10-Q 1 a2011q310q.htm FORM 10-Q 2011 Q3 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
___________________________________
FORM 10-Q
___________________________________ 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2011
OR
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-33755
____________________________________________ 
SUCCESSFACTORS, INC.
(Exact name of registrant as specified in its charter)
 ____________________________________________
Delaware
 
94-3398453
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1500 Fashion Island Blvd., Suite 300
San Mateo, California
 
94404
(Address of principal executive offices)
 
(Zip Code)
(650) 645-2000
(Registrant’s telephone number, including area code)
_____________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:      Yes   x No o  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No  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
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    x  No
As of October 31, 2011, there were approximately 84,197,440 shares of the registrant’s common stock outstanding.
 


SUCCESSFACTORS, INC.
Table of Contents
 
 
 
 
Page No.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 5.
 
Item 6.
 

2


PART I: FINANCIAL INFORMATION

ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SUCCESSFACTORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
 
September 30,
2011
 
December 31,
2010
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
94,553

 
$
75,384

Marketable securities
153,778

 
281,073

Accounts receivable, net of allowance for doubtful accounts of $1,617 and $1,039
76,725

 
80,440

Deferred commissions
6,766

 
7,106

Prepaid expenses and other current assets
13,960

 
8,022

Total current assets
345,782

 
452,025

Restricted cash
1,744

 
913

Property and equipment, net
14,971

 
8,737

Deferred commissions, less current portion
10,004

 
12,854

Goodwill
258,415

 
64,077

Intangible assets
97,598

 
37,832

Other assets
1,886

 
975

Total assets
$
730,400

 
$
577,413

LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,503

 
$
7,254

Accrued expenses and other current liabilities
24,000

 
11,433

Accrued employee compensation
24,940

 
23,467

Deferred revenue
233,212

 
219,868

Acquisition-related contingent consideration

 
5,200

Total current liabilities
286,655

 
267,222

Deferred revenue, less current portion
10,706

 
14,577

Long-term income taxes payable
2,620

 
1,987

Acquisition-related contingent consideration, less current portion
27,022

 
21,050

Other long-term liabilities
4,381

 
1,248

Total liabilities
331,384

 
306,084

Commitments and contingencies (Note 9)

 

Stockholders’ equity:
 
 
 
Preferred stock: $0.001 par value; 5,000 shares authorized; no shares issued or outstanding

 

Common stock: $0.001 par value; 200,000 shares authorized; 83,458 and 77,137 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively
84

 
77

Additional paid-in capital
658,807

 
499,343

Accumulated other comprehensive income
2,218

 
3,258

Accumulated deficit
(262,093
)
 
(231,349
)
Total stockholders’ equity
399,016

 
271,329

Total liabilities and stockholders’ equity
$
730,400

 
$
577,413

See accompanying notes to unaudited condensed consolidated financial statements.

3


SUCCESSFACTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Revenue:
 
 
 
 
 
 
 
Subscription and support
$
65,863

 
$
42,079

 
$
172,174

 
$
117,030

Professional services and other
25,373

 
9,457

 
59,510

 
28,744

Total revenue
91,236

 
51,536

 
231,684

 
145,774

Cost of revenue:
 
 
 
 

 
 
Subscription and support
17,466

 
7,331

 
38,877

 
18,238

Professional services and other
15,245

 
9,143

 
38,291

 
20,562

Total cost of revenue
32,711

 
16,474

 
77,168

 
38,800

Total gross profit
58,525

 
35,062

 
154,516

 
106,974

Operating expenses:
 
 
 
 

 
 
Sales and marketing
38,735

 
25,166

 
106,093

 
69,585

Research and development
18,242

 
11,048

 
47,533

 
27,699

General and administrative
15,585

 
9,180

 
44,303

 
24,877

Revaluation of contingent consideration
5,976

 
(3,056
)
 
4,620

 
(3,056
)
Gain on settlement of litigation, net

 

 
(2,906
)
 

Total operating expenses
78,538

 
42,338

 
199,643

 
119,105

Loss from operations
(20,013
)
 
(7,276
)
 
(45,127
)
 
(12,131
)
Unrealized foreign exchange gain (loss) on intercompany loan
(2,669
)
 
3,453

 
(1,168
)
 
3,453

Interest income (expense) and other, net
(1,782
)
 
1,301

 
(490
)
 
765

Loss before benefit for (provision of) income taxes
(24,464
)
 
(2,522
)
 
(46,785
)
 
(7,913
)
Benefit for (provision of) income taxes
(557
)
 
(292
)
 
16,041

 
(486
)
Net loss
$
(25,021
)
 
$
(2,814
)
 
$
(30,744
)
 
$
(8,399
)
Net loss per common share, basic and diluted
$
(0.30
)
 
$
(0.04
)
 
$
(0.38
)
 
$
(0.11
)
Shares used in computing net loss per common share, basic and diluted
83,136

 
74,618

 
79,883

 
73,100

See accompanying notes to unaudited condensed consolidated financial statements.

4


SUCCESSFACTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net loss
$
(30,744
)
 
$
(8,399
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 

Depreciation and amortization
5,851

 
4,074

Amortization of deferred commissions
12,620

 
6,552

Stock-based compensation expense
29,495

 
15,388

Loss on retirement/impairment of fixed assets

 
76

Amortization of intangible assets
8,184

 
1,482

Revaluation of contingent considerations
4,620

 
(3,056
)
Unrealized foreign exchange loss (gain) on intercompany loan
1,168

 
(3,453
)
Income tax benefit in connection with acquisitions
(16,541
)
 

Changes in assets and liabilities, net of acquired assets and assumed liabilities:
 
 
 
Accounts receivable, net
13,805

 
3,278

Deferred commissions
(9,429
)
 
(8,666
)
Prepaid expenses and other current assets
5,852

 
(2,813
)
Other assets
1,863

 
(218
)
Accounts payable
(3,060
)
 
585

Accrued expenses and other current liabilities
5,751

 
2,470

Accrued employee compensation
653

 
1,314

Long-term income taxes payable
282

 
36

Other liabilities
(7,364
)
 
(8
)
Deferred revenue
(416
)
 
20,855

Net cash provided by operating activities
22,590

 
29,497

Cash flows from investing activities:
 
 
 
Restricted cash
(2
)
 
(2
)
Capital expenditures
(4,925
)
 
(3,195
)
Acquisitions, net of cash acquired
(135,296
)
 
(26,089
)
Purchases of available-for-sale securities
(124,703
)
 
(272,733
)
Proceeds from maturities of available-for-sale securities
140,721

 
154,353

Proceeds from sales of available-for-sale securities
109,914

 
96,500

Net cash used in investing activities
(14,291
)
 
(51,166
)
Cash flows from financing activities:
 
 
 
Offering costs

 
(111
)
Proceeds from exercise of stock options
15,096

 
10,948

Payments on contingent consideration related to Inform acquisition
(4,000
)
 

Net cash provided by financing activities
11,096

 
10,837

Effect of exchange rate changes on cash and cash equivalents
(226
)
 
786

Net increase (decrease) in cash and cash equivalents
19,169

 
(10,046
)
Cash and cash equivalents at beginning of period
75,384

 
76,618

Cash and cash equivalents at end of period
$
94,553

 
$
66,572

Non-cash transactions:
 
 
 
Common stock issued and stock options and restricted stock units assumed in connection with acquisitions
$
116,055

 
$
31,796

Purchase of software licenses for note payable
2,321

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Significant Accounting Policies
Organization

Success Acquisition Corporation was incorporated in Delaware in 2001. In April 2007, the name was changed to SuccessFactors, Inc. (the Company). The Company provides on-demand business execution software solutions that enable organizations to bridge the execution gap between business strategy and results. The Company’s goal is to enable organizations to substantially increase employee productivity worldwide by enhancing its existing people performance solutions with business alignment solutions to enable customers to achieve business results. The Company’s integrated application suite includes the following modules and capabilities: Performance Management; Goal Management; Compensation Management; Succession Management; Career and Development Planning; Recruiting Management; Employee Central; Analytics and Reporting; Employee Profile; 360-Degree Review; Employee Survey; Calibration & Team Rater; Learning Management; Jam, Social Learning and Collaboration Platform; iContent; Extended Enterprise; and proprietary and third-party content. The Company’s headquarters are located in San Mateo, California. The Company conducts its business worldwide with additional locations in other regions in the United States, Europe, Asia, Canada and Latin America.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011, for any other interim period, or for any other future year.

The condensed consolidated balance sheet as of December 31, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (SEC) on March 8, 2011. There have been no significant changes in the Company’s critical accounting policies from those disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments the Company makes about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company bases its estimates and judgments on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. GAAP requires the Company to make estimates and judgments in several areas, including those related to revenue recognition, recoverability of accounts receivable, provision for income taxes, commission and bonus payments, fair values of marketable securities, fair value of acquired intangible assets, fair value of acquisition related contingent considerations and the determination of the fair market value of stock options, including the use of forfeiture estimates. Actual results could differ materially from those estimates.

 Revenue Recognition

Revenue consists of fees for the Company's software and support as well as fees for the provision of professional

6


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


services.

