.

The InfoSpace Mobile Acquisition and Business Strategy Realignment

In December 2007, we acquired InfoSpace Mobile for a cash purchase price of $135 million and the assumption of certain liabilities. The acquisition was a key element in the broad strategic realignment of our business. We viewed InfoSpace Mobile as a competing provider of mobile content solutions and services for the wireless industry that had strong relationships with several large wireless carriers. Through its mCore platform, InfoSpace Mobile offered many of the same services we provided to our customers through our then existing platform, called Fuel. InfoSpace Mobile also operated a large development organization, with an emphasis on professional services work. In the acquisition, in addition to acquiring the mCore platform and a number of leased U.S. datacenter facilities, we acquired a 224-person employee base, additional contracts with certain new and pre-existing customers, including AT&T and Verizon Wireless, and the Bellevue, Washington office facilities that we now use as our corporate headquarters. We financed the acquisition through the issuance of $177.3 million of Series I redeemable preferred stock and warrants.

Since completing the InfoSpace Mobile acquisition, we have significantly restructured our business. Due to the similar capabilities and features of the mCore and Fuel platforms, we conducted an evaluation of the mCore and Fuel platforms and concluded that it would be inefficient to continue managing and developing two incompatible technologies. As a result, we elected to phase out our legacy Fuel platform and began migrating our customers to an enhanced version of the acquired

 

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mCore platform. In 2008, we moved our headquarters from Durham, North Carolina to Bellevue, Washington. In mid-2008, we adopted several business initiatives to increase the operating efficiencies of the combined business, including eliminating redundant positions and functions, outsourcing a portion of our development activities to India and consolidating our network operations into five datacenters. In addition, we have more recently begun to move our business focus toward the sale of comprehensive managed services solutions, utilizing our more standardized architecture, and to de-emphasize the more highly customized, professional services intensive approach. We believe that this evolution of our business strategy will accelerate innovation in our service offerings for the benefit of our wireless carrier customers and their subscribers while reducing costs to the carriers.

Prior to the InfoSpace Mobile acquisition, we provided mobile data services to wireless carriers and content and application providers using our proprietary Fuel platform. In addition, we operated two other lines of business, direct to consumer and media and entertainment. In 2007 and 2008, in connection with this business strategy realignment, we sold our direct to consumer business and discontinued our media and entertainment business. We then heightened our focus on our existing managed services model predominately for the wireless carriers. As part of our plan to pursue this more focused business strategy, our board of directors and our chief executive officer recruited additional senior management executives with substantial experience working with large carriers and managing significantly larger business organizations. In the first half of 2009, we completed the migration of all of our customers from the Fuel platform to mCore, except for AT&T’s storefront. We expect AT&T to fully migrate to the mCore platform in the second half of 2010.

Key Components of Our Results of Operations

Sources of revenue

Our revenue is earned predominantly under contracts ranging from one to three years in duration with our wireless carrier and other customers. Under the typical contract, we provide one or more of our managed services, for which we charge fixed, periodic or variable, activity-based fees (or a combination of both), and often also charge professional service fees to implement the specific mCore solutions required by the customer. We typically charge fixed monthly managed service fees to host the solutions and provide other support and services as required by the customer. Managed service fees vary by contract based on a number of factors including the scope of the solutions deployed, IT processing and bandwidth capacity requirements and the nature and scope of any other support or services required by the customer. Surcharges are typically included for excessive IT capacity requirements based on customer usage. Professional service fees primarily relate to work required for the initial customization and implementation of our mCore solutions for customers, as well as for customer-specified enhancements, extensions or other customization of the solutions following initial implementation. Professional services are typically provided on a fixed fee basis, depending on the scope and complexity of the individual project. Professional services fees from time to time may include charges for computer hardware and third-party software related to implementing our solutions.

Most of our customer contracts include a variable fee based on one of several measures, including the number of wireless subscribers who use our mCore solutions each month, the aggregate dollar volume or number of transactions processed, or specified rates for individual transactions processed, depending on the specific type of service involved. We typically receive a monthly subscription fee from our wireless carrier customers for each active portal user, where active usage is defined as utilizing the service at least one to three times per calendar month depending on the customer contract. We also receive from our wireless carrier customers a portion of the gross dollars generated by all transactions conducted through our digital storefronts, ranging from approximately 3% to 15%. In addition, from our content and application provider customers, we typically receive either a share of gross dollars generated for each premium message, or a fee for each standard message, delivered through the mCore platform. Individual carrier and

 

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content provider contracts often contain monthly minimum charges for usage-based fees or transaction-based charges for all or a portion of the contract term, based on various factors including the size of the customer’s subscriber base and the expected rate of subscriber usage of our services.

Due to the nature of the services we provide, our customer contracts contain monthly service level requirements that typically require us to pay financial penalties if we fail to meet the required service levels. We recognize these penalties, when incurred, as a reduction in revenue. Typical service level requirements address down time or slow response of our services that impact mobile subscribers and response time in addressing customer requests. Potential penalties vary by contract and range from near zero to as much as 100% of monthly recurring revenue, depending on the severity and duration of the service issue. Service level penalties represented 4% of total revenue in 2008 (during integration of the InfoSpace Mobile acquisition), 1% of total revenue in 2009 and 3% of total revenue during the three months ended March 31, 2010.

Operating expenses

We classify our operating expenses into six categories: direct third-party, datacenter and network operations, product development and sustainment, sales and marketing, general and administrative and depreciation and amortization. Our operating expenses consist primarily of personnel costs, which include salaries, bonuses, commissions, payroll taxes, employee benefit costs and stock-based compensation expense. Other operating expenses include datacenter and office facility expenses, computer hardware, software and related maintenance and support expenses, bandwidth costs, and marketing and promotion, legal, audit, tax consulting and other professional service fees. We charge stock-based compensation expense resulting from the amortization of the fair value of stock option grants to each option holder’s functional area. We allocate certain facility-related and other common expenses such as rent, office and IT desktop support to functional areas based on headcount.

Direct Third-Party Expenses.    Our direct third-party expenses consist of the costs of certain content that we contract for directly on behalf of our wireless carrier customers, as well as certain computer hardware and software that we acquire on behalf of one major carrier customer. We expect these costs to increase as a percentage of revenue as we directly contract for additional content for our carrier customers and to the extent licensing costs for customer-specific, third-party software increase.

Datacenter and Network Operations.    Datacenter and network operations expenses consist primarily of personnel and outsourcing costs for operating our datacenters, which host our mCore solutions on behalf of our customers. Additional expenses include facility rents, power, bandwidth capacity and software maintenance and support. We have been consolidating our datacenters since the InfoSpace Mobile acquisition, which has reduced datacenter and network operations costs. We expect, however, to expand our datacenter and our network capabilities in order to support the expected growth in mobile data usage by mobile subscribers. We expect our datacenter and network operations expenses to increase in absolute dollars but to decrease as a percentage of revenue over time.

Product Development and Sustainment.    Product development expenses primarily consist of personnel costs and costs from our development vendors. Our product development efforts include improving and extending the functionality and performance of our service delivery platform, developing new solutions, customizing and implementing our solution set for our customers and providing other service and support functions for our solutions. Product development costs related to software used solely on an internal basis to provide our services, which we refer to as internal use software, are capitalized and amortized over the expected asset life. We expect that product development expenses will increase in absolute dollars as we continue to enhance and expand our suite of solutions and services, but will decline as a percentage of revenue over time.

 

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Sales and Marketing.    Sales and marketing expenses primarily consist of personnel costs for our sales and marketing staff, commissions earned by our sales personnel and the cost of marketing programs. In order to continue to grow our business and awareness of our services, we expect that we will commit additional resources to our sales and marketing efforts. We expect that sales and marketing expenses will increase in absolute dollars and as a percentage of revenue over time as we work to expand our U.S. and international customer bases.

General and Administrative.    General and administrative expenses, referred to herein as G&A, primarily consist of personnel costs for our executive, finance, legal, human resources and administrative personnel, as well as legal, accounting and other professional fees and facilities-related expenses. We expect our G&A expenses to increase in absolute dollars, but decrease as a percentage of revenue over time.

Depreciation and Amortization.    Depreciation and amortization expenses consist primarily of depreciation on computer hardware and leasehold improvements in our datacenters, depreciation of capitalized software development costs, and amortization of purchased intangibles. We expect that depreciation and amortization expenses will increase in absolute dollars as we continue to expand our datacenters and our suite of solutions, but decline as a percentage of revenue over time.

Other income (expense), net

Other income and other expenses, net consists of interest we earn on our cash and cash equivalents, interest expense we incur as a result of our borrowings, if any, and non-operating income and expenses. It also includes income or expense relating to changes in the fair value of our outstanding warrants to purchase redeemable preferred shares.

Income tax provision

Income tax expenses for 2008, 2009 and for the first three months of 2010 primarily consist of a deferred U.S. tax provision for the difference between book and tax treatment of goodwill associated with the acquisition of the InfoSpace Mobile assets. Due to our history of operating losses, we have accumulated substantial net operating and capital losses, which constitute the majority of our deferred tax assets. Because of our history of operating losses, we maintain full valuation allowances against these deferred tax assets and consequently are not recognizing any tax benefit related to our current pre-tax losses. If we achieve sustained profitability, subject to certain provisions of the U.S. federal tax laws that may limit our use of these accumulated losses, we will evaluate whether we should eliminate or reduce the valuation allowances which would result in immediate recognition of a tax benefit and we would begin recording income tax provisions based on our earnings and applicable statutory tax rates going forward. Due to our large net operating loss carryforwards, we do not expect to pay U.S. federal income taxes in the next several years.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.

The following critical accounting policies are those accounting policies that, in our view, are most important in the portrayal of our financial condition and results of operations. Our critical accounting

 

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policies and estimates include those involved in recognition of revenue, business combinations, software development costs, valuation of goodwill, valuation of long-lived and intangible assets, provision for income taxes, accounting for stock-based compensation and discontinued operations. Note 2 to our financial statements included elsewhere in this prospectus provides additional information about these critical accounting policies, as well as our other significant accounting policies.

Revenue recognition

We derive our revenues from contracts that include individual or varying combinations of our managed services and often include professional service fees to customize and implement the specific software platform solutions required by the customer. We recognize revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement; (ii) delivery has occurred; (iii) the fee is fixed or determinable; and (iv) collectability of the fee is reasonably assured. The timing of revenue recognition in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of our deliverables and obligations.

Our customer contracts may consist of professional service fees, a fixed monthly managed service fee to host the software platform solution, and a variable monthly subscription fee based on one of three measures: the number of wireless subscribers using our software solutions each month; the aggregate dollar volume or number of transactions processed; or specified rates for individual transactions processed. Certain arrangements also include minimum monthly fee provisions, monthly fees for providing additional managed services required by the customer and/or service level requirements related to the hosted solutions which often entail financial penalties for non-compliance. Professional service fees typically include both initial fees to customize and implement the specific software solution and fees to enhance the functionality of the software solution, which may occur any time during the contractual term of the arrangement.

Under our contracts where the customer does not have the right to take possession of the software, we determine the pattern of revenue recognition of the combined deliverables as a single unit of accounting. The professional service fees associated with the arrangement are not considered to be a separate earnings process because the services do not have stand-alone value to the customer. Such customers do not have the ability to benefit, resell or realize value from such services without the associated hosting services. Consequently, the professional service revenue is deferred and recognized monthly on a ratable basis together with the hosting services over the longer of the contractual term of the arrangement or the estimated period the customer is expected to benefit from the software platform or enhancement representing the period over which the hosting services are expected to be utilized. In determining the expected benefit period, we assess factors such as historical trends, data used to establish pricing in the arrangement, discussions with customers in negotiating the arrangement and the period over which the customer could be expected to recover and earn a reasonable return on the professional service fee. At December 31, 2009 and March 31, 2010, our balance sheets reflected deferred revenue of $11.8 million and $4.9 million, respectively, which consists primarily of such professional service fees. We consider the variable activity-based fees to be contingent fees and recognize revenue monthly as the contingency is resolved, the fees are earned and the amount of the subscription fee can be reliably measured. For purposes of classifying the arrangement consideration as managed services or professional services revenue on our statement of operations, we allocate the arrangement consideration based on the contractually stated amounts for each component. The pricing of our professional services is based on the expected level of effort necessary to complete a software solution. We believe this best approximates the fair value of the professional service fees if they were a separate unit of accounting.

