10-K 1 sfsf-12311110k.htm SFSF-12.31.11 10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ___________________________________________________
FORM 10-K
 ___________________________________________________
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2011
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
 
7372
 
94-3398453
(State or Other Jurisdiction of
Incorporation or Organization)
 
(Primary Standard Industrial
Classification Code Number)
 
(I.R.S. Employer
Identification Number)
1500 Fashion Island Blvd., Suite 300
San Mateo, CA 94404
(Address of Principal Executive Offices)
(650) 645-2000
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
N/A
 
N/A
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  o    No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of 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  þ    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 þ    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10 K.  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
 
þ
  
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).    Yes  o    No  þ
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant at June 30, 2011, based on the closing price of such stock on the NASDAQ Global Market on such date, was approximately $2.5 billion.
The number of shares of the registrant’s common stock outstanding on February 29, 2012, was one share.
SuccessFactors, Inc. meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and therefore is filing this Form 10-K with the reduced disclosure format.



2011 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 
PART I
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
PART II
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
PART III
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
PART IV
 
 
 
Item 15.
___________________________________________________

“SuccessFactors,” the SuccessFactors logo, “People Performance,” “SuccessCloud,” “SuccessFactory,” “IdeaFactory,” “SuccessConnect,” and “SuccessFactors University” are trademarks of SuccessFactors. Other service marks, trademarks and tradenames referred to in this report are the property of their respective owners.


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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements. All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report on Form 10-K may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
We cannot guarantee future results, levels of activity, performance or achievements. We are under no duty and do not intend to update any of these forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual results or revised expectations.
Except where the context requires otherwise, in this report “company,” “SuccessFactors,” “we,” “us” and “our” refer to SuccessFactors, Inc., a Delaware corporation and a wholly-owned subsidiary of SAP AG ("SAP"), and where appropriate, its subsidiaries.

Item 1.
Business

Our Solutions

SuccessFactors, a wholly-owned subsidiary of SAP, is the leading provider of cloud-based Business Execution ("BizX") software solutions to organizations of all sizes, with approximately 15 million subscription seats across multiple industries and geographies. We strive to delight our customers by delivering innovative solutions, a broad range of content, process expertise and best practices knowledge gained from serving our large and varied customer base. Today, we have more than 3,500 customers in more than 168 countries using our application suite in 35 languages. Our customer base includes organizations with as few as three and as many as 2,000,000 end users.

Compared to traditional approaches, our solutions offer customers rapid benefits and return on investment, enabling them to execute effectively on their strategy. Key customer benefits include:

Tangible Business Impact. Our solutions enable our customers to bridge the execution gap between strategy and achieving results by systematically aligning human resources (HR) to organizational strategy and optimizing workforce performance. By optimizing workforce performance and ensuring the collective efforts of their people are aligned to business strategy, we help customers achieve superior business results by allowing them to:
communicate strategy changes more quickly;
increase time spent on strategic priorities;
increase the rate of project completion;
increase the number of high performers and decrease the number of low performers; and
increase overall productivity.

Continuous Customer-Driven Development. We capture and incorporate best practices knowledge we gain from interactions with our customer base. Our customer-centric development focus, together with our cloud-based model, has enabled us to release significant enhancements several times a year over the past ten years.
Relentless User-Centric Innovation Drives Adoption. We focus on end users across all business functions and strive to deliver business applications that are as engaging as popular consumer web applications by incorporating features and content such as real-time coaching, goal and performance review writing assistants, personal dashboards and best-practice wizards. As a result, our user interface is designed to be highly intuitive, requiring limited training for end users.
Highly Configurable, Functionally Integrated Cloud-Based Application Suite. Our application suite shares a seamless

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common user experience that leverages common data and processes, and that allows us to easily add modules over time. Our application suite requires no installation of software or equipment on premises, which significantly reduces the costs and risks of traditional enterprise software. Our solution is highly configurable, allowing customers to tailor their deployment to reflect their identity, unique business processes, and existing forms and templates. We believe our architecture allows us to offer a more flexible, scalable, and secure service offering that is competitively priced when compared to other cloud-based vendors.
Broad Applicability Within Organizations of All Sizes and Industries. Our solutions are designed to be used by employees at all levels within an organization, and we offer multiple editions to meet the needs of organizations of all sizes.
Integration with Third-Party Applications through the Cloud. Our SuccessCloud initiative allows third-party applications and data from other business systems to connect and integrate with the SuccessFactors BizX suite. This enables customers to get the most from their existing technology investments and tap a broad ecosystem of SuccessFactors partners to enable effective business execution.

Our Application Suite

We offer a comprehensive, fully integrated suite of BizX applications delivered through the cloud, which enables organizations to optimize business alignment and the performance of their people to drive business results. We leverage a multi-tenant architecture and the core modules of our application suite and utilize a single code base. We market different editions of our application suite to better address the needs of organizations of different sizes:

Enterprise. We offer Enterprise Edition to mid-size and larger businesses. We offer two implementation options for our Enterprise Edition products:
The Enterprise Implementation option is a full-featured implementation, providing functionality and configurability that can scale to support the complex needs of large, global enterprises with tens to hundreds of thousands of employees.
The Standard Implementation option is designed for mid-sized businesses, which typically need a robust solution but may not require the advanced functionality of our Enterprise Edition. Modules that offer Standard Implementation options are pre-configured with best-practice workflows, form templates and other content, at a lower implementation cost than an Enterprise implementation.

Small Business. We offer Professional Edition to smaller businesses. Small businesses typically need an automated solution but may not require the more advanced functionality of our other editions. Professional Edition includes selected modules pre-configured with the best practices of smaller organizations. The baseline Professional Edition product can be rolled out quickly, without implementation support.

We offer the following products as part of our application suite:

Performance & Goals. Our Performance & Goals product includes a broad set of capabilities that include Performance Management, Goal Management, 360-Degree Reviews, and Calibration & Team Rater. This product streamlines the performance and goal setting process and transforms the often rushed and tedious process into an ongoing method of tying employee performance to business results. The product is highly configurable, allowing customers to design performance review templates and workflows that best meet their needs.

Performance Management. Our Performance Management capability delivers rich content that enables managers to provide meaningful and productive feedback to their direct and indirect reports. Performance Management is tightly integrated with our other modules, allowing organizations to:

assess performance accurately, allowing for goal adjustments in real time;
set relevant development goals based on accurate competency assessments;
compensate employees based on objective performance evaluations;
assess key performance data as part of the succession planning process; and
understand characteristics of strong performance to optimize recruiting.


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Goal Management. Our Goal Management capability supports the process of creating, monitoring and assessing employee goals across the organization. Goal Management allows executives and managers to align employee goals to the priorities of the organization. Customers can improve overall employee performance and agility by using Goal Management to focus employees on shared goals as these goals evolve. Goal Management can continually track progress against high-level strategic goals across the organization. Goal Management is tightly integrated with our other modules, allowing organizations to:

design competency development programs based on skills needed to achieve key goals;
evaluate individual performance against agreed upon goals;
make merit increase and bonus distribution decisions based on accomplishment of goals;
make informed succession planning decisions based on historical goal attainment data; and
expedite on-boarding of newly-hired employees with clearly articulated goals.

360-Degree Review. Our 360-Degree Review capability supports the collection of feedback from an employee's peers, direct and indirect reports and superiors. Once collected, the feedback can be aggregated, providing a comprehensive view of an employee's strengths, weaknesses and areas of improvement. This capability allows for an insightful and comprehensive assessment of employees, resulting in a better understanding of competency gaps and development needs.

Calibration & Team Rater. Our Calibration & Team Rater capability lets managers quickly assess and create a visual and intuitive rating of their teams across detailed criteria-in real time-to identify top and lower performers. Whether performing talent reviews or ad hoc assessments, Calibration & Team Rater gives managers a tool to optimize their teams by, for example, enabling them to target limited rewards to top employees that deserve extra recognition, or quickly identify low performers when faced with difficult layoff decisions.

Learning. Our Learning product transforms how the workforce learns by combining formal, social, and extended learning together with unprecedented content management, reporting, and analytics. SuccessFactors Learning also supports mobile devices - ensuring a convenient and easy way to deliver and administer learning on-the-go. The result is improved performance and learning ROI that is easily verifiable. With Learning, HR and learning leaders can:

Align business goals with individual employee learning and development so everyone is working on the right things.
Efficiently manage learning resources. House all learning activities in a single location, reducing administrative and training costs, and creating greater visibility and control.
Link learning activities to business results. SuccessFactors provides learning metrics that leverage learning data with additional talent and business data.
Ensure compliance. Track, train, and automate the certification and training assignment process.
Extend Learning to the Extended Enterprise, which includes eCommerce so training can easily and cost-effectively be extended to partners and customers.
Significantly improve content administration and delivery. SuccessFactors unique iContent, Content-as-a-Service removes the burden of online content management, reduces costs, increases efficiency, and greatly improves the user experience.

Succession & Development. Our Succession & Development product provides real-time visibility into an organization's talent pool from senior executives to individual contributors. This allows customers to plan for staffing changes by identifying key contributors throughout the organization and providing current profiles and readiness rankings for each candidate. This process enables customers to proactively develop and assure the readiness of employee talent at all levels. Succession & Development is tightly integrated with our other modules, allowing organizations to:

improve talent readiness in anticipation of evolving business goals and strategies;
incorporate employee development activities into the succession planning process;
view history of employee performance and assessments of potential as part of succession planning decisions;
adjust compensation based on succession planning decisions; and

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identify gaps in internal talent to optimize external recruiting.

Career and Development Planning. Our Career and Development Planning capability aligns learning activities with an employee's competency gaps required to achieve key goals. This allows customers to avoid costly, non-strategic training programs while facilitating the attainment of skills required for current and future job requirements. Career and Development Planning is tightly integrated with our other modules, allowing organizations to:

consider development accomplishments as part of compensation decisions;
link employee career development goals with succession planning activities;
take organizational competency data into account when planning for external hiring;
include competency assessments and development plans in performance reviews; and
ensure that employees have the skills required to execute on strategic objectives.

Compensation. Our Compensation product helps our customers establish a pay-for-performance culture. Compensation facilitates the processes of merit pay adjustments, bonus allocations, calibrations and distribution of stock-based awards. It also includes a variable pay management component that takes overall organizational and department performance into account in making individual compensation decisions. Compensation supports multiple currency conversion capabilities, which is particularly critical for customers with a global presence. Compensation is tightly integrated with our other modules, allowing organizations to:

influence employee engagement and thereby goal attainment by supporting a pay-for-performance culture;
directly link compensation distribution decisions to tracked performance;
access compensation history to inform succession management decisions;
allocate compensation based on skill development and anticipated performance; and
design hiring requisitions based on compensation guidelines.

Analytics and Reporting. Our Analytics and Reporting capability provides visibility into key performance and talent data across the organization. Managers and executives can access global views of the entire organization's performance data, including goal status, performance review ratings and compensation in real time. This capability offers insights to critical performance management trends through clear and easy-to-understand dashboards that summarize results while also linking to underlying data. All data can be seamlessly exported to spreadsheets for additional offline analysis. We also provide Workforce Analytics and Workforce Planning products, which provide valuable insights to managers and executives. Workforce Analytics provides the ability to understand key workforce issues using a flexible and easy to set up tool that comes pre-built with thousands of best practice metrics and analysis. Workforce Planning provides the ability to connect a company's business goals to its workforce plan. Using industry-leading capabilities, a company can plan and model various scenarios, with detailed supply and demand assumptions, to create a detailed and executable plan for all critical roles.

Recruiting Management. Our Recruiting Management product streamlines the process of identifying, screening, selecting, hiring and on-boarding job applicants. Hiring managers can identify talent gaps and initiate the process of creating hiring requisitions based on organizational needs. These detailed hiring requisitions can automatically be passed through a customer's internal approval process and routed to the appropriate internal or external recruiters. Recruiting Management is tightly integrated with our other products and capabilities, allowing organizations to:

improve hiring effectiveness for better execution of organizational goals;
identify performance expectations for newly-hired employees;
predefine compensation benchmarks for employees in newly-hired positions;
expose hiring needs as part of periodic succession planning sessions; and
predefine development programs for newly-hired employees.

Employee Central. Our Employee Central product is a next-generation HR information system that provides a single point

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to manage HR-related employee and organizational information, enable employees to collaborate and share information across the organization, and empower business leaders to leverage key talent insights to make better business decisions. Some key capabilities include:

robust core HR data management and process automation;
HR reporting and compliance;
rich aggregate employee profile information; and
collaboration tools such as tagging, badges and directory search, and talent search, all of which can be easily accessed and viewed by managers and executives.

