S-1 1 d301887ds1.htm REGISTRATION STATEMENT ON FORM S-1 Registration Statement on Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on March 30, 2012

 

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-1

REGISTRATION STATEMENT

Under

the Securities Act of 1933

 

 

 

SERVICENOW, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware    7372         20-2056195

(State or other jurisdiction of

incorporation or organization)

  

(Primary Standard Industrial

Classification Code Number)

       

(I.R.S. Employer

Identification Number)

 

ServiceNow, Inc.

12225 El Camino Real, Suite 100

San Diego, California 92130

(858) 720-0477

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

 

 

 

Frank Slootman

Chief Executive Officer and President

ServiceNow, Inc.

12225 El Camino Real, Suite 100

San Diego, California 92130

(858) 720-0477

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

 

 

 

Please send copies of all communications to:

 

Gordon K. Davidson, Esq.

Robert A. Freedman, Esq.

Dawn H. Belt, Esq.

Fenwick & West LLP

801 California Street

Mountain View, CA 94041

(650) 988-8500

 

Robert Specker, Esq.

General Counsel

ServiceNow, Inc.

12225 El Camino Real, Suite 100
San Diego, California 92130
(858) 720-0477

 

Eric C. Jensen, Esq.

John T. McKenna, Esq.

Cooley LLP

3175 Hanover Street

Palo Alto, CA 94304

(650) 843-5000

 

 

 

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

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act 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 number of the earlier effective registration statement for the same offering.  ¨

 

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

 

Large accelerated filer  ¨

   

Accelerated filer  ¨

Non-accelerated filer  x

 

(Do not check if a smaller reporting company)

 

Smaller reporting company  ¨

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of
securities to be registered
 

Proposed maximum
aggregate

offering price (1)(2)

 

Amount of
registration

fee

Common Stock, $0.001 par value per share

  $150,000,000   $17,190

 

 

(1)  

Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.

(2)  

Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

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

 

 

 


Table of Contents

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

 

 

PROSPECTUS (Subject to Completion)

Dated March 30, 2012

 

             Shares

 

LOGO

 

COMMON STOCK

 

 

 

ServiceNow, Inc. is offering              shares of common stock and the selling stockholders are offering              shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $         and $         per share.

 

 

 

We intend to apply to list our common stock on the New York Stock Exchange under the symbol “NOW.”

 

 

 

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

 

 

 

PRICE $             A SHARE

 

 

 

      

Price to

Public

    

Underwriting
Discounts and
Commissions

    

Proceeds to
ServiceNow

    

Proceeds to
Selling
Stockholders

Per Share

     $               $               $               $         

Total

     $                          $                          $                          $                    

 

We and the selling stockholders have granted the underwriters the right to purchase up to an additional              shares of common stock to cover over-allotments.

 

The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2012.

 

 

 

MORGAN STANLEY   CITIGROUP   DEUTSCHE BANK SECURITIES

 

BARCLAYS   CREDIT SUISSE   UBS INVESTMENT BANK
PACIFIC CREST SECURITIES         WELLS FARGO SECURITIES   

 

 

                    , 2012


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     9   

Special Note Regarding Forward-Looking Statements

     27   

Industry and Market Data

     28   

Use of Proceeds

     29   

Dividend Policy

     29   

Capitalization

     30   

Dilution

     32   

Selected Consolidated Financial Data

     34   

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

     36   

Business

     63   

Management

     75   
 

 

 

 

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

 

Through and including                     , 2012 (25 days after the date of this prospectus), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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

 

References to “IT” in our prospectus mean information technology.

 

i


Table of Contents

PROSPECTUS SUMMARY

 

The following summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

SERVICENOW, INC.

 

Overview

 

ServiceNow is a leading provider of cloud-based services to automate enterprise IT operations. Our service includes a suite of applications built on our proprietary platform that automates workflow and integrates related business processes. We focus on transforming enterprise IT by automating and standardizing business processes and consolidating IT across the global enterprise. Organizations deploy our service to create a single system of record for enterprise IT, to lower operational costs and to enhance efficiency. Additionally, our customers use our extensible platform to build custom applications for automating activities unique to their business requirements.

 

We help transform IT organizations from reactive, manual and task-oriented, to pro-active, automated and service-oriented organizations. Our on-demand service enables organizations to define their IT strategy, design the systems and infrastructure that will support that strategy, and implement, manage and automate that infrastructure throughout its lifecycle. We provide a broad set of integrated applications that are highly configurable and can be efficiently implemented and upgraded. Further, our multi-instance architecture has proven scalability for global enterprises, as well as advantages in security, reliability and deployment location.

 

We offer our service under a Software-as-a-Service, or SaaS, business model. Customers can rapidly deploy our service in a modular fashion, allowing them to solve immediate business needs and access, configure and build new applications as their requirements evolve. Our service, which is accessed through an intuitive web-based interface, can be easily configured to adapt to customer workflow and processes. Upgrades to our service are designed to be efficient and compatible with configuration changes and applied with minimal disruption to ongoing operations.

 

We have achieved significant growth in recent periods. A majority of our revenues comes from large, global enterprise customers. Our total customers grew 62% from 602 as of December 31, 2010 to 974 as of December 31, 2011. Our customers operate in a wide variety of industries, including financial services, IT services, health care, technology and utilities. For the fiscal years ended June 30, 2010 and 2011, our revenues grew 114% from $43.3 million to $92.6 million. We incurred a net loss of $29.7 million and generated net income of $9.8 million for the fiscal years ended June 30, 2010 and 2011, respectively. For the six months ended December 31, 2010 and 2011, our revenues grew 93% from $37.9 million to $73.4 million. We generated net income of $4.8 million and incurred a net loss of $6.7 million for the six months ended December 31, 2010 and 2011, respectively.

 

Our Industry

 

Enterprises Face Increasing Challenges in Managing and Automating IT Operations

 

For decades, enterprises have invested in IT to empower their workforces and enable business critical functionality. This investment reflects enterprise dependence on a myriad of software applications, databases,

 

 

1


Table of Contents

operating systems, servers, networking equipment, personal computers, mobile devices, and a variety of other hardware and software assets. When managing the IT environment, enterprises face significant challenges:

 

Complexity of IT environments. The accelerating adoption of cloud-based services, virtual servers and desktops, and mobile technologies has added to the complexity of enterprise IT environments.

 

Budget pressures. IT executives are consistently asked to deliver more value for less cost, and to provide transparency regarding the true costs and business value of IT investments. The most recent downturn in the global economy has heightened these demands.

 

Alignment to business goals. IT organizations are increasingly asked to be proactive and design and develop new processes that span the entire enterprise, rather than support a set of discrete technologies and react to business changes. IT organizations must develop strategies to enable necessary business changes. This has resulted in a much greater need for alignment of IT strategy and performance with overall business performance.

 

Consumerization of IT. Individuals are spending more time interacting with intuitive, social and mobile consumer-oriented Internet services. These experiences have increased business users’ expectations that they can access and interact with corporate IT technologies in a similar, familiar way. IT organizations are struggling to respond to these increased demands in a cost-effective manner.

 

Integration and standardization. Enterprises need integrated and standardized solutions that work with their existing systems and follow the most recent Information Technology Infrastructure Library, or ITIL, standard, a set of recommended business processes designed and adopted by IT operations industry participants globally to maximize the availability and usability of IT assets and the efficiency of IT staff.

 

Legacy IT Management Products Fall Short

 

Organizations have invested heavily in legacy software products to manage the inventory, cost and performance of IT resources. These traditional software products were originally architected in the 1980s and 1990s before the introduction of many of today’s modern computing technologies. Shortcomings of these legacy products include:

 

   

Disparate and redundant solutions. Many legacy IT management products were developed and widely deployed decades ago. Vendors of these products have in many cases relied upon acquisitions and partnerships to extend their offerings and have not re-architected their solutions to provide the seamless, integrated platform that customers desire. In addition, enterprises may have overlapping solutions in various business units, especially those that have grown by acquisition or that operate globally. As a result, many enterprises operate multiple systems and infrastructures.

 

   

Inflexible integration, customization and maintenance. Enterprises face numerous challenges when trying to customize legacy IT management products to meet their specific needs, as well as integrate them with third-party solutions. Due to their architectures and proprietary languages, these inflexible products often cannot be easily customized to meet customers’ business requirements and are difficult to integrate and maintain. As a result, enterprises may be required to adapt their business processes to the capabilities of the software.

 

   

Highly manual. Many legacy IT management products installed today are time-consuming, prone to error and prevent IT from rapidly responding to business needs.

 

   

Upgrade challenges and disruption of service. Once legacy IT management products have been installed, integrated and customized, upgrades can be challenging. As new versions of the software are released on a periodic basis, customers are often required to re-implement the updated software with limited ability to carry forward customizations.

 

 

2


Table of Contents
   

Difficult to use and access. Many legacy IT management products lack a modern, easy to navigate user interface and were not originally designed to be accessed over the Internet or on mobile devices.

 

   

High total cost of ownership. Because legacy IT management products are often disparate, inflexible, highly manual, challenging to upgrade and difficult to use and access, we believe these products have a high total cost of ownership.

 

Our Solution

 

Our cloud-based service includes the following key elements:

 

   

Broad set of integrated functionality and modular deployments. Our suite of applications was developed to address core ITIL processes as well as additional business processes, and runs on a single extensible platform. Our platform includes workflow automation, notification, assignment and escalation, third-party integration capabilities, reporting and administration capabilities. Our cloud-based service is designed to be deployed in a modular fashion, allowing customers to solve immediate business needs and access new application functionality as needs evolve.

 

   

Automation of IT operations. Our service automates the documentation, categorization, prioritization, assignment, notification and escalation of IT and other business processes. Additionally, our service automates routine and repeatable data center operations such as rebooting a server, cloning a database or deploying a virtualized environment.

 

   

Highly configurable and extensible to meet business needs. Our configuration features are designed to give customers the ability to easily alter the appearance and operation of the user interface, change and develop business rules to meet specific requirements, and extend the database schema to support the tracking and capturing of necessary data. As a result, our service enables management of IT operations without requiring changes to existing business processes. In addition, our customers and partners can use our platform to build applications to automate processes that are unique to their businesses.

 

   

Efficient implementations and integration. Our cloud-based model allows customers to quickly access and deploy our service without the need to install and maintain costly infrastructure hardware and software necessary for on-premises deployments. Our service is developed on an architecture that enables efficient integration with third-party architectures and other data sources.

 

   

Efficient upgrades. We design our upgrades to be compatible with customer configuration changes and applied rapidly with minimal disruption to ongoing operations, enabling customers to be on the most up-to-date version.

 

   

Scalable, secure and reliable multi-instance architecture. Our multi-instance architecture is designed to provide scalability, security and reliability for customers’ large, global businesses. By providing customers with dedicated applications and databases we ensure that customer data is not comingled. In addition, this architecture reduces risk associated with infrastructure outages, improves system scalability and security, and allows for flexibility in deployment location.

 

Our cloud-based service provides the following business benefits:

 

   

Single system of record for IT. We provide a single system of record for IT executives to track assets, activities and resources across the multiple systems and infrastructures currently in use in large enterprises. This provides executives with the ability to execute their IT strategy by quickly assessing how well their IT infrastructure is supporting business processes, analyzing business needs real-time and developing business solutions as needs evolve.

 

 

3


Table of Contents
   

Lower total cost of ownership. We assume complete responsibility for our service, including application set, hosting infrastructure, maintenance, monitoring, storage, security, customer support and upgrades, all of which free customer resources. Additionally, we manage, monitor and handle upgrades and patch deployments remotely, which can result in lower total cost of ownership to our customers compared to legacy IT management products.

 

   

Easy to use and widely accessible. Our suite of intuitive and easy-to-use applications provides users with a familiar experience based on business-to-consumer concepts. Users can access our service through a web-based interface anywhere an Internet connection is available, including through mobile devices. We believe this ease of use and accessibility result in increased user adoption of specified processes, enhancing efficiency.

 

Our Growth Strategy

 

Our goal is to be the industry-recognized leading provider of cloud-based services to automate enterprise IT operations. Key elements of our growth strategy include:

 

   

Expand our customer base. We believe the global market for next-generation enterprise IT operations management is large and underserved, and we intend to continue to make investments in our business to capture increasingly larger market share. To expand our customer base we intend to invest in our direct sales force and strategic resellers as well as our data center footprint. In particular, we grew our sales and marketing team from 140 as of June 30, 2011 to 242 as of December 31, 2011.

 

   

Further penetrate our existing customer base. We intend to increase the number of subscriptions purchased by our current customers as they deploy additional core ITIL and extended IT applications, and use our platform to develop custom applications to meet business needs outside of IT. Additionally, we believe there are significant cross-sell opportunities for our separately licensed Discovery and Runbook Automation technologies.

 

   

Expand internationally. We have a large and growing international presence, and intend to grow our customer base in various regions. We are investing in new geographies, including investment in direct and indirect sales channels, data centers, professional services, customer support and implementation partners.

 

   

Continue to innovate and enhance our service offerings. We have made, and will continue to make, significant investments in research and development to strengthen our existing applications, expand the number of applications on our platform and develop additional automation technologies. We typically offer multiple upgrades each year that allow our customers to benefit from ongoing innovation.

 

   

Strengthen our customer community. We have an enthusiastic and engaged customer community that contributes to our success through their willingness to share their ServiceNow experiences with other potential customers. Customer needs drive our development efforts. We will continue to leverage our large and growing customer community to expose our existing customers to new use cases and increase awareness of our service.

 

   

Develop our partner ecosystem. We intend to further develop our existing partner ecosystem by establishing agreements with strategic resellers and system integrators to provide broader customer coverage, access to senior executives and solution delivery capabilities. As we expand our base of partners, we intend to grow our indirect sales team and marketing efforts to support our distribution network.

 

   

Further promote our extensible platform. We plan to grow investments in our platform to better enable the creation of custom applications to address specific business issues. We believe our platform provides substantial application development capabilities and we intend to further realize the potential of our platform as a strategy to penetrate large and growing markets.

 

 

4


Table of Contents

Selected Risks Associated with Our Business

 

Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. Some of these risks are:

 

   

We have a limited history of operating profits and, as our growth rates decline and our costs increase, may not achieve or maintain profitability in the future;

 

   

We have experienced rapid growth in recent periods and may not be able to manage this growth and expansion, or our business may not grow as we expect;

 

   

The market for enterprise IT operations management solutions is rapidly evolving and highly competitive;

 

   

Declines in customer renewal rates would harm our future operating results;

 

   

Defects or disruptions in our service or security breaches could diminish demand for our service and subject us to substantial liability;

 

   

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

 

   

Our transition from third-party hosted data centers to our own managed co-location facilities is expensive and complex, and could result in inefficiencies or operational failure and increased risk; and

 

   

Our quarterly results may fluctuate and, if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.

