S-1 1 w83941sv1.htm S-1 sv1
 
As filed with the Securities and Exchange Commission on August 24, 2011
 
Registration No. 333-      
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
Eloqua Limited
(Exact name of registrant as specified in its charter)
 
         
Delaware   7372   98-0551177
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
Eloqua Limited
1921 Gallows Road, Suite 250
Vienna, VA 22182
(703) 584-2750
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
 
 
Joseph P. Payne
President and Chief Executive Officer
Eloqua Limited
1921 Gallows Road, Suite 250
Vienna, VA 22182
(703) 584-2750
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
Copies to:
 
     
Christopher J. Austin, Esq.
David V. Cappillo, Esq.
Mark H. Burnett, Esq.
Goodwin Procter LLP
Exchange Place
53 State Street
Boston, Massachusetts 02109
(617) 570-1000
  Rachel W. Sheridan, Esq.
Brandon J. Bortner, Esq.
Latham & Watkins LLP
555 Eleventh Street, NW
Suite 1000
Washington, DC 20004
(202) 637-2200
 
Approximate date of commencement of proposed sale to the public: as soon as practicable after this registration statement becomes effective.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o
 
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. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
CALCULATION OF REGISTRATION FEE
 
                     
      Proposed Maximum
      Amount of
 
Title of Each Class of
    Aggregate Offering
      Registration
 
Securities to Be Registered     Price(1)       Fee(2)  
Common Stock, par value $0.0001 per share
    $ 100,000,000.00       $ 11,610.00  
                     
 
(1) Includes offering price of shares which the underwriters have the option to purchase. Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.
 
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.
 
 
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.
 
 


 

The information in this preliminary 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 preliminary prospectus is not an offer to sell securities, and it is not soliciting an offer to buy these securities, in any state or jurisdiction where the offer or sale is not permitted.
 
Preliminary prospectus, subject to completion. Dated August 24, 2011
 
Prospectus
 
           Shares
 
(ELOQUA LIMITED LOGO)
 
Eloqua Limited
 
Common Stock
 
This is the initial public offering of Eloqua Limited’s common stock.
 
We are selling           shares of common stock. The selling stockholders identified in this prospectus are selling an additional           shares of common stock. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. The estimated initial public offering price is between $      and $      per share. Currently, no public market exists for the shares.
 
We expect to apply for listing of our common stock on the NASDAQ Global Market under the symbol “ELOQ.”
 
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 11.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
                 
    Per share   Total
 
Initial public offering price
  $               $        
Underwriting discounts and commissions
  $       $    
Proceeds to us, before expenses
  $       $    
Proceeds to the selling stockholders, before expenses
  $       $  
 
The underwriters may also purchase up to an additional           shares of common stock from us and up to an additional           shares from the selling stockholders, at the initial public offering price, less the underwriting discounts and commissions, within 30 days from the date of this prospectus. We will not receive any proceeds from the sale of shares by the selling stockholders.
 
 
The underwriters expect to deliver the shares of common stock on or about          , 2011.
 
J.P. Morgan Deutsche Bank Securities
 
JMP Securities Needham & Company, LLC Pacific Crest Securities
 
 
          , 2011


 

 
TABLE OF CONTENTS
 
         
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We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.


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PROSPECTUS SUMMARY
 
This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should carefully read the entire prospectus, including the financial statements and related notes and the section entitled “Risk Factors,” before deciding whether to invest in our common stock. Unless otherwise indicated or the context otherwise requires, references in this prospectus to, “Eloqua,” “the Company,” “our company,” “we,” “us,” and “our” refer to Eloqua Limited, a Delaware corporation, and its consolidated subsidiaries. References to any year herein refer to the 12 months ended December 31 of the year indicated.
 
Eloqua Limited
 
Business Overview
 
We are a leading provider of on-demand Revenue Performance Management, or RPM, software solutions that are designed to enable businesses to accelerate revenue growth and improve revenue predictability by automating, monitoring and measuring their complex marketing and sales initiatives. Our set of RPM solutions, which we refer to as the Eloqua Platform, is a software-as-a-service, or SaaS, platform integrating our leading marketing automation software with our revenue performance analytics suite. Marketing and sales professionals use the Eloqua Platform to move prospective buyers more efficiently through the marketing and sales funnel, identify and predict the drivers of revenue, provide insights about marketing and sales programs to senior management and more tightly align marketing and sales teams to optimize resource allocation and drive revenue growth.
 
The Eloqua Platform is designed to improve marketing effectiveness and efficiency by supporting strategies such as nurture marketing, segmentation of marketing campaigns, message targeting and enhanced lead generation. The Eloqua Platform enables our customers to track and analyze a potential buyer’s interactions with various web pages, social media networks and other communications platforms, which we refer to as “Digital Body Language.” We believe this real-time insight into buyer activity enables sales professionals to more efficiently convert sales opportunities into revenue.
 
The Eloqua Platform, which includes both our Marketing Automation Platform and Revenue Suite solution, includes the following functionality:
 
  •  Revenue Performance Analytics;
 
  •  Multi-Channel Campaign Management;
 
  •  Lead Management and Sales Intelligence;
 
  •  Marketing and Sales Measurement;
 
  •  Buyer Profile Management; and
 
  •  Integration with Enterprise Solutions and Social Media Applications.
 
We also provide professional services and educational courses to support our customers’ implementation and efficient use of the Eloqua Platform. Our professional services team facilitates rapid product adoption, integration with existing enterprise systems, such as customer relationship management, or CRM, and ongoing customer success with our solutions. Our Eloqua University offers educational courses to teach customers the principles and best practices of RPM, which we believe leads to improved business performance for our customers and increases customer loyalty.


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Our solutions are particularly suited to modeling and supporting the complex sales processes of both business to business, or B2B, sales and high-value business to consumer, or B2C, sales. As of June 30, 2011, we had over 1,000 customers, encompassing a wide spectrum of industries, including the technology, financial services, entertainment, manufacturing, business services and telecommunications industries. Our customers include Adobe Systems, American Express, Cummins Power Generation, Dell, The McGraw-Hill Companies, the Miami Heat, National Instruments, Nestlé S.A., Siemens AG, Standard & Poor’s, VMware and Wells Fargo. Our ten largest customers accounted in the aggregate for less than 12% of our total revenue in each of 2010 and the six months ended June 30, 2011, and no single customer accounted for more than 3% of our total revenue during either of those periods.
 
We sell our solutions on a subscription basis and our pricing is structured such that subscription fees increase when the size of a customer’s database of potential buyers increases above the contracted level. Our total revenue increased from $32.9 million in 2008 to $41.0 million in 2009 and $50.8 million in 2010, representing year-over-year increases of 25% and 24%, respectively. For the six months ended June 30, 2011, our total revenue increased to $31.7 million from $23.0 million during the same period in 2010, representing a 38% increase. We had net losses of $12.4 million in 2008, $4.2 million in 2009, $1.5 million in 2010 and $3.5 million for the six months ended June 30, 2011.
 
Market Opportunity
 
The Internet has led to profound changes in the way consumers and enterprises choose to communicate, share information, educate themselves, make decisions and purchase products and services. This transformation is causing a shift in marketers’ spending from traditional media channels, such as broadcast and print, to emerging interactive channels, such as web, email, mobile and social media, which we believe creates a market opportunity for a robust RPM solution capable of leveraging the available data to enable more effective marketing and sales programs. Forrester Research, Inc. predicts that spending on interactive marketing in the United States will increase from $34 billion in 2011, or 18% of overall U.S. marketing expenditures, to $77 billion in 2016, or 35% of overall U.S. marketing expenditures. Within this category, spending on email, mobile and social media marketing is projected to grow from $4.7 billion in 2011 to nearly $15.7 billion in 2016, representing a compound annual growth rate, or CAGR, of 27%. Business spending on automating, analyzing and optimizing marketing and sales functions is also projected to increase. International Data Corporation, or IDC, predicts that the marketing automation market will grow from $3.2 billion in 2010 to $4.8 billion in 2015, while the CRM analytics market, which includes marketing and sales analytics, is projected to grow from $2.2 billion in 2010 to $3.4 billion in 2015.
 
The significant increase in online activity by prospective buyers has led to a corresponding increase in the amount of prospect-related digital data. If appropriately analyzed, a prospect’s Digital Body Language provides marketing and sales professionals with valuable information about a prospect’s progress through the sales funnel. We believe enterprises are increasingly realizing that effective sales execution is dependent upon leveraging the vast quantities of available data to enable the delivery of a precise, targeted and timely message that caters to a prospective buyer’s unique concerns and desires at each stage of the buying process.
 
Marketing executives are increasingly confronted with managing complex constituencies, including internal and outsourced marketing groups, direct and indirect sales channels and traditional and online prospective buyers. At the same time, marketing and sales teams are being asked to demonstrate their direct impact on revenue generation to justify the value of marketing and sales expenditures. In many cases, marketing and sales teams continue to compete within organizations for resources and recognition, resulting in a lack of coordination between the two departments. Businesses are


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increasingly recognizing that this divide is counterproductive and that a company’s marketing and sales functions need to be tightly coordinated and aligned around the same goal of growing revenue.
 
Our Solution
 
The Eloqua Platform’s comprehensive suite of integrated marketing and sales solutions enables our customers to automate their marketing and sales functions, which we believe increases their effectiveness and productivity and leads to overall enhanced business performance. Key benefits of the Eloqua Platform include:
 
  •  Comprehensive On-Demand Revenue Performance Management Platform.  Single integrated on-demand platform with best-in-class functionality to automate and optimize complex marketing and sales processes across multiple interactive channels for each prospective buyer.
 
  •  Ability to Track, Capture and Analyze a Potential Buyer’s Digital Body Language.  Ability to track, store and analyze potential buyers’ Digital Body Language, including their preferences, behavior and decision-making processes, enabling our customers to more accurately score and qualify leads and identify high-quality buyer prospects to sales personnel, thereby shortening the sales cycle.
 
  •  Real-Time Insight to Facilitate Revenue Growth and Operational Efficiency.  Comprehensive marketing and sales performance reporting tools, including detailed dashboards, tailored to meet the needs of executives seeking to fully understand the impact of marketing and sales on revenue growth.
 
  •  Seamless Integration with Other Key Enterprise Systems.  Open platform integrated with other enterprise systems, allowing third-party developers to extend the capabilities of their systems to the Eloqua Platform, thereby facilitating marketers’ ability to gather valuable customer data from disparate sources.
 
  •  Differentiated Proprietary Knowledge and Professional Services.  Extensive insights about the marketing and sales process that we leverage through our SmartStart onboarding program, our SmartXchange best practices library and our Eloqua University to provide our customers with the tools they need to maximize the benefits of our solutions and apply RPM concepts to their businesses.
 
Our Competitive Strengths
 
We believe that our position as a market leader results from several key competitive strengths, including:
 
  •  Significant Domain Expertise and Thought Leadership in Marketing Automation and Revenue Performance Management.  Since our inception in 2000, we have been an innovator in the marketing software solutions industry, leading the transition to marketing automation and, more recently, acting as a pioneer of the RPM category.
 
  •  Deep Customer Relationships and Demonstrated Customer Success.  We have deep customer relationships with what we believe are some of the most successful and fastest growing companies worldwide, which demonstrates the strength of our solutions. We believe we earn the trust of our clients by working collaboratively with them to improve the effectiveness of their marketing activities.
 
  •  Our Partner Network Enables Us to Leverage Our Platform.  We have established an effective worldwide partner network of strategic consulting and implementation partners to facilitate the rapid and successful deployment of the Eloqua Platform.


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  •  On-Demand Software Delivery Model.  We developed the Eloqua Platform as a multi-tenant SaaS solution from the start, with no hardware or software installation required by our customers, which results in lower total cost of ownership, ease of deployment and adoption and improved return on investment for our customers.
 
  •  Highly Attractive Operating Model.  We believe we have a highly attractive operating model due to the recurring nature of our revenue, the scalability of, and our ability to leverage, our SaaS platform, our opportunity to generate additional sales from our existing customers over time and the diversification of our revenue stream across industries.
 
Our Growth Strategy
 
We intend to strengthen our position as a leading provider of on-demand RPM software solutions. The key elements of our growth strategy include:
 
  •  Acquire New Customers Through Education and Increasing Awareness of RPM.  Core to our growth strategy is continuing to educate chief executive officers, sales executives, marketers and industry analysts regarding the benefits and best practices of RPM, which we believe will drive increased demand for our solutions.
 
  •  Continue to Innovate and Expand the Capabilities and Functionality of our Platform.  We plan to introduce new solutions that enhance the functionality of our platform to continually address the latest opportunities for and challenges to business executives.
 
  •  Further Expand into Our Existing Customer Base.  Many of our customers initially purchase only a portion of our solution for a limited number of users within a specific department or group. We plan to increase revenue from our existing customers by using the success of the already-implemented solutions to expand utilization across the enterprise and to cross-sell other offerings and features.
 
  •  Continue to Strengthen and Expand our Direct Sales and Partner Relationships.  We believe that there are many large enterprises and small and medium-size businesses, or SMBs, that are potential customers for the Eloqua Platform, and we are building our direct sales force to capture new customer opportunities. We plan to leverage our direct sales force to drive revenue growth and expand our global market reach, as well as efficiently increase our services delivery capacity through continued attention to our partner relationships.
 
  •  Expand our International Presence.  We plan to increase our international presence into regions where we believe customers will recognize the benefits and adopt RPM solutions, including Europe, South America and the Asia-Pacific region.
 
  •  Selectively Pursue Acquisitions of Complementary Technologies.  In addition to developing innovative solutions internally, we may selectively acquire other businesses and technologies that we believe will strengthen our competitive advantage, accelerate our customer and revenue growth and provide access to new and emerging markets.
 
Summary Risk Factors
 
Investing in our common stock involves significant risks and uncertainties. You should carefully consider the risks and uncertainties discussed under the heading “Risk Factors” elsewhere in this prospectus before making a decision to invest in our common stock. If any of these risks and uncertainties occur, our business, financial condition or results of operations may be materially


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adversely affected. In such case, the trading price of our common stock would likely decline, and you may lose all or a part of your investment. Below is a summary of some of the principal risks we face:
 
  •  we have a history of losses and may not achieve consistent profitability in the future;
 
  •  economic uncertainties or downturns in the general economy or the industries in which our customers operate could disproportionately affect the demand for our solutions and negatively impact our results of operations;
 
  •  our future performance will depend in part on the acceptance and adoption of the new RPM market;
 
  •  we have experienced rapid growth in recent periods and our recent growth rates may not be indicative of our future growth. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and customer satisfaction or adequately address competitive challenges;
 
  •  we may experience quarterly fluctuations in our operating results due to a number of factors that make our future results difficult to predict and could cause our operating results to fall below expectations;
 
  •  our quarterly results reflect seasonality in the sale of our on-demand software and professional services, which can make it difficult to achieve sequential revenue growth or could result in sequential revenue declines; and
 
  •  we face significant competition from both established and new companies offering applications and other marketing software, as well as internally developed software, which may have a negative effect on our ability to add new customers, retain existing customers and grow our business.
 
Corporate Information
 
We originally commenced operations in Canada in 2000 through Eloqua Corporation. In 2006, we effected a business reorganization whereby Eloqua Corporation became a consolidated subsidiary of Eloqua Limited, a Delaware corporation, the entity through which we conduct our operations in the United States and the issuer of the shares offered hereby. Our principal executive offices are located at 1921 Gallows Road, Suite 250 Vienna, VA 22182, and our telephone number is (703) 584-2750. Our website is www.eloqua.com. Information contained on our website does not constitute a part of this prospectus.
 
Eloqua, Active Profiles, Digital Body Language, Eloqua Web Analytics, Eloqua CRM Integration and Eloqua Co-Dynamic Lead Scoring and other trademarks or service marks of Eloqua appearing in this prospectus are the property of Eloqua. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders.


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THE OFFERING
 
 
Common stock offered by us            shares
 
Common stock offered by the selling stockholders
           shares
 
Common stock to be outstanding after this offering
           shares
 
Option to purchase additional shares We and the selling stockholders have granted the underwriters an option to purchase up to an additional           and          shares of our common stock, respectively, at the initial public offering price. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.
 
Use of proceeds We estimate that we will receive net proceeds from the sale of shares of our common stock in this offering of approximately $      million, based on an assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholders. We intend to use the net proceeds to us from this offering to repay indebtedness under our term loan, pay off our capital lease obligations and for working capital and other general corporate purposes. See “Use of Proceeds” for additional information.
 
Risk factors You should read carefully “Risk Factors” in this prospectus for a discussion of factors that you should consider before deciding to invest in our common stock.
 
Proposed NASDAQ Global Market symbol
“ELOQ”
 
The number of shares of our common stock to be outstanding following this offering is based on 60,648,571 shares of our common stock outstanding as of June 30, 2011 and excludes:
 
  •  17,924,357 shares of common stock issuable upon exercise of options outstanding as of June 30, 2011 at a weighted average exercise price of $0.61 per share;
 
  •  971,414 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2011 at a weighted average exercise price of $0.26 per share, which will remain outstanding after this offering, unless earlier exercised;
 
  •  168,750 shares of common stock issuable upon the exercise of outstanding warrants to purchase Series C preferred stock as of June 30, 2011 at an exercise price of $1.20 per share, which will be converted into warrants to purchase an equivalent number of shares of our common stock upon the completion of this offering and remain outstanding after this offering, unless earlier exercised; and


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  •            shares of common stock reserved for future issuance under our 2011 Stock Option and Incentive Plan (including an aggregate of           shares previously reserved for future issuance under our 2006 Stock Option Plan, which shares were added to the shares reserved under our 2011 Stock Option and Incentive Plan).
 
Unless otherwise indicated, all information in this prospectus reflects or assumes the following:
 
  •  the issuance of an aggregate of 9,069,225 shares of our common stock upon the exchange of all of the outstanding exchangeable common shares of our subsidiary Eloqua Corporation, a company organized under the laws of Canada, in connection with this offering, as described in “Description of Capital Stock—Exchangeable Common Shares” elsewhere in this prospectus;
 
  •  the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 49,570,397 shares of our common stock immediately prior to the completion of this offering;
 
  •  the conversion, but not the exercise, of all outstanding warrants to purchase shares of our Series C preferred stock into warrants to purchase an aggregate of 168,750 shares of our common stock, effective upon completion of this offering;
 
  •  no exercise of outstanding options or outstanding warrants after June 30, 2011;
 
  •  the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated by-laws immediately prior to the effectiveness of the registration statement of which this prospectus forms a part;
 
  •  a  -for-1 reverse stock split of our common stock that will become effective prior to the effectiveness of the registration statement of which this prospectus forms a part; and
 
  •  no exercise by the underwriters of their option to purchase additional shares.


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SUMMARY CONSOLIDATED FINANCIAL DATA
 
The following table sets forth our summary consolidated financial data as of the dates and for the periods indicated. The summary consolidated financial data as of December 31, 2009 and 2010 and for each of the three years ended December 31, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of December 31, 2008 have been derived from our audited financial statements for such year, which are not included in this prospectus. The summary consolidated financial data for the six months ended June 30, 2010 and 2011 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of June 30, 2011 have been derived from our unaudited financial statements for such period, included elsewhere in this prospectus. In our opinion, these unaudited consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements and contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of such consolidated financial data. Historical results are not necessarily indicative of the results to be expected for future periods and operating results for the six-month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. This summary consolidated financial data should be read in conjunction 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 included elsewhere in this prospectus.
 
                                         
          Six Months Ended
 
    Years Ended December 31,     June 30,  
    2008     2009     2010     2010     2011  
    (in thousands, except share and per share data)  
 
Consolidated Statements of Operations Data:
                                       
Revenue:
                                       
Subscription and support
  $   28,468     $   37,543     $ 47,225     $   21,671     $ 28,871  
Professional services
    4,402       3,415       3,574       1,309       2,821  
                                         
Total revenue
    32,870       40,958       50,799       22,980       31,692  
                                         
Cost of revenue(1):
                                       
Subscription and support
    3,536       6,423       9,569       4,400       5,887  
Professional services
    5,702       5,284       6,980       2,584       4,729  
                                         
Total cost of revenue
    9,238       11,707       16,549       6,984       10,616  
                                         
Gross profit
    23,632       29,251       34,250       15,996       21,076  
                                         
Operating expenses:
                                       
Research and development(1)
    7,499       8,607       10,363       5,283       5,507  
Marketing and sales(1)
    21,632       17,321       22,147       10,515       13,713  
General and administrative(1)
    7,007       7,348       7,879       3,793       4,785  
                                         
Total operating expenses
    36,138       33,276       40,389       19,591       24,005  
                                         
Loss from operations
    (12,506 )     (4,025 )     (6,139 )     (3,595 )     (2,929 )
Other income (expense), net
    60       (107 )     (241 )     (126 )     (414 )
                                         
Loss before income tax benefit (expense)
    (12,446 )     (4,132 )     (6,380 )     (3,721 )     (3,343 )
Income tax benefit (expense)
          (81 )     4,869       (22 )     (154 )
                                         
Net loss
    (12,446 )     (4,213 )     (1,511 )     (3,743 )     (3,497 )
Accretion of redeemable preferred stock(2)
    (4,970 )     (4,970 )     (14,815 )     (3,172 )     (70,325 )
                                         
Net loss attributable to common stockholders
  $ (17,416 )   $ (9,183 )   $ (16,326 )   $ (6,915 )   $ (73,822 )
                                         
Net loss per share attributable to common stockholders, basic and diluted(3)
  $ (64.92 )   $ (14.62 )   $ (16.07 )   $ (8.08 )   $ (42.85 )
                                         
Weighted average common shares outstanding, basic and diluted
    268,259       628,116       1,016,004       855,359       1,722,924  
                                         
Pro forma net loss per share attributable to common stockholders, basic and diluted
                  $ (0.03 )           $ (0.06 )
                                         
Pro forma weighted average common shares outstanding, basic and diluted
                    59,655,626               60,362,546  
                                         


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          Six Months Ended
 
    Years Ended December 31,     June 30,  
    2008     2009     2010     2010     2011  
    (in thousands)  
 
Other Financial Data:
                                       
Adjusted EBITDA(4)
  $ (10,484 )   $ (1,597 )   $ (3,321 )   $ (2,318 )   $ (1,333 )
 
                         
    As of June 30, 2011  
                Pro Forma
 
    Actual     Pro Forma(5)     As Adjusted(6)  
    (in thousands)  
 
Consolidated Balance Sheet Data:
                       
Cash and cash equivalents
  $ 8,413     $ 8,413     $             
Working capital, excluding deferred revenue
    15,999       16,334          
Total assets
    34,615       34,615          
Debt and capital leases, current portion
    749       749          
Deferred revenue (current and long-term)
    26,813       26,813          
Long-term debt and capital leases, net of current portion
    1,901       1,901          
Redeemable convertible preferred stock
    141,771                
Stockholders’ (deficit) equity
    (146,592 )     (4,486 )        
 
 
(1) Total cost of revenue and operating expenses include stock-based compensation expense as follows:
 
                                         
          Six Months Ended
 
    Years Ended December 31,     June 30,  
    2008     2009     2010     2010     2011  
    (in thousands)  
 
Total cost of revenue
  $ 30     $ 57     $ 125     $ 55     $ 112  
Research and development
    67       154       203       110       133  
Marketing and sales
    129       318       364       176       219  
General and administrative
    682       336       376       161       251  
 
(2) Our preferred stock is redeemable by the holders thereof at any time after September 26, 2012, at the greater of the original issuance price, plus accumulated dividends, or its fair value. We measure the redemption amount of the preferred stock and adjust the carrying amount to the redemption amount at the end of each financial reporting period. The resulting increase or decrease in the redemption amount is treated as preferred dividends for purposes of computing net loss attributable to common stockholders. The significant increase in the amount of the accretion during the six months ended June 30, 2011 resulted from an increase in the fair value of the preferred stock. Upon completion of this offering, all of the outstanding shares of our preferred stock will be converted into an equivalent number of shares of our common stock and, upon such conversion, preferred dividends will cease to accrue and the carrying amount of the preferred stock will be credited to additional paid-in capital. See note 8 to our consolidated financial statements for a description of our preferred stock and the related accretion.
 
