S-1 1 c15503sv1.htm REGISTRATION STATEMENT sv1
 

As filed with the Securities and Exchange Commission on September 7, 2007
Registration No. 333-          
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
 
 
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
APRIMO, INCORPORATED
(Exact name of registrant as specified in its charter)
 
 
 
 
         
Delaware   7389   35-2052509
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
 
 
 
900 East 96th Street, Suite 400
Indianapolis, Indiana 46240
(317) 803-4300
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
 
 
 
 
William M. Godfrey
Chief Executive Officer
Aprimo, Incorporated
900 East 96th Street, Suite 400
Indianapolis, Indiana 46240
(317) 803-4300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
 
 
 
 
Copies to:
 
     
John J. Egan, III, Esq.
David J. Powers, Esq.
Goodwin Procter LLP
Exchange Place
53 State Street
Boston, Massachusetts 02109
(617) 570-1000
  Kenneth R. McVay, Esq.
Gregg A. Griner, Esq.
Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP
220 West 42nd
Street
New York, New York 10036
(212) 730-8113
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this registration statement becomes effective.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
    Amount of
Title of Each Class of
    Aggregate
    Registration
Securities to be Registered     Offering Price(1)     Fee(2)
Common Stock, $0.001 par value per share
    $50,000,000     $1,535
             
 
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.
 
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price and includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine.
 


 

The information contained in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any state where the offer or sale is not permitted.
 
PROSPECTUS (Subject to Completion)
Issued          , 2007
 
           Shares
 
(APRIMO LOGO)
 
COMMON STOCK
 
 
 
 
Aprimo, Incorporated is offering           shares of its common stock. This is our initial public offering, and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $     and $      per share.
 
 
 
 
We have applied to have our common stock listed on the NASDAQ Global Market under the symbol “MKTG.”
 
 
 
 
Investing in our common stock involves risks. See “Risk Factors” beginning on page 8.
 
 
 
 
PRICE $     A SHARE
 
 
 
 
                         
          Underwriting
       
    Price to
    Discounts and
    Proceeds to
 
   
Public
   
Commissions
   
Aprimo
 
 
Per Share
   $              $              $          
Total
  $             $             $          
 
We and certain selling stockholders have granted the underwriters the right to purchase up to an additional           shares of common stock to cover over-allotments.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on          , 2007.
 
 
 
 
MORGAN STANLEY THOMAS WEISEL PARTNERS LLC
 
 
 
 
WILLIAM BLAIR & COMPANY CANACCORD ADAMS
 
          , 2007


 

 
TABLE OF CONTENTS
 
         
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  110
  F-1
 
 
 
You should rely only on the information contained in this prospectus, any free writing prospectus prepared by us or on behalf of us or any information to which we have referred you. We have not authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell, and are seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.
 
Until          , 25 days after the commencement of this offering, all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
 
For investors outside the United States.  Neither we or the selling stockholders or any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.
 
 
 
 
We use various trademarks and tradenames in our business, including “Aprimo,” “Aprimo Marketing,” “Aprimo Enterprise,” “Aprimo Professional,” “Aprimo Agency,” “Marketing Value Chain,” “Enterprise Marketing Backbone,” “OptiSelect” and “Aprimo Knowledgebase.” This prospectus also contains trademarks, including “Magic Quadrant,” and tradenames of other companies that are the property of their respective holders.
 
This prospectus contains estimates and other statistical data, research or viewpoints based on information from independent parties, including Gartner, Inc., or Gartner, and International Data Corporation, or IDC, and made by us relating to market size and growth and other industry data, which are not representations of fact. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this prospectus, and, accordingly, we cannot guarantee their accuracy or completeness. Each Gartner report speaks as of its original publication date and is subject to change without notice. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.


 

 
PROSPECTUS SUMMARY
 
This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read the following summary together with all of the more detailed information regarding us and our common stock being sold in the offering, including our financial statements and the related notes, appearing elsewhere in this prospectus. Unless we state otherwise, “Aprimo,” the “Company,” “we,” “us,” and “our” refer to Aprimo, Incorporated, a Delaware corporation.
 
APRIMO, INCORPORATED
 
Our Company
 
We are a leading provider of marketing software and services that automate a broad spectrum of marketing processes and enhance the productivity and performance of marketing organizations. Our integrated suite of applications, Aprimo Enterprise, improves alignment across the Marketing Value Chain, which we define as the business processes that connect enterprise marketing departments with external marketing suppliers and enable the execution of marketing programs across multiple channels. Aprimo Enterprise is based on the Enterprise Marketing Backbone, our innovative service oriented architecture, which automates and unifies a broad range of marketing processes. We provide solutions primarily to large enterprises and medium-sized businesses worldwide, including AT&T Inc., Bank of America, N.A., Capital One Services, Inc., The Home Depot U.S.A. Inc., Honda Motor Europe Ltd., Intel Corporation, Merck & Co., Inc., Nestlé S.A., Sprint Nextel Corporation, Target Corporation, Toyota Motor Corporation and Warner Bros. Entertainment, Inc.
 
Aprimo Enterprise, our flagship solution, enables marketing professionals to better manage and optimize marketing expenditures and enhance their productivity by digitizing marketing processes from end to end. Our solutions meet the unique challenges inherent in the day-to-day activities of marketing professionals, which include managing assets and content, maintaining brand consistency, tracking expenditures, optimizing customer contacts, measuring advertising campaign returns and increasing the volume of high-value sales leads. By implementing our solutions, we believe our customers benefit from increased revenue through more leads and higher response rates, lower costs through the elimination of expensive rework, reduced time to market through streamlined production and approval workflows and improved efficiency of overall marketing operations through automated resource planning and management.
 
A significant portion of our revenue is contracted prior to the period in which it is recorded. For example, by the end of the fourth quarter of 2006, we had contracted over 80% of our revenue for the first quarter of 2007. We expect this trend to continue.
 
We increased our revenue from $30.5 million in 2005 to $51.6 million in 2006, representing a growth rate of 69%. Our revenue increased from $22.8 million for the six months ended June 30, 2006 to $29.8 million for the six months ended June 30, 2007, representing 31% year-over-year growth. We generated approximately 80% of our revenue in 2006 from customers in the United States and approximately 20% from international customers.
 
Our Industry
 
Marketing is one of the most critical enterprise functions, with worldwide expenditures on marketing activities exceeding $1 trillion annually. Marketing professionals are responsible for a wide range of activities, including the development of product strategy, brand and company promotion, and pricing and channel placement programs. In carrying out these responsibilities, marketing professionals must manage and analyze significant amounts of market data, optimize their business processes across the Marketing Value Chain and make critical strategic decisions in real time. Despite this complexity, few organizations have effectively automated their marketing functions, and in many cases, marketing professionals continue to rely on manual processes to manage marketing activities and communicate with marketing suppliers.
 
Our large and growing total addressable market includes inter-related market segments such as Enterprise Marketing Management, Marketing Resource Management, Marketing Analytics, Campaign Management,


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Marketing Performance Management and Lead Management. Our total opportunity is further enhanced by the demand for integrated marketing platforms as opposed to point products, our ability to integrate the marketing organization and other enterprise functions, and our deployments that extend beyond the enterprise to connect third-party marketing suppliers directly with corporate marketing groups. According to a 2006 Gartner report, more than 50% of the marketing staff within global companies will use enterprise software by 2010, compared with fewer than 20% that do so today.
 
We expect our growth to continue due to evolving challenges faced by marketing organizations, including:
 
Increasing Challenges of the Marketplace.  Marketing professionals operate in an increasingly challenging environment as consumers use technologies such as DVRs, commercial free radio and SPAM filters to limit the number of marketing messages that they receive. At the same time, the number of media channels continues to grow rapidly and includes both online and offline channels. In addition, the total number of products being marketed to consumers is increasing as enterprises develop more personalized products and reduce cycle times for new product introductions.
 
Growing Complexity of the Marketing Value Chain.  The Marketing Value Chain consists of an increasingly complicated network of entities including corporate marketing groups, external marketing suppliers, numerous channels, customers and prospective customers. Given the complexity of the Marketing Value Chain, marketing professionals face difficult challenges which include managing assets and content, maintaining brand consistency, tracking expenditures, optimizing customer contacts, measuring advertising campaign results and increasing the volume of high-value sales leads.
 
Greater Accountability of the Marketing Organization.  Organizations are placing greater attention on the transparency of marketing expenditures and risk management due to increasing legal and regulatory compliance requirements, including the Sarbanes-Oxley Act, “no call” lists and anti-spam laws. Additionally, marketing expenditures increasingly must demonstrate that they are producing an expected level of return on investment.
 
Lack of Flexible, Comprehensive Marketing Platforms.  Most disciplines within the enterprise, such as finance, sales and human resources, have implemented comprehensive software solutions to automate their workflows, business processes and data collection requirements. Marketing organizations have historically lacked a unified platform to manage and automate marketing activities, and most continue to rely on manual processes, internally developed software, office productivity tools and numerous other point products.
 
Integration of Traditional Marketing Channels and the Internet.  While online marketing expenditures remain relatively small compared to traditional marketing expenditures, online advertising is projected to approach 9% of total advertising expenditures by 2011, according to a 2007 IDC report, and is critical to the success of most marketing efforts. As a result, marketing professionals require technology solutions that can operate across traditional mass media and direct marketing channels, as well as online channels within an integrated platform.
 
Our Solution
 
We deliver a comprehensive software solution that enables our customers to automate their entire Marketing Value Chain, thereby increasing their marketing productivity and enhancing overall marketing performance. Aprimo Enterprise is a scalable platform that digitizes marketing processes from end to end through six main solution sets: Planning and Financial Management, Production Management and Workflow, Brand Content Management, Campaign Management and Planning, Lead Management and B2B Marketing. Our solutions are highly configurable, provide role-based functionality to all users, and are highly scalable with implementations generally ranging from 10 to 5,000 users.
 
By implementing our solutions, we believe our customers benefit from:
 
  •  revenue gains through more sophisticated and effective marketing programs;
 
  •  cost savings through optimized investment and resource allocation; and
 
  •  real-time measurement and insight into marketing performance, which improves the productivity of the marketing organization.


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Our Competitive Strengths
 
We believe that our leading market position results from several key competitive strengths, including:
 
Unified Platform for Marketing.  Our applications are built upon a unified platform that connects and automates communications, data and business processes across thousands of users located within numerous disparate groups in the marketing organization. Our flexible platform allows our customers to improve the productivity of their marketing organizations, and our role-based applications can be rapidly configured to meet the specific needs of marketing organizations within numerous industry verticals.
 
Comprehensive Service Oriented Architecture.  The Enterprise Marketing Backbone, our innovative service oriented architecture, underlies each of our solution sets and enables them to function as a unified application by providing core services such as calendar and workflow to support a wide variety of marketing activities. We believe our customers benefit from increased agility within their marketing organizations as they can rapidly and cost-effectively assemble and modify business processes in response to changing market requirements. The Enterprise Marketing Backbone provides real-time open connectivity to data located in various enterprise applications and databases, enabling marketing professionals to automatically synchronize their databases to financial, sales and other enterprise systems.
 
Robust Marketing Knowledgebase.  The foundation for our enterprise marketing platform is the Aprimo Knowledgebase, a comprehensive data repository that captures critical marketing information about customers, financials, best practice workflows, calendars, activities, assets, sales and suppliers. It serves to accelerate customer implementations, provide access to best practices, and ensure consistent delivery of functionality. The Aprimo Knowledgebase supports real-time operations and records all activities and transactions, providing customers with an auditable system of record for all of their activities.
 
Exclusive Focus on Providing Marketing Technology.  Our innovative portfolio of over 30 products functions within our common platform and is exclusively focused on meeting the broad and varied needs of marketing professionals. We are focused on continuing to develop and improve our marketing technology, enhancing our customers’ productivity and providing them with unique marketing insights. Accordingly, Gartner has recognized us as a leader in providing Marketing Resource Management software and services and as a visionary in the Enterprise Marketing Management software space.
 
Pervasive Deployments within our Customer Base.  Our customers have broadly deployed our solutions and use them throughout their marketing organizations. Our products have been licensed to over 75,000 marketing professionals and other users located in more than 40 countries and are built on a common, universal architecture that supports multiple languages, data formats and currencies. In contrast to point solutions with narrow user bases, our solutions are broadly adopted and widely used within our customers’ businesses, which creates significant switching costs.
 
Our Growth Strategy
 
We intend to strengthen our position as a leading provider of superior technology solutions for marketing organizations. The key elements of our growth strategy include:
 
Continue to Grow our Customer Base.  Our customer base represents a small fraction of the enterprises that could benefit from our solutions, creating a large opportunity to grow our customer base as we replace custom developed, in-house software and point products. We intend to target new customers through our expanding sales force and growing network of partners.
 
Further Expand our Existing Customer Relationships.  In 2006, less than 20% of our new customers purchased all six of the Aprimo Enterprise solution sets, providing us with a substantial opportunity to cross sell additional solution sets to existing customers. Approximately 14% of our customers have been using Aprimo Enterprise for at least the last three years. These customers have collectively increased their investment in our solutions by approximately 300% following their initial purchases. Our customer lifetime value grows as our customers deploy our software to additional users within their marketing organizations, purchase additional


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solution sets and expand our platform’s footprint across their entire Marketing Value Chain, including to additional corporate marketing departments, business units, geographies and marketing suppliers.
 
Maintain Focus on Developing Innovative Solutions.  As early adopters of software marketing solutions gain significant competitive advantages over their competitors, accelerate their revenue growth and reduce their costs, we believe enterprises that have yet to implement marketing software will do so to better compete. We plan to continue to invest in developing new products which will create additional entry points into the Marketing Value Chain and significant cross sell opportunities within our existing customer base.
 
Continue to Strengthen and Expand our Partner Relationships.  We have developed strategic relationships with systems integrators, marketing service providers and complementary software vendors to increase the distribution and market awareness of our solutions. Our partners led or participated in approximately 50% of our sales transactions for Aprimo Enterprise and Aprimo Agency in 2006 and a significant and growing percentage of our deployments. We believe we have a significant opportunity to drive revenue growth, expand our global market reach and increase our delivery capacity through partnerships.
 
Grow our International Operations.  We believe there is significant global demand for our solutions and a large market opportunity located outside of the United States. In 2006, we generated approximately 20% of our revenue from international customers. While we expect this percentage to stay relatively constant in the near term, our strategy is to expand our sales in Europe, the Middle East, Africa and Asia-Pacific by expanding our direct sales force and partner relationships in these locations.
 
Selectively Pursue Acquisitions of Complementary Businesses and Technologies.  We acquired Then, Limited, a provider of marketing software located in the United Kingdom, and the enterprise marketing solutions business unit of DoubleClick, Inc. in 2004 and 2005, respectively, and we plan to selectively pursue acquisitions of businesses and technologies that will extend our solution sets, accelerate our customer and revenue growth, and provide access to new and emerging markets.
 
Risk Factors
 
Our business is subject to numerous risks, which are highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. Principal risks of our business include:
 
  •  we operate in an emerging market, which may make it difficult to evaluate our business and future prospects and may increase the risk of an investment in our common stock;
 
  •  our business model is evolving to emphasize recurring license revenue, and this change carries with it a number of risks that may have a negative effect on our business, results of operations and financial condition;
 
  •  we face increased competition from enterprise, infrastructure and other marketing management software companies, as well as internally developed solutions, which may have a negative effect on our ability to add new customers, retain existing customers and grow our business; and
 
  •  if we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and changing customer needs, our solutions may become less competitive or obsolete.
 
 
Our Corporate Information
 
We were incorporated as an Indiana corporation in 1998. We changed our name from Genesis Technologies, Inc. to Attune Incorporated and from Attune Incorporated to Aprimo, Incorporated in 1998 and 1999, respectively, and we reincorporated as a Delaware corporation on December 15, 2000.
 
Our corporate headquarters is located at 900 East 96th Street, Suite 400, Indianapolis, Indiana 46240, and our telephone number is (317) 803-4300. Our website is www.aprimo.com. Information contained on our website does not constitute a part of this prospectus.


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THE OFFERING
 
Common stock offered by Aprimo                shares
 
Common stock to be outstanding after this offering
               shares
 
Over-allotment option offered by Aprimo and certain selling stockholders
               shares
 
Use of proceeds We expect our net proceeds from the offering to be approximately $     . We intend to use the net proceeds to us from this offering for working capital and other general corporate purposes, including financing the development of new solutions, sales and marketing activities, and capital expenditures. We may use a portion of the net proceeds to us to expand our current business through acquisitions of other businesses, products and technologies. We will not receive any proceeds from the sale of shares by the selling stockholders pursuant to the exercise of the underwriters’ over-allotment option. See “Use of Proceeds” for more information.
 