 

Corporate Information

 

We were incorporated as Glidesoft, Inc. in California in June 2004 and changed our name to Service-now.com in February 2006. We plan to reincorporate into Delaware prior to the completion of this offering as ServiceNow, Inc. Our principal executive offices are located at 12225 El Camino Real, Suite 100, San Diego, California 92130, and our telephone number is (858) 720-0477. Our website address is www.service-now.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus. Investors should not rely on any such information in deciding whether to purchase our common stock. We have included our website address in this prospectus solely as an inactive textual reference.

 

Unless the context indicates otherwise, as used in this prospectus, the terms “ServiceNow,” “we,” “us” and “our” refer to ServiceNow, Inc., a Delaware corporation, and its subsidiaries taken as a whole, unless otherwise noted.

 

In February 2012, we changed our fiscal year-end from June 30 to December 31. Throughout this prospectus, references to “fiscal 2009,” “fiscal 2010” and “fiscal 2011” are to the fiscal years ended June 30, 2009, 2010 and 2011, respectively.

 

We have registered the trademark “SERVICENOW” and our ServiceNow logo with the United States Patent and Trademark Office. “Discovery” and “Runbook Automation” are unregistered trademarks or service marks of ServiceNow and are the property of ServiceNow. This prospectus also includes references to trademarks and service marks of other entities, and those trademarks and service marks are the property of their respective owners.

 

 

5


Table of Contents

THE OFFERING

 

Common stock offered

By us

             shares

 

By the selling stockholders

             shares

 

Total

             shares

 

Common stock to be outstanding after this offering

             shares (             shares if the over-allotment option is exercised in full)

 

Over-allotment option

             shares (with              shares being offered by us and              shares being offered by the selling stockholders)

 

Use of proceeds

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

 

Proposed New York Stock Exchange symbol

“NOW”

 

The number of shares of our common stock to be outstanding after this offering is based on 107,683,974 shares of common stock outstanding as of December 31, 2011, and excludes:

 

   

39,314,140 shares of common stock issuable upon the exercise of options outstanding under our 2005 Stock Plan with a weighted-average exercise price of $2.20 per share;

 

   

6,657,210 shares of common stock reserved for future issuance under our 2005 Stock Plan; provided, however, that immediately prior to the closing of this offering, any remaining shares available for issuance under our 2005 Stock Plan will be added to the shares reserved under our 2012 Equity Incentive Plan and we will cease granting awards under the 2005 Stock Plan;

 

   

             additional shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan, which will become effective immediately prior to the closing of this offering; and

 

   

             shares of common stock reserved for future issuance under our 2012 Employee Stock Purchase Plan, which will become effective upon the closing of this offering.

 

Unless otherwise indicated, all information in this prospectus assumes:

 

   

the filing of our restated certificate of incorporation and the adoption of our restated bylaws as of the closing of this offering;

 

   

no exercise by the underwriters of their option to purchase              shares of common stock to cover over-allotments;

 

   

the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 83,703,016 shares of common stock immediately upon the closing of this offering; and

 

   

the sale and issuance of 1,750,980 shares of common stock in a private placement by us in February 2012.

 

 

6


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following consolidated financial data should be read together with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. We have derived the following consolidated statements of operations data for fiscal 2009, 2010 and 2011 and for the six months ended December 31, 2011 and the selected consolidated balance sheet data as of June 30, 2010 and 2011 and December 31, 2011 from our audited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated statement of operations data for the six months ended December 31, 2010 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited financial 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, we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of our results to be expected for any future period.

 

    Fiscal Year Ended June 30,     Six Months Ended
December 31,
 
    2009     2010     2011     2010     2011  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

 

Revenues(1):

         

Subscription

  $ 17,841      $ 40,078      $ 79,191      $ 33,191      $ 64,886   

Professional services and other

    1,474        3,251        13,450        4,753        8,489   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    19,315        43,329        92,641        37,944        73,375   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues(2)(3):

         

Subscription

    3,140        6,378        15,311        6,096        15,073   

Professional services and other

    4,711        9,812        16,264        6,778        12,850   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    7,851        16,190        31,575        12,874        27,923   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    11,464        27,139        61,066        25,070        45,452   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses(2)(3):

         

Sales and marketing

    8,499        19,334        34,123        13,728        32,501   

Research and development

    2.433        7,194        7,004        2,758        7,030   

General and administrative

    6,363        28,810        9,379        3,417        10,084   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    17,295        55,338        50,506        19,903        49,615   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (5,831     (28,199     10,560        5,167        (4,163

Interest and other income (expense), net

    (27     (1,226     606        289        (1,446
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

    (5,858     (29,425     11,166        5,456        (5,609

Provision for income taxes

    48        280        1,336        653        1,075   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (5,906     (29,705     9,830        4,803        (6,684
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders(4):

         

Basic

  $ (0.17   $ (1.31   $ 0.09      $ 0.04      $ (0.33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.17   $ (1.31   $ 0.08      $ 0.04      $ (0.33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders(4):

         

Basic

    39,039,066        23,157,576        18,163,977        17,156,445        21,104,219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    39,039,066        23,157,576        28,095,486        27,622,357        21,104,219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common
stockholders(4):

         

Basic

      $ 0.09        $ (0.06
     

 

 

     

 

 

 

Diluted

      $ 0.09        $ (0.06
     

 

 

     

 

 

 

Pro forma weighted-average shares used to compute pro-forma net loss per share attributable to common stockholders(4):

         

Basic

        103,617,973          106,558,215   
     

 

 

     

 

 

 

Diluted

        113,633,033          106,558,215   
     

 

 

     

 

 

 

 

 

7


Table of Contents

 

(1)  

Revenues for fiscal 2011 and the six months ended December 31, 2010 and 2011 reflect the prospective adoption of new revenue accounting guidance commencing on July 1, 2010. As a result of this guidance, we separately allocate value for multiple element contracts between our subscription revenues and professional services revenues based on the best estimate of selling price. Additionally, we recognize professional services revenues as the services are delivered. Please refer to Note 2 to our consolidated financial statements for further discussion of our revenue recognition policies.

(2)  

Stock-based compensation included in the statements of operations above was as follows:

 

     Fiscal Year Ended June 30,      Six Months Ended
December 31,
 
         2009          2010          2011              2010              2011      
     (in thousands)  

Cost of revenues:

              

Subscription

   $ 6       $ 48       $ 548       $ 225       $ 674   

Professional services and other

     11         28         117         37         193   

Sales and marketing

     45         277         1,004         431         2,010   

Research and development

     50         90         468         207         704   

General and administrative

     15         102         817         221         2,056   

 

(3)  

Operating expenses for fiscal 2009 reflect compensation expense of $3.8 million related to the stock settlement of an outstanding promissory note in connection with our sale and issuance of Series C preferred stock. Cost of revenues and operating expenses for fiscal 2010 reflect compensation expense of $0.7 million and $30.1 million, respectively, related to the repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock.

(4)  

Please refer to Note 11 to our consolidated financial statements for an explanation of the method used to calculate the historical and pro forma net income (loss) per share attributable to common stockholders and the number of shares used in the computation of the per share amounts.

 

    As of June 30,     As of December 31, 2011  
    2010     2011     Actual     Pro  Forma(1)     Pro Forma  as
Adjusted(2)(3)
 
    (in thousands)  

Consolidated Balance Sheet Data:

         

Cash

  $ 29,402      $ 59,853      $ 68,088      $ 85,948      $                

Working capital, excluding deferred revenue

    33,080        75,801        95,033        112,893     

Total assets

    51,369        108,746        156,323        174,183     

Deferred revenue, current and non-current portion

    40,731        74,646        104,636        104,636     

Convertible preferred stock

    67,227        67,860        68,172            

Total stockholders’ equity (deficit)

    (71,262     (58,381     (57,426     28,606     

 

(1)  

The pro forma column reflects (i) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 83,703,016 shares of common stock immediately upon the closing of this offering and the filing of our restated certificate of incorporation upon the closing of this offering; and (ii) the sale and issuance of 1,750,980 shares of common stock in a private placement by us in February 2012.

(2)  

The pro forma as adjusted column reflects the pro forma adjustments described above and the sale and issuance of              shares of common stock in this offering by us, and the receipt of the net proceeds from our sale of these shares at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

(3)  

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) each of cash, working capital, total assets and total stockholders’ equity by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions. Similarly, each increase (decrease) of one million shares in the number of shares offered by us would increase (decrease), cash, working capital, total assets and total stockholders’ equity by approximately $         million, assuming the assumed initial public offering price remains the same and after deducting the underwriting discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

 

8


Table of Contents

RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects could be harmed. In that event, the market price of our common stock could decline and you could lose part or even all of your investment.

 

Risks Related to Our Business and Industry

 

We have a limited history of operating profits, did not generate a profit in the six months ended December 31, 2011, and may not achieve or maintain profitability in the future.

 

We have not been consistently profitable on a quarterly or annual basis. Although we had net income for fiscal 2011, we experienced net losses of $5.9 million, $29.7 million and $6.7 million for fiscal 2009, fiscal 2010 and the six months ended December 31, 2011, respectively. As of December 31, 2011, our accumulated deficit was $68.1 million. While we have experienced significant revenue growth over recent periods, we may not be able to sustain or increase our growth or return to profitability in the future. Over the past year, we have significantly increased our expenditures to support the development and expansion of our business, which has resulted in increased losses. We plan to continue to invest for future growth, and as a result, we do not expect to be profitable in 2012. In addition, as a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. As a result of these increased expenditures, we will have to generate and sustain increased revenues to achieve future profitability. We may incur significant losses in the future for a number of reasons, including without limitation the other risks and uncertainties described in this prospectus. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our revenue growth expectations are not met in future periods, our financial performance will be harmed.

 

We have experienced rapid growth in recent periods. If we are not able to manage this growth and expansion, or if our business does not grow as we expect, our operating results may suffer.

 

We continue to experience rapid growth in our customer base and have significantly expanded our operations during the last several years. In particular, we are aggressively investing in: significant expansion of our cloud infrastructure and associated service capacity; our global sales, marketing and operations activities and personnel; and additional office facility lease commitments and administrative employees. Our employee headcount has increased from 375 as of June 30, 2011 to 603 as of December 31, 2011, and we plan on adding over 500 employees during 2012. We signed a new lease for a larger corporate headquarters location in San Diego in February 2012 and are currently seeking additional office space in San Jose, Seattle, London and Amsterdam. In addition, we hired new senior management in 2011 and 2012. Our rapid growth has placed, and will continue to place, a significant strain on our administrative and operational infrastructure. Our ability to manage our operations and growth will require us to continue to refine our operational, financial and management controls, human resource policies, and reporting systems and procedures. For instance, in 2012 we plan to implement a new financial enterprise resource planning system to help manage our future growth. If we fail to efficiently expand our sales force, operations or IT and financial systems, or if we fail to implement or maintain effective internal controls and procedures, our costs and expenses may increase more than we plan and we may lose the ability to close customer opportunities, enhance our existing service, develop new applications, satisfy customer requirements, respond to competitive pressures or otherwise execute our business plan. Additionally, as our operating expenses increase in anticipation of the growth of our business, if such growth does not meet our expectations, our financial results likely would be harmed.

 

9


Table of Contents

Defects or disruptions in our service could diminish demand for our service and subject us to substantial liability.

 

Like many Internet-based SaaS companies, we provide frequent incremental releases of product updates and functional enhancements. Such new versions frequently contain undetected errors when first introduced or released. We have from time to time found defects in our service, and new errors in our existing service may be detected in the future. In addition, our customers may use our service in unanticipated ways that may cause a disruption in service for other customers. Since our customers use our service for important aspects of their business, any errors, defects, disruptions in service or other performance problems with our service could hurt our reputation and may damage our customers’ businesses. If that occurs, our customers may delay or withhold payment to us, elect not to renew, make service credit claims, warranty claims or other claims against us, and we could lose future sales. The occurrence of any of these events could result in an increase in our bad debt expense, an increase in collection cycles for accounts receivable, require us to increase our warranty provisions, or incur the expense or risk of litigation. Further, if we are unable to meet the stated service level commitments we have guaranteed to our customers or suffer extended periods of unavailability for our service, we may be contractually obligated to provide these customers with credits for future service. We do not carry insurance sufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business that may result from interruptions in our service.

 

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

 

We currently serve our customers from third-party data center facilities, operated by several different providers, located around the world, with the largest located in Boston, San Jose, Washington, D.C., London and Amsterdam. Any damage to, or failure of, our systems generally could result in interruptions in our service. As we continue to add data centers and capacity in our existing data centers, we may move or transfer our data and our customers’ data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service. Any damage to, or failure of, our systems, or those of our third-party data centers, could result in interruptions in our service. Impairment of or interruptions in our service may reduce our revenues, cause us to issue credits or pay penalties, subject us to claims and litigation, cause our customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.

 

We do not control, or in some cases have limited control over, the operation of the data center facilities we use, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct, and to adverse events caused by operator error. For example, our third-party data center facility in London was subjected to a distributed denial of service attack in January 2012 that prevented some of our customers hosted in that data center from using our service intermittently for a period of about three hours. We cannot rapidly switch to new data centers or move customers from one data center to another in the event of any adverse event. Despite precautions taken at these facilities, the occurrence of a natural disaster, an act of terrorism or other act of malfeasance, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service and the loss of customer data.

 

Our transition from third-party hosted data centers to our own managed co-location facilities is expensive and complex, will result in a negative impact on our near-term cash flows and may negatively impact our financial results.

 

We have made and will continue to make substantial investments in new equipment to support growth at our data centers and provide enhanced levels of service to our customers. First, we are transitioning from a managed service hosting model, where a third party manages most aspects of the operations, to a co-location model, where we will have more direct control over the hosting infrastructure and its operation. Second, we are investing in

 

10


Table of Contents

enhancements to our cloud architecture, which are designed to provide our customers with enhanced data reliability and reduce potential service disruptions. We anticipate a negative impact on our margins in the near term as we accelerate depreciation on certain assets from our managed service hosting data centers and incur additional rent expenses as we complete this transition. However, as our data centers scale with our anticipated customer growth, we expect this transition will improve our margins in the long-term. We expect to complete these two transitions in the second half of 2012. We made capital expenditures of $8.4 million in the six months ended December 31, 2011 and anticipate making capital expenditures of approximately $25.0 million during 2012 for purchases of equipment for use in our data centers. If it takes longer than we expect to complete this transition, the negative impact on our operating results would likely exceed our initial expectations, particularly if the scope of the project grows and we deploy additional resources and hire additional personnel to complete the project. Additionally, to the extent that we are required to add data center capacity to accommodate customer demands, we may need to significantly increase the bandwidth, storage, power or other elements of our hosting operations, and the costs associated with adjustments to our data center architecture could also harm our margins and operating results.

 

If our security measures are breached or unauthorized access to customer data is otherwise obtained, our service may be perceived as not being secure, customers may curtail or stop using our service, and we may incur significant liabilities.