Our application suite also includes:

Recruiting Marketing (Jobs2web). Our Recruiting Marketing Product attracts and engages candidates with a multi-channel, evidence-based approach, to ensure that you are getting the most out of your sourcing dollars. It enables organizations to provide a compelling candidate experience that entices them to apply, and encourages them to return. SuccessFactors interactive platform enables you to initiate relationships and maintain contact in a systematic fashion with sophisticated automation. Recruiting Marketing is tightly integrated with our other products, allowing organizations to:

implement a multi-channel strategy to reach the best candidates via the best channels at the lowest cost;
improve the overall candidate and hiring experience to ensure it is an extension of the company's brand; and
hire better by delivering the reporting and analytics you need to make decisions about your recruiting strategy and execution.

Jam Social Learning and Collaboration Platform. Our Jam module helps improve employee creativity, spontaneity, and teamwork by powering social learning, onboarding, and other talent processes. The module lets teams work efficiently in a collaborative manner, drawing on a wide array of tools, including rapid content creation (e.g. videos, screen captures) crowdsourcing, blogs, wikis, Social Docs, polls, and task tracking. Tightly integrated with our other modules, Jam allows organizations to:

break down organizational silos by enabling teams to work more effectively across departments and geographies;
accelerate recruiting, on-boarding, performance reviews and other business processes with improved collaboration;
build communities around instructor-led training to greatly improve employee development and learning;
scale informal learning throughout the company to allow employees to find experts and content when needed; and
access and contribute to projects and discussions from anywhere with complete mobile access.

Proprietary and Third-Party Content. Our application suite incorporates proprietary and third-party content that is tailored to a wide range of business roles and industries. This content provides customers with valuable insights and information to increase the effectiveness of their performance and talent management. For example, we have proprietary libraries for competencies, goals, job descriptions, skills, surveys and wage data, and other content such as:

Writing Assistant for performance and 360-degree reviews, which helps eliminate “writer's block” and facilitates creating concise, meaningful feedback for employees;
Coaching Advisor, which enables managers to proactively provide relevant coaching and support for their direct and indirect reports based on identified competency gaps;
SuccessFactors Coach, which integrates coaching and mentoring into an employee's daily routine; and
Interview Question Library, which helps hiring managers interview effectively and facilitates a standard approach to talent assessment and selection.


Professional Services
 
Our professional services team's mission is to help our customers rapidly achieve the best results from our BizX solutions

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and value proposition. With our cloud-based model, we have significantly reduced the need for lengthy and complex technology-focused tasks such as customizing code, deploying equipment, and managing unique network and application environments for each customer. Instead, we focus on business and HR best practices and business process review. Our professional service consultants are experienced in a variety of competencies to support enterprise-level application implementations including core HR and talent strategy and process, application configuration, integration and data migration, reporting and project management. In 2011, in order to support our sales growth we significantly expanded both our in-house delivery capabilities as well as building our partner ecosystem. We currently have more than 200 certified consultants trained to implement our solutions.
 
Implementation Services. Our implementation services consultants, who are aligned by market segment, use our proprietary implementation methodology to implement our solution quickly and effectively. For small and mid-sized customers, our solution can be configured in a matter of days or weeks. Our implementation approach is based upon best practice templates that give customers flexibility within a proven configuration framework. For our larger customers, implementations typically take a few months. Our experienced project managers partner with customers to successfully manage projects using our proven project methodology. Most of our projects are priced on a fixed-fee basis, which reduces the risk of implementation cost overruns often associated with on premise software. We also provide follow-on services, including end- user training and strategic consulting services.
 
Strategic Consulting Services. We leverage our understanding of business and HR best practices to help customers gain additional business value from our solution. Services range from developing and implementing change management programs and defining metrics-based processes for performance and talent management to guiding executive teams on goals setting and goal cascading. In 2011, we began deemphasizing these offerings, and instead have leveraged our partner ecosystem to deliver these services.

Customer Training

SuccessFactors University. SuccessFactors University provides training to enhance the end user experience and drive business results for our customers. We offer a variety of packaged training content, such as course curricula, training guides and reference materials. We offer courses online or in person at customer locations. Our training professionals will also work with customers to develop tailored curricula and materials to suit their specific needs.

Customer Support

At SuccessFactors, our customer's success is an important measurement of performance. Our entire organization is highly focused on delighting our customers. The SuccessFactors Customer Success Organization is at the center of SuccessFactors' customer support services and the primary point of contact for post implementation assistance. This team of knowledgeable professionals is dedicated to ensuring that our customers use SuccessFactors' solutions effectively to achieve their business objectives and receive the maximum return on their SuccessFactors investment. To meet the varying support needs of our customers, SuccessFactors offers two support options: Premium and Platinum Support. Additionally, we offer customer success units for any additional configuration needs and administration support delivery that our customers may need to supplement the support of their SuccessFactors solutions.
 
To ensure we deliver consistent and reliable support services, we leverage sophisticated technology systems for customer and case management, performance analytics, online service, and telephone response. In addition, we have developed proprietary customer adoption and usage monitoring mechanisms that help us proactively engage with customers to ensure they are getting value from our solutions. We provide our customers an online platform to submit, update, and manage service requests. Our support services offerings are global and leverage phone, email, and other online communication channels. Customer satisfaction surveys and key performance metrics are reviewed regularly to ensure that we maintain a high level of responsiveness and satisfaction.
 
Customers

As of December 31, 2011, we had more than 3,500 customers of all sizes.

Sales and Marketing

We sell our application suite primarily through our global direct sales organization. Our sales force is organized by geographic regions, including the Americas, Europe and the Middle East, and Asia Pacific. For financial information about our geographic areas see note 2 of the notes to our consolidated financial statements included in Item 15 “Exhibits and Financial

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Statement Schedules” of this Annual Report on Form 10-K. We further organize our sales force into teams by specific customer segments, based on the size of our prospective customers, such as small, mid-sized and large enterprise customers to provide a higher level of service and understanding of our customers' unique needs. We work with channel partners, including leading global human resources outsourcing vendors. For a discussion of backlog and seasonality, see Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operation-Overview” of this Annual Report on Form 10-K.

We generate customer leads, accelerate sales opportunities and build brand awareness through our marketing programs. Our marketing programs target Human Resource (HR) executives, technology professionals, senior line-of-business leaders, and corporate or institutional executives. Like our sales teams, our marketing team and programs are organized by geography, company size and industry to focus on the unique needs of customers within the target markets. Our principal marketing programs include:

field marketing events for customers and prospects;
participation in, and sponsorship of, user conferences, trade shows and industry events;
customer programs, including user meetings and our online customer community;
online marketing activities, including direct email, online web advertising, pay-per-click, blogs and webinars;
public and analyst relations;
cooperative marketing efforts with partners, including joint press announcements, joint trade show activities, channel marketing campaigns and joint seminars;
use of our website to provide product and company information, as well as learning opportunities for potential customers; and
inbound lead generation representatives who respond to incoming leads to convert them into new sales opportunities.

We host SuccessConnect user conferences globally, where customers both participate in and deliver a variety of programs designed to help accelerate business performance through the use of our application suite. Our conferences feature a variety of prominent keynote and customer speakers, panelists and presentations focused on businesses of all sizes, across a wide range of industries. The events also bring together partners, customers and other key participants in the human resources area to exchange ideas and best practices for improving business performance. Attendees gain insight into our products and participate in interactive sessions that give them the opportunity to express opinions on new features and functionalities.

Operations

We serve our customers and end users from several secure data centers worldwide. Physical security features at these facilities include 24x7x365 on-site security, three physical barriers and multiple access controls. The systems at these facilities are protected by firewalls and encryption technology we utilize. Operational redundancy features include redundant power, on-site backup generators, multiple carrier entrance facilities, and robust environmental controls and monitoring.

We employ a wide range of security features, including two-factor authentication, data encryption, encoded session identifications and passwords. We contract with specialized security vendors to conduct regular security audits of our infrastructure. We also employ outside vendors for 24x7x365 managed network security and monitoring. Every page we serve is delivered encrypted to the end user via a Secure Socket Layer, or SSL, transaction. We also use encryption in our storage systems and backup technology.

We continuously monitor the performance of our application suite using a variety of automated tools. We designed our infrastructure with built-in redundancy for all key components. Our network includes redundant firewalls, switches and intrusion detection systems, and incorporates failover backup for maximum uptime. We load balance at each tier in the network infrastructure. We also designed our application server clusters so that servers can fail without interrupting the user experience, and our database servers are clustered for failover. We regularly back up and store customer data both on and off-site in secure locations to minimize the risk of data loss at any facility.
 
Item 1A.
Risk Factors

We have a history of losses and we may not achieve or sustain profitability in the future.

We have incurred losses in each fiscal period since our inception in 2001. We experienced a net loss on a generally

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accepted accounting principles in the United States of America ("GAAP") basis of $12.5 million for fiscal 2010 and $36.0 million for fiscal 2011. At December 31, 2011 we had an accumulated deficit of $267.3 million. The losses and accumulated deficit were due to the substantial investments we made to grow our business and acquire customers.

Because we recognize subscription and support revenue from our customers over the term of their agreements, downturns or upturns in sales may not be immediately reflected in our operating results.

We recognize subscription and support revenue over the terms of our customer agreements, which typically range from one to three years, with some up to five years. As a result, most of our quarterly revenue results from agreements entered into during previous quarters. Consequently, a shortfall in demand for our application suite in any quarter may not significantly reduce our subscription and support revenue for that quarter, but could negatively affect subscription and support revenue in future quarters. In particular, if such a shortfall were to occur in our fourth quarter, it may be more difficult for us to increase our customer sales to recover from such a shortfall as we have historically entered into a significant portion of our customer agreements during the fourth quarter. In addition, we may be unable to adjust our cost structure to reflect this potential reduction in subscription and support revenue.

Because we recognize subscription and support revenue from our customers over the term of their agreements but incur most costs associated with generating customer agreements up front, rapid growth in our customer base may result in increased losses.

Because the expenses associated with generating customer agreements are generally incurred up front, but the resulting subscription and support revenue is recognized over the life of the customer agreement, increased growth in the number of customers may result in our recognition of more costs than subscription and support revenue in the earlier periods of the terms of our agreements.

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

In order for us to maintain or improve our operating results, it is important that our customers renew their agreements with us when the initial contract term expires and also purchase additional modules or additional users. Our customers have no obligation to renew their subscriptions after the initial subscription period, and we cannot assure you that customers will renew subscriptions at the same or higher level of service, if at all. Although our renewal rates have been historically high, some of our customers have elected not to renew their agreements with us. Moreover, in some cases, some of our customers have the right to cancel their agreements prior to the expiration of the term.

Our customers' renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our application suite, our customer support, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, the effects of global economic conditions, or reductions in our customers' spending levels. If our customers do not renew their subscriptions, renew on less favorable terms or fail to purchase additional modules or users, our revenue and billings may decline, and we may not realize significantly improved operating results from our customer base.

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

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

While we still face competition from paper-based processes and desktop software tools, we also face competition from custom-built software that is designed to support the needs of a single organization, and from third-party human resources application providers. These software vendors include, without limitation, Automatic Data Processing, Inc., CareerBuilder Inc., Cornerstone OnDemand, Inc., Halogen Software Inc., Kenexa Corporation, Lumesse Limited, Optijob Inc., Oracle

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Corporation, People Fluent, Saba Software, Inc., Smashfly Technologies Inc., SumTotal Systems Inc., Taleo Corporation, TMP Worldwide Inc. and Workday, Inc. Our expanded product and feature offerings compete with those offered by other companies, including large public companies such as Google, IBM's Cognos, Microsoft's SharePoint Solutions and Salesforce.com and smaller private companies such as Jive Software and Socialtext. Competitive pressures may also increase with the consolidation of competitors within our market, such as the acquisition of Taleo by Oracle, Learn.com and Salary.com by Kenexa, Mr. Ted by Lumesse and Softscape, GeoLearning, Cybershift and Accero by SumTotal.

Many of our competitors are able to devote greater resources to the development, promotion and sale of their products and services. In addition, many of our competitors have established marketing relationships, major distribution agreements with consultants, system integrators and resellers. Moreover, many software vendors could bundle products or offer them at lower prices as part of a larger product sale. In addition, some competitors may offer software that addresses one or a limited number of business execution functions at lower prices or with greater depth than our application suite. As a result, our competitors might be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Further, some potential customers, particularly large enterprises, may elect to develop their own internal solutions. For all of these reasons, we may not be able to compete successfully against our current and future competitors.

We have made acquisitions in the past, which could divert our management's attention, and otherwise disrupt our operations and harm our operating results.