(3) See note 2 to our consolidated financial statements for a description of the method to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share attributable to common stockholders.
(4) We use Adjusted EBITDA to evaluate our performance relative to that of our peers. We prepare Adjusted EBITDA to eliminate the impact of additional items we do not consider indicative of ongoing operating performance. However, Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles in the United States, or U.S. GAAP, and this metric may not be comparable to similarly titled measures of other companies. Adjusted EBITDA represents net income (loss) before interest expense (income), income tax expense (benefit), depreciation and amortization and certain other items, including: (i) certain stock option-based and other equity-based compensation expenses; (ii) foreign currency transaction gains or losses; (iii) changes in fair value of our preferred stock warrant liabilities; and (iv) those deemed extraordinary, unusual, non-recurring or otherwise not indicative of our core business operations.
 
We disclose Adjusted EBITDA, which is a non-GAAP measure, because we believe this metric assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. We believe this metric is used in the financial community, and we present these metrics to enhance investors’ understanding of our operating performance and cash flows. You should

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not consider Adjusted EBITDA as an alternative to net income (loss), determined in accordance with U.S. GAAP, as an indicator of operating performance, or as an alternative to cash provided by operating activities, determined in accordance with U.S. GAAP, as an indicator of our cash flow.
 
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:
 
•  Adjusted EBITDA
  •   does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
  •   does not reflect changes in, or cash requirements for, our working capital needs;
  •   does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and
  •   does not reflect our income tax expense or the cash requirement to pay our taxes.
 
•  although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
 
•  other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
 
Additionally, non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it from Adjusted EBITDA as an expense when evaluating our ongoing operating performance for a particular period. Adjusted EBITDA also does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations, which charges are included in net income (loss).
 
Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.
 
A directly comparable U.S. GAAP measure to Adjusted EBITDA is net income (loss). We reconcile net loss to Adjusted EBITDA as follows:
 
                                         
          Six Months Ended
 
    Years Ended December 31,     June 30,  
    2008     2009     2010     2010     2011  
    (in thousands)  
 
Adjusted EBITDA
                                       
Net loss
  $ (12,446 )   $ (4,213 )   $ (1,511 )   $ (3,743 )   $ (3,497 )
Interest expense (income)
    (60 )     107       241       126       199  
Income tax expense (benefit)
          81       (4,869 )     22       154  
Depreciation and amortization
    1,120       1,127       1,661       747       934  
                                         
EBITDA
    (11,386 )     (2,898 )     (4,478 )     (2,848 )     (2,210 )
Stock-based compensation expense
    908       865       1,068       502       715  
Foreign currency transaction losses (gains)
    (6 )     436       45       28       (53 )
Change in fair value of preferred stock warrant liabilities
                44             215  
                                         
Adjusted EBITDA
  $ (10,484 )   $ (1,597 )   $ (3,321 )   $ (2,318 )   $ (1,333 )
                                         
 
(5) The pro forma balance sheet as of June 30, 2011 reflects the conversion of all of our preferred stock outstanding, the exchange of all of Eloqua Corporation’s exchangeable common shares for shares of our common stock and the conversion of our preferred stock warrants to common stock warrants in connection with this offering.
 
(6) The pro forma as adjusted balance sheet data reflects the pro forma adjustments described in footnote (5) above as adjusted to give effect to receipt by us of the estimated net proceeds from this offering, based on an assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.


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RISK FACTORS
 
Investing in our common stock involves a high degree of risk. You should carefully consider all the risk factors 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 whether to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that impair us. If any of the following risks were to materialize, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. The trading price of our common stock could decline as a result of any of these risks, and you could lose part or even all of your investment in our common stock.
 
Risks Related to Our Business
 
We have a history of losses and may not achieve consistent profitability in the future.
 
We generated net losses of approximately $4.2 million in 2009, $1.5 million in 2010 and $3.5 million for the six months ended June 30, 2011. As of June 30, 2011, we had an accumulated deficit of approximately $148.6 million. We will need to generate and sustain increased revenue levels in future periods in order to become consistently profitable, and, even if we do, we may not be able to maintain or increase our level of profitability. We intend to continue to expend significant funds to expand our marketing and direct sales force, develop and enhance our solutions and for general corporate purposes, including marketing, services and sales operations, hiring additional personnel, upgrading our infrastructure and expanding into new geographical markets. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenue enough to offset our higher operating expenses.
 
In addition, as a public company, we will incur additional legal, accounting and other expenses that we did not incur as a private company. These increased expenditures will make it more difficult to achieve future profitability. We may incur significant losses in the future for a number of reasons, including the other risks described in this prospectus, and unforeseen expenses, difficulties, complications and delays and other unknown events. We will need to generate significant additional revenue to achieve profitability, and we cannot assure any prospective investor that we will be able to do so. Likewise, we cannot assure you of our ability to sustain or increase such profitability on a quarterly or annual basis in the future. If we are unable to achieve and sustain profitability, the market price of our common stock may significantly decrease.
 
Economic uncertainties or downturns in the general economy or the industries in which our customers operate could disproportionately affect the demand for our solutions and negatively impact our results of operations.
 
General worldwide economic conditions have experienced a significant downturn, and market volatility and uncertainty remain widespread, making it extremely difficult for our customers and us to accurately forecast and plan future business activities. In addition, these conditions could cause our customers or prospective customers to reduce their marketing and sales budgets, which could decrease corporate spending on our solutions, resulting in delayed and lengthened sales cycles, a decrease in new customer acquisition and/or loss of customers. Furthermore, during challenging economic times our customers may face issues in gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us and adversely affect our revenue. If that were to occur, we may be required to increase our allowance for doubtful accounts and our financial results would be harmed. Further, the current challenging


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economic conditions also may impair the ability of our customers to pay for the solutions they have purchased and, as a result, our reserves, allowances for doubtful accounts and write-offs of accounts receivable could increase. From 2008 through the first half of 2010, these conditions impacted our business, as many businesses cut marketing and sales budgets, resulting in limited resources for purchasing third-party solutions.
 
We cannot predict the timing, strength or duration of any economic slowdown or recovery. If the condition of the general economy or markets in which we operate worsens from present levels, our business could be harmed. In particular, a downturn in the technology sector may disproportionately affect us because a significant portion of our customers are technology companies. In addition, even if the overall economy improves, we cannot assure you that the market for RPM will experience growth or that we will experience growth.
 
Our future performance will depend in part on the acceptance and adoption of the new RPM market.
 
The market for RPM solutions is new and evolving. Although the marketing automation market has gained traction over the past several years, our recent shift to focus on RPM exposes us to an additional degree of uncertainty. Our success will depend to a substantial extent on the willingness of businesses to accept and adopt RPM principles. We expect that we will continue to need intensive marketing and sales efforts to educate prospective customers about the uses and benefits of our RPM solutions. If businesses do not perceive the value proposition of RPM in general and our RPM solutions in particular, then a viable market for our RPM solutions may not develop, or it may develop more slowly than we expect, either of which would significantly and adversely affect our business and operating results.
 
We have experienced rapid growth in recent periods and our recent growth rates may not be indicative of our future growth.
 
Our revenue has increased substantially since our inception, but we may not be able to sustain revenue growth consistent with recent history, or at all. We believe growth of our revenue depends on a number of factors, including our ability to:
 
  •  price our services effectively so that we are able to attract and retain customers without compromising our profitability;
 
  •  attract new customers, increase our existing customers’ use of our services and provide our customers with excellent customer support;
 
  •  introduce our services to new markets outside of the United States;
 
  •  increase awareness of our brand on a global basis; and
 
  •  leverage and grow our RPM business.
 
We cannot assure you that we will be able to successfully accomplish any of these tasks.
 
If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and customer satisfaction or adequately address competitive challenges.
 
We have experienced, and may continue to experience, rapid growth and organizational change, which has placed, and may continue to place, significant demands on our management and our operational and financial resources. We have also experienced significant growth in the number of users and transactions and in the amount data that our SaaS hosting infrastructure supports. Finally,


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our organizational structure is becoming more complex as we improve our operational, financial and management controls as well as our reporting systems and procedures. We will require significant capital expenditures and the allocation of valuable management resources to grow and change in these areas without undermining our corporate culture of rapid innovation, teamwork and attention to customer success that has been central to our growth so far. If we fail to manage our anticipated growth and change in a manner that preserves the key aspects of our corporate culture, the quality of our solutions may suffer, which could negatively affect our brand and reputation and harm our ability to retain and attract customers.
 
We have established several international offices, including offices in the United Kingdom, Canada and Singapore, and we may continue to expand our international operations into other countries in the future. Our expansion has placed, and our expected future growth will continue to place, a significant strain on our managerial, customer operations, research and development, marketing and sales, administrative, financial and other resources. If we are unable to manage our growth successfully, our operating results could suffer.
 
Part of the challenge that we expect to face in the course of our expansion is to maintain a high level of customer service and customer satisfaction. To the extent our customer base grows, we will need to expand our account management, customer service and other personnel, and third-party channel partners, in order to provide personalized account management and customer service. If we are not able to continue to provide high levels of customer service, our reputation, as well as our business, results of operations and financial condition, could be harmed.
 
We may experience quarterly fluctuations in our operating results due to a number of factors that make our future results difficult to predict and could cause our operating results to fall below expectations.
 
Our quarterly operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as indicative of our future performance. If our revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially.
 
Our operating results have varied in the past. In addition to other risk factors listed in this section, factors that may affect our quarterly operating results include the following:
 
  •  demand for our solutions and related services and the size and timing of sales;
 
  •  customer renewal rates, and the pricing of those agreements that are renewed;
 
  •  customers delaying purchasing decisions in anticipation of new products or product enhancements by us or our competitors;
 
  •  market acceptance of our current and future products and services;
 
  •  changes in spending on marketing services or information technology and software by our current and/or prospective customers;
 
  •  budgeting cycles of our customers;
 
  •  changes in the competitive dynamics of our industry, including consolidation among competitors or customers;
 
  •  our lengthy sales cycle;
 
  •  the addition or loss of larger customers, including through acquisitions or consolidations;


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  •  the amount and timing of operating expenses, particularly marketing and sales, related to the maintenance and expansion of our business, operations and infrastructure;
 
  •  network outages or security breaches and any associated expenses;
 
  •  foreign currency exchange rate fluctuations;
 
  •  write-downs, impairment charges or incurrence of unforeseen liabilities in connection with acquisitions;
 
  •  failure to successfully manage any acquisitions; and
 
  •  general economic and political conditions in our domestic and international markets.
 
Based upon all of the factors described above, we have a limited ability to forecast the amount and mix of future revenue and expenses, and as a result, our operating results may from time to time fall below our estimates or the expectations of public market analysts and investors.
 
Our quarterly results reflect seasonality in the sale of our on-demand software and professional services, which can make it difficult to achieve sequential revenue growth or could result in sequential revenue declines.
 
We have historically experienced seasonal variations in our signing of new customer contracts. We sign a significantly higher number of agreements with new customers in the fourth quarter of each year as compared to the preceding quarters. As a result, a significantly higher number of renewals occur in the first quarter of each year, as the terms of most of our customer agreements are measured in full-year increments and begin upon our provision of log-in credentials to the customer, which generally occurs within ten days following the end of the quarter in which the agreement was executed. We expect this seasonality to continue in the future, which may cause fluctuations in certain of our operating results and financial metrics, and thus limit our ability to predict future results. Although these seasonal factors can be common in the marketing sector, historical patterns should not be considered indicative of our future sales activity or performance.
 
If we fail to forecast our revenue accurately, or if we fail to match our expenditures with corresponding revenue, our results of operations and financial condition could be adversely affected.
 
Because our recent growth has resulted in the rapid expansion of our business, we do not have a long history upon which to base forecasts of future operating revenue. Additionally, the lengthy sales cycle for the evaluation and implementation of our solutions, which typically extends for several months, may also cause us to experience a delay between increasing operating expenses and the generation of corresponding revenue, if any. Accordingly, we may be unable to prepare accurate internal financial forecasts or replace anticipated revenue that we do not receive as a result of delays arising from these factors, and our results of operations in future reporting periods may be significantly below the expectations of the public market, equity research analysts or investors, which could harm the price of our common stock.
 
Because we recognize revenue from subscriptions and support services over the term of the relevant service period, downturns or upturns in sales are not immediately reflected in full in our operating results.
 
As a SaaS company, we recognize revenue over the term of our contracts, which is typically 12 to 24 months. As a result, much of the revenue we report each quarter is the recognition of deferred revenue from contracts entered into during previous quarters. Consequently, a shortfall in demand for


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our solutions and professional services or a decline in new or renewed contracts in any one quarter may not significantly reduce our revenue for that quarter but could negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewed sales of our services is not reflected in full in our results of operations until future periods. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable term of the contracts.
 
If we are unable to attract new customers or sell additional functionality and services to our existing customers, our revenue growth will be adversely affected.
 
To increase our revenue, we must add new customers, sell additional functionality to existing customers and encourage existing customers to renew their subscriptions on terms favorable to us. As the interactive marketing industry matures, as interactive channels develop further, or as competitors introduce lower cost and/or differentiated products or services that are perceived to compete with ours, our ability to compete with respect to pricing, technology and functionality could be impaired. In such event, we may be unable to renew our agreements with existing customers or attract new customers or new business from existing customers on terms that would be favorable or comparable to prior periods, which could have a material adverse effect on our revenue, gross margin and other operating results.
 
If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and changing customer needs or requirements, our RPM solutions may become less competitive or obsolete.
 
Our future success will depend on our ability to adapt and innovate our RPM solutions. To attract new customers and increase revenue from existing customers, we will need to enhance and improve our offerings to meet customer needs, add functionality and address technological advancements. If we are unable to develop new solutions that address and advance RPM principles for our customers and prospective customers, or to enhance and improve our solutions in a timely manner or to position and price our solutions to meet market demand, we may not be able to achieve or maintain adequate market acceptance of our solutions. The success of any enhancement or new feature depends on several factors, including timely completion, introduction and market acceptance. If we are unable to successfully develop or acquire new features or enhance our existing solutions to meet customer needs, our business and operating results will be adversely affected.
 
Our ability to grow is also subject to the risk of future disruptive technologies. If new technologies emerge that are able to deliver RPM solutions at lower prices, more efficiently or more conveniently, such technologies could adversely impact our ability to compete.
 
If we fail to enhance our brand cost-effectively, our ability to expand our customer base will be impaired and our financial condition may suffer.
 
We believe that developing and maintaining awareness of the Eloqua brand in a cost-effective manner is critical to achieving widespread acceptance of our existing and future solutions and is an important element in attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. In the past, our efforts to build our brand have involved significant expenses. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful


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attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.
 
Our brand and reputation are dependent on the continued participation and level of service of our third-party service providers.
 
We currently utilize a combination of internal support personnel and third-party service providers, which are not in our control, may harm our reputation and damage the brand loyalty among our customer base. In the event that we are not able to maintain our brand reputation because of the actions of our third-party service providers, we may face difficulty in maintaining or have reduced demand for our products, which could negatively impact our business, results of operations and financial condition. In addition, if a significant number of third-party providers were to terminate their contracts, it could materially adversely impact our business, results of operations and financial condition.
 
If we fail to offer high quality customer support, our business and reputation would suffer.
 
Once our solutions are deployed to our customers, our customers rely on our support services to resolve any related issues. High-quality education and customer support is important for the successful marketing and sale of our solutions and for the renewal of existing customers. The importance of high quality customer support will increase as we expand our business and pursue new enterprise customers. If we do not help our customers quickly resolve post-deployment issues and provide effective ongoing support, our ability to sell additional services to existing customers would suffer and our reputation with existing or potential customers would be harmed. Also, certain of our maintenance agreements contain service level agreements under which we guarantee specified availability of the Eloqua Platform. Failure to meet these requirements could result in contractual penalties or the loss of the contract and/or customers and materially adversely impact our business, results of operations and financial condition.
 
Failure to effectively develop and expand our marketing and sales capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solutions.
 
Our ability to increase our customer base and achieve broader market acceptance of our solutions will depend to a significant extent on our ability to expand our marketing and sales operations. We plan to continue expanding our direct sales force and engaging additional third-party channel partners, both domestically and internationally. This expansion will require us to invest significant financial and other resources. Our business will be seriously harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve anticipated revenue growth from expanding our direct sales force if we are unable to hire and develop talented direct sales personnel, if our new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if we are unable to retain our existing direct sales personnel. We also may not achieve anticipated revenue growth from our third-party channel partners if we are unable to attract and retain additional motivated third-party channel partners, if any existing or future third-party channel partners fail to successfully market, resell, implement or support our solutions for their customers, or if they represent multiple providers and devote greater resources to market, resell, implement and support the products and services of these other providers.
 
Future product development is dependent on adequate research and development resources.
 
In order to remain competitive, we must continue to develop new products, applications and enhancements to our existing solutions, especially as we further expand our capabilities. Maintaining


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adequate research and development resources, such as the appropriate personnel and development technology, to meet the demands of the market is essential. If we are unable to develop solutions internally due to certain constraints, such as high employee turnover, lack of management ability or a lack of other research and development resources, we may be forced to expand into a certain market or strategy via an acquisition for which we could potentially pay too much or unsuccessfully integrate into our operations. In addition, our research and development organization is located primarily in Toronto, Canada and Vienna, Virginia, and we may have difficulty hiring suitably skilled personnel in these regions or expanding our research and development organization to facilities located in other geographic locations. Further, many of our competitors expend a considerably greater amount of funds on their respective research and development programs, and those that do not may be acquired by larger companies that would allocate greater resources to our competitors’ research and development programs. Our failure to maintain adequate research and development resources or to compete effectively with the research and development programs of our competitors would present an advantage to such competitors.
 
As a result of our customers’ increased usage of our on-demand software, we will need to continually improve our computer network and infrastructure to avoid service interruptions or slower system performance.
 
As usage of our on-demand software grows and as customers use it for more complicated tasks, we will need to devote additional resources to improving our computer network, our application architecture and our infrastructure in order to maintain the performance of our platform. Any failure or delays in our computer systems could cause service interruptions or slower system performance. If sustained or repeated, these performance issues could reduce the attractiveness of the Eloqua Platform to customers. These performance issues could result in lost customer opportunities and lower renewal rates, any of which could hurt our revenue growth, customer loyalty and reputation. We may need to incur additional costs to upgrade or expand our computer systems and architecture in order to accommodate increased demand if our systems cannot handle current or higher volumes of usage.
 
If our solutions fail to perform properly due to defects or similar problems, and if we fail to develop an enhancement to resolve any defect or other software problem, we could lose customers, become subject to product liability, performance or warranty claims or incur significant costs, and our business may be harmed and our results of operations and financial condition could be materially adversely affected.
 
Our operations are dependent upon our ability to prevent system interruption. The software applications underlying our platform are inherently complex and may contain material defects or errors, which may cause disruptions in availability or other performance problems. The costs incurred in correcting any material defects or errors in our software may be substantial and could materially adversely affect our operating results. We have from time to time found defects in our solutions and may discover additional defects in the future. We may not be able to detect and correct defects or errors before installing our solutions. Consequently, we or our customers may discover defects or errors after our solutions have been implemented. We implement bug fixes and upgrades as part of our regularly scheduled system maintenance. If we do not complete this maintenance according to schedule or if customers are otherwise dissatisfied with the frequency and/or duration of our maintenance services and related system outages, customers could elect not to renew, or delay or withhold payment to us, or cause us to issue credits, make refunds or pay penalties.


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The occurrence of any defects, errors, disruptions in service or other performance problems with our platform, whether in connection with the day-to-day operation, upgrades or otherwise, could result in:
 
  •  loss of customers;
 
  •  lost or delayed market acceptance and sales of our solutions;
 
  •  delays in payment to us by customers;
 
  •  solution returns;
 
  •  injury to our reputation;
 
  •  diversion of our resources;
 
  •  legal claims, including warranty and product liability claims, against us;
 
  •  increased service and warranty expenses or financial concessions; and
 
  •  increased insurance costs.
 
Interruptions or delays in service from our single third-party data center provider could impair our ability to deliver our services to our customers, resulting in customer dissatisfaction, damage to our reputation, loss of customers, limited growth and reduction in revenue.
 
We currently serve our customers from a single third-party data center hosting facility located in Toronto, Canada. Our operations depend, in part, on our third-party facility provider’s ability to protect this facility against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. In the event that our third-party facility arrangement is terminated, or if there is a lapse of service or damage to this facility, we could experience interruptions in our service as well as delays and additional expenses in arranging new facilities and services.
 
Any damage to, or failure of, the systems of our third-party providers could result in interruptions to our service. Despite precautions taken at our data center, the occurrence of a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close the facility without adequate notice, or other unanticipated problems at this facility could result in lengthy interruptions in the availability of our on-demand software. Even with current and planned disaster recovery arrangements, our business could be harmed.
 
We design the system infrastructure and procure and own or lease the computer hardware used for our services. Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our service. Any interruptions or delays in our service, whether as a result of third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with customers and our revenue. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could further reduce our revenue, subject us to liability and cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could materially adversely affect our business.