The majority of the Company's software is intended to be delivered through the cloud from the Company's hosting facilities and customers generally do not have the contractual right to take possession of this software. In the infrequent circumstance in which a customer of the Company has the contractual right to take possession of this software, the Company has determined that the customers would incur a significant penalty to take possession of the software. Therefore, these arrangements are treated as service agreements.

Since the acquisition of Plateau Systems, Ltd. (“Plateau”), certain acquired software is licensed to customers under either perpetual or term arrangements. The software does not require significant modification or customization services. Customers may either take possession of this software or may contract with the Company for hosting services. Related maintenance and support revenues are generated through the sale of maintenance contracts which are renewable on an annual basis. Under these contracts, the Company provides non-specified upgrades of its products only on a when-and-if-available basis.

The Company recognizes revenue for service agreements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, Revenue Recognition, and for software license agreements in accordance with ASC 985-605, Software Revenue Recognition.

The Company commences revenue recognition when all of the following conditions are met:
Persuasive evidence of an arrangement;
Subscription or services have been delivered to the customer;
Collection of related fees is reasonably assured or, in the case of a software sale, collection is probable; and
Related fees are fixed or determinable.

Additionally, if an agreement contains non-standard acceptance or requires non-standard performance criteria to be met, the Company defers revenues until these conditions are satisfied. Signed agreements are used as evidence of an arrangement. The Company assesses cash collectability based on a number of factors such as past collection history with the customer and creditworthiness of the customer. If the Company determines that collectability is not reasonably assured or probable, the Company defers the revenue recognition until collectability becomes reasonably assured, generally upon receipt of cash. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company’s arrangements are typically non-cancelable, though customers typically have the right to terminate their agreement for cause if the Company fails to perform.

The Company recognizes the total contracted subscription revenue ratably over the contracted term of the subscription agreement, generally one to three years although terms can extend to as long as five years. Subscription terms commence on either the start date specified in the subscription arrangement or the date the customer’s module is provisioned. The customer's module is provisioned when a customer is provided access to use the Company’s on-demand application suite.

The Company’s professional services include forms and workflow configuration, data integration, business process consulting and training related to the application suite and are short-term in nature. Professional services are generally sold in conjunction with the Company’s subscriptions.

In October 2009, the FASB issued Accounting Standards Update ("ASU") 2009-13, which amended the accounting guidance for multiple-deliverable revenue arrangements to:
provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;
require an entity to allocate revenue in an arrangement using estimated selling prices (“ESP”) of each deliverable if a vendor does not have vendor-specific objective evidence of selling price (“VSOE”) or third-party evidence of selling price (“TPE”); and
eliminate the use of the residual method and require a vendor to allocate revenue using the relative selling price method.

The Company early-adopted this accounting guidance and retrospectively applied its provisions to arrangements entered

7


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


into or materially modified after January 1, 2010 (the beginning of the Company’s 2010 fiscal year). The previously reported quarterly results have been retrospectively adjusted to reflect the adoption as of the beginning of fiscal year 2010. Refer to note 2, "Revenue Recognition" in the 2010 Annual Report on Form 10-K for additional information on the impact of adoption.

Prior to the adoption of ASU 2009-13, the Company determined that it did not have objective and reliable evidence of fair value for each deliverable of its arrangements. As a result, the Company accounted for subscription and professional services revenue as one unit of accounting and recognized the total arrangement fee ratably over the contracted term of the subscription agreement, generally one to three years although terms could extend to as long as five years.

Upon adoption of ASU 2009-13, the Company accounts for subscription and professional services revenue as separate units of account and allocates revenue to each deliverable in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on its VSOE, if available, TPE, if VSOE is not available, or ESP, if neither VSOE nor TPE are available. Since VSOE and TPE are not available for the Company’s subscription or professional services, the Company uses ESP.

The Company's arrangements with customers generally contain multiple elements. Certain of these transactions are accounted for under ASC 605-25, Revenue Recognition-Multiple Element Arrangements, and others are accounted for under ASC 985-605, Software Revenue Recognition, depending on the terms of the related agreements.

The Company's arrangements subject to ASC 605-25 contain multiple elements that may include subscriptions or hosting services, maintenance and support, and professional services. The Company accounts for subscription services, maintenance and support, and professional services deliverables as separate units of accounting and allocates revenue to each deliverable in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on VSOE, if available, TPE, if VSOE is not available, or ESP, if neither VSOE nor TPE are available.

The ESP for professional services deliverables is determined primarily by considering cost plus a targeted range of gross margins. ESP for subscription services and maintenance and support services is generally determined based on the renewal rate offered to the customer to renew the service. Those renewal rates are used when they are considered substantive based on the Company's normal pricing practices, which consider the modules purchased, the number of users, the term of the arrangement, and targeted discounts to internal pricing guidelines. In a minority of cases where other evidence of ESP is not available, the Company uses the weighted average selling price of a deliverable to determine ESP. When weighted average selling prices are used (generally in the absence of other evidence), selling prices are weighted based on aggregate volume excluding transactions priced below the 10th percentile and above the 90th percentile of the pricing distribution to remove price outliers.

The majority of customer contracts specify the value of each undelivered element and, as a result of the contingent revenue guidance in Subtopic 605-25, paragraphs 30-4 and 30-5, the amount deferred for each undelivered element must generally be at or above the contractual amounts.

Revenue allocated to subscription services and maintenance support services is recognized over the term. Revenue allocated to professional services is recognized under the percentage of completion method using the ratio of hours incurred to estimated total hours or, for short term projects, upon acceptance of services related to each module.

The Company's arrangements subject to ASC 985-605 contain multiple elements that may include term or perpetual software licenses, maintenance and support, and professional services. Prior to the acquisition, Plateau determined that it had established VSOE of fair value for its maintenance and support and professional services using a bell curve methodology stratifying by customer type. The Company has implemented processes in order to maintain the aforementioned VSOE rates; therefore, for perpetual licenses sold in arrangements along with maintenance and support and/or professional services, license revenues are recognized at the date of delivery and acceptance, if applicable, using the residual method. Maintenance and support revenues are recognized ratable from the date of acceptance of the license, if applicable, over the service period.

Indirect taxes, including sales and use tax amounts and goods and service tax amounts, collected from customers have been recorded on a net basis.

Deferred revenue consists of billings or payments received in advance of revenue recognition from the Company’s subscription and other services as described above are recognized as revenue when all of the revenue recognition criteria are

8


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


met. For subscription arrangements with terms of over one year, the Company generally invoices its customers in annual installments. Accordingly, the deferred revenue balance does not represent the total contract value of these multi-year, non-cancelable subscription agreements. The Company’s professional services are generally sold in conjunction with the subscriptions. The portion of deferred revenue that the Company anticipates 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. Current deferred revenue also includes subscription agreements for which the subscription delivery (provision) start date has not yet been determined. Upon determination of the initial access date timing of such arrangements, amounts estimated to be recognized after more than 12 months are reclassified to non-current deferred revenue.

Deferred Commissions

Deferred commissions are the incremental costs that are directly associated with non-cancelable subscription agreements and consist of sales commissions paid to the Company’s direct sales force. The commissions are deferred and amortized over the non-cancelable terms of the related customer contracts, typically one to three years, with some agreements having durations of up to five years. The deferred commission amounts are recoverable from the future revenue streams under the non-cancelable subscription agreements. The Company believes this is the appropriate method of accounting, as the commission costs are so closely related to the revenue from the non-cancelable subscription that they should be recorded as an asset and charged to expense over the same period that the associated subscription or professional services revenue is recognized.

Amortization of deferred commissions is included in sales and marketing expense in the accompanying unaudited condensed consolidated statements of operations. Deferred commissions associated with subscription agreements for which revenue recognition has not commenced as of September 30, 2011 are classified as long-term deferred commissions.

During the three and nine months ended September 30, 2011, the Company capitalized $4.4 million and $9.4 million, respectively, of deferred commissions and amortized $4.3 million and $12.6 million, respectively, to sales and marketing expense. As of September 30, 2011, deferred commissions on the Company’s unaudited condensed consolidated balance sheet totaled $16.8 million.
2. Recent Accounting Pronouncements
Effective January 2011, the Company adopted ASU No. 2010-29, "Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations", which requires enhanced disclosure requirements and description of material, nonrecurring pro forma adjustments directly attributable to a business combination. These additional requirements became effective January 1, 2011 for business combinations for which the acquisition date is after the effective date. The adoption of this accounting update did not have a material impact on the Company's unaudited condensed consolidated financial statements.

On May 12, 2011, the FASB issued ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS", which was issued concurrently with IFRS 13, "Fair Value Measurement", to provide largely identical guidance about fair value measurement and disclosure requirements. The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is required or permitted under International Financial Reporting Standards ("IFRS") or U.S. GAAP. A public entity is required to apply the ASU prospectively for interim and annual periods beginning after December 15, 2011, and early adoption is not permitted. The Company does not expect the adoption of ASU No. 2011-04 will have a material impact on the Company's condensed consolidated financial statements.