Proposed NASDAQ Global Market symbol
“MKTG”
 
The number of shares of our common stock to be outstanding following this offering is based on 78,368,803 shares of our common stock outstanding as of June 30, 2007 and excludes:
 
  •  10,185,113 shares of common stock issuable upon exercise of options outstanding as of June 30, 2007 under our 1998 Option Plan, at a weighted average exercise price of $0.40 per share;
 
  •  2,456,335 shares of common stock reserved as of June 30, 2007 for future issuance under our 1998 Option Plan; and
 
  •  1,638,158 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2007 at a weighted average exercise price of $1.16 per share.
 
Unless otherwise indicated, this prospectus reflects and assumes the following:
 
  •  the automatic conversion of all outstanding shares of our preferred stock into 39,335,471 shares of common stock upon the closing of the offering;
 
  •  except as provided above, no exercise of outstanding options or outstanding warrants after June 30, 2007;
 
  •  the conversion, but not the exercise, of all outstanding warrants to purchase shares of our Series A2 preferred stock into warrants to purchase an aggregate of 829,315 shares of common stock, effective upon completion of this offering;
 
  •  the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated by-laws immediately prior to the effectiveness of this offering; and
 
  •  no exercise by the underwriters of their over-allotment option.


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SUMMARY CONSOLIDATED FINANCIAL DATA
 
The tables below summarize our consolidated financial information for the periods indicated. You should read the following information together with the more detailed information contained in “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus. The results for the six months ended June 30, 2007 are not necessarily indicative of the results expected for the year ended December 31, 2007 or for any other future period.
 
                                         
          Six Months Ended
 
    Year Ended December 31,     June 30,  
    2004     2005     2006     2006     2007  
                      (unaudited)        
    (in thousands, except share and per share data)  
 
Consolidated Statement of Operations Data:
                                       
Revenue:
                                       
Software, maintenance and hosting
  $ 9,516     $ 15,446     $ 27,076     $ 12,019     $ 16,955  
Professional services
    10,351       15,066       24,516       10,819       12,859  
                                         
Total revenue
    19,867       30,512       51,592       22,838       29,814  
Cost of revenue:
                                       
Software, maintenance and hosting
    946       1,621       2,547       1,243       1,618  
Amortization — technology
    198       254       82       40       40  
Professional services
    7,056       11,802       15,758       8,068       8,821  
                                         
Total cost of revenue
    8,200       13,677       18,387       9,351       10,479  
                                         
Gross profit
    11,667       16,835       33,205       13,487       19,335  
Operating expenses:
                                       
Sales and marketing
    6,975       10,749       16,882       7,582       12,009  
Research and development
    3,478       5,080       7,580       3,904       4,853  
General and administrative
    2,346       3,778       5,287       2,454       3,819  
Amortization — other intangibles
    128       629       942       468       479  
                                         
Total operating expenses
    12,927       20,236       30,691       14,408       21,160  
                                         
Income (loss) from operations
    (1,260 )     (3,401 )     2,514       (921 )     (1,825 )
Other income (expense):
                                       
Interest income
    67       101       78       61       120  
Interest expense
    (54 )     (1,446 )     (236 )     (148 )     (28 )
Other income (expense)
    173       (251 )     (209 )     (130 )     (171 )
                                         
Income (loss) before income taxes
    (1,074 )     (4,997 )     2,147       (1,138 )     (1,904 )
Income tax benefit (expense)
    (14 )     237                    
                                         
Net income (loss)
    (1,088 )     (4,760 )     2,147       (1,138 )     (1,904 )
Preferred stock dividends
    (3,009 )     (8,565 )                  
                                         
Net income (loss) applicable to common stockholders
  $ (4,097 )   $ (13,325 )   $ 2,147     $ (1,138 )   $ (1,904 )
                                         
Net income (loss) per common share:
                                       
Basic
  $ (0.21 )   $ (0.66 )   $ 0.06     $ (0.03 )   $ (0.05 )
Diluted
    (0.21 )     (0.66 )     0.03       (0.03 )     (0.05 )
Weighted average common shares outstanding:
                                       
Basic
    19,435,013       20,069,108       38,576,987       38,494,915       38,987,570  
Diluted
    19,435,013       20,069,108       78,530,347       38,494,915       38,987,570  
                                         
Pro Forma(1) (unaudited):
                                       
Net income (loss) per common share:
                                       
Basic
                  $ 0.03             $ (0.02 )
                                         
Diluted
                  $ 0.03             $ (0.02 )
                                         
Weighted average common shares outstanding:
                                       
Basic
                    77,912,458               78,323,041  
Diluted
                    78,692,314               78,323,041  
 
(footnotes appear on following page)


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          Six Months Ended
 
    Year Ended December 31,     June 30,  
    2004     2005     2006     2006     2007  
    (unaudited)  
    (in thousands)  
Other GAAP and Non-GAAP Financial Data:
                                       
Recurring revenue(2)
  $ 4,451     $ 8,426     $ 14,573     $ 6,764     $ 10,419  
 
                         
    As of June 30, 2007  
                Pro Forma
 
    Actual     Pro Forma(3)     As Adjusted(4)  
          (unaudited)  
    (in thousands)  
 
Consolidated Balance Sheet Data:
                       
Cash and cash equivalents
  $ 6,036     $ 6,036     $             
Total assets
    34,838       34,838          
Total liabilities
    19,407       18,778          
Total convertible redeemable preferred stock
    46,445              
Total stockholders’ equity (deficit)
    (31,014 )     16,060          
 
 
(1) Pro forma to give effect to the conversion of all outstanding shares of our convertible redeemable preferred stock into shares of our common stock immediately prior to the completion of this offering.
 
(2) Recurring revenue is revenue derived from term licenses, maintenance and hosting agreements.
 
(3) Pro forma to reflect (i) the conversion of all outstanding shares of our convertible redeemable preferred stock into shares of our common stock immediately prior to the completion of this offering and (ii) the conversion, but not the exercise, of all outstanding warrants to purchase shares of our Series A2 preferred stock into warrants to purchase common stock upon completion.
 
(4) Pro forma as adjusted to reflect (i) the conversion of all outstanding shares of our convertible redeemable preferred stock into shares of our common stock immediately prior to this offering, (ii) the conversion, but not the exercise, of all outstanding warrants to purchase shares of our Series A2 preferred stock into warrants to purchase common stock upon completion and (iii) our receipt of estimated net proceeds of $      million from our sale of           shares of common stock in this offering at an assumed public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.


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RISK FACTORS
 
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in our common stock. If any of the following risks were to materialize, our business, financial condition and results of operations would suffer. The trading price of our common stock could decline as a result of any of these risks, and you could lose part or all of your investment in our common stock. You should read the section entitled “Forward-Looking Statements” immediately following these risk factors for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus.
 
Risks Related To Our Business
 
We operate in an emerging market which may make it difficult to evaluate our business and future prospects and may increase the risk of your investment.
 
The market for software designed to manage the broad range of specific activities relevant for marketing professionals is relatively new and emerging, making our business and future prospects difficult to evaluate. It is also uncertain whether our solutions will achieve and sustain high levels of market acceptance. Some businesses may be reluctant or unwilling to implement our marketing management solutions for a variety of reasons. Many companies have invested substantial personnel and financial resources in their marketing departments in order to develop internal solutions for managing their marketing activities and those departments may be reluctant or unwilling to migrate to our software. Other businesses may elect to manage their marketing processes through software solutions obtained from their existing enterprise resource planning or infrastructure software providers, whose principal products are designed largely to address one or more functional areas other than marketing. These enterprise products may appeal to customers that wish to limit the number of software vendors on which they rely and the number of different types of software used to run their businesses. Widespread market acceptance of our solutions is critical to the success of our business and will require that we overcome the bias some businesses have for marketing management software solutions that are developed internally or obtained from established software vendors. Other factors that may affect market acceptance include:
 
  •  customer concerns with entrusting a third party to store and manage their data;
 
  •  our ability to maintain high levels of customer satisfaction; and
 
  •  the price, performance and availability of competing products and services.
 
You must consider our business and future prospects in light of the challenges, risks and difficulties we encounter in the new and rapidly evolving market for enterprise marketing management software. If we are unable to successfully address any of these challenges, risks and difficulties, including the other risks related to our business and industry described below, our business, results of operations and financial condition will be adversely affected.
 
Our business model is evolving to emphasize recurring license revenue. This change carries with it a number of risks that may have a negative effect on our business, results of operations and financial condition.
 
In 2006, we changed our sales methodology and compensation structures to encourage the sales of recurring and on-demand software licenses rather than traditional perpetual license arrangements. We also intend to initiate other programs designed to increase the percentage of recurring licenses sales and decrease the percentage of perpetual licenses sales, which may negatively and materially affect our future operating results. Because recurring license arrangements result in longer periods of time over which revenue from a customer arrangement is recognized as compared to current perpetual license recognition, we may recognize less revenue in any given period than we would have had we continued with a predominantly perpetual license business model. Similarly, a decline in new or renewed recurring licenses in any one quarter will not necessarily be reflected fully in the total revenue for that quarter and may negatively affect our revenue in future quarters. Differences in the mix of our recurring license revenue and perpetual license revenue could cause our operating results for a quarter to vary from the expectations of our investors and market analysts to react negatively toward our common stock, which could materially and adversely affect the price of our common stock. In addition, our recurring license model makes it


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difficult for us to increase our revenue rapidly through additional sales in any period, as revenue from new customers must be recognized over the applicable contract term. Our recurring revenue strategy also carries a number of additional risks, including:
 
  •  potential for increased customer attrition;
 
  •  potential for lack of customer acceptance of the recurring license revenue model of operations,
 
  •  potential for a decline in our average price per transaction;
 
  •  lack of market penetration; and
 
  •  short-term and long-term decreases, and deferrals, in total revenue.
 
We face increased competition from enterprise application and other marketing management software companies, as well as internally developed solutions, which may have a negative effect on our ability to add new customers, retain existing customers and grow our business.
 
The market for enterprise management marketing software is evolving, highly competitive and fragmented, and we expect competition to increase in the future. We face competition from both businesses that develop their software internally and from other software vendors and service providers. These software vendors and service providers include:
 
  •  marketing management software vendors, such as Unica Corporation and SAS Institute Inc.;
 
  •  enterprise application software vendors, such as SAP AG, Oracle Corporation and Infor Global Solutions;
 
  •  providers of other related marketing services; and
 
  •  new companies entering the enterprise marketing management software market.
 
We expect to face additional competition with the development and expansion of the enterprise marketing management software market. We also expect competition to increase as a result of software industry consolidation, including through possible mergers or partnerships of two or more of our competitors. For example, in January 2006, Oracle Corporation completed its acquisition of Siebel Systems, Inc. We also expect that new competitors, such as enterprise software vendors and online service providers that have traditionally focused on enterprise resource planning or back office applications, will continue to enter the enterprise marketing management market with competing products, which could have an adverse effect on our business, results of operations and financial condition. Many of our current and potential competitors have longer operating histories and larger presence in the general software market, greater name recognition and access to larger customer bases and substantially greater financial, technical, sales and marketing, management, service, support and other resources. As a result, these competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements and also devote greater resources to the promotion and sale of their products and services. To the extent any of our competitors have existing relationships with potential customers, those customers may be unwilling license our products because of those existing relationships with that competitor.
 
Competition could seriously impede our ability to sell additional software solutions and related services on terms favorable to us. Businesses may continue to enhance their internally developed solutions, rather than investing in commercial software such as ours. Our current and potential competitors may develop and market new technologies that render our existing or future products obsolete, unmarketable or less competitive. In addition, if these competitors develop products with similar or superior functionality to our products, we may need to decrease the prices for our products in order to remain competitive. If we are unable to maintain our current product, services and maintenance pricing due to competitive pressures, our margins will be reduced and our operating results will be negatively affected. We cannot assure you that we will be able to compete successfully against current or future competitors or that competitive pressures will not materially adversely affect our business, results of operations and financial condition.


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If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and changing customer needs, our solutions may become less competitive or obsolete.
 
Rapid technological advances and evolving standards in computer hardware, software development and communications infrastructure, changing and increasingly sophisticated customer needs and frequent new product introductions and enhancements characterize the enterprise software market in which we compete. If we are unable to develop new products and services, or to enhance and improve our products and support services in a timely manner or to position and price our products and services to meet market demand, we may not be able to achieve or maintain adequate market acceptance of our products and related services. In addition, standards for network protocols, as well as other industry-adopted and de facto standards for the Internet, are rapidly evolving. We cannot provide any assurance that the standards on which we choose to develop new products will allow us to compete effectively. Consequently, our failure to adapt and respond effectively to technological advances and evolving standards could adversely affect our business results of operations and financial condition.
 
In addition, because our software solutions are intended to operate on a variety of hardware and software platforms, we must continue to modify and enhance our products to keep pace with changes in these platforms. Any inability of our products to operate effectively with existing or future hardware and software platforms could reduce the demand for our products, resulting in customer dissatisfaction and adversely affecting our revenues.
 
The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.
 
To execute our business strategy, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for senior sales executives and engineers with high levels of experience in designing and developing enterprise software solutions. We may not be successful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications.
 
Many of the companies with which we compete for experienced personnel have greater resources than us. In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the stock options or other equity incentives they are to receive in connection with their employment. Significant volatility in the price of our stock may, therefore, adversely affect our ability to attract or retain key employees. Furthermore, changes to accounting principles generally accepted in the United States relating to the expensing of stock options may discourage us from granting the size or type of stock-based compensation that job candidates require to join our company, and may result in our paying additional cash compensation or other stock-based compensation to job candidates to offset reduced stock option grants. If we fail to attract new personnel or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.
 
We have a history of losses, a limited operating history and may not achieve sustained profitability in the future.
 
We generated net losses of $1.1 million in 2004, $4.8 million in 2005 and $1.9 million for the six months ended June 30, 2007. As of June 30, 2007, we had an accumulated deficit of approximately $47.1 million. We commenced operations in July 1998, and we have a limited operating history on which you can base your evaluation of our business, including our ability to increase our revenue or achieve and maintain profitability. We will need to generate and sustain increased revenue levels in future periods in order to sustain profitability, and, even if we do, we may not be able to maintain or increase our level of profitability. We intend to continue to expend significant funds to expand our direct sales force and develop and enhance our software and service solutions and for general corporate purposes, including marketing, services and sales operations, hiring additional personnel, upgrading our infrastructure and expanding into new geographical markets. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenue enough to offset our higher operating expenses. If we are unable to sustain profitability, the market price of our common stock may fall.


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Our quarterly financial position, revenue, operating results and profitability are difficult to predict and may vary significantly from quarter to quarter, which could cause the price of our common stock to decline significantly.
 
We have experienced and expect to continue experiencing significant fluctuations in our quarterly revenues and operating results because of a number of factors, many of which are outside of our control. These factors include:
 
  •  spending priorities and marketing budget cycles of specific customers and prospects;
 
  •  the timing and size of our licensing transactions;
 
  •  the revenue mix between recurring licenses and perpetual licenses;
 
  •  lengthy and unpredictable sales cycles;
 
  •  the timing of development, introduction and market acceptance of new products or product enhancements by us or our competitors;
 
  •  the timing of business and product acquisitions by us or our competitors;
 
  •  product and price competition;
 
  •  the mix of higher-margin license revenue and lower-margin service revenue;
 
  •  software defects or other product quality problems;
 
  •  our ability to hire, train and retain sufficient sales, service and other personnel;
 
  •  the geographical mix of our sales, together with fluctuations in currency exchange rates;
 
  •  fluctuations in economic and financial market conditions, both domestically and in our foreign markets;
 
  •  resolution of, and expenses related to, litigation, claims and other contingencies;
 
  •  expenses related to litigation, claims and other contingencies;
 
  •  complexity of the accounting rules that govern revenue recognition;
 
  •  new services provided by us or our competitors; and
 
  •  seasonal fluctuations in marketing spending.
 
You should not rely solely on quarter-to-quarter comparisons of our results of operations as an indicator of our future results, nor should you rely on other expectations, predictions or projections of our future revenue or other aspects of our results of operations. It is also possible that our results of operations in one or more quarters may fall below the expectations of investors and equity research analysts, in which case the trading price of our common stock is likely to decline.
 
If we fail to forecast our revenues accurately, or if we fail to match our expenditures with corresponding revenues, our results of operations and financial condition could be adversely affected.
 