 

Our operations involve the storage and transmission of our customers’ confidential information, and security breaches, computer malware and computer hacking attacks could expose us to a risk of loss of this information, litigation, indemnity obligations and other liability. While we have administrative, technical, and physical security measures in place, and try to contractually require third parties to whom we transfer data to implement and maintain appropriate security measures, if our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to our customers’ data, including personally identifiable information regarding users, our reputation will be damaged, our business may suffer and we could incur significant liability. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers’ data or our data, including our intellectual property and other confidential business information, or our information technology systems. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose potential sales and existing customers.

 

If the market for our technology delivery model and SaaS develops more slowly than we expect, our growth may slow or stall, and our operating results would be harmed.

 

Use of SaaS applications to manage and automate enterprise IT is at an early stage. We do not know whether the trend of adoption of enterprise SaaS solutions we have experienced in the past will continue in the future. In particular, many organizations have invested substantial personnel and financial resources to integrate legacy software into their businesses over time, and some have been reluctant or unwilling to migrate to SaaS. Furthermore, some organizations, particularly large enterprises upon which we are dependent, have been reluctant or unwilling to use SaaS because they have concerns regarding the risks associated with the security of their data and the reliability of the technology delivery model associated with these solutions. In addition, if other SaaS providers experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for SaaS solutions as a whole, including our service, will be negatively impacted. If the adoption of SaaS solutions does not continue, the market for these solutions may stop developing or may develop more slowly than we expect, either of which would harm our operating results.

 

11


Table of Contents

The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.

 

The market for enterprise IT operations management solutions is fragmented, rapidly evolving and highly competitive, with relatively low barriers to entry in some segments. Many of our competitors and potential competitors are larger and have greater name recognition, much longer operating histories, more established customer relationships, larger marketing budgets and significantly greater resources than we do. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. With the introduction of new technologies, the evolution of our service and new market entrants, we expect competition to intensify in the future. If we fail to compete effectively, our business will be harmed. Some of our principal competitors offer their products or services at a lower price, which has resulted in pricing pressures. If we are unable to achieve our target pricing levels, our operating results would be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses or the failure of our service to achieve or maintain more widespread market acceptance, any of which could harm our business.

 

We face competition from in-house solutions, large integrated systems vendors and smaller companies with point solutions including SaaS offerings. Our competitors vary in size and in the breadth and scope of the products and services offered. Our primary competitors include BMC Software, Inc., CA, Inc., Hewlett-Packard Company and International Business Machines Corporation, all of which can bundle competing products and services with other software offerings, or offer them at a low price as part of a larger sale. In addition, many of our competitors offer SaaS solutions and may make acquisitions of businesses or assets that improve their service offerings. Further, other established SaaS providers not currently operating in enterprise IT operations management may expand their services to compete with our service. Many of our current and potential competitors have established marketing relationships, access to larger customer bases, pre-existing customer relationships and major distribution agreements with consultants, system integrators and resellers. In addition, some competitors may offer software that addresses one or a limited number of enterprise IT operation functions at lower prices or with greater depth than our service. Moreover, as we expand the scope of our service, we may face additional competition from platform and application development vendors. Additionally, some potential customers, particularly large enterprises, may elect to develop their own internal solutions. For all of these reasons, we may not be able to compete successfully against our current and future competitors.

 

Because our sales efforts are targeted at large enterprise customers, we face longer sales cycles, substantial upfront sales costs and less predictability in completing some of our sales. If our sales cycle lengthens, or if our substantial upfront sales investments do not result in sufficient sales, our operating results could be harmed.

 

We target our sales efforts at large enterprises. For instance, we derived approximately 10% and 12% of our revenues from large enterprise customers in the financial services industry for fiscal 2011, and the six months ended December 31, 2011, respectively. Because our large enterprise customers are often making an enterprise-wide decision to deploy our service, sometimes on a global basis, we face long sales cycles, complex customer requirements, substantial upfront sales costs and less predictability in completing some of our sales. Our sales cycle is generally six to nine months, but is variable and difficult to predict and can be much longer. Large enterprises often undertake a prolonged evaluation of our service, including whether the customer needs professional services performed by us or a third party for its unique IT and business process needs, and a comparison of our service to products offered by our competitors. Moreover, our large enterprise customers often begin to deploy our service on a limited basis, but nevertheless demand extensive configuration, integration services and pricing concessions, which increase our upfront investment in the sales effort with no guarantee that these customers will deploy our service widely enough across their organization to justify our substantial upfront investment. We anticipate that in the future we may experience even longer sales cycles, more complex customer needs, higher upfront sales costs and less predictability in completing some of our sales as we continue to expand our direct sales force and thereby increase the percentage of our sales personnel with less experience in selling

 

12


Table of Contents

our service, expand into new territories and expand into functional areas outside of the traditional ITIL processes. If our sales cycle lengthens or our substantial upfront sales and implementation investments do not result in sufficient sales to justify our investments, our operating results may be harmed.

 

Our business depends substantially on our customers renewing their subscriptions and purchasing additional subscriptions from us. Any decline in our customer renewals would harm our future operating results.

 

In order for us to maintain or improve our operating results, it is important that our customers renew their subscriptions when the initial contract term expires and add additional authorized users to their subscriptions. Our customers have no obligation to renew their subscriptions, and we cannot assure you that our customers will renew subscriptions with a similar contract period or with the same or a greater number of authorized users. Although our renewal rates have been historically high, some of our customers have elected not to renew their agreements with us and we cannot accurately predict renewal rates. Moreover, in some cases, some of our customers have the right to cancel their agreements prior to the expiration of the term.

 

Our renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction with our subscription service, our professional services, our customer support, our prices, the prices of competing solutions, mergers and acquisitions affecting our customer base, the effects of global economic conditions, or reductions in our customers’ spending levels. Our future success also depends in part on our ability to sell more subscriptions and additional professional services to our current customers. If our customers do not renew their subscriptions, renew on less favorable terms or fail to add more authorized users or fail to purchase additional professional services, our revenues may decline, and we may not realize improved operating results from our customer base.

 

If we are not able to develop enhancements and new applications that achieve market acceptance or that keep pace with technological developments, our business could be harmed.

 

Our ability to attract new customers and increase revenues from existing customers depends in large part on our ability to enhance and improve our existing service and to introduce new services. In order to grow our business, we must develop a service that reflects future updates to the ITIL framework and extends beyond the ITIL framework into other areas of enterprise IT operations management. The success of any enhancement or new service depends on several factors, including timely completion, adequate quality testing, introduction and market acceptance. Any new service that we develop may not be introduced in a timely or cost-effective manner, contain defects or may not achieve the broad market acceptance necessary to generate significant revenues. If we are unable to successfully develop new applications or enhance our existing service to meet customer requirements, our business and operating results will be harmed.

 

Because we designed our service to be provided over the Internet, we need to continuously modify and enhance our service to keep pace with changes in Internet-related hardware, software, communication and database technologies and standards. If we are unable to respond in a timely manner to these rapid technological developments and standards changes in a cost-effective manner, our service may become less marketable and less competitive or obsolete and our operating results may be harmed.

 

We may not timely and effectively scale and adapt our existing technology to meet the performance and other requirements of our large global enterprise customers.

 

Our future growth is dependent upon our ability to continue to meet the expanding needs of our large enterprise customers as their use of our service grows. As these customers gain more experience with our service, the number of users and transactions managed by our service, the amount of data transferred, processed and stored by us, the number of locations where our service is being accessed, and the number of processes and systems managed by our service on behalf of these customers have in some cases, and may in the future, expand rapidly. In order to ensure that we meet the performance and other requirements of these large enterprise

 

13


Table of Contents

customers, we intend to continue to make significant investments to develop and implement new technologies in our service and cloud infrastructure operations. These technologies, which include databases, applications and server optimizations, network and hosting strategies, and automation, are often advanced, complex, new and untested. We may not be successful in developing or implementing these technologies. To the extent that we do not effectively scale our service and operations to maintain performance as our customers expand their use of our service, our business and operating results may be harmed.

 

If we fail to integrate our service with a variety of operating systems, software applications and hardware that are developed by others, our service may become less marketable and less competitive or obsolete, and our operating results would be harmed.

 

Our service must integrate with a variety of network, hardware and software platforms, and we need to continuously modify and enhance our platform to adapt to changes in cloud-enabled hardware, software, networking, browser and database technologies. Any failure of our service to operate effectively with future infrastructure platforms and technologies could reduce the demand for our service, resulting in customer dissatisfaction and harm to our business. If we are unable to respond to these changes in a cost-effective manner, our service may become less marketable and less competitive or obsolete and our operating results may be negatively impacted. In addition, an increasing number of individuals within the enterprise are utilizing mobile devices to access the Internet and corporate resources and to conduct business. If we cannot effectively make our service available on these mobile devices and offer the information services and functionality required by enterprises that widely use mobile devices, we may experience difficulty attracting and retaining customers.

 

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

 

Increasing our customer base and achieving broader market acceptance of our service will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities. We are substantially dependent on our direct sales force to obtain new customers. From June 30, 2011 to December 31, 2011, our sales and marketing organization increased from 140 to 242 employees. We plan to continue to expand our direct sales force both domestically and internationally. We believe that there is significant competition for direct sales personnel with the sales skills and technical knowledge that we require. Our ability to achieve significant revenue growth in the future will depend, in large part, on our success in recruiting, training and retaining a sufficient number of direct sales personnel. New hires require significant training and time before they achieve full productivity, particularly in new sales territories. Our recent hires and planned hires may not become as productive as quickly as we would like, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business. Because we do not have a long history of expansion in our sales force, we cannot predict whether or to what extent our sales will increase as we expand our sales force or how long it will take for sales personnel to become productive. Moreover, we do not have significant experience as an organization developing and implementing overseas marketing campaigns, and such campaigns may be expensive and difficult to implement. Our business will be harmed if our expansion efforts do not generate a significant increase in revenues.

 

Our current management team is new and if we lose key members of our management team or are unable to attract and retain executives and employees we need to support our operations and growth, our business may be harmed.

 

Each of our executive officers either joined us recently or has taken on a new role in the organization. These changes in our executive management team may be disruptive to our business. Our success depends substantially upon the continued services of this new group of executive officers, particularly Frank Slootman, our Chief Executive Officer, who joined us in May 2011, and Frederic B. Luddy, our founder and Chief Product Officer, who are critical to our vision, strategic direction, culture, services and technology. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives. Our

 

14


Table of Contents

executive officers are generally employed on an at-will basis, which means that our executive officers could terminate their employment with us at any time. The loss of one or more of our executive officers or the failure by our executive team to effectively work with our employees and lead our company could harm our business.

 

In the technology industry, there is substantial and continuous competition for engineers with high levels of experience in designing, developing and managing software and Internet-related solutions, as well as competition for sales executives and operations personnel. We may not be successful in attracting and retaining qualified personnel. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In particular, competition for experienced software and cloud infrastructure engineers in San Diego, San Jose, Seattle, London and Amsterdam, our primary operating locations, is intense. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be harmed.

 

Our quarterly results may fluctuate and, if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.

 

Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly financial results fall below the expectations of investors or any securities analysts who follow our stock, the price of our common stock could decline substantially. Some of the important factors that may cause our revenues, operating results and cash flows to fluctuate from quarter to quarter include:

 

   

our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers’ requirements;

 

   

the number of new employees added;

 

   

the rate of expansion and productivity of our sales force;

 

   

changes in the relative and absolute levels of professional services we provide;

 

   

the cost, timing and management effort for the development of new services;

 

   

the length of the sales cycle for our service;

 

   

changes in our pricing policies whether initiated by us or as a result of competition;

 

   

the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;

 

   

significant security breaches, technical difficulties or interruptions with our service;

 

   

new solutions, products or changes in pricing policies introduced by our competitors;

 

   

changes in foreign currency exchange rates;

 

   

changes in effective tax rates;

 

   

general economic conditions that may adversely affect either our customers’ ability or willingness to purchase additional subscriptions, delay a prospective customers’ purchasing decision, or reduce the value of new subscription contracts, or affect renewal rates;

 

   

changes in deferred revenue balances due to the seasonal nature of our customer invoicing, changes in the average duration of our customer agreements, the rate of renewals and the rate of new business growth;

 

   

the timing of customer payments and payment defaults by customers;

 

   

extraordinary expenses such as litigation or other dispute-related settlement payments;

 

   

the impact of new accounting pronouncements; and

 

   

the timing of stock awards to employees and the related adverse financial statement impact of having to expense those stock awards ratably over their vesting schedules.

 

15


Table of Contents

Many of these factors are outside of our control, and the occurrence of one or more of them might cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenues, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance.

 

We expect our revenue growth rate to decline, and, as our costs increase, we may not be able to generate sufficient revenue to sustain our profitability over the long term.

 

From fiscal 2009 to fiscal 2011, our revenues grew from $19.3 million to $92.6 million, which represents a compounded annual growth rate of 119%. We expect that, in the future, as our revenues increase to higher levels our revenue growth rate will decline. However, we may not be able to generate sufficient revenues to achieve and sustain profitability as we also expect our costs to increase in future periods. We expect to continue to expend substantial financial and other resources on:

 

   

our technology infrastructure, including migrating from a managed hosting model to co-location facilities, enhancements to our cloud architecture and hiring of additional employees for our research and development team;

 

   

software development, including investments in our software development team, the development of new features and the improvement of the scalability, availability and security of our service;

 

   

sales and marketing, including a significant expansion of our direct sales organization;

 

   

international expansion in an effort to increase our customer base and sales; and

 

   

general administration, including legal and accounting expenses related to being a public company.

 

These investments may not result in increased revenues or growth in our business. If we fail to continue to grow our revenues and overall business, our operating results and business would be harmed.

 

Because we recognize revenues from our subscription service over the subscription term, downturns or upturns in new sales will not be immediately reflected in our operating results.

 

We generally recognize revenues from customers ratably over the terms of their subscriptions, which on average are approximately 30 months in duration for initial contract terms, although terms can range from 12 to 120 months. As a result, most of the revenues we report in each quarter are derived from the recognition of deferred revenues relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any single quarter will likely have only a small impact on our revenue results for that quarter. Such a decline, however, will negatively affect our revenues in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our service, and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenues through additional sales in any period, as revenues from new customers must be recognized over the applicable subscription term. In addition, we may be unable to adjust our cost structure to reflect the changes in revenues.

 

If we are unable to successfully manage the growth of our professional services business and improve our profit margin from these services our operating results will be harmed.