Under certain arrangements, the customer has the right to take possession of the software, and it is feasible for the customer to either self-host the software on its own hardware or contract with another

 

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entity for the hosting service without significant penalty. Such multiple element arrangements are analyzed under software revenue guidance to assess the elements for separation and recognition. The fixed monthly hosting fee to host the software solution is not considered essential to the functionality of other elements, is described in the contract such that the total price of the arrangement would be expected to vary as the result of the inclusion or exclusion of the services and we have established vendor-specific objective evidence of fair value through substantive renewal rates included in the contract. Accordingly we account for the hosting fee element of the arrangement separately and recognize the hosting fee as managed services revenue on a monthly basis as earned. The variable monthly subscription fee is considered a contingent fee and is recognized as managed services revenue monthly when the contingency is resolved and the related fee is earned. We then use the residual method to allocate the arrangement consideration to the professional services element for revenue recognition purposes. We recognize the professional service revenues using the cost-to-cost percentage of completion method of accounting. We recognize the revenue based on the ratio of costs incurred to the estimated total costs at completion. Should the customer elect to self-host the software, the hosting fee is eliminated and the variable subscription fee becomes the licensing fee. No customer has elected to self-host as of March 31, 2010. If a contract which previously did not have a right to self-host without significant penalty is amended to include such a right, we reassess the contract under the above software revenue guidance.

We provide premium messaging services to subscribers of wireless carriers on behalf of third-party vendors and earn a fixed percentage of the related revenue. We bill the carriers for transactions conducted by their subscribers and provide settlement services for the third-party vendors based on payments received from the carriers. We have determined it is appropriate to record our net share of the billings to carriers as service revenue rather than the gross billing amount. The primary considerations for this determination are:

 

  Ÿ  

the third-party vendor sells its content or service directly to the wireless carriers’ subscribers and is considered the primary obligor;

 

  Ÿ  

the carriers have a contractual relationship with their subscribers and are directly responsible for billing and collecting premium messaging fees from their subscribers and resolving billing disputes;

 

  Ÿ  

the carriers establish gross pricing for the transactions;

 

  Ÿ  

the wireless carriers generally pay us a fixed percentage of premium messaging revenues actually collected from their subscribers; and

 

  Ÿ  

we have limited risks, including no inventory risk and limited credit risk, because the carriers generally bear the risk of collecting fees from their subscribers and we are obligated to remit to the third-party vendor only their share of the funds we actually receive from the carrier.

Business combinations

We have completed eight business combinations since 2003. The purchase price of an acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with any amount in excess of such allocations designated as goodwill. We make significant judgments and assumptions in determining the fair value of acquired assets and assumed liabilities, especially with respect to acquired intangibles. Using different assumptions in determining fair value could materially impact the purchase price allocation and our financial position and results of operations.

Several methods are commonly used to determine fair value. For intangible assets, we typically use the “income method.” This method starts with our forecast of all expected future net cash flows.

 

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These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method and other methods include:

 

  Ÿ  

the amount and timing of projected future cash flows;

 

  Ÿ  

the discount rate selected to measure the risks inherent in the future cash flows;

 

  Ÿ  

the acquired company’s competitive position; and

 

  Ÿ  

the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry.

Software development costs

We capitalize certain software development costs, including the costs to develop new software products or significant enhancements to existing software products, which are developed or obtained for internal use. We capitalize software development costs when application development begins, it is probable that the project will be completed, and the software will be used as intended. Such capitalized costs are amortized on a straight-line basis over the estimated useful life of the related asset, which is generally three years. Costs associated with preliminary project stage activities, training, maintenance and all post implementation stage activities are expensed as incurred.

Software development costs related to software products to be sold, leased or otherwise marketed, however, are capitalized when technological feasibility has been established. In 2010, we have focused on developing software products that can be leveraged across various customers. As such, we have capitalized costs, including direct labor and related overhead. Amortization of capitalized software development costs will begin as each product is available for general release to customers. Amortization will be computed on an individual product basis for those products available for market and will be recognized based on the product’s estimated economic life. Unamortized capitalized software development costs determined to be in excess of net realizable value of the product are expensed immediately.

Valuation of goodwill

Our business acquisitions typically result in the recording of goodwill, and we periodically assess whether the recorded value of goodwill has become impaired. We test for potential impairment annually, in the fourth quarter of each year, and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Testing for impairment of goodwill involves estimating the fair value of the associated reporting unit and comparing it to its carrying value. If the estimated fair value is lower than the carrying value, then a more detailed assessment is performed comparing the fair value of the reporting unit to the fair value of the assets and liabilities plus the goodwill carrying value of the reporting unit. If the fair value of the reporting unit is less than the fair value of its assets and liabilities plus goodwill, then an impairment charge is recognized to reduce the carrying value of goodwill by the difference.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. We use valuation techniques consistent with the market approach and income approach to measure fair value for purposes of impairment testing. An estimate of fair value can be affected by many assumptions, requiring that management make significant judgments in arriving at these estimates, including the expected operational performance of our businesses in the future, market conditions and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use to estimate future cash flows—including sales volumes, pricing, market penetration, competition, technological obsolescence and discount rates—are

 

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consistent with our internal planning. Significant changes in these estimates or their related assumptions in the future could result in an impairment charge related to our goodwill.

The $74.7 million of recorded goodwill at December 31, 2008, December 31, 2009 and March 31, 2010 relates entirely to our acquisition of InfoSpace Mobile. In conjunction with our strategy reassessment in 2007 to focus primarily on the mobile network operator business and prior impairment or disposition of goodwill in our other reporting units, we have combined the reporting unit for our 2006 U.S. messaging acquisition, GoldPocket Wireless, Inc., which we refer to as GPW, with our mobile network operator reporting unit resulting in one enterprise level reporting unit for purposes of our fourth quarter 2008 annual impairment test. Our impairment test in the fourth quarter of 2009 indicated we had significant excess of fair value over the net book value of our Company such that a 50% decrease in our projected net cash flow or a doubling of the discount rate would not have resulted in impairment of our goodwill.

In 2007 and 2008, we fully impaired $33.7 million of goodwill associated with acquisitions completed prior to our acquisition of InfoSpace Mobile. In the third quarter of 2008, it became apparent that revenue from GPW would not achieve expectations, which resulted in a goodwill impairment charge of $6.8 million. During 2007, we recorded a $26.9 million impairment charge related to goodwill associated with our mobile network operator reporting unit, which represents our primary operations, and our GPW reporting unit. The annual impairment test performed on the mobile network operator reporting unit, prior to inclusion of the InfoSpace Mobile assets and operations, indicated that changes in consumer purchasing habits were resulting in lower revenues and net cash flows than originally expected, requiring a goodwill impairment of $12.1 million. The annual impairment test performed on the GPW reporting unit indicated that unanticipated competitive dynamics in the marketplace were resulting in lower revenues and net cash flows than originally expected, requiring a goodwill impairment of $14.8 million.

Valuation of long-lived and intangible assets

We periodically evaluate events or changes in circumstances that indicate the carrying amount of our long-lived and intangible assets may not be recoverable or that the useful lives of the assets may no longer be appropriate. Factors which could trigger an impairment review or a change in the remaining useful life of our long-lived and intangible assets include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cash flow analysis, based on an income and/or cost approach, and an impairment charge is recorded for the excess of carrying value over fair value.

The process of assessing potential impairment of our long-lived and intangible assets is highly subjective and requires significant judgment. An estimate of future undiscounted cash flow can be affected by many assumptions, requiring that management make significant judgments in arriving at these estimates. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use to estimate future cash flows including sales volumes, pricing, market penetration, competition and technological obsolescence are consistent with our internal planning. Significant future changes in these estimates or their related assumptions could result in an impairment charge related to individual or groups of these assets.

Our intangible assets, other than goodwill, of $10.7 million at December 31, 2009 and $11.5 million at March 31, 2010, relate primarily to customer relationships associated with our acquisition of

 

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InfoSpace Mobile. We are amortizing the recorded value of the customer relationships over an estimated useful life of approximately eight years utilizing a variable methodology.

During 2009, we recognized impairment charges of $5.8 million related primarily to our GPW long-lived and intangible assets. In June 2009, we received notification that our future revenue stream associated with a significant messaging customer obtained as part of the GPW acquisition would likely be eliminated. We performed an impairment analysis, which resulted in impairment charges of $1.9 million and $3.3 million associated with the GPW customer list and GPW capitalized software, respectively.

During 2008, we recorded long-lived and intangible asset impairment charges of $22.3 million. These impairment charges included $8.4 million related to software assets acquired in the InfoSpace Mobile acquisition based on information received indicating it was likely that two significant customers would no longer be utilizing our search and storefront solutions. We also recognized impairments of $12.7 million related to restructuring of the business following the InfoSpace Mobile acquisition. The $12.7 million included $8.2 million to impair computer software, furniture and fixtures and leasehold improvements associated with moving our headquarters to Bellevue, Washington and the planned consolidation and shutdown of certain datacenter facilities. The other restructuring-related impairment of $4.5 million was associated with the planned early shutdown of and migration of customers from the Fuel software solution platform to the mCore platform. We had redundant software solution platforms as a result of the InfoSpace Mobile acquisition and, based on specific migration plans developed in cooperation with our customers during the third quarter, it was determined the Fuel platform would not generate sufficient revenues to recover the remaining carrying value of the software platform. As a result, we impaired the remaining software carrying value. The remaining $1.2 million impairment related to the remaining customer relationship intangible from our M7 Networks, Inc. acquisition in 2005, as we no longer had customers utilizing that technology.

Income taxes

We are subject to federal and various state income taxes in the U.S., and to a lesser extent, income-based taxes in various foreign jurisdictions, including, but not limited to, the Netherlands, the United Kingdom, Canada, Indonesia and Singapore, and we use estimates in determining our provision for these income taxes and the recognition of deferred tax assets. Deferred tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities are determined separately by tax jurisdiction. In making these determinations, we estimate tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities, and we assess temporary differences resulting from differing treatment of items for tax and accounting purposes. We recognize only tax positions that are “more likely than not” to be sustained based solely on their technical merits. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business.

At December 31, 2009, our gross deferred tax assets consisted primarily of domestic net operating losses and book to tax differences in fixed assets, as well as research and development credit carryforwards. As of December 31, 2009, we had U.S. federal and state net operating loss carryforwards of approximately $222 million and $89 million, respectively, which begin to expire at varying dates starting in 2019 for U.S. federal income tax purposes and in the current year for state income tax purposes. Because of our history of generating operating losses, we maintain full valuation allowances against these deferred tax assets and consequently do not recognize tax benefits for our current operating losses. If we achieve sustained profitability, we will assess the likelihood that the deferred tax assets will be realized through the ability to utilize them to offset our expected future tax obligations, subject to certain provisions of the U.S. federal tax laws that may limit our use of these accumulated losses. If we determine it is likely that all or a portion of the deferred tax assets will be

 

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realized, we will eliminate or reduce the corresponding valuation allowances which would result in immediate recognition of an associated tax benefit. Going forward, we will reassess the need for any remaining valuation allowances or the necessity to recognize additional valuation allowances in the future based on our then current and expected future financial performance. In the event we do eliminate all or a portion of the valuation allowances in the future, we will begin recording income tax provisions based on our earnings and applicable statutory tax rates from that time forward.

As a result of the InfoSpace Mobile asset acquisition at the end of 2007, we record a U.S. tax provision each subsequent period for the difference between book and tax treatment of goodwill associated with the acquisition. The tax amortization of the goodwill results in a deferred tax liability which does not provide a source of income for purposes of evaluating the realizability of the deferred tax assets. This results in recognition of income tax each period through 2022 corresponding to the tax amortization period of the goodwill. This provision has no cash tax implications absent liquidation of our Company and would otherwise only be adjusted or reversed to the extent our book goodwill balance would be impaired in the future.