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If our security measures are breached and unauthorized access is obtained to a customer’s stored consumer data or any consumer data that we may store from time to time or if data is lost due to hardware failures or errors, our solutions may be perceived as not being secure, customers may curtail or stop using our solutions and we may incur significant legal liability and financial exposure.
 
Our solutions involve the storage and transmission of customers’ proprietary information, including certain buyer data, and security breaches could expose us to a risk of loss or unauthorized disclosure of this information, litigation and possible liability, as well as damage our relationships with our customers. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, or during transfer of data to additional data centers or at any time, and, as a result, someone obtains unauthorized access to our data or our customers’ data, our reputation could be damaged, our business may suffer and we could incur significant liability.
 
Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose sales and customers. Any significant violations of data privacy could result in the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and adversely impact our results of operations and financial condition. Moreover, if a high profile security breach occurs with respect to another SaaS provider, our customers and potential customers may lose trust in the security of the SaaS business model generally, which could adversely impact our ability to retain existing customers or attract new ones.
 
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 data or our customers’ data, which could result in significant legal and financial exposure and a loss of confidence in the security of our service and ultimately harm our future business prospects. A party who is able to compromise the security of our facilities could misappropriate either our proprietary information or the personal information of our customers, or cause interruptions or malfunctions in our operations. We may be required to expend significant capital and financial resources to protect against such threats or to alleviate problems caused by breaches in security.
 
Furthermore, our ability to collect and report data may be interrupted by a number of other factors, including our inability to access the internet, the failure of our network or software systems or variability in user traffic on customer websites. In addition, computer viruses may harm our systems causing us to lose data, and the transmission of computer viruses could expose us to litigation.
 
Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management’s attention.
 
If we are unable to expand and maintain our relationships with third parties such as system integrators, marketing service providers, marketing agencies, complementary software vendors or other business alliance partners, our revenue or revenue growth and our results of operations could be materially and adversely impacted.
 
Many of our customers were made aware of our solutions by third parties, including system integrators, marketing service providers, marketing agencies and complementary software vendors, with whom we have maintained strategic relationships. We may not be able to develop or maintain


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strategic relationships with these, or other, third parties for a number of reasons, including their existing relationships with our competitors or prospective competitors. If we are unsuccessful in establishing or maintaining our strategic relationships, our ability to compete in the marketplace or to grow our revenue could be impaired, and our results of operations would suffer. Additionally, if we cannot leverage our sales and services resources through our strategic relationships with third parties, we may need to hire and train additional qualified sales personnel and incur additional costs associated with providing services, which may adversely affect our operating results. Even if we are successful in establishing and maintaining these relationships, we cannot assure you that these will result in increased customers or revenue.
 
If we do not or cannot maintain the compatibility of our solutions with third-party applications that our customers use in their businesses, demand for our solutions could decline.
 
The functionality of our on-demand software depends, in part, on our ability to integrate it with third-party applications and data management systems that our customers use and from which they obtain buyer data. In addition, we rely on access to third-party application programming interfaces, or APIs, to provide our social media channel offerings through social media platforms. Third-party providers of marketing applications and APIs may change the features of their applications and platforms, restrict our access to their applications and platforms or alter the terms governing use of their applications and APIs and access to those applications and platforms in an adverse manner. Such changes could functionally limit or terminate our ability to use these third-party applications and platforms with our on-demand software, which could negatively impact our offerings and harm our business. Further, if we fail to integrate our software with new third-party applications and platforms that our customers use for marketing purposes, or to adapt to the data transfer requirements of such third-party applications and platforms, we may not be able to offer the functionality that our customers need, which would negatively impact our offerings and, as a result, harm our business.
 
We face significant competition from both established and new companies offering applications and other marketing software, as well as internally developed software, which may have a negative effect on our ability to add new customers, retain existing customers and grow our business.
 
The services we provide are also offered by others and in the future may be offered by an increasing number of parties. The market for marketing automation and RPM software is evolving, highly competitive and significantly fragmented, and we expect competition to continue to increase in the future. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our prices. We face intense competition from software companies that develop marketing technologies and from marketing services companies that provide interactive marketing services.
 
Our competitors vary with each challenge that our solutions address, but some of these providers include:
 
  •  plan and spend management software vendors, such as Oracle Corporation and SAP AG;
 
  •  workflow, project management and brand management vendors, such as marketing agencies who develop custom systems for their clients;
 
  •  email marketing software vendors, including Responsys, Inc., ExactTarget, Inc., Constant Contact, Inc. and numerous other email marketing companies;


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  •  campaign management software vendors, such as Oracle Corporation, SAS Institute Inc., Aprimo, Inc. (a division of Teradata Corporation), and Unica Corporation (a division of International Business Machines Corporation, or IBM); and
 
  •  lead management software vendors, such as Oracle Corporation, Genius.com, Incorporated, Marketo, Inc., Neolane Inc., Pardot LLC, SilverPop Systems, Inc., and smartFOCUS Group plc.
 
We expect to face additional competition with the continued development and expansion of the RPM and marketing automation software markets. We also expect competition to increase as a result of software industry consolidation, including through possible mergers or partnerships of two or more of our competitors or the acquisition of our competitors by larger and better-funded companies. For instance, in December 2010, Teradata completed its acquisition of Aprimo and in October 2010, IBM completed its acquisition of Unica.
 
We also expect that new competitors, such as enterprise software vendors that have traditionally focused on enterprise resource planning or back office applications, will continue to enter the marketing automation market with competing products, which could have an adverse effect on our business, results of operations and financial condition. For example, due to the growing popularity of new development models such as SaaS, the traditional barriers to entry to the marketing automation market continue to decrease and we expect to face additional competition from SaaS application vendors.
 
Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, are able to devote greater resources to the development, promotion, sale and support of their products and services, have more extensive customer bases and broader customer relationships than we have, and may have longer operating histories and greater name recognition than we have. As a result, these competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. In some cases, these vendors may also be able to offer interactive marketing applications at little or no additional cost by bundling them with their existing applications. If we are unable to compete with such companies, the demand for our solutions could substantially decline. To the extent any of our competitors have existing relationships with potential customers, those customers may be unwilling to purchase our solutions because of those existing relationships with that competitor.
 
Competition could significantly impede our ability to sell additional solutions on terms favorable to us. Businesses may continue to enhance their internally developed software, rather than investing in commercial software solutions such as ours. Our current and potential competitors may develop and market new technologies that render our existing or future products obsolete, unmarketable or less competitive. In addition, if these competitors develop products with similar or superior functionality to our solutions, we may need to decrease the prices for our solutions in order to remain competitive. If we are unable to maintain our current pricing due to competitive pressures, our margins will be reduced and our operating results will be negatively affected. We cannot assure you that we will be able to compete successfully against current or future competitors or that competitive pressures will not materially adversely affect our business, results of operations and financial condition.
 
Consolidation among our competitors and our competitors’ strategic partnerships may adversely affect our business.
 
If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. Our competitors may also establish or strengthen cooperative relationships with our current or future strategic distribution and technology partners or other parties with whom we have relationships,


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thereby limiting our ability to promote and implement our solutions. Disruptions in our business caused by these events could reduce our revenue.
 
Failure or perceived failure by us to comply with our privacy policy or legal or regulatory requirements in one or multiple jurisdictions could result in proceedings, actions or penalties against us.
 
The effectiveness of our solutions relies on our customers’ storage and use of data concerning their customers. Our customers’ collection and use of data for consumer profiling may raise privacy and security concerns and negatively impact the demand for our solutions. We have implemented various features intended to enable our customers to better comply with privacy and security requirements, such as opt-out or opt-in messaging and checking, the use of anonymous identifiers for sensitive data and restricted data access, but these security measures may not be effective against all potential privacy concerns and security threats. If a breach of customer data security were to occur, our solutions may be perceived as less desirable, which would negatively affect our business and operating results.
 
In addition, governments in some jurisdictions have enacted or are considering enacting consumer data privacy legislation, including laws and regulations applying to the solicitation, collection, processing and use of consumer data. Because many of the features of our applications use, store and report on personal information from our customers, any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy laws, regulations and policies, could result in liability to us, damage our reputation, inhibit sales and harm our business. There are numerous lawsuits in process against various technology companies that collect and use personal information. If those lawsuits are successful, it would increase our liability and hurt our business. Furthermore, the costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of our on-demand software and reduce overall demand for it. Privacy concerns, whether or not valid, may inhibit market adoption of our on-demand software.
 
If our on-demand software is perceived to cause or is otherwise unfavorably associated with invasions of privacy, whether or not illegal, it may subject us or our customers to public criticism. Existing and potential future privacy laws and increasing sensitivity of consumers to unauthorized disclosures and use of personal information may create negative public reactions related to interactive marketing, including marketing practices of our customers. Public concerns regarding data collection, privacy and security may cause some of our customers’ customers to be less likely to visit their websites or otherwise interact with them. If enough consumers choose not to visit our customers’ websites or otherwise interact with them, our customers could stop using our on-demand software. This discontinuance in use, in turn, would reduce the value of our service and inhibit or reverse the growth of our business.
 
The standards that private entities use to regulate the use of email have in the past interfered with, and may in the future interfere with, the effectiveness of our on-demand software and our ability to conduct business.
 
Our customers rely on email to communicate with their existing or prospective customers. Various private entities attempt to regulate the use of email for commercial solicitation. These entities often advocate standards of conduct or practice that significantly exceed current legal requirements and classify certain email solicitations that comply with current legal requirements as spam. Some of these entities maintain “blacklists” of companies and individuals, and the websites, internet service providers and internet protocol addresses associated with those entities or individuals that do not adhere to those standards of conduct or practices for commercial email solicitations that the blacklisting entity


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believes are appropriate. If a company’s internet protocol addresses are listed by a blacklisting entity, emails sent from those addresses may be blocked if they are sent to any internet domain or internet address that subscribes to the blacklisting entity’s service or purchases its blacklist.
 
From time to time, some of our internet protocol addresses may become listed with one or more blacklisting entities due to the messaging practices of our customers. There can be no guarantee that we will be able to successfully remove ourselves from those lists. Blacklisting of this type could interfere with our ability to market our on-demand software and services and communicate with our customers and, because we fulfill email delivery on behalf of our customers, could undermine the effectiveness of our customers’ email marketing campaigns, all of which could have a material negative impact on our business and results of operations.
 
Existing federal, state and foreign laws regulating email and text messaging marketing practices impose certain obligations on the senders of commercial emails and text messages, which could minimize the effectiveness of our on-demand software or increase our operating expenses to the extent financial penalties are triggered.
 
The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, establishes certain requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future emails from the sender. In addition, some states have passed laws regulating commercial email practices that are significantly more punitive and difficult to comply with than the CAN-SPAM Act, particularly Utah and Michigan, which have enacted do-not-email registries listing minors who do not wish to receive unsolicited commercial email that markets certain covered content, such as adult content or content regarding harmful products. Some portions of these state laws may not be preempted by the CAN-SPAM Act. The ability of our customers’ constituents to opt out of receiving commercial emails may minimize the effectiveness of our email marketing solution. Moreover, noncompliance with the CAN-SPAM Act carries significant financial penalties. We also may be required to change one or more aspects of the way we operate our email marketing software solution business.
 
In addition, certain foreign jurisdictions, such as Australia, Canada and the European Union, have enacted laws that regulate sending email, and some of these laws are more restrictive than U.S. laws. For example, some foreign laws prohibit sending unsolicited email unless the recipient has provided the sender advance consent to receipt of such email, or in other words has “opted-in” to receiving it. A requirement that recipients opt into, or the ability of recipients to opt out of, receiving commercial emails may minimize the effectiveness of our on-demand software.
 
In addition, the CAN-SPAM Act and regulations implemented by the Federal Communications Commission pursuant to the CAN-SPAM Act, and the Telephone Consumer Protection Act, also known as the Federal Do-Not-Call law, among other requirements, prohibit companies from sending specified types of commercial text messages unless the recipient has given his or her prior express consent. Non-compliance with these laws and regulations carries significant financial penalties. If we were found to be in violation of the CAN-SPAM Act, other federal laws, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email or text messages, whether as a result of violations by our customers or any determination that we are directly subject to and in violation of these requirements, we could be required to pay penalties, which would adversely affect our financial performance and significantly harm our reputation and our business.


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In addition, U.S., state or foreign jurisdictions may in the future enact legislation or laws restricting the ability to conduct interactive marketing activities in mobile, social and web channels. Any such restrictions could require us to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers or increase our operating costs or otherwise harm our business.
 
Changes in laws, regulations or governmental policy applicable to our customers or potential customers may decrease the demand for our solutions.
 
The level of our customers’ and potential customers’ activity in the business processes our solutions are used to support is sensitive to many factors beyond our control, including governmental regulation and regulatory policies. Many of our customers and potential customers in the healthcare, financial and other industries are subject to substantial regulation and may be the subject of further regulation in the future. Accordingly, significant new laws or regulations or changes in, or repeals of, existing laws, regulations or governmental policy may change the way these customers do business and could cause the demand for and sales of our solutions to decrease. Any change in the scope of applicable regulations that negatively impacts our customers’ use of our solutions would have a material adverse impact on our business, results of operations and financial condition. Moreover, we may have to reconfigure our existing services or develop new services to adapt to new regulatory rules and policies which will require additional expense and time. Such changes could adversely affect our business, results of operations and financial condition.
 
As internet commerce develops, federal, state and foreign governments may propose and implement new taxes and new laws to regulate internet commerce, which may negatively affect our business.
 
As internet commerce continues to evolve, increasing regulation by federal, state or foreign governments becomes more likely. Our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws applicable to interactive marketing. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to our customers in the form of increased subscription fees. In addition, federal, state and foreign governmental or regulatory agencies may decide to impose taxes on services provided over the internet or via email. Such taxes could discourage the use of the internet and email as a means of commercial marketing, which would adversely affect the viability of our on-demand software.
 
Evolving regulations and standards concerning data privacy may restrict our customers’ ability to solicit, collect, process, disclose and use data necessary to conduct effective marketing campaigns and analyze the results or may increase their costs, which could harm our business.
 
Federal, state and foreign governments have enacted, and may in the future enact, laws and regulations concerning the solicitation, collection, processing, disclosure or use of personal information. Such laws and regulations may require companies to implement privacy and security policies, permit users to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personal information for certain purposes. Other proposed legislation could, if enacted, impose additional requirements and prohibit the use of certain technologies that track individuals’ activities on web pages or that record when individuals click through to an internet address contained in an email message. Such laws and regulations could restrict our customers’ ability to collect and use email addresses, page viewing data, and personal information, which may reduce demand for our solutions.


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If we fail to adequately protect our proprietary rights, our competitive position could be impaired and we may lose valuable assets, generate reduced revenue and incur costly litigation to protect our rights.
 
Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of patents, copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our products and services. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our products may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying and use of our products and proprietary information may increase.
 
We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our products and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our solutions.
 
To date, we have two patent applications pending. The process of seeking patent protection can be lengthy and expensive. Any of our pending or future patent applications, whether or not challenged, may not be issued with the scope of the claims we seek, if at all. We are unable to guarantee that additional patents will issue from pending or future applications or that, if patents issue, they will not be challenged, invalidated or circumvented, or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. Some of our technologies are not covered by any patent or patent application. The confidentiality agreements on which we rely to protect certain technologies may be breached and may not be adequate to protect our proprietary technologies.
 
In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our solutions, impair the functionality of our solutions, delay introductions of new solutions, result in our substituting inferior or more costly technologies into our solutions, or injure our reputation. In addition, we may be required to license additional technology from third parties to develop and market new solutions, and we cannot assure you that we could license that technology on commercially reasonable terms or at all. Although we do not expect that our inability to license this technology in the future would have a material adverse affect on our business or operating results, our inability to license this technology could adversely affect our ability to compete.


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Our results of operations may be adversely affected if we are subject to a protracted infringement claim or a claim that results in a significant damage award.
 
We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors grows and the functionality of products in different industry segments overlaps. Our competitors or other third parties may challenge the validity or scope of our intellectual property rights. A claim may also be made relating to technology that we acquire or license from third parties. If we were subject to a claim of infringement, regardless of the merit of the claim or our defenses, the claim could:
 
  •  require costly litigation to resolve and the payment of substantial damages;
 
  •  require significant management time;
 
  •  cause us to enter into unfavorable royalty or license agreements;
 
  •  require us to discontinue the sale of our products;
 
  •  require us to indemnify our customers or third-party service providers; or
 
  •  require us to expend additional development resources to redesign our products.
 
We depend, in part, on technology of third parties licensed to us for our solutions, and the loss or inability to maintain these licenses or errors in the software we license could result in increased costs, reduced service levels or delayed sales of our solutions.
 
We use open source software in our products, which could subject us to litigation or other actions.
 
We use open source software in our products and may use more open source software in the future. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to lawsuits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our products. In addition, if we were to combine our proprietary software products with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software products. If we inappropriately use open source software, we may be required to re-engineer our products, discontinue the sale of our products or take other remedial actions.
 
Future acquisitions, strategic investments, partnerships or alliances could be difficult to identify and integrate, divert the attention of key management personnel, disrupt our business, dilute stockholder value and adversely affect our results of operations and financial condition.
 
We may in the future seek to acquire or invest in businesses, products or technologies that we believe could complement or expand our application suite, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. In addition, we do not have any experience in acquiring other businesses. If we acquire additional businesses, we may not be able to integrate successfully the acquired personnel, operations and technologies, or effectively manage the combined business following the acquisition.
 
We can provide no assurances that we will be able to find and identify desirable acquisition targets or that we will be successful in entering into an agreement with any one target. Acquisitions


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could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer.
 
Changes in tax laws or regulations that are applied adversely to us or our customers could increase the costs of our on-demand software and professional services and adversely impact our business.
 
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Those enactments could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. These events could require us or our customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our customers to pay fines and/or penalties and interest for past amounts deemed to be due. If we raise our prices to offset the costs of these changes, existing and potential future customers may elect not to continue or purchase our on-demand software and professional services in the future. Additionally, new, changed, modified or newly interpreted or applied tax laws could increase our customers’ and our compliance, operating and other costs, as well as the costs of our on-demand software and professional services. Further, these events could decrease the capital we have available to operate our business. Any or all of these events could adversely impact our business and financial performance.
 
We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.
 
As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and results of operations. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations.
 
Our business may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past sales. Any successful action by state, foreign or other authorities to collect additional or past sales tax could adversely harm our business.
 
States and some local taxing jurisdictions have differing rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our subscription services in various jurisdictions is unclear. We have recorded sales tax liabilities of $0.2 million as of December 31, 2010 with respect to sales and use tax liabilities in various states and local jurisdictions. It is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as state tax authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. We could also be subject to audits with respect to states and international jurisdictions for which we have not accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services in


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jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our application or otherwise harm our business and operating results.
 
We file sales tax returns in certain states within the United States as required by law and certain customer contracts for a portion of the solutions that we provide. We do not collect sales or other similar taxes in other states and many of the states do not apply sales or similar taxes to the vast majority of the solutions that we provide. However, one or more states or foreign authorities could seek to impose additional sales, use or other tax collection and record-keeping obligations on us or may determine that such taxes should have, but have not been, paid by us. Liability for past taxes may also include substantial interest and penalty charges. Any successful action by state, foreign or other authorities to compel us to collect and remit sales tax, use tax or other taxes, either retroactively, prospectively or both, could adversely affect our results of operations and business.
 
The loss of key members of our senior management team or software development personnel could prevent us from executing our business strategy.
 
Our success depends largely upon the continued services of our executive officers and other key personnel. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our services and technologies. We do not have long-term employment agreements with any of our key personnel. The loss of one or more of our key employees, including our engineering and technical staff, could seriously harm our business.
 
Competition for qualified personnel is intense and we may not be successful in attracting and retaining the key personnel that we need to compete effectively. The value of our common stock may adversely affect our efforts to motivate the performance of our key personnel. It may be difficult to retain those employees who have substantial in-the-money, vested options or other equity awards. Conversely, if options granted to our employees have exercise prices that are substantially above our then-current share price, it may be difficult to motivate and retain those employees. Additionally, if the market price of our common stock does not increase or declines, it may limit our ability to attract new employees with equity incentives.
 
The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.
 
To execute our business strategy, we must attract and retain highly qualified personnel. We may not be successful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and difficulty in retaining highly skilled employees with appropriate qualifications.
 
Many of the companies with which we compete for experienced personnel have greater resources than we do. In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the stock options or other equity incentives they are to receive in connection with their employment. Significant volatility in the price of our stock may, therefore, adversely affect our ability to attract or retain key employees. Furthermore, changes to generally accepted accounting principles in the United States relating to the treatment of stock options as a company expense may discourage us from granting the size or type of stock-based compensation that job candidates require to join our company, and may result in our paying additional cash compensation or other stock-based compensation to job candidates to offset reduced stock option grants. If we fail to attract new personnel or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.


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Our international operations expose us to several risks, such as significant currency fluctuations and unexpected changes in the regulatory requirements of multiple jurisdictions.
 
During 2010 and the six months ended June 30, 2011, revenue generated outside of the United States and Canada was 11% and 10% of total revenue, respectively, based on the location of the legal entity of the customer with which we contracted. Our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates, particularly changes in the Canadian dollar, due to our compensation expenses payable in local currencies. Although a majority of our revenue and operating expenses is denominated in U.S. dollars and we prepare our financial statements in U.S. dollars, a portion of our expenses is paid in foreign currencies.
 
Our primary research and development operations are located in Toronto, Canada and Vienna, Virginia, but we conduct research and development in other international locations as well. We currently have international offices outside of North America in Singapore, the United Kingdom, Germany and Belgium, which focus primarily on selling and implementing our solutions in those regions. In the future, we may expand to other international locations. Our current international operations and future initiatives will involve a variety of risks, including:
 
  •  localization of our services, including translation into foreign languages and adaptation for local practices;
 
  •  unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;
 
  •  differing labor regulations, especially in the European Union and Canada, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;
 
  •  more stringent regulations relating to data security and the unauthorized use of, or access to, commercial and personal information, particularly in the European Union and Canada;
 
  •  reluctance to allow personally identifiable data related to non-U.S. citizens to be stored in databases within the United States, due to concerns over the U.S. government’s right to access information in these databases or other concerns;
 
  •  changes in a specific country’s or region’s political or economic conditions;
 
  •  challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;
 
  •  risks resulting from changes in currency exchange rates and the implementation of exchange controls, including restrictions promulgated by the Office of Foreign Assets Control of the U.S. Department of the Treasury, and other trade protection regulations and measures;
 
  •  limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;
 
  •  limited or unfavorable intellectual property protection;
 
  •  exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act and similar laws and regulations in other jurisdictions; and
 
  •  restrictions on repatriation of earnings.
 