 

Our professional services business, which performs implementation and configuration of our subscription service for our customers, has grown as our revenues from subscriptions have grown. We believe our investment in professional services facilitates the adoption of our subscription service. As a result, our sales efforts have been focused primarily on our subscription service, rather than the profitability of our professional services business. Historically, our pricing for professional services was predominantly on a fixed-fee basis and the cost of the time and materials incurred to complete these services were greater than the amount charged to the customer. These factors contributed to our negative gross profit percentages from professional services and other

 

16


Table of Contents

of (220)%, (202)% and (21)% for fiscal 2009, 2010 and 2011, respectively, and (43)% and (51)% for the six months ended December 31, 2010 and 2011, respectively. The improvement in gross profit percentages was due in part to the adoption of new revenue recognition accounting guidance commencing on July 1, 2010. In addition, in December 2011, we began shifting our pricing model to a time-and-materials basis. In the future, we intend to price our professional services based on the anticipated cost of those services and, as a result, expect to improve the gross profit percentage of our professional services business. If we are unable to successfully transition to a time-and-materials based pricing model and manage the growth of our professional services business, our operating results, including our profit margins, will be harmed. In addition, the shift to this new pricing model may cause our sales cycle to lengthen.

 

We may be sued by third parties for alleged infringement of their proprietary rights.

 

There is considerable patent and other intellectual property development activity in our industry. Our success depends in part on not infringing upon the intellectual property rights of others. From time to time, our competitors or other third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. In the future, we may receive claims that our applications and underlying technology infringe or violate the claimant’s intellectual property rights. However, we may be unaware of the intellectual property rights of others that may cover some or all of our technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our service, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses, modify our service or refund fees, which could further exhaust our resources. In addition, we may pay substantial settlement costs to resolve claims or litigation, whether or not legitimately or successfully asserted against us, which could include royalty payments in connection with any such litigation and to obtain licenses, modify our service or refund fees, which could further exhaust our resources. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. Such disputes could also disrupt our service, causing an adverse impact to our customer satisfaction and related renewal rates.

 

Our use of “open source” software could harm our ability to sell our service and subject us to possible litigation.

 

A significant portion of the technologies licensed or developed by us incorporate so-called “open source” software, and we may incorporate open source software into other services in the future. We attempt to monitor our use of open source software in an effort to avoid subjecting our service to conditions we do not intend; however, there can be no assurance that our efforts have been or will be successful. There is little or no legal precedent governing the interpretation of the terms of open source licenses, and therefore the potential impact of these terms on our business is uncertain and enforcement of these terms may result in unanticipated obligations regarding our service and technologies. For example, depending on which open source license governs open source software included within our service or technologies, we may be subjected to conditions requiring us to offer our service to users at no cost; make available the source code for modifications and derivative works based upon, incorporating or using the open source software; and license such modifications or derivative works under the terms of the particular open source license.

 

If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal costs defending ourselves against such allegations, we could be subject to significant damages or be enjoined from the distribution of our service. In addition, if we combine our proprietary software with open source software in a certain manner, under some open source licenses we could be required to release the source code of our proprietary software, which could substantially help our competitors develop solutions that are similar to or better than our service.

 

17


Table of Contents

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

 

Our success depends to a significant degree on our ability to protect our proprietary technology and our brand. We rely on a combination of copyright, trade secret and other intellectual property laws and confidentiality procedures to protect our proprietary rights. If we fail to protect our intellectual property rights adequately, our competitors may gain access to our technology and our business may be harmed. In addition, defending our intellectual property rights might entail significant expense. Any of our trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. We have only recently begun to develop a strategy to seek, and may be unable to obtain, patent protection for our technology. In addition, any patents issued in the future may not provide us with competitive advantages, or may be successfully challenged by third parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our service is available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.

 

We may be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel.

 

Our growth depends in part on the success of our strategic relationships with third parties and their continued performance.

 

We anticipate that we will continue to depend on various third-party relationships in order to grow our business. In particular, we depend on a limited number of third parties to provide a majority of our implementation services. Our strategy is to work with third parties to increase the breadth of capability and the depth of capacity for delivery of these services to our customers.

 

We intend to expand our relationships with third parties, such as implementation partners, systems integrators and managed services providers. Identifying these and other partners, and negotiating and documenting relationships with them, require significant time and resources. Our agreements with partners are typically non-exclusive and do not prohibit them from working with our competitors or from offering competing solutions. Our competitors may be effective in providing incentives to third parties, including our partners, to favor their solutions or to prevent or reduce subscriptions to our service either by disrupting our relationship with existing customers or by limiting our ability to win new customers. In addition, global economic conditions could harm the businesses of our partners, and it is possible that they may not be able to devote the additional resources we expect to the relationship. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenues could be impaired and our operating results would suffer. Even if we are successful, we cannot assure you that these relationships will result in greater customer usage of our service or increased revenues.

 

If a customer is not satisfied with the quality of work performed by us or a third party, we could incur additional costs to address the situation, the profitability of that work might be impaired, and the customer’s dissatisfaction with our professional services could damage our ability to obtain additional revenues from that customer.

 

18


Table of Contents

Sales to customers outside North America expose us to risks inherent in international sales.

 

Because we sell our service throughout the world, we are subject to risks and challenges that we would otherwise not face if we conducted our business only in North America. Sales outside of North America represented 25% and 29% of our total revenues for fiscal 2011 and the six months ended December 31, 2011, respectively, and we intend to continue to expand our international sales efforts. Our business and future prospects depend on increasing our international sales as a percentage of our total revenues, and the failure to grow internationally will harm our business. The risks and challenges associated with sales to customers outside North America are different in some ways from those associated with sales in North America and we have a limited history addressing those risks and meeting those challenges. The risks and challenges inherent with international sales include:

 

   

localization of our service, including translation into foreign languages and associated expenses;

 

   

differing laws and business practices, which may favor local competitors;

 

   

longer sales cycles;

 

   

compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;

 

   

treatment of revenues from international sources and changes to tax codes, including being subject to foreign tax laws and being liable for paying withholding income or other taxes in foreign jurisdictions;

 

   

regional data privacy laws that apply to the transmission of our customers’ data across international borders;

 

   

foreign currency fluctuations and controls;

 

   

different pricing environments;

 

   

difficulties in staffing and managing foreign operations;

 

   

different or lesser protection of our intellectual property;

 

   

longer accounts receivable payment cycles and other collection difficulties;

 

   

regional economic conditions; and

 

   

regional political conditions.

 

Any of these factors could negatively impact our business and results of operations.

 

We face exposure to foreign currency exchange rate fluctuations.

 

We conduct significant transactions, including intercompany transactions, in currencies other than the United States dollar or the functional operating currency of the transactional entities. In addition, our international subsidiaries maintain significant net assets that are denominated in currencies other than the functional operating currencies of these entities. Accordingly, changes in the value of foreign currencies relative to the United States dollar can affect our revenues and operating results due to transactional and translational remeasurement that is reflected in our earnings. We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.

 

19


Table of Contents

Weakened global economic conditions may harm our industry, business and results of operations.

 

Our overall performance depends in part on worldwide economic conditions, which may remain challenging for the foreseeable future. Global financial developments seemingly unrelated to us or the IT industry may harm us. The United States and other key international economies have been impacted by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. These conditions affect the rate of information technology spending and could adversely affect our customers’ ability or willingness to purchase our service, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscriptions, or affect renewal rates, all of which could harm our operating results.

 

Changes in laws, regulations and standards related to the Internet may cause our business to suffer.

 

Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws and regulations affecting data privacy and the use of the Internet as a commercial medium. Industry organizations also regularly adopt and advocate for new standards in this area. For instance, we believe increased regulation is likely in the area of data privacy, and changing laws, regulations and standards applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially restricting our ability to store, process and share data with our customers. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet, commerce conducted via the Internet or validation that particular processes follow the latest standards. These changes could limit the viability of Internet-based services such as ours. If we are not able to adjust to changing laws, regulations and standards related to the Internet, our business may be harmed.

 

Unanticipated changes in our effective tax rate could harm our future results.

 

We are subject to income taxes in the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses as a result of acquisitions, the valuation of deferred tax assets and liabilities and changes in federal, state or international tax laws and accounting principles. Increases in our effective tax rate would reduce our profitability or in some cases increase our losses.

 

In addition, we may be subject to income tax audits by many tax jurisdictions throughout the world, many of which have not established clear guidance on the tax treatment of SaaS-based companies. Although we believe our income tax liabilities are reasonably estimated and accounted for in accordance with applicable laws and principles, an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.

 

Natural disasters and other events beyond our control could harm our business.

 

Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thus could have a strong negative effect on us. Our business operations are subject to interruption by natural disasters, fire, power shortages, pandemics and other events beyond our control. Although we maintain crisis management and disaster response plans, such events could make it difficult or impossible for us to deliver our service to our customers, and could decrease demand for our service. The majority of our research and development activities, corporate headquarters, information technology systems, and other critical business operations are located near major seismic faults in California. Customer data could be lost, significant recovery time could be required to resume operations and our financial condition and operating results could be harmed in the event of a major earthquake or catastrophic event.

 

20


Table of Contents

We will incur increased costs as a result of operating as a public company and our management will have to devote substantial time to public company compliance obligations.

 

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and our stock exchange, has imposed various requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance requirements and any new requirements that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may impose on public companies. Moreover, these rules and regulations, along with compliance with accounting principles and regulatory interpretations of such principles, have increased and will continue to increase our legal, accounting and financial compliance costs and have made and will continue to make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees, or as executive officers.

 

If we do not remediate material weaknesses in our internal control over financial reporting or are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

 

Prior to completion of this offering, we have been a private company and historically had limited accounting personnel to adequately execute our accounting processes and other supervisory resources with which to address our internal control over financial reporting. This lack of adequate accounting resources contributed to audit adjustments to our financial statements in the past.

 

In connection with our preparation of the financial statements for the year ended June 30, 2011 and the six months ended December 31, 2011, our independent registered public accounting firm identified control deficiencies in our internal control that constituted material weaknesses. A material weakness is defined under the standards issued by the Public Company Accounting Oversight Board as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected and corrected on a timely basis. The material weaknesses our independent registered public accounting firm identified related to the design and operation of policies and procedures for accounting and reporting control processes, performance of account review and analysis, the development and review of complex judgments and estimates, the preparation of the provision for income taxes and the identification, communication and accounting of significant contracts and agreements. These material weaknesses, which contributed to multiple audit adjustments, primarily resulted from our failure to maintain a sufficient number of personnel with an appropriate level of knowledge, experience and training in the application of U.S. generally accepted accounting principles, or GAAP.

 

We are in the process of implementing measures designed to improve our internal control over financial reporting to remediate these material weaknesses. During the six months ended December 31, 2011, we hired a new Chief Financial Officer, a new Vice President of Finance and a several new finance and accounting managers which significantly increases our finance and accounting team’s experience in GAAP and financial reporting for publicly traded companies. In September 2011, we engaged a third-party tax firm and in February 2012, we hired a Senior Manager of Internal Audit. In March 2012, we hired a Vice President of Tax to assist with the accounting for income taxes and review of complex tax accounting matters. In addition, we expect to retain consultants to advise us on making further improvements to our internal controls related to these accounting areas. We believe that these additional resources enable us to broaden the scope and quality of our internal review of underlying information related to financial reporting and to further enhance our financial review procedures, including both the accounting processes for income taxes and significant contracts and agreements.

 

21


Table of Contents

We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weaknesses in our internal control over financial reporting or to avoid potential future material weaknesses.

 

The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and disclosure controls and procedures quarterly. In particular, beginning with the year ending on December 31, 2013, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our accounting firm, that must be performed for 2013 may reveal other material weaknesses or that the material weaknesses described above have not been fully remediated. If we do not remediate the material weaknesses described above, or if other material weaknesses are identified or we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could be materially misstated or could subsequently require restatement, we could receive an adverse opinion regarding our controls from our accounting firm and we could be subject to investigations or sanctions by regulatory authorities, which would require additional financial and management resources, and the market price of our stock could decline.

 

A portion of our revenues are generated by sales to government entities and heavily regulated organizations, which are subject to a number of challenges and risks.

 

A portion of our sales are to governmental agencies. Additionally, many of our current and prospective customers are highly regulated and may be required to comply with more stringent regulations in connection with subscribing to and implementing our service. Selling to these entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will successfully complete a sale. Government and highly regulated entities often require contract terms that differ from our standard arrangements and impose compliance requirements that are complicated, require preferential pricing or “most favored nation” terms and conditions, or are otherwise time consuming and expensive to satisfy. Due to the additional requirements of the U.S. federal government, we are in the process of establishing data centers that are compliant with the Federal Information Security Management Act. The additional costs associated with providing our service to government and highly regulated customers could harm our margins. Moreover, changes in the underlying regulatory conditions that affect these types of customers could harm our ability to efficiently provide our service to them and to grow or maintain our customer base.

 

We may acquire or invest in companies, which may divert our management’s attention, result in additional dilution to our stockholders, and we may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions.

 

We may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets in the future. We also may enter into relationships with other businesses to expand our service offerings or our ability to provide services in international locations, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies. An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, their software is not easily adapted to work with ours, or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise. Acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our existing business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown risks or liabilities.

 

22


Table of Contents

Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close. For one or more of those transactions, we may:

 

   

issue additional equity securities that would dilute our stockholders;

 

   

use cash that we may need in the future to operate our business;

 

   

incur debt on terms unfavorable to us or that we are unable to repay;

 

   

incur large charges or substantial liabilities;

 

   

encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures; and

 

   

become subject to adverse tax consequences, substantial depreciation or deferred compensation charges.

 

Risks Relating to Ownership of Our Common Stock and this Offering

 

The market price of our common stock is likely to be volatile and could subject us to litigation.

 

Prior to this offering, there has not been a public market for our common stock. We cannot assure you that an active trading market for our common stock will develop following this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. The initial public offering price for the shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market following the offering. In addition, the trading prices of the securities of technology companies in general have been highly volatile. Accordingly, the market price of our common stock is likely to be subject to wide fluctuations. Factors affecting the market price of our common stock include:

 

   

variations in our operating results, earnings per share, cash flows from operating activities, deferred revenue, and other financial metrics and non-financial metrics, and how those results compare to analyst expectations;

 

   

forward-looking statements related to future revenues and earnings per share;

 

   

the net increases in the number of customers, either independently or as compared with published expectations of industry, financial or other analysts that cover our company;

 

   

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

 

   

announcements of technological innovations, new solutions or enhancements to services, strategic alliances or significant agreements by us or by our competitors;

 

   

announcements by us or by our competitors of mergers or other strategic acquisitions, or rumors of such transactions involving us or our competitors;

 

   

announcements of customer additions and customer cancellations or delays in customer purchases;

 

   

recruitment or departure of key personnel;

 

   

disruptions in our service due to computer hardware, software or network problems, security breaches, or other man-made or natural disasters;

 

   

the economy as a whole, market conditions in our industry, and the industries of our customers;

 

   

trading activity by a limited number of stockholders who together beneficially own a majority of our outstanding common stock;

 

   

the size of our market float; and

 

   

any other factors discussed herein.

 

23


Table of Contents

In addition, if the market for technology stocks or the stock market in general experiences uneven investor confidence, the market price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The market price of our common stock might also decline in reaction to events that affect other companies within, or outside, our industry even if these events do not directly affect us. Some companies that have experienced volatility in the trading price of their stock have been the subject of securities class action litigation. If we are the subject of such litigation, it could result in substantial costs and a diversion of our management’s attention and resources.