Stock-based compensation

Prior to January 1, 2006, we accounted for share-based awards, including stock options, to employees using the intrinsic value method. Under the intrinsic value method, compensation expense was measured on the date of award as the difference, if any, between the deemed fair value of our common stock and the option exercise price, multiplied by the number of options granted. The option exercise prices and fair value of our common stock are determined by our board of directors based on a review of various objective and subjective factors. No compensation expense was recorded for stock options issued to employees prior to January 1, 2006 because all options were granted in fixed amounts and with fixed exercise prices at least equal to the fair value of our common stock at the date of grant.

Effective January 1, 2006, we changed our accounting treatment to recognize compensation expense based on the fair value of all share-based awards granted, modified, repurchased or cancelled on or after that date. This compensation expense is recognized on a straight-line basis over the requisite service period for all time-based vesting awards. We continue to account for share-based awards granted prior to January 1, 2006 under the intrinsic value method.

For share-based awards subsequent to January 1, 2006, we estimate the fair value of such awards, including stock options, using the Black-Scholes option-pricing model. Determining the fair value of share-based awards requires the use of subjective assumptions, including the expected term of the award and expected stock price volatility. The assumptions used in calculating the fair value of share-based awards granted since January 1, 2008, are set forth below:

 

     Year Ended
December 31,
2008
   Year Ended
December 31,
2009
   Three Months
Ended
March 31,
2010

Expected life of options granted

   5 years    5 years    5 years

Expected volatility

   58%    50% - 58%    50%

Range of risk-free interest rates

   2.8% - 3.3%    1.7% - 2.3%    2.3%

Expected dividend yield

   0%    0%    0%

The assumptions used in determining the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties. As a result, if factors change, and we use different assumptions, our share-based compensation could be materially different in the future. The risk-free interest rate used for each grant is based on a U.S. Treasury instrument with a term similar to the expected term of the share-based award. The expected term of options has been estimated

 

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utilizing the vesting period of the option, the contractual life of the option and our option exercise history. Because there was no public market for our common stock prior to this offering, we lacked company-specific historical and implied volatility information. Therefore, in estimating our expected stock volatility, we have taken into account volatility information of publicly-traded peer companies, and we expect to continue to use this methodology until such time as we have adequate historical data regarding the volatility of our publicly-traded stock price. Also, we recognize compensation expense for only the portion of options that are expected to vest. Accordingly, we estimated future forfeitures of stock options based on our historical forfeiture rate, taking into account unusual events such as employee attrition due to the relocation of our headquarters to Bellevue, Washington. If our actual forfeiture rate varies from our historical rates and estimates, additional adjustments to compensation expense may be required in future periods.

All our employee stock options were granted at exercise prices equal to the fair value of common stock as of the grant date, except for the December 11, 2009 grant with an exercise price of $15.00 per share, as described further below. As of March 31, 2010, we had $2.5 million of unrecognized compensation expense related to unvested employee stock options, which will be recognized over a weighted-average period of 2.2 years.

The following table summarizes by grant date the number of stock options granted from January 1, 2008 through March 31, 2010, and the per share exercise price per share of each option grant:

 

Date of Grant

   Stock Options Granted    Exercise Price

January 1, 2008

   370,140    $ 12.00

February 7, 2008

   110,371      12.00

February 5, 2009

   117,250      12.15

May 4, 2009

   28,867      12.15

December 11, 2009

   14,967      15.00

December 11, 2009

   15,800      19.65

December 14, 2009

   19,933      19.65

February 9, 2010

   21,190      19.65

February 12, 2010

   666      19.65

March 8, 2010

   6,597      20.40

The fair value of our common stock, for the purpose of determining the grant prices of our common stock option grants, is ultimately approved by our board of directors after an extensive process involving the audit committee, management, and a third-party valuation firm. The board of directors initially delegates the valuation process to the audit committee. The audit committee works with management, and starting in 2008, also began working with a third-party valuation firm to develop each valuation. The audit committee then presents the resulting valuation to the full board of directors, and recommends its approval, which has historically been adopted. Our board of directors exercised judgment in determining the estimated fair value of our common stock on the date of grant based on various factors, including:

 

  Ÿ  

the prices for our redeemable preferred stock sold to outside investors in arm’s-length transactions;

 

  Ÿ  

the rights, preferences and privileges of our redeemable preferred stock relative to those of our common stock;

 

  Ÿ  

our operating and financial performance;

 

  Ÿ  

the hiring of key personnel;

 

  Ÿ  

our stage of development and revenue growth;

 

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  Ÿ  

the lack of an active public market for our common and preferred stock;

 

  Ÿ  

industry information such as market growth and volume;

 

  Ÿ  

the execution of strategic and customer agreements;

 

  Ÿ  

the risks inherent in the development and expansion of our service offerings;

 

  Ÿ  

the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions and the nature of and history of our business; and

 

  Ÿ  

the acquisitions of companies that we have completed.

We believe consideration of these factors by our board of directors was a reasonable approach to estimating the fair value of our common stock for those periods. Estimation of the fair value of our common stock requires complex and subjective judgments, however, and there is inherent uncertainty in our estimate of fair value.

The fair value of our common stock as of the January 1, 2008 and February 7, 2008 grant dates was estimated by the board of directors to be $12.00 per share. Due to the proximity of the acquisition of InfoSpace Mobile in December 2007 to these grants, the issuance of the Series I redeemable preferred stock to a subset of existing and new investors to fund the acquisition was considered the most objective approach to estimating the fair value of our common stock for purposes of these grants. We sold 190.8 million shares of Series I redeemable preferred stock at a price of $0.9694 per share. Each share is convertible into .0667 shares of common stock and has a liquidation preference equal to the $0.9694 issue price plus cumulative unpaid dividends of $0.038776 per annum, whether declared or not. Based on the pre-money valuation associated with the Series I preferred stock issuance of $295 million, which was negotiated between our board of directors and investors participating in the Series I financing round, and the Series I proceeds of $185 million, we estimated the fair value of the common stock to be $12.00 by deducting the liquidation preferences of Series A, B, C, D and E as of such date from the post-money valuation of $480 million and divided by the number of fully diluted shares outstanding as of such date.

In early 2008, following the closing of the acquisition of InfoSpace Mobile in December 2007, we finalized our plans to integrate the business and initiated implementation of the plans, including relocating our headquarters to Bellevue, Washington. Significant progress was also made during that period toward the eventual disposition of the discontinued business lines. We updated our financial forecasts as of April 2008 based on the progress made in the integration process, the additional knowledge of the InfoSpace Mobile business gained and initiatives undertaken to increase revenues and reduce operating expenses of the combined business.

We engaged an independent third-party valuation firm to assist the board of directors in performing a contemporaneous valuation of our common stock as of April 30, 2008, for stock option grants. The enterprise value was calculated by using an asset-based approach, a market-based approach, determined primarily by the recent issuance of the Series I redeemable preferred stock, and an income-based approach. After considering these methods, we relied primarily on the income-based approach utilizing the discounted cash flow method to determine enterprise value. The discounted cash flow analysis incorporated three different scenarios based on different exit or terminal values, each incorporating three different market condition assumptions which were probability weighted. Assumptions utilized in each discounted cash flow scenario were:

 

  Ÿ  

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

 

  Ÿ  

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

 

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  Ÿ  

a terminal value multiple, which is applied to our last year of discretely forecasted operating results to calculate the residual value of our future cash flows.

The enterprise value was then allocated to our shares of redeemable preferred stock, preferred stock, warrants to purchase shares of redeemable preferred stock and common stock, and common stock, using option pricing theory. This methodology treats the various components of our capital structure as a series of call options on the proceeds expected from a future liquidity event. These call options are then valued using the Black-Scholes option pricing model. This model estimates the fair value of each individual security based on the enterprise value of the Company and assumptions based on the securities’ rights and preferences. The option pricing method also requires assumptions regarding the anticipated timing of a potential liquidity event, such as an initial public offering, and the estimated volatility of our equity securities. For this purpose, an initial public offering was assumed to occur in three to five years and estimates of the volatility of our stock were based on available information on the volatility of capital stock of comparable publicly traded companies. The value of each of the call options is deducted from the enterprise value with the remainder being the value attributed to the common stock. A discount for lack of marketability of 20% was applied to arrive at the fair value of our common stock. On the basis of this analysis the board of directors estimated the fair value of our common stock to be $12.15 per share as of April 30, 2008, which was substantially unchanged from the $12.00 valuation as of the closing of the InfoSpace Mobile acquisition.

Over the remainder of 2008 and the early part of 2009, we completed much of the post-acquisition integration of InfoSpace Mobile and other restructuring of our business. Financial results were better than expected over this period but economic conditions continued to deteriorate which reduced our confidence in our longer-term forecasts and expectations regarding the timing and potential for a public stock offering. For common stock valuation purposes, the impact of the improved short-term operating performance was assumed to be offset by the greater uncertainty regarding future prospects. On this basis, the board of directors estimated that the fair value of our common stock continued to be $12.15 per share on February 5, 2009 and May 4, 2009.

In the second quarter of 2009, we experienced improvements in our operating performance and in the economic outlook, including in the capital markets, which led our board of directors to perform another valuation of our common stock, after an extensive process described herein involving the audit committee, management and a third-party valuation firm. Greater than expected operating efficiencies achieved recently, higher projections of future growth with greater confidence and giving greater weight to a public stock offering in a two-year time frame resulted in an increase in value to $15.00 per share as of June 30, 2009. Our compensation committee approved stock option grants, primarily for new employees, on August 5, 2009 subject to completion of this valuation. Prior to completion of the valuation for June 30, 2009, the board of directors determined the need to perform another common stock valuation as of September 30, 2009, based on events during the third quarter. Our operating performance continued to improve during the third quarter and discussions occurred with several investment banks regarding a potential initial public offering of our common stock in 2010. Based primarily on greater weight placed on a near-term public stock offering and a reduction in the discount for the lack of marketability from 20% used in earlier valuations to 5%, the common stock was valued at $19.65 per share as of September 30, 2009. Since the valuations as of June 30, 2009 and September 30, 2009 were both finalized by the board of directors on December 11, 2009, the options approved on August 5, 2009, were granted at the $15.00 price, but due to the increase in fair value of our common stock to $19.65, will be treated as “in the money” grants on December 11, 2009.

Restricted stock is granted to certain employees as part of their total compensation package. All grants of restricted stock prior to October 25, 2006 are fully vested except for 24,509 shares which vest in April 2010. All restricted shares granted on or after October 25, 2006 are subject to a double trigger vesting requirement consisting of time-based vesting and occurrence of a qualified sale or qualified

 

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public offering which would include the offering contemplated by this prospectus. These employees are not required to be employed as of the occurrence of a qualified event to receive shares for which the time-based vesting has occurred based on the period of their employment. If no qualified event occurs within 10 years, the stock is forfeited. Under these terms, vesting of the shares is not probable until a qualified event is probable; therefore, no compensation expense has been recognized related to the grant of these shares of restricted stock. Upon closing of a qualified sale or qualified public offering, those shares subject to the double trigger for which time-based vesting has occurred will become vested and we will immediately recognize compensation expense for those shares. Had a qualified event occurred on March 31, 2010, the compensation expense recognized immediately would have been $16.3 million and additional compensation expense of approximately $13.2 million will be recognized over a weighted-average period of 2.9 years.

As of March 5, 2010, we updated our valuation of our common stock utilizing a methodology consistent with that described for the valuation work of our common stock in 2009, including the involvement of the audit committee, management and a third-party valuation firm. Based primarily on updates to our financial projections to incorporate current performance and market conditions, we determined the common stock was valued at $20.40 per share as of March 5, 2010. As part of the assessment, we increased the discount for the lack of marketability to 7.5% to reflect the market conditions for initial public offerings. The estimated offering price range shown on the front cover of the prospectus is based on a variety of factors, including but not limited to, general economic conditions and financial market conditions. The price range is lower than the March 5, 2010 valuation due to the overall impact of these factors.