On June 16, 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”, to increase the prominence of other comprehensive income (loss) in financial statements. Under this ASU, an entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The ASU eliminates the option in U.S. GAAP to present other comprehensive income in the statement of changes in equity. An entity should apply the ASU retrospectively. For a public entity, the ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company plans to adopt the provisions of ASU No. 2011-05 beginning with its quarterly filing for the three months ending March 31, 2012. The adoption of this accounting update will have no impact on the Company's financial position, results of operations, or cash flows.


9


On September 15, 2011, the FASB issued ASU No. 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment”, to modify the impairment test for goodwill intangibles. The ASU permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the two-step impairment test is not required. This amendment to U.S. GAAP will be effective for annual and interim tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company will adopt the provisions of ASU No. 2011-08 in fiscal 2012.The Company does not expect the adoption of ASU No. 2011-08 will have a material impact on the Company's condensed consolidated financial statements.
3. Business Combinations
On June 29, 2011, the Company acquired all issued and outstanding shares of Plateau Systems, Ltd. ("Plateau"), a leading learning management system ("LMS") and Content-as-a-Service ("CaaS") provider, for $130.1 million in cash at closing and 3,407,130 shares of the Company's common stock with estimated fair value of $96.8 million. The Company also paid $5.0 million in cash to buy-out vested stock options and restricted stock units ("RSUs") from terminated employees and assumed certain employee stock options and RSUs that represent an aggregate of 1,348,185 shares of the Company's Common Stock. The fair value of the assumed stock options and RSUs was $26.2 million, of which $17.3 million, associated with the employee service period performed prior to the acquisition date, was allocated to the purchase price. The fair value of assumed stock options was determined using the Black-Scholes pricing model.

Of the total consideration paid in connection with the acquisition, $46.8 million is held in the form of cash in escrow to secure indemnification obligations.

The acquisition was accounted for using the purchase method of accounting. The following table summarizes the consideration paid for Plateau and the fair value of the assets acquired and liabilities assumed at the acquisition date (unaudited, in thousands):
Purchase Consideration:
 
Cash at Closing
$
130,116

Buy-out of Vested Options and RSUs from Terminated Employees
5,000

Stock at Closing
96,763

Options and RSUs Assumed
17,304

Total Purchase Consideration
$
249,183

 
 
Net Tangible Liabilities Acquired:
 
Current Assets
$
24,896

Property & Equipment
2,775

Other Assets
3,600

Current and Other Liabilities
(5,212
)
Deferred Revenue Liability
(9,888
)
Deferred Tax Liability
(24,794
)
 
(8,623
)
 
 
Purchased Intangible Assets
65,000

 
 
Goodwill
192,806

 
 
Total
$
249,183


The fair value of purchase consideration and purchase price allocation are preliminary as of the reporting date.

During the three months ended September 30, 2011, the Company made certain revisions to the preliminary purchase price allocation, which have been reflected in the table above, including the following:

10


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


The fair value of assumed options and RSUs was revised from $20.4 million to $17.3 million based on the completion of the final valuation.
The fair value of intangible assets decreased by $4.8 million based on completion of the final valuation.
In connection with the decrease in the fair value of the intangible assets, the Company reduced the related deferred tax liability ("DTL") by $1.5 million. In the second quarter of fiscal 2011, the Company released approximately $18.0 million of its valuation allowance against its historical deferred tax assets as the assumed net DTL from Plateau created a new source of taxable income. As a result of the $1.5 million decrease in the DTL in the third quarter of fiscal 2011, the Company also had a corresponding increase in the deferred tax asset valuation allowance which resulted in a decrease in the tax benefit recognized in the second quarter of fiscal 2011. In accordance with the guidance in ASC 805, this $1.5 million change was recorded retrospectively to the acquisition date.
The Company recorded a $1.2 million receivable from escrow in potential sales tax and use tax liabilities which, if paid, are recoverable against the escrow balance.

The Company is in the process of obtaining additional information required to finalize the fair value of deferred tax assets and liabilities. The purchase price allocation is expected to be finalized by December 31, 2011. Changes to deferred tax assets or liabilities may result in changes to the Company's income tax benefit or expense. All changes as a result of finalizing the value of purchase consideration or purchase price allocation will be made retrospectively to the acquisition date. 

The fair value of the 3,407,130 common stock issued as part of the consideration paid for Plateau was determined on the basis of the closing market price of the Company's common stock on the acquisition date. The total weighted-average amortization period for intangible assets is 7.0 years. The intangible assets are being amortized on a straight-line basis, which in general reflects the pattern in which the economic benefits of the intangible assets are being utilized. The goodwill results from expected synergies from the transaction, including complementary products that will enhance the Company's overall product portfolio, which is expected to result in incremental revenue. None of the goodwill is deductible for tax purposes.

As required by ASC 805, the Company retrospectively adjusted previously reported quarterly results for the second quarter of fiscal 2011 due to measurement period adjustments made to the preliminary purchase price allocation of Plateau. This resulted in changes to the Company's deferred tax assets and liabilities, and impacted the Company's income tax benefit for the three months ended June 30, 2011. The following table presents selected condensed consolidated statements of operations data for the three months ended June 30, 2011 (unaudited, in thousands, except per share amounts):
 
Three Months Ended June 30, 2011
 
Retrospectively adjusted
 
As previously reported
 
Impact of measurement period adjustments
Revenue
$
72,850

 
$
72,850

 
$

 
 
 
 
 
 
Loss before income taxes
(24,431
)
 
(24,431
)
 

Benefit for income taxes
15,989

 
17,470

 
(1,481
)
Net loss
(8,442
)
 
(6,961
)
 
(1,481
)
Net loss per common share, basic and diluted
(0.11
)
 
(0.09
)
 
(0.02
)
Shares used in computing net loss per common share, basic and diluted
78,902

 
78,902

 


Plateau's results of operations have been included in the Company's unaudited condensed consolidated financial statements subsequent to the date of acquisition. The Plateau acquisition contributed $12.6 million to our total revenues for the nine months ended September 30, 2011, representing revenue from deferred revenue and backlog existing on the date of the acquisition. The majority of sales of Plateau products since the date of acquisition has been bundled with existing Company's products and not separately priced thus making the disclosure of revenue from such products impracticable.

Costs associated with the Plateau acquisition include transaction costs of $5.5 million and restructuring costs of $1.7 million for the nine months ended September 30, 2011. The following table presents these costs included in the Company's unaudited condensed consolidated statements of operations:

11


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


 
 
Three Months Ended

 
Nine Months Ended

 
 
September 30,
 
September 30,
(in thousands)
 
2011
 
2010
 
2011
 
2010
Subscription and support
 
$

 
$

 
$
30

 
$

Professional services and other
 

 

 
144

 

Sales and marketing
 

 

 
488

 

Research and development
 

 

 
491

 

General and administrative
 
823

 

 
6,010

 

Total
 
$
823

 
$

 
$
7,163

 
$


Refer to Note 14, "Income Taxes” regarding the tax effect of the acquisition on the Company's unaudited condensed consolidated financial statements.  

Unaudited Pro Forma Financial Information

The pro forma financial information in the table below summarizes the combined results of operations for the Company and Plateau, as though the companies were combined as of the beginning of the comparable prior annual reporting period. The pro forma financial information for all periods presented includes the accounting effects resulting from the Plateau acquisition including amortization charges from acquired intangible assets, changes in depreciation due to differing asset values and depreciation lives, and stock-based compensation charges for unvested restricted stock-based awards as though the Company and Plateau were combined as of January 1, 2010. Due to differing fiscal calendars, the results of Plateau included in this presentation are on a one month lag.

The unaudited pro forma financial information for the nine months ended September 30, 2011 combined the historical results of the Company for the six months ended June 30, 2011 and the historical results of Plateau for six months ended May 31, 2011 plus the three months ended September 30, 2011 consolidated for both companies.

The unaudited pro forma financial information for the three and nine months ended September 30, 2010 combined the historical results of the Company for the three and nine months ended September 30, 2010 and the historical results of Plateau for the three and nine months ended August 31, 2010.

The pro forma financial information, as presented below, is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition of Plateau had taken place as of the beginning of each period presented.
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(in thousands, except per share data)
 
2011
 
2010
 
2011
 
2010
Total revenues
 
$
91,236

 
$
68,431

 
$
268,221

 
$
194,711

Net income (loss)
 
$
(25,021
)
 
$
(4,862
)
 
$
(51,621
)
 
$
1,809

Basic earnings (loss) per share
 
$
(0.30
)
 
$
(0.06
)
 
$
(0.65
)
 
$
0.02

Diluted earnings (loss) per share
 
$
(0.30
)
 
$
(0.06
)
 
$
(0.65
)
 
$
0.02


In the second quarter of fiscal 2011, the Company reported pro forma total revenues and net loss for the three months ended June 30, 2011 of $98.3 million and $26.2 million, and for the six months ended June 30, 2011 of $183.8 million and $26.3 million, respectively. The total revenue amounts were overstated by $6.8 million for the three and six months ended June 30, 2011, respectively. The net loss amounts were understated by $0.6 million and $0.3 million for the three and six months ended June 30, 2011, respectively. The error was corrected in the pro forma financial information for the nine months ended September 30, 2011 and was not considered material as it had no impact on the condensed consolidated balance sheets, condensed consolidated statements of operations, or condensed consolidated statements of cash flows for any period.