 

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

 

Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders.

 

We do not intend to pay dividends on our common stock so any returns will be limited to changes in the value of our common stock.

 

We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, our ability to pay cash dividends on our common stock may be prohibited or limited by the terms of any future debt financing arrangement. Any return to stockholders will therefore be limited to the increase, if any, of our stock price.

 

Our directors and principal stockholders own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

 

As of February 29, 2012, our directors, five percent or greater stockholders and their respective affiliates owned in the aggregate approximately 89% of our outstanding voting stock and, upon completion of this offering, that same group will hold in the aggregate approximately     % of our outstanding voting stock (assuming no exercise of the underwriters’ overallotment option), including approximately     % controlled by funds affiliated with JMI Equity. Therefore, after this offering these stockholders will continue to have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders will be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

 

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

 

The assumed initial public offering price is substantially higher than the net tangible book value per share of our common stock will be immediately after this offering. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $         per share, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

24


Table of Contents

This dilution is due to the substantially lower price paid by our investors who purchased shares prior to this offering as compared to the price offered to the public in this offering, and any previous exercise of stock options granted to our employees. In addition, as of December 31, 2011, options to purchase 39,314,140 shares of our common stock at a weighted average exercise price of $2.20 per share were outstanding. The exercise of any of these options would result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive less than the purchase price paid in this offering, if anything, in the event of our liquidation.

 

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.

 

We may need additional capital in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering.

 

Sales of a substantial number of shares of our common stock in the public market by our existing stockholders following this offering could cause our stock price to fall.

 

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.

 

All of our officers and directors and the holders of substantially all of our capital stock are subject to lock-up agreements with the underwriters of this offering that restrict the stockholders’ ability to transfer shares of our common stock for at least 180 days from the date of this prospectus. The lock-up agreements limit the number of shares of common stock that may be sold immediately following this initial public offering. Subject to certain limitations, approximately              shares will become eligible for sale upon expiration of the lock-up period. In addition, shares issued or issuable upon exercise of options vested as of the expiration of the lock-up period will be eligible for sale at that time. Sales of stock by these stockholders could have a material adverse effect on the trading price of our common stock.

 

Certain holders of shares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act of 1933, as amended, or the Securities Act, subject to the 180-day lock-up arrangement described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

 

25


Table of Contents

Provisions in our restated certificate of incorporation and restated bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the market price of our common stock.

 

Our restated certificate of incorporation and restated bylaws contain provisions that could depress the market price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions among other things:

 

   

establish a classified board of directors so that not all members of our board are elected at one time;

 

   

permit the board of directors to establish the number of directors;

 

   

provide that directors may only be removed “for cause” and only with the approval of 66 2/3% of our stockholders;

 

   

require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws;

 

   

authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder rights plan;

 

   

eliminate the ability of our stockholders to call special meetings of stockholders;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

   

provide that the board of directors is expressly authorized to make, alter or repeal our restated bylaws; and

 

   

establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

 

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. Section 203 imposes certain restrictions on merger, business combinations and other transactions between us and holders of 15% or more of our common stock.

 

26


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.

 

27


Table of Contents

INDUSTRY AND MARKET DATA

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations, market position, market opportunity and market size, is based on information from various sources, including independent industry publications like those generated by Gartner, Inc. In presenting this information, we have also made assumptions based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets for our service and related solutions. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Neither we nor the underwriters have independently verified the accuracy or completeness of any third-party information. While we believe the market position, opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

The Gartner report, “Forecast: Enterprise Software Markets, Worldwide, 2009-2016, 1Q12 Update,” March, 2012, described herein, or the Gartner Report, represents data, research opinion or viewpoints published as part of a syndicated subscription service, by Gartner, and may not be representations of fact. The Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Report are subject to change without notice.

 

28


Table of Contents

USE OF PROCEEDS

 

We estimate that our net proceeds from the sale of the shares of common stock offered by us will be approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $         million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of common stock by the selling stockholders.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) our net proceeds from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions.

 

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

 

Pending the use of proceeds from this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities. Our management will have broad discretion in the application of the net proceeds from this offering and investors will be relying on the judgment of our management regarding the application of the proceeds.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors.

 

29


Table of Contents

CAPITALIZATION

 

The following table sets forth our cash and our capitalization as of December 31, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to:

 

   

the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 83,703,016 shares of common stock and the filing of our restated certificate of incorporation upon the closing of this offering; and

 

   

the sale and issuance of 1,750,980 shares of common stock in a private placement by us in February 2012; and

 

   

on a pro forma as adjusted basis to reflect the pro forma adjustments described above and the sale and issuance of shares of common stock in this offering by us, and the receipt of the net proceeds from our sale of              shares at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

The information below is illustrative only and our cash and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the information in this table together with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

    As of December 31, 2011  
    Actual     Pro Forma     Pro Forma
as  Adjusted(1)
 
    (In thousands, except share and per
share data)
 

Cash

  $ 68,088      $ 85,948      $                
 

 

 

   

 

 

   

 

 

 

Series C redeemable convertible preferred stock, $0.001 par value: 983,606 shares authorized, 983,606 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

  $ 5,957      $      $     

Series A redeemable convertible preferred stock, $0.001 par value: 2,500,000 shares authorized, 2,500,000 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    3,805            

Series B redeemable convertible preferred stock, $0.001 par value: 4,040,488 shares authorized, 3,988,636 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    7,165            

Series D convertible preferred stock, $0.001 par value: 3,830,379 shares authorized; 2,990,635 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    51,245            

Stockholders’ equity (deficit):

     

Preferred stock, $0.001 par value: no shares authorized, issued or outstanding, actual;          shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted

               

Common stock, $0.001 par value: 200,000,000 shares authorized, 22,229,978 shares issued and outstanding, actual; 200,000,000 shares authorized, 107,683,974 shares issued and outstanding, pro forma; shares authorized and          shares issued and outstanding, pro forma as adjusted

    22        108     

Additional paid-in capital

    9,793        95,739     

Accumulated other comprehensive income

    899        899     

Accumulated deficit

    (68,140     (68,140  
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    (57,426     28,606     
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 10,746      $ 28,606      $     
 

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

 

(1)  

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions. Similarly, each increase (decrease) of one million shares in the number of shares offered by us would increase (decrease), cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million, assuming the assumed initial public offering price remains the same and after deducting the underwriting discounts and commissions.

 

The number of shares of our common stock to be outstanding after this offering is based on 107,683,974 shares of common stock outstanding as of December 31, 2011 and excludes:

 

   

39,314,140 shares of common stock issuable upon the exercise of options outstanding under our 2005 Stock Plan with a weighted-average exercise price of $2.20 per share;

 

   

6,657,210 shares of common stock reserved for future issuance under our 2005 Stock Plan; provided, however, that immediately prior to the closing of this offering, any remaining shares available for issuance under our 2005 Stock Plan will be added to the shares reserved under our 2012 Equity Incentive Plan and we will cease granting awards under the 2005 Stock Plan;

 

   

             additional shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan, which will become effective immediately prior to the closing of this offering; and

 

   

             shares of common stock reserved for future issuance under our 2012 Employee Stock Purchase Plan, which will become effective upon the closing of this offering.

 

31


Table of Contents

DILUTION

 

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

 

As of December 31, 2011, our pro forma net tangible book value was $28.6 million, or $0.27 per share of common stock. Pro forma net tangible book value per share represents the amount of our tangible assets less our liabilities divided by the total number of shares of our common stock outstanding, after giving effect to (i) the conversion of our convertible preferred stock into an aggregate of 83,703,016 shares of our common stock upon the closing of this offering and (ii) the sale and issuance of 1,750,980 shares of common stock in a private placement by us in February 2012.

 

Our pro forma as adjusted net tangible book value as of December 31, 2011 was $         million, or $         per share of common stock. Pro forma as adjusted net tangible book value per share reflects the pro forma adjustments described above and further reflects the sale of              shares of common stock by us in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to existing stockholders and immediate dilution of $         per share to new investors purchasing shares in the offering.

 

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of December 31, 2011

   $ 0.27      

Increase in net tangible book value per share attributable to new investors in this offering

     
  

 

 

    

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

     
     

 

 

 

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

      $     
     

 

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) our pro forma as adjusted net tangible book value as of December 31, 2011 by approximately $         million, the pro forma as adjusted net tangible book value per share after this offering by $         and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by $        , and the dilution in pro forma net tangible book value per share to new investors in this offering by $        , assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions. If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per share after this offering would be $         per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $         per share of common stock.

 

32


Table of Contents

The following table summarizes, on a pro forma as adjusted basis as of December 31, 2011, the differences between the number of shares of common stock purchased from us, the total cash consideration and the average price per share paid to us by existing stockholders and by new investors purchasing shares in this offering, at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares purchased     Total consideration     Average
price  per
share
 
     Number    Percent     Amount      Percent    

Existing stockholders

               $                             $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100   $           100  
  

 

  

 

 

   

 

 

    

 

 

   

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid to us by new investors participating in this offering by approximately $         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 underwriting discounts and commissions.

 

If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to     % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to         , or     % of the total number of shares of common stock to be outstanding after this offering.

 

Sales of shares of common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to         , or approximately     % of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to         , or approximately     % of the total shares of common stock outstanding after this offering.

 

The table and discussion above are based on 107,683,974 shares of common stock outstanding as of December 31, 2011, and exclude:

 

   

39,314,140 shares of common stock issuable upon the exercise of options outstanding under our 2005 Stock Plan with a weighted-average exercise price of $2.20 per share;

 

   

6,657,210 shares of common stock reserved for future issuance under our 2005 Stock Plan; provided, however, that immediately prior to the closing of this offering, any remaining shares available for issuance under our 2005 Stock Plan will be added to the shares reserved under our 2012 Equity Incentive Plan and we will cease granting awards under the 2005 Stock Plan;

 

   

         additional shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan, which will become effective immediately prior to the closing of this offering; and

 

   

         shares of common stock reserved for future issuance under our 2012 Employee Stock Purchase Plan, which will become effective upon the closing of this offering.

 

33


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

 

The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarily indicative of our future results.

 

The selected consolidated statements of operations data for fiscal 2009, 2010 and 2011 and for the six months ended December 31, 2011 and the selected consolidated balance sheet data as of June 30, 2010 and 2011 and as of December 31, 2011 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated balance sheet data as of June 30, 2009 is derived from our audited consolidated financial statements which are not included in this prospectus. The consolidated statement of operations data for the six months ended December 31, 2010 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for fiscal 2007 and 2008 and the consolidated balance sheet data as of June 30, 2007 and 2008 are derived from our unaudited consolidated financial statements which are not included in this prospectus. We have prepared the unaudited financial 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, we consider necessary for a fair statement of the financial information set forth in those statements.

 

    Fiscal Year Ended June 30,     Six Months Ended
December 31,
 
    2007     2008     2009     2010     2011     2010     2011  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

 

Revenues(1):

             

Subscription

  $ 1,834      $ 8,644      $ 17,841      $ 40,078      $ 79,191      $ 33,191      $ 64,886   

Professional services and other

    29        137        1,474        3,251        13,450        4,753        8,489   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    1,863        8,781        19,315        43,329        92,641        37,944        73,375   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues(2)(3):

             

Subscription

    397        1,838        3,140        6,378        15,311        6,096        15,073   

Professional services and other

    253        2,717        4,711        9,812        16,264        6,778        12,850   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    650        4,555        7,851        16,190        31,575        12,874        27,923   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,213        4,226        11,464        27,139        61,066        25,070        45,452   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses(2)(3):

             

Sales and marketing

    2,314        6,142        8,499        19,334        34,123        13,728        32,501   

Research and development

    2,682        2,098        2,433        7,194        7,004        2,758        7,030   

General and administrative

    356        1,854        6,363        28,810        9,379        3,417        10,084   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    5,352        10,094        17,295        55,338        50,506        19,903        49,615   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (4,139     (5,868     (5,831     (28,199     10,560        5,167        (4,163

Interest and other income (expense), net

    170        10        (27     (1,226     606        289        (1,446
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

    (3,969     (5,858     (5,858     (29,425     11,166        5,456        (5,609

Provision for income taxes

    2        23        48        280        1,336        653        1,075   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (3,971     (5,881     (5,906     (29,705     9,830        4,803        (6,684
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders(4):

             

Basic

  $ (0.11   $ (0.16   $ (0.17   $ (1.31   $ 0.09      $ 0.04      $ (0.33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.11   $ (0.16   $ (0.17   $ (1.31   $ 0.08      $ 0.04      $ (0.33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Table of Contents
    Fiscal Year Ended June 30,     Six Months Ended
December 31,
 
    2007     2008     2009     2010     2011     2010     2011  
    (in thousands, except share and per share data)  

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders(4):

             

Basic

    40,000,000        40,115,383        39,039,066        23,157,576        18,163,977        17,156,445        21,104,219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    40,000,000        40,115,383        39,039,066        23,157,576        28,095,486        27,622,357        21,104,219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders(4):

             

Basic

          $ 0.09        $ (0.06
         

 

 

     

 

 

 

Diluted

          $ 0.09        $ (0.06
         

 

 

     

 

 

 

Pro forma weighted-average shares used to compute pro-forma net loss per share attributable to common stockholders(4):

             

Basic

            103,617,973          106,558,215   
         

 

 

     

 

 

 

Diluted

            113,633,033          106,558,215   
         

 

 

     

 

 

 

 

(1)  

Revenues for fiscal 2011 and the six months ended December 31, 2010 and 2011 reflect the prospective adoption of new revenue accounting guidance commencing on July 1, 2010. As a result of this guidance, we separately allocate value for multiple element contracts between our subscription revenues and professional services revenues based on the best estimate of selling price. Additionally, we recognize professional services revenues as the services are delivered. Please refer to Note 2 to our consolidated financial statements for further discussion of our revenue recognition policies.

(2)  

Stock-based compensation included in the statements of operations above was as follows:

 

     Fiscal Years Ended June 30,      Six Months Ended
December 31,
 
     2007      2008      2009      2010      2011          2010              2011      
     (in thousands)  

Cost of revenues:

                    

Subscription

   $       $ 3       $ 6       $ 48       $ 548       $ 225       $ 674   

Professional services and other

     1         5         11         28         117         37         193   

Sales and marketing

     8         22         45         277         1,004         431         2,010   

Research and development

     3         12         50         90         468         207         704   

General and administrative

     5         14         15         102         817         221         2,056   

 

(3)  

Operating expenses for fiscal 2009 reflect compensation expense of $3.8 million related to the stock settlement of an outstanding promissory note in connection with our sale and issuance of Series C preferred stock. Cost of revenues and operating expenses for fiscal 2010 reflect compensation expense of $0.7 million and $30.1 million, respectively, related to the repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock.