Discontinued operations

In connection with our business strategy reassessment initiated in 2007, we exited two lines of business in 2007 and 2008, the results of which are reflected in our operating results as discontinued operations. The discontinued lines of business were direct to consumer, which was sold in two transactions in 2007 and 2008, and media and entertainment, which was discontinued in 2008. We have reclassified all of the revenues and associated operating expenses which would no longer be incurred upon disposition of the business to discontinued operations for all periods presented. Any gains and losses from the sale of the businesses are also reported in discontinued operations.

 

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Results of Operations

The following tables set forth components of our results of operations, including both continuing and discontinued operations, for the periods indicated:

 

     Years Ended December 31,     Three Months Ended
March 31,
 
     2007     2008     2009     2009     2010  
                       Unaudited  
     (In thousands)  

Revenue

          

Managed services

   $ 31,772      $ 85,677      $ 81,403      $ 20,222      $ 20,881   

Professional services

     3,399        17,474        32,292        3,054        8,199   
                                        

Total revenues

     35,171        103,151        113,695        23,276        29,080   
                                        

Operating expenses

          

Direct third-party expenses

     3,709        5,451        9,485        1,171        1,305   

Datacenter and network operations, excluding depreciation

     9,468        33,000        31,786        8,683        8,034   

Product development and sustainment, excluding depreciation

     16,229        52,261        31,389        7,677        8,182   

Sales and marketing, excluding depreciation

     7,119        10,228        11,900        2,989        3,655   

General and administrative, excluding depreciation

     10,334        26,052        20,841        5,175        5,264   

Depreciation and amortization

     10,322        21,559        13,208        3,777        3,041   

Restructuring

     1,283        3,236        2,058        235        407   

Goodwill and long-lived asset impairment charges

     26,867        29,130        5,806        —          —     

Abandoned transaction charge

     2,600        —          —          —          —     
                                        

Total operating expenses

     87,931        180,917        126,473        29,707        29,888   
                                        

Operating loss

     (52,760     (77,766     (12,778     (6,431     (808
                                        

Other income (expense), net

          

Other income (expense)

     79        1,892        (1,657     (82     (258

Interest and investment income, net

     2,157        1,315        250        80        —     

Interest expense

     (1,081     (493     (220     (94     —     
                                        

Other income (expense), net

     1,155        2,714        (1,627     (96     (258
                                        

Loss from continuing operations, before income tax

     (51,605     (75,052     (14,405     (6,527     (1,066

Provision for income taxes

     —          1,776        1,896        444        467   
                                        

Loss from continuing operations

     (51,605     (76,828     (16,301     (6,971     (1,533

Loss from discontinued operations

     (24,928     (1,072     —          —          —     

Loss from sale of discontinued operations

     (1,360     (127     —          —          —     
                                        

Net loss

   $ (77,893   $ (78,027   $ (16,301   $ (6,971   $ (1,533
                                        

 

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Depreciation and amortization by function:

 

     Years Ended December 31,    Three Months
Ended March 31,
     2007    2008    2009    2009    2010
     (In thousands)

Datacenter and network operations

   $ 7,310    $ 16,824    $ 8,890    $ 2,497    $ 1,992

Product development and sustainment

     1,548      2,237      1,962      586      428

Sales and marketing

     307      2,075      1,960      572      524

General and administrative

     1,157      423      396      122      97
                                  

Total depreciation and amortization

   $ 10,322    $ 21,559    $ 13,208    $ 3,777    $ 3,041
                                  

 

     Years Ended December 31,     Three Months
Ended

March 31,
 
       2007         2008         2009         2009         2010    

As a Percentage of Total Revenues from
Continuing Operations

          

Total revenues

   100   100   100   100   100

Operating expenses

          

Direct third-party expenses

   11      5      8      5      4   

Datacenter and network operations, excluding depreciation

   27      32      28      38      28   

Product development and sustainment, excluding depreciation

   46      51      28      33      28   

Sales and marketing, excluding depreciation

   20      10      10      13      13   

General and administrative, excluding depreciation

   29      25      18      22      18   

Depreciation and amortization

   29      21      12      16      10   

Other charges

   87      31      7      1      2   
                              

Total operating expenses

   250      175      111      128      103   
                              

Operating loss

   (150   (75   (11   (28   (3

Other income (expense), net

   3      3      (1   0      (1
                              

Loss from continuing operations, before income tax

   (147   (73   (13   (28   (4

Provision for income taxes

   0      2      2      2      1   
                              

Loss from continuing operations

   (147 )%    (74 )%    (14 )%    (30 )%    (5 )% 
                              

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Total Revenues

 

     Three Months Ended
March 31,
   Change  
     2009    2010    $    %  
     (Dollars in thousands)  

Managed services

   $ 20,222    $ 20,881    $ 659    3.3

Professional services

     3,054      8,199      5,145    168.5   
                       

Total revenues

   $ 23,276    $ 29,080    $ 5,804    24.9
                       

Our total revenues increased $5.8 million, or 24.9%, for the three months ended March 31, 2010 compared to the corresponding 2009 period. Managed services revenues accounted for 71.8% and 86.9% of our revenues for the three month periods ended March 31, 2010 and 2009, respectively, while professional services accounted for 28.2% and 13.1%, respectively. The $5.1 million increase in

 

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professional services revenues includes $4.9 million of revenues recognized due to an amendment of a contract with a customer during the quarter which established that the arrangement meets the self-host criteria for revenue recognition. As a result of this amendment the contract met the criteria for recognition of the balance of the setup fee that had been previously deferred. The amendment converted the managed service component of the contract from a fixed monthly fee arrangement with predetermined periodic increases to a fixed monthly subscription fee plus a variable monthly subscription fee based on usage.

Managed service revenues increased $0.7 million, or 3.3% for the three months ended March 31, 2010 compared to the prior year period due to higher storefront revenues. Variable user- and transaction-based fees made up approximately 52% and 76% of our managed services revenues for the three months ended March 31, 2010 and 2009, respectively, the decrease due primarily to conversion of a storefront contract from a transaction based to a fixed fee arrangement upon extension of the contract early in the fourth quarter of 2009. The average monthly number of users of our non-messaging based solutions decreased to approximately 34.4 million for the three months ended March 31, 2010 from 34.5 million in the comparable period of 2009.

We generated 96% of our revenues in the U.S. for the three months ended March 31, 2010. Revenues from our five largest customers, represented 90% of our total revenues for the three months ended March 31, 2010, with AT&T and Verizon Wireless accounting for 40% and 39% of total revenues, respectively. For the three months ended March 31, 2009, revenues from our five largest customers represented 88% of our total revenues, with AT&T and Verizon Wireless accounting for 44% and 25% of total revenues, respectively. No other customers accounted for more than 10% of our revenues during these periods.

Operating expenses

 

     Three Months Ended
March 31,
   Change  
     2009    2010    $     %  
     (Dollars in thousands)  

Direct third-party expenses

   $ 1,171    $ 1,305    $ 134      11.4

Datacenter and network operations, excluding depreciation

     8,683      8,034      (649   (7.5

Product development and sustainment, excluding depreciation

     7,677      8,182      505      6.6   

Sales and marketing, excluding depreciation

     2,989      3,655      666      22.3   

General and administrative, excluding depreciation

     5,175      5,264      89      1.7   

Depreciation and amortization

     3,777      3,041      (736   (19.5

Restructuring

     235      407      172      73.2   
                        

Total operating expenses

   $ 29,707    $ 29,888    $ 181      0.6
                        

Our operating expenses were $29.9 million for the three months ended March 31, 2010 compared to $29.7 million for the three months ended March 31, 2009. The increase of $0.2 million, or 0.6%, consists of increases in most expense categories, largely offset by expense reductions in datacenter and network operations and depreciation and amortization.

Direct third party expenses

Direct third party expenses increased $0.1 million, or 11.4%, for the three months ended March 31, 2010 compared to the corresponding 2009 period. The increase is due primarily to higher usage-based licensing expenses for customer-specific third-party software as user volume increases.

 

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Datacenter and network operations, excluding depreciation

Datacenter and network operations expense, excluding depreciation, decreased $0.6 million, or 7.5%, for the three months ended March 31, 2010 compared to the corresponding 2009 period. The decrease is primarily due to cost savings from consolidating datacenter operations and renegotiating certain vendor contracts.

Product development and sustainment, excluding depreciation

Product development and sustainment expense, excluding depreciation, increased $0.5 million, or 6.6%, for the three months ended March 31, 2010 compared to the corresponding 2009 period. The additional expense primarily relates to the recognition of $1.2 million in deferred expenses associated with the deferred revenues recognized during the first quarter of 2010 due to amendment of a customer contract.

Sales and marketing, excluding depreciation

Sales and marketing expense, excluding depreciation, increased $0.7 million, or 22.3%, for the three months ended March 31, 2010 compared to the corresponding 2009 period. The increase is due to higher personnel expenses, primarily from our international expansion efforts.

General and administrative, excluding depreciation

General and administrative expense, excluding depreciation, increased $0.1 million, or 1.7%, for the three months ended March 31, 2010 compared to the corresponding 2009 period. The increase is due to additional strategy consulting fees incurred.

Depreciation and amortization

Depreciation and amortization expense decreased $0.7 million, or 19.5%, for the three months ended March 31, 2010 compared to the corresponding 2009 period. The decrease is primarily due to the datacenter consolidation and certain assets from the InfoSpace Mobile acquisition now being fully depreciated.

Restructuring

During the first quarter of 2009, we incurred $0.2 million of restructuring charges related to the relocation of our headquarters from Durham, North Carolina to Bellevue, Washington in 2008. In the first quarter of 2010, we incurred a $0.4 million expense upon disposition of the remaining asset held for sale related to the relocation.

Other income (expense), net

 

     Three Months Ended
March 31,
    Change  
         2009             2010        
     (In thousands)  

Other income (expense)

   $ (82   $ (258   $ (176

Interest and investment income, net

     80        —          (80

Interest expense

     (94     —          94   
                        

Total other income (expense), net

   $ (96   $ (258   $ (162
                        

 

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Other expense of $0.3 million for the three months ended March 31, 2010 consists primarily of expense related to the increase in fair value of our warrants to purchase redeemable preferred shares. The higher net interest and investment income in the first three months of 2009 reflects the higher investments in marketable securities during the period. We did not incur any interest expense in the first quarter of 2010 due to the repayment of our remaining outstanding debt in April 2009.

Provision for income taxes

 

     Three Months Ended
March 31,
   Change  
         2009            2010        $    %  
     (Dollars in thousands)  

Provision for income taxes

   $ 444    $ 467    $ 23    5.2

Income tax expense for the three months ended March 31, 2010 and 2009 primarily consist of a deferred U.S. tax provision for the difference between book and tax treatment of goodwill associated with the acquisition of InfoSpace Mobile. We maintain a full valuation allowance against our net deferred tax assets which precludes us from recognizing a tax benefit for our current operating losses. Our lack of profitability historically is a key factor in concluding there is insufficient evidence of our ability to realize any future benefits from our deferred tax assets.

Net loss

 

     Three Months
Ended March 31,
    Change
     2009     2010    
     (In thousands)

Net loss

   $ (6,971   $ (1,533   $ 5,438

The major factor leading to the $5.4 million decrease in net loss to $1.5 million was the $5.8 million increase in total revenues resulting from increases in professional service and managed service revenues of $5.1 million and $0.7 million, respectively. Total operating expenses were largely the same in both periods.

Year ended December 31, 2009 compared to the year ended December 31, 2008

Total revenues

 

     Year Ended
December 31,
   Change  
     2008    2009    $     %  
     (Dollars in thousands)  

Managed services

   $ 85,677    $ 81,403    $ (4,274   (5.0 )% 

Professional services

     17,474      32,292      14,818      84.8   
                        

Total revenues

   $ 103,151    $ 113,695    $ 10,544      10.2
                        

Our total revenues increased $10.5 million, or 10.2%, for the year ended December 31, 2009 compared to the year ended December 31, 2008. Managed services revenue accounted for 71.6% and 83.1% of our revenue for the years ended December 31, 2009 and 2008, respectively, while professional services accounted for 28.4% and 16.9%, respectively. The increase in revenues was due to the $14.8 million increase in professional services revenue, partially offset by the $4.3 million reduction in managed services revenue. The increase in professional services revenue was primarily due to a large portal customization and implementation project, which included $4.4 million of associated third-party computer hardware and software revenue, completed during 2009 for which we

 

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recognized the revenue based on completion milestones. Our professional services revenue can vary significantly from period to period due to the timing and magnitude of large customization and implementation projects.