12


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


A material non-recurring adjustment included in the pro forma financial information is the income tax benefit of $16.5 million, which was included in the first quarter of 2010 from the release of valuation allowance on our deferred tax asset.

The pro forma financial information for the three months ended September 30, 2011 includes a revaluation loss of $6.0 million from changes in the fair value of contingent considerations.

On March 17, 2011, the Company acquired Jambok, Inc., ("Jambok"), a provider of social learning software, for $2.8 million in cash, and 63,728 shares of common stock with an estimated fair value of approximately $2.0 million. Furthermore, the Company agreed to pay additional cash and stock consideration with 50% payable in shares of common stock and 50% payable in cash up to $4.7 million in the aggregate to the former shareholders of Jambok based upon their continued employment with the Company for three years, as of the close of the transaction. The Company did not record any acquisition-related liabilities in connection with this additional payment arrangement, as it is considered compensatory in nature, and therefore, it will be recognized as compensation expense over the requisite three-year service period. This acquisition was not considered material to the Company.

The acquisition was accounted for using the purchase method of accounting. Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The total purchase price was comprised of the following (unaudited, amounts in thousands, except shares):
 
Shares Issued
 
Purchase 
Consideration
 
Net Tangible Liabilities
Assumed
 
Purchased Intangible
Assets
 
Goodwill
Jambok
63,728
 
$
4,810

 
$
(1,117
)
 
$
3,404

 
$
2,523


Transaction costs associated with Jambok were expensed as incurred, and such transaction costs were $0.2 million for the nine months ended September 30, 2011 and are included in general and administrative expenses on the condensed consolidated statement of operations.

The goodwill recorded in connection with this transaction is primarily related to the ability of Jambok to develop new products and technologies in the future and expected synergies to be achieved in connection with the acquisition. The goodwill recognized is not expected to be deductible for income tax purposes.

Jambok's results of operations have been included in the Company's consolidated financial statements subsequent to the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material to prior period financial statements.

The Company completed the following business combinations during fiscal 2010:
On July 1, 2010, the Company acquired Inform Business Impact ("Inform"), a provider of business analytics and workforce planning software, for $25.6 million in cash and 906,892 shares of common stock valued at approximately $12.9 million, of which 371,372 shares are held in escrow, plus contingent consideration based on performance related earn-out payments with a fair value of $5.3 million. This acquisition was not considered material to the Company.
On July 13, 2010, the Company acquired Epista Software A/S ("YouCalc"), a provider of real-time analytics and reporting software for $3.2 million in cash, plus contingent consideration based on performance related earn-out payments in shares of common stock with a fair value of $1.5 million. This acquisition was not considered material to the Company.
On July 20, 2010, the Company acquired CubeTree, Inc., ("CubeTree") a provider of social media and collaboration software, for 903,733 shares of common stock valued at approximately $18.9 million, of which 190,511 shares are held in escrow, plus a future contingent cash payment with a fair value of $27.8 million.

Each of these acquisitions was accounted for using the purchase method of accounting. Assets acquired and liabilities assumed were recorded at their fair values as of the respective acquisition dates. The total purchase price for each acquisition was comprised of the following (amounts in thousands, except shares):

13


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


 
Shares Issued
 
Purchase 
Consideration
 
Net Tangible  Assets (Liabilities)
Assumed
 
Purchased Intangible
Assets
 
Goodwill
Inform
906,892

 
$
43,838

 
$
(1,412
)
 
$
23,900

 
$
21,350

YouCalc

 
4,676

 
(20
)
 
3,710

 
986

CubeTree
903,733

 
46,653

 
67

 
8,120

 
38,466

Total
1,810,625

 
$
95,167

 
$
(1,365
)
 
$
35,730

 
$
60,802

4. Cash, Cash Equivalents and Marketable Securities
Cash, cash equivalents and marketable securities consisted of the following (unaudited, in thousands):
 
As of September 30, 2011
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Cash
$
73,231

 
$

 
$

 
$
73,231

Cash equivalents:

 

 

 

Money market funds
13,223

 

 

 
13,223

Commercial paper
8,099

 

 

 
8,099

Total cash equivalents
21,322

 

 

 
21,322

Total cash and cash equivalents
94,553

 

 

 
94,553

Marketable securities:
 
 

 

 

U.S. Treasury bills and bonds
3,813

 

 

 
3,813

U.S. government and agency securities
96,015

 
54

 
(22
)
 
96,047

Commercial paper
5,198

 

 

 
5,198

Corporate debt securities
48,538

 
77

 
(16
)
 
48,599

Marketable equity securities
100

 
21

 

 
121

Total marketable securities
153,664

 
152

 
(38
)
 
153,778

Total cash, cash equivalents and marketable securities
$
248,217

 
$
152

 
$
(38
)
 
$
248,331


The Company did not recognize any other-than-temporary impairments during the three and nine months ended September 30, 2011.

The Company did not have any marketable securities that were in an unrealized loss position for 12 months or greater as of September 30, 2011. Investments in unrealized loss positions for less than 12 months and their related fair value as of September 30, 2011 were as follows (unaudited, in thousands):
 
As of September 30, 2011
 
Less than 12 Months
Security Description
Fair Value
 
Unrealized
Loss
U.S. government and agency securities
32,062

 
(22
)
Corporate debt securities
14,088

 
(16
)
Total
$
46,150

 
$
(38
)

 The Company did not realize any significant gains or losses on marketable securities during the three and nine months ended September 30, 2011.


14


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


As of September 30, 2011, the following table summarizes the estimated fair value of the Company's investments in marketable debt securities designated as available-for-sale classified by the contractual maturity date of the security (unaudited, in thousands):
 
As of
 
September 30,
2011
Due within 1 year
$
92,884

Due within 1 year through 5 years
60,773

Due within 5 years through 10 years

Due after 10 years

Total marketable debt securities
$
153,657


Cash, cash equivalents and marketable securities as of December 31, 2010, consisted of the following (in thousands):
 
As of December 31, 2010
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Cash
$
23,538

 
$

 
$

 
$
23,538

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
33,000

 

 

 
33,000

Commercial paper
18,846

 

 

 
18,846

Total cash equivalents
51,846

 

 

 
51,846

Total cash and cash equivalents
75,384

 

 

 
75,384

Marketable securities:
 
 
 
 
 
 
 
U.S. Treasury bills and bonds
9,836

 

 
(2
)
 
9,834

U.S. government and agency securities
196,167

 
119

 
(81
)
 
196,205

Foreign government securities
5,050

 
6

 

 
5,056

Commercial paper
21,315

 

 

 
21,315

Corporate debt securities
48,651

 
9

 
(75
)
 
48,585

Marketable equity securities
50

 
28

 

 
78

Total marketable securities
281,069

 
162

 
(158
)
 
281,073

Total cash, cash equivalents and marketable securities
$
356,453

 
$
162

 
$
(158
)
 
$
356,457


The Company did not have any marketable securities that were in an unrealized loss position for 12 months or greater as of December 31, 2010. Investments in unrealized loss positions for less than 12 months and their related fair value as of December 31, 2010 were as follows (in thousands):
 
As of December 31, 2010
 
Less than 12 Months
Security Description
Fair Value
 
Unrealized
Loss
U.S. Treasury bills and bonds
$
3,935

 
$
(2
)
U.S. government and agency securities
72,042

 
(81
)
Corporate debt securities
25,964

 
(75
)
Total
$
101,941

 
$
(158
)

As of December 31, 2010, the following table summarizes the estimated fair value of the Company's investments in

15


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


marketable debt securities designated as available-for-sale classified by the contractual maturity date of the security (in thousands): 
 
As of
 
December 31, 2010
Due within 1 year
$
214,164

Due within 1 year through 5 years
66,831

Due within 5 years through 10 years

Due after 10 years

Total marketable debt securities
$
280,995

5. Fair Value Measurements
The Company accounts for certain financial assets and liabilities at fair value. The Company determines fair value based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:
Level 1:
  
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
 
 
 
Level 2:
  
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
 
 
 
Level 3:
  
Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 The following table presents cash equivalents, marketable securities, and acquisition-related contingent considerations carried at fair value, as of September 30, 2011 (unaudited, in thousands):
 
 
 
Fair Value Measurements Using
 
As of September 30, 2011
 
Quoted Prices in
Active Market for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
13,223

 
$
13,223

 
$

 
$

Commercial paper
8,099

 

 
8,099

 

Total cash equivalents
$
21,322

 
$
13,223

 
$
8,099

 
$

Marketable securities:

 

 

 

U.S. Treasury bills and bonds
$
3,813

 
$
3,813

 
$

 
$

U.S. government and agency securities
96,047

 

 
96,047

 

Commercial paper
5,198

 

 
5,198

 

Corporate debt securities
48,599

 

 
48,599

 

Marketable equity securities
121

 
121

 

 

Total marketable securities
$
153,778

 
$
3,934

 
$
149,844

 
$

Liabilities:

 

 

 

Contingent consideration
$
27,022

 
$

 
$

 
$
27,022


The following table presents cash equivalents, marketable securities, and acquisition-related contingent consideration carried at fair value, as of December 31, 2010 (in thousands):

16


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


 
 
 
Fair Value Measurements Using
 
As of December 31, 2010
 
Quoted Prices in
Active Market for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
33,000

 
$
33,000

 
$

 
$

Commercial paper
18,846

 
18,846

 

 

Total cash equivalents
$
51,846

 
$
51,846

 
$

 
$

Marketable securities:
 
 
 
 
 
 
 
U.S. Treasury bills and bonds
$
9,834

 
$
9,834

 
$

 
$

U.S. government and agency securities
196,205

 

 
196,205

 

Foreign government securities
5,056

 

 
5,056

 

Commercial paper
21,315

 

 
21,315

 

Corporate debt securities
48,585

 

 
48,585

 

Marketable equity securities
78

 
78

 

 

Total marketable securities
$
281,073

 
$
9,912

 
$
271,161

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$
26,250

 
$

 
$

 
$
26,250


Cash Equivalents and Marketable Securities

Cash equivalents consist primarily of highly liquid investments in money market funds and commercial paper with original maturities of three months or less.