(4)  

Please refer to Note 11 to our consolidated financial statements for an explanation of the method used to calculate the historical and pro forma net income (loss) per share attributable to common stockholders and the number of shares used in the computation of the per share amounts.

 

     As of June 30,     As of
December 31,
 
     2007     2008     2009     2010     2011     2011  
     (in thousands)  

Consolidated Balance Sheet Data:

  

Cash

   $ 3,619      $ 4,772      $ 7,788      $ 29,402      $ 59,853      $ 68,088   

Working capital, excluding deferred revenues

     5,647        5,401        10,090        33,080        75,801        95,033   

Total assets

     6,341        7,725        15,327        51,369        108,746        156,323   

Deferred revenues, current and non-current portion

     4,207        9,867        16,778        40,731        74,646        104,636   

Convertible preferred stock

     8,187        8,810        15,342        67,227        67,860        68,172   

Total stockholders’ deficit

     (6,650     (13,112     (21,690     (71,262     (58,381     (57,426

 

35


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Overview

 

ServiceNow is a leading provider of cloud-based services to automate enterprise IT operations. Our service includes a suite of applications built on our proprietary platform that automates workflow and integrates related business processes. We focus on transforming enterprise IT by automating and standardizing business processes and consolidating IT across the global enterprise. Organizations deploy our service to create a single system of record for enterprise IT, to lower operational costs and to enhance efficiency. Additionally, our customers use our extensible platform to build custom applications for automating activities unique to their business requirements.

 

We offer our service under a SaaS business model. Our subscription fee includes the use of our service and our technical support and management of the hosting infrastructure. We provide a scaled pricing model based on the number of users, in which the subscription price per user decreases as the number of users increases. We generally bill our customers annually in advance. We generate sales through our direct sales team and indirectly through channel partners and third-party referrals. We also generate revenues from professional services for implementation and training.

 

Many customers initially subscribe to our service to solve a specific and immediate problem. Once their problem is solved, many of our customers deploy additional applications as they become more familiar with our service and apply it to new IT processes. In addition, some customers adopt our platform to build applications that automate various processes for business uses outside of IT such as human resources, facilities and quality control management. A majority of our revenues come from large global enterprise customers. Our total customers grew 62% from 602 as of December 31, 2010 to 974 as of December 31, 2011.

 

We were founded in 2004 and entered into our first commercial contract in 2005. To date, we have funded our business primarily with cash flows from operations. We continue to invest in the development of our service, infrastructure and sales and marketing to drive long-term growth. In 2011, we significantly changed our executive management team. We hired a new Chief Executive Officer in May 2011, and our founder became Chief Product Officer. We subsequently hired additional key executives across our entire organization including our Chief Financial Officer, Chief Technology Officer, Senior Vice President of Sales and Services, Senior Vice President of Development and Customer Support, Vice President of Human Resources and Vice President of Marketing. In addition, we increased our overall employee headcount from 375 as of June 30, 2011 to 603 as of December 31, 2011.

 

We have achieved significant revenue growth in recent periods. For the fiscal years ended June 30, 2010 and 2011, our revenues grew 114% from $43.3 million to $92.6 million. We incurred a net loss of $29.7 million and generated net income of $9.8 million for the fiscal years ended June 30, 2010 and 2011, respectively. For the six months ended December 31, 2010 and 2011, our revenues grew 93% from $37.9 million to $73.4 million. We generated net income of $4.8 million and incurred a net loss of $6.7 million for the six months ended December 31, 2010 and 2011, respectively.

 

36


Table of Contents

Fiscal Year End

 

On February 3, 2012, our Board of Directors approved a change to our fiscal year-end from June 30 to December 31. Included in this prospectus is the transition period for the six months ended December 31, 2011. Accordingly, we present the consolidated balance sheets as of June 30, 2010 and 2011 and December 31, 2011, and the consolidated statements of comprehensive income, changes in convertible preferred stock and stockholders’ deficit, and cash flows for the fiscal years ended June 30, 2009, 2010 and 2011 and the six months ended December 31, 2010 and 2011. References to “fiscal 2009”, “fiscal 2010” and “fiscal 2011” still refer to the fiscal years ended June 30, 2009, 2010 and 2011, respectively.

 

Key Factors Affecting Our Performance

 

Total customers. We believe total customers is a key indicator of our market penetration, growth and future revenues. We have aggressively invested in and intend to continue to invest in our direct sales force, as well as to pursue additional partnerships within our indirect sales channel. We generally define a customer as an entity with an active service contract as of the measurement date. In situations where there is a single contract that applies to entities with multiple subsidiaries or divisions, universities, or governmental organizations, each entity that has contracted for a separate production instance of our service is counted as a separate customer. Our total customers were 281, 460 and 771 as of June 30, 2009, 2010 and 2011, respectively, and 602 and 974 as of December 31, 2010 and 2011, respectively.

 

Investment in growth. We have aggressively invested, and intend to continue to invest, in expanding our operations, increasing our headcount and developing technology to support our growth. We expect our total operating expenses to increase in the foreseeable future, particularly as we continue to expand our sales and hosting operations. We continue to invest in our sales and marketing organization to drive additional revenues and support the growth of our customer base. Any investments we make in our sales and marketing organization will occur in advance of experiencing any benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating our resources in these areas.

 

Renewal rate. We calculate our renewal rate by subtracting our attrition rate from 100%. Our attrition rate for a period is equal to the annual contract value from customers that are due for renewal in the period and did not renew, divided by the total annual contract value from all customers due for renewal during the period. Annual contract value is equal to the first twelve months of expected subscription revenues under a contract. We believe our renewal rate is an important metric to measure the long-term value of customer agreements and our ability to retain our customers. Our renewal rate was 94%, 95%, and 97% in fiscal 2009, 2010 and 2011, respectively, and 99% and 97% in the six months ended December 31, 2010 and 2011, respectively.

 

Upsells. In order for us to continue to grow our business, it is important to generate additional revenue from existing customers. We believe there is significant opportunity to increase the number of subscriptions sold to current customers as customers become more familiar with our platform and adopt our applications to address additional business use cases. We believe our ability to upsell is a key factor affecting our ability to further penetrate our existing customer base. We monitor upsells by measuring the annual contract value of upsells signed in the period as a percentage of our total annual contract value of all contracts signed in the period. Upsells as a percentage of total annual contract value signed was 20%, 25% and 27% in fiscal 2009, 2010 and 2011, respectively, and 25% and 28% in the six months ended December 31, 2010 and 2011, respectively.

 

Investment in infrastructure. We intend to continue to make substantial investments in new equipment to support growth at our data centers and provide enhanced levels of service to our customers. We are transitioning from a managed service hosting model, where a third party manages most aspects of the operations of the hosting infrastructure, to a co-location model, where we will have more direct control over the infrastructure and its operation. We are also investing in enhancements to our cloud architecture, which are designed to provide our customers with enhanced data reliability and availability. We expect to complete these two transitions in the second half of 2012. We made capital expenditures of $8.4 million in the six months ended December 31, 2011

 

37


Table of Contents

and anticipate making capital expenditures of approximately $25.0 million during 2012 for purchases of equipment used in our data centers. Actual capital expenditures during 2012 may fluctuate from this estimate due to unforeseen circumstances, such as changes to our customer growth rate or project delays.

 

Professional services model. We believe our investment in professional services facilitates the adoption of our subscription service. As a result, our sales efforts have been focused primarily on our subscription service, rather than the profitability of our professional services business. Historically, our pricing for professional services was predominantly on a fixed-fee basis and the cost of the time and materials incurred to complete these services was greater than the amount charged to the customer. These factors contributed to our negative gross profit percentages from professional services of (220)%, (202)% and (21)% for fiscal 2009, 2010 and 2011, respectively, and (43)% and (51)% for the six months ended December 31, 2010 and 2011, respectively. The improvement in gross profit percentages was due in part to the adoption of new revenue recognition accounting guidance commencing on July 1, 2010. In addition, in December 2011, we began shifting our pricing model to a time-and-materials basis. In the future, we intend to price our professional services based on the anticipated cost of those services and as a result expect to improve the gross profit percentage of our professional services business.

 

Platform adoption. Our service includes access to our suite of applications, as well as access to our platform to develop custom applications. Though in the near term we expect our revenue growth to be primarily driven by the pace of adoption and penetration of our suite of applications, we are investing considerable resources to enhance the application development capabilities of our platform. We believe the adoption of our platform will enhance our ability to acquire new customers, to increase renewals and to increase upsells due to an increase in the number of authorized users per customer.

 

Components of Results of Operations

 

Revenues

 

Subscription revenues. Subscription revenues are primarily comprised of fees which give customers access to our suite of on-demand applications, as well as access to our platform to build custom applications. Pricing includes multiple instances, hosting and support services, data backup and disaster recovery services, as well as future upgrades offered during the subscription period. In addition, we offer two separately licensed enabling technologies, Discovery and Runbook Automation. We typically invoice our customers for subscription fees in annual increments upon initiation of the initial contract or subsequent renewal. We generally enter into arrangements with customers to purchase subscriptions for a term greater than 12 months, with an average initial contract term of approximately 30 months. Our contracts are generally non-cancelable, though customers can terminate for breach if we materially fail to perform. Fees for subscription services are generally billed annually in advance.

 

We generate sales directly through our sales team and, to a lesser extent, through our channel partners. Sales to our channel partners are made at a discount and revenues are recorded at the discounted price when all revenue recognition criteria are met. In addition, we pay referral fees to third parties typically ranging from 10% to 20% of the first year’s annual contract value. These fees are included in sales and marketing expense.

 

Professional services and other revenues. Professional services revenues consist of fees associated with the implementation and configuration of our subscription service. Other revenues include customer training and attendance fees for our Knowledge conferences. Historically, our pricing for professional services was predominantly on a fixed-fee basis. However, in December 2011, we began shifting our pricing model to a time-and-materials basis. Going forward, we anticipate the majority of our new business will be priced on a time-and-materials basis. Most of our professional services engagements span six to eight months. We typically bill for our fixed price professional services in two installments, with the first installment due up front and the second installment due at either a specified future date (usually approximately three months from the contract

 

38


Table of Contents

start date) or upon completion of the services. Our time-and-materials professional services are generally billed monthly in arrears based on actual hours and expenses incurred. Typical payment terms provide our customers pay us within 30 days of invoice.

 

Prior to fiscal 2011, we recorded revenues from our professional services over a period commensurate with our subscription service contracts. However, the cost associated with our professional services engagements was recorded as the services were delivered, resulting in lower gross profit percentages in fiscal 2009 and 2010. On July 1, 2010, we adopted new revenue recognition accounting guidance on a prospective basis that enabled us to separately allocate value for our multiple element arrangements between our subscription revenues and professional services revenues, based on the best estimate of selling price. As a result, professional services revenues are recognized as the services are delivered, which is substantially the same period as the associated costs are incurred. This shift resulted in an increase to professional services and other revenues of $5.5 million for fiscal 2011. Refer to “Critical Accounting Policies and Significant Judgments and Estimates” below for further discussion of our revenue recognition accounting policy.

 

Backlog. Backlog represents future amounts to be invoiced under our agreements. As of December 31, 2011, we had backlog of approximately $210 million. We expect backlog will change from period to period for several reasons, including the timing and duration of customer subscription and professional services agreements, varying billing cycles of subscription agreements, and the timing of customer renewals.

 

Overhead Allocation

 

Overhead associated with our facilities, IT costs and depreciation is allocated to our cost of revenues and operating expenses based on headcount.

 

Cost of Revenues

 

Subscription cost of revenues. Cost of subscription revenues primarily consists of expenses related to hosting our service and providing support. These expenses are comprised of data center capacity costs; personnel and related costs directly associated with our cloud infrastructure and customer support, including salaries, benefits, bonuses and stock-based compensation; allocated overhead; and third-party referral fees.

 

Professional services and other cost of revenues. Cost of professional services and other revenues consists primarily of personnel and related costs directly associated with our professional services and training departments, including salaries, benefits, bonuses and stock-based compensation; the costs of contracted third-party vendors; and allocated overhead.

 

Professional services associated with the implementation and configuration of our subscription service are performed directly by our services team, as well as by contracted third-party vendors. Fees paid up-front to our third-party vendors are deferred and amortized to cost of revenues as the services are delivered. Fees owed to our third-party vendors are accrued over the same requisite service period. Cost of revenues associated with our professional services engagements contracted with third-party vendors as a percentage of professional services and other revenues was 52%, 135% and 54% for fiscal 2009, 2010 and 2011, respectively, and 70% and 64% for the six months ended December 31, 2010 and 2011, respectively. Cost of revenues associated with our professional services engagements contracted with third-party vendors as a percentage of the total professional services and other cost of revenues was 16%, 45% and 45% for fiscal 2009, 2010 and 2011, respectively, and 49% and 43% for the six months ended December 31, 2010 and 2011, respectively.

 

Sales and Marketing Expenses

 

Sales and marketing expenses consist primarily of personnel and related costs directly associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions and stock-based compensation. Other costs included in this expense are marketing and promotional events, including our Knowledge conferences, online marketing, product marketing and allocated overhead.

 

39


Table of Contents

Research and Development Expenses

 

Research and development expenses consist primarily of personnel and related costs directly associated with our research and development staff, including salaries, benefits, bonuses and stock-based compensation, and allocated overhead.

 

General and Administrative Expenses

 

General and administrative expenses primarily consist of personnel and related costs for our executive, finance, legal, human resources and administrative personnel, including salaries, benefits, bonuses and stock-based compensation; legal, accounting and other professional services fees; other corporate expenses; and allocated overhead.

 

Provision for Income Taxes

 

Provision for income taxes consists of federal, state and foreign income taxes. Due to cumulative losses, we maintain a valuation allowance against our deferred tax assets as of December 31, 2011. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets.

 

Results of Operations

 

To enhance comparability, the following table sets forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.

 

     Fiscal Years Ended June 30,      Six Months Ended
December 31,
 
     2009     2010     2011      2010      2011  
     (in thousands)  

Revenues(1):

  

Subscription

   $ 17,841      $ 40,078      $ 79,191       $ 33,191       $ 64,886   

Professional services and other

     1,474        3,251        13,450         4,753         8,489   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total revenues

     19,315        43,329        92,641         37,944         73,375   

Cost of revenues(2)(3):

            

Subscription

     3,140        6,378        15,311         6,096         15,073   

Professional services and other

     4,711        9,812        16,264         6,778         12,850   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total cost of revenues

     7,851        16,190        31,575         12,874         27,923   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

     11,464        27,139        61,066         25,070         45,452   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Operating expenses(2)(3):

            

Sales and marketing

     8,499        19,334        34,123         13,728         32,501   

Research and development

     2,433        7,194        7,004         2,758         7,030   

General and administrative

     6,363        28,810        9,379         3,417         10,084   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

     17,295        55,338        50,506         19,903         49,615   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) from operations

     (5,831     (28,199     10,560         5,167         (4,163

Interest and other income (expense), net

     (27     (1,226     606         289         (1,446
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) before provision for income taxes

     (5,858     (29,425     11,166         5,456         (5,609

Provision for income taxes

     48        280        1,336         653         1,075   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ (5,906   $ (29,705   $ 9,830       $ 4,803       $ (6,684
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

40


Table of Contents

 

(1)  

Revenues for fiscal 2011 and the six months ended December 31, 2010 and 2011 reflect the prospective adoption of new revenue accounting guidance commencing on July 1, 2010. As a result of this guidance, we separately allocate value for multiple element contracts between our subscription revenues and professional services revenues based on the best estimate of selling price. Additionally, we recognize professional services revenues as the services are delivered. Please refer to Note 2 to our consolidated financial statements for further discussion of our revenue recognition policies.