We acquired three companies in 2010 and three in 2011, including Plateau. We cannot assure you that we will realize the anticipated benefits of these acquisitions. There are inherent risks in integrating and managing corporate acquisitions, and we have limited experience with acquisitions. For example, in addition to the risks noted below, we may not achieve expected benefits of the Plateau acquisition if we fail to successfully transition its customers from licensed solutions to software as a service solutions from on premise or hosted solutions. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

unanticipated costs or liabilities associated with the acquisition;
the need to migrate an acquired company's customers to our platform;
customers of the acquired company not desiring to renew with us;
incurrence of acquisition-related costs, which would be recognized as a current period expense under FASB Accounting Standards Codification 805-20, Business Combinations;
liabilities associated with an acquired company's data security, privacy, regulatory compliance or technology;
diversion of management's attention from other business concerns;
harm to our existing business relationships with business partners and customers as a result of the acquisition;
the potential loss of key employees;
use of resources that are needed in other parts of our business; and
use of substantial portions of our available cash to consummate the acquisition.

As a result of our acquisition of Plateau, a portion of our revenue will be generated by sales to government entities, which are subject to a number of challenges and risks.

As a result of our acquisition of Plateau, we will begin to have sales to U.S. federal, state and local governmental agency customers, and we may in the future increase sales to government entities. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will successfully complete a sale. Government entities may require contract terms that differ from our standard arrangements and impose compliance requirements that are complicated, time consuming and expensive to satisfy. In addition, government customers may be adversely affected by budgetary cycles, and funding reductions or delays.

Additionally, governments routinely audit and investigate government contractors, and we may be subject to such audits and investigations. We may not meet the compliance requirements of our government customers, or may not be able to adequately document our compliance. For example, we have made a voluntary disclosure to the government regarding Plateau's prior government contract sales. We could be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture or refund of profits or certain fees collected, suspension of payments, fines, and

11


suspension or prohibition from doing business with the government entity.

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

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

Because our application suite collects, stores and reports personal information of job applicants and employees, privacy concerns could result in liability to us or inhibit sales of our application suite.

Many U.S. federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that apply to us. We may not be in compliance with all such laws, regulations or industry standards. Because many of the features of our application suite collect, store and report on personal information, including that of our own employees, any failure to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in liability to us, damage our reputation, inhibit sales and harm our business.

Furthermore, the costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of our application suite and reduce overall demand for it. Privacy concerns, whether or not valid, may inhibit market adoption of our application suite particularly in certain industries and foreign countries.

Our organization continues to experience rapid changes. If we fail to manage these changes effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.

We continue to experience rapid changes in headcount and operations. We grew from 188 employees at December 31, 2005 to 596 employees at December 31, 2008 to 1,578 employees at December 31, 2011 and have added additional members to our management team. We increased the size of our customer base from 341 customers at December 31, 2005 to approximately 2,600 customers at December 31, 2008 to more than 3,500 customers at December 31, 2011. The growth in our customer base has placed, and any future growth will place, a significant strain on our management, administrative, operational, legal and financial compliance infrastructure. Our success will depend in part on our ability to manage these changes effectively. We will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Failure to effectively manage organizational changes could result in difficulty in implementing customers, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties, and any of these difficulties could adversely impact our business performance and results of operations.

The market for our application suite depends on widespread adoption of business execution.

Widespread adoption of our solutions depends on the widespread adoption of business execution by organizations. It is uncertain whether they will purchase software as a service for this function. Accordingly, we cannot assure you that a software as a service model for business execution will achieve and sustain the high level of market acceptance that is critical for the success of our business.


12


We have historically derived a significant portion of our revenue from sales of our performance management and goal management modules. If these modules are not widely accepted by new customers, our operating results may be harmed.

We have derived a significant portion of our historical revenue from sales of our core Performance Management and Goal Management modules but the percentage of revenue from these modules has decreased over time as we have expanded our suite of products and customers have purchased additional modules. If these core modules do not remain competitive, or if we experience pricing pressure or reduced demand for these modules, our future subscription and other revenue could be negatively affected, which would harm our future operating results.

The market for software as a service is at a relatively early stage of development, and if it does not develop or develops more slowly than we expect, our business will be harmed.

The market for software as a service is at a relatively early stage relative to on premise solutions, and these applications may not achieve and sustain high levels of demand and market acceptance. Our success will depend on the willingness of organizations to increase their use of software as a service. Many companies have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to software as a service. We have encountered customers in the past that have been unwilling to subscribe to our application suite because they could not install it on their premises. Other factors that may affect the market acceptance of software as a service include:

perceived security capabilities and reliability;
perceived concerns about ability to scale operations for large enterprise customers;
concerns with entrusting a third party to store and manage critical employee data; and
the level of configurability or customizability of the software.

If organizations do not perceive the benefits of software as a service, the market for our software may not develop further, or it may develop more slowly than we expect, either of which would adversely affect our business.

The market for our application suite among large enterprise customers may be limited if they require customized features or functions that we do not intend to provide.

Prospective large enterprise customers may require customized features and functions unique to their business processes. If prospective customers require customized features or functions that we do not offer, then the market for our application suite will be more limited among these types of customers and our business could suffer. In addition, supporting large enterprise customers could require us to devote significant development services and support personnel and strain our personnel resources and infrastructure. Further, we intend to utilize our professional services partner network to provide such services, and our large enterprise customers may not wish to have professional services performed by parties other than us. If we are unable to address the needs of these customers in a timely fashion or further develop and enhance our application suite, these customers have in the past and may not renew their subscriptions, seek to terminate their relationship, renew on less favorable terms, fail to purchase additional modules or additional users or assert legal claims against us. If any of these were to occur, our revenue may decline and we may not realize significantly improved operating results from our customer base.

As more of our sales efforts are targeted at larger enterprise customers, our sales cycle may become more time- consuming and expensive, we may encounter pricing pressure and implementation challenges, and we may have to delay revenue recognition for some complex transactions, all of which could harm our business and operating results.

As we target more of our sales efforts at larger enterprise customers, we will face greater costs, longer sales cycles and less predictability in completing some of our sales. Our quarterly results of operations also may vary significantly depending on when we complete sales to these larger enterprise customers. For large enterprises, a purchase decision may be an enterprise- wide decision and, if so, these types of sales would require us to provide greater levels of education regarding the use and benefits of our service, as well as education regarding our compliance with applicable privacy and data protection laws and regulations to prospective customers with international operations. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting sales and professional services resources to a smaller number of larger transactions, while potentially requiring us to delay revenue recognition on some of these transactions until the technical or implementation requirements have been met.


13


We depend on our management team, particularly our Chief Executive Officer, our President and our key sales and development personnel, and the loss of one or more key employees or groups could harm our business and prevent us from implementing our business plan in a timely manner.

Our success depends on the expertise and continued services of our executive officers, particularly our Chief Executive Officer and our President. We have in the past and may in the future continue to experience changes in our executive management team resulting from the hiring or departure of executives, which may be disruptive to our business. We are also substantially dependent on the continued service of key sales personnel and existing development personnel because of their familiarity with the inherent complexities of our application suite and technologies.

Most of our employees do not have employment arrangements that require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. We do not maintain key person life insurance policies on any of our employees. The loss of one or more of our key employees or groups could seriously harm our business.

If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contribute to our success and our business may be harmed.

We believe that a critical contributor to our success has been our corporate culture, which we believe fosters innovation, teamwork, passion for customers and focus on execution. As we grow and change, we may find it difficult to maintain these important aspects of our corporate culture. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, continue to perform at current levels or otherwise adversely affect our future success.

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

We anticipate that we will increasingly depend on various third-party relationships in order to grow our business. In addition to growing our indirect sales channels, we intend to pursue additional relationships with other third parties, such as implementation partners and technology and content providers. We also intend to have third parties perform more professional services. Identifying partners, negotiating and documenting relationships with them require significant time and resources as does integrating third-party content and technology. Our agreements with technology and content providers are typically non- exclusive and do not prohibit them from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to third parties, including our partners, to favor their products or services or to prevent or reduce subscriptions to our application suite either by disrupting our relationship with existing customers or by limiting our ability to win new customers. In addition, global economic conditions could adversely affect the businesses of our partners, and it is possible that they may not be able to devote the additional resources we expect to the relationship. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results would suffer. Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our application suite or revenue.

We rely on a small number of third-party service providers to host and deliver our application suite and any interruptions or delays in services from these third parties could impair the delivery of our application suite and harm our business.

We currently host our application suite from multiple data centers worldwide. We do not control the operation of these facilities. These facilities are vulnerable to damage or interruption from natural disasters, fires, power loss, telecommunications failures and similar events. They are also subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions, which would have a serious adverse impact on our business. Additionally, our data center agreements are of limited duration and are subject to early termination rights in certain circumstances, and the providers of our data centers have no obligation to renew their agreements with us on commercially reasonable terms, or at all.

As we continue to add data centers and add capacity in our existing data centers, we may transfer data to other locations. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service. Interruptions in our service or data loss or corruption may cause customers to terminate their agreements and adversely affect our renewal rates and our ability to attract new customers. Data transfers may also subject us to regional privacy and data protection laws that apply to the transmission of customer data across international borders.

We also depend on access to the Internet through third-party bandwidth providers to operate our business. If we lose the

14


services of one or more of our bandwidth providers, or if these providers experience outages, for any reason, we could experience disruption in delivering our application suite or we could be required to retain the services of a replacement bandwidth provider.

Our operations also rely heavily on the availability of electricity, which also comes from third-party providers. If we or the third-party data center facilities that we use to deliver our services were to experience a major power outage or if the cost of electricity were to increase significantly, our operations and financial results could be harmed. If we or our third-party data centers were to experience a major power outage, we or they would have to rely on back-up generators, which might not work properly or might not provide an adequate supply during a major power outage. Such a power outage could result in a significant disruption of our business.

If our application suite becomes unavailable, is breached or otherwise fails to perform properly, our reputation and customer relationships could be harmed, our market share could decline and we could be subject to liability claims.

The software used in our application suite is inherently complex and may contain material defects or errors. Any defects in product functionality or that cause interruptions in the availability of our application suite could result in:

lost or delayed market acceptance and sales;
breach of warranty or other contract breach or misrepresentation claims;
sales credits or refunds to our customers;
loss of customers;
diversion of development and customer service resources; and
injury to our reputation.

The costs incurred in correcting any material defects or errors might be substantial and could adversely affect our operating results.

Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant. Furthermore, the availability of our application suite could be interrupted by a number of factors, including customers' inability to access the Internet, the failure of our network or software systems due to human or other error, security breaches or variability in user traffic for our application suite. We may be required to issue credits or refunds or indemnify or otherwise be liable to our customers or third parties for damages they may incur resulting from certain of these events. In addition to potential liability, if we experience interruptions in the availability of our application suite, our reputation could be harmed and we could lose customers.

Our errors and omissions or other insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover any claim against us for loss or security breach of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management's attention.

We rely on third-party computer hardware and software that may be difficult to replace or which could cause errors or failures of our service.

We rely on computer hardware, purchased or leased, and software licensed from third parties in order to deliver our application suite. This hardware and software may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could result in delays in our ability to provide our application suite until equivalent technology is either developed by us or, if available, identified, obtained and integrated, which could harm our business. In addition, errors or defects in third-party hardware or software used in our application suite could result in errors or a failure of our application suite, which could harm our business.

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

Our ability to attract new customers and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing application suite and to introduce new features. The success of any enhancement or new product depends on several factors, including timely completion, adequate quality testing, introduction and market acceptance.

15


Any new feature or module that we develop or acquire may not be introduced in a timely or cost-effective manner, contain defects or may not achieve the broad market acceptance necessary to generate significant revenue. If we are unable to successfully develop or acquire new features or modules or to enhance our existing application suite to meet customer requirements, our business and operating results will be adversely affected.

Because we designed our application suite to operate on a variety of network, hardware and software platforms using standard Internet tools and protocols, we will need to continuously modify and enhance our application suite to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. If we are unable to respond in a timely manner to these rapid technological developments in a cost-effective manner, our application suite may become less marketable and less competitive or obsolete and our operating results may be negatively impacted.

If we fail to develop widespread brand awareness cost-effectively, our business may suffer.

We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our application suite and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our application suite.

Because our long-term success depends, in part, on our ability to expand the sales of our application suite to customers located outside of the United States, our business will be susceptible to risks associated with international operations.

A key element of our growth strategy is to expand our international operations and develop a worldwide customer base. We have added employees, offices and customers internationally, particularly in Europe, Asia and Australia. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks and competition that are different from those in the United States. Because of our limited experience with international operations, we cannot assure you that our international expansion efforts will be successful or that returns on such investments will be achieved in the future.

In addition, our international operations may fail to succeed due to other risks inherent in operating businesses internationally, including:

our lack of familiarity with commercial and social norms and customs in international countries which may adversely affect our ability to recruit, retain and manage employees in these countries;
difficulties and costs associated with staffing and managing foreign operations;
the potential diversion of management's attention to oversee and direct operations that are geographically distant from our U.S. headquarters;
compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;
legal systems in which our ability to enforce and protect our rights may be different or less effective than in the United States and in which the ultimate result of dispute resolution is more difficult to predict;
greater difficulty collecting accounts receivable and longer payment cycles;
higher employee costs and difficulty in terminating non-performing employees;
differences in work place cultures;
unexpected changes in regulatory requirements;
the need to adapt our application suite for specific countries;
our ability to comply with differing technical and certification requirements outside the United States;
tariffs, export controls and other non-tariff barriers such as quotas and local content rules;
more limited protection for intellectual property rights in some countries;
adverse tax consequences;
fluctuations in currency exchange rates;

16


restrictions on the transfer of funds; and
new and different sources of competition.