Marketable securities, which are classified as available for sale as of September 30, 2011, are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity.

 Acquisition-related Contingent Consideration

The Company estimates the fair value of acquisition-related contingent consideration using various valuation approaches including: the Monte Carlo Simulation approach, the Finnerty option model and the discounted cash flow model. The contingent consideration liabilities are classified as Level 3 liabilities, because the Company uses unobservable inputs to value them, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. The unrealized gains and losses related to the contingent consideration were included in operating expenses on the unaudited condensed consolidated statement of operations.

The following table presents a reconciliation for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2011 (unaudited, in thousands):
 
Fair Value  Measurements
Using
 
Significant Unobservable
Inputs (Level 3)
Balance at December 31, 2010
$
26,250

Total (gains) and losses, (realized and unrealized):
 
Included in operating expenses - Revaluation of contingent consideration
4,620

Included in other comprehensive loss
152

Payments of contingent consideration
(4,000
)
Balance at September 30, 2011
$
27,022


17


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


The transfer out of Level 3 was due to the earn-out achievement associated with the acquisition of Inform. During the third quarter the Company made an earn-out payment of $4.0 million to former shareholders of Inform.

The following table presents a reconciliation for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2010 (unaudited, in thousands):
 
Fair Value  Measurements
Using
 
Significant Unobservable
Inputs (Level 3)
Balance at December 31, 2009
$

Contingent considerations issued in business combinations
33,085

Total (gains) and losses, (realized and unrealized):
 
Included in operating expenses - Revaluation of contingent consideration
(3,056
)
Included in other comprehensive loss
737

Balance at September 30, 2010
$
30,766

6. Goodwill
Goodwill consisted of the following (unaudited, in thousands):
Balance at December 31, 2010
$
64,077

Additions
195,329

Other adjustments
(991
)
Balance at September 30, 2011
$
258,415


During the third quarter of fiscal 2011 the Company recorded adjustments for the effect on goodwill of changes to net assets acquired during the measurement period as described in Note 3, "Business Combinations."

For the nine months ended at September 30, 2011, additions represent $2.5 million and $192.8 million of goodwill associated with the Jambok and Plateau acquisitions, respectively.

Other adjustments represent foreign currency translation, as the functional currencies of the Company’s foreign subsidiaries, where goodwill is recorded, are their respective local currencies. Accordingly, the foreign currencies are translated into U.S. dollars using exchange rates in effect at period end. Adjustments are included in other comprehensive income (loss).
7. Intangible Assets
The following table present details of the Company's acquired intangible assets through business combinations as of September 30, 2011 (unaudited, in thousands, except years):
 
Weighted-
Average Useful
Life (in Years)
 
Gross
 
Accumulated
Amortization
 
Foreign currency translation
 
Net
Technology
6

 
$
58,735

 
$
(8,961
)
 
$
3,931

 
$
53,705

Customer relationships
7

 
44,900

 
(2,091
)
 
167

 
42,976

Trademark and tradename
5

 
1,000

 
(250
)
 
167

 
917

Total purchased intangible assets with finite lives
 
 
$
104,635

 
$
(11,302
)
 
$
4,265

 
$
97,598


The following table present details of the Company's acquired intangible assets through business combinations as of December 31, 2010 (in thousands, except years):

18


 
Weighted-
Average Useful
Life (in Years)
 
Gross
 
Accumulated
Amortization
 
Foreign currency translation
 
Net
Technology
7

 
$
33,730

 
$
(2,920
)
 
$
4,808

 
$
35,618

Customer relationships
5

 
1,000

 
(99
)
 
206

 
1,107

Trademark and tradename
5

 
1,000

 
(99
)
 
206

 
1,107

Total purchased intangible assets with finite lives
 
 
$
35,730

 
$
(3,118
)
 
$
5,220

 
$
37,832


As the functional currencies of the Company’s foreign subsidiaries, where certain intangible assets are recorded, are their respective local currencies, there are related foreign currency translation adjustments. The foreign currencies are translated into U.S. dollars using exchange rates in effect at period end, with any adjustment included in other comprehensive income (loss). 

As of September 30, 2011, the Company expects amortization expense in future periods to be as follows (unaudited, in thousands):
Remainder of 2011
$
4,771

2012
19,014

2013
18,493

2014
16,595

2015
11,182

Thereafter
27,543

Total
$
97,598


The following table presents the amortization of purchased intangible assets (unaudited, in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Technology
$
2,677

 
$
1,382

 
$
6,041

 
$
1,382

Customer relationships
1,892

 
50

 
1,992

 
50

Trademark and tradename
51

 
50

 
151

 
50

 
$
4,620

 
$
1,482

 
$
8,184

 
$
1,482


Of these amounts, $3.6 million, $0.1 million and $0.9 million were included in cost of revenue, sales and marketing expenses, and research and development expenses, respectively, for the three months ended September 30, 2011 and $7.0 million, $0.3 million, and $0.9 million were included in cost of revenue, sales and marketing expenses, and research and development expenses, respectively, for the nine months ended September 30, 2011. Comparatively, $1.4 million and $0.1 million were included in cost of revenue (subscription and support) and sales and marketing expenses, respectively, for the three and nine months ended September 30, 2010.
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of September 30, 2011 and December 31, 2010 consisted of (unaudited, in thousands):
 
As of
 
As of
 
September 30,
2011
 
December 31,
2010
Accrued royalties
$
2,735

 
$
1,785

Indirect taxes
4,501

 
902

Accrued other liabilities
16,764

 
8,746

 
$
24,000

 
$
11,433


19


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



Accrued employee compensation as of September 30, 2011 and December 31, 2010 consisted of (unaudited, in thousands):
 
As of
 
As of
 
September 30,
2011
 
December 31,
2010
Accrued bonus payable
$
11,590

 
$
6,895

Accrued commission payable
8,551

 
12,279

Accrued vacation
2,271

 
1,809

All other accrued employee compensation payable
2,528

 
2,484

 
$
24,940

 
$
23,467

9. Commitments and Contingencies
Legal Proceedings

The Company from time to time is involved in various legal proceedings arising in the normal course of its business activities. In management’s opinion, resolution of these matters is not expected to have a material adverse effect on the Company’s results of operations, cash flows or financial position. As of September 30, 2011, no amount is accrued as a loss is not probable or estimable.

On December 2, 2010, the Company filed suit against its competitor Halogen Software, Inc. ("Halogen") for intentional interference with prospective economic relations, conversion, fraud and unfair competition seeking injunctive relief and damages, including punitive damages. During the second quarter of fiscal 2011, the Company entered into a settlement agreement with Halogen to resolve the litigation with the settlement amount received, net of litigation costs, by the Company during the second quarter of fiscal 2011.

Acquisition-related contingent consideration

The Company estimates the fair value of contingent consideration issued in business combinations using various valuation approaches, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. The fair values of liability classified contingent consideration are remeasured at each reporting period, with any changes in the fair value recorded as income or expense, and such remeasurements resulted in net losses of approximately $6.0 million and $4.6 million for the three and nine months ended September 30, 2011, respectively, compared to net gains of approximately $3.1 million for the three and nine months ended September 30, 2010, respectively. The potential undiscounted amount of all future cash payments that the Company could be required to make under the contingent consideration is between $0.0 million and $62.9 million as of September 30, 2011.

On July 1, 2010, the Company completed the acquisition of Inform, which included an earn-out provision. The earn-out provided for the payment of up to approximately $15.0 million in cash consideration upon the achievement of certain bookings revenue targets for a period of two years following the closing date of the acquisition. Payments were to be made at the end of two twelve month periods from the closing date of acquisition. During the three months ended September 30, 2011, the Company made payments of $4.0 million based on achievement of bookings revenue targets for the first twelve month period. As of September 30, 2011, the Company does not expect to trigger any payment for the second twelve month period based on bookings revenue targets for that period.