The decrease in managed services revenue in 2009 consisted primarily of a $3.6 million reduction in storefront revenue due to the expiration of several small contracts and a $3.7 million reduction in storefront revenue due to declining transaction activity from two large customers. User- and transactional-based fees made up approximately 74% and 70% of our managed services revenue for 2008 and 2009, respectively, the decrease being primarily due to the decline in storefront transaction volumes. The average monthly number of users of our non-messaging based solutions increased to approximately 35 million in 2009 from approximately 33 million in 2008, although related managed services revenue did not increase due to mix changes among customers and associated pricing differences. The storefront contract expirations will not significantly impact managed services revenue comparisons with 2010 revenue as the expirations occurred late in 2008 or early in 2009. Managed services revenues are expected to increase in 2010 due in part to recent storefront contract modifications. The large portal project and two smaller portal implementation projects completed in the latter part of 2009 are expected to result in higher managed service revenues as the number of mobile subscriber utilizing those services increases.

We generated 95% of our revenue in the U.S. for the year ended December 31, 2009. Revenue from our current five largest customers, represented 84% of our total revenue for the year ended December 31, 2009, with AT&T and Verizon Wireless accounting for 53% and 20% of total revenue, respectively. For the year ended December 31, 2008, revenue from our five largest customers represented 67% of our total revenue, with AT&T and Verizon Wireless accounting for 42% and 12% of total revenue, respectively. No other customers accounted for more than 10% of our revenue during these periods.

Operating expenses

 

     Year Ended
December 31,
   Change  
     2008    2009    $     %  
     (Dollars in thousands)  

Direct third-party expenses

   $ 5,451    $ 9,485    $ 4,034      74.0

Datacenter and network operations, excluding depreciation

     33,000      31,786      (1,214   (3.7

Product development and sustainment, excluding depreciation

     52,261      31,389      (20,872   (39.9

Sales and marketing, excluding depreciation

     10,228      11,900      1,672      16.3   

General and administrative, excluding depreciation

     26,052      20,841      (5,211   (20.0

Depreciation and amortization

     21,559      13,208      (8,351   (38.7

Restructuring

     3,236      2,058      (1,178   (36.4

Goodwill and long-lived asset impairment charges

     29,130      5,806      (23,324   (80.1
                        

Total operating expenses

   $ 180,917    $ 126,473    $ (54,444   (30.1 )% 
                        

Our operating expenses were $126.5 million for the year ended December 31, 2009 compared to $180.9 million for the year ended December 31, 2008. The decrease of $54.4 million, or 30.1%, is primarily attributable to the $20.9 million decrease in product development expense, the $5.2 million decrease in general and administrative expense, the $8.4 million decrease in depreciation and amortization expense and significantly lower goodwill and long-lived asset impairment charges for year ended December 31, 2009 compared to the prior year period. Excluding the impact of restructuring and goodwill and long-lived asset impairment charges, operating expenses decreased $29.9 million during

 

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2009, even though direct third-party expenses increased $4.0 million. The reduction is primarily driven by approximately $16 million of cost efficiencies from outsourcing a portion of our development activities to India and operating efficiencies resulting from the integration and restructuring activities we initiated in 2008 after the acquisition of InfoSpace Mobile. These activities included the relocation of our corporate headquarters to Bellevue, Washington, the cost efficiencies from outsourcing a portion of our development activities and consolidation of our datacenters.

Direct third-party expenses

Direct third-party expenses increased $4.0 million, or 74.0%, for the year ended December 31, 2009 compared to the corresponding 2008 period. The increase is primarily due to the cost of third-party computer hardware and software purchased on behalf of a major customer as part of a large custom portal development and implementation project.

Datacenter and network operations, excluding depreciation

Datacenter and network operations expense, excluding depreciation, decreased $1.2 million, or 3.7%, for the year ended December 31, 2009 compared to the corresponding 2008 period. The decrease is primarily due to lower labor related costs, as we have consolidated datacenter operations since completing the InfoSpace Mobile acquisition in December 2007.

Product development and sustainment, excluding depreciation

Product development and sustainment expense, excluding depreciation, decreased $20.9 million, or 39.9%, for the year ended December 31, 2009 compared to the corresponding 2008 period. The decrease is primarily due to approximately $16 million of cost efficiencies from outsourcing a portion of our development activities to India. The remaining expense reduction was due primarily to lower labor-related costs as a result of operating efficiencies realized from the integration and restructuring activities we initiated in 2008.

Sales and marketing, excluding depreciation

Sales and marketing expense, excluding depreciation, increased $1.7 million, or 16.3%, for the year ended December 31, 2009 compared to the corresponding 2008 period. The increase is due to increases in our sales and marketing headcount as we grow the business.

General and administrative, excluding depreciation

General and administrative expense, excluding depreciation, decreased $5.2 million, or 20.0%, for the year ended December 31, 2009 compared to the corresponding 2008 period. The decrease is primarily due to lower labor-related costs as a result of operating efficiencies realized from the integration and restructuring activities we initiated in 2008.

Depreciation and amortization

Depreciation and amortization expense decreased $8.4 million, or 38.7%, for the year ended December 31, 2009 compared to the corresponding 2008 period. The decrease is primarily due to lower depreciation expense as a result of consolidating datacenters, impairing the remaining value of certain datacenter assets determined to be no longer recoverable and impairing certain capitalized software development costs and other amortized intangibles as noted in the long-lived asset impairment charges discussed below.

 

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Restructuring

During the year ended December 31, 2009, we incurred $2.1 million of restructuring charges to close our office in the United Kingdom, move our remaining employees in Durham, North Carolina from our former headquarters facility to a smaller facility and assign the lease for our former headquarters facility to a third party.

During the year ended December 31, 2008, we incurred $3.2 million of restructuring charges related to relocating our headquarters and certain key personnel to Bellevue, Washington and eliminating redundant functions and positions as a result of the InfoSpace Mobile acquisition.

Goodwill and long-lived asset impairment charges

The $5.8 million of impairments in the 2009 period relate primarily to writing off the remaining asset balances of $1.9 million and $3.3 million associated with the GPW customer list and capitalized software, respectively.

The $29.1 million of impairments in the 2008 period consisted of:

 

  Ÿ  

$12.7 million related to restructuring of the business following the InfoSpace Mobile acquisition, including $8.2 million to impair computer software, furniture and fixtures and leasehold improvements associated with moving our headquarters to Bellevue, Washington and the planned shutdown of certain datacenter facilities, as well as $4.5 million for the planned shutdown of the Fuel software solution platform;

 

  Ÿ  

$6.8 million to impair the remaining GPW goodwill;

 

  Ÿ  

$4.6 million related to software assets from the InfoSpace Mobile acquisition based on our pricing decision to bundle our search functionality with our portal solution;

 

  Ÿ  

$3.8 million related to software assets from the InfoSpace Mobile acquisition based on the likelihood that two significant customers would no longer be utilizing our storefront solution; and

 

  Ÿ  

$1.2 million to impair the remaining customer relationship intangible from our acquisition of M7 Networks, Inc. in 2005.

Other income (expense), net

 

     Year Ended
December 31,
    Change  
     2008     2009    
     (In thousands)  

Other income (expense)

   $ 1,892      $ (1,657   $ (3,549

Interest and investment income, net

     1,315        250        (1,065

Interest expense

     (493     (220     273   
                        

Total other income (expense), net

   $ 2,714      $ (1,627   $ (4,341
                        

Other expense of $1.7 million for the year ended December 31, 2009 consists primarily of $1.5 million in expense related to the increase in fair value of our warrants to purchase redeemable preferred shares. Other income of $1.9 million for the year ended December 31, 2008 is primarily the result of billings to InfoSpace, Inc. (during an agreed transition period) for use of shared facilities acquired as part of the InfoSpace Mobile acquisition at the end of 2007. The higher net interest and investment income in 2008 primarily reflects the higher average cash and investment balances during the 2008 period relative to 2009. Our interest expense decreased to $0.2 million for the year ended December 31, 2009 compared to $0.5 million for the year ended December 31, 2008, due to the repayment of our remaining outstanding debt in April 2009.

 

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Provision for income taxes

 

     Year Ended
December 31,
   Change  
     2008    2009    $    %  
     (Dollars in thousands)  

Provision for income taxes

   $ 1,776    $ 1,896    $ 120    6.8

Income tax expense for years ended December 31, 2009 and 2008 primarily consists of a U.S. tax provision for the difference between book and tax treatment of goodwill associated with the acquisition of InfoSpace Mobile. We maintain a full valuation allowance against our net deferred tax assets which precludes us from recognizing a tax benefit for our current operating losses. Our lack of profitability historically is a key factor in concluding that there is insufficient evidence of our ability to realize any future benefits from our deferred tax assets.

Discontinued operations

 

     Year Ended
December 31,
   Change
     2008     2009   
     (In thousands)

Loss from discontinued operations

   $ (1,072   $ —      $ 1,072

Loss from sale of discontinued operations

   $ (127   $ —      $ 127

The loss from discontinued operations in 2008 consists of losses from the portion of the direct to consumer business line sold in 2008 and the media and entertainment business that was discontinued in 2008.

Net loss

 

     Year Ended
December 31,
    Change
     2008     2009    
     (In thousands)

Net loss

   $ (78,027   $ (16,301   $ 61,726

The major factors leading to the $61.7 million decrease in net loss to $16.3 million were:

 

  Ÿ  

A $10.5 million increase in revenue resulting from increased professional services revenues, partially offset by reduced managed services revenue;

 

  Ÿ  

A $54.4 million reduction in total operating expenses due primarily to a $23.3 million reduction in impairment charges, approximately $16 million expense reduction associated with the outsourcing of certain development activities to India and the remaining reduction was due to the late 2008 completion of many major elements of the plan to integrate the InfoSpace Mobile acquisition. This plan included elimination of most redundant functions and staffing, the relocation of our headquarters to Bellevue, Washington, and consolidation of certain datacenters; and

 

  Ÿ  

A $1.2 million reduction in losses from discontinued operations and related losses upon disposition.

These improvements in operating results were partially offset by a $4.3 million reduction in other income (expense), net due primarily to the absence of fees in 2009 that were charged to InfoSpace, Inc. in 2008 (during an agreed transition period) for InfoSpace’s use of certain facilities that we acquired in the InfoSpace Mobile acquisition at the end of 2007.

 

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Year ended December 31, 2008 compared to the year ended December 31, 2007

Total revenues

 

     Year Ended December 31,    Change  
           2007                2008          $    %  
     (Dollars in thousands)  

Managed services

   $ 31,772    $ 85,677    $ 53,905    169.7

Professional services

     3,399      17,474      14,075    414.1   
                       

Total revenues

   $ 35,171    $ 103,151    $ 67,980    193.3
                       

Our total revenues were $103.2 million for the year ended December 31, 2008 compared to $35.2 million for the year ended December 31, 2007, an increase of $68.0 million, or 193.3%. This increase was primarily attributable to the acquisition of InfoSpace Mobile at the end of 2007. InfoSpace Mobile generated approximately $55 million of revenue in 2007, prior to our acquisition of the business. The organic growth of Motricity revenue was approximately 13% from 2007 to 2008, and the growth rate from the acquired InfoSpace Mobile business was slightly higher at 15%. In both instances, we believe this growth represents additional revenues from existing customers. The structure of the customer arrangements under the InfoSpace Mobile business model resulted in a higher percentage of revenue from professional services relative to Motricity, which is reflected in the high growth in professional services revenue in our 2008 results.