We have limited experience in marketing, selling and supporting our products and services abroad. Our limited experience in operating our business internationally increases the risk that any


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potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and operating results will suffer.
 
Additionally, operating in international markets also requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required in establishing operations in other countries will produce desired levels of revenue or profitability.
 
We have not engaged in currency hedging activities to limit risk of exchange rate fluctuations. Changes in exchange rates affect our costs and earnings, and may also affect the book value of our assets located outside the United States and the amount of our stockholders’ equity.
 
Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.
 
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, we have recently adopted and applied a new revenue recognition standard, which may in the future be subject to varying interpretations that could materially impact how we recognize revenue. Accounting for revenue from sales of subscriptions to software is particularly complex, is often the subject of intense scrutiny by the SEC, and will evolve as FASB continues to consider applicable accounting standards in this area.
 
For example, we recognize subscription revenue in accordance with Accounting Standards Update 2009-13, Revenue Recognition (Topic 605)—Multiple-Deliverable Revenue Arrangements—a Consensus of the Emerging Issues Task Force, or ASU 2009-13 (formerly known as EITF 08-01). The American Institute of Certified Public Accountants and the SEC continue to issue interpretations and guidance for applying the relevant accounting standards to a wide range of sales contract terms and business arrangements that are prevalent in software licensing arrangements. As a result of future interpretations or applications of existing accounting standards, including ASU 2009-13, by regulators or our internal or independent accountants, we could be required to delay revenue recognition into future periods, which would adversely affect our operating results.
 
Certain factors have in the past and may in the future cause us to defer recognition for license fees beyond delivery. For example, the inclusion in our software arrangements of customer acceptance testing, specified upgrades or other material non-standard terms could require the deferral of license revenue beyond delivery.
 
Because of these factors and other specific requirements under accounting principles generally accepted in the United States for software revenue recognition, we must have very precise terms in our software arrangements in order to recognize revenue when we initially deliver software or perform services. Negotiation of mutually acceptable terms and conditions can extend our sales cycle, and we may accept terms and conditions that do not permit revenue recognition at the time of delivery.


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The Investment Canada Act or the Competition Act (Canada) may apply to prevent or delay a change of control of our company.
 
Under the Investment Canada Act, any investment by a “non-Canadian” (which includes any entity which is not controlled or beneficially owned by Canadians) involving the direct acquisition of control of a “Canadian Business” is subject to review by the Investment Review Division of Industry Canada if, in the case of an investment by or from an investor from a state that is a member of the World Trade Organization, the asset value of the entity or entities being acquired is equal to or exceeds CDN$312 million (indexed annually to account for inflation). A “Canadian Business” is defined to comprise any business carried on in Canada that has:
 
  •  a place of business in Canada;
 
  •  one or more employees or self-employed individuals working in connection with the business; and
 
  •  assets in Canada used in carrying out the business.
 
Based on this definition, we currently have a Canadian Business which is operated through our consolidated Canadian subsidiary, Eloqua Corporation. A reviewable acquisition may not proceed unless the relevant Minister is satisfied that the investment is likely to be a net benefit to Canada. An investment by a non-Canadian involving the acquisition of control of a Canadian Business that does not meet the CDN$312 million threshold still requires the acquirer to make a formal notification under the Investment Canada Act within 30 days after closing.
 
The sale of our company may also be subject to formal pre-notification obligations under Canada’s Competition Act if certain thresholds are met. For acquisitions of more than 20% of the issued and outstanding shares of a public company, the thresholds are CDN$400 million for the combined size of the parties to the transaction and their affiliates, and CDN$70 million for the size of the target company. Independent of pre-notification obligations, the sale of our company may also raise competition law issues under the merger provisions of the Competition Act that could be scrutinized by the Canadian Commissioner of Competition.
 
The application of the Investment Canada Act or the Competition Act (Canada) could prevent or delay an acquisition of control of our company and may limit strategic opportunities for our stockholders to sell their common stock.
 
The enactment of legislation implementing changes in U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations.
 
Several tax bills have been introduced to reform U.S. taxation of international business activities. Depending on the final form of legislation enacted, if any, the consequences may be significant for us due to the scale of our international business activities. If any of these proposals are enacted into legislation, they could have material adverse consequences on the amount of tax we pay and thereby on our financial position and results of operations.
 
Risks Related to this Offering and Ownership of Our Common Stock
 
There has been no prior market for our common stock, our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.
 
There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters


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and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon closing of this offering or, if it does develop, it may not be sustainable. The trading prices of the securities of technology companies have been highly volatile. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
 
  •  actual or anticipated fluctuations in our revenue and other operating results;
 
  •  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
 
  •  failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
 
  •  announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
  •  announcements by us of negative conclusions about our internal controls and our ability to accurately report our financial results;
 
  •  changes in operating performance and stock market valuations of software or other technology companies, or those in our industry in particular;
 
  •  price and volume fluctuations in the trading of our common stock and in the overall stock market, including as a result of trends in the economy as a whole;
 
  •  lawsuits threatened or filed against us;
 
  •  new laws or regulations or new interpretations of existing laws or regulations applicable to our business our industry;
 
  •  changes in key personnel;
 
  •  sales of common stock by us, members of our management team or our stockholders;
 
  •  the granting or exercise of employee stock options or other equity awards;
 
  •  other events or factors, including those resulting from war, incidents of terrorism or responses to these events; and
 
  •  the realization of any risks described under “Risk Factors.”
 
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.


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We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
 
We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. In addition, our existing credit facilities prohibit us from paying cash dividends, and any future financing agreements may prohibit us from paying any type of dividends. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. Investors seeking cash dividends should not purchase our common stock.
 
Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.
 
Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. Our amended and restated certificate of incorporation and bylaws, which will become effective upon the closing of this offering, include provisions that:
 
  •  authorize “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;
 
  •  create a classified board of directors whose members serve staggered three-year terms;
 
  •  specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of the board, the chief executive officer or the president;
 
  •  stockholder action by written consent will be prohibited;
 
  •  establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;
 
  •  provide that our directors may be removed only for cause;
 
  •  provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
 
  •  specify that no stockholder is permitted to cumulate votes at any election of directors;
 
  •  our board of directors will be expressly authorized to modify, alter or repeal our amended and restated bylaws; and
 
  •  require supermajority votes of the holders of our common stock to amend specified provisions of our charter documents.
 
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.


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In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us.
 
Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
 
Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.
 
Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds to expand our marketing and sales and product development efforts or to make acquisitions. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to fund the expansion of our marketing and sales and research and development efforts or take advantage of acquisition or other opportunities, which could seriously harm our business and results of operations. If we incur debt, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue additional equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.
 
Our business is subject to changing regulations regarding corporate governance, disclosure controls, internal control over financial reporting and other compliance areas that will increase both our costs and the risk of noncompliance.
 
As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and the rules and regulations of the NASDAQ Stock Market. The requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.
 
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Commencing with our fiscal year ending December 31, 2012, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant management efforts. Prior to this offering, we have never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner, particularly if material weaknesses or significant deficiencies persist.
 
If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, the market price of our stock could decline and we could be subject to sanctions or


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investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which would require additional financial and management resources.
 
Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that we will be required to include in our periodic reports filed with the SEC, beginning for our fiscal year ending December 31, 2012 under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures or internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.
 
Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that we are not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.
 
In addition, 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 incur substantial costs to maintain appropriate levels of coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.
 
If we fail to maintain proper and effective internal controls, our business and results of operations could be impaired.
 
Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We are in the process of documenting, reviewing and, if appropriate, improving our internal controls and procedures in connection with Section 404 of the Sarbanes-Oxley Act, which requires annual management and independent auditor assessments of the effectiveness of our internal controls over financial reporting. Both we and our independent auditors will be testing our internal controls in connection with the Section 404 requirements and, as part of that documentation and testing, identifying areas for further attention and improvement. Commencing with our fiscal year ending December 31, 2012, we will be required to perform system and process evaluations and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Although we did not conduct a formal internal control audit, during the course of the audit of our financial statements for the year ended December 31, 2010, four deficiencies in internal control that were considered to be significant deficiencies were identified to our audit committee: (i) our process and controls over the reconciliation of deferred partner costs and related accrued and prepaid expenses to the general ledger; (ii) our lack of a formal, documented process by which we review entries into the accounting journal; (iii) our process and controls to appropriately identify and account for stock options granted to


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non-employees; and (iv) our process and controls to ensure all assumptions used in valuing stock options are appropriately supported and applied.
 
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit the attention by those charged with an entity’s governance. Absent remediation, a significant deficiency adversely affects an entity’s ability to initiate, authorize, record, process or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected by the entity’s internal control. We have taken steps to remediate the significant deficiencies in internal control identified to our audit committee. However, the process of designing and implementing effective internal controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and economic and regulatory environments. Our testing, or the subsequent testing by our independent auditors, may reveal additional deficiencies in our internal controls over financial reporting, including those deemed to be significant deficiencies or material weaknesses. If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our results of operations, our ability to operate our business, our stock price and investors’ views of us.
 
If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.
 
If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution in the pro forma net tangible book value per share after giving effect to this offering of $      per share as of          , based on an assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus, because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon exercise of any warrant, upon exercise of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under our equity incentive plans or if we otherwise issue additional shares of our common stock. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”
 
Participants in our directed share program must hold their shares for a minimum of 180 days following the date of the final prospectus related to this offering and accordingly will be subject to market risks not imposed on other investors in the offering.
 
At our request, the underwriters have reserved up to           shares of the common stock offered hereby for sale to our directors, officers, employees and certain individuals associated with our company. Purchasers of these shares will enter into a lock-up agreement with the underwriters whereby they will agree, subject to exceptions, not to offer, sell, contract to sell or otherwise dispose of or hedge any such shares for a period of 180 days after the date of the final prospectus relating to this offering, subject to certain specified extensions. As a result of such restriction, such purchasers may face risks not faced by other investors who have the right to sell their shares at any time following the offering. These risks include the market risk of holding our shares during the period that such restrictions are in effect. In addition, our officers, directors and substantially all of our stockholders have also agreed to enter into similar lock-up agreements with the underwriters, and the price of our common stock may be adversely affected following expiration of the lock-up period if there is an increase in the number of shares for sale in the market.


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Future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.
 
If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. Based on shares outstanding as of June 30, 2011, upon completion of this offering, we will have outstanding approximately           shares of common stock, approximately           of which are subject to the 180-day contractual lock-up referred to above, assuming no exercise of the underwriters’ option to purchase additional shares. J.P. Morgan Securities LLC and Deutsche Bank Securities Inc. may permit our officers, directors, employees and current stockholders to sell shares prior to the expiration of the lock-up agreements.
 
After the lock-up agreements pertaining to this offering expire, and based on shares outstanding as of June 30, 2011, an additional           shares of common stock will be eligible for sale in the public market, 39,661,705 of which are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act. In addition, the           shares of common stock subject to outstanding options under our equity incentive plans and the           shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline substantially.
 
The concentration of our capital stock ownership with insiders upon the completion of this offering will likely limit your ability to influence corporate matters including the ability to influence the outcome of director elections and other matters requiring stockholder approval.
 
We anticipate that our executive officers, directors, current five percent or greater stockholders and affiliated entities will together beneficially own approximately          percent of our common stock outstanding after this offering, assuming no exercise of the underwriters’ option to purchase additional shares. As a result, these stockholders, acting together, will have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.
 
Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.
 
Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of this offering in ways that increase the value of your investment. We intend to use the net proceeds from this offering for working capital and other general corporate purposes, including financing the development of new solutions, marketing and sales activities and capital expenditures. We may use a portion of the net proceeds to us to expand our current business through acquisitions of other businesses, products and technologies. Until we use the net proceeds from this offering, we plan to invest them, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.


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If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.
 
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If no or few securities or industry analysts cover our company, the trading price for our stock would be negatively impacted. If one or more of the analysts who covers us downgrades our stock or publishes incorrect or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, or downgrades our common stock, demand for our stock could decrease, which could cause our stock price or trading volume to decline.


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FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the plural or negative of these terms or other comparable terminology. These statements are only predictions. 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 business, results of operations and financial condition.
 
You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include those listed under “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus and the documents that we reference in this prospectus and have filed with the Securities and Exchange Commission as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from those expressed or implied by any forward-looking statements. Forward-looking statements in this prospectus include, among others, statements regarding:
 
  •  our ability to achieve or maintain consistent profitability in the future;
 
  •  general economic conditions and the conditions in our industry;
 
  •  the RPM market;
 
  •  competition in our industry and innovation by our competitors;
 
  •  our failure to anticipate and adapt to future changes in our industry;
 
  •  uncertainty regarding our solution innovations;
 
  •  adverse developments concerning our relationships with existing customers;
 
  •  the increased expenses and administrative workload associated with being a public company; and
 
  •  failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud.
 
The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.


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INDUSTRY AND MARKET DATA
 
We obtained the industry, market and competitive position data in this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties, including Forrester Research, Inc., Gartner, Inc., or Gartner, and IDC. Industry surveys, publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed.
 
The Gartner report described herein, “Forecast: Software as a Service, Worldwide, 2010-2015, 1H11 Update,” Sharon A. Mertz, Chad Eschinger, Tom Eid, Chris Pang, Laurie F. Wurster, June 22, 2011, which we refer to as the Gartner Report, represents data, research opinions or viewpoints published, as part of a syndicated subscription service, by Gartner, which are not 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.
 
We do not know what assumptions regarding general economic growth were used in preparing the forecasts and projections we cite. Statements as to our market position are based on recently available data. While we are not aware of any misstatements regarding industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors” in this prospectus.


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USE OF PROCEEDS
 
We estimate that the net proceeds to us of the sale of the common stock offered by us will be approximately $      million, based on an assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares is exercised in full, we estimate the net proceeds payable to us will be approximately $      million. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      would increase (decrease) the net proceeds to us from this offering by $      million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
 
We intend to use the net proceeds from this offering as follows:
 
  •  approximately $2.5 million for the repayment of indebtedness under our term loan, which bears interest at a rate of prime plus 2.0%, subject to a minimum rate of 6.0% (the rate as of June 30, 2011), and has a maturity date of September 1, 2014;
 
  •  approximately $0.2 million for the payment in full of outstanding capital leases; and
 
  •  the balance to fund working capital and other general corporate purposes, including marketing and sales activities, research and development and general and administrative expenses.
 
We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present understandings, commitments or agreements to enter into any such acquisitions or investments.
 
The amount and timing of our actual expenditures will depend on numerous factors, including the cash used in or generated by our operations, the status of our development, and the level of our product development and our marketing and sales activities. Our management has discretion over many of these factors. Therefore, we are unable to estimate the amount of net proceeds from this offering that will be used for any of the purposes described above. Our management will have broad discretion over the uses of the net proceeds from this offering. Pending the above uses, we intend to invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities, such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government.


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DIVIDEND POLICY
 
We have never declared or paid dividends on our capital stock. In addition, we are currently prohibited by our credit agreement from paying cash dividends without the prior written consent of the lender. Subject to the foregoing, our board of directors will have discretion in determining whether to declare or pay dividends, which will depend upon our results of operations, financial condition, future prospects and any other factors deemed relevant by our board of directors. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and do not anticipate paying any dividends in the foreseeable future. Investors should not purchase our common stock with the expectation of receiving cash dividends.


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CAPITALIZATION
 
The following table sets forth our cash, cash equivalents and capitalization as of June 30, 2011, as follows:
 
  •  on an actual basis;
 
  •  on a pro forma basis to give effect to (i) the issuance of an aggregate of 9,069,225 shares of our common stock upon the exchange of each outstanding exchangeable common share of Eloqua Corporation for one share of our common stock in connection with this offering, as described in “Description of Capital Stock—Exchangeable Common Shares,” (ii) the conversion of all outstanding shares of our preferred stock into 49,570,397 shares of common stock immediately prior to the completion of this offering; and (iii) the conversion, but not the exercise, of all outstanding warrants to purchase shares of our Series C preferred stock into warrants to purchase an aggregate of 168,750 shares of common stock upon completion of this offering; and
 
  •  on a pro forma as adjusted basis to give effect to the pro forma adjustments listed above and our sale in this offering of           shares of common stock based on an assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
 
You should read the following table in conjunction with our consolidated financial statements and related notes and the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.
                         
    As of June 30, 2011  
                Pro Forma as
 
    Actual     Pro Forma     Adjusted(1)  
    (dollars in thousands)  
 
Cash and cash equivalents
  $ 8,413     $ 8,413     $  
                         
Current portion of long-term debt and capital leases
  $ 749     $ 749     $  
                         
Long-term debt and capital leases, net of current portion
    1,901       1,901          
Preferred stock warrants
    335              
Redeemable convertible preferred stock:
                       
Series A preferred stock, $0.0001 par value, 12,124,650 shares authorized, issued and outstanding at June 30, 2011, and no shares outstanding pro forma
    34,676              
Series B preferred stock, $0.0001 par value, 17,678,926 shares authorized, issued and outstanding at June 30, 2011 and no shares outstanding pro forma
    50,562              
Series C preferred stock, $0.0001 par value, 21,483,563 shares authorized and 19,766,821 issued and outstanding at June 30, 2011, and no shares outstanding pro forma
    56,533              
Stockholders’ deficit:
                       
Eloqua Limited stockholders’ deficit:
                       
Common stock, $0.0001 par value, 90,000,000 shares authorized, 2,008,950 shares issued and outstanding at June 30, 2011, and 60,648,571 shares outstanding pro forma
    0       6          
Additional paid-in capital
          144,074          
Accumulated deficit
    (148,566 )     (148,566 )        
                         
Total Eloqua Limited stockholders’ deficit:
    (148,566 )     (4,486 )                 
                         
Noncontrolling interest
    1,974              
                         
Total stockholders’ deficit:
    (146,592 )     (4,486 )        
                         
Total capitalization
  $ (2,585 )   $ (2,585 )   $  
                         
 
 
(1) A $1.00 increase (decrease) in the assumed initial public offering price of $      per share of our common stock would increase (decrease) our pro forma as adjusted cash and cash equivalents by $      million, after deducting the estimated underwriters’ discounts and commissions and estimated offering expenses payable by us.


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DILUTION
 
If you invest in our common stock, your investment will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering.
 
Our net tangible book value as of June 30, 2011 was $(4.8) million, or $(2.40) per share of common stock. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding as of June 30, 2011. Our pro forma net tangible book value as of June 30, 2011 was $(4.5) million, or $(0.07) per share of common stock, based on 60,648,571 shares of common stock outstanding after giving effect to (i) the issuance of an aggregate of 9,069,225 shares of our common stock upon the exchange of each outstanding exchangeable common share of Eloqua Corporation for one share of our common stock in connection with this offering, as described in “Description of Capital Stock—Exchangeable Common Shares,” and (ii) the conversion of all outstanding shares of our preferred stock into 49,570,397 shares of common stock immediately prior to the completion of this offering.
 
After giving effect to the sale by us of           shares of common stock in this offering based on the assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2011 would have been approximately $      million, or approximately $      per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $      per share to our existing stockholders and an immediate dilution of approximately $      per share to new investors purchasing shares of common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock.
 
The following table illustrates this dilution on a per share basis:
 
                 
Assumed initial public offering price per share
          $    
Net tangible book value per share as of June 30, 2011
  $ (2.40 )        
Increase per share attributable to conversion of preferred stock and exchange of exchangeable common shares
    2.32          
                 
Pro forma net tangible book value per share as of June 30, 2011
    (0.07 )        
Increase per share attributable to this offering
               
                 
Pro forma as adjusted net tangible book value per share after this offering
               
                 
Dilution in pro forma net tangible book value per share to new investors
          $          
                 
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $      per share and the dilution to new investors by $      per share, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
 
The following table summarizes, as of June 30, 2011, the differences between the number of shares purchased from us, the total consideration paid to us in cash and the average price per share that existing stockholders and new investors paid. The calculation below is based on the assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of


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this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:
 
                                         
                            Average
 
    Shares Purchased     Total Consideration     Price Per
 
    Number     Percent     Amount     Percent     Share  
 
              %   $             %   $        
Existing stockholders
                                       
New investors
                                       
                                         
Totals
            100 %             100 %        
                                         
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price paid by all stockholders by $      million, $      million, and $      million, respectively, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, and without deducting the estimated underwriting discounts and commissions and other expenses of the offering.
 
If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding after this offering.
 
Sales by selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to           shares of common stock, or     % of the total number of shares of our common stock outstanding after this offering.
 
To the extent that outstanding options or warrants are exercised, you will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our stockholders.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The following table sets forth our selected consolidated financial and other data as of the dates and for the periods indicated. The selected consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010 and the consolidated balance sheet data as of December 31, 2009 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data presented below for the years ended December 31, 2006 and 2007 and the selected consolidated balance sheet data presented below as of December 31, 2006, 2007 and 2008 have been derived from our audited consolidated financial statements not included in this prospectus. Our consolidated statements of operations data for the six months ended June 30, 2010 and 2011 and the selected consolidated balance sheet data presented below as of June 30, 2011 have been derived from unaudited consolidated financial statements included elsewhere in this prospectus. In our opinion, these unaudited consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements and contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of such consolidated financial data. Historical results are not necessarily indicative of the results to be expected for future periods and operating results for the six-month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. This selected consolidated financial data should be read in conjunction 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 included elsewhere in this prospectus.
 