(2)  

Stock-based compensation included in the statements of operations above was as follows:

 

     Fiscal Year Ended June 30,      Six Months Ended
December 31,
 
       2009          2010          2011            2010              2011      
     (in thousands)  

Cost of revenues:

              

Subscription

   $ 6       $ 48       $ 548       $ 225       $ 674   

Professional services and other

     11         28         117         37         193   

Sales and marketing

     45         277         1,004         431         2,010   

Research and development

     50         90         468         207         704   

General and administrative

     15         102         817         221         2,056   

 

(3)  

Operating expenses for fiscal 2009 reflect compensation expense of $3.8 million related to the stock settlement of an outstanding promissory note in connection with our sale and issuance of Series C preferred stock. Cost of revenues and operating expenses for fiscal 2010 reflect compensation expense of $0.7 million and $30.1 million, respectively, related to the repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock.

 

     Fiscal Year Ended June 30,     Six Months Ended
December 31,
 
     2009     2010     2011         2010             2011      
     (as a percentage of revenues)  

Revenues:

  

Subscription

     92     92     85     87     88

Professional services and other

     8        8        15        13        12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100        100        100        100        100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

          

Subscription

     16        15        16        16        20   

Professional services and other

     25        22        18        18        18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     41        37        34        34        38   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     59        63        66        66        62   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Sales and marketing

     44        45        37        36        44   

Research and development

     12        17        8        7        10   

General and administrative

     33        66        10        9        14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     89        128        55        52        68   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (30     (65     11        14        (6

Interest and other income (expense), net

            (3     1        1        (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (30     (68     12        15        (8

Provision for income taxes

     1        1        1        2        1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (31 )%      (69 )%      11     13     (9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

41


Table of Contents
NNN,NNN NNN,NNN NNN,NNN NNN,NNN NNN,NNN
     Fiscal Years Ended June 30,     Six Months Ended
December 31,
 
     2009     2010     2011     2010     2011  
    

(in thousands)

 

Revenues by geography

          

North America

   $ 14,062         $ 31,396         $ 69,333         $ 27,919         $ 51,901      

Europe

     5,018        10,708        20,093        8,693        18,842   

Asia Pacific and other

     235        1,225        3,215        1,332        2,632   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 19,315      $ 43,329      $ 92,641      $ 37,944      $ 73,375   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

NNN,NNN NNN,NNN NNN,NNN NNN,NNN NNN,NNN
     Fiscal Year Ended June 30,     Six Months Ended
December  31,
 
         2009             2010             2011             2010             2011      

Revenues by geography

          

North America

    
73

    72     75     74     71

Europe

     26     25     22     23     26

Asia Pacific and other

     1     3     3     3     3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Comparison of the six months ended December 31, 2010 and 2011

 

Revenues

 

     Six Months Ended December 31,     % Change  
             2010                     2011            
     (dollars in thousands)        

Revenues:

      

Subscription

   $ 33,191      $ 64,886        95

Professional services and other

     4,753        8,489        79
  

 

 

   

 

 

   

Total revenues

   $ 37,944      $ 73,375        93
  

 

 

   

 

 

   

Percentage of revenues:

      

Subscription

     87     88  

Professional services and other

     13     12  
  

 

 

   

 

 

   

Total

     100     100  
  

 

 

   

 

 

   

 

Revenues increased $35.4 million, comprised primarily of the increase to subscription revenues of $31.7 million. Subscription revenues increased primarily due to new customers and additional subscriptions sold to current customers. Our total number of customers increased 62% from December 31, 2010 to December 31, 2011. The average subscription revenues per customer increased 19% over this period primarily due to an increase in the number of subscriptions sold to existing customers. The increase in professional services and other revenues of $3.7 million was primarily due to the growth in our customer base.

 

42


Table of Contents

Cost of Revenues and Gross Profit Percentage

 

     Six Months Ended December 31,     % Change  
             2010                     2011            
     (dollars in thousands)        

Cost of revenues:

      

Subscription

   $ 6,096      $ 15,073        147

Professional services and other

     6,778        12,850        90
  

 

 

   

 

 

   

Total cost of revenues

   $ 12,874      $ 27,923        117
  

 

 

   

 

 

   

Gross profit percentage:

      

Subscription

     82     77  

Professional services and other

     (43 )%      (51 )%   
  

 

 

   

 

 

   

Total gross profit percentage

     66     62  
  

 

 

   

 

 

   

Gross profit

   $ 25,070      $ 45,452        81

Headcount (at period end)

     101        217        115

 

Cost of subscription revenues increased $9.0 million resulting in a decrease from 82% to 77% in subscription gross profit percentage. The overall increase in cost of subscription revenues was primarily attributed to increased personnel-related costs of $4.9 million, consisting of increased employee compensation, benefits and travel costs of $4.5 million and additional stock-based compensation of $0.4 million. In addition, hosting fees for our network infrastructure increased $1.6 million as we increased data center capacity to support our growth. At December 31, 2011, we delivered our service from five data centers in the United States and six data centers internationally compared to three data centers in the United States and five data centers internationally at December 31, 2010. Depreciation expense also increased $1.1 million as we started the transition of our network infrastructure from a managed services hosting model to a co-location model.

 

Cost of professional services and other revenues increased $6.1 million resulting in a decrease in professional services and other gross profit percentage from (43)% to (51)%. The overall increase in cost of professional services and other revenues was primarily attributed to increased personnel-related costs of $3.7 million, consisting of increased employee compensation, benefits and travel costs of $3.5 million and additional stock-based compensation of $0.2 million. In addition, outside services increased $1.9 million primarily related to additional fees paid to third-parties to provide implementation services.

 

Total headcount associated with cost of revenues increased 115% from December 31, 2010 to December 31, 2011 as we invested in additional resources to continue to support our subscription service and further develop our professional services group.

 

We expect cost of subscription revenues to increase in line with increases in revenues. Additionally, we are in the process of transitioning our network infrastructure from a managed service hosting model to a co-location model. We expect to complete the transition in the second half of 2012. We anticipate a negative impact on our gross profit percentage in the near term as we accelerate depreciation on certain assets from our managed service hosting data centers and incur additional rent expenses as we complete the migration. However, as our data centers scale with our anticipated customer growth, we expect this transition will improve our gross profit percentage in the long term.

 

We expect cost of professional services and other will continue to increase as revenues increase and as we further develop our professional services group. In the future, we expect our gross profit percentage to improve as we increase our focus on the profitability of the professional services business.

 

43


Table of Contents

Sales and Marketing

 

     Six Months Ended December 31,     % Change  
             2010                     2011            
     (dollars in thousands)        

Sales and marketing

   $ 13,728      $ 32,501        137

Percentage of revenues

     36     44  

Headcount (at period end)

     90        242        169

 

Sales and marketing expenses increased $18.8 million due to the expansion of our sales force and increases in marketing programs to address additional opportunities in new and existing markets. Total headcount in sales and marketing increased 169% from December 31, 2010 to December 31, 2011, contributing to a $13.3 million increase in personnel-related costs, consisting primarily of increased employee compensation, benefits and travel costs associated with our direct sales force of $11.8 million, and additional stock-based compensation of $1.6 million. In addition, we incurred an increase of $3.1 million in commissions directly attributable to increased sales and changes made to our commissions plan in the six months ended December 31, 2011. Marketing and event costs increased $1.3 million due to our continued efforts to generate sales leads and build brand awareness.

 

We expect sales and marketing expenses to increase and continue to be our largest component of costs and expenses, as we continue to expand our direct sales teams, increase our marketing activities, grow our international operations, build brand awareness and sponsor additional marketing events.

 

Research and Development

 

     Six Months Ended December 31,     % Change  
             2010                     2011            
     (dollars in thousands)        

Research and development

   $ 2,758      $ 7,030        155

Percentage of revenues

     7     10  

Headcount (at period end)

     34        83        144

 

Research and development expenses increased $4.3 million primarily due to increased personnel-related costs of $4.0 million, consisting of increased employee compensation, benefits and travel costs associated with our research and development team of $3.5 million and additional stock-based compensation of $0.5 million. Total headcount in research and development increased 144% from December 31, 2010 to December 31, 2011 as we upgraded and extended our service offerings and developed new technologies.

 

We expect research and development expenses to increase as we improve the existing functionality of our service, develop new applications to fill market needs and continue to enhance our core platform.

 

General and Administrative

 

     Six Months Ended December 31,     % Change  
             2010                     2011            
     (dollars in thousands)        

General and administrative

   $ 3,417      $ 10,084        195

Percentage of revenues

     9     14  

Headcount (at period end)

     25        61        144

 

General and administrative expenses increased $6.7 million primarily due to increased headcount of 144% from December 31, 2010 to December 31, 2011. Personnel-related expenses increased by $4.1 million, consisting of increased employee compensation, benefits and travel costs of $2.3 million and additional stock-based

 

44


Table of Contents

compensation of $1.8 million, as we added employees to support the growth of our business. Professional and outside service costs increased $1.6 million, comprised primarily of legal and accounting fees associated with our international expansion.

 

We expect to incur higher general and administrative expenses as a result of both our growth and transition as a public company, including higher legal, corporate insurance and accounting expenses, and the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act and related regulations. We expect the continued expansion of our operations will also contribute to higher general and administrative expenses.

 

Interest and Other Income (Expense), net

 

     Six Months Ended December 31,     % Change  
             2010                     2011            
     (dollars in thousands)        

Interest and other income (expense), net

   $ 289      $ (1,446     NM   

Percentage of revenues

     1     (2 )%   

 

Interest and other income (expense), net primarily consists of foreign currency transaction gains and losses. The decrease of $1.7 million is primarily due to unrealized losses on amounts invoiced to customers that are denominated in British Pounds and Euros as the U.S. Dollar strengthened over the six months ended December 31, 2011 as compared to the six months ended December 31, 2010. While we have not engaged in the hedging of our foreign currency transactions to date, we are presently evaluating the costs and benefits of initiating such a program and may in the future hedge selected significant transactions denominated in currencies other than the U.S. Dollar.

 

Provision for Income Taxes

 

     Six Months Ended December 31,     % Change  
             2010                     2011            
     (in thousands)        

Income before income taxes

   $ 5,456      $ (5,609     NM   

Provision for income taxes

     653        1,075        65

Effective tax rate

     12     (19 )%   

 

The provision for income taxes increased $0.4 million, primarily as a result of the increase in pre-tax income related to international operations and California taxes for the six months ended December 31, 2011 compared to the same period in the prior year. During the six months ended December 31, 2011, we recorded a provision for income taxes principally attributable to foreign taxes, U.S. federal taxes and California taxes.

 

We expect to expand our international operations to better support our growth in international markets. Effective December 1, 2011, we reorganized our international operations to establish a centralized international headquarters in Amsterdam and to provide flexibility to accommodate structural and operational expansion outside of North America. Our future effective tax rates may be adversely affected by earnings being lower than anticipated in countries that have lower statutory rates and earnings being higher than anticipated in countries that have higher statutory rates. The earnings of our foreign subsidiaries are considered permanently reinvested outside of the United States.

 

45


Table of Contents

Comparison of Fiscal 2009, 2010 and 2011

 

Revenues

 

     Fiscal Year Ended June 30,     2009 to 2010
% Change
    2010 to 2011
% Change
 
     2009     2010     2011      
     (dollars in thousands)              

Revenues:

          

Subscription

   $ 17,841      $ 40,078      $ 79,191        125     98

Professional services and other

     1,474        3,251        13,450        121     314
  

 

 

   

 

 

   

 

 

     

Total revenues

   $ 19,315      $ 43,329      $ 92,641        124     114
  

 

 

   

 

 

   

 

 

     

Percentage of revenues:

          

Subscription

     92     92     85    

Professional services and other

     8        8        15       
  

 

 

   

 

 

   

 

 

     

Total

     100     100     100    
  

 

 

   

 

 

   

 

 

     

 

Fiscal 2010 compared to fiscal 2011. Revenues increased $49.3 million, comprised primarily of increased subscription revenues of $39.1 million. Subscription revenues increased primarily due to new customers and additional subscriptions sold to existing customers. Our total number of customers increased 68% from June 30, 2010 to June 30, 2011. The average subscription revenues per customer increased 19% over this period primarily due to an increase in the number of subscriptions sold to existing customers. The increase in professional services and other revenues of $10.2 million was primarily due to the prospective adoption of new revenue accounting guidance resulting in an increase to professional services and other revenues of $5.5 million in fiscal 2011. The remaining increase of $4.7 million was attributable to the growth in our customer base.

 

Fiscal 2009 compared to fiscal 2010. Revenues increased $24.0 million, comprised primarily of increased subscription revenues of $22.2 million. Subscription revenues increased primarily due to new customers and additional subscriptions sold to existing customers. The average subscription revenues per customer increased 41% over this period primarily due to an increase in the average number of subscriptions sold to new customers. Our total number of customers increased by 64% from June 30, 2009 to June 30, 2010. The increase in professional services and other revenues of $1.8 million was primarily attributable to the growth in our customer base.

 

Cost of Revenues and Gross Profit Percentage

 

     Fiscal Year Ended June 30,     2009 to 2010
% Change
    2010 to 2011
% Change
 
     2009     2010     2011      
     (dollars in thousands)              

Cost of revenues:

          

Subscription

   $ 3,140      $ 6,378      $ 15,311        103     140

Professional services and other

     4,711        9,812        16,264        108     66
  

 

 

   

 

 

   

 

 

     

Total cost of revenues

   $ 7,851      $ 16,190      $ 31,575        106     95
  

 

 

   

 

 

   

 

 

     

Gross profit percentage:

          

Subscription

     82     84     81    

Professional services and other

     (220     (202     (21    
  

 

 

   

 

 

   

 

 

     

Total gross profit percentage

     59     63     66    
  

 

 

   

 

 

   

 

 

     

Gross profit

   $ 11,464      $ 27,139      $ 61,066        137     125

Headcount (at period end)

     38        66        150        74     127

 

46


Table of Contents

Fiscal 2010 compared to fiscal 2011. Cost of subscription revenues increased $8.9 million, resulting in a decrease from 84% to 81% in subscription gross profit percentage from June 30, 2010 to June 30, 2011. The overall increase in cost of subscription revenues was primarily attributable to increased personnel-related costs of $5.0 million, consisting of increased employee compensation, benefits and travel costs of $4.5 million and additional stock-based compensation of $0.5 million. Hosting fees for our network infrastructure increased $2.1 million as we increased data center capacity to support our growth. At June 30, 2011, we delivered our service from five data centers in the United States and six data centers internationally compared to three data centers in the United States and five data centers internationally at June 30, 2010. Depreciation expense also increased $0.8 million as we started the transition of our network infrastructure from a managed service hosting model to a co-location model.