Operating expenses

 

     Year Ended December 31,    Change  
           2007                2008          $     %  
     (Dollars in thousands)  

Direct third-party expenses

   $ 3,709    $ 5,451    $ 1,742      47.0

Datacenter and network operations, excluding depreciation

     9,468      33,000      23,532      248.5   

Product development and sustainment, excluding depreciation

     16,229      52,261      36,032      222.0   

Sales and marketing, excluding depreciation

     7,119      10,228      3,109      43.7   

General and administrative, excluding depreciation

     10,334      26,052      15,718      152.1   

Depreciation and amortization

     10,322      21,559      11,237      108.9   

Restructuring

     1,283      3,236      1,953      152.2   

Goodwill and long-lived asset impairment charges

     26,867      29,130      2,263      8.4   

Abandoned transaction charge

     2,600      —        (2,600   —     
                        

Total operating expenses

   $ 87,931    $ 180,917    $ 92,986      105.7
                        

Our operating expenses were $180.9 million for the year ended December 31, 2008 compared to $87.9 million for the year ended December 31, 2007, an increase of $93.0 million, or 105.7%. In 2008, operating expenses were significantly higher relative to 2007 as a result of our acquisition of InfoSpace Mobile. We operated for much of 2008 with duplicate work forces and facilities in North Carolina and Washington while we executed acquisition integration activities and relocated our headquarters to Bellevue, Washington. As a percentage of revenue, our total operating expenses decreased to 175% for the year ended December 31, 2008 compared to 250% for 2007, primarily as a result of the significant revenue increase, proportionately lower asset impairment charges and decreases in other operating expenses in the second half of 2008 as initial integration activities were completed.

Direct third-party expenses

Direct third-party expenses of $5.5 million for the year ended December 31, 2008 represents an increase of $1.7 million, or 47.0%, compared to 2007. Direct third-party expenses as a percentage of

 

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revenue decreased to 5.3% for the year ended December 31, 2008 compared to 10.5% in 2007, reflecting better leverage on content-related expenses in 2008 primarily as a result of the significant increase in revenue.

Datacenter and network operations, excluding depreciation

Datacenter and network operations expense, excluding depreciation, increased $23.5 million, or 248.5%, for the year ended December 31, 2008 compared to the corresponding 2007 period. The increase is primarily due to the acquisition of InfoSpace Mobile, which had multiple, large datacenters with higher operating expenses. We operated for most of 2008 with duplicate infrastructure and also incurred additional operating expenses in connection with integrating the acquired infrastructure.

Product development and sustainment, excluding depreciation

Product development and sustainment expense, excluding depreciation, increased $36.0 million, or 222.0%, for the year ended December 31, 2008 compared to 2007. The increase is primarily due to the acquisition of InfoSpace Mobile at the end of 2007. InfoSpace Mobile operated with a substantially larger development organization, in part due to greater emphasis on professional services work, and relied more heavily on the use of higher cost contract labor. In addition, we operated for most of 2008 with duplicate resources to support and integrate the two different software infrastructures, mCore and Fuel, which are based on different technologies.

Sales and marketing, excluding depreciation

Sales and marketing expense, excluding depreciation, increased $3.1 million, or 43.7%, for the year ended December 31, 2008 compared to 2007. The increase is primarily due to the acquisition of InfoSpace Mobile. Sales and marketing expense as a percentage of revenue decreased to 9.9% for the year ended December 31, 2008 compared to 20.2% in 2007. The reduction in expenses as a percentage of revenue reflects our decision to reduce marketing and certain sales activities while we revamped our service offerings during the process of integrating the InfoSpace Mobile acquisition, including the mCore and Fuel solution and service platforms. During this integration process we enhanced and extended the capabilities of the mCore platform to provide a more comprehensive and robust offering, and thereafter began to market and sell services utilizing that platform more aggressively.

General and administrative, excluding depreciation

G&A expense, excluding depreciation, increased $15.7 million, or 152.1%, for the year ended December 31, 2008 compared to 2007. The increase was primarily due to the acquisition of InfoSpace Mobile, as we were operating with duplicate infrastructure and conducting acquisition integration activities for much of the year. G&A expense as a percentage of revenue decreased to 25.3% for the year ended December 31, 2008 compared to 29.4% in 2007, due mainly to elimination of redundant functions and staffing in the second half of 2008.

Depreciation and amortization

Depreciation and amortization expense increased from $10.3 million in 2007 to $21.6 million in 2008, or 108.9%, due to the InfoSpace Mobile acquisition at the end of 2007. A total of $58.4 million of property and equipment and amortizable intangible assets was recorded as part of the purchase price allocation for the acquisition. This increased the balance of our depreciable and amortizable assets by 193%, which resulted in the higher depreciation expense in 2008.

 

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Restructuring

During the year ended December 31, 2008, we incurred restructuring charges related to relocating our headquarters and certain key personnel to Bellevue, Washington, and eliminating redundant functions and positions following completion of the InfoSpace Mobile acquisition.

In the first half of 2007, we closed our San Diego and Los Angeles, California offices and relocated employees to our corporate headquarters (then located in Durham, North Carolina).

Goodwill and long-lived asset impairment charges

The $29.1 million of impairment charges in the 2008 period consisted of:

 

  Ÿ  

$12.7 million related to restructuring of the business following the InfoSpace Mobile acquisition, including $8.2 million to impair computer software, furniture and fixtures and leasehold improvements associated with moving our headquarters to Bellevue, Washington and the planned shutdown of certain datacenter facilities, as well as $4.5 million for the planned shutdown of the Fuel software solution platform;

 

  Ÿ  

$6.8 million to impair the remaining GPW goodwill;

 

  Ÿ  

$4.6 million related to software assets from the InfoSpace Mobile acquisition based on our pricing decision to bundle our search functionality with our portal solution;

 

  Ÿ  

$3.8 million related to software assets from the InfoSpace Mobile acquisition based on the likelihood that two significant customers would no longer be utilizing our storefront solution; and

 

  Ÿ  

$1.2 million to impair the remaining customer relationship intangible from our acquisition of M7 Networks, Inc. in 2005.

In 2007, we recorded asset impairment charges of $26.9 million to write off the goodwill associated with our mobile network operator reporting unit, which represents our primary operations, and a large portion of the goodwill associated with the GPW reporting unit. The annual impairment test performed on the mobile network operator reporting unit indicated that changes in consumer purchasing habits were producing lower revenues and margins than originally forecasted, resulting in a goodwill impairment of $12.1 million. In addition, the annual impairment test performed on the GPW reporting unit indicated that unanticipated competitive dynamics in the messaging marketplace generated lower revenues and cash flows than were originally projected, resulting in a goodwill impairment of $14.8 million.

Abandoned transaction charge

In 2007, we issued a warrant to purchase common shares to an affiliate of an existing investor as consideration for a financing commitment in connection with a proposed transaction that was not completed. The expense of $2.6 million represents the fair value of the warrant upon issuance.

Other income (expense), net

 

     Year Ended December 31,        
         2007             2008         Change  
     (In thousands)  

Other income

   $ 79      $ 1,892      $ 1,813   

Interest and investment income, net

     2,157        1,315        (842

Interest expense

     (1,081     (493     588   
                        

Total other income (expense), net

   $ 1,155      $ 2,714      $ 1,559   
                        

 

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Other income of $1.9 million for 2008 is primarily the result of billings to InfoSpace, Inc. (during an agreed transition period) for use of facilities that we acquired as part of the InfoSpace Mobile acquisition at the end of 2007. Our interest and investment income, net of interest expense, was $0.8 million for the year ended December 31, 2008 compared to $1.1 million for the year ended December 31, 2007 due to higher average cash and investment balances during 2007 and lower average debt balances during 2008.

Provision for income taxes

 

     Year Ended December 31,     
         2007            2008        Change
     (In thousands)

Income tax provision

   $ —      $ 1,776    $ 1,776

The income tax provision for the year ended December 31, 2008 primarily consists of a deferred U.S. tax provision for the difference between book and tax treatment of goodwill associated with the acquisition of the InfoSpace Mobile assets. We maintain a full valuation allowance against our net deferred tax assets which precludes us from recognizing a tax benefit for our current operating losses. Our lack of profitability historically is a key factor in concluding there is insufficient evidence of our future ability to realize any future benefits from our deferred tax assets.

Discontinued operations

 

     Year Ended December 31,     Change
           2007                 2008          
    

(In thousands)

Loss from discontinued operations

   $ (24,928   $ (1,072   $ 23,856

Loss from sale of discontinued operations

     (1,360     (127     1,233

The loss from discontinued operations in both periods consists primarily of losses from the direct to consumer business line sold in two transactions in 2007 and 2008 and the media and entertainment business discontinued in 2008. The substantially higher losses in 2007 resulted primarily from high marketing and operating expenses related to the media and entertainment business, which were largely mitigated late in 2007 in conjunction with the decision to wind down the business. Results for 2007 also include a goodwill impairment of $2.9 million related to the direct to consumer business.

Net loss

 

     Year Ended December 31,     Change  
           2007                 2008          
    

(In thousands)

 

Net loss

   $ (77,893   $ (78,027   $ (134

The net losses for both periods were consistent, although different factors contributed to the losses in each year as follows:

 

  Ÿ  

The InfoSpace Mobile acquisition, combined with revenue growth from both former InfoSpace Mobile and Motricity customer accounts resulted in 2008 revenue growth of $68.0 million, or 193.3%, compared to 2007. The growth in revenue was more than offset by the additional cost structure acquired as part of InfoSpace Mobile.

 

  Ÿ  

A $93.0 million (105.7%) increase in operating expenses from 2007 to 2008 primarily reflects the significant cost structure acquired in the InfoSpace Mobile acquisition. The operating expenses that experienced the most significant increases in 2008 included datacenter and

 

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network operations, which was up 248.5%, product development and sustainment, which was up 222.0%, G&A, which was up 152.1%, and depreciation and amortization, which was up 108.9%.

 

  Ÿ  

In 2007, the net loss included losses from discontinued operations and related sales of $26.3 million compared to losses of $1.2 million in 2008.

Quarterly Results of Operations

The following table sets forth our unaudited quarterly consolidated statements of operations and other data for the year ended December 31, 2009 and the three months ended March 31, 2010. We have prepared the unaudited statement of operations data on the same basis as the audited consolidated financial statements included in this prospectus, and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Quarterly results are not necessarily indicative of the operating results to be expected for the full fiscal year. You should read this data together with our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    For the Three Months Ended,  
    March 31, 2009     June 30, 2009     September 30, 2009     December 31, 2009     March 31, 2010  
    (In thousands, except per share data)  

Revenue

         

Managed services

  $ 20,222      $ 20,314      $ 20,417      $ 20,450      $ 20,881   

Professional services

    3,054        16,694        7,672        4,872        8,199   
                                       

Total revenues

    23,276        37,008        28,089        25,322        29,080   
                                       

Operating expenses

         

Direct third-party expenses

    1,171        5,366        1,611        1,337        1,305   

Datacenter and network operations, excluding depreciation

    8,683        7,786        7,185        8,132        8,034   

Product development and sustainment, excluding depreciation

    7,677        9,739        6,672        7,301        8,182   

Sales and marketing, excluding depreciation

    2,989        2,763        2,708        3,440        3,655   

General and administrative, excluding depreciation

    5,175        4,495        5,270        5,901        5,264   

Depreciation and amortization

    3,777        3,205        3,248        2,978        3,041   

Restructuring

    235        712        1,010        101        407   

Goodwill and long-lived asset impairment charges

    —          5,488        318        —          —     
                                       

Total operating expenses

    29,707        39,554        28,022        29,190        29,888   
                                       

Operating income (loss)

    (6,431     (2,546     67        (3,868     (808
                                       

Other income (expense), net

    (96     (198     (1,342     9        (258
                                       

Loss from continuing operations, before income taxes

    (6,527     (2,744     (1,275     (3,859     (1,066

Provision for income taxes

    444       444        517        491        467   
                                       

Net loss

    (6,971     (3,188     (1,792     (4,350     (1,533

Accretion of redeemable preferred stock and Series D1 preferred dividends

    (5,987     (5,987     (5,992     (5,990     (6,400
                                       

Net loss attributable to common stockholders

  $ (12,958   $ (9,175   $ (7,784   $ (10,340   $ (7,933
                                       

Basic and fully diluted net loss per share attributable to common stockholders

  $ (2.20   $ (1.55   $ (1.31   $ (1.79   $ (1.38

Weighted-average number of shares of common stock used in computing basic net loss per share attributable to common stockholders

    5,887        5,930        5,931        5,767        5,753   

Other Data

         

Percentage of managed services revenue that varies with number of users and transactions

    76     74     70     57     52

Average non-messaging based solution users (in millions)

    34.5        35.6        35.5        34.3        34.4   

 

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During the fourth quarter of 2009, we identified certain correcting adjustments in our financial results for the nine months ended September 30, 2009. These adjustments increased our net loss by $0.3 million, $0.06 million and $0.8 million in the quarters ended March 31, June 30 and September 30, 2009, respectively, and have been corrected in each of the quarters presented in the table above.