                                                         
          Six Months Ended
 
    Years Ended December 31,     June 30,  
    2006     2007     2008     2009     2010     2010     2011  
    (in thousands, except share and per share data)  
 
Consolidated Statements of Operations Data:
                                                       
Revenue:
                                                       
Subscription and support
  $ 9,325     $ 17,496     $ 28,468     $ 37,543     $ 47,225     $ 21,671     $ 28,871  
Professional services
    2,175       3,440       4,402       3,415       3,574       1,309       2,821  
                                                         
Total revenue
    11,500       20,936       32,870       40,958       50,799       22,980       31,692  
                                                         
Cost of revenue:
                                                       
Subscription and support
    859       2,501       3,536       6,423       9,569       4,400       5,887  
Professional services
    3,067       3,791       5,702       5,284       6,980       2,584       4,729  
                                                         
Total cost of revenue
    3,926       6,292       9,238       11,707       16,549       6,984       10,616  
                                                         
Gross profit
    7,574       14,644       23,632       29,251       34,250       15,996       21,076  
                                                         
Operating expenses:
                                                       
Research and development
    3,151       5,627       7,499       8,607       10,363       5,283       5,507  
Marketing and sales
    8,435       16,187       21,632       17,321       22,147       10,515       13,713  
General and administrative
    2,867       6,987       7,007       7,348       7,879       3,793       4,785  
                                                         
Total operating expenses
    14,453       28,801       36,138       33,276       40,389       19,591       24,005  
                                                         
Loss from operations
    (6,879 )     (14,157 )     (12,506 )     (4,025 )     (6,139 )     (3,595 )     (2,929 )
Other income (expense), net
    170       259       60       (107 )     (241 )     (126 )     (414 )
                                                         
Loss before income tax benefit (expense)
    (6,709 )     (13,898 )     (12,446 )     (4,132 )     (6,380 )     (3,721 )     (3,343 )
Income tax benefit (expense)
    209       99             (81 )     4,869       (22 )     (154 )
                                                         
Net loss
    (6,500 )     (13,799 )     (12,446 )     (4,213 )     (1,511 )     (3,743 )     (3,497 )
Accretion of redeemable preferred stock
    (2,340 )     (2,649 )     (4,970 )     (4,970 )     (14,815 )     (3,172 )     (70,325 )
                                                         
Net loss attributable to common stockholders
  $ (8,840 )   $ (16,448 )   $ (17,416 )   $ (9,183 )   $ (16,326 )   $ (6,915 )   $ (73,822 )
                                                         
Net loss per share attributable to common stockholders, basic and diluted(1)
  $ (8,840,000 )   $ (1,521.27 )   $ (64.92 )   $ (14.62 )   $ (16.07 )   $ (8.08 )   $ (42.85 )
                                                         
Weighted average common shares outstanding, basic and diluted
    1       10,812       268,259       628,116       1,016,004       855,359       1,722,924  
                                                         
Pro forma net loss per share attributable to common stockholders, basic and diluted
                                  $ (0.03 )           $ (0.06 )
                                                         
Pro forma weighted average common shares outstanding, basic and diluted
                                    59,655,626               60,362,546  
                                                         
 


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    As of December 31,     As of June 30,  
    2006     2007     2008     2009     2010     2010     2011  
    (in thousands)  
 
Consolidated Balance Sheet Data:
                                                       
Cash and cash equivalents
  $ 8,838     $ 16,623     $ 6,821     $ 8,140     $ 7,549     $ 8,269     $ 8,413  
Working capital, excluding deferred revenue
    9,412       18,102       14,657       14,028       19,195       14,193       15,999  
Total assets
    13,742       25,401       22,767       23,853       36,755       23,340       34,615  
Debt and capital leases, current portion
    314       807       760       211       446       366       749  
Deferred revenue
    3,053       7,092       15,604       16,399       26,601       20,057       26,813  
Long-term debt and capital leases, net of current portion
    482       856       315       2,174       2,375       2,214       1,901  
Redeemable convertible preferred stock
    20,188       46,690       51,661       56,631       71,446       59,804       141,771  
Stockholders’ deficit
    (12,947 )     (34,248 )     (50,573 )     (58,761 )     (73,743 )     (67,088 )     (146,592 )
 
 
(1) See note 2 to our consolidated financial statements for a description of the method to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share attributable to common stockholders.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 and other financial information included elsewhere in 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 review 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
 
We are a leading provider of on-demand RPM software solutions that are designed to enable businesses to accelerate revenue growth and improve revenue predictability by automating, monitoring and measuring their complex marketing and sales initiatives. Our set of RPM solutions, which we refer to as the Eloqua Platform, is a SaaS platform integrating our leading marketing automation software with our revenue performance analytics suite. Marketing and sales professionals use the Eloqua Platform to move prospective buyers more efficiently through the marketing and sales funnel, identify and predict the drivers of revenue, provide insights about marketing and sales programs to senior management and more tightly align marketing and sales teams to optimize resource allocation and drive revenue growth.
 
We sell subscriptions to our on-demand software and services primarily through our direct sales force. Our direct sales force is comprised of a group of enterprise sales professionals who sell our solutions to larger companies and a group of SMB sales professionals who sell our solutions to smaller companies. We also continue to market and sell to existing customers, who may renew their subscriptions, increase the use of our system over time, add functionality and broaden the deployment of our solutions across their organizations. Our solutions can be used in substantially all industry vertical segments, and a significant number of our current customers are in the technology, software and entertainment industries. For 2010 and the six months ended June 30, 2011, no single client accounted for more than 3% of our revenue and our 10 largest customers accounted for less than 12% of our revenue.
 
We derive most of our revenue from subscriptions to our on-demand software and related subscription-based services. Subscription and support revenue accounted for 86.6%, 91.7%, 93.0% and 91.1% of our total revenue during the years ended December 31, 2008, 2009 and 2010 and the six months ended June 30, 2011, respectively. Subscription and support revenue is driven primarily by the number of customers we have, the number of prospective buyer profiles our customers manage with the Eloqua Platform, and the levels of service for which they contract. To date, revenue generated from our Marketing Automation Platform has been, and we expect will continue to be for the foreseeable future, the primary driver of our subscription and support revenue. We have only recently begun to sell our Revenue Suite product, and we believe that revenue associated with our Revenue Suite product will grow as revenue performance management gains further market acceptance.
 
Professional services revenue accounted for 13.4%, 8.3%, 7.0% and 8.9% of our total revenue during the years ended December 31, 2008, 2009 and 2010 and the six months ended June 30, 2011, respectively. We derive our professional services revenue primarily from services provided in connection with the onboarding of new customers onto the Eloqua Platform, including implementation


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and integration with our customers’ sales automation and other marketing systems, as well as educating the customer on optimal use of our solutions.
 
Our revenue growth has been driven by the addition of new customers and additional revenue from existing customers offset by reductions resulting from the non-renewal of subscriptions from existing customers. We have increased the number of customers operating on our platform from 552 as of December 31, 2008 to 1,002 as of June 30, 2011. In some cases, we enter into separate contracts with various units of a larger enterprise, and we count each of those contracting parties as a separate customer. We generate the majority of our revenue in the United States and Canada. Our revenue from outside the United States and Canada as a percentage of total revenue was 4.9%, 8.3%, 10.8% and 10.2% for the years ended December 31, 2008, 2009 and 2010, and the six months ended June 30, 2011, respectively.
 
We have focused on growing our business to pursue the significant market opportunity we see for our products and services, and we plan to continue to invest in building for growth. As a result, we expect our cost of revenue and operating expenses will increase in future periods. Marketing and sales expenses are expected to increase, as we continue to expand our direct sales teams, increase our marketing activities, and grow our international operations. Research and development expenses are expected to increase as we continue to improve and expand our existing solutions and develop new solutions. We also believe that we must invest in maintaining a high level of client service and support as we consider it critical for our continued success. We plan to continue our policy of implementing best practices across our organization, expanding our technical operations and investing in our network infrastructure and services capabilities in order to support continued future growth. We also expect to incur additional general and administrative expenses as a result of both our growth and transition to becoming a public company.
 
Basis of Presentation
 
Sources of Revenue
 
Subscription and Support Revenue
 
We derive our subscription and support revenue from subscriptions to our on-demand marketing automation and revenue performance management solutions. We generally sell one and two year contracts, and we typically bill in advance either annually, semi-annually or quarterly. Pricing for our on-demand software is principally based on the number of prospective buyer profiles a customer manages with the Eloqua Platform and by product configuration. Customers can also subscribe to related product add-ons, such as sales enablement tools. Our three primary product configurations of the Eloqua Platform are Eloqua Enterprise, Eloqua Team and Eloqua Express. All product configurations are delivered on the Eloqua Platform, which enables us to leverage development and customer support dollars by providing the functionality required by any type of customer on a single platform. Our Enterprise product is targeted at the large enterprise market, and includes the full functionality of our platform, including more sophisticated targeting and more robust consolidated reporting, as well as premier support. Our Team product, which is targeted at mid-market and smaller enterprises, has many of the same features as the Enterprise product, but does not include some of the advanced features required by larger organizations. Our Express product is targeted at the SMB market, and has more basic functionality. By pricing based upon the number of prospective buyer profiles managed by the Eloqua Platform, our subscription and support revenue from a given customer generally increases as the customer’s database of profiles grows. Subscription fees are subject to periodic adjustment, to the extent the number of buyer profiles under management is larger than estimated or increases.


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Customer contracts are typically non-cancellable for a minimum period that ranges in length from one to two years. The arrangements with customers do not provide customers with the right to take possession of the software supporting the on-demand application service at any time. We generally recognize revenue from subscriptions ratably over the term of the agreement. We also offer our customers premium product support beyond the standard support that is included in the base subscription. We primarily recognize customer support revenue ratably over the term of the subscription.
 
Professional Services Revenue
 
We offer our customers assistance in implementing our solutions, deploying the Eloqua Platform and optimizing its use. Professional services include application configuration, system integration, business process re-engineering and mapping and data migration. Services are typically provided either on a time-and-materials basis for larger projects, or on a fixed-fee basis for smaller projects. These services are generally purchased as part of the subscription arrangement and are typically performed within the first several months of the arrangement. Beginning in 2011, the revenue associated with professional services will typically be recognized as the services are delivered, while prior to 2011 the revenue associated with these services was recognized over the life of the subscription. See “—Critical Accounting Policies and Estimates—Revenue Recognition” below and note 2 to our consolidated financial statements for a discussion of these changes.
 
We also provide other services for our customers which include consultative and training services. These services are either performed directly by us or through third-party service providers that we hire. The revenue associated with these services is generally recognized as the services are delivered.
 
Cost of Revenue
 
Cost of Subscription and Support Revenue
 
Cost of subscription and support revenue primarily consists of direct personnel and related costs, including salaries and bonuses, benefits and payroll taxes, and stock based compensation, as well as contract labor of departments managing the Eloqua Platform and database environment and providing technical support. Additionally, these costs include software license fees and amortization expenses associated with capitalized software hosting costs and depreciation expenses associated with computer equipment such as servers. In addition, we allocate a portion of overhead including rent, IT costs, and depreciation and amortization to cost of revenue based on headcount. Expenses related to the depreciation associated with computer equipment, hosting and software license fees are affected by the number of customers using our on-demand software and the size of their respective prospective buyer profile databases, the complexity of their marketing needs and the volume of transactions processed. We plan to continue to significantly expand our capacity and to implement more robust redundancy measures to support our growth, which will result in higher cost of subscription revenue in absolute dollars, but which we expect will keep the cost of subscription revenue as a percentage of revenue roughly the same as it is currently for the foreseeable future.
 
Cost of Professional Services Revenue
 
Cost of professional services revenue primarily consists of personnel and related costs, allocated overhead, user conferences, and third party contractors employed to carry out our SmartStart onboarding program as well as other business process or custom services. When we perform our services, we often supplement our internal resources with third party partners. Expenses incurred


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from these partners is deferred and amortized to correspond with the revenue from fees we receive for our services.
 
The cost of client services may fluctuate from quarter to quarter based on the number of customers that are in the process of implementation, and also based on the extent to which the services are implemented by us or a third party. We may experience large fluctuations in amortized expenses from quarter to quarter when we engage in large services contracts but generally our costs of services, mainly from our SmartStart onboarding program, will show a steady increase along with our growth. Our costs associated with providing professional services are significantly higher as a percentage of revenue than our cost of subscription revenue due to the labor costs associated with providing professional services.
 
At the end of 2008, in response to the onset of difficult economic times, we made a decision to reduce our investment in our professional services personnel and serve the majority of clients’ professional service needs through various partners that we trained and certified. While this led to an erosion of the margin of those services, it also helped to accelerate the growth of our network of partners. These partners are organizations that are actively providing services to marketing departments and, in addition to performing services on our behalf, they often discover new sales opportunities for our solutions. During 2010, as the economy improved and our volume of new business transactions increased, we made the decision to re-invest in our professional services organization such that an increasing percentage of our clients’ professional service needs would be performed by us rather than third parties. As our business has grown substantially, we anticipate the volume of professional services subcontracted to our partners will remain materially unchanged and the increased demand will be fulfilled by our own personnel. As a result, we expect cost of professional services revenue to decrease over time as a percentage of professional services revenue.
 
Operating Expenses
 
Research and Development
 
Research and development expenses consist primarily of personnel and related expenses for our research and development and product management staffs, including salaries, benefits, bonuses and stock-based compensation; the cost of certain third-party contractors; and allocated overhead. Research and development costs, other than software development expenses qualifying for capitalization, are expensed as incurred. We evaluate certain software development costs to determine if they should be capitalized. Based on our product development process, technological feasibility is established upon completion of a working model. To date, the period between achieving technological feasibility and general availability of such software has been short and software costs qualifying for capitalization have been immaterial. Accordingly, we have not capitalized any software development costs.
 
We have focused our research and development efforts on continuously improving our platform, including feature innovation as well as platform extension. We believe that our research and development activities are efficient, because we benefit from maintaining a single software code base. We expect research and development expenses to increase in absolute dollars as we add new functionality to the platform. No capitalization of these expenses has occurred to date.
 
Marketing and Sales
 
Marketing and sales expenses consist primarily of personnel and related expenses for our marketing and sales staff, including salaries, bonuses, stock-based compensation, benefits and commissions as well as allocated overhead of facilities and IT. It also includes program costs for


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campaigns, field marketing, partner marketing, corporate communications, online marketing, product marketing and other content and brand-building activities. Sales commissions on subscription services and professional services are recorded as prepaid expenses once an order is booked and the customer is activated on the Eloqua Platform. The expense for these commissions is recognized over the term of the subscription period or over the period that the professional services revenue is recognized.
 
We intend to continue to invest in marketing and sales in order to increase awareness of both RPM and marketing automation and to acquire new customers. We expect spending in these areas to increase in absolute dollars as we continue to expand our business both domestically and internationally. We expect marketing and sales expenses to continue to be among the most significant components of our operating expenses.
 
General and Administrative
 
General and administrative expenses consist primarily of personnel and related expenses for administrative, finance, information technology, or IT, legal and human resource staffs, including salaries, benefits, bonuses and stock-based compensation; professional fees; insurance premiums; and other corporate expenses.
 
We expect our general and administrative expenses to increase as we continue to expand our operations, hire additional personnel and transition from being a private company to a public company. In transitioning to a public company, we expect to incur increased expenses related to increased outside legal counsel assistance, accounting and auditing activities, compliance with SEC requirements and enhancing our internal control environment through the adoption and administration of new corporate policies.
 
Other Income (Expense)
 
Other income (expense) primarily consists of interest income and interest expense. Interest income represents interest received on our cash and cash equivalents. Interest expense is associated with our outstanding long-term debt and capital leases. In addition, other income (expense) includes changes in the fair value of preferred stock warrant liabilities.
 
Critical Accounting Policies and Estimates
 
Our financial statements and the related notes included elsewhere in this prospectus are prepared in accordance with generally accepted accounting principles in the United States. Our significant accounting policies are more fully described under the heading “Significant Accounting Policies” in note 2 of the notes to the consolidated annual financial statements and in note 1 of the notes to the consolidated interim financial statements, both included elsewhere in this prospectus. However, we believe the accounting policies described below are particularly important to the portrayal and understanding of our financial position and results of operations and require application of significant judgment by our management. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, cost of revenue, operating expenses, other income and expenses, provision for income taxes and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.


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Revenue Recognition
 
We derive our revenue from two sources: (i) subscription and support revenue, which is comprised of subscription fees from customers accessing our on demand application service, customer support beyond the standard support that is included in the basic subscription fee and other subscription-based services; and (ii) other professional service revenue, which is comprised of installation and deployment services and other non-subscription services, which include our user conferences. We provide our on-demand application as a service and follow the provisions of FASB ASC Subtopic 605-25, Revenue Recognition—Multiple Element Arrangements. We recognize revenue when all of the following conditions are met: (i) there is persuasive evidence of an arrangement; (ii) the service has been provided to the customer; (iii) the collection of the fees is reasonably assured; and (iv) the amount of fees to be paid by the customer is fixed or determinable. Our arrangements do not contain general rights of return.
 
We enter into arrangements with multiple deliverables that generally include subscription, support and professional services.
 
Prior to January 1, 2011, the deliverables in multiple-deliverable arrangements were accounted for separately if the delivered items had standalone value and there was objective and reliable evidence of fair value for the undelivered items. If the deliverables in a multiple-deliverable arrangement could not be accounted for separately, the total arrangement fee was recognized ratably as a single unit of accounting over the contracted term of the subscription agreement. A significant portion of our multiple-deliverable arrangements were accounted for as a single unit of accounting because we did not have objective and reliable evidence of fair value for certain of our deliverables. Additionally, in these situations, we deferred the direct costs of a professional service arrangement and amortized those costs over the same period as the professional services revenue is recognized.
 
In October 2009, the FASB issued ASU 2009-13, which amended the previous multiple-deliverable arrangements accounting guidance. Pursuant to the new guidance, objective and reliable evidence of fair value of the deliverables to be delivered is no longer required in order to account for deliverables in a multiple-deliverable arrangement separately. Instead, arrangement consideration is allocated to deliverables based on their relative selling price. The new guidance also eliminates the use of the residual method.
 
In the first quarter of the year ending December 31, 2011, we adopted this new accounting guidance on a prospective basis. We have applied the new accounting guidance to those multiple-deliverable arrangements entered into or materially modified on or after January 1, 2011. During the six months ended June 30, 2011, we recognized approximately $0.6 million more of professional services revenue and $0.5 million more in cost of professional services revenue than would have been recognized prior to the adoption of ASU 2009-13.
 
Under the new accounting guidance, in order to treat deliverables in a multiple-deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, we account for each deliverable separately. Subscription services have standalone value as such services are often sold separately. In determining whether professional services have standalone value, we consider, for each professional services agreement, the availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date, and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work. To date, we have concluded that all of the professional services included in multiple-deliverable arrangements executed have standalone value.


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Under the new accounting guidance, when multiple deliverables included in an arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. We determine the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price, or VSOE, if available, or our best estimate of selling price, or BESP, if VSOE is not available. We have determined that third-party evidence, or TPE, is not a practical alternative due to the unique nature and functionality of our service offering. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.
 
We are not able to demonstrate VSOE of selling price with respect to our subscription services. We do not have sufficient instances of separate sales of subscriptions nor are we able to demonstrate sufficient pricing consistency with respect to such sales. Therefore, we have determined the best estimated selling price based on the following:
 
  •  Expected discounts from the list price for each service offering, which represents a component of our current go-to-market strategy, as established by senior management taking into consideration factors such as the competitive and economic environment.
 
  •  An analysis of the historical pricing with respect to both of our bundled and standalone subscription arrangements.
 
We have established VSOE of selling price for our professional services based on an analysis of separate sales of such services.
 
Subscription and support revenue is recognized ratably over the contract terms beginning on the activation date of each contract. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
 
Prior to the adoption of ASU 2009-13, fees for consulting services that did not qualify for separate accounting because VSOE or TPE of fair value did not exist, were recognized ratably over the remaining term of the subscription contract.
 
Consulting services, including professional services and training have stand alone value from the related subscription services. Following the adoption of ASU 2009-13, professional services revenue is recognized as the services are performed. Training revenue is recognized after the service has been performed.
 
Revenue related to our user conferences is recognized upon completion of the user conference.
 
Deferred Revenue
 
Deferred revenue consists of billings or payments received in advance of revenue recognition from our subscriptions, professional services and other services described above and are recognized as revenue when all of the revenue recognition criteria are met. For subscription arrangements, we generally invoice our customers in quarterly, semi-annual or annual installments. Accordingly, the deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. The portion of deferred revenue that we anticipate will be recognized after the succeeding 12-month period is recorded as non-current deferred revenue and the remaining portion is recorded as current deferred revenue.
 
Deferred Commissions and Subcontractor Costs
 
We defer sales commissions paid to our sales force that are direct and incremental costs associated with non-cancelable subscription contracts with customers. We generally pay commissions


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in the periods we receive payment from the customer under the associated subscription agreement. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts. Commissions are deferred and amortized to sales expense over the non-cancelable terms of the related subscription contracts with our customers, which are typically 12 to 24 months.
 
During the six months ended June 30, 2011, we deferred $1.2 million of commission expenditures and we amortized $1.1 million to sales expense. During the same period in 2010, we deferred $1.0 million of commission expenditures and we amortized $0.8 million to sales expense. Deferred commissions on our condensed consolidated balance sheet totaled $1.9 million at June 30, 2011 and $1.8 million at December 31, 2010.
 
When subcontractors are used to provide all or a portion of our professional services, we defer the direct and incremental subcontracting costs and amortize those costs over the same period that the professional service revenue is recognized. During the six months ended June 30, 2011, we deferred $1.2 million of subcontracting costs and we amortized $1.6 million to cost of revenue. During the same period in 2010, we deferred $0.9 million of subcontracting costs and we amortized $0.7 million to cost of revenue. Deferred subcontracting costs on our condensed consolidated balance sheet totaled $1.1 million at June 30, 2011 and $1.5 million at December 31, 2010.
 
Allowance for Doubtful Accounts
 
On a quarterly basis, we evaluate the need to establish an allowance for doubtful accounts, by analyzing the likelihood of receiving customer payments. Our evaluation and analysis include a specific identification and review of all outstanding accounts receivable balances, review of our historical collection experience with each customer, and any specific facts and circumstances that may indicate that a specific customer receivable is not collectible. We make judgments as to our ability to collect outstanding receivables and establish an allowance when collection becomes doubtful.
 
Accounting for Stock-Based Compensation
 
We account for stock-based awards granted to employees and directors by recording compensation expense based on the awards’ estimated fair values. We expect that our expense related to stock-based compensation will increase over time.
 
We estimate the fair value of our stock-based awards as of the date of grant using the Black-Scholes option-pricing model. Determining the fair value of stock-based awards under this model requires judgment, including estimating the value per share of our common stock adjusted for our status as a private company, estimated volatility, expected term of the awards, estimated dividend yield and the risk-free interest rate. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, based on management’s judgment and subjective future expectations. These estimates involve inherent uncertainties. If any of the assumptions used in the model change significantly, stock-based compensation recorded for future awards may differ materially from that recorded for awards granted previously.
 
The determination of the estimated value per share of our common stock is discussed below. We use the average volatility of similar publicly traded companies to determine our estimated volatility. For purposes of determining the expected term of the awards in the absence of sufficient historical data relating to stock-option exercises for our company, we apply a simplified approach in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the award. The risk-free interest rate for periods within the expected life of an award, as applicable, is based on the U.S. Treasury yield curve in effect during the period in which the


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award was granted. Our estimated dividend yield is zero, as we have not and do not currently intend to declare dividends in the foreseeable future.
 