Our failure to manage any of these risks successfully could harm our existing and future international operations and seriously impair our overall business.

Because competition for our target employees is intense, we may not be able to attract and retain the quality employees we need to support our planned growth.

Our future success will depend, to a significant extent, on our ability to attract and retain high quality personnel. Despite the economic downturn, competition for qualified management, technical and other personnel is intense, and we may not be successful in attracting and retaining such personnel. If we fail to attract and retain qualified employees, our ability to grow our business could be harmed.

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

Our success and ability to compete depend in part upon our intellectual property. We rely on copyright, patent, trade secret and trademark laws, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate or we may be unable to secure intellectual property protection for all of our products and services.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect and enforce our intellectual property rights could seriously harm our brand and adversely impact our business.

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

There is considerable patent and other intellectual property development activity in our industry. Our success depends upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. As a result of our acquisitions and as we expand our product offerings, we could be subject to an increased risk of such litigation. We have and may in the future receive claims that our application suite and underlying technology infringe or violate the claimant's intellectual property rights. However, we may be unaware of the intellectual property rights of others that may cover some or all of our technology or application suite. Any such claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our services, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses, modify products, or refund fees, which could further exhaust our resources. In addition, we may pay substantial settlement costs to resolve claims or litigation, whether or not legitimately or successfully asserted against us, which could include royalty payments in connection with any such litigation and to obtain licenses, modify products, or refund fees. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

Our use of open source and third-party technology could impose limitations on our ability to commercialize our application suite.

We use open source software in our application suite. Although we try to monitor our use of open source software, the terms of many open source licenses have not been interpreted by United States courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our application suite. In such event, we could be required to seek licenses from third parties in order to continue offering our application suite, to re-engineer our technology or to discontinue offering our application suite in the event re-engineering cannot be accomplished on a timely basis, any of which could cause us to breach contracts, harm our reputation, result in customer losses or claims, increase our costs or otherwise adversely affect our business, operating results and financial condition. We also

17


incorporate certain third-party technologies into our application suite and may desire to incorporate additional third-party technologies in the future. Licenses to new third-party technology may not be available to us on commercially reasonable terms, or at all.

Changes in laws and/or regulations related to the Internet or changes in the Internet infrastructure itself may cause our business to suffer.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy and the use of the Internet as a commercial medium. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, result in a decline in the use of the Internet and the viability of Internet-based applications such as ours and reduce the demand for our application suite.

The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. If the Internet infrastructure is unable to support the demands placed on it, or if hosting capacity becomes scarce, our business growth may be adversely affected.

Uncertainty in global economic conditions may adversely affect our business, operating results or financial condition.

Our operations and performance depend on global economic conditions. Challenging or uncertain economic conditions make it difficult for our customers and potential customers to accurately forecast and plan future business activities, and may cause our customers and potential customers to slow or reduce spending on our application suite. Furthermore, during challenging or uncertain economic times, our customers may face difficulties gaining timely access to sufficient credit and experience decreasing cash flow, which could impact their willingness to make purchases and their ability to make timely payments to us. Global economic conditions have in the past and could continue to have an adverse effect on demand for our application suite, including new bookings and renewal and upsell rates, on our ability to predict future operating results, and on our financial condition and operating results. If global economic conditions remain uncertain or deteriorate, it may materially impact our business, operating results, and financial condition.

Item 1B.
Unresolved Staff Comments
Not applicable.
 
Item 2.
Properties
We currently lease approximately 58,700 square feet of space for use as our headquarters, including operations and research and development activities, located in San Mateo, California. The lease for this space expires in December 2014. We also lease space in various locations throughout the United States for local sales and professional services personnel. Our foreign subsidiaries lease office space for their operations, including their local sales and professional services personnel. Additionally, we operate numerous data centers worldwide, including in the United States, The Netherlands, Australia, and China.

Item 3.
Legal Proceedings
From time to time, we are involved in a variety of claims, suits, investigations and proceedings arising from the ordinary course of our business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims, tax and other matters. Although claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, we believe that the resolution of our current pending matters will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on us because of defense costs, diversion of management resources and other factors. In addition, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect our financial position, results of operations or cash flows in a particular period.

Shareholder Litigation
Four putative shareholder class action suits relating to our acquisition by SAP were filed in state and federal court against us, the members of our Board, SAP America and a subsidiary of SAP. Three suits have been consolidated before the California

18


Superior Court, County of San Mateo, under the caption In re SuccessFactors, Inc. Shareholder Litigation, Case No. CIV 510279. The consolidated class action complaint seeks certification of a class of our stockholders and generally alleges, among other things, that (i) the members of the Board breached their fiduciary duties in connection with the transactions contemplated by the merger agreement; and (ii) SAP America and its subsidiary aided and abetted the Board's purported breaches of fiduciary duties. The complaint seeks, among other relief, an injunction prohibiting the transactions contemplated by the merger agreement, rescission in the event such transactions are consummated, damages, and attorneys' fees and costs. A fourth putative shareholder class action was pending in U.S. District Court for the Northern District of California, captioned Israni v. Dalgaard et al., Case No. 12-CV-0076-JSW. The federal complaint sought certification of a class of our stockholders and alleged substantially similar claims to those at issue in the consolidated complaint filed in state court.

On January 12, 2012, we and the other parties entered into a memorandum of understanding ("MOU") reflecting an agreement to settle the state and federal actions. The MOU provided that the federal action would be voluntarily dismissed as to all defendants, and that the consolidated state court action would be dismissed with prejudice as to all defendants. Pursuant to the terms of the MOU, the federal action was voluntarily dismissed on January 18, 2012. We expect to execute a stipulation of settlement, which will be subject to approval by the court following notice to the Company's stockholders. In addition, we and the other parties contemplate that plaintiff's counsel will seek an award of attorney's fees and expenses as part of the settlement, and that plaintiffs will release defendants from any and all liability.
 
Item 4.
Mine Safety Disclosures

Not applicable.

19



PART II

Item 5.
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Our Common Stock and Related Stockholder Matters
Our common stock commenced trading on the New York Stock Exchange under the symbol “SFSF” on November 20, 2007. On January 3, 2011, our common stock commenced trading on the NASDAQ Global Select Market and on July 19, 2011, our common stock commenced trading on the New York Stock Exchange. On February 22, 2012, we became an indirect, wholly-owned subsidiary of SAP AG. We applied to delist our common stock on The New York Stock Exchange and this delisting became effective on March 5, 2012.
The following table summarizes the high and low sales prices for our common stock as reported by The NASDAQ Stock Market or the New York Stock Exchange, as applicable, for the period indicated:
Fiscal Year 2011 Quarters Ended:
 
High
 
Low
March 31, 2011
 
$
39.09

 
$
28.60

June 30, 2011
 
40.27

 
28.40

September 30, 2011
 
30.85

 
19.52

December 31, 2011
 
39.88

 
21.23

 
 
 
 
 
Fiscal Year 2010 Quarters Ended:
 
High
 
Low
March 31, 2010
 
$
20.93

 
$
15.07

June 30, 2010
 
23.68

 
18.51

September 30, 2010
 
26.51

 
19.12

December 31, 2010
 
31.75

 
24.33

As of February 29, 2012, one share of our common stock was issued and outstanding and was held by SAP AG.

Equity Compensation Plan Information
The following table summarizes information about our equity compensation plans as of December 31, 2011. All outstanding awards relate to our common stock.
Plan Category
 
(a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1)
 
(b) Weighted-average Exercise Price of Outstanding Options, Warrants and Rights (2)
 
(c) Number of Securities Remaining Available for Future Issuances Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity compensation plans approved by security holders (1)
 
$
10,591

 
$
15.06

 
$
3,079

Equity compensation plans not approved by security holders
 

 

 

Total
 
$
10,591

 
$
15.06

 
$
3,079

(1)
Prior to our initial public offering, we issued securities under our 2001 Stock Option Plan. Following our initial public offering, we issued securities under our 2007 Equity Incentive Plan (“2007 Plan”) and we may issue stock awards, including but not limited to restricted stock awards, restricted stock units, stock bonus awards, stock appreciation rights and performance share awards under this plan. The 2007 Plan contains a provision that the number of shares available for grant and issuance will be increased on January 1 of each of 2009-2017 by an amount equal to 5% of our shares outstanding on the immediately preceding December, 31, unless our Board of Directors, in its discretion determines to make a smaller increase.
(2)
The weighted average exercise price does not reflect the shares that will be issued upon issuance of common stock under RSUs.

Dividend Policy
We have never declared or paid cash dividends on our capital stock.

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Item 6.
Selected Financial Data
Omitted pursuant to General Instruction I(1)(a) and (b) of Form 10-K.

Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to facilitate an understanding of our business and results of operations. You should read the following discussion and analysis of our financial condition in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011 included in Item 15, “Exhibits and Financial Statement Schedules,” in this Annual Report on Form 10-K. The information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including without limitation information with respect to our plans and strategy of our business and our financial condition, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. You should review the section titled “Risk Factors” included in Item 1A of Part I of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes included elsewhere in this Form 10-K are prepared in accordance with generally accepted accounting principles ("GAAP") in the United States. The preparation of these 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.

We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
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 significant penalty to take possession of the software. Therefore, these arrangements are treated as service agreements.
Since our acquisition of Plateau in the second quarter of fiscal 2011, 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 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.
We recognize 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.
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.

21


 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. Indirect taxes, including sales and use tax amounts and goods and service tax amounts, collected from customers have been recorded on a net basis.
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 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. 
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). 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.
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 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 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 cases where other evidence of ESP is not available, we use the median or mode average selling price of a deliverable to determine ESP. When median or mode average selling prices are used (generally in the absence of other evidence), selling prices are averaged based on aggregate volume excluding transactions priced below the 10 percentile and above the 90 percentile of the pricing distribution to remove price outliers.

22


 The majority of customer contracts specify the value of each undelivered element and, as a result of the contingent revenue guidance in ASC 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 proportional performance method of accounting 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 related to products acquired from Plateau, 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.
Accounting for Commission Payments
We defer commissions that are the incremental costs that are directly associated with non-cancelable service contracts and consist of sales commissions paid to our direct sales force. The commissions are deferred and amortized over the non-cancelable terms of the related customer agreements. The deferred commission amounts are recoverable from the future revenue streams under the customer agreements. We believe this is the appropriate method of accounting, as the commission costs are so closely related to the revenue from the customer agreements that they should be recorded as an asset and charged to expenses over the same period that the related revenue is recognized. Amortization of deferred commissions is included in sales and marketing expenses.
During 2011, we capitalized $22.5 million of deferred commissions and amortized $17.4 million to sales and marketing expenses. During 2010, we capitalized $14.9 million of deferred commissions and amortized $10.1 million to sales and marketing expenses. As of December 31, 2011, deferred commissions on our consolidated balance sheet totaled $25.1 million.
Accounting for Stock-Based Awards
We measure all share-based payments to employees based on the grant date fair value of the awards and recognize these amounts in our consolidated statement of operations over the period during which the employee is required to perform services in exchange for the award (generally over the vesting period of the award). Generally, we amortize the fair value of share-based payments on a straight-line basis. We have never capitalized stock-based employee compensation cost or recognized any tax benefits related to these costs.
To estimate the fair value of an option award, we use 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, we calculated the expected term based on our historical experience from previous stock option grants. We estimate the volatility of our common stock by analyzing our historical volatility and considering volatility data of our peer group and their implied volatility. We recognize expense only for awards expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised, and cancelled. We also award employees with restricted stock units ("RSUs") with service conditions, and measure the fair value based on the closing market price of our common stock on the date of the awards. Additionally, we granted RSUs with market and performance conditions to our chief executive officer ("CEO"). The fair values 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, which are subjective and generally require significant analysis and judgment to develop. The fair value of a performance-based RSU is based on the closing market price of our common stock on the date of the award. These market- and performance-condition RSUs are amortized based upon the graded vesting method.
We recorded stock-based compensation of $42.1 million and $22.0 million during 2011 and 2010, respectively.
Allowance for Doubtful Accounts
Based on a review of the current status of our existing accounts receivable and historical collection experience, we have established an estimate of our allowance for doubtful accounts. We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided based on our collection history and current economic trends. As a result, if our actual collections are lower than

23


expected, additional provisions for doubtful accounts may be needed and our future results of operations and cash flows could be negatively affected. Write-offs of accounts receivable and recoveries were not significant during 2011 and 2010.
Identified Intangible Assets
Identified intangible assets primarily consist of acquisition-related developed technology, customer relationships, trade names and trademarks which are generally amortized on a straight-line basis over the periods of benefit, ranging from two to ten years. We perform a review of identified intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than it had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. There were no impairment charges related to identified intangible assets during 2011 and 2010.
Goodwill
We perform a goodwill impairment test annually during the fourth quarter of our fiscal year and more frequently if an event or circumstance indicates that an impairment may have occurred. Such events or circumstances may include significant adverse changes in the general business climate, among other things. We have determined that we have a single reporting unit. The impairment test is performed by determining the fair value of the reporting unit based on the market price of our common stock. If the carrying value, of the reporting unit, is less than its fair value, then the fair value is allocated to all of our assets and liabilities (including any unrecognized intangible assets) as if the fair value was the purchase price to acquire us. The excess of the fair value over the amounts assigned to our assets and liabilities is the implied fair value of the goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. We did not record any charges related to goodwill impairment during 2011 and 2010.