Because our recent growth has resulted in the rapid expansion of our business, we do not have a long history upon which to base forecasts of future operating revenues. In addition, our ability to generate revenue and profit from our recurring license revenue business model is unproven. Moreover, the lengthy sales cycle for the evaluation and implementation of our solutions may also cause us to experience a delay between increasing operating expenses and the generation of corresponding revenue, if any. Accordingly, we may be unable to prepare accurate internal financial forecasts or replace anticipated revenues that we do not receive as a result of delays arising from these factors, and our results of operations in future reporting periods may be significantly below the expectations of the public market, equity research analysts or investors, which could harm the price of our common stock.


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The long sales cycles for our software solutions may cause our quarterly revenue to fluctuate significantly, which could result in volatility in the price of our common stock.
 
Our software solutions have lengthy sales cycles, which typically extend from four to twelve months and may take more than two years. A customer’s decision to license our products often involves a significant commitment of its resources and a lengthy product evaluation and qualification process. The length of our sales cycle varies depending on the approval processes of the customer, the product being licensed, the nature and size of the project, the customer’s budget, and the involvement of third-party product or service providers. We may incur substantial sales and marketing expense and expend significant management efforts during this time, regardless of whether we make a sale. As a result of the lengthy sales cycles for our products, it is difficult for us to predict the quarter in which a particular sale may occur. Additionally, the effect of significant downturns in sales and market acceptance of our solutions may not be fully reflected in our results of operations until future periods. Accordingly, our revenue and other operating results may vary significantly from quarter to quarter, or year to year, which in turn could cause volatility in the price of our common stock.
 
Our recent growth rates may not be indicative of our future growth.
 
We have substantially expanded our overall business, customer base, headcount and operations in recent periods. However, we cannot guarantee that our recent growth rates will continue. Even if we are able to continue at our recent growth rate, we may be unable to manage our expenses effectively in the future, which may negatively impact our profitability or cause our operating expenses to increase in any particular quarter. Our historic growth has strained, and our expected future growth will continue to strain, our managerial, administrative, operational, financial and other resources. You should not rely on our recent growth rates as an indicator of future growth rates.
 
We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and customer satisfaction or adequately address competitive challenges.
 
We have substantially expanded our headcount and operations in recent periods. We have increased our total number of full-time employees to 355 at June 30, 2007 from 211 at December 31, 2005. To achieve our business objectives, we intend to continue to expand our business at a rapid pace. This expansion has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We anticipate that this expansion will require substantial management effort and significant additional investment in our infrastructure. If we are unable to successfully manage our growth, our business, results of operations and financial condition could be adversely affected.
 
Traditionally, more than half of our annual revenue has been derived from new and expanded relationships with existing customers. Part of the challenge that we expect to face in the course of our expansion is to maintain a high level of customer service and customer satisfaction. To the extent our customer base grows, we will need to expand our account management, customer service and other personnel, and third-party channel partners, in order to provide personalized account management and customer service. If we are not able to continue to provide high levels of customer service, our reputation, as well as our business, results of operations and financial conditions, could be harmed.
 
If we are unable to attract new customers or to sell additional solutions and services to our existing customers, our revenue growth will be adversely affected.
 
To increase our revenues, we must regularly add new customers, sell additional solutions and services to existing customers and encourage existing customers to increase their minimum commitment levels. If our existing and prospective customers do not perceive our services to be of sufficiently high value and quality, we may not be able to attract new customers or increase sales to existing customers and our operating results will be adversely affected.


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Our existing customers may not renew recurring license, maintenance and hosting agreements with us, which could negatively impact our revenue or revenue growth and adversely affect our results of operations and financial condition.
 
We sell our enterprise marketing management software and services pursuant to agreements that generally have an initial license period and annual renewals after that. Our customers have no obligation to renew their agreements for our software and services after the expiration of their initial license period, and we cannot assure you that these agreements will be renewed at the same or higher levels, if at all. Some of our customers have elected not to renew their agreements with us. Moreover, our customers have the right to cancel their service agreements prior to any renewal terms of their agreements. We have limited historical data with respect to customer renewal rates, so we cannot accurately predict future customer renewal rates. Our customer renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our software or services, the prices and features of our software or services, the prices of software or services offered by our competitors, mergers and acquisitions affecting our customer base, budgetary or other concerns, or reductions in our customers’ spending levels. Customer satisfaction or dissatisfaction with our services and software is a critical factor in a customer’s decision whether to renew their agreements. If our customers do not renew their agreements for our software or services or if they renew on less favorable terms, our revenues could decline and our business, results of operations and financial condition could be adversely affected.
 
The loss of key members of our senior management team could prevent us from executing our business strategy.
 
Our success depends largely upon the continued services of our executive officers and other key personnel. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our services and technologies. The loss of one or more of our key employees, including our engineering and technical staff, could seriously harm our business.
 
Our growth and success also depends to a significant extent on our ability to retain William M. Godfrey, our President and Chief Executive Officer, and Robert W. McLaughlin, our Executive Vice President and Chief Technology Officer, both of whom were founders of our company and have developed, engineered and guided the growth and operation of our business since its inception. The loss of the services of either of these persons could inhibit our growth or impair our operations and cause our stock price to decline.
 
Failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solutions.
 
Our ability to increase our customer base and achieve broader market acceptance of our solutions will depend to a significant extent on our ability to expand our sales and marketing operations. We plan to continue expanding our direct sales force and engaging additional third-party channel partners, both domestically and internationally. This expansion will require us to invest significant financial and other resources. Our business will be seriously harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve anticipated revenue growth from expanding our direct sales force if we are unable to hire and develop talented direct sales personnel, if our new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if we are unable to retain our existing direct sales personnel. We also may not achieve anticipated revenue growth from our third-party channel partners if we are unable to attract and retain additional motivated third-party channel partners, if any existing or future third-party channel partners fail to successfully market, resell, implement or support our solutions for their customers, or if they represent multiple providers and devote greater resources to market, resell, implement and support products and services.
 
If we are unable to expand and leverage our relationships with system integrators, marketing service providers, complementary software vendors or other business alliance partners, our revenue or revenue growth and our results of operations could be materially adversely impacted.
 
We offer or software and services through third parties, including system integrators, marketing service providers and complementary software vendors. We may not be able to develop or maintain strategic relationships


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with these third parties for a number of reasons, including their existing relationships with our competitors or prospective competitors. If we are unsuccessful in establishing or maintaining our strategic relationships, our ability to compete in the marketplace or to grow our revenues could be impaired, and our results of operations would suffer. Even if we are successful in establishing and maintaining these relationships, we cannot assure you that these will result in increased customers or revenues.
 
Our inability to sustain our historical maintenance renewal rates and pricing would adversely affect our operating results.
 
We generate maintenance fees revenue from sales of maintenance associated with licensed software. We generally sell maintenance on an annual basis. We cannot assure you that we will succeed in sustaining the rate of maintenance renewals that we have experienced in the past. Moreover, we are facing competitive and other pressures to reduce the pricing of our maintenance arrangements. If we fail to sustain our historical level of maintenance renewals or our historical pricing, our maintenance fees revenue and total revenue would decrease and our results of operations would be adversely affected.
 
If our products fail to perform properly due to undetected defects or similar problems, and if we fail to develop an enhancement to resolve any defect or other software problem, we could be subject to product liability, performance or warranty claims or incur significant costs, our business may be harmed and our results of operations and financial condition could be adversely affected.
 
Our software solutions are complex and may contain undetected defects or errors. We have from time to time found defects in our products and may discover additional defects in the future. We may not be able to detect and correct defects or errors before releasing products. Consequently, we or our customers may discover defects or errors after our products have been implemented. We have in the past issued, and may in the future need to issue, corrective releases of our products to address defects or errors. The occurrence of any defects or errors could result in:
 
  •  lost or delayed market acceptance and sales of our products;
 
  •  delays in payment to us by customers;
 
  •  product returns;
 
  •  injury to our reputation;
 
  •  diversion of our resources;
 
  •  legal claims, including product liability claims, against us;
 
  •  increased service and warranty expenses or financial concessions; and
 
  •  increased insurance costs.
 
Defects and errors in our software solutions could result in an increase in service and warranty costs or claims for substantial damages against us. Our license agreements with our customers typically contain provisions designed to limit our liability for defects and errors in our products and damages relating to such defects and errors, but these provisions may not be enforced by a court or otherwise protect us effectively from legal claims. Our liability insurance may not be adequate to cover all of the costs resulting from these legal claims. Moreover, we cannot assure you that our current liability insurance coverage will continue to be available on acceptable terms or that the insurer will not deny coverage as to any future claim. The successful assertion against us of one or more large claims that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse affect on our business and operating results. Furthermore, even if we succeed in defending liability claims, we are likely to incur substantial costs, and our management’s attention will be diverted from our operations.


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The expansion of our international operations exposes us to several risks, such as significant currency fluctuations and unexpected changes in the regulatory requirements of multiple jurisdictions.
 
We have small but growing international operations, and our business strategy includes expanding these operations. Conducting international operations subjects us to new risks that we have not generally faced in the United States. These include:
 
  •  fluctuations in currency exchange rates;
 
  •  lack of local recognition of our branding, which may require that we spend significant amounts of time and money to build brand identity;
 
  •  import and export controls;
 
  •  unexpected changes in foreign regulatory requirements;
 
  •  establishing and maintaining strategic alliance relationships;
 
  •  internationalization of our products to meet local customs or the needs of local marketing organizations;
 
  •  different pricing environments;
 
  •  longer accounts receivable payment cycles and other collection difficulties;
 
  •  difficulties in managing and staffing international operations;
 
  •  potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;
 
  •  the burdens of complying with a wide variety of foreign laws and different legal standards;
 
  •  laws and business practices, which may vary from country to country and may favor local competitors;
 
  •  limited protection of intellectual property in some countries outside of the United States; and
 
  •  political and economic instability.
 
The occurrence of any one of these risks could negatively affect our international operations and, consequently, our results of operations generally. In addition, the Internet may not be used as widely in international markets in which we expand our international operations and, as a result, we may not be successful in offering our solutions internationally.
 
Additionally, operating in international markets also requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required in establishing operations in other countries will produce desired levels of revenues or profitability. We have not engaged in currency hedging activities to limit risk of exchange rate fluctuations.
 
If we fail to enhance our brand, our ability to expand our customer base will be impaired and our financial condition may suffer.
 
We expect the importance of brand recognition to increase as competition further develops in our market. Successful development of our brand will depend largely on the effectiveness of our marketing efforts and our ability to provide customers with reliable and technically sophisticated solutions at competitive prices. If customers do not perceive our solutions and services to be of high value, our brand and reputation could be harmed, which could adversely impact our financial condition. Despite our efforts, our brand development efforts may not yield increased revenue sufficient to offset the additional expenses incurred in our brand-building efforts.


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The success of our business depends on the continued growth and acceptance of the Internet by marketing professionals as a business and communications tool and the related expansion of the Internet infrastructure.
 
Use of the Internet by marketing professionals for enterprise marketing management is at an early stage of development, and acceptance of the Internet as a medium for enterprise marketing management among marketing professionals is subject to a high level of uncertainty. Our success will depend on our ability to generate revenues, which will require the development and widespread acceptance of the Internet as a medium for enterprise marketing management among marketing professionals. The Internet may not prove to be a viable medium for enterprise marketing management among marketing professionals because of inadequate development of the necessary infrastructure or complementary services, such as security procedures. The viability of the Internet as a medium for enterprise marketing management among marketing professionals may also prove uncertain due to delays in the development and adoption of new standards and protocols to handle increased levels of Internet activity or due to increased government regulation. If use of the Internet among marketing professionals for enterprise marketing management does not continue to grow, or if the necessary Internet infrastructure or complementary services are not developed, our business, results of operations, and financial condition could be adversely affected.
 
We may face liability if we inappropriately disclose confidential customer information.
 
We currently retain confidential information relating to our users in secure database servers. Although we observe security measures throughout our operations, we cannot assure you that we will be able to prevent individuals from gaining unauthorized access to these database servers. Any unauthorized access to our servers, or abuse by our employees, could result in the theft of confidential user information. If confidential information is compromised, we could lose customers or become subject to liability or litigation and our reputation could be harmed, any of which could materially and adversely affect our business, results of operations and financial condition.
 
We may be liable to our customers and may lose customers if we provide poor service, if our services do not comply with our agreements or if we are unable to collect customer data or otherwise lose customer data.
 
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, our ability to collect and report data may be interrupted by a number of factors, including our inability to access the Internet, the failure of our network or software systems, security breaches or variability in user traffic on customer websites. In addition, computer viruses may harm our systems causing us to lose data, and the transmission of computer viruses could expose us to litigation. We may be liable to our customers for damages they may incur resulting from these events, such as loss of business, loss of future revenues, breach of contract or for the loss of goodwill to their business. In addition to potential liability, if we supply inaccurate information or experience interruptions in our ability to capture, store and supply information, our reputation could be harmed and we could lose customers.
 
Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management’s attention.
 
Interruptions or delays in service from our third-party providers could impair our global delivery model, which could result in customer dissatisfaction and a reduction of our revenue.
 
We have a contract with a third party facility provider, pursuant to which we host a substantial portion of our IT infrastructure, as well as approximately 30 percent of our customers, from a single co-location facility located in Indianapolis, Indiana. This third-party facility provider does not guarantee that our customers’ access to our solutions will be uninterrupted, error-free or secure. Our operations depend, in part, on our third-party facility provider’s ability to protect systems in its facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. In the event that our third-party facility arrangement


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is terminated, or if there is a lapse of service or damage to the third-party facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities and services.
 
Our disaster recovery computer hardware and systems located at our headquarters in Indianapolis, Indiana have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring at our third-party facilities. In the event of a disaster in which our third-party facilities were irreparably damaged or destroyed, we could experience lengthy interruptions in our service. Moreover, our disaster recovery computer hardware and systems are located within the same geographic region as our third-party facilities and may be equally or more affected by any disaster affecting the third-party facilities. Any or all of these events could cause our customers to lose access to our on-demand software. In addition, the failure by our third-party facilities to meet our capacity requirements could result in interruptions in service or impede our ability to scale our operations.
 
We also have a long-term contract with Virtusa Corporation, which provides certain outsourced professional, customer support and product development services. A disruption in this arrangement could increase our costs, disrupt our business and have an adverse effect on our results of operations and financial condition.
 
We design the system infrastructure and procure and own or lease the computer hardware used for our services. Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our service. Any interruptions or delays in our service, whether as a result of third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with customers and our reputation. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could reduce our revenue, subject us to liability, and cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could adversely affect our business, results of operations and financial condition.
 
Our software and services may infringe on the intellectual property rights of others, which may subject us to legal liability, harm our reputation, prevent us from offering some solutions and services to our customers or distract management. Any claims or litigation involving intellectual property, whether we ultimately win or lose, could be extremely time-consuming, costly and harmful our reputation.
 
The Internet, software and technology industries are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of infringement and other violations of intellectual property rights. We expect the possibility of intellectual property rights claims to increase as the number of products and competitors in our industry segments grows, the functionality of products overlap, and the volume of issued software patents continues to increase. Responding to any infringement claim, regardless of its validity, could:
 
  •  be time-consuming, costly and result in litigation;
 
  •  divert management’s time and attention from developing our business;
 
  •  require us to pay monetary damages or enter into royalty and licensing agreements that we would not normally find acceptable;
 
  •  require us to stop selling or to redesign certain of our products; or
 
  •  require us to satisfy indemnification obligations to our customers.
 
If a successful claim is made against us and we fail to develop or license a substitute technology, our business, results of operations and financial condition could be adversely affected.
 
We may also be required to indemnify customers for their use of the intellectual property associated with an infringement claim or for other third-party products that are incorporated into our products and that infringe the intellectual property rights of others. If we are unable to resolve our legal obligations by settling or paying an infringement claim or a related indemnification claim, we may be required to refund amounts that we had received under the contractual arrangement with the customers.


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In addition, from time to time there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. We use a limited amount of open source software in our products and may use more open source software in the future. As a result, we could be subject to lawsuits by parties claiming ownership of what we believe to be open source software.
 
If we are unable to protect our proprietary technology and other intellectual property rights, our ability to compete for business will be adversely affected.
 
We rely on a combination of copyright, patent, trade secrets, confidentiality procedures and contractual commitments to protect our proprietary information. Despite our efforts, these measures can only provide limited protection. Unauthorized third parties may try to copy or reverse engineer portions of our products or otherwise obtain and use our intellectual property. Any patents owned by us may be invalidated, circumvented or challenged. Any of our pending or future patent applications, whether or not being currently challenged, may not be issued with the scope of the claims we seek, if at all. In addition, the laws of some countries do not provide the same level of protection of our proprietary rights as do the laws of the United States. If we cannot protect our proprietary technology against unauthorized copying or use, we may not remain competitive.
 