A reconciliation of Adjusted EBITDA to net loss from continuing operations for each of the quarterly periods is as follows:

 

     For the Three Months Ended,  
     March 31,
2009
    June 30,
2009
    September 30,
2009
    December 31,
2009
    March 31,
2010
 
     (In thousands)  

Net loss

   $ (6,971   $ (3,188   $ (1,792   $ (4,350   $ (1,533

Interest and other income (expense), net

     96        198        1,342        (9     258   

Provision for income taxes

     444       444        517        491        467   

Depreciation and amortization

     3,777        3,205        3,248        2,978        3,041   

Restructuring and asset impairments

     235        6,200        1,328        101        407   

Stock-based compensation

     532        556        580        511        505   
                                        

Adjusted EBITDA

   $ (1,887   $ 7,415      $ 5,223      $ (278   $ 3,145   
                                        

Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance.

Liquidity and Capital Resources

General

We have financed our operations primarily through issuances of redeemable preferred stock, borrowings under our revolving credit facility, and more recently, from cash provided by operating activities. We intend to use the net proceeds from this offering to fund investments in, and acquisitions of, competitive and complementary businesses, products or technologies. As of the date of this prospectus, we do not have any agreements or understandings in place with respect to any investments or acquisitions, although we are continually exploring potential opportunities.

Our principal sources of liquidity as of March 31, 2010 consisted of cash of $25.4 million and $8.1 million of availability under our $25.0 million revolving credit facility.

Our principal needs for liquidity have been to fund operating losses, working capital requirements, capital expenditures, acquisitions and for debt service. We expect that working capital requirements, capital expenditures and acquisitions will continue to be our principal needs for liquidity over the near term. Working capital requirements are expected to increase as a result of our growth, both organically and through future acquisitions. The main portion of our capital expenditures has been, and is expected to continue to be, for datacenter facilities and equipment and product development. We believe that our cash flow from operations, available cash and cash equivalents (including the net proceeds from this offering) and available borrowings under our revolving credit facility will be sufficient to meet our liquidity needs for at least the next 12 months, although such sources of liquidity may not be sufficient to fund any significant acquisitions we might decide to pursue. Our Series H preferred stock becomes redeemable on August 31, 2013. On or after such date, upon request of at least a majority of the then outstanding shares of Series H preferred stock, we must redeem the Series H preferred stock in immediately available funds or by the issuance of a promissory note which shall bear simple interest at the rate of 4% per annum and shall be payable in eight consecutive quarterly installments with the first such installment becoming due and payable on the first anniversary of the redemption payment date (determined once such written request is received); provided, however, that in lieu of receiving the redemption payment in the form of a

 

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promissory note, any holder of Series H preferred stock may instead elect to be redeemed quarterly and receive the redemption payment in eight consecutive quarterly installments. Consequently, we will need to have sufficient liquidity to permit us to redeem the outstanding Series H preferred stock on or after August 31, 2013 or satisfy our obligations under the promissory notes issued. Our existing revolving credit facility matures on April 13, 2011. We anticipate that to the extent we require additional liquidity, we will seek to increase borrowing availability under our existing credit facility, pursue a new, expanded bank borrowing facility, explore additional debt or equity financing options or pursue a combination of some or all of these alternatives.

The credit markets have experienced extreme volatility and disruption that reached unprecedented levels during late 2008 and through much of 2009. The market for new debt financing (including bank borrowing) was extremely limited, and in some cases debt financing was available only on very expensive terms or not at all. While market conditions have improved recently, the credit markets—and the capital markets generally, including the equity markets—remain volatile and capital availability remains relatively limited. Accordingly, if we require additional debt or equity financing, we may not be able to obtain it on terms we consider favorable to us or at all. In addition, our liquidity and our ability to meet our obligations and fund our capital requirements depends upon the future financial performance of our business, which is subject to general economic, financial and other factors that are beyond our control. While the severe recession that negatively affected the global economy beginning in 2008 may be coming to an end, general economic conditions and the prospects for renewed economic growth throughout the world remain uncertain. Accordingly, we cannot assure you that our business will generate sufficient cash flow from operations, that future borrowings will be available under our credit facility or otherwise, or that additional sources of liquidity will be available in amounts sufficient to meet our future liquidity needs.

Although we have no specific current plans to do so, if we decide to pursue one or more significant strategic acquisitions, we would likely need to incur additional debt or sell additional equity to finance such transactions.

Cash Flows

As of March 31, 2010 and December 31, 2009, 2008, and 2007, we had cash and cash equivalents of $25.4 million, $35.9 million, $14.3 million and $67.4 million, respectively.

Operating Activities

In fiscal 2007, operating activities used $41.5 million in cash as a result of a net loss of $77.9 million, less non-cash items including depreciation and amortization of $10.9 million, goodwill and long-lived asset impairment charges of $29.7 million and an abandoned transaction charge of $2.6 million. Working capital sources of cash were related to a $2.7 million decrease in prepaid expenses and other assets and an increase in deferred revenue of $0.8 million. These sources of cash were primarily offset by an $11.9 million increase in accounts receivable due to accounts receivable balances from the InfoSpace Mobile acquisition.

In fiscal 2008, operating activities used $28.7 million in cash as a result of a net loss of $78.0 million, less non-cash items including depreciation and amortization of $21.6 million, goodwill and long-lived asset impairment charges of $29.1 million and stock-based compensation expense of $2.3 million. Working capital sources of cash were primarily related to a $2.0 million decrease in accounts receivable and an increase of $7.1 million in deferred revenue, attributable to increased professional services billings. These sources of cash were offset primarily by a $16.8 million decrease in accounts payable due primarily to payments of liabilities assumed as part of the InfoSpace Mobile acquisition in December 2007.

In fiscal 2009, operating activities provided $33.1 million of cash despite a net loss of $16.3 million, primarily as a result of cash from working capital sources and due to the inclusion of non-cash

 

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items in our operating results. Working capital sources of cash were primarily related to a $20.7 million decrease in accounts receivable due to strong collection efforts and the timing of collections surrounding our professional service projects and a $2.5 million increase in deferred revenue attributable primarily to increased billing for our professional services. Our accounts receivable terms are typically 30 to 45 days, and, for certain types of customers, can be up to 60 days. Non-cash items included in our operating results include depreciation and amortization amounts of $13.2 million, goodwill and long-lived asset impairment charges of $5.8 million, stock-based compensation expense of $2.2 million, deferred tax liability of $2.0 million and changes in the fair value of redeemable preferred stock warrants of $1.5 million.

In the first three months of fiscal 2009, operating activities used $1.8 million in cash as a result of net loss of $7.0 million, less non-cash items, including depreciation and amortization of $3.8 million and stock-based compensation expense of $0.5 million. Working capital sources of cash were primarily related to a $7.9 million decrease in accounts receivable due to strong collection efforts and the timing of collections surrounding our professional service projects. This source of cash was offset primarily by a $5.0 million decrease in accounts payable due primarily to payments of liabilities.

In the first three months of fiscal 2010, operating activities used $8.0 million primarily as a result of payments reducing accounts payable and accrued expenses by $6.0 million, a $6.9 million reduction in deferred revenue and the net loss of $1.5 million. These uses of cash were partially offset by a $1.7 million reduction in current and long-term assets, and non-cash items included in our operating results, including $3.0 million of depreciation and amortization, $0.5 million of stock-based compensation expense, a $0.5 million increase in deferred tax liability and a $0.4 million loss on disposition of assets held for sale.

Investing Activities

Investing activities have involved primarily purchases of businesses and capital expenditures. For the years ended December 31, 2007 and 2008, we had acquisition costs of $137.0 million (incurred to acquire InfoSpace Mobile) and $1.1 million, respectively. We incurred no acquisition costs during 2009 or the first three months of 2010. In 2009 and the first three months of 2010, our cash capital expenditures totaled $4.9 million and $2.3 million, respectively. Our capital expenditures are typically for routine purchases of computer equipment to maintain and upgrade our technology infrastructure and for development of software to provide services to our customers. We anticipate future capital expenditures for maintenance, support and enhancements of existing technology and continued investments in new technologies. Our software development investments consist primarily of development, testing and deployment of new applications and new functionality to existing applications. We expect our capital expenditures over the next year to increase to approximately $18 million due primarily to increased capitalized software development activity, which is expected to represent approximately half of the capital expenditures. Although we have financed some of these purchases in the past, we anticipate funding future capital expenditures with cash flows from operations. Additionally, in the first three months of 2010, we realized $1.2 million of cash associated with the sale of assets held for sale.

Financing Activities

Until recently, financing activities provided us with funding for all of our liquidity needs, including operating losses, capital expenditures and acquisitions. In 2007, we financed the acquisition of InfoSpace Mobile and subsequent operating needs of the business with proceeds from the issuance of Series H and I redeemable preferred stock, net of issuance costs, totaling $221.7 million.

Due to recent improvements in the operating performance of our business and the absence of any additional acquisitions, we repaid our outstanding debt in April 2009 and have not needed to borrow additional amounts under our credit facility or obtain other financing to fund operations and

 

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capital expenditures. However, we have used the revolving credit facility in the past to fund a portion of our operating needs and may need to do so again in the future. Our cash flows from operations fluctuate from period to period due to various factors, both known and unforeseen. These factors may include changes in working capital from inconsistent timing of cash receipts and payments for items such as accounts payable, incentive compensation, changes in deferred revenue, interest payments and other various items. In addition, significant acquisitions and organic growth impact net cash flows from operations due to growth in revenue and associated working capital requirements.

Credit Facility

We are party to a credit facility with Silicon Valley Bank pursuant to which we can borrow up to $25 million in secured loans. The availability under the credit facility is subject to a borrowing base calculated based on qualifying accounts receivable. The interest rate on any borrowings is based on the lender’s prime rate plus a margin ranging between 50 to 150 basis points depending on our trailing EBITDA. The minimum interest rate is 5.50%. The credit facility restricts, among other things, our ability to incur indebtedness, create or permit liens on our assets, declare or pay dividends and certain other restricted payments, consolidate, merge or recapitalize, acquire or sell assets, make certain investments, loans or other advances, and enter into transactions with affiliates. The credit facility requires us to maintain a “tangible net worth” of $15 million. The credit facility terminates in April 2011. As of December 31, 2009 and March 31, 2010, there were no outstanding amounts under the credit facility. As of March 31, 2010, we had borrowing capability of approximately $8.1 million.

Contractual Obligations and Other Commitments

There have been no material changes outside of the normal course of business to our contractual obligations and other commitments since December 31, 2009. As of December 31, 2009, our contractual obligations and other commitments were as follows:

 

     Payments due by Period
     Total    Less than
1 year
   1-3
years
   3-5 years    More than
5 years
     (In thousands)

Operating lease obligations(1)

   $ 12,512    $ 4,900    $ 4,908    $ 2,704    $ —  

Commitments to network service providers(2)

     6,274      4,135      2,139      —        —  

Additional contractual commitments(3)

     2,020      2,020      —        —        —  
                                  

Total

   $ 20,806    $ 11,055    $ 7,047    $ 2,704    $ —  
                                  

 

(1) Includes operating lease commitments for facilities and equipment that we have entered into with third parties. Also includes the payments associated with the lease of our former corporate headquarters in Durham, North Carolina that was assigned to a third party effective May 1, 2009. As a result of the assignment, we are required to pay 23 months of rent on behalf of the assignee and make a $0.3 million payment at the end of that period to subsidize future operating expenses. As of December 31, 2008, we had placed in escrow $0.95 million as security for our original lease, and that sum was returned to us upon assignment of the lease. As of December 31, 2009, we have placed in escrow $1.4 million as security for the last 10 payments to be made under the agreement to assign the lease.
(2) We have entered into several agreements with third-party network service providers, who provide additional operational support for our various datacenters.
(3) We have entered into a professional services agreement which expires on December 31, 2010.