Once we have determined the estimated fair value of our stock-based awards, we recognize the portion of that value that corresponds to the portion of the award that is ultimately expected to vest, taking estimated forfeitures into account. This amount is recognized as an expense over the vesting period of the award using the straight-line method. We estimate forfeitures based upon our historical experience and, at each period, review the estimated forfeiture rate and make changes as factors affecting the forfeiture rate calculations and assumptions change.
 
We calculated the fair value of options granted using the Black-Scholes pricing model with the following assumptions:
 
                                 
    Years Ended December 31,   Six Months Ended
    2008   2009   2010   June 30, 2011
 
Estimated volatility
    61.0 %     76.0 %     62.3 %     59.1 %
Estimated dividend yield
    0.0 %     0.0 %     0.0 %     0.0 %
Estimated term (years)
    6.1       6.1       6.1       6.1  
Risk-free rate
    3.0 %     2.2 %     1.9 %     2.5 %
 
Significant Factors, Assumptions and Methodologies Used in Determining Fair Value of Common Stock
 
Given the absence of an active market for our common stock, our board of directors is required to estimate the fair value of our common stock at the time of each grant of stock-based awards. Beginning with the fourth quarter of 2007, our management has regularly commissioned Timan LLC, or Timan, an independent third party valuation firm, to prepare contemporaneous valuation analyses near the time of each grant to assist our board of directors in this determination. In general, our board of directors received a draft of the Timan valuation report prior to the board meeting at which options were to be granted. At the meeting, the board of directors would consider the draft report, and following the meeting, the valuation report would be finalized after taking into account any corrections or updates requested by the board of directors. The board of directors considered the Timan valuation reports along with other relevant objective and subjective factors it deemed important in each valuation, exercising significant judgment and reflecting the board of director’s best estimates at the time. These factors included:
 
  •  independent third-party valuations performed by Timan contemporaneously or within a short period of time of the grant date, as applicable;
 
  •  the nature and history of our business;
 
  •  our operating and financial performance;
 
  •  general economic conditions and the specific outlook for our industry;
 
  •  significant new customer wins by us and by our competitors and our competitive position in general;
 
  •  the lack of liquidity for our non-publicly traded common stock;
 
  •  the market price of companies engaged in the same or similar lines of business whose equity securities are publicly traded in active trading markets;


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  •  the differences between our preferred and common stock in terms of liquidation preferences, conversion rights, voting rights and other features; and
 
  •  the likelihood of achieving different liquidity events or remaining a private company.
 
We have performed the valuations of our common stock in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation.” We have used the Probability-Weighted Expected Return Method, or PWERM, to estimate the fair value of our common and preferred stock. This valuation method was considered to be the most appropriate given the status of our business. Under the PWERM method, management assigned probabilities and timing estimates to potential liquidity events for our business based on a variety of factors, including primarily our recent operating history, the amount of cash held by us, and our business outlook. Four principal scenarios were examined: (1) an initial public offering, or IPO, scenario (2) a merger, acquisition or sale, or M&A, scenario (3) dissolution or liquidation scenario and (4) a no exit scenario in which the company continues to operate as a private entity. For each valuation date, we prepared a financial forecast to be used in the computation of the enterprise value. The financial forecasts took into account our past experience and future expectations.
 
For each of the scenarios, we have applied one or more of the following generally accepted valuation approaches: the market-based approach, the asset approach, and the income approach. To arrive at the enterprise value under the M&A and IPO scenarios, we used a market-multiple approach, which measures the value of an asset or business through an analysis of recent sales or offerings of comparable investments or assets. In our case, we focused on comparing our company to publicly traded comparable companies, or our benchmarked companies for the IPO scenario. We analyzed the business and financial profiles of the selected companies for relative similarity to us, and once such differences and similarities were determined and proper adjustments were made, we selected an appropriate enterprise value revenue multiple. When considering which companies to include in our benchmarked companies, we focused on two sets of companies based in the United States: (1) publicly traded software companies that primarily deliver software using the SaaS business model similar to ours; and (2) competitors that deliver marketing automation and revenue performance management applications and solutions. As the benchmarked companies have either a similar business model to us, delivering SaaS solutions, or compete for similar customers, we believe our cost structures are similar. The selection of benchmarked companies requires us to make judgments as to the comparability of these companies to us. While the benchmarked companies are generally larger than us in terms of total revenue and assets, several of the companies, like us, are in the investment and growth stage and have experienced operating losses while they have been growing their businesses. Also, several of the comparable companies completed initial public offerings in recent years. The selection of benchmarked companies changes over time based on whether we believe the selected companies remain comparable to us. Based on these considerations, we believe that the companies we selected are a representative group for purposes of performing valuations.
 
For the M&A scenario, the future enterprise value was estimated using projected revenue and revenue multiples estimated from private companies that have recently sold based on information from the Mergerstat database and other public databases.
 
To arrive at the enterprise value under the dissolution or liquidation scenario, we used the asset approach, which is based on the current net asset value and the estimated future net asset value and the liquidation preferences of the preferred shareholders.
 
We estimated our enterprise value under the continuing to operating as a private entity scenario, or No Exit scenario, using an income approach through performing a discounted cash flow, or DCF, analysis. Under the DCF analysis, we forecasted our expected cash flows and then, discounted them


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back to the present using a rate of return derived from comparison companies of similar type and risk profile.The value of future net cash flows was calculated by applying a terminal valuation calculation to our projected cash flow, using projected EBITDA and median trailing twelve-month EBITDA multiples of publicly traded comparable companies.
 
Lastly, we probability-weighted the common stockholder values under each of the scenarios to arrive at an indication of value for our common equity. A discount rate of 35% has been used for all the scenarios, other than the No Exit scenario, based on our estimated cost of capital, including calculation of discounted cash flow. The following table summarizes all option grants from January 1, 2009 through the date of this prospectus:
 
                         
            Common Stock
    Number of
  Per Share
  Fair Value Per Share
Grant Date
  Options Granted   Exercise Price   at Grant Date
 
January 27, 2009
    140,000     $ 0.48     $ 0.48  
February 6, 2009
    487,500     $ 0.48     $ 0.48  
April 28, 2009
    390,000     $ 0.48     $ 0.48  
July 21, 2009
    1,263,000     $ 0.57     $ 0.57  
October 27, 2009
    330,000     $ 0.61     $ 0.61  
January 26, 2010
    530,000     $ 0.62     $ 0.62  
February 8, 2010
    650,000     $ 0.62     $ 0.62  
April 28, 2010
    560,000     $ 0.70     $ 0.70  
July 29, 2010
    290,000     $ 0.76     $ 0.76  
November 10, 2010
    928,000     $ 0.93     $ 0.93  
December 20, 2010
    500,000     $ 0.93     $ 0.93  
February 23, 2011
    537,500     $ 1.29     $ 1.29  
March 4, 2011
    780,000     $ 1.29     $ 1.29  
April 28, 2011
    302,500     $ 1.90     $ 1.90  
July 1, 2011
    517,000     $ 2.86     $ 2.86  
July 27, 2011
    120,000     $ 2.86     $ 2.86  
August 23, 2011
    1,302,500     $ 2.90     $ 2.90  
 
Significant factors contributing to changes in common stock fair value at the date of each grant beginning in fiscal year 2009 were as follows:
 
January and February 2009
 
On January 27, 2009, our board of directors granted options to purchase 140,000 shares of common stock with an exercise price of $0.48. In estimating the fair value of our common stock to set the exercise price of such options as of January 27, 2009, the board of directors reviewed and considered a draft of an independent valuation report for our common stock as of November 30, 2008. The independent valuation report was finalized on February 6, 2009 and reflected a fair value of our common stock of $0.48 per share as of November 30, 2008. Our board of directors determined that there were no significant factors affecting the value of our common stock that occurred between November 30, 2008 and January 27, 2009.
 
On February 6, 2009, when our results were similar to the prior month, the compensation committee of our board of directors granted options to purchase 487,500 shares of common stock with an exercise price of $0.48. There had been no meaningful change in our performance since the last stock option grant date and therefore our board and management believed that the estimated fair value of common stock had not changed since the January 27, 2009 grant.


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The board and our management considered the relatively flat performance by the benchmarked companies for the quarter ended March 30, 2009. In addition, the macro-economic conditions at the time had deteriorated, with uncertainty as to whether the overall economy would rebound in 2009 and as to the impact of the recession on the purchasing patterns of our customer base, which was slower than both our board-approved operating plan, as well as our revised goals.
 
April 2009
 
On April 28, 2009, our board of directors granted options to purchase 390,000 shares of common stock with an exercise price of $0.48. In estimating the fair value of our common stock to set the exercise price of such options as of April 28, 2009, the board of directors reviewed and considered a finalized independent valuation report dated April 24, 2009 for our common stock as of February 28, 2009. The independent valuation report reflected a fair value of our common stock of $0.48 per share as of February 28, 2009. Our board of directors determined that there were no significant factors affecting the value of our common stock that occurred between February 28, 2009 and April 28, 2009. The board of directors considered the continuing economic downturn, which caused our sales growth to slow. Beginning in early 2009, we began to cut expenses to deal with slower growth, which caused our valuation to remain relatively stable for an extended period of time.
 
July 2009
 
On July 21, 2009, our board of directors granted options to purchase 1,263,000 shares of common stock with an exercise price of $0.57. In estimating the fair value of our common stock to set the exercise price of such options as of July 21, 2009, the board of directors reviewed and considered a draft of an independent valuation report for our common stock as of May 31, 2009. The independent valuation report was finalized on August 19, 2009 and reflected a fair value of our common stock of $0.57 per share as of May 31, 2009. Our board of directors determined that there were no significant factors affecting the value of our common stock that occurred between May 31, 2009 and July 21, 2009. In determining the value of our common stock, our board of directors noted that various benchmarked companies began to show improvements in their valuation multiples and our financial results began to stabilize. However, we continued to experience challenges from the overall economic environment, and to deal with growth that was slower than our plan.
 
October 2009
 
On October 27, 2009, our board of directors granted options to purchase 330,000 shares of common stock with an exercise price of $0.61. In estimating the fair value of our common stock to set the exercise price of such options as of October 27, 2009, the board of directors reviewed and considered a finalized independent valuation report dated October 24, 2009 for our common stock as of August 31, 2009. The independent valuation report reflected a fair value of our common stock of $0.61 per share as of August 31, 2009. Our board of directors determined that there were no significant factors affecting the value of our common stock that occurred between August 31, 2009 and October 27, 2009. The benchmarked companies continued to slowly improve their performance on average. The overall economy continued to slowly recover from the widespread recession, which caused our potential customers to continue to be hesitant to purchase our solutions, leading to slower growth than our business plan had anticipated.
 
January and February 2010
 
On January 26, 2010, our board of directors granted options to purchase 530,000 shares of common stock with an exercise price of $0.62. In estimating the fair value of our common stock to set the exercise price of such options as of January 26, 2010, the board of directors reviewed and


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considered a draft of an independent valuation report dated January 21, 2010 for our common stock as of November 30, 2009. The independent valuation report was finalized on March 30, 2010 and reflected a fair value of our common stock of $0.62 per share as of November 30, 2009. Our board of directors determined that there were no significant factors affecting the value of our common stock that occurred between November 30, 2009 and January 26, 2010.
 
On February 8, 2010, when our results were similar to prior months, the compensation committee of our board of directors granted options to purchase 650,000 shares of common stock with an exercise price of $0.62. There had been no meaningful change in our performance since the last stock option grant date and therefore our board and management believed that the estimated fair value of common stock had not changed since the January 26, 2010 grant. Our board of directors and management determined that there was no real change in economic conditions, our results or the performance of the benchmarked companies since the October 2009 grants.
 
April 2010
 
On April 28, 2010, our board of directors granted options to purchase 560,000 shares of common stock with an exercise price of $0.70. In estimating the fair value of our common stock to set the exercise price of such options as of April 28, 2010, the board of directors reviewed and considered a draft of an independent valuation report dated April 12, 2010 for our common stock as of February 28, 2010. The independent valuation report was finalized on June 3, 2010 and reflected a fair value of our common stock of $0.70 per share as of February 28, 2010. Our board of directors determined that there were no significant factors affecting the value of our common stock that occurred between February 28, 2010 and April 28, 2010. We began to see some recovery in sales momentum as the economy continued to improve. Therefore, we began to increase staffing in a number of areas, and expanded marketing and sales efforts as we sought to regain our sales momentum.
 
July 2010
 
On July 29, 2010, our board of directors granted options to purchase 290,000 shares of common stock with an exercise price of $0.76. In estimating the fair value of our common stock to set the exercise price of such options as of July 29, 2010, the board of directors reviewed and considered a draft of an independent valuation report dated July 26, 2010 for our common stock as of May 31, 2010. The independent valuation report was finalized on August 26, 2010 and reflected a fair value of our common stock of $0.76 per share as of May 31, 2010. Our board of directors determined that there were no significant factors affecting the value of our common stock that occurred between May 31, 2010 and July 29, 2010. In the first half of 2010, we continued to see improvement in our operating results as our customers and potential customers became more willing to purchase our solutions or to expand their use of our solutions.
 
November and December 2010
 
On November 10, 2010, our board of directors granted options to purchase 928,000 shares of common stock with an exercise price of $0.93. In estimating the fair value of our common stock to set the exercise price of such options as of November 10, 2010, the board of directors reviewed and considered a draft of an independent valuation report dated October 29, 2010 for our common stock as of August 31, 2010. The independent valuation report was finalized on January 3, 2011 and reflected a fair value of our common stock of $0.93 per share as of August 31, 2010. Our board of directors determined that there were no significant factors affecting the value of our common stock that occurred between August 31, 2010 and November 10, 2010.


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One month later, on December 20, 2010, when our results were similar to prior months, the compensation committee of our board of directors granted options to purchase 500,000 shares of common stock with an exercise price of $0.93. There had been no meaningful change in our performance since the last stock option grant date and therefore our board and management believed that the estimated fair value of common stock had not changed since the November 10, 2010 grant. Our operating results continued to improve throughout 2010, leading to an increase in our valuation, as we logged increased sales while maintaining our expense levels.
 
February and March 2011
 
On February 23, 2011, our board of directors granted options to purchase 537,500 shares of common stock with an exercise price of $1.29. In estimating the fair value of our common stock to set the exercise price of such options as of February 23, 2011, the board of directors reviewed and considered a draft of an independent valuation report dated February 23, 2011 for our common stock as of December 31, 2010. The independent valuation report was finalized on March 4, 2011 and reflected a fair value of our common stock of $1.29 per share as of December 31, 2010. Our board of directors determined that there were no significant factors affecting the value of our common stock that occurred between December 31, 2010 and February 23, 2011.
 
On March 4, 2011, when our results were similar to prior months, the compensation committee of our board of directors granted options to purchase 780,000 shares of common stock with an exercise price of $1.29. There had been no meaningful change in our performance since the last stock option grant date and therefore our board and management believed that the estimated fair value of common stock had not changed since the February 23, 2011 grant. The overall market for comparable companies began to show improvement at the end of 2010 and into early 2011, as multiples paid for comparable companies increased.
 
April 2011
 
On April 29, 2011, our board of directors granted options to purchase 302,500 shares of common stock with an exercise price of $1.90. In estimating the fair value of our common stock to set the exercise price of such options as of April 29, 2011, the board of directors reviewed and considered a draft of an independent valuation report dated April 20, 2011 for our common stock as of February 28, 2011. The independent valuation report was finalized on June 10, 2011 and reflected a fair value of our common stock of $1.30 per share as of February 28, 2011. Our board of directors determined that there were significant factors affecting the value of our common stock that occurred between February 28, 2011 and April 29, 2011 including the significantly increased likelihood that we would be able to complete an initial public offering in 2011 due to improved equity market conditions and our planned meetings with investment bankers to discuss an initial public offering.
 
July 2011
 
On July 1, 2011, our board of directors granted options to purchase 517,000 shares of common stock with an exercise price of $2.86. In estimating the fair value of our common stock to set the exercise price of such options as of July 1, 2011, the board of directors reviewed and considered a finalized independent valuation report dated June 30, 2011 for our common stock as of June 30, 2011. The independent valuation report reflected a fair value of our common stock of $2.86 per share. Our board of directors determined that there were no significant factors affecting the value of our common stock that occurred between June 30, 2011 and July 1, 2011.
 
Less than a month later, our board of directors granted options to purchase 120,000 shares of common stock with an exercise price of $2.86 on July 27, 2011. In estimating the fair value of our


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common stock to set the exercise price of such options as of July 27, 2011, the board of directors reviewed and considered a finalized independent valuation report dated June 30, 2011 for our common stock as of June 30, 2011 and a draft of an independent valuation report dated July 26, 2011 for our common stock as of July 25, 2011. The June 30, 2011 independent valuation report reflected a fair value of our common stock of $2.86 per share whereas the July 26, 2011 independent valuation report reflected a fair value of our common stock of $2.82 per share based on lower valuations of market comparables. However, our board of directors determined that despite changes in the market, the value of our common stock remained the same as June 30, 2011.
 
August 2011
 
On August 23, 2011, our board of directors granted options to purchase 1,302,500 shares of common stock with an exercise price of $2.90. In estimating the fair value of our common stock to set the exercise price of such options as of August 23, 2011, the board of directors reviewed and considered a finalized independent valuation report dated August 22, 2011 for our common stock as of August 22, 2011. The independent valuation report reflected a fair value of our common stock of $2.53 per share as of August 22, 2011. Our board of directors determined that the fair value of our stock was somewhat higher than in July 2011 as our business continued to progress in accordance with our expectations, we continued our progress towards an initial public offering and the sole reason for the decrease in the 409A valuation performed by Timan was the significant reduction in market prices of the public comparables resulting from the recent turmoil in the financial markets.
 
Accounting for Income Taxes
 
Income taxes are accounted for under the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent that it is not considered to be more likely than not that a deferred tax asset will be realized, a valuation allowance is established.
 
We apply the guidance in FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) (included in FASB ASC Topic 740-10, Income Taxes-Overall), which provides guidance related to the accounting for uncertain tax positions. In accordance with FIN 48, we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination. We have assessed our income tax positions and recorded tax benefits for all years subject to examination, based upon our evaluation of the facts, circumstances and information available at each period end. For those tax positions where we have determined there is greater than 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit which is more-likely-than-not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where we have determined there is a less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized in our financial statements.
 
We claim investment tax credits in Canada arising from qualifying scientific research and experimental development expenditures. Certain refundable claims resulting from qualifying costs do not have characteristics of income tax benefits, and are recorded as a reduction of research and


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development expenses on our statement of operations. Nonrefundable investment tax credits are recorded as a reduction of income tax expense.
 
New Accounting Pronouncements
 
In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements (EITF Issue No. 08-1, Revenue Arrangements with Multiple Deliverables). ASU 2009-13 amends ASC 650-25 to eliminate the requirement that all undelivered elements have VSOE or TPE before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We adopted the provisions of ASU 2009-13 prospectively, on January 1, 2011. See “—Critical Accounting Policies and Estimates—Revenue Recognition” above for additional information.
 
In October 2009, the FASB issued ASU No. 2009-14 Software: Certain Revenue Arrangements That Include Software Elements, a new accounting standard for the accounting for certain revenue arrangements that include software elements. ASU 2009-14 amends the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. The new standard is effective for fiscal years beginning on or after June 15, 2010. We adopted this new standard on January 1, 2011. Since we do not account for our subscription service revenue under the software revenue recognition rules there was no impact on our consolidated financial statements upon the adoption of the new accounting standard.
 
Results of Operations
 
The following tables set forth our statements of operations data for each of the periods indicated as well as the percentage of total revenue for each line item shown. The financial information presented for the interim periods has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the results of operations for such periods. This data should be read in conjunction with the audited consolidated financial statements and the related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of the results to be expected for future periods and operating results for the six-month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011.
 
                                         
    Years Ended December 31,     Six Months Ended June 30,  
    2008     2009     2010     2010     2011  
    (in thousands)  
 
Consolidated Statements of Operations Data
                               
Revenue:
                                       
Subscription and support
  $ 28,468     $ 37,543     $ 47,225     $ 21,671     $ 28,871  
Professional services
    4,402       3,415       3,574       1,309       2,821  
                                         
Total revenue
    32,870       40,958       50,799       22,980       31,692  
                                         
Cost of revenue:
                                       
Subscription and support
    3,536       6,423       9,569       4,400       5,887  
Professional services
    5,702       5,284       6,980       2,584       4,729  
                                         
Total cost of revenue
    9,238       11,707       16,549       6,984       10,616  
                                         
Gross profit
    23,632       29,251       34,250       15,996       21,076  
                                         


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    Years Ended December 31,     Six Months Ended June 30,  
    2008     2009     2010     2010     2011  
    (in thousands)  
 
Operating expenses:
                                       
Research and development
    7,499       8,607       10,363       5,283       5,507  
Marketing and sales
    21,632       17,321       22,147       10,515       13,713  
General and administrative
    7,007       7,348       7,879       3,793       4,785  
                                         
Total operating expenses
    36,138       33,276       40,389       19,591       24,005  
                                         
Loss from operations
    (12,506 )     (4,025 )     (6,139 )     (3,595 )     (2,929 )
Other income (expense), net
    60       (107 )     (241 )     (126 )     (414 )
                                         
Loss before income tax benefit (expense)
    (12,446 )     (4,132 )     (6,380 )     (3,721 )     (3,343 )
Income tax benefit (expense)
          (81 )     4,869       (22 )     (154 )
                                         
Net loss
  $ (12,446 )   $ (4,213 )   $ (1,511 )   $ (3,743 )   $ (3,497 )
                                         
 
                                         
    Years Ended December 31,     Six Months Ended June 30,  
    2008     2009     2010     2010     2011  
    (as a percentage of total revenue)  
 
Consolidated Statement of Operations Data
                                       
Revenue:
                                       
Subscription and support
    86.6 %     91.7 %     93.0 %     94.3 %     91.1 %
Professional services
    13.4       8.3       7.0       5.7       8.9  
                                         
Total revenue
    100.0       100.0       100.0       100.0       100.0  
                                         
Cost of revenue:
                                       
Subscription and support
    10.8       15.7       18.8       19.1       18.6  
Professional services
    17.3       12.9       13.7       11.2       14.9  
                                         
Total cost of revenue
    28.1       28.6       32.6       30.4       33.5  
                                         
Gross profit
    71.9       71.4       67.4       69.6       66.5  
                                         
Operating expenses:
                                       
Research and development
    22.8       21.0       20.4       23.0       17.4  
Marketing and sales
    65.8       42.3       43.6       45.8       43.3  
General and administrative
    21.3       17.9       15.5       16.5       15.1  
                                         
Total operating expenses
    109.9       81.2       79.5       85.3       75.7  
                                         
Loss from operations
    (38.0 )     (9.8 )     (12.1 )     (15.6 )     (9.2 )
Other income (expense), net
    0.2       (0.3 )     (0.5 )     (0.5 )     (1.3 )
                                         
Loss before income tax benefit (expense)
    (37.9 )     (10.1 )     (12.6 )     (16.2 )     (10.5 )
Income tax benefit (expense)
          (0.2 )     9.6       (0.1 )     (0.5 )
                                         
Net loss
    (37.9 )%     (10.3 )%     (3.0 )%     (16.3 )%     (11.0 )%
                                         

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Comparison of Six Months Ended June 30, 2010 and 2011
 
Revenue
 
                                 
    Six Months Ended June 30,     Change  
    2010     2011     $     %  
    (dollars in thousands)              
 
Subscription and support revenue
  $ 21,671     $ 28,871     $ 7,200       33.2 %
Percentage of total revenue
    94.3 %     91.1 %                
Professional services revenue
  $ 1,309     $ 2,821     $ 1,512       115.5 %
Percentage of total revenue
    5.7 %     8.9 %                
 
Subscription and support revenue.  Subscription and support revenue for the six months ended June 30, 2011 increased by $7.2 million, or 33.2%, over the six months ended June 30, 2010. The increase was driven by an increase in revenue from new and existing customers. We had 1,002 customers operating on our platform at June 30, 2011, an increase from 787 customers operating on our platform at June 30, 2010.
 