In seeking to protect our intellectual property, we could face costly litigation and enforcement proceedings and the diversion of our management’s attention and resources, either of which could harm our business. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
 
Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our products, impair the functionality of our products, delay new product introductions, result in our substituting inferior or more costly technologies into our products, or injure our reputation. In addition, we may be required to license additional technology from third parties to develop and market new products, and we cannot assure you that we could license that technology on commercially reasonable terms or at all. Although we do not expect that our inability to license this technology in the future would have a material adverse affect on our business or operating results, our inability to license this technology could adversely affect our ability to compete.
 
To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of trade secrets, know-how or other proprietary information
 
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our results of operations, our ability to operate our business, our stock price and investors’ views of us.
 
Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We are in the process of documenting, reviewing and, if appropriate, improving our internal controls and procedures in connection with Section 404 of the Sarbanes-Oxley Act, which requires annual management and independent auditor assessments of the effectiveness of our internal controls over financial reporting. Both we and our independent auditors will be testing our internal controls in connection with the Section 404 requirements and, as part of that documentation and testing, identifying areas for further attention and improvement.
 
We have identified a material weakness in our internal controls over financial reporting that, if not corrected, could result in material misstatements in our financial statements. A material weakness is defined as a significant deficiency, or combination of significant deficiencies, in our internal controls over financial reporting, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be presented or detected by our employees. A significant deficiency is in turn defined as a control deficiency, or a combination of control deficiencies, that adversely affects our ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of our annual or interim financial statements that is more than


18


 

inconsequential will not be prevented or detected. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A design deficiency exists when a control necessary to meet the control objective is missing or an existing control is not properly designed so that, even if the control operates as designed, the control objective is not always met. The material weakness that we have identified results from a design deficiency in the consolidation formation relating to our operations in the United Kingdom and Australia, which requires the translation of financial statements from local functional currencies into U.S. dollars. Specifically, we have utilized our historical consolidation model, which does not appropriately address the consolidation of new foreign subsidiaries and has resulted in the establishment of investment in subsidiary, trade inter-company balances and inter-company loans in a manner inconsistent with our legal ownership structure and, in some cases, the recording or translation of subsidiaries at an incorrect currency translation.
 
We are in the process of implementing changes to strengthen our internal controls. Implementing these changes may distract our directors, officers and employees, and entail substantial costs in order to modify our existing accounting systems, take a significant period of time to complete and distract our officers, directors and employees from the operation of our business. These changes may not, however, be effective in improving or maintaining the adequacy of our internal controls, and any failure to improve or maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs, materially impair our ability to operate our business and subject us to civil or criminal investigations and penalties. In addition, other material weaknesses may be identified in the future. Further, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements may seriously affect our stock price.
 
Potential future acquisitions, strategic investments, partnerships or alliances could be difficult to identify and integrate, divert the attention of key management personnel, disrupt our business, dilute stockholder value and adversely affect our results of operations and financial condition.
 
We have acquired, and in the future may acquire or invest in, complementary businesses, products or technologies. Acquisitions and investments involve numerous risks including:
 
  •  difficulty in assimilating the operations and personnel of acquired businesses;
 
  •  potential disruption of our ongoing business and distraction of our management and the management of the acquired companies;
 
  •  difficulty in incorporating acquired technology and rights into our solutions and services;
 
  •  unanticipated expenses related to technology and other integration;
 
  •  potential failure to achieve additional sales and enhance our customer bases through cross-marketing of the combined company’s solutions to new and existing customers;
 
  •  potential litigation resulting from our business combinations or acquisition activities; and
 
  •  potential unknown liabilities associated with the acquired businesses.
 
Our inability to integrate any acquired business successfully, or the failure to achieve any expected synergies, could result in increased expenses and a reduction in expected revenues or revenue growth. As a result, our stock price could fluctuate or decline, and our results of operations and financial condition could be adversely affected.
 
Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.
 
Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds to expand our sales and marketing and product development efforts or to make acquisitions. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to fund the expansion of our sales and marketing and research and development efforts or take advantage of acquisition or other opportunities, which could seriously harm our business and results


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of operations. If we incur debt, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue additional equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.
 
Being a public company will increase the administrative costs of operating our business and may divert management attention from the operations of the business.
 
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the NASDAQ Global Market have imposed various requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.
 
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
 
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.
 
For example, we recognize software license revenue in accordance with Statement of Position, or SOP, 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2 Software Revenue Recognition with Respect to Certain Transactions. The American Institute of Certified Public Accountants and the SEC continue to issue interpretations and guidance for applying the relevant accounting standards to a wide range of sales contract terms and business arrangements that are prevalent in software licensing arrangements. As a result of future interpretations or applications of existing accounting standards, including SOP 97-2 and SOP 98-9, by regulators or our internal or independent accountants, we could be required to delay revenue recognition into future periods, which would adversely affect our operating results.
 
Certain factors have in the past and may in the future cause us to defer recognition for license fees beyond delivery. For example, the inclusion in our software arrangements of customer acceptance testing, specified upgrades or other material non-standard terms could require the deferral of license revenue beyond delivery.
 
On December 16, 2004, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004), Share-Based Payment, or SFAS No. 123(R). SFAS No. 123(R), which became effective for fiscal periods beginning after September 15, 2005, requires that employee stock-based compensation be measured based on its fair-value on the grant date and treated as an expense that is reflected in the financial statements over the related service period. As a result of SFAS No. 123(R), our results of operations in 2006 and 2007 reflect expenses that are not reflected in prior periods, potentially making it more difficult for investors to evaluate our 2006 and 2007 results of operations relative to prior periods.
 
Because of these factors and other specific requirements under accounting principles generally accepted in the United States for software revenue recognition, we must have very precise terms in our software arrangements in order to recognize revenue when we initially deliver software or perform services. Negotiation of mutually acceptable terms and conditions can extend our sales cycle, and we may accept terms and conditions that do not permit revenue recognition at the time of delivery.


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Risks Related To This Offering And Ownership Of Our Common Stock
 
No public market for our common stock currently exists, and an active, liquid and orderly market for our common stock may not develop.
 
Prior to this offering there has been no market for shares of our common stock. Even though we have applied to list our shares on the NASDAQ Global Market, an active trading market for our common stock may never develop or be sustained, which could depress the market price of our common stock and could affect your ability to sell your shares. The initial public offering price will be determined through negotiations among us, the selling stockholders and the representatives of the underwriters and may bear no relationship to the price at which our common stock will trade following the completion of this offering.
 
The trading value of our common stock may be volatile and decline substantially.
 
The trading price of our common stock following this offering is likely to be volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:
 
  •  our operating performance and the operating performance of similar companies;
 
  •  the overall performance of the equity markets;
 
  •  quarterly variations in our operating results compared to market expectations;
 
  •  announcements by us or our competitors of acquisitions, business plans or commercial relationships;
 
  •  threatened or actual litigation;
 
  •  any major change in our board of directors or management;
 
  •  publication of research reports about us, our competitors or our industry, or positive or negative recommendations or withdrawal of research coverage by equity research analysts;
 
  •  our sale of common stock or other securities in the future;
 
  •  large volumes of sales of our shares of common stock by existing stockholders; and
 
  •  general political and economic conditions.
 
In addition, the stock market in general, and historically the market for software companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.
 
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
 
We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. In addition, the terms of our credit facility prohibit us from paying cash dividends. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.


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Provisions of our certificate of incorporation, bylaws and Delaware law could deter takeover attempts.
 
Various provisions in our certificate of incorporation and bylaws could delay, prevent or make more difficult a merger, tender offer, proxy contest or change of control. Our stockholders might view any transaction of this type as being in their best interest since the transaction could result in a higher stock price than the then-current market price for our common stock. Among other things, our certificate of incorporation and bylaws:
 
  •  authorize our board of directors to issue preferred stock with the terms of each series to be fixed by our board of directors, which could be used to institute a “poison pill” that would work to dilute the share ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board;
 
  •  divide our board of directors into three classes so that only approximately one-third of the total number of directors is elected each year;
 
  •  permit directors to be removed only for cause;
 
  •  require supermajority stockholder voting to effect certain amendments to our certificate of incorporation and bylaws;
 
  •  prohibit action by written consent of our stockholders; and
 
  •  specify advance notice requirements for stockholder proposals and director nominations.
 
In addition, with some exceptions, the Delaware General Corporation Law restricts or delays mergers and other business combinations between us and any stockholder that acquires 15% or more of our voting stock.
 
Future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.
 
If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. Based on shares outstanding as of June 30, 2007, upon completion of this offering, we will have outstanding approximately           shares of common stock, assuming no exercise of the underwriters’ over-allotment option. Morgan Stanley & Co. Incorporated may, in its sole discretion, permit our officers, directors, employees and current stockholders to sell shares prior to the expiration of the lock-up agreements.
 
After the lock-up agreements pertaining to this offering expire, and based on shares outstanding as of June 30, 2007, an additional           shares of common stock will be eligible for sale in the public market,          of which are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act. In addition, the 10,185,113 shares of common stock subject to outstanding options under our 1998 Option Plan as of June 30, 2007, the 3,607,683 shares reserved for future issuance under our 2007 Stock Option and Incentive Plan and the 2,000,000 shares reserved for future issuance under our 2007 Employee Stock Purchase Plan will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline substantially.
 
A limited number of stockholders will have the ability to influence the outcome of director elections and other matters requiring stockholder approval.
 
Immediately after this offering, our directors, executive officers and their affiliated entities will beneficially own more than     percent of our outstanding common stock. These stockholders, if they act together, could exert substantial influence over matters requiring approval by our stockholders, including the election of directors, the amendment of our certificate of incorporation and bylaws and the approval of mergers or other business combination transactions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part


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of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by other stockholders, including those who purchase shares in this offering.
 
Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.
 
Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of this offering in ways that increase the value of your investment. We intend to use the net proceeds from this offering for working capital and other general corporate purposes, including financing the development of new solutions, sales and marketing activities and capital expenditures. We may use a portion of the net proceeds to us to expand our current business through acquisitions of other businesses, products and technologies. Until we use the net proceeds from this offering, we plan to invest them, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.
 
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
 
The trading market for our common stock will rely in part on the research and reports that industry or equity research analysts publish about us and our business. We do not control these analysts. The price of our stock could decline if one or more of these analysts downgrade our stock or issue other unfavorable commentary. Further, if one or more of these analysts ceases publishing reports about us or our business, we could lose visibility in the market, which in turn could cause the price of our stock to decline.
 
You will experience immediate and substantial dilution.
 
The initial public offering price will be substantially higher than the net tangible book value of each outstanding share of common stock immediately after this offering. If you purchase common stock in this offering, you will suffer immediate and substantial dilution of $      per share in the net tangible book value of our common stock from the initial public offering price of $      per share. If the underwriters exercise in full their option to purchase additional shares, there will be dilution of $      per share in the net tangible book value of our common stock.
 
If previously granted warrants or options are exercised, you will experience additional dilution. As of June 30, 2007, there were 1,638,158 shares of common stock subject to outstanding warrants with a weighted average exercise price of $1.16 per share and 10,185,113 shares of common stock subject to outstanding options with a weighted average exercise price of $0.40 per share. For more information refer to “Dilution.”


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FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date of this prospectus. Forward-looking statements do not guarantee future performance and should not be considered as statements of fact.
 
Factors that may cause actual results to differ from expected results include, among others:
 
  •  general economic conditions and a downturn in our industry;
 
  •  competition in our industry and innovation by our competitors;
 
  •  our failure to anticipate and adapt to future changes in our industry;
 
  •  uncertainty regarding our product and service innovations;
 
  •  our inability to successfully identify and manage our acquisitions;
 
  •  adverse developments concerning our relationships with existing customers;
 
  •  the increased expenses and administrative workload associated with being a public company; and
 
  •  failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud.
 
In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. We discuss many of the risks in greater detail under the heading “Risk Factors.”
 
Except as required by law, we assume no obligation to update any forward-looking statements after the date of this prospectus.
 
This prospectus contains estimates and other statistical data, research or viewpoints based on information from independent parties, including Gartner, Inc., or Gartner, and International Data Corporation, or IDC, and made by us relating to market size and growth and other industry data, which are not representations of fact. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this prospectus, and, accordingly, we cannot guarantee their accuracy or completeness. Each Gartner report speaks as of its original publication date and is subject to change without notice. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.


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USE OF PROCEEDS
 
We estimate that the net proceeds to us of the sale of the common stock that we are offering will be approximately $      million, based on an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses that we must pay. A $1.00 increase (decrease) in the assumed initial public offering price of $     would increase (decrease) the net proceeds to us from this offering by $      million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ overallotment option is exercised in full, we estimate the net proceeds payable to us will be approximately $      million. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders pursuant to the exercise of the underwriters’ over-allotment option.
 
We intend to use the net proceeds to us from this offering for working capital and other general corporate purposes, including financing the development of new products, sales and marketing activities, and capital expenditures. Currently, we expect to fund a significant portion of our working capital with funds generated from the sale of our solutions, and as a result, we do not have a specific plan, timeline or budget for the allocation of the net proceeds from this offering among potential general corporate purposes.
 
We may use a portion of the net proceeds to us to expand current business through acquisitions of other businesses, products and technologies. We may use a portion of the net proceeds to us to expand our current business through strategic alliances with, or acquisitions of, other businesses, products or technologies. In addition, the amount and timing of what we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations. Accordingly, our management will have broad discretion in applying the net proceeds of this offering.
 
Pending any use, as described above, we plan to invest the net proceeds in a variety of capital preservation instruments, including investment-grade, short-term, interest-bearing certificates of deposit or direct or guaranteed obligations of the United States government.
 
DIVIDEND POLICY
 
Our board of directors will have discretion in determining whether to declare or pay dividends, which will depend upon our financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant. We currently intend to retain future earnings for the development, operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.


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CAPITALIZATION
 
The following table sets forth our cash, cash equivalents and capitalization as of June 30, 2007, as follows:
 
  •  on an actual basis;
 
  •  on a pro forma basis to give effect to (i) the conversion of all outstanding shares of our convertible redeemable preferred stock into 39,335,471 shares of common stock immediately prior to the completion of this offering and (ii) the conversion, but not the exercise, of all outstanding warrants to purchase shares of our Series A2 preferred stock into warrants to purchase an aggregate of 829,315 shares of common stock upon completion of this offering; and
 
  •  on a pro forma as adjusted basis to give effect to (i) the conversion of all outstanding shares of our convertible redeemable preferred stock into shares of our common stock, (ii) give effect to the conversion, but not the exercise, of all outstanding warrants to purchase shares of our Series A2 preferred stock into warrants to purchase an aggregate of 829,315 shares of common stock upon completion of the offering and (iii) to reflect the sale of           shares of common stock that we are offering at an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
You should read the following table in conjunction with our consolidated financial statements and related notes and the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.
 
                         
    As of June 30, 2007  
                Pro Forma
 
    Actual     Pro Forma     As Adjusted  
          (unaudited)  
    (in thousands)  
 
Cash and cash equivalents
  $ 6,036     $ 6,036     $        
                         
Long-term debt, including current portion
  $       $       $    
Warrants to purchase Series A2 Convertible Redeemable
                       
Preferred Stock, par value $.001 per share
    629                
Series A Convertible Redeemable Preferred Stock, par value $.001 per share, 9,708,737 shares authorized and 9,708,737 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted
    20,000              
Series A1 Convertible Redeemable Preferred Stock, par value $.001 per share, 9,480,175 shares authorized and 9,480,175 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted
    11,945              
Series A2 Convertible Redeemable Preferred Stock, par value $.001 per share, 14,811,597 shares authorized and 13,982,282 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted
    14,500              
Shareholders’ equity (deficit):
                       
Preferred stock, $.001 par value: no shares authorized, issued or outstanding actual or pro forma;           shares authorized, no shares issued or outstanding pro forma as adjusted
                 
Common stock, $.001 par value: 100,000,000 shares authorized; 39,033,332 shares issued, actual; 100,000,000 shares authorized, 78,368,803 shares issued, pro forma;           shares authorized,          shares issued, pro forma as adjusted
    38       77          
Additional paid-in capital
    15,417       62,452          
Accumulated other comprehensive income (loss)
    616       616          
Accumulated deficit
    (47,085 )     (47,085 )        
                         
Total stockholders’ equity (deficit)
    (31,014 )     16,060          
                         
Total capitalization
  $ 22,096     $ 22,096     $  
                         


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DILUTION
 
Our net tangible book value as of June 30, 2007 was $(1.6) million, or $(0.02) per share of common stock. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding as of June 30, 2007 after giving effect to the assumed conversion of all of our convertible preferred stock.
 
After giving effect to the sale by us of          shares of common stock in this offering at the assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our adjusted net tangible book value as of June 30, 2007 would have been approximately $      million, or approximately $      per share. This amount represents an immediate increase in net tangible book value of $      per share to our existing stockholders and an immediate dilution in net tangible book value of approximately $      per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price. We determine dilution by subtracting the adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock.
 