On July 20, 2010, the Company completed the acquisition of CubeTree and agreed to make a future contingent cash payment based on the value of the Company's common stock. Specifically, the contingent cash payment provides for the former stockholders of CubeTree to receive a cash payment on the three-year anniversary of the closing or at such earlier time as a change of control of the Company occurs. This time is referred to as the “Top-Up Payment Date.” If, on the Top-Up Payment Date, the value of the consideration issued at the closing, or the “Market Value,” is less than approximately $47.9 million or $53.01 per share, or the “Guaranteed Value,” subject to adjustments, we would be obligated to make a payment to such holders in an aggregate amount equal to the difference between the Guaranteed Value and the Market Value, or the “Top-Up Payment.”

20


The aggregate Top-Up Payment will be reduced to the extent of any sale, transfer or other disposition of any of the consideration, subject to limited exceptions. This right to receive the Top-Up Payment will terminate in the event the value of the shares of the consideration paid at closing equals or exceeds approximately $47.9 million or $53.01 per share at any time prior to the Top-Up Payment Date.

On March 17, 2011, the Company completed the acquisition of Jambok, which included future consideration up to $4.7 million (payable in shares of stock and cash) for continued employment by the former Jambok shareholders over a three-year period subsequent to the acquisition date. The Company did not record any acquisition-related liabilities in connection with this arrangement, as it is considered compensatory in nature, and therefore, it will be recognized as compensation expense over the requisite three-year service period.

Contingent consideration are recorded at fair value on the Company's consolidated balance sheet as of the acquisition dates, and are remeasured to fair value each reporting period with any changes in the value recorded as income or expense. As of September 30, 2011, $27.0 million is accrued for the fair value of the expected CubeTree top-up payment.
10. Stock-Based Compensation
For stock-based awards exchanged for employee services, the Company measures stock-based compensation cost on the grant date, based on the fair value of the award, and recognizes expense over the requisite service period, which is generally the vesting period. To estimate the fair value of an option, the Company uses the Black-Scholes pricing model. This model requires inputs such as expected term, expected volatility and risk-free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop. For all grants during 2011 and 2010, the Company calculated the expected term based on its historical experience from previous stock option grants. The Company estimates the volatility of its common stock by analyzing its historical volatility and considering volatility data of its peer group and the Company's implied volatility. The Company estimates the forfeiture rate based on historical experience of its stock-based awards that are granted, exercised, and cancelled. The Company also awards employees with restricted stock units ("RSUs") with service conditions, and estimates the fair value based on the closing market price of the Company's common stock on the date of the awards.

The following table presents stock-based compensation included in the Company’s unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010 (unaudited, in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Cost of revenue
$
2,088

 
$
783

 
$
4,441

 
$
2,062

Sales and marketing
4,388

 
2,153

 
11,248

 
5,902

Research and development
2,353

 
975

 
5,545

 
2,572

General and administrative
3,575

 
1,931

 
8,261

 
4,852

Total
$
12,404

 
$
5,842

 
$
29,495

 
$
15,388


Stock-based compensation expense for the nine months ended September 30, 2010 includes shares of common stock with a fair value of $2.3 million issued to the Company’s senior management in lieu of cash bonuses. Of this amount, $1.1 million was included in general and administrative, $0.8 million was included in sales and marketing, $0.3 million was included in research and development, and $0.1 million was included in cost of revenue for the nine months ended September 30, 2010. There were no such cash bonuses for the nine months ended September 30, 2011.

The fair value of options granted to employees during the three and nine months ended September 30, 2011 and 2010 were determined using the following weighted-average assumptions for employee grants, excluding replacement stock options granted in connection with the Plateau acquisition (unaudited):

21


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Expected life from grant date (in years)
4.83

 
4.01

 
4.57

 
4.16

Risk-free interest rate
0.93
%
 
1.15
%
 
1.84
%
 
1.77
%
Expected volatility
57
%
 
60
%
 
59
%
 
63
%
Dividend yield

 

 

 

Weighted-average estimated fair value of options granted during the period
$
11.46

 
$
10.20

 
$
15.32

 
$
10.19


The following table summarizes the activity for stock options for the nine months ended September 30, 2011 (unaudited):
 
Shares
Subject to
Options
Outstanding
 
Weighted-Average
Exercise Price
per Share
 
(Shares in thousands)
Balance at December 31, 2010
7,815

 
$
9.64

Granted
1,505

 
15.13

Exercised
(2,193
)
 
6.35

Cancelled
(412
)
 
14.53

Balance at September 30, 2011
6,715

 
$
11.65


As of September 30, 2011, unrecognized compensation expense under the Company’s stock option plans for employee stock options was $17.2 million, which is expected to be recognized over a weighted-average remaining vesting period of 2.3 years.

During the third quarter of fiscal 2011, the Company granted RSUs with market and performance conditions to the chief executive officer ("CEO"). The fair value of market-based RSUs are estimated using the Monte-Carlo simulation method. This method requires inputs such as risk-free interest rate, volatility, and correlation coefficients. The fair value of performance-based RSUs are based on the closing market price of the Company's common stock on the date of the award. These market- and performance-condition RSUs are amortized based upon the graded vesting method in accordance with the Company's accounting policy election. Following the end of each calendar year commencing with 2011, the Company's performance, based on certain metrics, will determine the achievement level of the market and performance conditions. Achievement levels for each calendar year may range from 0% to 200% of the target. The following table presents the RSU target shares for these awards (unaudited):
Year
 
Performance-based RSUs
 
Market-based RSUs
 
Total Target RSUs
2011
 
16,697

 
16,636

 
33,333

2012
 
16,697

 
16,636

 
33,333

2013
 
16,697

 
16,636

 
33,333


The following table summarizes the activity for RSUs for the nine months ended September 30, 2011, including the RSUs with market and performance conditions granted to the CEO (unaudited):

22


SUCCESSFACTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


 
Restricted Stock Units
 
Number of
Shares
 
Weighted-Average
Grant Date
Fair Value
 
(Shares in thousands)
Unvested at December 31, 2010
2,765

 
$
12.94

Granted
2,545

 
30.79

Vested
(494
)
 
33.68

Forfeited
(435
)
 
23.68

Unvested at September 30, 2011
4,381

 
$
19.90


As of September 30, 2011, unrecognized compensation expense under the Company’s equity incentive plans for employee RSUs was $96.1 million, which is expected to be recognized over a weighted-average remaining vesting period of 3.0 years.
11. Interest Income and Other, Net
The components of interest income and other, net are as follows (unaudited, in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Interest income
$
201

 
$
388

 
$
833

 
$
977

Foreign currency exchange gains (losses), net
(2,044
)
 
1,000

 
(1,276
)
 
(122
)
Other
61

 
(87
)
 
(47
)
 
(90
)
Total
$
(1,782
)
 
$
1,301

 
$
(490
)
 
$
765

12. Comprehensive Income (Loss)
Comprehensive income (loss) consists of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in equity that are excluded from net loss. Specifically, cumulative foreign currency translation adjustments, net of tax, and unrealized gain (loss) on marketable securities, net of tax, are included in accumulated other comprehensive (loss). The following table sets forth the calculation of comprehensive loss (unaudited, in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Net loss
$
(25,021
)
 
$
(2,814
)
 
$
(30,744
)
 
$
(8,399
)
Change in foreign currency translation, net
(2,987
)
 
3,031

 
(1,152
)
 
2,763

Change in unrealized gain (loss) on marketable securities, net
(31
)
 
53

 
112

 
343

Comprehensive income (loss)
$
(28,039
)
 
$
270

 
$
(31,784
)
 
$
(5,293
)
13. Net Loss Per Common Share
Basic net loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per common share is computed by giving effect to all potentially dilutive common shares, including outstanding options, unvested RSUs, and contingently issuable shares placed in escrow. Shares are included only if they are dilutive. Basic and diluted net loss per common share was the same for all periods presented as the impact of all potentially dilutive securities outstanding was anti-dilutive. Securities that have been excluded from computation of diluted shares as of September 30, 2011 and 2010 were 11.7 million, including 0.6 million shares held in escrow in connection with the Inform and CubeTree acquisitions, and 12.5 million, respectively.