Professional services revenue.  Professional services revenue for the six months ended June 30, 2011 increased by $1.5 million, or 115.5%, over the six months ended June 30, 2010. The increase was partially the result of the adoption of a new accounting standard, as discussed above. Prior to January 1, 2011, we recognized billings received for our implementation and training service engagements ratably over the term of the related subscription agreement. As a result of the new accounting standard, service fees are generally separated from the related subscription arrangement and recognized as the services are delivered. During the six months ended June 30, 2011, we recognized $0.6 million more in services revenue than we would have under our previous revenue recognition policy. The remaining increase in service revenue in the six months ended June 30, 2011 compared to the same period in 2010 was primarily driven by an increase in the number of customers from which we were recognizing professional services revenue during the six months ended June 30, 2011.
 
Cost of Revenue
 
                                 
    Six Months Ended
   
    June 30,   Change
    2010   2011   $   %
    (dollars in thousands)        
 
Cost of subscription and support revenue
  $ 4,400     $ 5,887     $ 1,487       33.8 %
Percentage of subscription and support revenue
    20.3 %     20.4 %                
Gross margin
  $ 17,271     $ 22,984     $ 5,713       33.1 %
Cost of professional services revenue
  $ 2,584     $ 4,729     $ 2,145       83.0 %
Percentage of professional services revenue
    197.4 %     167.6 %                
Gross margin (loss)
  $ (1,275 )   $ (1,908 )   $ (633 )     (49.6 )%
 
Cost of subscription and support revenue.  Cost of subscription and support revenue for the six months ended June 30, 2011 increased by $1.5 million, or 33.8%, over the six months ended June 30, 2010. This increase was primarily driven by an increase of $1.2 million in personnel and related expenses resulting from new hiring to support the growth of our customer base in the six months ended June 30, 2011, which expenses included salaries and bonuses, benefits and payroll taxes, stock compensation and overhead, as compared to the six months ended June 30, 2010. The increase was also attributable to a $0.2 million increase in hosting and equipment costs relating to the growth in number of customers as well as increased use by existing customers in the six month period ended June 30, 2011 as compared to the six month period ended June 30, 2010.


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Cost of professional services revenue.  Cost of professional services revenue for the six months ended June 30, 2011 increased by $2.1 million, or 83.0%, over the six months ended June 30, 2010. This increase was primarily driven by an increase of $1.0 million in personnel and related expenses resulting from an increase in new implementations to support our customer growth in the six months ended June 30, 2011, which expenses included salaries and bonus, benefits and payroll taxes, stock compensation, and overhead, as compared to the six months ended June 30, 2010. The increase was also driven by an increase of $0.9 million attributable to our hiring third party contractors to provide approximately 50% of our SmartStart onboarding programs, as well as custom integration and configuration services to implement new customers on our platform, in the six month period ended June 30, 2011 as compared to the six month period ended June 30, 2010.
 
Operating Expenses
 
Research and Development
 
                                 
    Six Months Ended
   
    June 30,   Change
    2010   2011   $   %
    (dollars in thousands)        
 
Research and development
  $ 5,283     $ 5,507     $ 224       4.2 %
Percentage of total revenue
    23.0 %     17.4 %                
 
Research and development expenses for the six months ended June 30, 2011 increased by $0.2 million, or 4.2%, over the six months ended June 30, 2010. The increase was attributable to investments made to enhance and improve the functionality of the Eloqua Platform. Our personnel and related expenses increased $0.2 million in the six months ended June 30, 2011 as compared to the six month period ended June 30, 2010 due to increases in salaries and allocated overhead costs.
 
Marketing and Sales
                                 
    Six Months Ended
   
    June 30,   Change
    2010   2011   $   %
    (dollars in thousands)        
 
Marketing and sales
  $ 10,515     $ 13,713     $ 3,198       30.4 %
Percentage of total revenue
    45.8 %     43.3 %                
 
Marketing and sales expenses for the six months ended June 30, 2011 increased by $3.2 million, or 30.4%, over the six months ended June 30, 2010. The increase was attributable to increases in demand generation marketing programs and the expansion of our marketing and sales staff to address increased opportunities in new and existing markets. As a result of the increased headcount in marketing and sales staff, we incurred an additional $1.5 million of personnel and related expenses, which included salaries, payroll taxes and benefits, and stock option compensation, in the six month period ended June 30, 2011 as compared to the six month period ended June 30, 2010. In addition, during the six month period ended June 30, 2011 as compared to the same period in the prior year, commissions and sales bonuses increased by $0.5 million, or 23%, as a result of an increase in new customers acquired and renewed subscription contracts and marketing program expenses increased by $0.3 million to support the expansion of our domestic and international sales activities. During the six months ended June 30, 2011 as compared to the same period in the prior year, travel and entertainment expenses increased by $0.4 million and allocated overhead costs including rent, IT costs, and depreciation and amortization expenses increased by $0.3 million, in each case, as a result of expenses incurred to support our growth.


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General and Administrative
                                 
    Six Months Ended
   
    June 30,   Change
    2010   2011   $   %
    (dollars in thousands)        
 
General and administrative
  $ 3,793     $ 4,785     $ 992       26.2 %
Percentage of total revenue
    16.5 %     15.1 %                
 
General and administrative expenses for the six months ended June 30, 2011 increased by $1.0 million, or 26.2%, over the six months ended June 30, 2010. The increase was driven by increased employee-related costs and professional fees to support our growth. We incurred increased personnel, consulting and related costs of $0.8 million and increased professional fees of $0.1 million for accounting, audit, legal and tax services incurred in the six months ended June 30, 2011 as compared to the same period in 2010. Additionally, during the six months ended June 30, 2011, we increased our reserve for bad debt by $0.2 million as a result of the $7.2 million increase in revenue as compared to the same period in 2010.
 
Other Income (Expense), Net
                                 
    Six Months
   
    Ended June 30,   Change
    2010   2011   $   %
    (dollars in thousands)        
 
Other income (expense), net
  $ (126 )   $ (414 )   $ (288 )     *  
Percentage of total revenue
    (0.5 )%     (1.3 )%                
 
 
* Not meaningful
 
Other expense for the six months ended June 30, 2011 increased $0.3 million over the six months ended June 30, 2010. The increase was primarily attributable to a change in the fair value of our outstanding Series C preferred stock warrants, which are classified as liabilities and adjusted to fair value each reporting period.
 
Comparison of Years Ended December 31, 2008, 2009 and 2010
 
Revenue
 
                                                         
                      Change from
       
    Years Ended December 31,     2008 to 2009     Change from 2009 to 2010  
    2008     2009     2010     $     %     $     %  
    (dollars in thousands)                          
 
Subscription and support revenue
  $ 28,468     $ 37,543     $ 47,225     $ 9,075       31.9 %   $ 9,682       25.8 %
Percentage of total revenue
    86.6 %     91.7 %     93.0 %                                
Professional services revenue
  $ 4,402     $ 3,415     $ 3,574     $ (987 )     (22.4 )%   $ 159       4.7 %
Percentage of total revenue
    13.4 %     8.3 %     7.0 %                                
 
Subscription and support revenue.  Subscription and support revenue increased $9.7 million, or 25.8%, from 2009 to 2010. The increase was driven by an increase in revenue from new and existing customers. We had 896 customers operating on our platform at December 31, 2010, an increase from 712 customers operating on our platform at December 31, 2009.
 
Subscription and support revenue increased $9.1 million, or 31.9%, from 2008 to 2009. The increase was driven by an increase in revenue from new and existing customers. We had 712 customers operating on our platform at December 31, 2009, an increase from 552 customers operating on our platform at December 31, 2008.


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Professional services revenue.  Professional services revenue increased $0.2 million, or 4.7%, from 2009 to 2010. The increase was driven primarily by an increase in customer attendance and sponsorship fees related to our annual user conference and the introduction of a user conference in Europe in 2010.
 
Services revenue decreased $1.0 million, or 22.4%, from 2008 to 2009. The decrease was driven by a decrease in the number of customers to which we provided professional services resulting from our decision to reduce our professional services team and allow new customers to contract directly with our partners for services that we had historically provided.
 
Cost of Revenue
 
                                                         
        Change from
  Change from
    Years Ended December 31,   2008 to 2009   2009 to 2010
    2008   2009   2010   $   %   $   %
    (dollars in thousands)                
 
Cost of subscription and support revenue
  $ 3,536     $ 6,423     $ 9,569     $ 2,887       81.6 %   $ 3,146       49.0 %
Percentage of subscription and support revenue
    12.4 %     17.1 %     20.3 %                                
Gross margin
  $ 24,932     $ 31,120     $ 37,656     $ 6,188       24.8 %   $ 6,536       21.0 %
Cost of professional services revenue
  $ 5,702     $ 5,284     $ 6,980     $ (418 )     (7.3 )%   $ 1,696       32.1 %
Percentage of professional services revenue
    129.5 %     154.7 %     195.3 %                                
Gross margin (loss)
  $ (1,300 )   $ (1,869 )   $ (3,406 )   $ (569 )     (43.8 )%   $ (1,537 )     (82.2 )%
 
Cost of subscription and support revenue.  Cost of subscription and support revenue increased $3.1 million, or 49.0%, from 2009 to 2010. The increase was primarily attributable to a $0.8 million increase in depreciation and maintenance expenses as well as software and hosting fees associated with equipment for our data centers. In addition, we incurred $0.6 million of increased allocated overhead costs such as rent, IT costs, and depreciation and amortization expenses incurred in order to accommodate our growth in 2010. Finally, our personnel and related expenses increased $1.3 million in 2010 as a result of increased headcount.
 
Cost of subscription and support revenue increased $2.9 million, or 81.6%, from 2008 to 2009. The increase was primarily attributable to a $2.3 million increase in personnel and related expenses as a result of increased headcount in 2009. We also incurred increases of $0.3 million in travel and entertainment expenses and $0.4 million in increased allocated overhead costs including rent, IT costs, and depreciation and amortization expenses as a result of our growth in 2009.
 
Cost of professional services revenue.  Cost of professional services revenue increased $1.7 million, or 32.1%, from 2009 to 2010. The increase was primarily attributable to a $0.6 million increase in salary and related expenses, including bonus, benefits and payroll taxes, and stock based compensation resulting from an increase in headcount of our professional services staff that perform SmartStart and other implementation services in 2010. The increase was also attributable to a $0.4 million increase in 2010 in expenses for third-party contractor costs that we incurred to implement new customers on our platform.
 
Cost of professional services revenue decreased $0.4 million, or 7.3%, from 2008 to 2009. The reduction in cost of services in 2009 resulted primarily from the change in mix of resources used on implementation projects from internal billable employees to third-party contractors. We downsized the internal team in late 2008 by 20%, which, as a result of payments under related severance agreements, first resulted in a reduction in salaries and related expenses during 2009 of $0.5 million.


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This was offset by a $0.4 million increase in expenses from the use of additional third-party contractors.
 
Operating Expenses
 
Research and Development
 
                                                         
                Change from
  Change from
    Years Ended December 31,   2008 to 2009   2009 to 2010
    2008   2009   2010   $   %   $   %
    (dollars in thousands)                
 
Research and development
  $ 7,499     $ 8,607     $ 10,363     $ 1,108       14.8 %   $ 1,756       20.4 %
Percentage of total revenue
    22.8 %     21.0 %     20.4 %                                
 
Research and development expenses increased $1.8 million, or 20.4%, from 2009 to 2010. This increase was primarily attributable to a $1.6 million increase in personnel and related expenses in 2010 due to the change in the mix of our employees to add more senior level developers and management in order to continue to add features and functionality to our platform. We also continued to supplement our internal development efforts with third-party contractors resulting in an additional $0.3 million of expense in 2010 as compared to 2009.
 
Research and development expenses increased $1.1 million, or 14.8%, from 2008 to 2009. This increase was driven by a $0.5 increase in 2010 in personnel expenses, including salaries and related payroll taxes and benefits, recruiting, training and overhead allocation, and a $0.5 million increase in 2010 in costs for third-party contract developers.
 
Marketing and Sales
 
                                                         
                Change from
   
    Years Ended December 31,   2008 to 2009   Change from 2009 to 2010
    2008   2009   2010   $   %   $   %
    (dollars in thousands)                
 
Marketing and sales
  $ 21,632     $ 17,321     $ 22,147     $ (4,311 )     (19.9 )%   $ 4,826       27.9 %
Percentage of total revenue
    65.8 %     42.3 %     43.6 %                                
 
Marketing and sales expenses increased $4.8 million, or 27.9%, from 2009 to 2010. The increase was attributable to increased expenses related to demand generation marketing programs and the expansion of our sales force to address increased opportunities in new and existing markets. As a result of the increased headcount in marketing and sales in 2010, we incurred an additional $2.2 million of personnel and related expenses, which included salaries, payroll taxes and benefits, and stock option compensation in 2010 as compared to 2009. In addition, in 2010 as compared to 2009, commissions and sales bonuses increased by $0.9 million, or 26%, as a result of an increase in new customers acquired and renewed subscription contracts, and marketing program expenses increased by $0.4 million to support the expansion of our domestic and international sales activities. In 2010 as compared to 2009, travel and entertainment expenses increased by $0.3 million and allocated overhead costs including rent, IT costs, and depreciation and amortization expenses increased by $1.0 million, in each case as a result of our growth.
 
Marketing and sales expenses decreased $4.3 million, or 19.9%, from 2008 to 2009. The decrease was primarily attributable to a $3.6 million decrease in personnel and related expenses including sales commissions and travel and entertainment expenses. In addition, we reduced our discretionary marketing programs spending in 2009 by approximately $0.2 million in response to the weakened economy.


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General and Administrative
 
                                                         
                Change from
  Change from
    Years Ended December 31,   2008 to 2009   2009 to 2010
    2008   2009   2010   $   %   $   %
    (dollars in thousands)                
 
General and administrative
  $ 7,007     $ 7,348     $ 7,879     $ 341       4.9 %   $ 531       7.2 %
Percentage of total revenue
    21.3 %     17.9 %     15.5 %                                
 
General and administrative expenses increased $0.5 million, or 7.2%, from 2009 to 2010. The increase was primarily attributable to headcount growth in human resources and our internal information technology support function which contributed to an overall increase in salaries, payroll taxes and benefits, and stock option compensation of $1.1 million from 2009 to 2010. This increase was partially offset by professional fees for outside legal counsel, which declined by $0.2 million from 2009 to 2010 as a result of hiring in-house legal counsel.
 
General and administrative expenses increased $0.3 million, or 4.9%, from 2008 to 2009, as a result of an increase in depreciation and amortization expense of $0.3 million due to increased leasehold improvements for new office space and hardware purchases to support additional personnel.
 
Other Income (Expense), Net
 
                                                         
                Change from
  Change from
    Years Ended December 31,   2008 to 2009   2009 to 2010
    2008   2009   2010   $   %   $   %
    (dollars in thousands)                
 
Other income (expense), net
  $ 60     $ (107 )   $ (241 )   $ (167 )     *     $ (134 )     *  
Percentage of total revenue
    0.2 %     (0.3 )%     (0.5 )%                                
 
 
* Not meaningful
 
Other expense increased $0.1 million from 2009 to 2010 and increased $0.2 million from 2008 to 2009, primarily due to higher interest expense on our long-term debt and capital lease obligations.
 
Income Tax Benefit (Expense)
 
We have recorded valuation allowances on the net deferred tax assets of our U.S. operations and do not anticipate recording an income tax benefit related to these deferred tax assets. We will reassess the realization of deferred tax assets based on accounting standards for income taxes each reporting period and will be able to reduce the valuation allowance to the extent that the financial results of these operations improve and it becomes more likely than not that the deferred tax assets are realizable.
 
For the year ended December 31, 2010 there was an income tax benefit of approximately $4.9 million on a loss before income taxes of approximately $6.4 million. The income tax benefit in 2010 resulted primarily from the release of our valuation allowance for our non U.S. deferred tax assets. The valuation was removed due to a change in management’s assessment of our ability to realize these tax assets due to changes in the nature of our foreign operations. For the year ended December 31, 2009, there was income tax expense of approximately $0.1 million on a loss before income taxes of approximately $4.1 million. The income tax expense for the year ended December 31, 2009 reflected various foreign income taxes that were due. The provision for income taxes was $0 in 2008.


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Quarterly Results of Operations
 
The following tables set forth selected unaudited quarterly consolidated statements of operations data for the last eight quarters, as well as the percentage of total revenue for each line item shown. The financial information presented for the interim periods has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the results of operations for such periods. This data should be read in conjunction with the audited consolidated financial statements and the related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results to be expected for any future period.
 
                                                                 
    Quarters Ended  
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
 
    2009     2009     2010     2010     2010     2010     2011     2011  
    (in thousands)  
 
Revenue:
                                                               
Subscription and support
  $ 9,408     $ 9,868     $ 10,484     $ 11,187     $ 12,416     $ 13,138     $ 13,901     $ 14,970  
Professional services
    648       1,353       633       676       647       1,618       1,057       1,764  
                                                                 
Total revenue
    10,056       11,221       11,117       11,863       13,063       14,756       14,958       16,734  
                                                                 
Cost of revenue:
                                                               
Subscription and support
    1,499       2,236       2,082       2,318       2,399       2,771       2,739       3,148  
Professional services
    1,268       1,790       1,220       1,364       1,662       2,734       2,255       2,474  
                                                                 
Total cost of revenue
    2,767       4,026       3,302       3,682       4,061       5,505       4,994       5,622  
                                                                 
Gross profit
    7,289       7,195       7,815       8,181       9,002       9,251       9,964       11,112  
                                                                 
Operating expenses:
                                                               
Research and development
    2,139       2,548       2,585       2,699       2,611       2,468       2,792       2,716  
Marketing and sales
    4,344       4,374       5,294       5,222       5,161       6,471       6,851       6,862  
General and administrative
    1,914       2,011       1,812       1,982       1,898       2,188       2,546       2,238  
                                                                 
Total operating expenses
    8,397       8,933       9,691       9,903       9,670       11,127       12,189       11,816  
                                                                 
Loss from operations
    (1,108 )     (1,738 )     (1,876 )     (1,722 )     (668 )     (1,876 )     (2,225 )     (704 )
Other expense, net
    (47 )     (49 )     (43 )     (82 )     (62 )     (52 )     (124 )     (291 )
                                                                 
Loss before income tax benefit (expense)
    (1,155 )     (1,787 )     (1,919 )     (1,804 )     (730 )     (1,928 )     (2,349 )     (995 )
Income tax benefit (expense)
    (14 )     (35 )     (11 )     (11 )     (29 )     4,920       (63 )     (91 )
                                                                 
Net income (loss)
  $ (1,169 )   $ (1,822 )   $ (1,930 )   $ (1,815 )   $ (759 )   $ 2,992     $ (2,412 )   $ (1,086 )
                                                                 
 


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    Quarters Ended  
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
 
    2009     2009     2010     2010     2010     2010     2011     2011  
                (as a percentage of total revenue)              
 
Revenue:
                                                               
Subscription and support
    93.6 %     87.9 %     94.3 %     94.3 %     95.0 %     89.0 %     92.9 %     89.5 %
Professional services
    6.4       12.1       5.7       5.7       5.0       11.0       7.1       10.5  
                                                                 
Total revenue
    100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0  
                                                                 
Cost of revenue:
                                                               
Subscription and support
    14.9       19.9       18.7       19.5       18.4       18.8       18.3       18.8  
Professional services
    12.6       16.0       11.0       11.5       12.7       18.5       15.1       14.8  
                                                                 
Total cost of revenue
    27.5       35.9       29.7       31.0       31.1       37.3       33.4       33.6  
                                                                 
Gross profit
    72.5       64.1       70.3       69.0       68.9       62.7       66.6       66.4  
                                                                 
Operating expenses:
                                                               
Research and development
    21.3       22.7       23.3       22.8       20.0       16.7       18.7       16.2  
Marketing and sales
    43.2       39.0       47.6       44.0       39.5       43.9       45.8       41.0  
General and administrative
    19.0       17.9       16.3       16.7       14.5       14.8       17.0       13.4  
                                                                 
Total operating expenses
    83.5       79.6       87.2       83.5       74.0       75.4       81.5       70.6  
                                                                 
Loss from operations
    (11.0 )     (15.5 )     (16.9 )     (14.5 )     (5.1 )     (12.7 )     (14.9 )     (4.2 )
Other expense, net
    (0.5 )     (0.4 )     (0.4 )     (0.7 )     (0.5 )     (0.4 )     (0.8 )     (1.7 )
                                                                 
Loss before income benefit (expense)
    (11.5 )     (15.9 )     (17.3 )     (15.2 )     (5.6 )     (13.1 )     (15.7 )     (5.9 )
Income tax benefit (expense)
    (0.1 )     (0.3 )     (0.1 )     (0.1 )     (0.2 )     33.3       (0.4 )     (0.5 )
                                                                 
Net income (loss)
    (11.6 )%     (16.2 )%     (17.4 )%     (15.3 )%     (5.8 )%     20.3 %     (16.1 )%     (6.5 )%
                                                                 
 
In general, our revenues have increased as a result of an increase in the number of customers operating on our platform. In most of the quarters presented, increases in operating expenses reflected the addition of marketing and sales personnel to focus on adding new customers and to increase sales within our existing customer base and also added technical support, services, research and development and administrative personnel to support our growth.
 