The following table illustrates this dilution on a per share basis:
 
                 
Assumed initial public offering price per share (the midpoint of the range listed on the cover page of this prospectus)
          $    
Net tangible book value as of June 30, 2007
  $ (0.02 )        
                 
Increase attributable to this offering
               
Adjusted net tangible book value per share after this offering
               
                 
Dilution in net tangible book value per share to new investors
          $        
                 
 
A $1.00 increase (decrease) in the assumed initial public offering price of $     would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $      per share and the dilution in pro forma net tangible book value to new investors by $      per share, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
The following table summarizes, as of June 30, 2007, the differences between the number of shares purchased from us, the total consideration paid to us in cash and the average price per share that existing stockholders and new investors paid. The following table does not reflect any non-cash consideration paid to us, or deemed to be paid to us, by our existing stockholders. The calculation below is based on the assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses that we must pay:
 
                                         
                            Average
 
    Shares Purchased     Total Consideration     Price per
 
    Number     Percent     Amount     Percent     Share  
 
Existing stockholders
                                %   $                            %   $        
New investors
                                  $    
                                         
Totals
            %   $         %        
                                         
 
A $1.00 increase (decrease) in the assumed initial public offering price of $     would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price paid by all stockholders by $      million, $      million, and $      million, respectively, assuming the number of shares offered by us, as set forth on the cover of this prospectus , remains the same, and without deducting the estimated underwriting discounts and commissions and other expenses of the offering.
 
The above discussion and tables assume no exercise of outstanding options or the outstanding warrants after June 30, 2007. As of June 30, 2007, there were 1,638,158 shares of common stock subject to outstanding warrants with a weighted average exercise price of $1.16 per share and 10,185,113 shares of common stock subject to outstanding options with a weighted average exercise price of $0.40 per share. To the extent any of these options or warrants are exercised, there will be further dilution to new investors.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The following consolidated statements of operations data for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2007 and consolidated balance sheet data as of December 31, 2005 and 2006 and June 30, 2007 have been derived from our audited consolidated financial statements and related notes, which are included elsewhere in this prospectus. The statements of operations data for the years ended December 31, 2002 and 2003 and the balance sheet data as of December 31, 2002, 2003 and 2004 have been derived from our audited consolidated financial statements that do not appear in this prospectus. The statement of operations data for the six months ended June 30, 2006 has been derived from our audited consolidated financial statements and related notes, which are included elsewhere in the prospectus. The consolidated selected financial data set forth below should be read in conjunction with our consolidated financial statements, the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The historical results are not necessarily indicative of the results to be expected for any future period.
 
                                                         
          Six Months Ended
 
    Year Ended December 31,     June 30,  
    2002     2003     2004     2005     2006     2006     2007  
                                  (unaudited)        
    (in thousands, except share and per share data)  
 
Consolidated Statement of Operations Data:
                                                       
Revenue:
                                                       
Software, maintenance and hosting
  $ 6,568     $ 8,327     $ 9,516     $ 15,446     $ 27,076     $ 12,019     $ 16,955  
Professional services
    6,752       8,231       10,351       15,066       24,516       10,819       12,859  
                                                         
Total revenue
    13,320       16,558       19,867       30,512       51,592       22,838       29,814  
Cost of revenue:
                                                       
Software, maintenance and hosting
    1,027       1,055       946       1,621       2,547       1,243       1,618  
Amortization — technology
                198       254       82       40       40  
Professional services
    4,599       5,382       7,056       11,802       15,758       8,068       8,821  
                                                         
Total cost of revenue
    5,626       6,437       8,200       13,677       18,387       9,351       10,479  
                                                         
Gross profit
    7,694       10,121       11,667       16,835       33,205       13,487       19,335  
Operating expenses:
                                                       
Sales and marketing
    9,269       9,400       6,975       10,749       16,882       7,582       12,009  
Research and development
    3,640       3,169       3,478       5,080       7,580       3,904       4,853  
General and administrative
    2,471       2,600       2,346       3,778       5,287       2,454       3,819  
Amortization — other intangibles
                128       629       942       468       479  
                                                         
Total operating expenses
    15,380       15,169       12,927       20,236       30,691       14,408       21,160  
                                                         
Income (loss) from operations
    (7,686 )     (5,048 )     (1,260 )     (3,401 )     2,514       (921 )     (1,825 )
Other income (expense):
                                                       
Interest income
    259       150       67       101       78       61       120  
Interest expense
    (385 )     (155 )     (54 )     (1,446 )     (236 )     (148 )     (28 )
Other income (expense)
    (35 )     108       173       (251 )     (209 )     (130 )     (171 )
                                                         
Income (loss) before income taxes
    (7,847 )     (4,945 )     (1,074 )     (4,997 )     2,147       (1,138 )     (1,904 )
Income tax benefit (expense)
          (34 )     (14 )     237                    
                                                         
Net income (loss)
    (7,847 )     (4,979 )     (1,088 )     (4,760 )     2,147       (1,138 )     (1,904 )
Preferred Stock Dividends
    (2,511 )     (2,825 )     (3,009 )     (8,565 )                  
                                                         
Net income (loss) applicable to common stockholders
  $ (10,358 )   $ (7,804 )   $ (4,097 )   $ (13,325 )   $ 2,147     $ (1,138 )   $ (1,904 )
                                                         
Net loss per common share:
                                                       
Basic
  $ (0.54 )   $ (0.40 )   $ (0.21 )   $ (0.66 )   $ 0.06     $ (0.03 )   $ (0.05 )
Diluted
    (0.54 )     (0.40 )     (0.21 )     (0.66 )     0.03       (0.03 )     (0.05 )
Weighted average common shares outstanding:
                                                       
Basic
    19,346,379       19,363,621       19,435,013       20,069,108       38,576,987       38,494,915       38,987,570  
Diluted
    19,346,379       19,363,621       19,435,013       20,069,108       78,530,347       38,494,915       38,987,570  
                                                         
Pro Forma(1) (unaudited):
                                                       
Net income (loss) per common share:
                                                       
Basic
                                  $ 0.03             $ (0.02 )
                                                         
Diluted
                                  $ 0.03             $ (0.02 )
                                                         
Weighted average common shares outstanding:
                                                       
Basic
                                    77,912,458               78,323,041  
Diluted
                                    78,629,314               78,323,041  
 
(footnotes appear on following page)


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    Year Ended December 31,     Six Months Ended June 30,  
    2004     2005     2006     2006     2007  
                      (unaudited)        
    (in thousands)  
Other GAAP and Non-GAAP Financial Data:
                                       
Recurring revenue(2)
  $ 4,451     $ 8,426     $ 14,573     $ 6,764     $ 10,419  
 
                                                 
    As of December 31,     As of June 30,  
    2002     2003     2004     2005     2006     2007  
    (in thousands)  
 
Consolidated Balance Sheet Data:
                                               
Cash and cash equivalents
  $ 15,737     $ 6,658     $ 5,312     $ 5,557     $ 5,591     $ 6,036  
Total assets
    19,400       9,252       12,123       30,670       34,191       34,838  
Total liabilities
    9,085       3,888       7,706       18,164       17,234       19,407  
Total convertible redeemable preferred stock
    36,750       39,575       42,584       45,303       46,445       46,445  
Total stockholders’ deficit
    (26,435 )     (34,211 )     (38,167 )     (32,797 )     (29,488 )     (31,014 )
 
 
(1) Pro forma to give effect to the conversion of all outstanding shares of our convertible redeemable preferred stock into shares of our common stock immediately prior to the completion of this offering.
 
(2) Recurring revenue is revenue derived from term licenses, maintenance and hosting agreements.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the “Selected Consolidated Financial Data” section of this prospectus and our consolidated financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the heading “Risk Factors.”
 
Overview
 
We are a leading provider of marketing software and services that automate a broad spectrum of marketing processes, and enhance the productivity and performance of marketing organizations. Our integrated suite of applications, Aprimo Enterprise, improves alignment across the Marketing Value Chain, which we define as the business processes that connect enterprise marketing departments with external marketing suppliers and enable the execution of marketing programs across multiple channels. Aprimo Enterprise is based on the Enterprise Marketing Backbone, our innovative service oriented architecture, which automates and unifies a broad range of marketing business processes. We provide solutions primarily to large enterprises and medium-sized businesses worldwide, including AT&T Inc., Bank of America, N.A., Capital One Services, Inc., The Home Depot U.S.A. Inc., Honda Motor Europe Ltd., Intel Corporation, Merck & Co., Inc., Nestlé S.A., Sprint Nextel Corporation, Target Corporation, Toyota Motor Corporation and Warner Bros. Entertainment, Inc.
 
Aprimo Enterprise, our flagship solution, enables marketing professionals to better manage and optimize marketing expenditures and enhance their productivity by digitizing marketing processes from end to end. Our solutions meet the unique challenges inherent in the day-to-day activities of marketing professionals, which include managing assets and content, maintaining brand consistency, tracking expenditures, optimizing customer contacts, measuring advertising campaign results and increasing the volume of high-value sales leads. By implementing our solutions, we believe our customers benefit from increased revenue through more leads and higher response rates, lower costs through the elimination of expensive rework, reduced time to market through streamlined production and approval workflows and improved efficiency of overall marketing operations through automated resource planning and management.
 
We also offer Aprimo Professional, a web-based, on-demand solution, which is delivered as a multi-tenant subscription service, specifically designed for medium-sized businesses and marketing workgroups within larger organizations. In addition, we offer Aprimo Agency, a role-based solution specifically designed to help marketing agencies increase efficiency and differentiate their offerings in a highly competitive market.
 
A significant portion of our revenue is contracted prior to the period in which it is recorded. For example, by the end of the fourth quarter 2006, we had contracted over 80% of our revenues for the first quarter of 2007. We expect this trend to continue.
 
Our revenue increased 31% to $29.8 million for the six months ended June 30, 2007 from $22.8 million for the six months ended June 30, 2006. This revenue growth is attributable, in part, to our focus on customer and partner relationships and our global sales efforts. We increased our revenue 69% to $51.6 million in 2006 from $30.5 million in 2005.
 
Since 2004, our revenue growth has generated positive operating cash flows that have enabled significant investments in our sales and marketing capabilities and research and development initiatives, as well as improvements in our operating infrastructure. We generated approximately 80% of our revenue in 2006 from customers in the United States and approximately 20% from international customers.
 
For the six months ended June 30, 2007, we had a net loss of $1.9 million, compared to a net loss of $1.1 million for the six months ended June 30, 2006. We generated net income of $2.1 million in 2006, and we incurred net losses of $4.8 million and $1.1 million in 2005 and 2004, respectively, as a result of our business acquisitions and significant expenditures to expand our research and development team and sales and marketing functions.


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Historical Background
 
We were founded in July 1998 and are headquartered in Indianapolis, Indiana. In July 2000, we established a wholly-owned subsidiary, Aprimo UK Limited, in the United Kingdom. In July 2004, we acquired Then, Limited, a provider of marketing software located in the United Kingdom, and in June 2005, we acquired the enterprise marketing solutions business unit of DoubleClick, Inc., or DoubleClick EMS, through the acquisition of certain assets and the purchase of outstanding shares of certain subsidiaries.
 
In 2000, we raised $20.0 million through the issuance of Series A preferred stock. We used the proceeds to expand our research and development team, our sales force and our marketing functions. In addition, we raised approximately $11.9 million in 2002 through the issuance of Series A1 preferred stock. We used a portion of the proceeds from that financing to fund the acquisition of Then, Limited for a purchase price of approximately $6.3 million. In 2005, we borrowed $6.0 million under a $10.0 million revolving line of credit and $10.5 million under a term note payable to fund the DoubleClick EMS acquisition. In 2005 and 2006, we raised approximately $14.5 million through the issuance of Series A2 preferred stock, a portion of which we used to repay the $10.5 million term note. From 2000 to 2001, we issued warrants exercisable for 808,843 shares of common stock, and in 2005 we issued warrants exercisable for 829,315 shares of Series A2 preferred stock. In January 2007, we repaid in full the outstanding borrowings under our line of credit.
 
Key Financial Measures and Trends
 
Sources of Revenue
 
We derive our revenue from our software licenses and the related maintenance and hosting services and from professional services related to the training, configuration and implementation of our software. Since the fourth quarter of 2006, our business strategy has been to emphasize licensing our software on a recurring revenue basis under term licenses. Historically, our licensing arrangements consisted of perpetual license arrangements with annually renewable maintenance contracts, and we continue to offer perpetual license arrangements to customers that require those arrangements.
 
Software, Maintenance and Hosting.  Revenue from our term licenses is recognized over the contractual term of the license, which can range from one to five years for the initial term, with annual renewals thereafter. When we enter into a perpetual license, we determine if the nature of our services is significant to the entire arrangement. If so, we recognize the software over the period of the implementation on a percentage of completion basis, which typically spans six to nine months. If we do not provide significant services to customers under a perpetual license arrangement, we recognize revenue upon delivery of the software. In either case, we do not recognize software revenue unless all other requirements of the software revenue recognition accounting principles are met. Pricing of our software takes into account the size of the customer licensing our software, the number of applications licensed, the number of users and the length of the license commitment.
 
We expect that our recurring revenue strategy will result in an increase in the number of our customers that license our software under term license arrangements. Term license arrangements generally result in longer periods of time over which revenue is recognized, as compared to perpetual license arrangements. As a result, we may recognize less revenue in any given period than we would have had we continued with a predominantly perpetual license model.
 
We provide hosting services to approximately 30% of our Aprimo Enterprise and Aprimo Agency customers and all of our Aprimo Professional customers, offering them on-demand access to our software, and support and maintenance services as part of our license arrangements. Our maintenance and hosting arrangements are recognized ratably over the related contractual period. Maintenance arrangements that contain access to product updates and customer support are typically provided as part of our term licenses or under separate support agreements in our perpetual licenses. In our perpetual license maintenance arrangements, initial maintenance terms average eighteen months with annual renewals thereafter. Hosting arrangements typically have committed terms between one and five years and are billed primarily on an annual or quarterly basis. We expect that revenue derived from our hosting services will increase as the number of customers requesting that our software be delivered on demand continues to grow.


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Professional Services.  We provide professional services to our customers, including on site and classroom training and configuration and implementation consulting services for our software. We provide professional services under time and material contracts, and our services revenue is recognized when the services are performed. We also provide services to assist our partners in delivering our software to their customers. Professional services revenue includes billable travel and out-of-pocket expenses incurred during the performance of such services to our customers and partners.
 
In addition to continuing to target new customers, we expect revenue to increase as we expand our existing customer relationships by cross selling additional solution sets. Approximately 14% of our customers have been using Aprimo Enterprise for at least the last three years. These customers have collectively increased their investment in our solutions by approximately 300% following their initial purchases. We offer our software and services directly through our sales force and our partners, including systems integrators, marketing service providers and complementary software vendors. Our partners led or participated in approximately 50% of our sales transactions in 2006. Our partners led or participated in approximately 67% of our new customer implementations in the six months ended June 30, 2007, compared to approximately 43% in 2006 and approximately 38% in 2005. We believe we have a significant opportunity to drive revenue growth, expand our global market reach and increase our delivery capacity through partners. We also believe there is a large market opportunity for our solutions and services outside the United States, and we expect to continue to develop our direct and indirect sales channels on an international basis. In 2006, we generated approximately 20% of our revenue from international customers. We expect our revenue from international customers to increase in absolute dollars, but not as a percentage of revenue, as we further expand internationally. In addition, while we expect that, as a result of our partnering efforts, professional services revenue will decrease as a percentage of revenue, we expect that it will continue to increase in absolute dollars.
 
Cost of Revenue
 
Our cost of software, maintenance and hosting revenue consists primarily of salaries, benefits and stock-based compensation related to customer support and hosting personnel, hosting facilities and other related overhead and third-party royalties for licensed technology incorporated into our current product offerings. We anticipate incurring additional costs in the future for additional personnel to support our growing customer base, and we expect our cost of software, maintenance and hosting revenue to increase as a percentage of revenue in the near term due to the evolution of our business model to emphasize recurring license revenue. However, we expect our cost of software, maintenance and hosting revenue to decrease over time as a percentage of revenue.
 
Our amortization of technology expense is related to technology acquired through our acquisitions of Then, Limited and DoubleClick EMS in 2004 and 2005, respectively. These technologies have useful lives ranging from two to three years, are amortized on a straight-line basis and will be fully amortized by the end of 2008.
 