Contingent Consideration
We estimate the fair value of the contingent consideration issued in business combinations using various valuation approaches, as well as significant unobservable inputs, reflecting our assessment of the assumptions market participants would use to value these liabilities. The fair values of our liability-classified contingent consideration is remeasured at each reporting period, with any changes in the fair value recorded as income or expense, and such remeasurements resulted in a net gain of approximately $10.6 million for the year ended December 31, 2011. Our equity-classified contingent consideration is not remeasured. The potential undiscounted amount of all future cash payments that we could be required to make under the contingent consideration agreements is between $0 and $58.9 million as of December 31, 2011.

Results of Operations
The following table sets forth selected consolidated statements of operations data for the specified periods as a percentage of revenue for each of those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
 

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Year Ended December 31,
 
2011
 
2010
Revenue:
 
 
 
Subscription and support
74
 %
 
79
 %
Professional services and other
26

 
21

Total revenue
100

 
100

Cost of revenue:
 
 
 
Subscription and support
17

 
13

Professional services and other
17

 
14

Total cost of revenue
34

 
27

Gross margin
66

 
73

Operating expenses:
 
 
 
Sales and marketing
47

 
48

Research and development
20

 
19

General and administrative
21

 
17

Revaluation of contingent consideration
(3
)
 
(4
)
Gain on settlement of litigation, net
(1
)
 

Total operating expenses
83

 
80

Loss from operations
(17
)
 
(8
)
Unrealized foreign exchange gain on intercompany loan

 
2

Interest income (expense) and other, net

 
1

Loss before benefit for (provision of) income taxes
(18
)
 
(5
)
Benefit for (provision of) income taxes
7

 
(1
)
Net loss
(11
)%
 
(6
)%
_____________________
Due to rounding to the nearest percent, totals may not equal the sum of the line items in the table above.

Year Ended December 31, 2011 and 2010.
Revenue
 
Year Ended December 31,
 
2011
 
2010
 
(Dollars in thousands)
Subscription and support
$
242,765

 
$
163,682

Professional services and other
85,182

 
42,244

Total revenue
$
327,947

 
$
205,926

2011 Compared to 2010. Total revenue increased primarily due to a $98.3 million increase in the level of renewals and sale of additional subscription modules to our existing customers, and an increase of $23.7 million in new business. We define existing customers as companies that we have sold to before and 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. Of these increased amounts, approximately $18.3 million is due to the business combinations in 2011. The Plateau acquisition contributed the majority with $18.0 million. In 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 2011, we determined that we were able to estimate costs to complete for larger contracts that tend to span multiple quarters and recognized revenue using the proportional performance method of accounting. Under the proportional performance method of accounting, we recognized an additional $27.0 million in professional services revenue as compared to 2010. As of December 31, 2011, we had over 3,500 customers compared to over 3,200 as of December 31, 2010.
Revenue from customers in the United States accounted for $232.6 million, or 71% of total revenue, in 2011, compared to

25


$160.2 million, or 78% of total revenue, in 2010.
Subscription and support revenue
Subscription and support revenue increased by $79.1 million, or 48%. A majority of the increase in subscription and support revenue came from increase in revenue from existing customers of $66.9 million. In addition, an increase in new business contributed $12.2 million.
Professional services and other revenue
Professional services and other revenue increased by $42.9 million, or 102%. The increase in professional services and other revenue was driven by revenue from existing customers and new business of $31.4 million and $11.5 million, respectively, of which $27.0 million of the total increase was recognized under the proportional performance method of accounting.
Cost of Revenue and Gross Margin
 
 
Year Ended December 31,
 
2011
 
2010
 
(Dollars in thousands)
Revenue:
 
 
 
Subscription and support
$
242,765

 
$
163,682

Professional services and other
85,182

 
42,244

Total revenue
327,947

 
205,926

Cost of revenue:
 
 
 
Subscription and support
56,681

 
26,552

Professional services and other
54,822

 
29,939

Total cost of revenue
111,503

 
56,491

Gross profit
$
216,444

 
$
149,435

Gross margin for subscription and support
77
%
 
84
%
Gross margin for professional services and other
36
%
 
29
%
Subscription and support cost of revenue
2011 Compared to 2010. Subscription and support cost of revenue increased by $30.1 million, or 113%, which was primarily driven by an increase in employee-related costs of $12.7 million resulting from an increase in headcount from acquisitions. The increased employee-related costs were comprised of increasing salaries of $7.0 million, bonus compensation of $2.1 million, combined payroll taxes and employee benefits of $2.1 million, and stock-based compensation of $1.5 million. In addition, amortization of intangibles increased by $7.7 million due to realizing a full year's impact from acquisitions in 2010 along with additional acquisitions in 2011, our data center-related costs increased by $3.3 million, combined depreciation and allocated overhead costs increased by $2.9 million, combined outsourced maintenance and outside services increased by $1.5 million, license royalties increased by $1.4 million, and various individually insignificant increasing items totaling $0.6 million.
Professional services and other cost of revenue
2011 Compared to 2010. Professional services and other cost of revenue increased by $24.9 million, or 83%, which was primarily driven by an increase in employee-related costs of $14.7 million resulting from an increase in headcount from acquisitions. The increased employee-related costs were primarily comprised of increasing salaries of $8.7 million, stock-based compensation of $2.4 million, bonus compensation of $2.2 million, and combined payroll taxes and employee benefits of $1.3 million. In addition, outside professional services increased by $6.3 million, allocated overhead costs increased by $1.7 million, travel and entertainment costs increased by $0.7 million, customer training costs increased by $0.5 million, partner referral fees increased by $0.4 million, amortization of intangibles increased by $0.3 million, and various individually insignificant increasing items totaling $0.4 million.
Subscription and support gross margin for the year ended December 31, 2011 was 77% compared to 84% for the corresponding period of fiscal 2010. The decrease in gross margin was primarily due to increases in personnel costs due to

26


headcount additions, amortization expense of purchased intangible assets attributable to acquisitions completed as well as the costs incurred on significant contracts for which the associated revenue recognition has not begun or is being recognized ratably, offset by increases in revenue associated with existing and Plateau customers.

Professional services and other gross margin for the year ended December 31, 2011 was 36% compared to 29% for the corresponding period of fiscal 2010. The increase in gross margin was primarily attributed to our use of the proportional performance method of accounting in fiscal 2011 for certain larger contracts as we determined we had the ability to estimate costs to complete these contracts. Prior to fiscal 2011, we recognized professional services and other revenue on a completed contract method of accounting, in which we did not recognize revenues until a project was finished, while the associated costs were being incurred. The proportional performance method increased our gross margin as the costs incurred previously accounted for contracts were captured in the corresponding periods of fiscal 2010. These were offset by the increased personnel costs, largely due to headcount additions from acquisitions.
Sales and Marketing
 
Year Ended December 31,
 
2011
 
2010
 
(Dollars in thousands)
Sales and marketing
$
152,665

 
$
99,051

Percent of total revenue
47
%
 
48
%
2011 Compared to 2010. Sales and marketing expenses increased by $53.6 million, or 54%, compared to fiscal 2010. The increases were primarily due to employee-related costs, marketing initiatives, depreciation and allocated overhead expenses, outside services, and various other items. Increased costs were largely related to a $42.8 million increase in employee-related costs primarily driven by increased headcount through acquisitions. The increased employee-related costs were comprised of increasing salaries of $14.0 million, commissions of $13.9 million, stock-based compensation of $7.1 million, combined payroll taxes and employee benefits of $4.7 million, and bonus compensation of $3.4 million with offsets of various individually insignificant decreasing items. Additionally, increasing marketing efforts contributed $4.1 million to the increased sales and marketing expenses, which were comprised of higher general marketing and tradeshow costs of $2.2 million, market research costs of $0.8 million, public relations costs of $0.5 million, and various other advertising and website related costs of $0.6 million. The remaining increases in expenses included $3.1 million of travel and entertainment costs, $2.0 million of combined depreciation and allocated overhead costs, $0.9 million of outside services, $0.2 million of IT and telecommunication expenses, $0.2 million of amortization of intangible assets, and $0.2 million of equipment-related expenses.
Research and Development
 
Year Ended December 31,
 
2011
 
2010
 
(Dollars in thousands)
Research and development
$
66,896

 
$
39,892

Percent of total revenue
20
%
 
19
%
2011 Compared to 2010. Research and development expenses increased by $27.0 million, or 68%, compared to fiscal 2010. The increases were primarily due to employee-related costs, depreciation and allocated overhead expenses, amortization of intangible assets, outside services, and various other items. Increased costs were largely related to a $20.8 million increase in employee-related costs primarily driven by increased headcount through acquisitions. The increased employee-related costs were comprised of increasing salaries of $11.2 million, stock-based compensation of $4.0 million, bonus compensation of $3.8 million, and combined payroll taxes and employee benefits of $1.8 million. Additionally, greater depreciation and allocated overhead costs of $2.9 million, amortization of intangible assets of $1.8 million, outside services of $0.8 million, equipment related expenses of $0.4 million, and travel and entertainment costs of $0.3 million contributed to the period over period increases.
General and Administrative

27


 
Year Ended December 31,
 
2011
 
2010
 
(Dollars in thousands)
General and administrative
$
67,718

 
$
35,941

Percent of total revenue
21
%
 
17
%
2011 Compared to 2010. General and administrative expenses increased by $31.8 million, or 88%, compared to fiscal 2010. The increases were primarily due to employee-related costs, outside services, facilities costs, and various other items. Increased costs were largely related to a $17.9 million increase in employee-related costs primarily driven by increased headcount through acquisitions. The increased employee-related costs were primarily comprised of increasing salaries of $6.1 million, stock-based compensation of $5.2 million, bonus compensation of $4.7 million, and combined payroll taxes and employee benefits of $2.0 million. In addition, greater outside services of $12.7 million consisted of increased due diligence and integration costs of $9.6 million, general accounting and tax related services of $1.5 million, general contractor expenses of $1.4 million, and legal services of $0.2 million. We also had increased facilities-related expenses of $3.2 million, which was primarily due to additional rent expenses of $2.7 million from leases assumed due to acquisitions, and increased general and administrative expenses of $3.1 million, which was primarily due to increased bad debt expenses of $2.2 million. Additionally, there were greater equipment-related expenses of $0.8 million, IT and telecommunication expenses of $0.7 million, and travel and entertainment expenses of $0.6 million. The year over year increase in general and administrative expenses was partially offset by a decrease in depreciation and allocated overhead expenses of $7.3 million. As such expenses are allocated proportionately based on headcount across the functions, the decreased amount was driven by the lower incremental increase in general and administrative headcount compared to sales and marketing and research and development.
Revaluation of Contingent Consideration
 
Year Ended December 31,
 
2011
 
2010
 
(Dollars in thousands)
Revaluation gain of contingent consideration
$
(10,644
)
 
$
(7,874
)
Percent of total revenue
(3
)%
 
(4
)%
2011 Compared to 2010. Revaluation gain of $10.6 million was related to contingent considerations associated with the CubeTree and Inform acquisitions. We value the contingent consideration at each reporting period for the following contingency periods: 1) CubeTree is based on our stock price over a three-year period commencing on July 20, 2010, which was the date of acquisition closing, or at such earlier time as a change of control of the Company occurs, and 2) Inform is based on achievement of bookings for a two-year period following the closing of the acquisition. A payment of $4.0 million was made to the former shareholders of Inform due to the earn-out achievement during the third quarter of fiscal 2011. CubeTree is fixed at $11.8 million due to the SAP acquisition subsequent to year end.
Gain on Settlement of Litigation, Net
 
Year Ended December 31,
 
2011
 
2010
 
(Dollars in thousands)
Gain on settlement of litigation, net
$
(2,906
)
 
$

Percent of total revenue
(1
)%
 
%
Gain on settlement of litigation, net of litigation costs, was due to the settlement of litigation with Halogen Software, Inc. ("Halogen"), during the second quarter of fiscal 2011. We filed suit against 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, we entered into a settlement agreement with Halogen to resolve the litigation and recorded the settlement amount received, net of litigation costs.
Unrealized Foreign Exchange Gain on Intercompany Loan

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Year Ended December 31,
 
2011
 
2010
 
(Dollars in thousands)
Unrealized foreign exchange gain on intercompany loan
$
151

 
$
4,954

Percent of total revenue
%
 
2
%
As the functional currency of our foreign subsidiary, where the intercompany loan is recorded, is its respective local currency, we remeasured the foreign currency into U.S. dollars at each reporting period. For the years ended December 31, 2011 and 2010, such changes resulted in gains of $0.2 million and $5.0 million, respectively.
Interest Income (Expense) and Other, Net
 
Year Ended December 31,
 
2011
 
2010
 
(Dollars in thousands)
Interest income (expense) and other, net
$
(1,234
)
 
$
1,414

Percent of total revenue
 %
 
1
%
2011 Compared to 2010. Interest expense and other, net was $1.2 million primarily due to foreign exchange loss of $2.4 million, offset by interest income of $1.0 million, in fiscal 2011 compared to a foreign exchange gain of $0.1 million and interest income of $1.4 million in fiscal 2010.
Benefit for (Provision of) Income Taxes
 
Years Ended December 31,
 
2011
 
2010
 
(Dollars in thousands)
Benefit for (provision of) income taxes
$
22,416

 
$
(1,243
)
Effective tax rate on earnings
(38
)%
 
11
%

Our effective tax rates were approximately (38)% and 11% in the years ended December 31, 2011 and 2010, respectively. Our effective tax rate differed from the U.S. federal statutory rate primarily due to the distribution and mixture of taxable profits in various jurisdictions carrying foreign income taxes and certain U.S. losses not benefited due to our valuation allowance.