Our gross profit in absolute dollars increased sequentially in all but the quarter ended December 31, 2009, which decrease was primarily due to the costs associated with our annual user conference of $0.6 million. Our cost to run our infrastructure is generally fixed within a given quarter and therefore, when applied against our generally fixed costs, higher revenue in a quarter results in higher overall gross profits.
 
Research and development expenses in absolute dollars increased sequentially in every quarter presented except for the quarters ended September 30, 2010, December 31, 2010 and June 30, 2011, which increases primarily resulted from increasing headcount to maintain and improve the functionality of our platform. Research and development expenses varied as a percentage of revenue throughout the periods presented.
 
Marketing and sales expenses in absolute dollars increased sequentially in every quarter presented except the quarters ended June 30, 2010 and September 30, 2010, which increases primarily resulted from increasing headcount in our direct and channel sales teams, as well as increased marketing programs and events and timing of these programs. Marketing and sales expenses as a percentage of revenue varied from quarter to quarter primarily due to the timing of implementation of marketing programs but generally stayed stable year over year as marketing and sales expenses grew along with our revenue growth.
 
General and administrative expenses in absolute dollars increased sequentially in every quarter presented except for the quarters ended March 31, 2010, September 30, 2010 and June 30, 2011, which increases primarily resulted from increasing headcount to support the growth of our business.

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General and administrative expenses as a percentage of revenue decreased from an average rate of approximately 17% for the first four quarters presented to an average rate of approximately 15% for the last four quarters presented due to slower growth in employee-related costs and increased revenue over those periods.
 
During the quarter ended December 31, 2010 we recorded an income tax benefit primarily resulting from the release of our valuation allowance for our non U.S. deferred tax assets. The valuation was removed due to a change in management’s assessment of our ability to realize these tax assets due to changes in the nature of our foreign operations.
 
More generally, our quarterly operating results have fluctuated in the past and may continue to fluctuate in the future based on a number of factors, many of which are beyond our control. Such factors include, in addition to those in the “Risk Factors” section of this prospectus:
 
  •  factors affecting the number of buyer profiles in our customers’ databases;
 
  •  our ability to attract new customers;
 
  •  the timing, committed subscription levels and revenue share rates at which we enter into contracts for our solutions with new customers;
 
  •  the extent to which our existing clients renew their subscriptions for our solutions and the timing and terms of those renewals;
 
  •  our ability to manage growth, including increases in the number of customers on our platform and new geographies;
 
  •  the timing and success of competitive solutions offered by our competitors;
 
  •  changes in our pricing policies and those of our competitors;
 
  •  the purchasing and budgeting cycles of our customers;
 
  •  the financial condition of our customers; and
 
  •  general economic and market conditions.
 
One or more of these factors may cause our operating results to vary widely. As such, we believe that our quarterly results of operations may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance.
 
Liquidity and Capital Resources
 
                                 
          Six Months
 
          Ended
 
    Years Ended December 31,     June 30,  
    2008     2009     2010     2011  
    (in thousands)  
 
Net cash provided by (used in) operating activities
  $ (7,833 )   $ 1,134     $ 1,065     $ 2,197  
Net cash used in investing activities
    (965 )     (1,450 )     (1,851 )     (1,495 )
Net cash provided by (used in) financing activities
    (405 )     1,440       202       88  
Effect of foreign exchange rate changes on cash and equivalents
    (599 )     195       (7 )     74  
                                 
Net increase (decrease) in cash and equivalents
  $ (9,802 )   $ 1,319     $ (591 )   $ 864  
                                 
 
To date, we have financed our operations primarily through private placements of preferred stock and common stock, proceeds from equipment financings and cash from operating activities. As of


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June 30, 2011, we had $8.4 million of cash and cash equivalents. A substantial source of our cash provided by operating activities is our deferred revenue, which is included on our consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of billed fees for our on-demand software and professional services, which is amortized into revenue in accordance with our revenue recognition policy. We assess our liquidity, in part, through an analysis of the anticipated amortization of deferred revenue into revenue together with our other sources of liquidity. As of June 30, 2011, we had a working capital deficit of $10.5 million, which included $26.5 million of deferred revenue recorded as a current liability as of June 30, 2011, representing the unearned portion of billed fees for our on-demand software and professional services for succeeding periods, generally three to 12 months. This deferred revenue will be recognized as revenue when all of the revenue recognition criteria are met.
 
We believe our current cash and cash equivalents, cash flow from operations, amounts available under our credit facility and net proceeds of this offering will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.
 
Net cash provided by (used in) operating activities.  Cash provided by operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business, the increase in the number of customers using our on-demand software and services and the amount and timing of customer payments. Cash provided by operations has historically resulted from net income driven by sales of subscriptions to our on-demand software and services and adjusted for non-cash expense items such as depreciation and amortization of property and equipment and stock-based compensation.
 
Our cash provided by operating activities during the six months ended June 30, 2011 primarily reflects our net loss of $3.5 million, offset by $1.7 million in non-cash expenses that included $0.9 million of depreciation and amortization and $0.7 million in stock-based compensation. Working capital sources of cash included a $5.0 million decrease in accounts receivable as we collected receivables invoiced during the prior quarters and a $0.6 million increase in deferred revenue due to additional customers invoiced in advance during the prior quarters. These sources of cash were partially offset by a $1.4 million increase in prepaid expenses and other assets and a $0.2 million increase in deferred commissions and other deferred costs.
 
Our cash provided by operating activities during 2010 primarily reflects our net loss of $1.5 million, offset by $2.2 million in non-cash expenses that included a $4.9 million deferred tax benefit, partially offset by $1.7 million of depreciation and amortization and $1.1 million in stock-based compensation. Working capital sources of cash included a $10.3 million increase in deferred revenue due to additional customers invoiced in advance during the fourth quarter and a $2.4 million increase in accounts payable and accrued liabilities due to a higher level of expenses consistent with the overall growth of our business. These sources of cash were offset in part by a $6.2 million increase in accounts receivable due to higher customer billing volume compared to the prior year, a $0.8 million increase in prepaid expenses and other assets and a $0.9 million increase in deferred commissions and other deferred costs.
 
Our cash provided by operating activities during 2009 primarily reflects our net loss of $4.2 million, offset by $1.8 million in non-cash expenses that included $1.1 million of depreciation and amortization and $0.9 million in stock-based compensation, offset by $0.2 million in foreign currency transaction gains. Working capital sources of cash included a $1.4 million decrease in accounts receivable as we collected receivables invoiced during the prior quarters, a $1.1 million increase in deferred revenue due to additional customers invoiced in advance during the fourth quarter and a $1.9 million increase in accounts payable and accrued liabilities due to a higher level of expenses consistent with the overall growth of our business. These sources of cash were offset in part by a


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$0.6 million increase in prepaid expenses and other assets and a $0.3 million increase in deferred commissions and other deferred costs.
 
Our cash used in operating activities during 2008 primarily reflects our net loss of $12.4 million, as we focused on making additional investments in headcount and infrastructure in anticipation of future growth, offset by $2.6 million in non-cash expenses that included $1.1 million of depreciation and amortization, $0.9 million in stock-based compensation and $0.6 million in foreign currency losses. Working capital uses of cash included a $6.7 million increase in accounts receivable due to higher customer billing volume compared to the prior year and a $0.6 million increase in deferred commissions and other deferred costs. These uses of cash were offset in part by an $8.5 million increase in deferred revenue due to additional customers invoiced in advance during the fourth quarter a $0.8 million increase in accounts payable and accrued liabilities due to a higher level of expenses consistent with the overall growth of our business.
 
Net cash used in investing activities.  Our primary investing activities have consisted of capital expenditures to purchase computer equipment and furniture and fixtures in support of expanding our infrastructure and workforce. As our business grows, we expect our capital expenditures and our investment activity to continue to increase.
 
For the six months ended June 30, 2011, and the years ended December 31, 2010, 2009, and 2008, cash used in investing activities consisted of $1.5 million, $1.9 million, $1.5 million, and $1.0 million, respectively, for purchases of property and equipment. In general, our purchases of property and equipment are primarily for data center equipment and network infrastructure to support our customer base, as well as equipment for supporting our increasing employee headcount.
 
Net cash provided by (used in) financing activities.  Our primary financing activities have consisted of capital raised to fund our operations as well as proceeds from and payments on equipment debt obligations entered into to finance our property and equipment, primarily equipment used in our data centers. As our business grows, we expect to continue to finance our capital expenditures through equipment debt vehicles.
 
For the six months ended June 30, 2011, cash provided by financing activities consisted primarily of $0.3 million in proceeds from the issuance of common stock due to the exercise of stock options and warrants offset by $0.2 million in repayment of principal obligations under capital leases.
 
For the year ended December 31, 2010, cash provided by financing activities consisted primarily of $2.5 million in proceeds from borrowings under the term loan offset by a $2.0 million repayment under the working capital line of credit. In addition, we received $0.3 million in proceeds from the issuance of common stock due to the exercise of stock options and warrants offset by $0.6 million in repayment of principal obligations under capital leases.
 
For the year ended December 31, 2009, cash provided by financing activities consisted primarily of a $2.0 million draw under the revolving line of credit offset by a $0.6 million repayment of long-term debt.
 
For the year ended December 31, 2008, cash used in financing activities consisted primarily of $0.6 million in repayment of principal obligations under capital leases offset by $0.2 million in proceeds from the issuance of common stock due to the exercise of stock options and warrants.


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Contractual Obligations and Commitments
 
Our principal commitments consist of obligations under our outstanding term loan, operating leases for our office space, capital leases for our computer equipment, and contractual commitments for hosting and other support services. The following table summarizes our operating lease obligations at December 31, 2010:
 
                                         
    Payment Due by Period  
          Less than
                More than
 
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (in thousands)  
 
Term loan
  $ 2,500     $ 208     $ 2,292     $     $  
Operating lease obligations
    5,921       1,383       3,879       659        
Capital lease obligations
    321       238       83              
Contractual commitments
    3,385       1,305       1,880       200        
                                         
Total
  $ 12,127     $ 3,134     $ 8,134     $ 859     $  
                                         
 
We have various contractual agreements with third parties that provide us with co-location hosting services, software licenses, maintenance and support for our operations which typically range from 12 to 36 months. The agreements require payment of a minimum amount per annum or per month for a fixed period of time. All agreements expire by 2014.
 
We have an outstanding credit facility that provides for a $10 million working capital line of credit and a $2.5 million term loan. The line of credit bears interest at prime plus 1.5%, subject to a minimum rate of 5.5%, and matures on December 28, 2012. The term loan bears interest at prime plus 2.0%, subject to a minimum rate of 6.0%, and calls for monthly principal payments over 36 months beginning in October 2011. The line of credit and term loan are collateralized by all of our assets and also contains various covenants that limit, amongst other things, indebtedness, investments, liens, transactions, and certain mergers and sales of assets. At June 30, 2011, we had available borrowings under our line of credit of $9.3 million (after giving effect to $0.7 million of issued but undrawn letters of credit). At June 30, 2011, we were in compliance with all covenants under our line of credit facility.
 
In June 2011, we renewed two contractual agreements with third parties to provide software licenses, maintenance and support for our operations. The agreements require payment of a minimum amount per annum or per month for a fixed period of time of 36 months. The agreements expire by 2014.
 
Off-Balance Sheet Arrangements
 
During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
Quantitative and Qualitative Disclosures about Market Risk
 
We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large clients and limit credit exposure by collecting in advance and setting credit limits as we deem appropriate. In addition, our investment strategy currently has been to invest in financial instruments that are highly liquid and readily convertible into cash and that mature within three months


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from the date of purchase. To date, we have not used derivative instruments to mitigate the impact of our market risk exposures. We have also not used, nor do we intend to use, derivatives for trading or speculative purposes.
 
Interest Rate Risk
 
We are exposed to market risk related to changes in interest rates. Our investments are considered cash equivalents and primarily consist of money market funds backed by U.S. Treasury Bills and certificates of deposit. At June 30, 2011, we had cash and cash equivalents of $8.4 million. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. We do not believe our investments are exposed to significant market risk due to a fluctuation in interest rates.
 
We do not believe our cash equivalents have significant risk of default or illiquidity. While we believe our cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on these deposits.
 
Our principal interest rate exposure relates to borrowings under our credit facility, which bear interest at a variable rate. See “—Contractual Obligations and Commitments.” At June 30, 2011, we had borrowings outstanding under the term loan of $2.5 million and available borrowings under our $10 million line of credit of $9.3 million (after giving effect to $0.7 million issued but undrawn letters of credit). The term loan bears interest at prime plus 2.0%, subject to a floor of 6.0%. The interest rate under the term loan at June 30, 2011 was 6.0%. Borrowings under the line of credit bear interest at a rate of prime plus 1.5%, subject to a minimum rate of 5.5% (the applicable rate at June 30, 2011). If there is a rise in interest rates, our debt service obligations on the borrowings under our credit facility would increase even if the amount borrowed remained the same, which would affect our results of operations, financial condition and liquidity. At our debt level and borrowing rates as of June 30, 2011, annual cash interest expense, including fees under our credit facility, would have been approximately $0.1 million, or $0.7 million if our line of credit was fully drawn. If variable interest rates were to change by 1.0%, our interest expense would fluctuate approximately $0.03 million per year based on borrowings at June 30, 2011, or $0.13 million per year if our line of credit was fully drawn, in each case, without taking into account interest rate floors.
 
Foreign Currency Exchange Risk
 
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar. Our customer contracts are generally denominated in the currencies of the countries in which the customer is located. Our historical revenue has been denominated in U.S. dollars and Canadian dollars. The effect of an immediate 10% adverse change in foreign exchange rates on foreign-denominated accounts receivable at June 30, 2011 would have a 1.5% adverse impact on our total accounts receivable balance at June 30, 2011. Our operating expenses are generally denominated in the currencies of the countries in which our operations are located, primarily the United States and Canada. More than half of our employees are located in Canada. Increases and decreases in our foreign denominated revenue from movements in foreign exchange rates are partially offset by the corresponding decreases or increases in our foreign-denominated operating expenses.


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As our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to reassess our approach to managing this risk. In addition, currency fluctuations or a weakening U.S. dollar can increase the costs of our international expansion. To date, we have not entered into any foreign currency hedging contracts, since exchange rate fluctuations have not had a material impact on our operating results and cash flows. Based on our current international structure, we do not plan on engaging in hedging activities in the near future.
 
Inflation Risk
 
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.


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BUSINESS
 
Overview
 
We are a leading provider of on-demand Revenue Performance Management, or RPM, software solutions that are designed to enable businesses to accelerate revenue growth and improve revenue predictability by automating, monitoring and measuring their complex marketing and sales initiatives. Our set of RPM solutions, which we refer to as the Eloqua Platform, is a software-as-a-service, or SaaS, platform integrating our leading marketing automation software with our revenue performance analytics suite. Marketing and sales professionals use the Eloqua Platform to move prospective buyers more efficiently through the marketing and sales funnel, identify and predict the drivers of revenue, provide insights about marketing and sales programs to senior management and more tightly align marketing and sales teams to optimize resource allocation and drive revenue growth.
 
The Eloqua Platform is designed to improve marketing effectiveness and efficiency by supporting strategies such as nurture marketing, segmentation of marketing campaigns, message targeting and enhanced lead generation. A key capability of the Eloqua Platform is its ability to enable our customers to track and analyze a potential buyer’s interactions with various web pages, social media networks and other communications platforms, which interactions we refer to as “Digital Body Language.” We believe this real-time insight into buyer activity enables sales professionals to more efficiently convert sales opportunities into revenue.
 
The Eloqua Platform, which includes both our Marketing Automation Platform and Revenue Suite solution, includes the following functionality:
 
  •  Revenue Performance Analytics.  Provides senior executives with actionable, revenue-generating intelligence, including the impact of marketing and sales programs on revenue performance and the ability to benchmark the effectiveness of their marketing programs against industry data.
 
  •  Marketing and Sales Measurement.  Allows our customers to model and understand the stages of the buying process by tracking and measuring the performance and revenue impact of their marketing programs and campaigns. Enables automatic monitoring of key revenue drivers with campaign reporting, website and social media analytics, dashboards and alerts.
 
  •  Multi-Channel Campaign Management.  Helps marketers target, execute, automate, streamline, measure and benchmark marketing campaigns, from simple email execution and outbound social media communication to automated multi-channel marketing campaigns.
 
  •  Buyer Profile Management.  Enables organizations to aggregate, track and analyze lead information, including a potential buyer’s Digital Body Language. Empowers organizations to better understand potential buyers by combining contact management with lead scoring functionality, enabling more effective and robust segmentation of marketing campaigns.
 
  •  Lead Management and Sales Intelligence.  Allows our customers to increase sales effectiveness by using sophisticated lead scoring, routing processes and sales enablement features that integrate with customer relationship management, or CRM, systems such as salesforce.com.
 
  •  Integration.  Integrates with and leverages enterprise software solutions such as sales force automation and web analytics, as well as email, social media and other communication channels to help organizations understand, measure and intelligently respond to each step in the customer acquisition process.


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We also provide professional services and educational courses to support our customers’ implementation and efficient use of the Eloqua Platform. Our professional services team facilitates rapid product adoption, integration with existing enterprise systems, such as CRM, and ongoing customer success with our solutions. Our Eloqua University offers educational courses to teach customers the principles and best practices of RPM, which we believe leads to improved business performance for our customers and increases customer loyalty.
 
Our solutions are particularly suited to modeling and supporting the complex sales processes of both business to business, or B2B, sales and high-value business to consumer, or B2C, sales. We have a diverse, global base of over 1,000 customers, encompassing a wide spectrum of industries, including the technology, financial services, entertainment, manufacturing, business services and telecommunications industries. Our customers include Adobe Systems, American Express, Cummins Power Generation, Dell, The McGraw-Hill Companies, the Miami Heat, National Instruments, Nestlé S.A., Siemens AG, Standard & Poor’s, VMware and Wells Fargo. Our ten largest customers accounted in the aggregate for less than 12% of our total revenue in each of 2010 and the six months ended June 30, 2011, and no single customer accounted for more than 3% of our total revenue during either of those periods. We sell the Eloqua Platform on a subscription basis, generally pursuant to either one- or two-year contracts, with subscription fees paid quarterly, semiannually or annually. We price our solutions such that subscription fees increase when the size of a customer’s database of potential buyers increases above the contracted level. Our SaaS subscription revenue model facilitates the predictability of our revenue and, as a result, our visibility into operating results, which enhances our ability to manage our business. Our total revenue increased from $32.9 million in 2008 to $41.0 million in 2009 and $50.8 million in 2010, representing year-over-year increases of 25% and 24%, respectively. For the six months ended June 30, 2011, our total revenue increased to $31.7 million from $23.0 million during the same period in 2010, representing a 38% increase. We had net losses of $12.4 million in 2008, $4.2 million in 2009, $1.5 million in 2010 and $3.5 million for the six months ended June 30, 2011.
 
Our Industry
 
Marketing executives are increasingly confronted with managing complex constituencies, including internal and outsourced marketing groups, direct and indirect sales channels and traditional and online prospective buyers. At the same time, marketing and sales teams are being asked to demonstrate their direct impact on revenue generation to justify the value of marketing and sales expenditures. In addition, senior executives are demanding better visibility into the efficacy of marketing campaigns in order to assess the overall revenue pipeline in connection with strategic operational planning. In many cases, marketing and sales teams continue to lack the interdepartmental coordination required to effectively execute campaigns and, as a result, lack the ability to efficiently utilize related marketing and sales expenditures to increase revenue. At the same time, despite widespread adoption and integration of enterprise applications such as enterprise resource planning, or ERP, and CRM systems, many marketing and sales teams continue to rely on traditional point solutions, internally-developed solutions or manual processes to manage marketing processes and their impact on revenue. Faced with increasing levels of complexity while lacking effective solutions to align marketing and sales teams around the goal of growing revenue, marketing professionals struggle to efficiently collaborate across their constituencies, build effective content and marketing assets, track expenditures and measure return on investment and maintain brand and channel consistency.
 
The proliferation of digital media and the rise of social media have transformed the traditional relationship between buyer and seller. Today, buyers have instant access to vast amounts of product information through Internet searches, social media networks and company websites. As a result,


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rather than purely relying on vendors or mass broadcast messages for information and education about products and services, buyers are increasingly researching and educating themselves about a company’s products and services online, comparing offerings and soliciting feedback from trusted peers through social networks long before engaging with the sales personnel of a vendor. This shift has fundamentally changed the way businesses of all sizes and across all industries need to market to and communicate with buyers.
 
The significant increase in online activity by prospective buyers has led to a corresponding increase in the amount of prospect-related digital data. If appropriately analyzed, a prospect’s Digital Body Language provides marketing and sales professionals with valuable information about a prospect’s progress through the sales funnel. We believe enterprises are increasingly realizing that effective sales execution is dependent upon leveraging the vast quantities of available data to enable the delivery of a precise, targeted and timely message that caters to a prospective buyer’s unique concerns and desires at each stage of the buying process.
 
Market Opportunity for Revenue Performance Management
 
The Internet has led to profound changes in the way consumers and enterprises choose to communicate, share information, educate themselves, make decisions and purchase products and services. This transformation is causing a shift in marketers’ spending from traditional media channels, such as broadcast and print, to emerging interactive channels, such as web, email, mobile and social media, which we believe creates a market opportunity for a robust RPM solution capable of leveraging the data from these interactive channels to enable more effective marketing and sales programs. Forrester Research, Inc. predicts that spending on interactive marketing in the United States will increase from $34 billion in 2011, or 18% of overall U.S. marketing expenditures, to $77 billion in 2016, or 35% of overall U.S. marketing expenditures. Within this category, spending on email, mobile and social media marketing is projected to grow from $4.7 billion in 2011 to nearly $15.7 billion in 2016, representing a compound annual growth rate, or CAGR, of 27%. Business spending on automating, analyzing and optimizing marketing and sales functions is also projected to increase. IDC predicts that the marketing automation market will grow from $3.2 billion in 2010 to $4.8 billion in 2015, while the CRM analytics market, which includes marketing and sales analytics, is projected to grow from $2.2 billion in 2010 to $3.4 billion in 2015.
 
The increased adoption of SaaS solutions to automate business processes has further enhanced our market opportunity. Traditionally, enterprises have relied on internal IT resources and on-premise software applications to handle their most sensitive data and business processes. As the SaaS market has matured and the benefits of SaaS solutions, including ease of deployment and use, cost-effectiveness and scalability, have become more widely recognized, enterprises have grown increasingly comfortable utilizing SaaS solutions for critical business processes. Gartner predicts that the Enterprise Application Software segment of the global SaaS market will grow