Our cost of professional services revenue consists primarily of salaries and benefits related to our professional services personnel, travel, lodging and other out-of-pocket expenses, facilities and other related overhead and cost of services provided by subcontractors for professional services. We expect our cost of professional services revenue to increase in absolute dollars but remain relatively constant as a percentage of professional services revenue in the future as we increase personnel to meet expected demand for our services.
 
Gross Profit
 
Gross profit varies from period to period. Gross profit has been, and will be continue to be, affected by many factors, including volume and mix of software license sales, timing of revenue recognition, pricing, utilization of our professional services resources and collectability of accounts. We expect that gross profit will continue to increase as revenue grows, and we expect gross profit as a percentage of revenue to also increase over time, although we expect gross profit to decrease in the near term due to the evolution of our business strategy from a perpetual license model to a term license model.


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Sales and Marketing Expenses
 
Sales and marketing expenses consist primarily of salaries, commissions, employee benefits, travel and related expenses of our sales and marketing personnel, advertising and promotional expenses and marketing costs. Costs associated with developing, training and incentivizing our partners are also included in our sales and marketing expenses. We recognize commissions and partner referral fees over time and in proportion to the related revenue from which such costs arise. As we further develop our strategic relationships with our partners, we expect to incur increased costs related to these efforts. As a result, we expect that sales and marketing expenses will continue to increase in absolute dollar amounts as we further increase our sales and marketing activities but remain relatively constant as a percentage of revenue.
 
Research and Development Expenses
 
Research and development expenses consist primarily of costs associated with the development of new products or enhancements to existing products, including salaries and employee benefits related to our research and development personnel and costs associated with outsourcing certain research and development. To date, we have expensed all research and development costs as incurred. We intend to continue to invest significantly in our research and development efforts because we believe they are essential to maintaining and increasing our competitive position. We expect that research and development expenses will continue to increase in absolute dollars but that these expenses will decrease over time as a percentage of revenue, as we continue to leverage our unified software platform.
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of salaries and benefits related to the executive, legal, finance and human resource personnel, legal and professional fees, amortization and depreciation and facilities costs. We expect that general and administrative expenses will increase in absolute dollars and will increase as a percentage of revenue in the near term as we invest in infrastructure to support continued growth and incur additional expenses related to being a publicly traded company, including increased accounting and legal fees, costs of compliance with securities and other regulations, including Sarbanes-Oxley, higher insurance premiums and investor relations expenses.
 
Critical Accounting Policies and Estimates
 
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Our significant accounting policies are described in the notes to the financial statements appearing elsewhere in this prospectus. However, certain of our accounting policies, which we refer to as our “critical accounting policies,” are particularly important to the portrayal of our financial position and results of operations and require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain and may change in future periods. Our management bases its estimates and judgments on historical experience and various other factors that it believes to be reasonable under the circumstances. We believe the following to be our critical accounting policies:
 
  •  revenue recognition,
 
  •  estimation of allowance for doubtful accounts,
 
  •  valuation of goodwill, long-lived and other intangible assets,
 
  •  accounting for research and development expenditures,
 
  •  valuation of stock-based compensation,
 
  •  estimation of fair value of warrants to purchase convertible preferred stock, and
 
  •  accounting for income taxes.
 
Accordingly, we believe the policies set forth above are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the


33


 

estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.
 
Revenue Recognition
 
We derive our revenue from our software licenses and the related hosting and maintenance, and from professional services related to the training, configuration and implementation of our software.
 
We recognize revenue in accordance with SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, issued by the American Institute of Certified Public Accountants. We recognize revenue when we determine that the following criteria have been met. If we determine that any of these criteria is not met, we defer revenue until such time as all such criteria are met.
 
  •  Evidence of an Arrangement.  Persuasive evidence of an arrangement exists arising from a legally binding agreement with the customer.
 
  •  Delivery has Occurred.  Delivery of the product has occurred, either through delivery of physical media or by granting the customer the right to obtain the software through electronic delivery, and no customer acceptance provisions exist in the agreement.
 
  •  Fees are Fixed or Determinable.  Fixed or determinable fee in which the fee is free of contingencies and is payable within normal payment terms not to exceed one year.
 
  •  Collection is Deemed Probable.  Collection is probable as determined by the creditworthiness of the customer.
 
We license our software solutions and sell related services together in multiple-element arrangements under both term and perpetual license contracts. When we enter into a multiple-element arrangement, we use the residual method outlined by SOP 98-9 to allocate the total fee among the various elements of the arrangement. The residual method provides standardized rules for recognizing revenue when vendor-specific objective evidence, or VSOE, of fair value does not exist for all elements of an arrangement. Under the residual method, if VSOE does not exist for all of the elements of the arrangement, revenue is deferred until VSOE of fair value exists for all of the undelivered elements in the arrangement. Each license agreement requires us to analyze the individual elements in the transaction and to estimate the fair value of each undelivered element, which typically includes maintenance, hosting and professional services. We allocate revenue to each undelivered element based on its fair value, with the fair value determined by the price charged when that element is sold separately. If, in our judgment, evidence of fair value cannot be established for the undelivered elements in the multiple-element transaction, then we defer the entire amount of revenue from the arrangement until evidence of fair value can be established for all of the undelivered elements, at which time we recognize the revenue allocated to the delivered elements.
 
Term license agreements generally include, on a bundled basis, the right to use the software for a specified period of time, updates and customer support services. Revenue for these arrangements is recognized ratably over the term of the agreement.
 
For arrangements that include significant implementation services, customizations that are essential to that customer’s expected product functionality, milestones or customer acceptance provisions that may affect the collectability of the arrangement fees, or license fee payments tied to performance of professional services, revenue is recognized using contract accounting in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Product-Type Contracts. Under contract accounting, we apply the percentage of completion method based either on contractual milestones or hours of input depending on the specifics contained in each contract. Estimates of the percentage of completion are subject to change as the arrangement progresses. We account for these changes at the time these changes are determined. We classify software license and professional services revenue based upon the estimated fair value of each element in the arrangement.
 
We generally determine the fair value of the maintenance portion of an arrangement based on the VSOE for maintenance services under that arrangement, which is the amount charged on a stand-alone basis for such services, and is essentially determined by the renewal rate of such services. The fair value of the professional services portion


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of the arrangement is based on the rates that we charge for these services when sold independently from a software license.
 
We also offer hosting services to our customers. The fair value of the hosting portion of an arrangement is generally based on the price of hosting services when sold, on a stand-alone basis. When a customer contracts to use our hosting facilities in connection with a term or perpetual license, these arrangements do not provide for substantial penalties or forfeiture of license rights if the customer cancels or does not renew the hosting arrangement.
 
We record deferred revenue for software arrangements when cash has been received from the customer and the arrangement does not qualify for revenue recognition under our revenue recognition policy. Accounts receivable include amounts due from customers for which revenue has been recognized.
 
Estimation for Allowance for Doubtful Accounts
 
In addition to initial credit evaluations conducted upon the inception of a sales transaction, we regularly assess our ability to collect outstanding customer balances and make estimates, and review prior estimates, of our allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable and is offset against our gross trade accounts receivable. Our allowance for doubtful accounts is based on several factors, including overall customer credit quality, historical write-off experience and specific account analysis by customer. These factors may change over time, causing us to adjust our allowance for doubtful accounts accordingly. Provisions for doubtful accounts are recorded in bad debt expense. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. If our historical collection experience does not reflect our future ability to collect outstanding accounts receivable, our future provision for doubtful accounts could be materially affected. To date, we have not incurred any write-offs of accounts receivable significantly different than the amounts reserved. As of December 31, 2006 and June 30, 2007, the allowance for doubtful accounts was $150,000 and $200,000, respectively.
 
Valuation of Goodwill, Long-Lived and Other Intangible Assets
 
Our goodwill represents the excess of the purchase price over the fair value of net assets associated with our acquisitions of Then, Limited in 2004 and DoubleClick EMS in 2005. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not subject to amortization. We allocated a portion of the purchase price of each acquisition to intangible assets, including customer contracts, non-compete agreements and developed technology, which are being amortized over their estimated useful lives. We also allocated a portion of the purchase price of each acquisition to tangible assets and liabilities to be recorded as part of the purchase prices. These allocations involved the application of judgment and the use of estimates. SFAS No. 142 requires that goodwill be tested for impairment on an annual basis and between annual tests when events or changes in circumstances indicate that the carrying value of goodwill may exceed its fair value. We evaluate impairment of goodwill by comparing its estimated fair value to its carrying value. We estimate fair value by computing the expected future discounted operating cash flows based on historical result trends. The estimates of future cash flows involve considerable management judgment and are based upon assumptions about future operating performance. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, economic conditions and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value. Impairment of our goodwill could significantly affect our operating results and financial position. In October 2006, we performed our annual test of goodwill and determined there was no impairment. Goodwill totaled $14.2 million at June 30, 2007.
 
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we continually evaluate whether events or circumstances have occurred that indicate that the estimated remaining useful lives of our long-lived assets, including intangible assets, may warrant revision or that the carrying value of these assets may be impaired. When events or circumstances indicate that the carrying amount of long-lived assets to be held and used or intangible assets might not be recoverable, the expected future undiscounted cash flows from the assets is estimated and compared with the carrying amount of the assets. If the sum of the estimated


35


 

undiscounted cash flows is less than the carrying amount of the assets, we record an impairment loss. The impairment loss is measured by comparing the fair value of the assets with their carrying amounts. We determine fair value based on discounted cash flow or appraised values, as appropriate, and we use judgment in evaluating whether events or circumstances indicate that useful lives should change or that carrying values of assets have been impaired. Any resulting revision to useful life or the amount of an impairment also requires judgment. Any of these judgments could affect the timing or amount of any future impairment charges. Revision of useful lives or impairment charges could significantly affect our operating results and financial positions.
 
Long-lived and other intangible assets are stated on the basis of cost and are being amortized by the straight-line method over the estimated future periods to be benefited.
 
Accounting for Research and Development Expenditures
 
Research and development expenditures are generally charged to operations as incurred. SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on our product development process, technological feasibility is established upon completion of a working model. Costs incurred between the completion of the working model and the point at which the product is ready for general release have been insignificant. Through June 30, 2007, we expensed all of our research and development costs.
 
Stock-Based Compensation
 
Through December 31, 2005, we accounted for our stock-based awards to employees using the intrinsic value method prescribed in Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under the intrinsic value method, compensation expense is measured on the date of the grant as the difference between the deemed fair value of our common stock and the exercise or purchase price multiplied by the number of stock options or restricted stock awards granted.
 
In December 2004, FASB issued SFAS No. 123(R), Share-Based Payments, which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. We adopted SFAS No. 123(R) effective January 1, 2006. SFAS No. 123(R) requires nonpublic companies that used the minimum value method under SFAS No. 123 for either recognition or pro forma disclosures to apply SFAS No. 123(R) using the prospective transition method. As such, we will continue to apply APB Opinion No. 25 in future periods to equity awards outstanding at the date of SFAS No. 123(R)’s adoption that were measured using the minimum value method. Effective with the adoption of SFAS No. 123(R), we have elected to use the Black-Scholes option pricing model to determine the fair value of stock options granted to employees. In accordance with SFAS No. 123(R), we recognized the fair value of employee stock-based awards granted or modified on or after January 1, 2006 using the straight line method over the vesting period of the award. In the six months ended June 30, 2007 and in the year ended December 31, 2006, we recognized $174,000 and $246,000, respectively, in stock-based compensation expense.
 
In all periods prior to January 1, 2006, and in accordance with SFAS No. 148, we have disclosed in the notes to our consolidated financial statements the impact on net income and earnings per share had the fair value method been adopted. We used the Black-Scholes option pricing model to measure stock-based compensation expense under the minimum value method. The assumptions used in the Black-Scholes option pricing model include dividend yield, risk free rate of return and expected option term. If the fair value method had been adopted, net loss for 2005 would have been $38,000 higher than reported, and net loss for 2004 would have been $49,000 higher than reported.
 
As there has been no public market for our common stock prior to this offering, and therefore a lack of company-specific historical and implied volatility data, we granted stock options at exercise prices no less than the


36


 

fair market value at the time of grant as determined by our board of directors in good faith based upon consideration of a number of objective and subjective factors, including the factors described below:
 
  •  the illiquidity of shares of our common stock underlying the options, which were illiquid securities in a private company not readily tradable at the time of grant, with no assurance that the shares would ever be readily tradable;
 
  •  our current and projected cash requirements and prospects for raising needed capital on satisfactory terms;
 
  •  prices of our convertible preferred stock issued in arms-length transactions;
 
  •  important developments relating to achievement of our business objectives, including bookings and growth in our revenue;
 
  •  our results of operations, financial status and the status of our product development efforts;
 
  •  our stage of development and business strategy;
 
  •  the state of the new issue market for similarly-situated software companies;
 
  •  the likelihood of achieving a liquidity event for the shares of our common stock underlying stock options, such as an initial public offering of our common stock or a sale to a third party, given prevailing market conditions;
 
  •  the market prices of publicly-held software companies with similar business models; and
 
  •  contemporaneous valuation reports that we received from Clifton Gunderson LLP, an independent valuation firm, beginning in October 2005.
 
Since January 1, 2006, we granted stock options with exercise prices as follows:
 
                 
    Number of
    Exercise Price
 
Grants Made Since January 1, 2006
  Options Granted     per Share  
 
March 9, 2006
    3,448,250     $ 0.55  
June 8, 2006
    36,000       0.61  
October 4, 2006
    985,375       0.59  
January 18, 2007
    209,750       0.88  
April 26, 2007
    149,750       1.39  
 
On March 9, 2006, we determined the fair value of our common stock to be $0.55 per share. Our determination of fair value was based on the factors listed above. We also obtained a contemporaneous valuation report prepared by Clifton Gunderson LLP for us in contemplation of these option grants. The report yielded a valuation of our equity of $75.5 million on a marketable minority interest basis as of January 1, 2006. The valuation was based upon the publicly-traded guideline company methodology, which uses direct comparisons to comparable public companies and their valuations, trading and operating statistics to estimate comparable valuation ranges. In applying this methodology, Clifton Gunderson LLP selected publicly traded companies that were comparable to us in a variety of factors, such as size, market growth and economic drivers. Companies included in the comparable company analysis were similar to us with respect to some, but not necessarily all, of these characteristics. Clifton Gunderson LLP used weighted average valuation multiples in estimating fair market value. These valuation multiples were determined by calculating the enterprise value to last twelve month and next twelve month revenue multiples for each of the comparable companies, and then selecting the revenue multiples appropriate for us after considering various factors, including anticipated growth, geographic diversification, profitability, size and revenue composition.
 
On June 8, 2006, we determined the fair value of our common stock to be $0.61 per share. Our determination of fair value was based on the factors listed above. In connection with our determination, we also obtained a contemporaneous valuation report prepared by Clifton Gunderson LLP for us in contemplation of these option grants. The report yielded a valuation of our equity of approximately $82.0 million on a marketable minority


37


 

interest basis as of April 1, 2006. After deducting for the dilutive effects of our outstanding common stock and warrants, the report indicated a valuation of our equity of approximately $77.0 million as of April 1, 2006. The valuation was again based upon the publicly-traded guideline company methodology described above.
 
On October 4, 2006, we determined the fair value of our common stock to be $0.59 per share. Our determination of fair value was based on the factors listed above. In connection with our determination, we also obtained a contemporaneous valuation report prepared by Clifton Gunderson LLP for us in contemplation of these option grants. The report yielded a valuation of our equity, including both common stock and convertible preferred stock, of approximately $80.6 million on a marketable minority interest basis as of July 1, 2006. After deducting for the dilutive effects of our outstanding common stock and warrants, the report indicated a valuation of our common equity of approximately $22.7 million as of July 1, 2006. The valuation was based upon the discounted future income (or cash flow) and publicly-traded guideline company methodologies. The discounted future income (or cash flow) methodology applies a discount rate to our long-term projected cash flows to produce an implied valuation range. Clifton Gunderson LLP applied a 21% discount rate in the discounted future income (or cash flow) analysis, which was determined by using a weighted average cost of capital analysis of certain comparable companies.
 
On January 18, 2007, we determined the fair value of our common stock to be $0.88 per share. Our determination of fair value was based on the factors listed above. In connection with our determination, we also obtained a contemporaneous valuation report prepared by Clifton Gunderson LLP for us in contemplation of these option grants. The report yielded a valuation of our equity, including both common stock and convertible preferred stock, of approximately $103 million on a marketable minority interest basis as of October 1, 2006. After deducting for the dilutive effects of our outstanding common stock and warrants, the report indicated a valuation of our common equity of approximately $34.2 million as of October 1, 2006. The valuation was again based upon the discounted future income (or cash flow) and publicly-traded guideline company methodologies, and Clifton Gunderson LLP applied a 21% discount rate in the discounted future income (or cash flow) analysis.
 