Off-Balance Sheet Arrangements

We have no off-balance sheet financing arrangements or other financing activities with special-purpose entities other than our operating leases.

 

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Qualitative and Quantitative Disclosures about Market Risk

Interest Rate Risk

At March 31, 2010, we had cash and cash equivalents of $25.4 million. These amounts are held primarily in cash and money market funds. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.

We are exposed to interest rate risk to the extent we incur borrowings under our credit facility. Any borrowings under our revolving credit facility will bear interest at floating rates based on the lender’s prime rate plus a margin ranging between 50 to 150 basis points depending on our trailing EBITDA, with a minimum interest rate of 5.50%. For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant. We do not expect to incur significant borrowings under our credit facility in 2010, and therefore we do not believe that a 10% increase in interest rates would have a significant impact on our operating results, future earnings, or liquidity.

Effects of Inflation

Inflation generally affects us by increasing costs of labor, supplies and equipment. We do not believe that inflation has had any material effect on our business, financial condition or results of operations in the last three fiscal years. Although we do not expect that inflation or changing prices will materially affect our business in the foreseeable future, if our costs were to become subject to significant inflationary pressures, we might not be able to offset these higher costs fully through price increases. Our inability or failure to do so could harm our business, operating results and financial condition.

Recent Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board, or FASB, Emerging Issues Task Force issued authoritative guidance addressing revenue recognition arrangements with multiple deliverables. The guidance requires revenue to be allocated to multiple elements using relative fair value based on vendor specific objective evidence, third-party evidence, or estimated selling price. The residual method also becomes obsolete under this guidance. The new guidance is effective for fiscal years beginning on or after June 15, 2010. We are currently evaluating the impact of the implementation of this guidance on our financial position, results of operations and cash flows.

In January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this statement in the first quarter of fiscal 2010 did not have a material impact on our consolidated financial statements, as the principal impact from this update relates to our fair value measurements disclosure.

 

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BUSINESS

Overview

We are a leading provider of mobile data solutions that enable wireless carriers to deliver high value mobile data services to their subscribers. We provide a comprehensive suite of hosted, managed service offerings, which includes services to access the Internet using a mobile device, services to market and distribute a wide range of mobile content and applications, messaging services and billing support and settlement services. These services enable wireless carriers to deliver customized, carrier-branded mobile data services.

Our mCore service delivery platform provides the tools for mobile subscribers to easily locate and access personally relevant and location-based content and services, engage in social networking and download content and applications. We also leverage our data-rich insights into subscriber behavior and our user interface expertise to provide a highly personalized mobile data experience and targeted mobile marketing solutions. By enabling wireless carriers to deliver a personalized subscriber experience, we enhance their ability to attract and retain mobile subscribers, increase the average revenue per user for mobile data services, or mobile data ARPU, and reduce network overhead and operating costs. We also facilitate effective monetization for mobile content and application providers by making it easier for them to reach millions of targeted subscribers with customized offerings.

Our operations are predominantly based in the U.S., with international operations in the United Kingdom, the Netherlands, Indonesia and Singapore. Our customers include 4 of the top 10 global wireless carriers based on total wireless data revenue: Verizon Wireless, AT&T, Sprint and T-Mobile USA. Since 2005, Motricity has generated over $2.5 billion in gross revenue for our carrier customers through the sale of content and applications and powered over 50 billion page views through access to the mobile Internet. For the year ended December 31, 2009, we generated revenue of $113.7 million and incurred a net loss of $16.3 million. For the twelve months ended March 31, 2010, we generated revenue of $119.5 million and incurred a net loss of $10.9 million.

Industry Background

The Market for Mobile Data Services

The number of mobile subscribers has grown rapidly over the past 10 years. The Yankee Group, an independent market research firm, estimates that the number of mobile subscribers in the U.S. will grow from 285 million in 2009 to 304 million in 2013, and worldwide will grow from 4.4 billion in 2009 to 5.3 billion in 2013. Emerging markets, such as those in Southeast Asia, India and Latin America, are experiencing the most rapid growth in mobile subscribers. Early mobile subscribers used mobile phones primarily for voice services, as mobile data services were not available on the initial wireless networks. The Yankee Group estimates that the proportion of U.S. subscribers owning smartphones increased to 12% in 2009 from 9% in 2008 and 6% in 2007. The share of smartphones as a percentage of the overall mobile device market is projected to continue growing. With the advent of the Internet and the evolution of wireless networks and mobile phones, mobile subscribers have increased their demand for mobile content, including information, images, music and video, and for mobile applications, including games and productivity tools.

The Yankee Group estimates that the mobile data services market in the U.S. will grow from $40 billion in 2009 to $48 billion in 2013, and worldwide will grow from $195 billion in 2009 to $253 billion in 2013. The mobile data services market predominantly includes data access, content and applications, commerce and messaging services. We believe the current market for our services is the mobile content delivery platform market, which includes portals and storefronts. Given the complexity of this market, wireless carriers often use third-party content delivery platforms to deliver mobile data services to their subscribers. The Yankee Group estimates that the North American market for mobile content delivery

 

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platforms will grow from $553 million in 2009 to $862 million in 2013, which represents a compound annual growth rate of 12%, and worldwide will grow from $2.9 billion in 2009 to $4.3 billion in 2013, which represents a compound annual growth rate of 11%. This market is projected to continue to grow as wireless carriers continue to improve the speed and quality, and lower the total cost, of mobile data services, and as mobile phone manufacturers continue to develop and deliver mobile phones with increasing levels of features and functions, addressing mobile subscriber demand. Additionally, as mobile subscribers become more aware of the ever-increasing amount of available mobile content and applications, their use of mobile data services is projected to grow for the foreseeable future.

Wireless Carrier Dynamics

Wireless carriers operate in a highly competitive market and face growing challenges to attract and retain subscribers and expand total ARPU. As the demand for mobile data services continues to grow, the following industry dynamics affect wireless carriers:

Mobile Voice ARPU Declining.    As the market for mobile voice services has matured and become more commoditized, competition among wireless carriers to acquire and retain subscribers has intensified, placing greater downward pressure on voice services revenue. The Yankee Group estimates that monthly mobile voice ARPU in the U.S. will decline from $40.67 in 2009 to $36.34 in 2013, and worldwide will decline from $13.94 in 2009 to $11.89 in 2013.

Mobile Data ARPU Increasing.    The rising capabilities of data-enabled mobile devices combined with the increasing capacity and speed of wireless networks has resulted in significant growth in the demand for mobile data services. Mobile data ARPU has been increasing, which we believe is due to wireless carriers aggressively marketing new mobile data services and pricing plans to attract and retain mobile subscribers. The Yankee Group estimates that the monthly mobile data ARPU in the U.S. will increase from $12.15 in 2009 to $13.16 in 2013, and worldwide will grow from $3.88 in 2009 to $4.06 in 2013. As wireless carriers continue to spend billions of dollars upgrading their wireless networks to handle the accelerated growth in data traffic, they are expected to continue to focus on growing mobile data revenue.

Smartphone Market Share Increasing. With the launch of the newest versions of the iPhone, Android and Blackberry, smartphones are becoming an increased percentage of phones serviced by the wireless carriers. The Yankee Group estimates that the proportion of U.S. subscribers owning smartphones increased to 12% in 2009 from 9% in 2008 and 6% in 2007. The share of smartphones as a percentage of the overall mobile device market is projected to continue growing. We believe that these smartphone users tend to use more data services and have more full featured web browsers. As the percentage of smartphones increases further, wireless carriers will need to understand how to extend their mobile data services to allow for application and content delivery to these new phones.

Premium Content and Applications Revenue Increasing.    As the capabilities of mobile devices and mobile data networks continue to increase and as consumers come to expect more from their mobile experience, the market for premium content and applications will continue to expand. The Yankee Group estimates that consumer spending for premium mobile content and applications will grow from $9.5 billion in 2009 to $12.2 billion in 2013 in the U.S., and from $80.9 billion in 2009 to $114.9 billion in 2013 worldwide.

Competition Increasing.    The growth dynamics of the mobile data services market and mobile devices and their operating systems have attracted non-carrier participants into the market, including Apple and Google. These relatively new entrants are offering access to mobile content and applications through their own solutions and are capturing a greater portion of value being created in the mobile data market. We believe that, as Apple, Google and other participants continue to focus on

 

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this market opportunity, and as open standards continue to proliferate, wireless carriers will experience stronger competitive pressure to design, develop and deploy leading-edge mobile data service solutions that will enable them to compete in an increasingly open marketplace.

Mobile Subscriber Loyalty Being Challenged.    Retaining mobile subscribers has become more difficult given the wider adoption of number portability, in which subscribers are able to retain their phone numbers even if they change wireless carriers, and the accelerated adoption of prepaid mobile service plans, particularly in international markets. The difficulty in retaining subscribers grows as new competitive mobile devices and platforms are introduced into the market and as new entrants take more aggressive approaches toward acquiring new customers. Additional threats arise as Internet incumbents like Google and Yahoo! enter the mobile market and offer mobile subscribers alternative means to access and consume mobile data services.

Mobile Data Ecosystem Complexity Increasing.    A complex mobile data ecosystem has developed as a result of the large and growing mobile data services market opportunity, and the diversification of industry participants involved, including wireless carriers, mobile device manufacturers, operating system developers, and mobile content and application providers. This ecosystem will continue to change rapidly as new mobile devices and operating systems are introduced into the market, new mobile content and applications are developed, and as mobile subscribers continue to make greater demands for an enhanced and personalized subscriber experience.

Challenges of Internally Developed Solutions Increasing.    Historically, many wireless carriers provided mobile data services directly to their mobile subscribers through internally developed proprietary solutions. These solutions predominantly consisted of point solutions for specific needs. As the mobile data ecosystem becomes more complex, wireless carriers are challenged to manage the ever-changing dynamics in the mobile data services market. Wireless carriers have to spend significant time, capital and other resources to develop, implement, maintain and upgrade their internal solutions. As wireless carriers are increasingly required to focus their efforts on wireless network deployment and subscriber acquisition, they have faced greater challenges in delivering the type of high value subscriber experience required to compete and fully capitalize on opportunities within the mobile data services market.

Mobile Content and Application Provider Dynamics

Mobile content and application providers operate in a highly fragmented market and face increasing challenges to cost-effectively reach the broadest base of mobile subscribers and monetize their offerings. As the demand for mobile data services grow, the following industry dynamics affect mobile content and application providers:

Limited Reach and Distribution.    The mobile content and application provider community consists of hundreds of thousands of participants, most of whom, we believe, do not have the experience, scale or resources necessary to effectively and affordably access mobile subscribers.

Limited Infrastructure.    Most mobile content and application providers do not have the necessary infrastructure to effectively monetize their mobile offerings. They generally have limited capabilities with respect to delivery, quality assurance, purchase confirmation, billing and settlement. In addition, given the wide variety of mobile devices in the market, with different screen sizes and resolution, mobile content and applications must be adapted to each possible configuration in order to enhance the subscriber experience. Content and application providers continue to face challenges each year with non-delivered content and applications, poor customer service and mobile phone or wireless network compatibility issues.

 

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Mobile Subscriber Dynamics

As the mobile phone increasingly becomes an indispensable part of their everyday lives, mobile subscribers are demanding an enhanced, personalized subscriber experience, with easy access to content and applications on a real-time basis. As the demand for mobile data services grow, the following industry dynamics affect mobile subscribers:

Increasing Mobile Device Capabilities and Aggressive Pricing Plans.    Mobile subscribers are rapidly upgrading their mobile devices, and often select devices with the latest features and capabilities. In addition, through increased competition in the mobile data market, mobile subscribers have access to attractively priced mobile service plans and promotions.

Growth of Wireless in Emerging International Markets.    In many emerging international markets, mobile data services are expected to experience significa