23



The following table sets forth the computation of basic and diluted net loss per common share (unaudited, in thousands, except per share data: 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Net loss
$
(25,021
)
 
$
(2,814
)
 
$
(30,744
)
 
$
(8,399
)
Shares used in computing net loss per common share, basic and diluted
83,136

 
74,618

 
79,883

 
73,100

Net loss per common share, basic and diluted
$
(0.30
)
 
$
(0.04
)
 
$
(0.38
)
 
$
(0.11
)
14. Income Taxes
For the three and nine months ended September 30, 2011, income tax expense was $0.6 million, or 2.3% of pre-tax loss, and income tax benefit was $16.0 million, or 34.3% of pre-tax loss, respectively, compared to income tax expense of $0.3 million, or 11.6% of pre-tax loss, and $0.5 million, or 6.1% of pre-tax loss, for the three and nine months ended September 30, 2010, respectively. The effective tax rate for the three and nine months ended September 30, 2011 and 2010 differs from the U.S. federal statutory rate of 34% primarily due to stock-based compensation, permanent tax adjustments, foreign withholding taxes partially offset with foreign operational rate benefits and a valuation allowance against the Company's deferred tax assets. Included in the $16.0 million income tax benefit for the nine months ended September 30, 2011 is a $16.5 million tax benefit from the release of valuation allowance on the Company's deferred tax asset ("DTA"). In connection with the Plateau acquisition in the second quarter of fiscal 2011, the Company established a deferred tax liability ("DTL") on the acquired identifiable intangible assets. This DTL exceeded the acquired DTA by $16.5 million and creates additional source of income to realize a tax benefit for the Company's DTA. Authoritative guidance requires the impact on the acquiring company's deferred tax assets and liabilities caused by an acquisition be recorded in the acquiring company's financial statements outside of acquisition accounting. Accordingly, the valuation allowance on a portion of the Company's DTA was released and resulted in an income tax benefit of $16.5 million. This tax benefit decreased by $1.5 million in the third quarter of fiscal 2011 from $18.0 million as of June 30, 2011 due to a change in the purchase price allocation during the current quarter. This change in tax expense was retrospectively applied to the acquisition date.
15. Related Party Transaction
In connection with the acquisition of Inform in July 2010, the Company assumed a non-cancelable operating lease for an office building in Brisbane, Australia, owned by the former owners of Inform who are now stockholders of the Company. The lease expires in 2015, with future payment obligations of approximately $3.8 million. The associated rent expense was approximately $0.2 million and $0.6 million for the three and nine months ended September 30, 2011, respectively. The associated rent expense was approximately $0.2 million for both the three and nine months ended September 30, 2010.

24


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the federal securities laws, including statements referencing our expectations relating to future revenue mix and growth; operating expenses and losses; the sufficiency of our cash balances and cash flows for the next 12 months; investment and potential investments of cash or stock to acquire or invest in complementary businesses, products, or technologies; the impact of recent changes in accounting standards; and assumptions underlying any of the foregoing. Words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions or their negatives are intended to identify forward-looking statements.  We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition and results of operations. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth under Part II, Item 1A. Risk Factors. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof, and we assume no obligation to update any such forward-looking statements or reasons why actual results may differ.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this report.

Overview

SuccessFactors provides on-demand Business Execution (BizX) software solutions that enable organizations to bridge the gap between business strategy and results. Our goal is to enable organizations to substantially increase employee productivity worldwide by enhancing our existing people performance solutions with business alignment solutions to enable customers to achieve business results. Our integrated application suite includes the following modules and capabilities: Performance Management; Goal Management; Compensation Management; Succession Management; Career and Development Planning; Recruiting Management; Employee Central; Analytics and Reporting; Employee Profile; 360-Degree Review; Employee Survey; Calibration & Team Rater; Learning Management; Jam, Social Learning and Collaboration Platform; iContent; Extended Enterprise; and proprietary and third-party content. We deliver our application suite to organizations of all sizes across all industries and geographies. Our suite, which is delivered through the cloud, improves business alignment, team execution and people performance to drive results for companies of all sizes. Across more than 168 countries and in 34 languages, approximately 15 million subscription seats and more than 3,500 customers leverage our application suite every day, up from approximately 300,000 seats and 100 companies in 2003.

We generate sales primarily through our global direct sales organization and, to a much lesser extent, indirectly through channel partners, with sales through channel partners constituting approximately 4% of total revenue for the first nine months in 2011. However, in the future, we anticipate that revenue from channel partners will increase. For the first nine months in 2011, we did not have any single customer that accounted for more than 5% of our total revenue. We target our sales and marketing efforts at large enterprises as well as small and mid-sized organizations. We intend to utilize our professional services partner network to broaden our distribution and capacity in order to meet expected demand.

Historically, most of our revenue has been from sales of our application suite to organizations located in the United States. For the first nine months of fiscal 2011, approximately 73% of our total revenue was generated from customers in the United States. We intend to continue to grow our international business. Accordingly, we expect the growth rate in our international business to exceed the growth rate in the U.S.

We have historically experienced significant seasonality in sales of subscriptions to our application suite, with a higher percentage of our customers renewing or entering into new subscription agreements in the fourth quarter of the year. Also, a significant percentage of our customer agreements within a given quarter are generally entered into during the last month of the quarter. We have derived a substantial portion of our historical revenue from sales of our Performance Management and Goal Management modules, but the percentage of revenue from these modules has decreased over time as we expanded our product offerings.

We believe the market for BizX software is large and underserved. Accordingly, we might incur additional operating expenses, particularly for sales and marketing and professional services activities to pursue this opportunity, and in research

25


and development to develop new products. We expect operating losses to continue as we intend to continue to pursue new customers, develop new products and 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.

We continue to experience growth in headcount compared to prior periods as we expand our operations and acquire companies. However, we had a slight decrease in total headcount in the third quarter of 2011 as compared to the second quarter of fiscal 2011. This was a result of us completing the Plateau acquisition on June 28, 2011 and therefore added headcount at the end of the quarter but incurred minimal expenses compared to the full impact of the business combination in the third quarter of fiscal 2011. We also executed on some synergy savings in headcount during the third quarter of fiscal 2011, which decreased our total headcount quarter over quarter.

The Jambok acquisition completed in the first quarter of 2011 did not significantly contribute to our total revenues for the three or nine months ended September 30, 2011. The Plateau acquisition completed at the end of the second quarter of 2011 contributed $12.1 million and $12.6 million to our total revenues for the three and nine months ended September 30, 2011, respectively.

Recent Accounting Pronouncements

Refer to Note 2, "Recent Accounting Pronouncements" regarding the effect of certain recent accounting pronouncements on our unaudited condensed consolidated financial statements.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. On an ongoing basis, we evaluate our estimates and assumptions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

As discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2010, we consider our estimates of the following accounting policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements:
Revenue Recognition
Accounting for Commission Payments
Accounting for Stock-Based Awards
Allowance for Doubtful Accounts
Identified Intangible Assets
Goodwill
Contingent Considerations

Our revenue recognition accounting policy has been updated to reflect the acquisition in June 2011 of Plateau (see Note 3 to the unaudited condensed consolidated financial statements). No other critical accounting policy has been modified since the filing of our last Annual Report on Form 10-K.

Revenue Recognition

Our revenue consists of fees for our software and support as well as fees for the provision of professional services.

The majority of our software is intended to be delivered through the cloud from our hosting facilities and our customers generally do not have the contractual right to take possession of this software. In the infrequent circumstance in which our customer has the contractual right to take possession of this software, we have determined that the customers would incur a

26


significant penalty to take possession of the software. Therefore, these arrangements are treated as service agreements.

Other software is licensed to customers under either perpetual or term arrangements, and does not require significant modification or customization services. Customers may either take possession of this software or may contract with us for hosting services. Related maintenance and support revenues are generated through the sale of maintenance contracts which are renewable on an annual basis. Under these contracts, we provide non-specified upgrades of our products only on a when-and-if-available basis. Hosting revenues are generated through the sale of contracts that contain multi-year commitments on the part of customers. These arrangements are treated as software sales agreements for perpetual licenses and as service agreements for term licenses.

We recognize revenue for service agreements in accordance with ASC 605, Revenue Recognition, and for software sales agreements in accordance with ASC 985-605, Software Revenue Recognition.

We commence revenue recognition when all of the following conditions are met:
Persuasive evidence of an arrangement;
Subscription or services have been delivered to the customer;
Collection of related fees is reasonably assured or, in the case of a software sale, collection is probable; and
Related fees are fixed or determinable.
 
Additionally, if an agreement contains non-standard acceptance or requires non-standard performance criteria to be met, we defer revenues until these conditions are satisfied. Signed agreements are used as evidence of an arrangement. We assess cash collectability based on a number of factors such as past collection history with the customer and creditworthiness of the customer. If we determine that collectability is not reasonably assured or probable, we defer the revenue recognition until collectability becomes reasonably assured, generally upon receipt of cash. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Our arrangements are typically non-cancelable, though customers typically have the right to terminate their agreement for cause if we fail to perform.

We recognize the total contracted subscription revenue ratably over the contracted term of the subscription agreement, generally one to three years although terms can extend to as long as five years. Subscription terms commence on either the start date specified in the subscription arrangement or the date the customer's module is provisioned. The customer's module is provisioned when a customer is provided access to use our on-demand application suite.

Our professional services include forms and workflow configuration, data integration, business process consulting and training related to the application suite and are short-term in nature. Professional services are generally sold in conjunction with our subscriptions.

In October 2009, the Financial Accounting Standards Board (FASB) issued ASU 2009-13, which amended the accounting guidance for multiple-deliverable revenue arrangements to:
provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;
require an entity to allocate revenue in an arrangement using estimated selling prices (“ESP”) of each deliverable if a vendor does not have vendor-specific objective evidence of selling price (“VSOE”) or third-party evidence of selling price (“TPE”); and
eliminate the use of the residual method and require a vendor to allocate revenue using the relative selling price method. 

We early-adopted this accounting guidance and retrospectively applied its provisions to arrangements entered into or materially modified after January 1, 2010 (the beginning of our 2010 fiscal year). The previously reported quarterly results have been retrospectively adjusted to reflect the adoption as of the beginning of fiscal year 2010. Refer to Note 2, “Revenue Recognition” in the 2010 Annual Report on Form 10-K for additional information on the impact of adoption.