On April 26, 2007, we determined the fair value of our common stock to be $1.39 per share. Our determination of fair value was based on the factors listed above. In connection with our determination, we also obtained a contemporaneous valuation report prepared by Clifton Gunderson LLP for us in contemplation of these option grants. The report yielded a valuation of our equity, including both common stock and convertible preferred stock, of approximately $137 million on a marketable minority interest basis as of January 1, 2007. After deducting for the dilutive effects of our outstanding common stock and warrants, the report indicated a valuation of our common equity of approximately $54.1 million as of January 1, 2007. The valuation was again based upon the discounted future income (or cash flow) and publicly-traded guideline company methodologies, and Clifton Gunderson LLP applied a 21% discount rate in the discounted future income (or cash flow) analysis.
 
In August 2007, in connection with our proposed initial public offering and in light of the lapse of time between the April 26, 2007 option grants and the corresponding valuation date of January 1, 2007 used in the valuation report of Clifton Gunderson LLP, we decided to undertake a reassessment of the fair market value of our common stock as of the April 26, 2007 grant date for accounting purposes. In connection with our reassessment of the April 26, 2007 stock option grants, we obtained a valuation report from Clifton Gunderson LLP as of April 1, 2007. The report yielded a valuation of our equity, including common stock and convertible preferred stock, of approximately $145 million on a marketable minority interest basis as of April 1, 2007. After deducting for the dilutive effects of our outstanding common stock and warrants, the report indicated a valuation of our common stock of approximately $57 million, or $1.45 per share of our common stock. Consequently, the grant date fair value of the stock options granted by us, calculated using the Black-Scholes option pricing model pursuant to SFAS No. 123(R), increased to $1.45 from $1.39 for April 26, 2007. This amount will be recorded as stock-based compensation expense over the vesting period of the options.
 
Additionally, in August 2007, and in light of the lapse of time between the January 18, 2007 option grants and the corresponding valuation date of October 1, 2006 used in the valuation report of Clifton Gunderson LLP, we decided to undertake a reassessment of the fair market value of our common stock as of the January 18, 2007 grant date for accounting purposes. In connection with our reassessment of the stock option grants on January 18, 2007, we obtained a valuation report from Clifton Gunderson LLP as of January 1, 2007. The report yielded a valuation of


38


 

our equity, including common stock and convertible preferred stock, of approximately $137 million on a marketable minority interest basis as of January 1, 2007. After deducting for the dilutive effects of our outstanding common stock and warrants, the report indicated a valuation of our common stock of approximately $54.1 million, or $1.39 per share of our common stock. Consequently, the grant date fair value of the stock options granted by us, calculated using the Black-Scholes option pricing model pursuant to SFAS No. 123(R), increased to $1.39 from $0.88 for January 18, 2007. This amount will be recorded as stock-based compensation expense over the vesting period of the options.
 
The following table shows the intrinsic value of our outstanding vested and unvested options as of June 30, 2007 based upon the initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus:
 
                 
    Number of Shares
       
    Underlying Options     Intrinsic Value  
          (in thousands)  
 
Total vested options outstanding
    6,193,516     $         
Total unvested options outstanding
    3,991,597               
                 
Total options outstanding
    10,185,113     $  
                 
 
We believe all equity awards to our employees, including executive officers and directors, were granted at no less than the fair market value of our common stock as determined in good faith by our board of directors on the date of grant.
 
Estimation of Fair Value of Warrants to Purchase Convertible Preferred Stock
 
In connection with our 2005 acquisition financing, we issued warrants exercisable for a maximum of 829,315 shares of Series A2 preferred stock. These warrants are exercisable at a price of $1.037 per share and expire on June 13, 2012. In lieu of exercising these warrants, the holders may convert these warrants, in whole or in part, into a number of shares of Series A2 preferred stock determined by dividing the aggregate fair market value of the Series A2 preferred stock less the aggregate warrant price per share by the fair market value of one share of Series A2 preferred stock. On the closing of an initial public offering, these warrants will convert into warrants to purchase shares of common stock at the then applicable conversion rate for the related preferred stock. The estimated fair value of these warrants was $629,000, $436,000 and $243,000 at June 30, 2007, December 31, 2006 and December 31, 2005, respectively.
 
We have accounted for these warrants under the provisions of FASB Staff Position (FSP) No. 150-5, Issuer’s Accounting under Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that Are Redeemable, an interpretation of SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. Pursuant to FSP No. 150-5, freestanding warrants for shares that are either puttable or warrants for shares that are redeemable are classified as liabilities on the balance sheet at fair value. In connection with the grant of the warrants to purchase Series A2 preferred stock in 2005, we recorded initial fair values of $243,000 as a preferred stock warrant liability. At the end of each reporting period, changes in fair value during the period are recorded as a component of other income or expense.


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The fair value of the above warrants was determined using the Black-Scholes valuation model using the following assumptions:
 
                                 
    Year Ended December 31,     Six Months Ended June 30,  
    2005     2006     2006     2007  
 
Weighted-average risk-free interest rate
    4.41 %     4.79 %     4.71 %     4.48 %
Weighted-average expected life (years)
    2.89       4.53       3.85       4.54  
Expected dividend yield
                       
Weighted-average expected volatility
    41.46 %     40.00 %     46.00 %     37.00 %
 
For the year ended December 31, 2006 and for the six month periods ended June 30, 2006 and 2007, we recorded $193,000, $86,000 and $193,000, respectively, as other expense for the increase in fair value of the preferred stock warrants. We will continue to adjust the liabilities for changes in fair value until the earlier of the exercise of the warrants to purchase shares of preferred stock or the completion of a liquidation event, including the completion of an initial public offering, at which time the liabilities will be reclassified to stockholders’ equity (deficit) when the warrants are converted to common stock warrants.
 
Accounting for Income Taxes
 
We are subject to income taxes in both the United States and foreign jurisdictions, and we use estimates in determining our provision for income taxes. We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which is the asset and liability method for accounting and reporting for income taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. Deferred tax assets, related valuation allowances, and deferred tax liabilities are determined separately by tax jurisdiction. In making these determinations, we estimate tax assets, related valuation allowances and deferred tax liabilities and assess temporary differences resulting from differing treatments of items for tax and accounting purposes. We assess the likelihood that deferred tax assets will be realized, and we recognize a valuation allowance if it is more likely than not that some portion of deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.
 
Our deferred tax assets are comprised primarily of net operating loss carryforwards. At June 30, 2007, we had net operating loss carryforwards available to offset future taxable income for federal and state purposes of approximately $43 million. These net operating loss carryforwards expire at various dates through fiscal years 2019 and 2025 for federal and state purposes, respectively. At June 30, 2007, we had available net operating losses for foreign purposes of $1.3 million, all of which may be carried forward indefinitely. We also had available at June 30, 2007 research and development credit carryforwards to offset future federal and state taxes of approximately $1.6 million and $755,000, respectively, which may be used to offset future taxable income and expire at various dates beginning in 2015 through fiscal year 2022. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business.
 
On January 1, 2007, we adopted FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. The adoption of FIN 48 did not have a material impact on our consolidated financial position or results of operations. See Note 7 to the Consolidated Financial Statements for further details.


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Results of Operations
 
The following table sets forth our consolidated results of operations for the periods shown:
 
                                         
    Year Ended December 31,     Six Months Ended June 30,  
    2004     2005     2006     2006     2007  
                      (unaudited)        
    (in thousands)  
 
Revenue:
                                       
Software, maintenance and hosting
  $ 9,516     $ 15,446     $ 27,076     $ 12,019     $ 16,955  
Professional services
    10,351       15,066       24,516       10,819       12,859  
                                         
Total revenue
    19,867       30,512       51,592       22,838       29,814  
Cost of revenue:
                                       
Software, maintenance and hosting
    946       1,621       2,547       1,243       1,618  
Amortization — technology
    198       254       82       40       40  
Professional services
    7,056       11,802       15,758       8,068       8,821  
                                         
Total cost of revenue
    8,200       13,677       18,387       9,351       10,479  
                                         
Gross profit
    11,667       16,835       33,205       13,487       19,335  
Operating expenses:
                                       
Sales and marketing
    6,975       10,749       16,882       7,582       12,009  
Research and development
    3,478       5,080       7,580       3,904       4,853  
General and administrative
    2,346       3,778       5,287       2,454       3,819  
Amortization — other intangibles
    128       629       942       468       479  
                                         
Total operating expenses
    12,927       20,236       30,691       14,408       21,160  
                                         
Income (loss) from operations
    (1,260 )     (3,401 )     2,514       (921 )     (1,825 )
Other income (expense):
                                       
Interest income
    67       101       78       61       120  
Interest expense
    (54 )     (1,446 )     (236 )     (148 )     (28 )
Other income (expense)
    173       (251 )     (209 )     (130 )     (171 )
                                         
Income (loss) before income taxes
    (1,074 )     (4,997 )     2,147       (1,138 )     (1,904 )
Income tax benefit (expense)
    (14 )     237                    
                                         
Net income (loss)
  $ (1,088 )   $ (4,760 )   $ 2,147     $ (1,138 )   $ (1,904 )
                                         


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The following table sets forth our consolidated results of operations as a percentage of revenue for the periods shown:
 
                                         
    Year Ended December 31,     Six Months Ended June 30,  
    2004     2005     2006     2006     2007  
                      (unaudited)        
    (percentage of revenue)  
 
Revenue:
                                       
Software, maintenance and hosting
    47.9 %     50.6 %     52.5 %     52.6 %     56.9 %
Professional services
    52.1       49.4       47.5       47.4       43.1  
                                         
Total revenue
    100.0       100.0       100.0       100.0       100.0  
                                         
Cost of revenue:
                                       
Software, maintenance and hosting
    4.8       5.3       4.9       5.4       5.4  
Amortization — technology
    1.0       0.8       0.2       0.2       0.1  
Professional services
    35.5       38.7       30.5       35.3       29.6  
                                         
Total cost of revenue
    41.3       44.8       35.6       40.9       35.1  
                                         
Gross profit
    58.7       55.2       64.4       59.1       64.9  
Operating expenses:
                                       
Sales and marketing
    35.1       35.2       32.7       33.2       40.3  
Research and development
    17.5       16.6       14.7       17.1       16.3  
General and administrative
    11.8       12.4       10.2       10.7       12.8  
Amortization — other intangibles
    0.6       2.1       1.8       2.0       1.6  
                                         
Total operating expenses
    65.0       66.3       59.4       63.0       71.0  
                                         
Income (loss) from operations
    (6.3 )     (11.1 )     5.0       (3.9 )     (6.1 )
Other income (expense):
                                       
Interest income
    0.3       0.3       0.2       0.3       0.4  
Interest expense
    (0.3 )     (4.8 )     (0.5 )     (0.6 )     (0.1 )
Other income (expense)
    0.9       (0.8 )     (0.4 )     (0.6 )     (0.6 )
                                         
Income (loss) before income taxes
    (5.4 )     (16.4 )     4.3       (4.8 )     (6.4 )
Income tax benefit (expense)
    (0.1 )     0.8                    
                                         
Net income (loss)
    (5.5 )%     (15.6 )%     4.3 %     (4.8 )%     (6.4 )%
                                         


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Comparison of Six Months Ended June 30, 2006 and 2007
 
Revenue
 
                                                 
    Six Months Ended June 30,              
    2006     2007              
          Percentage
          Percentage
    Period-to-Period
 
          of Total
          of Total
    Change  
    Amount     Revenue     Amount     Revenue     Amount     Percent  
    (unaudited)                          
    (dollars in thousands)  
 
Revenue:
                                               
Software, maintenance and hosting
  $ 12,019       53 %   $ 16,955       57 %   $ 4,936       41.1 %
Professional services
    10,819       47       12,859       43       2,040       18.9  
                                                 
Total revenue
  $ 22,838       100 %   $ 29,814       100 %   $ 6,976       30.5 %
                                                 
 
Software, maintenance and hosting revenue increased 41% to $17.0 million in the six months ended June 30, 2007 from $12.0 million for the six months ended June 30, 2006. This increase was attributable to sales to new customers with increased contract values as those customers licensed more of our products with greater numbers of users, as well as sales of additional products, services and user licenses to existing customers. Recurring software, maintenance and hosting revenue increased to $10.4 million in the six months ended June 30, 2007, representing 61% of software, maintenance and hosting revenue, compared to $6.8 million, or 56% of software, maintenance and hosting revenue in the six months ended June 30, 2006. This increase was due primarily to our business strategy of focusing on term licenses instead of perpetual licenses.
 
Professional services revenue increased 19% to $12.9 million in the six months ended June 30, 2007 from $10.8 million in the six months ended June 30, 2006. This increase was attributable to an increase in resource capacity due to professional services headcount growth, together with continued customer growth.
 
Customers generally purchase professional services with initial software arrangements and periodically over the life of the contract.
 
Cost of Revenue
 
                                                 
    Six Months Ended June 30,              
    2006     2007              
          Percentage of
          Percentage of
             
          Total
          Total
    Period-to-Period Change  
    Amount     Revenue     Amount     Revenue     Amount     Percent  
    (unaudited)                          
    (dollars in thousands)  
 
Cost of revenue:
                                               
Software, maintenance and hosting
  $ 1,243       5 %   $ 1,618       5 %   $ 375       30.2 %
Amortization — technology
    40             40                    
Professional services
    8,068       35       8,821       30       753       9.3  
                                                 
Total cost of revenue
  $ 9,351       40 %   $ 10,479       35 %   $ 1,128       12.1 %
                                                 
 
Cost of revenue relating to software, maintenance and hosting increased 30% to $1.6 million in the six months ended June 30, 2007 from $1.2 million in the six months ended June 30, 2006. This increase primarily was due to an increase of $181,000 in personnel and personnel-related expenses attributable to headcount growth. We also


43


 

incurred $68,000 in subcontractor costs related to maintenance services in the first half of 2007. No similar expenses were incurred in the first half of 2006.
 
Amortization of technology remained at $40,000 in the six months ended June 30, 2007, unchanged from the six months ended June 30, 2006.
 
Cost of revenue relating to professional services increased 9% to $8.8 million in the six months ended June 30, 2007 from $8.1 million in the six months ended June 30, 2006. This increase primarily was related to a $1.4 million increase in personnel and personnel-related expenses resulting from headcount growth, which was partially offset by an $826,000 decrease in subcontractor fees.
 
Gross Profit
 
Gross profit increased 43% to $19.3 million, or 65% of revenue, for the six months ended June 30, 2007 from $13.5 million, or 59% of revenue, for the six months ended June 30, 2006. The increase in gross profit primarily was due to the increase in revenue in the six months ended June 30, 2007 of $7.0 million, while cost of revenue related to software, maintenance and hosting and professional services increased by only $1.1 million.
 
Operating Expenses
 
                                                 
    Six Months Ended June 30,              
    2006     2007              
          Percentage of
          Percentage of
             
          Total
          Total
    Period-to-Period Change  
    Amount     Revenue     Amount     Revenue     Amount     Percent  
    (unaudited)                          
    (dollars in thousands)  
 
Operating expenses:
                                               
Sales and marketing
  $ 7,582       33 %   $ 12,009       40 %   $ 4,427       58.4 %
Research and development
    3,904       17       4,853       16       949       24.3  
General and Administrative
    2,454       11       3,819       13       1,365       55.6  
Amortization — other intangibles
    468       2       479       2       11       2.4  
                                                 
Total operating expenses
  $ 14,408       63 %   $ 21,160       71 %   $ 6,752       46.9 %
                                                 
 
Sales and Marketing Expenses
 
Sales and marketing expenses increased 58% to $12.0 million, or 40% of revenue, in the six months ended June 30, 2007 from $7.6 million, or 33% of revenue, in the six months ended June 30, 2006. This increase primarily was due to a $3.6 million increase in personnel and personnel-related expenses, including sales commissions, related to our headcount and revenue growth. We also experienced an increase of $653,000 in advertising and other general marketing expenses. The increase in sales and marketing expense as a percentage of revenue primarily was due to our shift to a recurring license revenue basis from a perpetual license basis, increased expenses related to our expansion internationally and costs associated with our continued expansion of our partner relationships.
 
Research and Development Expenses
 
Research and development expenses increased 24% to $4.9 million, or 16% of revenue, in the six months ended June 30, 2007 from $3.9 million, or 17% of revenue, in the six months ended June 30, 2006. This increase primarily was due to an increase of $618,000 in personnel and personnel-related expenses related to increased development of our applications. We also experienced an increase of $197,000 in subcontractor fees.