Included in the $22.4 million income tax benefit for the year ended December 31, 2011 is a $25.4 million tax benefit from the release of valuation allowance on our deferred tax assets ("DTAs"). In connection with our acquisitions during fiscal 2011, deferred tax liabilities ("DTLs") were established on the acquired identifiable intangible assets. These DTLs exceeded the acquired DTAs by $25.4 million and created additional sources of income to realize a tax benefit for our DTAs. As such, 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 our DTAs was released and resulted in an income tax benefit of $25.4 million, which was due from approximately $16.5 million associated with Plateau, $7.8 million associated with Jobs2web, and $1.1 million associated with Jambok.

We have incurred operating losses in all periods to date and, accordingly, have not recorded a provision for income taxes for any of the periods presented other than provisions for certain state taxes and foreign income taxes. In connection with our adoption of ASC 718, we use the "with-and-without" approach described in ASC 740 (Intraperiod Tax Allocation of the Tax Effect of Pretax Income from Continuing Operations) to determine the recognition and measurement of excess tax benefits. Accordingly, we have elected to recognize excess income tax benefits from stock option exercises in additional paid in capital only if an incremental income tax benefit would be realized after considering all other tax attributes presently available to us. In addition, we have elected to account for the indirect effects of stock-based awards on other tax attributes, such as the research and alternative minimum tax credits, through the consolidated statements of operations.

Realization of deferred tax assets depends upon future earnings, if any, the timing and amount of which are uncertain.

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Accordingly, we have offset our net deferred tax assets which are not more-likely-than-not to be realized with a valuation allowance.

The utilization of our net operating loss could be subject to substantial annual limitation as a result of certain future events, such as acquisition or other significant equity events, which may be deemed as a "change in ownership" under the provisions of the Internal Revenue Code of 1986, as amended and similar state provisions. The annual limitations could result in the expiration of net operating losses and tax credits before utilization. In addition, for the year ended December 31, 2011, the utilization of California net operating loss is not allowed due to the suspension of California net operating loss.

Recent Accounting Pronouncements
In 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. We do not expect the adoption of ASU No. 2011-04 will have a material impact on our financial position or results of operations.

In 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 adoption of this accounting update will have no impact on our financial position or results of operations.

In 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. We do not expect the adoption of ASU No. 2011-08 will have a material impact on our financial position or results of operations.

Item 7A.
Quantitative and Qualitative Disclosures about Market Risks
Foreign Currency Exchange Risk
As we expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Our revenue is generally denominated in the local currency of the contracting party. The substantial majority of our revenue has been denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located. Our expenses are incurred primarily in the United States, with a small portion of expenses incurred where our other international sales and operations offices are located. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. Fluctuations in currency exchange rates could harm our business in the future. The effect of an immediate 10% adverse change in exchange rates on foreign denominated receivables as of December 31, 2011 would result in an adverse impact on loss before income taxes of approximately $2.2 million. To date, we have not entered into any foreign currency hedging contracts although we may do so in the future.
We had cash and cash equivalents of $103.5 million and marketable securities of $61.5 million as of December 31, 2011, respectively. Cash, cash equivalents and marketable securities are held for working capital purposes and restricted cash of $1.5 million is held as security against credit card deposits and various lease obligations. Our exposure to market rate risk for changes in interest rates relates to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We placed our investments with high quality issues and, by policy, limit the amount of credit exposure to any one issuer. We protect and preserve our investment funds by limiting default, market and reinvestment risk. Our investments in marketable securities consist of high-grade government, corporate commercial paper and debt securities with maturities of less than three years. Investments purchased with the remaining maturity of 90 days or less are considered to be cash equivalents. We classify all of our investments as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax reported in a separate component of stockholder’s equity. The average maturity of our investment

30


portfolio is approximately 272 days; therefore the movement of interest rates should not have a material impact on our consolidated balance sheet or statement of operations.
At any time, a significant increase or decrease in interest rates will have an impact on the fair market value and interest earnings of our investment portfolio. We do not currently hedge this interest exposure. We have performed a sensitivity analysis as of December 31, 2011 using a modeling technique that measures the change in the fair values arising from a hypothetical 100 basis points adverse movement in the levels of interest rates across the entire yield curve, which are representative of historical movements in the Federal Funds rate with all other variables held constant. The analysis is based on the weighted-average maturity of our investments as of December 31, 2011. The sensitivity analysis indicated that a hypothetical 100 basis points adverse movement in interest rates would result in a loss in the fair values of our investments of approximately $0.5 million as of December 31, 2011.
 
Item 8.
Financial Statements and Supplementary Data
Please refer to Item 15—Exhibits and Financial Statement Schedules.
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.

Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed and submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of our fiscal year, December 31, 2011. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of December 31, 2011 were not effective because of the material weaknesses described in Management's Report on Internal Control Over Financial Reporting below.
In light of the material weaknesses described in Management's Report on Internal Control Over Financial Reporting, additional procedures were performed by management to ensure that the Company's consolidated financial statements included in this Annual Report on Form 10-K were prepared in accordance with U.S. generally accepted accounting principles. As a result of these procedures, our Chief Executive Officer and Chief Financial Officer concluded that the Company's consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, the Company's financial position, results of operations and cash flows as of the dates and for the periods presented, in conformity with U.S. generally accepted accounting principles.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are made only in accordance with authorizations of our management and Board of Directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,

31


projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (“COSO Framework”).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim consolidated financial statements will not be prevented or detected on a timely basis. As a result of management's evaluation of our internal control over financial reporting, our Chief Executive Officer and Chief Financial Officer have concluded that our internal control over financial reporting was not effective as of December 31, 2011 due to the following material weaknesses identified:
The Company's control related to the review and approval of the accounting for significant and unusual transactions did not operate as designed. As a result, the Company did not identify on a timely basis a liability of $2.9 million related to professional services received from an investment banker that should have been accrued for at year-end. This material weakness resulted in a material misstatement of accrued liabilities and general and administrative expense that was corrected prior to the issuance of the Company's consolidated financial statements.
The Company did not have appropriately designed controls in place to evaluate the application of certain accounting policies related to professional service revenues. This material weakness resulted in the Company not appropriately evaluating the impact to their consolidated financial statements of the method used in transitioning certain contracts from completed contract method of accounting to the proportional performance method of accounting. As a result of this material weakness, there is a reasonable possibility that a material misstatement of the Company's annual or interim consolidated financial statements would not be prevented or detected on a timely basis.
Our independent registered public accounting firm, KPMG LLP, has issued an auditors' report on the effectiveness of our internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K.
Changes in Internal Controls over Financial Reporting
During the quarter ended December 31, 2011, we implemented additional systems and internal controls to estimate costs related to professional services and completed our transition from a completed contract method of accounting to proportional performance method of accounting. There has been no other change in our internal control over financial reporting that occurred during the quarter ended December 31, 2011 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
 
Item 9B.
Other Information
None.
 

32



PART III

Item 10.
Directors and Executive Officers and Corporate Governance
Omitted pursuant to General Instruction I(1)(a) and (b) of Form 10-K.

Item 11.
Executive Compensation
Omitted pursuant to General Instruction I(1)(a) and (b) of Form 10-K.

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Omitted pursuant to General Instruction I(1)(a) and (b) of Form 10-K.

Item 13.
Certain Relationships and Related Transactions, and Director Independence
Omitted pursuant to General Instruction I(1)(a) and (b) of Form 10-K.

Item 14.
Principal Accounting Fees and Services
Audit and Related Fees
The following table sets forth the aggregate fees for audit and other services provided by KPMG for the fiscal years ended December 31, 2011 and 2010: 
 
2011
 
2010
Audit fees (1)
$
1,409,734

 
$
762,500

Audit-related fees (2)
418,840

 
286,800

Tax fees (3)
145,541

 
73,600

All other fees (4)
359,709

 

Total fees
$
2,333,824

 
$
1,122,900

(1)
Audit fees consist of fees billed or to be billed for professional services rendered for (i) the audit of SuccessFactors’ annual financial statements set forth in SuccessFactors’ Annual Reports for 2011 and 2010 and (ii) the issuances of consents and review of documents filed with the Securities and Exchange Commission.
(2)
Audit-related fees consist of fees billed for professional services rendered and not reported under “Audit fees” above, which principally related to due diligence services and consultation on corporate transactions in 2011 and SAS 70 attestation services in 2010.
(3)
Tax fees consist of fees billed or to be billed for tax compliance, tax advice and tax planning services rendered. Tax-related services rendered consisted primarily of tax advice on our domestic and international operations.
(4)
All other fees in 2011 consist of fees billed for professional services rendered for integration advisory consultation and certain other services not reported above.

Policy on Audit Committee Pre-Approval of Services Performed by Independent Registered Public Accounting Firm
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent accountants. These services may include audit services, audit-related services, tax services and other services. The Audit Committee generally pre-approves particular services or categories of services on a case-by-case basis. The independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with these pre-approvals, and the fees for the services performed to date.
All of the services of KPMG for 2011 and 2010 described above were pre-approved by the Audit Committee.

33



PART IV

Item 15.
Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The following financial statements are filed as part of this report:
 

34


REPORT OF KPMG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder
SuccessFactors, Inc.:

We have audited the accompanying consolidated balance sheets of SuccessFactors, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SuccessFactors, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for multiple element revenue transactions in fiscal 2010 resulting from the adoption of a new accounting pronouncement.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), SuccessFactors, Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2012 expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
Santa Clara, California
March 16, 2012

35


REPORT OF KPMG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder
SuccessFactors, Inc.:

We have audited SuccessFactors, Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). SuccessFactors, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting included in Item 9A(b). Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses related to controls over significant and unusual transactions and certain revenue accounting policies have been identified and included in management's assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of SuccessFactors, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for the years then ended. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2011 consolidated financial statements, and this report does not affect our report dated March 16, 2012, which expressed an unqualified opinion on those consolidated financial statements.

In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria, SuccessFactors, Inc. has not maintained effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
Santa Clara, California
March 16, 2012

36


REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of SuccessFactors, Inc.