 

Cost of professional services and other revenues increased $6.5 million from June 30, 2010 to June 30, 2011. Our professional services and other gross profit percentage improved from (202)% to (21)% from June 30, 2010 to June 30, 2011, primarily due to increased revenues as a result of the prospective adoption of new revenue recognition accounting guidance. This guidance enabled us to recognize professional services revenues as the services are delivered. The overall increase in cost of professional services and other revenues was primarily attributable to increased employee compensation, benefits and travel costs of $3.1 million and increased outside services costs of $3.1 million primarily related to additional fees paid to third parties to provide implementation services.

 

Total headcount associated with cost of revenues increased 127% from June 30, 2010 to June 30, 2011 as we invested in additional resources to continue to support our subscription service and further develop our professional services group.

 

Fiscal 2009 compared to fiscal 2010. Our subscription gross profit percentage increased from 82% to 84% from June 30, 2009 to June 30, 2010, due to increased revenues of $22.2 million offset by an increase in the cost of subscription revenues of $3.2 million. The overall increase in cost of subscription revenues was primarily attributed to an increase in our hosting fees for our network infrastructure of $1.5 million as we increased data center capacity to support our growth. At June 30, 2010, we delivered our service from three data centers in the United States and five data centers internationally compared to three data centers in the United States and two data centers internationally at June 30, 2009. Personnel-related costs increased $1.1 million, consisting of increased employee compensation, benefits and travel costs.

 

Our professional services and other gross profit percentage improved from (220)% to (202)% from June 30, 2009 to June 30, 2010, due to an increase in professional services and other revenues of $1.8 million offset by an increase in cost of professional services and other revenues of $5.1 million. The overall increase in cost of professional services and other revenues was primarily attributable to increased outside services costs of $3.2 million primarily related to additional fees paid to third parties to provide implementation services. In addition, personnel-related costs increased $1.5 million, consisting primarily of increased employee compensation, benefits and travel costs of $1.4 million. Total headcount associated with cost of revenues increased 74% from June 30, 2009 to June 30, 2010 as we invested in additional resources to continue to support our subscription service and further develop our professional services group.

 

47


Table of Contents

Sales and Marketing

 

     Fiscal Year Ended June 30,      2009 to 2010
% Change
     2010 to 2011
% Change
 
     2009      2010      2011        
     (dollars in thousands)         

Sales and marketing

   $ 8,499       $ 19,334       $ 34,123         127%         76%   

Percentage of revenues

     44%         45%         37%         

Headcount (at period end)

     40         72         140         80%         94%   

 

Fiscal 2010 compared to fiscal 2011. Sales and marketing expenses increased $14.8 million. Employee-related costs increased $13.3 million, consisting of increased employee compensation, benefits and travel costs in connection with our direct sales force of $11.5 million, increased commissions of $1.1 million, and an increase in stock-based compensation of $0.7 million, which was primarily driven by an increase in sales and marketing headcount of 94% from June 30, 2010 to June 30, 2011. In addition, we incurred an increase of $2.7 million in marketing and event costs primarily attributable to our annual Knowledge conference, which experienced a 107% increase in attendance year-over-year. Offsetting these increases was a decrease of $2.0 million in compensation expense related to the fiscal 2010 repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock. Please see Note 7 to our consolidated financial statements for further explanation of this transaction.

 

Fiscal 2009 compared to fiscal 2010. Sales and marketing expenses increased $10.8 million. Employee-related costs increased $7.6 million, consisting of increased employee compensation, benefits and travel costs in connection with our direct sales force of $4.7 million, increased commissions of $2.7 million, and an increase in stock-based compensation of $0.2 million, which was primarily driven by an increase in sales and marketing headcount of 80% from June 30, 2009 to June 30, 2010. In addition, fiscal 2010 included $2.0 million in compensation expense related to the repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock. Marketing and event costs, primarily related to our Knowledge conference, increased $0.8 million.

 

Research and Development

 

     Fiscal Year Ended June 30,      2009 to 2010
% Change
     2010 to 2011
% Change
 
     2009      2010      2011        
     (dollars in thousands)                

Research and development

   $ 2,433       $ 7,194       $ 7,004         196%         (3)%   

Percentage of revenues

     13%         17%         8%         

Headcount (at period end)

     15         28         44         87%         57%   

 

Fiscal 2010 compared to fiscal 2011. Research and development expenses decreased $0.2 million. Personnel-related costs increased $2.8 million, consisting of increased employee compensation, benefits and travel costs of $2.4 million and increased stock-based compensation of $0.4 million, which was primarily driven by an increase in research and development headcount of 57% from June 30, 2010 to June 30, 2011. In addition, outside services costs increased $0.4 million. Offsetting these increases was a decrease of $3.6 million in compensation expense related to the fiscal 2010 repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock.

 

Fiscal 2009 compared to fiscal 2010. Research and development expenses increased $4.8 million primarily due to $3.6 million in compensation expense related to the repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock in fiscal 2010. In addition, personnel-related costs increased $1.1 million, primarily consisting of increased employee compensation, benefits and travel costs of $1.0 million, which was driven by an increase in research and development headcount of 87% from June 30, 2009 to June 30, 2010.

 

48


Table of Contents

General and Administrative

 

     Fiscal Year Ended June 30,      2009 to  2010
%Change
     2010 to  2011
%Change
 
     2009      2010      2011        
     (dollars in thousands)                

General and administrative

   $ 6,363       $ 28,810       $ 9,379         353%         (67)%   

Percentage of revenues

     33%         66%         10%         

Headcount (at period end)

     8         12         41         50%         242%   

 

Fiscal 2010 compared to fiscal 2011. General and administrative expenses decreased $19.4 million. Personnel-related expenses increased $3.3 million, consisting of increased employee compensation, benefits and travel costs of $2.6 million and increased stock-based compensation of $0.7 million primarily driven by an increase in general and administrative headcount of 242% from June 30, 2010 to June 30, 2011. Professional and outside service costs, comprised primarily of legal and accounting and auditing fees, increased $1.1 million. Offsetting these increases was a decrease of $24.5 million in compensation expense related to the fiscal 2010 repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock.

 

Fiscal 2009 compared to fiscal 2010. General and administrative expenses increased $22.4 million primarily due to $24.5 million in compensation expense related to the repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock in fiscal 2010. The effects of the sale and issuance of Series D preferred stock were partially offset by a decrease of $3.8 million in compensation expense related to the fiscal 2009 stock settlement of an outstanding promissory note in connection with the sale and issuance of Series C preferred stock. Please see Note 7 to our consolidated financial statements for further discussion of these transactions. In addition, general and administrative expenses increased $1.7 million primarily due to an increase in general and administrative headcount of 50% from June 30, 2009 to June 30, 2010. Personnel-related expenses increased by $0.8 million, consisting of increased employee compensation, benefits and travel costs of $0.7 million and increased stock-based compensation of $0.1 million. Professional and outside service costs, comprised mostly of legal and accounting and auditing fees, accounted for $0.6 million of the increase.

 

Interest and Other Income (Expense), net

 

     Fiscal Year Ended June 30,     2009 to  2010
%Change
     2010 to  2011
%Change
 
       2009         2010         2011         
     (dollars in thousands)               

Interest and other income (expense), net

   $ (27   $ (1,226   $ 606        NM         NM   

Percentage of revenues

         (3 )%      1     

 

Fiscal 2010 compared to fiscal 2011. The increase in interest and other income (expense), net of $1.8 million is due to losses on foreign currency transactions of $0.6 million during fiscal 2011 as compared to realized and unrealized gains of $0.5 million during fiscal 2010. Additionally, during fiscal 2010, we marked to market our preferred stock warrants and revalued them upon settlement as part of the sale and issuance of Series D preferred stock, resulting in additional expense of $0.7 million.

 

Fiscal 2009 compared to fiscal 2010. The decrease in interest and other income (expense), net of $1.2 million is due to additional realized and unrealized losses on foreign currency transactions of $0.5 million coupled with the revaluation of our preferred stock warrants upon settlement resulting in a decrease of $0.7 million.

 

49


Table of Contents

Provision for Income Taxes

 

     Fiscal Year Ended June 30,      2009 to 2010
% Change
     2010 to 2011
% Change
 
         2009             2010           2011          
     (dollars in thousands)                

Provision for income taxes

   $ 48      $ 280      $ 1,336         483%         377%   

Effective tax rate

     (1 )%      (1 )%      12%         

 

Fiscal 2010 compared to fiscal 2011. The provision for income taxes increased $1.1 million primarily as a result of the increase in pre-tax income related to international operations and California taxes.

 

Fiscal 2009 compared to fiscal 2010. The provision for income taxes increased $0.2 million primarily as a result of international operations.

 

Quarterly Results of Operations

 

The following tables set forth our unaudited quarterly consolidated statements of operations data and our unaudited consolidated statements of operations data as a percentage of total revenues for each of the six quarters in the period ended December 31, 2011. We have prepared the quarterly data on a consistent basis with the audited consolidated financial statements included in this prospectus. In the opinion of management, the financial information reflects all necessary adjustments, consisting of normal recurring adjustments, necessary for a fair statement of this data. This information should be read in conjunction with the audited consolidated financial statements and related noted included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future periods.

 

     For the Three Months Ended  
     Sep 30,
2010
     Dec 31,
2010
    March 31,
2011
     June 30,
2011
     Sep 30,
2011
    Dec 31,
2011
 
     (in thousands)  

Revenues:

               

Subscription

   $ 14,816       $ 18,375      $ 21,224       $ 24,776       $ 30,331      $ 34,555   

Professional services and other

     1,773         2,980        3,988         4,709         3,866        4,623   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     16,589         21,355        25,212         29,485         34,197        39,178   

Cost of revenues(1):

               

Subscription

     2,711         3,385        4,451         4,764         6,323        8,750   

Professional services and other

     2,653         4,125        4,763         4,723         5,609        7,241   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total cost and revenues

     5,364         7,510        9,214         9,487         11,932        15,991   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Gross profit

     11,225         13,845        15,998         19,998         22,265        23,187   

Operating expenses(1):

               

Sales and marketing

     6,433         7,295        8,309         12,086         13,980        18,521   

Research and development

     1,237         1,521        1,885         2,361         2,757        4,273   

General and administrative

     1,453         1,964        2,680         3,282         4,509        5,575   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     9,123         10,780        12,874         17,729         21,246        28,369   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     2,102         3,065        3,124         2,269         1,019        (5,182

Interest and other income (expense), net

     320         (31     252         65         (729     (717
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before provision for income taxes

     2,422         3,034        3,376         2,334         290        (5,899

Provision for income taxes

     290         363        385         298         169        906   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 2,132       $ 2,671      $ 2,991       $ 2,036       $ 121      $ (6,805
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

50


Table of Contents

 

(1)  

Stock-based compensation included in the statements of operations above was as follows:

 

     For the Three Months Ended  
     Sep 30,
2010
     Dec 31,
2010
     March 31,
2011
     June 30,
2011
     Sep 30,
2011
     Dec 31,
2011
 
     (in thousands)  

Cost of revenues:

                 

Subscription

   $ 97       $ 128       $ 156       $ 167       $ 201       $ 473   

Professional services and other

     15         22         38         42         71         122   

Sales and marketing

     192         239         288         285         800         1,210   

Research and development

     95         112         143         118         263         441   

General and administrative

     134         87         130         466         1,056         1,000   

 

     For the Three Months Ended  
     Sep 30,
2010
    Dec 31,
2010
    March 31,
2011
    June 30,
2011
    Sep 30,
2011
    Dec 31,
2011
 
     (as a percentage of revenues)  

Revenues:

            

Subscription

     89     86     84     84     89     88

Professional services and other

     11        14        16        16        11        12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100        100        100        100        100        100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

            

Subscription

     16        16        18        16        18        22   

Professional services and other

     16        19        19        16        17        19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     32        35        37        32        35        41   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     68        65        63        68        65        59   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Sales and marketing

     39        34        33        41        41        47   

Research and development

     7        7        7        8        8        11   

General and administrative

     9        9        11        11        13        14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     55        50        51        60        62        72   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     13        15        12        8        3        (13

Interest and other income (expense), net

     2               1               (2     (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     15        15        13        8        1        (15

Provision for (benefit from) income taxes

     2        2        1        1               (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     13     13     12     7     1     (17 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Seasonality, Cyclicality and Quarterly Trends

 

We have historically experienced seasonality in terms of when we enter into customer agreements for our service. We sign a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the quarters ended June 30 and December 31. The increase in customer agreements for the quarters ended June 30 is primarily as a result of the historical terms of our commission plans to incentivize our direct sales force to meet their quotas by the end of the fiscal year. The increase in customer agreements for the quarter ended December 31 can be attributed to large enterprise account buying patterns typical in the software industry. Furthermore, we usually sign a significant portion of these agreements during the last month, and often the last two weeks, of each quarter. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in our revenues, due to the fact that we recognize subscription revenues over the term of the license agreement, which is generally 12 to 36 months. As a result of the change in our fiscal year end from June 30 to December 31 and changes to our commission plans to provide for earlier

 

51


Table of Contents

incentives, we may not see the same increase in new customer agreements for future quarters ended June 30. Although these seasonal factors are common in the technology industry, historical patterns should not be considered a reliable indicator of our future sales activity or performance.

 

Our revenues have increased over the periods presented due to increased sales to new customers, as well as upsells to existing customers. Our operating expenses have increased sequentially in every quarter primarily due to increases in headcount and other related expenses to support our growth. We anticipate these expenses will continue to increase in future periods as we continue to focus on investing in the long-term growth of our business.

 

In the quarters ended September 30, 2011 and December 31, 2011, we accelerated investments in our headcount and operations to drive our future growth. As a result, we generated a net loss in the quarter ended December 31, 2011 despite significant revenue growth in the period.

 

Liquidity and Capital Resources

 

     Fiscal Year Ended June 30,     Six Months Ended
December 31,
 
     2009     2010     2011     2010     2011  
     (in thousands)  

Net cash provided by (used in) operating activities

   $ 160      $ (7,532   $ 37,468      $ 10,711      $ 13,220   

Net cash used in investing activities

     (851     (1,455     (8,383     (1,857     (7,959

Net cash provided by financing activities

     3,701        30,672        1,227        222        2,154   

Net increase in cash, net of impact of exchange rates on cash

     3,016        21,614        30,451