Prior to the adoption of ASU 2009-13, we determined that we did not have objective and reliable evidence of fair value for each deliverable of its arrangements. As a result, we accounted for subscription and professional services revenue as one unit of accounting and recognized the total arrangement fee ratably over the contracted term of the subscription agreement, generally one to three years although terms could extend to as long as five years.

27



Upon adoption of ASU 2009-13, we account for subscription and professional services revenue as separate units of account and allocate revenue to each deliverable in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on its VSOE, if available, TPE, if VSOE is not available, or ESP, if neither VSOE nor TPE are available. Since VSOE and TPE are not available for our subscription or professional services, we use ESP.

Our arrangements with customers generally contain multiple elements. Certain of these transactions are accounted for under ASC 605-25, Revenue Recognition-Multiple Element Arrangements, and others are accounted for under ASC 985-605, Software Revenue Recognition, depending on the terms of the related agreements.

Our arrangements subject to ASC 605-25 contain multiple elements that may include subscriptions or hosting services, maintenance and support, and professional services. We account for subscription services, maintenance and support, and professional services deliverables as separate units of accounting and allocate revenue to each deliverable in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on vendor-specific objective evidence of selling price (VSOE), if available, third-party evidence of selling price (TPE), if VSOE is not available, or estimated selling price (ESP), if neither VSOE nor TPE are available.

The ESP for professional services deliverables is determined primarily by considering cost plus a targeted range of gross margins. ESP for subscription services and maintenance and support services is generally determined based on the renewal rate offered to the customer to renew the service. Those renewal rates are used when they are considered substantive based on our normal pricing practices, which consider the modules purchased, the number of users, the term of the arrangement, and targeted discounts to internal pricing guidelines. In a minority of cases where other evidence of ESP is not available, we use the weighted average selling price of a deliverable to determine ESP. When weighted average selling prices are used (generally in the absence of other evidence), selling prices are weighted based on aggregate volume excluding transactions priced below the 10 percentile and above the 90 percentile of the pricing distribution to remove price outliers.
 
The majority of customer contracts specify the value of each undelivered element and, as a result of the contingent revenue guidance in Subtopic 605-25, paragraphs 30-4 and 30-5, the amount deferred for each undelivered element must generally be at or above the contractual amounts.
 
Revenue allocated to subscription services and maintenance and support services is recognized over the term. Revenue allocated to professional services is recognized under the percentage of completion method using the ratio of hours incurred to estimated total hours or, for short term projects, upon acceptance of services related to each module.

Our arrangements subject to ASC 985-605 contain multiple elements that may include term or perpetual software licenses, maintenance and support, and professional services. Prior to our acquisition of Plateau, it established VSOE of fair value for its maintenance and support and professional services using a bell curve methodology stratifying by customer type. We have implemented controls in order to maintain the aforementioned VSOE rates; therefore, for perpetual licenses sold in arrangements along with maintenance and support and/or professional services, license revenues are recognized at the date of delivery and acceptance, if applicable, using the residual method. Maintenance and support revenues are recognized ratably from the date of acceptance of the license, if applicable, over the service period.

Deferred revenue consists of billings or payments received in advance of revenue recognition from our subscription and other services as described above are recognized as revenue when all of the revenue recognition criteria are met. For subscription arrangements with terms of over one year, we generally invoice our customers in annual installments. Accordingly, the deferred revenue balance does not represent the total contract value of these multi-year, non-cancelable subscription agreements. Our professional services are generally sold in conjunction with the subscriptions. 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. Current deferred revenue also includes subscription agreements for which the subscription delivery (provision) start date has not yet been determined. Upon determination of the initial access date timing of such arrangements, amounts estimated to be recognized after more than 12 months are reclassified to non-current deferred revenue.
Results of Operations
The following table presents certain consolidated financial data for the three and nine months ended September 30, 2011 and 2010 as a percentage of total revenue (unaudited):

28


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Revenue:
 
 
 
 
 
 
 
Subscription and support
72
 %
 
82
 %
 
74
 %
 
80
 %
Professional services and other
28

 
18

 
26

 
20

Total revenue
100

 
100

 
100

 
100

Cost of revenue:
 
 
 
 
 
 
 
Subscription and support
19

 
14

 
17

 
13

Professional services and other
17

 
18

 
17

 
14

Total cost of revenue
36

 
32

 
33

 
27

Total gross profit
64

 
68

 
67

 
73

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
42

 
49

 
46

 
48

Research and development
20

 
21

 
21

 
19

General and administrative
17

 
18

 
19

 
17

Revaluation of contingent consideration
7

 
(6
)
 
2

 
(2
)
Gain on settlement of litigation, net

 

 
(1
)
 

Total operating expenses
86

 
82

 
86

 
82

Loss from operations
(22
)
 
(14
)
 
(19
)
 
(8
)
Unrealized foreign exchange gain (loss) on intercompany loan
(3
)
 
7

 
(1
)
 
2

Interest income (expense) and other, net
(2
)
 
3

 

 
1

Loss before benefit for (provision of) income taxes
(27
)
 
(5
)
 
(20
)
 
(5
)
Benefit for (provision of) income taxes
(1
)
 
(1
)
 
7

 

Net loss
(27
)%
 
(6
)%
 
(13
)%
 
(6
)%

Due to rounding to the nearest percent, totals may not equal the sum of the line items in the table above.

Revenue

The following table presents our components of total revenue for the periods presented (unaudited):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
Change
 
2011
 
2010
 
Change
 
(Dollars in thousands)
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Subscription and support
$
65,863

 
$
42,079

 
57
%
 
$
172,174

 
$
117,030

 
47
%
Professional services and other
25,373

 
9,457

 
168
%
 
59,510

 
28,744

 
107
%
Total revenue
$
91,236

 
$
51,536

 
77
%
 
$
231,684

 
$
145,774

 
59
%

Total revenue increased by $39.7 million, or 77%, for the three months ended September 30, 2011, compared to the corresponding period of fiscal 2010, primarily due to an increase in the level of renewals and sales of additional subscription modules to our existing customers as well as a slight increase in subscription sales to new customers. We define existing customers as companies that we have sold to before that are either renewing their subscriptions, purchasing additional modules and/or adding new users, and we define new customers as companies that have never purchased from us before.

Total revenue increased by $85.9 million, or 59%, for the nine months ended September 30, 2011, compared to the corresponding period of fiscal 2010, primarily due to an increase in the level of renewals and sales of additional subscription modules to our existing customers as well as a slight increase in subscription sales to new customers.


29


Revenue from customers in the United States accounted for approximately 74% and 73% of total revenue for the three and nine months ended September 30, 2011, respectively.

Subscription and support revenue

Subscription and support revenue for the three months ended September 30, 2011 increased by $23.8 million, or 57% compared to the corresponding period of fiscal 2010. This increase was composed of a $21.2 million increase in subscription and support revenue from existing customers, which includes backlog, renewals and subscriptions for additional modules and end users as well as a $2.6 million increase in subscription and support revenues from new customers, which we define as subscription and support revenue from the first year of the initial contract of the new customers.

Subscription and support revenue for the nine months ended September 30, 2011 increased by $55.1 million, or 47%, compared to the corresponding period of fiscal 2010. The increase in subscription and support revenue for the nine months ended September 30, 2011 was composed of a $51.8 million increase in subscription and support revenue from existing customers as well as a $3.3 million increase in new business.

Professional services and other revenue

In fiscal 2010, revenue on most professional services contracts was recorded upon customer acceptance of the services as we did not have the ability to make reasonably dependable estimates of costs to complete and progress towards completion. In fiscal 2011, the Company determined that it had the ability to estimate costs to complete for larger contracts that tend to span multiple quarters and recognized revenue using the proportional performance method of accounting. The financial impact on the first and second quarters of fiscal 2011 was not material. In the third quarter of fiscal 2011, the Company expanded the scope of contracts under proportional performance accounting, which resulted in the recognition of an additional $3.9 million of professional services revenue during the quarter.

Professional services and other revenue for the three months ended September 30, 2011 increased by $15.9 million, or 168%, compared to the corresponding period of fiscal 2010. The increase in professional services and other revenue was composed of $9.8 million in professional services revenue recognized under the proportional performance method using the ratio of hours incurred to estimated total hours and $6.4 million in revenue from existing customers. These increases were offset by a $0.3 million decrease in revenue from new customers. We expect professional services revenue recognized under the proportional performance method to increase in future quarters as the majority of our service projects will be accounted for under proportional performance accounting.

Professional services and other revenue for the nine months ended September 30, 2011 increased by $30.8 million, or 107%, compared to the corresponding period of fiscal 2010. The increase in professional services and other revenue was composed of an $11.3 million increase in revenue from existing customers, and a $1.6 million increase in new business. In addition, we recognized $14.3 million in professional services revenue under the proportional performance method using the ratio of hours incurred to estimated total hours and $3.6 million in professional services revenue that was previously deferred pending non-standard acceptance criteria in one customer contract that was removed during the period.

Cost of Revenue and Gross Margin

The following table presents our revenue, cost of revenue, gross profit and gross margin for the periods presented (unaudited):

30


 
Three Months Ended