We have audited the accompanying consolidated statement of operations, stockholders' equity (deficit) and comprehensive loss, and cash flows of SuccessFactors, Inc. for the year ended December 31, 2009. These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of SuccessFactors, Inc. for the year ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
San Francisco, California
February 26, 2010

37


SUCCESSFACTORS, INC.
Consolidated Balance Sheets
 (In thousands, except par value)
 
As of December 31,
 
2011
 
2010
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
103,536

 
$
75,384

Marketable securities
61,503

 
281,073

Accounts receivable, net of allowance for doubtful accounts of $2,569 and $1,039
116,755

 
80,440

Deferred commissions
8,605

 
7,106

Prepaid expenses and other current assets
19,739

 
8,022

Total current assets
310,138

 
452,025

Restricted cash
1,536

 
913

Property and equipment, net
16,279

 
8,737

Deferred commissions, less current portion
16,504

 
12,854

Goodwill
356,356

 
64,077

Intangible assets
121,232

 
37,832

Other assets
3,415

 
975

Total assets
$
825,460

 
$
577,413

LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
5,099

 
$
7,254

Accrued expenses and other current liabilities
36,061

 
11,433

Accrued employee compensation
47,941

 
23,467

Deferred revenue
285,546

 
219,868

Acquisition-related contingent consideration
11,758

 
5,200

Total current liabilities
386,405

 
267,222

Deferred revenue, less current portion
10,623

 
14,577

Long-term income taxes payable
2,896

 
1,987

Acquisition-related contingent consideration, less current portion

 
21,050

Other long-term liabilities
11,401

 
1,248

Total liabilities
411,325

 
306,084

Commitments and contingencies (Note 5)

 

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; 84,810 and 77,137 shares issued and outstanding as of December 31, 2011 and 2010, respectively
85

 
77

Additional paid-in capital
678,277

 
499,343

Accumulated other comprehensive income
3,074

 
3,258

Accumulated deficit
(267,301
)
 
(231,349
)
Total stockholders’ equity
414,135

 
271,329

Total liabilities and stockholders’ equity
$
825,460

 
$
577,413

See accompanying notes to consolidated financial statements.

38


SUCCESSFACTORS, INC.
Consolidated Statements of Operations
 (In thousands, except per share data)
 
Year Ended December 31,
 
2011
 
2010
 
2009
Revenue:
 
 
 
 
 
Subscription and support
$
242,765

 
$
163,682

 
$
122,028

Professional services and other
85,182

 
42,244

 
31,026

Total revenue
327,947

 
205,926

 
153,054

Cost of revenue: (1)
 
 
 
 
 
Subscription and support
56,681

 
26,552

 
17,763

Professional services and other
54,822

 
29,939

 
17,560

Total cost of revenue
111,503

 
56,491

 
35,323

Total gross profit
216,444

 
149,435

 
117,731

Operating expenses: (1)
 
 
 
 
 
Sales and marketing
152,665

 
99,051

 
80,431

Research and development
66,896

 
39,892

 
24,427

General and administrative
67,718

 
35,941

 
24,995

Revaluation of contingent consideration
(10,644
)
 
(7,874
)
 

Gain on settlement of litigation, net
(2,906
)
 

 

Total operating expenses
273,729

 
167,010

 
129,853

Loss from operations
(57,285
)
 
(17,575
)
 
(12,122
)
Unrealized foreign exchange gain on intercompany loan
151

 
4,954

 

Interest income (expense) and other, net
(1,234
)
 
1,414

 
810

Loss before benefit for (provision of) income taxes
(58,368
)
 
(11,207
)
 
(11,312
)
Benefit for (provision of) income taxes
22,416

 
(1,243
)
 
(1,322
)
Net loss
$
(35,952
)
 
$
(12,450
)
 
$
(12,634
)
Net loss per common share, basic and diluted
$
(0.44
)
 
$
(0.17
)
 
$
(0.21
)
Shares used in computing net loss per common share, basic and diluted
80,932

 
73,939

 
59,534

________________
(1)
Amounts include stock-based compensation expense as follows:

 
Year Ended December 31,
 
2011
 
2010
 
2009
Cost of revenue
$
6,715

 
$
2,826

 
$
1,417

Sales and marketing
15,355

 
8,300

 
4,451

Research and development
7,699

 
3,742

 
1,354

General and administrative
12,314

 
7,170

 
3,195


See accompanying notes to consolidated financial statements.

39


SUCCESSFACTORS, INC.
Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss
 (In thousands)
 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
(Deficit)
Balances at December 31, 2008
55,990

 
$
56

 
$
200,907

 
$
(74
)
 
$
(206,265
)
 
$
(5,376
)
Exercise of stock options and stock grants to board members for board services
1,552

 
2

 
5,023

 

 

 
5,025

Vested restricted stock units converted to shares
74

 

 

 

 

 

Stock-based compensation

 

 
10,417

 

 

 
10,417

Issuance of common stock in connection with follow-on public offering, net of issuance costs incurred
13,800

 
14

 
203,041

 

 

 
203,055

Vesting of stock option shares exercised early
332

 

 
2,031

 

 

 
2,031

Comprehensive loss:

 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax

 

 

 
(138
)
 

 
(138
)
Unrealized gain on marketable securities

 

 

 
123

 

 
123

Net loss

 

 

 

 
(12,634
)
 
(12,634
)
Total comprehensive loss

 

 

 

 

 
(12,649
)
Balances at December 31, 2009
71,748

 
72

 
421,419

 
(89
)
 
(218,899
)
 
202,503

Exercise of stock options
3,678

 
4

 
22,653

 

 

 
22,657

Vested restricted stock units converted to shares
457

 

 

 

 

 

Stock-based compensation

 

 
22,038

 

 

 
22,038

Issuance cost incurred in prior year follow-on public offering

 

 
(111
)
 

 

 
(111
)
Issuance of common stock in connection with acquisitions
1,250

*
1

 
31,797

 

 

 
31,798

Contingent consideration in connection with acquisition

 

 
1,540

 

 

 
1,540

Vesting of stock option shares exercised early
4

 

 
7

 

 

 
7

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax

 

 

 
3,258

 

 
3,258

Unrealized gain on marketable securities

 

 

 
89

 

 
89

Net loss

 

 

 

 
(12,450
)
 
(12,450
)
Total comprehensive loss

 

 

 

 

 
(9,103
)
Balances at December 31, 2010
77,137

 
77

 
499,343

 
3,258

 
(231,349
)
 
271,329

Exercise of stock options
2,857

 
3

 
19,448

 

 

 
19,451

Vested restricted stock units converted to shares
812

 
1

 
(1
)
 

 

 

Stock-based compensation

 

 
42,083

 

 

 
42,083

Issuance of common stock in connection with acquisitions
4,004

*
4

 
98,746

 

 

 
98,750

Equity awards assumed for acquisitions

 

 
18,658

 

 

 
18,658

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax

 

 

 
(259
)
 

 
(259
)
Unrealized gain on marketable securities

 

 

 
75

 

 
75

Net loss

 

 

 

 
(35,952
)
 
(35,952
)
Total comprehensive loss

 

 

 

 

 
(36,136
)
Balances at December 31, 2011
84,810

 
$
85

 
$
678,277

 
$
3,074

 
$
(267,301
)
 
$
414,135


*
In fiscal 2010, excludes 561 thousand shares held in escrow in connection with Inform and CubeTree acquisitions. In fiscal 2011, 371 thousand shares were released from escrow in connection with Inform acquisition.
See accompanying notes to consolidated financial statements.

40


SUCCESSFACTORS, INC.
Consolidated Statements of Cash Flows
(In thousands)

41


 
Year Ended December 31,
 
2011
 
2010
 
2009
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(35,952
)
 
$
(12,450
)
 
$
(12,634
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 

 
 
Depreciation and amortization
7,854

 
5,720

 
3,902

Amortization of deferred commissions
17,382

 
10,120

 
7,383

Stock-based compensation expense
42,083

 
22,038

 
10,417

Amortization of intangible assets
13,035

 
3,118

 

Revaluation of contingent consideration
(10,644
)
 
(7,874
)
 

Unrealized foreign exchange gain on intercompany loan
(151
)
 
(4,954
)
 

Income tax benefit in connection with acquisitions
(24,298
)
 

 

Changes in assets and liabilities, net of acquired assets and assumed liabilities:
 
 

 
 
Accounts receivable, net of allowance for doubtful accounts
(23,164
)
 
(21,044
)
 
(13,165
)
Deferred commissions
(22,532
)
 
(14,896
)
 
(10,553
)
Prepaid expenses and other current assets
1,029

 
(2,164
)
 
(2,455
)
Other assets
440

 
(715
)
 
(61
)
Accounts payable
(2,512
)
 
5,511

 
(1,166
)
Accrued expenses and other current liabilities
12,945

 
2,888

 
(1,470
)
Accrued employee compensation
22,705

 
8,312

 
2,387

Long-term income taxes payable
558

 
344

 
788

Other liabilities
(117
)
 
190

 
201

Deferred revenue
47,769

 
49,213

 
31,826

Net cash provided by operating activities
46,430

 
43,357

 
15,400

Cash flows from investing activities:
 
 
 
 
 
Restricted cash
205

 
118

 
317

Capital expenditures
(7,741
)
 
(6,039
)
 
(2,756
)
Acquisitions, net of cash acquired
(244,799
)
 
(26,089
)
 

Purchases of available-for-sale securities
(164,662
)
 
(400,355
)
 
(323,537
)
Proceeds from maturities of available-for-sale securities
176,750

 
222,963

 
104,654

Proceeds from sales of available-for-sale securities
205,905

 
141,500

 
4,534

Net cash used in investing activities
(34,342
)
 
(67,902
)
 
(216,788
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from exercise of stock options
20,141

 
22,657

 
5,025

Proceeds from public offerings, net of offering costs

 
(111
)
 
203,055

Principal payments on capital lease obligations

 
(4
)
 
(56
)
Payments on contingent consideration related to Inform acquisition
(4,000
)
 

 

Net cash provided by financing activities
16,141

 
22,542

 
208,024

Effect of exchange rate changes on cash and cash equivalents
(77
)
 
769

 
123

Net increase (decrease) in cash and cash equivalents
28,152

 
(1,234
)
 
6,759

Cash and cash equivalents at beginning of year
75,384

 
76,618

 
69,859

Cash and cash equivalents at end of year
$
103,536

 
$
75,384

 
$
76,618

Non-cash transactions:
 
 
 
 
 
Common stock issued and stock options and restricted stock units assumed in connection with acquisitions
$
117,408

 
$
31,796

 
$

Purchase of software licenses for note payable
2,097

 

 

Supplemental cash flow disclosure:
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
Interest
$

 
$

 
$
165

Income taxes
1,663

 
1,029

 
392

See accompanying notes to consolidated financial statements.

42


SUCCESSFACTORS, INC.
Notes to Consolidated Financial Statements

1. Organization
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 cloud-based 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; 360-Degree Review; Calibration & Team Rater; Learning Management; iContent; Extended Enterprise; Succession Management; Career and Development Planning; Compensation Management; Analytics and Reporting; Recruiting Management; Recruiting Marketing; Employee Central; Jam Social Learning and Collaboration Platform; 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.
Public Offerings
In November 2007, the Company completed its initial public offering, selling approximately 11,619,000 shares of its common stock for approximately $104 million in net proceeds. Since 2007, the Company has used the net proceeds for general corporate purposes, including the expansion of sales and marketing, research and development, working capital and capital expenditures.
In June 2008, and October 2009, the Company completed follow-on offerings, raising net proceeds of approximately $27.4 million and $202.9 million, respectively.

2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable for annual financial information. The Company’s consolidated financial statements include the accounts of SuccessFactors, Inc. and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates
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 consideration, and the determination of the fair market value of stock-based awards, including the use of forfeiture estimates. These estimates are based on management’s knowledge about current events and expectations about actions the Company may undertake in the future. Actual results could differ materially from those estimates.
Segments
The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis. Accordingly, the Company has determined that it has a single reporting and operating segment structure, specifically the provision of cloud-based business execution software and associated services for employee performance and business alignment.
Revenue Recognition

43


Revenue consists of fees for the Company's software and support as well as fees for the provision of professional 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 in the second quarter of fiscal 2011, 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. Indirect taxes, including sales and use tax amounts and goods and service tax amounts, collected from customers have been recorded on a net basis.
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 into or materially modified after January 1, 2010 (the beginning of the Company’s 2010 fiscal year). 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

44


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 cases where other evidence of ESP is not available, the Company uses the median or mode average selling price of a deliverable to determine ESP. When median or mode average selling prices are used (generally in the absence of other evidence), selling prices are averaged 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 ASC 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 proportional performance method of accounting 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 related to the historical Plateau business, 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.
Deferred Revenue
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 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.

Cost of Revenue
Cost of revenue primarily consists of costs related to hosting the Company’s application suite, compensation and related

45


expenses for data center, professional services staff and customer support staff, amortization of intangibles, payments to outside service providers, allocated overhead and depreciation expenses, license royalties and partner referral fees. Allocated overhead includes rent, information technology costs and employee benefits costs and is apportioned to all departments based on relative headcount.
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 agreements that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized. Amortization of deferred commissions is included in sales and marketing expense in the accompanying consolidated statements of operations. Deferred commissions associated with subscription agreements for which revenue recognition has not commenced as of December 31, 2011 are classified as long-term deferred commissions.
During the year ended December 31, 2011, the Company capitalized $22.5 million of deferred commissions and amortized $17.4 million to sales and marketing expense. As of December 31, 2011 and 2010, deferred commissions on the Company’s consolidated balance sheet totaled $25.1 million and $20.0 million, respectively.
Identified Intangible Assets
Identified intangible assets primarily consist of acquisition-related developed technology, customer relationships, tradenames and trademarks which are generally amortized on a straight-line basis over the periods of benefit, ranging from two to ten years. The Company performs a review of identified intangible assets whenever events of changes in circumstances indicate that the useful life is shorter than it had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the Company accelerates the rate of amortization and amortizes the remaining carrying value over the new shorter useful life. There was no impairment charge related to identified intangible assets during the years ended December 31, 2011 and 2010.
Goodwill
The Company performs a goodwill impairment test annually during the fourth quarter of our fiscal year and more frequently if an event or circumstance indicates that an impairment may have occurred. Such events or circumstances may include significant adverse changes in the general business climate, among other things. The Company has determined that it is a single reporting unit. The impairment test is performed by determining the fair value of the reporting unit based on the market price of the Company’s common stock. If the Company’s carrying value of the reporting unit is less than its fair value, then the fair value is allocated to all of the Company’s assets and liabilities (including any unrecognized intangible assets) as if the fair value was the purchase price to acquire the Company. The excess of the fair value over the amounts assigned to the Company’s assets and liabilities is the implied fair value of the goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company did not record any charges related to goodwill impairment during the years ended December 31, 2011 and 2010.
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 is remeasured at each reporting period, with any changes in the fair value recorded as income or expense, and such remeasurements resulted in net gains of approximately $10.6 million and $7.9 million for the years ended December 31, 2011 and 2010, respectively. The potential undiscounted amount of all future cash payments that the Company could be required to make under the contingent consideration agreements is between $0 and $58.9 million as of December 31, 2011.
Equity-classified contingent consideration issued in business combinations, is recognized at fair value as of the acquisition date and not adjusted in subsequent periods.


46


Research and Development
The Company expenses the cost of research and development as incurred. Research and development expenses consist primarily of expenses for research and development staff, the cost of certain third-party service providers and allocated overhead.
Software Development Costs
The Company capitalizes qualifying computer software costs that are incurred during the application development stage and amortizes them over the software’s estimated useful life. Due to the Company’s delivery of product releases on a monthly basis, there have been no material qualifying costs incurred during the application development stage in any of the periods presented. On occasion, the Company allows customers to take possession of the Company’s software products. Accordingly, the capitalization of software development costs for software to be sold, leased, or otherwise marketed begins upon the establishment of technological feasibility, which is generally the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. To date, software development costs incurred between completion of a working prototype and general availability of the related product have not been material.
Income Taxes
The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of our assets and liabilities, and for net operating loss and tax credit carryforwards.
Further, compliance with income tax regulations requires the Company to make decisions relating to the transfer pricing of revenue and expenses between each of its legal entities that are located in several countries. The Company’s determinations include many decisions based on management’s knowledge of the underlying assets of the business, the legal ownership of these assets, and the ultimate transactions conducted with customers and other third parties. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple tax jurisdictions. The Company may be periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews may include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, the Company records estimated reserves when it is not more likely than not that an uncertain tax position will be sustained upon examination by a taxing authority. These estimates are subject to change.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with remaining maturities at the date of purchase of 90 days or less to be cash equivalents. Cash and cash equivalents, which consist of cash on deposit with banks and money market funds, are stated at cost, which approximates fair value.
Marketable Securities
The Company classifies its marketable securities as available-for-sale. Accordingly, available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a separate component of stockholders’ equity. The cost of securities sold is based on the specific-identification method. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included as a component of interest income and other, net. Interest on securities classified as available-for-sale is included as a component of interest income. As the Company’s marketable securities are considered by the Company as available to support current operations, these securities have been classified as current assets on the consolidated balance sheets.

Restricted Cash
The Company’s restricted cash balances at December 31, 2011 and 2010 were as follows (in thousands):
 
As of December 31,
 
2011
 
2010
Certificates of deposit and guarantees in connection with corporate leases
$
1,529

 
$
506

Credit card deposits
7

 
407

 
$
1,536

 
$
913


47


Fair Value of Financial Instruments
The Company accounts for certain financial instruments 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. These levels are:
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.
Observable inputs are based on market data obtained from independent sources. Unobservable inputs reflect the Company's assessment of the assumptions market participants would use to value certain financial instruments. Refer to note 6, "Fair Value Measurements" for additional information.
Allowance for Doubtful Accounts
The Company has established an allowance for doubtful accounts based on a review of the current status of existing accounts receivable by customer and historical collection experience. The allowance for doubtful accounts increased by $1.5 million in the year ended December 31, 2011 and decreased by $0.1 million in the year ended December 31, 2010, respectively. Write-offs of accounts receivable and recoveries were not significant during the years ended December 31, 2011, 2010, and 2009.
 
Balance at Beginning of
Period
 
Additions Charged to
Costs and Expenses
 
Deductions (1)
 
Balance at End of Period
2009
$
727

 
$
701

 
$
(267
)
 
$
1,161

2010
1,161

 
316

 
(438
)
 
1,039

2011
1,039

 
2,459

 
(929
)
 
2,569

_____________________
(1)
Represents amounts written off against the allowance, less recoveries.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related asset, or group of assets, over the remaining lives against their respective carrying amounts. Long-lived assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amounts of these assets may not be recoverable. If this review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of these assets is reduced to its fair value.
In addition to the recoverability assessment, the Company routinely reviews the remaining estimated useful lives of its long-lived assets. Any reduction in the useful life assumption would result in increased depreciation and amortization expense in the period when those determinations are made, as well as in subsequent periods.
Leases
The Company leases office space under non-cancelable operating leases. The terms of certain lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on a straight-line basis over the lease period and accrues for rent expense incurred but not yet paid.
Under certain leases, the Company also received allowances for leasehold improvements. These allowances are lease incentives, which have been recognized as a liability and are being amortized on a straight-line basis over the term of the lease as a component of minimum rental expense.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Equipment under capital leases and leasehold improvements are amortized over their respective estimated useful lives or the remaining lease

48


term, whichever is shorter.
When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from their respective accounts and any gain or loss on that sale or retirement is reflected in interest income (expense) and other, net.
Concentrations of Credit Risk and Significant Customers and Suppliers
Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities, restricted cash and accounts receivable. The Company maintains an allowance for doubtful accounts. The allowance is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with problem accounts. The Company does not require its customers to provide collateral. Credit risk arising from accounts receivable is mitigated due to the large number of customers comprising the Company’s customer base and their dispersion across various industries. No customer represented more than 10% of revenue in any of the three years in the period ended December 31, 2011.
As of December 31, 2011, the Company had international subsidiaries in over twenty countries. Long-lived assets at these subsidiaries were not significant as of December 31, 2011 or 2010. Revenue by geographic region, based on billing address of the customer, was as follows (in thousands):
 
Year Ended December 31,
 
2011
 
2010
 
2009
Americas
$
251,472

 
$
169,912

 
$
132,171

Europe
56,352

 
28,514

 
16,401

Asia Pacific
20,123

 
7,500

 
4,482

 
$
327,947

 
$
205,926

 
$
153,054

The Company’s revenue from customers based in the United States was $232.6 million, $160.2 million and $126.6 million for the years ended December 31, 2011, 2010 and 2009 and these amounts are included in the Americas line in the table above.
The Company’s cash balances are maintained at several banks. Accounts located in the United States are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. Certain operating cash accounts may exceed the FDIC limits.

The Company serves its customers and users from various hosting facilities, located throughout the United States, The Netherlands, Australia, and China. The Company has internal procedures to restore services in the event of disasters at its current hosting facilities. Even with these procedures for disaster recovery in place, the Company’s service could be significantly interrupted during the implementation of the procedures to restore services.
Foreign Currency Translation
The functional currency of the Company’s foreign subsidiaries is the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component of stockholders’ equity. Income and expense accounts are translated into U.S. dollars at average rates of exchange prevailing during the periods presented. All assets and liabilities are translated into U.S. dollars at the respective exchange rates in effect on the consolidated balance sheet dates. Foreign currency transaction gains and losses are included in net loss. For the years ended December 31, 2011 and 2010, the Company recognized unrealized foreign exchange gains of $0.2 million and $5.0 million, respectively, related to an intercompany loan entered into during 2010. There was no intercompany loan during fiscal 2009.
Advertising Expenses
Advertising is expensed as incurred as a component of sales and marketing expenses on the consolidated statement of operations. Advertising expenses were $2.8 million, $2.3 million and $3.8 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Accounting for Stock-Based Compensation
The Company measures all share-based payments, including grants of stock options and restricted stock units ("RSUs"), based on the fair value of the awards on the grant date and recognizes expense in the Company’s consolidated statement of operations over the period during which the recipient is required to perform service in exchange for the stock options and RSUs (generally over the vesting period of the awards). The Company uses the Black-Scholes pricing model to determine the fair

49


values of the stock options on the grant dates. To estimate the fair values of RSUs, the Company utilizes the closing market price of its common stock on the date of the awards. Furthermore, the Company estimates the forfeiture rate based on historical experience of its stock-based awards. The Company amortizes the fair values of share-based payments on a straight-line basis for the majority of its awards. The Company amortizes the fair values of market- and performance-condition RSUs under the graded vesting method.
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 decreased by $0.3 million and net unrealized gain on marketable securities increased by $0.1 million are included in accumulated other comprehensive income for fiscal year 2011. Accumulated other comprehensive income has been reflected in stockholders’ equity.
The components of accumulated other comprehensive income were as follows (in thousands):
 
As of
December 31,
 
2011
 
2010
Foreign currency translation and other adjustments
$
2,997

 
$
3,256

Net unrealized gain on marketable securities
77

 
2

 
$
3,074

 
$
3,258

Recent Accounting Pronouncements
In 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 financial position or results of operations.

In 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 adoption of this accounting update will have no impact on the Company's financial position or results of operations.

In 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 does not expect the adoption of ASU No. 2011-08 will have a material impact on the Company's financial position or results of operations.

3. Business Combinations

Jobs2web, Inc.
On December 9, 2011, the Company acquired all issued and outstanding shares of Jobs2web, Inc. (“Jobs2web”), a provider of hosted recruitment marketing platforms, for $111.9 million in cash at closing, including $2.9 million in cash to buy out vested stock options and warrants. The Company also assumed certain unvested employee stock options that represent an aggregate of 125,980 shares of the Company's common stock. The fair value of the assumed stock options was $3.6 million, of

50


which $1.4 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, $11.2 million is held in the form of cash in escrow to secure indemnification obligations and changes to the purchase consideration due to finalizing net working capital adjustments.

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 (in thousands, except shares):
 
Shares Issued
 
Total Purchase 
Consideration
 
Net Tangible Liabilities
Assumed
 
Purchased Intangible
Assets
 
Goodwill
Jobs2web

 
$
113,236

 
$
(10,723
)
 
$
27,400

 
$
96,559


The fair value of purchase consideration and the purchase price allocation are preliminary as of the reporting date as the Company is in the process of obtaining additional information required to finalize the fair value of acquired intangible assets. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill, and could affect the amounts reported in the Company's consolidated statement of operations in future periods. All changes as a result of finalizing the value of purchase consideration or purchase price allocation will be made retrospectively to the acquisition date.

Transaction costs associated with Jobs2web were expensed as incurred, and such transaction costs were $0.9 million for the twelve months ended December 31, 2011 and are included in general and administrative expenses on the consolidated statement of operations.

The total weighted-average amortization period for intangible assets is 7.4 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 recorded in connection with this transaction is primarily related to the ability of Jobs2web 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.

Jobs2web'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.

Plateau Systems, Ltd.
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 following table summarizes the consideration paid for Plateau and the fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):
 

51


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 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 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.

The following table presents details of the Company's acquired intangible assets of Plateau at the acquisition date (in thousands, except years):
 
Weighted-
Average Useful
Life (in Years)
 
Fair Value
Technology
6
 
$
21,100

Customer relationships
7
 
43,900

Total
 
 
$
65,000


Plateau's results of operations have been included in the Company's consolidated financial statements subsequent to the date of acquisition. The Plateau acquisition contributed $18.0 million to our total revenues for the year ended December 31, 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 $5.7 million and restructuring costs of $1.8 million for the year ended December 31, 2011. The following table presents these costs included in the Company's consolidated statement of operations:

52


 
Year Ended
 
December 31,
(in thousands)
2011
Subscription and support
$
30

Professional services and other
144

Sales and marketing
488

Research and development
491

General and administrative
6,382

Total
$
7,535


Refer to note 11, "Income Taxes” regarding the tax effect of the acquisition on the Company's 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 year ended December 31, 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 six months ended December 31, 2011 consolidated for both companies.

The unaudited pro forma financial information for the year ended December 31, 2010 combined the historical results of the Company for the year ended December 31, 2010 and the historical results of Plateau for the twelve months ended November 30, 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.
 
Year Ended
 
December 31,
(in thousands, except per share data)
2011
 
2010
Total revenues
$
364,467

 
$
270,168

Net income (loss)
$
(40,268
)