44


 

General and Administrative Expenses
 
General and administrative expenses increased 56% to $3.8 million, or 13% of revenue, in the six months ended June 30, 2007 from $2.5 million, or 11% of revenue, in the six months ended June 30, 2006. This increase primarily was due to an increase in personnel and personnel-related expenses related to an increase in our personnel to build the infrastructure necessary to support our growth.
 
Other Income (Expense)
 
Interest income increased 97% to $120,000 for the six months ended June 30, 2007 from $61,000 in the six months ended June 30, 2006. This increase primarily was due to an increase in interest earned on our higher cash balances throughout the first half of 2007.
 
Interest expense decreased 81% to $28,000 in the six months ended June 30, 2007 from $148,000 in the six months ended June 30, 2006. This decrease primarily was due to our payment in full of our outstanding borrowings under our line of credit in January 2007.
 
Other expense in the six months ended June 30, 2007 was $171,000 compared to expense of $130,000 in the six months ended June 30, 2006, an unfavorable variance of $41,000. The primary reason for this unfavorable variance was an expense of $193,000 in 2007 related to the change in fair market value of the Series A2 preferred stock warrants issued in 2005 compared to an expense of $86,000 for the six months ended June 30, 2006.
 
Income Tax Expense
 
Income tax expense was $0 for the six months ended June 30, 2007 and 2006. This was due to the recognition of a full valuation allowance related to our net deferred tax assets.
 
Net Income (Loss)
 
Net loss increased 67% to $1.9 million for the six months ended June 30, 2007 from $1.1 million for the six months ended June 30, 2006. This increase primarily was due to increased personnel costs in 2007 associated with the expansion of our sales and marketing teams and continued expenditures on our software development.
 
Comparison of Years Ended December 31, 2005 and 2006
 
Revenue
 
                                                 
    Year Ended December 31,              
    2005     2006              
          Percentage
          Percentage
             
          of Total
          of Total
    Period-to-Period Change  
    Amount     Revenue     Amount     Revenue     Amount     Percent  
                (dollars in thousands)              
 
Revenue:
                                               
Software, maintenance and hosting
  $ 15,446       51 %   $ 27,076       52 %   $ 11,630       75.3 %
Professional services
    15,066       49       24,516       48       9,450       62.7  
                                                 
Total revenue
  $ 30,512       100 %   $ 51,592       100 %   $ 21,080       69.1 %
                                                 
 
Software, maintenance and hosting revenue increased 75% to $27.1 million, or 52% of revenue, in 2006 from $15.4 million, or 51% of revenue, in 2005. This increase is attributable to sales to 36 new customers with increased contract values as these customers licensed more of our products with greater numbers of users, as well as sales of additional products, services and user licenses to existing customers. Recurring software, maintenance and hosting revenue increased to $14.6 million in 2006, representing 54% of software, maintenance and hosting revenue, compared to $8.4 million, or 55% of software, maintenance and hosting revenue, in 2005. This increase in recurring


45


 

revenue was partially because our 2006 software, maintenance and hosting revenue reflected a full year of existing customer agreements and renewals from the DoubleClick EMS acquisition in June 2005, which agreements and renewals represented 45% of the total percentage increase in recurring revenue in 2006.
 
Professional services revenue increased 63% to $24.5 million, or 48% of revenue, in 2006 from $15.1 million, or 49% of revenue, in 2005. This increase was attributable to continued customer growth along with an increase in professional services resource capacity due in part to the DoubleClick EMS acquisition in 2005.
 
Cost of Revenue
 
                                                 
    Year Ended December 31,              
    2005     2006              
          Percentage of
          Percentage of
             
          Total
          Total
    Period-to-Period Change  
    Amount     Revenue     Amount     Revenue     Amount     Percent  
    (dollars in thousands)  
 
Cost of revenue:
                                               
Software, maintenance and hosting
  $ 1,621       5 %   $ 2,547       5 %   $ 926       57.1 %
Amortization — technology
    254       1       82       0       (172 )     (67.7 )
Professional services
    11,802       39       15,758       31       3,956       33.5  
                                                 
Total cost of revenue
  $ 13,677       45 %   $ 18,387       36 %   $ 4,710       34.4 %
                                                 
 
Cost of revenue relating to software, maintenance and hosting increased 57% to $2.5 million in 2006 from $1.6 million in the 2005. This increase primarily was due to an increase of $586,000 in personnel and personnel-related expenses related to headcount growth to support the growth in revenue.
 
Amortization of technology decreased 68% to $82,000 in 2006 from $254,000 in 2005. This decrease primarily was due to the amortization of the technology acquired through the Then, Limited acquisition in 2004, which became fully amortized in 2005.
 
Cost of revenue relating to professional services increased 34% to $15.8 million in 2006 from $11.8 million in 2005. This increase primarily was due to an increase of $2.5 million in personnel and personnel-related expenses attributable to an expanded professional services force and an increase of $1.2 million in outsourced professional services fees to support the higher revenue growth.
 
Gross Profit
 
Gross profit increased 97% to $33.2 million, or 64% of revenue, for 2006 from $16.8 million, or 55% of revenue, for 2005. The increase in gross profit primarily was due to increased revenue in 2006 of $21.1 million, while cost of revenue related to software, maintenance and hosting and professional services grew by only $4.7 million.


46


 

Operating Expenses
 
                                                 
    Year Ended December 31,              
    2005     2006              
          Percentage of
          Percentage of
             
          Total
          Total
    Period-to-Period Change  
    Amount     Revenue     Amount     Revenue     Amount     Percent  
    (dollars in thousands)  
 
Operating expenses:
                                               
Sales and marketing
  $ 10,749       35 %   $ 16,882       33 %   $ 6,133       57.1 %
Research and development
    5,080       17       7,580       15       2,500       49.2  
General and Administrative
    3,778       12       5,287       10       1,509       39.9  
Amortization — other intangibles
    629       2       942       2       313       49.8  
                                                 
Total operating expenses
  $ 20,236       66 %   $ 30,691       60 %   $ 10,455       51.7 %
                                                 
 
Sales and Marketing Expenses
 
Sales and marketing expenses increased 57% to $16.9 million, or 33% of revenue, in 2006 from $10.7 million, or 35% of revenue, in 2005. This increase primarily was due to an increase of $5.1 million in personnel and personnel-related expenses attributable to our expanded marketing force. We also experienced an increase of $366,000 in advertising, public relations and marketing expenses and an increase of $102,000 related to the purchase of sales automation tools.
 
Research and Development Expenses
 
Research and development expenses increased 49% to $7.6 million, or 15% of revenue, in 2006 from $5.1 million, or 17% of revenue in 2005. This increase primarily was due to an increase of $2.1 million in personnel and personnel-related expenses attributable to our expanded research and development force. We also experienced an increase in professional fees of $333,000 from the prior year related to outsourced professional services fees.
 
General and Administrative Expenses
 
General and administrative expenses increased 40% to $5.3 million, or 10% of revenue, in 2006 from $3.8 million, or 12% of revenue in 2005. This increase primarily was due to an increase in headcount resulting in higher personnel and personnel-related expenses of $747,000 from the prior year. We also experienced an increase in professional fees of $352,000 related to audit, stock valuation and legal services and an increase in depreciation of $29,000 related to investments in our facilities and equipment.
 
Amortization of Other Intangibles
 
Amortization of other intangibles increased 50% to $942,000, or 2% of revenue, in 2006 from $629,000, or 2% of revenue in 2005. This increase primarily was due to a full year of amortization expense in 2006 related to intangibles acquired in the DoubleClick EMS acquisition in 2005.
 
Other Income (Expense)
 
Interest income decreased 23% to $78,000 in 2006 compared to $101,000 in 2005. This decrease primarily was due to decreased earnings on average cash balances from the prior period.
 
Interest expense decreased 84% to $236,000 in 2006 from an expense of $1.4 million in 2005. Interest expense in 2005 included $593,000 in interest on a term loan, which we repaid in December 2005. In 2006, we recorded $17,000 in debt issuance costs compared to $195,000 in 2005. Also, in 2005, we recorded $216,000 in warrant accretion expense compared to $15,000 in 2006.


47


 

Other expense was $209,000 in 2006 compared to an expense of $251,000 in 2005, a favorable variance of $42,000.
 
Income Tax Expense
 
Income tax expense was $0 in 2006 compared to an income tax benefit of $237,000 in 2005. This was the result of the effect of the Then, Limited acquisition and changes in our valuation allowance in foreign jurisdictions.
 
Net Income (Loss)
 
Net income was $2.1 million in 2006 compared to a net loss of $4.8 million in 2005. This increase in net income primarily was due to a greater increase in our revenue compared to the increase in cost of revenue.
 
Comparison of Years Ended December 31, 2004 and 2005
 
Revenue
 
                                                 
    Year Ended December 31,              
    2004     2005              
          Percentage
          Percentage of
             
          of Total
          Total
    Period-to-Period Change  
    Amount     Revenue     Amount     Revenue     Amount     Percent  
                (dollars in thousands)              
 
Revenue:
                                               
Software, maintenance and hosting
  $ 9,516       48 %   $ 15,446       51 %   $ 5,930       62.3 %
Professional services
    10,351       52       15,066       49       4,715       45.6  
                                                 
Total revenue
  $ 19,867       100 %   $ 30,512       100 %   $ 10,645       53.6 %
                                                 
 
Software, maintenance and hosting revenue increased 62% to $15.4 million, or 51% of revenue, in 2005 from $9.5 million, or 48% of revenue, in 2004. This increase was attributable to sales to 21 new customers, as well as sales of additional solution sets to our existing customers. Recurring software, maintenance and hosting revenue increased to $8.4 million in 2005, representing 55% of software, maintenance and hosting revenue, compared to $4.5 million, or 47% of software, maintenance and hosting revenue, in 2004. This 89% increase in recurring revenue was due in part to maintenance revenue from the customers obtained in the 2005 acquisition of DoubleClick EMS, which represented 36% of the total percentage increase in recurring revenue.
 
Professional services revenue increased 46% to $15.1 million, or 49% of revenue, in 2005 from $10.4 million, or 52% of revenue, in 2004. This increase was attributable to approximately the same percentage growth in professional services headcount, increased sales of services with new licenses and add-on services from existing customers.


48


 

Cost of Revenue
 
                                                 
    Year Ended December 31,              
    2004     2005              
          Percentage
          Percentage
             
          of Total
          of Total
    Period-to-Period Change  
    Amount     Revenue     Amount     Revenue     Amount     Percent  
    (dollars in thousands)  
 
Cost of revenue:
                                               
Software, maintenance and hosting
  $ 946       5 %   $ 1,621       5 %   $ 675       71.4 %
Amortization — technology
    198       1       254       1       56       28.3  
Professional services
    7,056       36       11,802       39       4,746       67.3  
                                                 
Total cost of revenue
  $ 8,200       42 %   $ 13,677       45 %   $ 5,477       66.8 %
                                                 
 
Cost of revenue relating to software, maintenance and hosting increased 71% to $1.6 million in 2005 from $946,000 in 2004. This increase primarily was due to a $540,000 increase in personnel and personnel-related expenses due to increases in headcount in this area.
 
Amortization of technology increased 28% to $254,000 in 2005 from $198,000 in 2004. This increase was related to the impact of amortization of intangibles acquired in the DoubleClick EMS acquisition in 2005.
 
Cost of revenue relating to professional services increased 67% to $11.8 million in 2005 from $7.1 million in 2004. This increase primarily was due to a $4.5 million increase in personnel and personnel-related expenses attributable to an expanded professional services force, which was partially offset by a decrease in outsourced professional services fees in 2005 of $243,000 compared to 2004.
 
Gross Profit
 
Gross profit increased 44% to $16.8 million, or 55% of revenue, for 2005 from $11.7 million, or 59% of revenue, for 2004. The increase in gross profit primarily was due to revenue growth in 2005 of $10.6 million, while cost of revenue grew by only $5.5 million.
 
Operating Expenses
 
                                                 
    Year Ended December 31,              
    2004     2005              
          Percentage
          Percentage
             
          of Total
          of Total
    Period-to-Period Change  
    Amount     Revenue     Amount     Revenue     Amount     Percent  
    (dollars in thousands)  
 
Operating expenses:
                                               
Sales and marketing
  $ 6,975       35 %   $ 10,749       35 %   $ 3,774       54.1 %
Research and development
    3,478       18       5,080       17       1,602       46.1  
General and Administrative
    2,346       12       3,778       12       1,432       61.0  
Amortization — other intangibles
    128       1       629       2       501       391.4  
                                                 
Total operating expenses
  $ 12,927       66 %   $ 20,236       66 %   $ 7,309       56.5 %
                                                 
 
Sales and Marketing Expenses
 
Sales and marketing expenses increased 54% to $10.7 million, or 35% of revenue, in 2005 from $7.0 million, or 35% of revenue, in 2004. This increase primarily was due to an increase of $3.0 million in personnel and


49


 

personnel-related expenses attributable to our expanded sales and marketing forces. In addition, we experienced a $586,000 increase in advertising, public relations and marketing expenses and a $131,000 increase in professional services fees primarily related to sales contract negotiations and legal services.
 
Research and Development Expenses
 
Research and development expenses increased 46% to $5.1 million, or 17% of revenue, in 2005 from $3.5 million, or 18% of revenue, in 2004. This increase primarily was due to an increase in personnel and personnel-related expenses of $942,000 from 2004 to 2005 attributable to the expansion of our research and development force. We also experienced a $596,000 increase in professional fees related to outsourced professional services fees.
 
General and Administrative Expenses
 
General and administrative expenses increased 61% to $3.8 million, or 12% of revenue, in 2005 from $2.3 million, or 12% of revenue, in 2004. This increase primarily was due to a $634,000 increase in personnel and personnel-related expenses from the prior year. We also experienced a $395,000 increase in facilities costs, such as rent and utilities, and a $288,000 increase in professional services fees primarily related to increased audit and accounting fees.
 
Amortization of Other Intangibles
 
Amortization of other intangibles increased 391% to $629,000, or 2% of revenue, in 2005 from $128,000, or 1% of revenue, in 2004. This increase was related to amortization of intangibles acquired in the DoubleClick EMS acquisition in 2005.
 
Other Income (Expense)
 
Interest income increased 51% to $101,000 in 2005 from $67,000 in 2004. This increase primarily was due to year-over-year fluctuations in our average cash balances.
 
Interest expense increased 2,578% to $1.4 million in 2005 from $54,000 in 2004. In 2005, we incurred $593,000 in interest expense on a term loan and $331,000 in interest expense on the revolving line of credit related to the DoubleClick EMS acquisition. In addition, interest expense in 2005 included $216,000 in warrant accretion expense and $195,000 in amortization of debt issuance costs. There were no similar expenses in 2004.
 
Other expense was $251,000 in 2005 compared to income of $173,000 in 2004, an unfavorable variance of $424,000. We experienced a loss of $165,000 in short term foreign currency fluctuations in 2005 compared to a gain of $56,000 in 2004. Further, we recorded a loss on disposals of property and equipment of $36,000 in 2005 compared to a gain on disposals of $4,000 in 2004.
 
Income Tax Expense
 
We incurred an income tax benefit of $237,000 in 2005 compared to an expense of $14,000 in 2004. This was the result of the effect of the Then, Limited acquisition.
 
Net Income (Loss)
 
Net loss increased 338% to $4.8 million for 2005 from $1.1 million in 2004. This increase primarily was a result of additional expenses in 2005 associated with expanding our business, including expenses related to increased headcount and our acquisition of DoubleClick EMS.


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Selected Quarterly Operating Results
 
The following tables show our unaudited quarterly income statement data for each of our six most recent quarters, as well as our percentage of total revenue for each line item shown. We derived this information from our unaudited financial statements, which, in our opinion, have been prepared on the same basis as our audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the information for the quarters presented. This information should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of the results of operations for any future period.
 
                                                 
    Three Months Ended  
    Mar. 31,
    Jun. 30,
    Sep. 30,
    Dec. 31,
    Mar. 31,
    Jun. 30,
 
    2006     2006     2006     2006     2007     2007  
    (unaudited)
 
    (in thousands)  
 
Revenue:
                                               
Software, maintenance & hosting
  $ 5,312     $ 6,706     $ 7,213     $ 7,845     $ 7,658     $ 9,297  
Professional services
    4,864       5,955       7,024       6,673       6,696       6,163  
                                                 
Total revenue
    10,176       12,661       14,237       14,518       14,354       15,460  
Cost of revenue:
                                               
Software, maintenance & hosting
    633       610       654       650       782       836  
Amortization — technology
    20       20       21       21       20       20  
Professional services
    4,173       3,895       3,821       3,869       4,162       4,659  
                                                 
Total cost of revenue
    4,826       4,525       4,496       4,540       4,964       5,515  
                                                 
Gross profit
    5,350       8,136       9,741       9,978       9,390       9,945  
Operating expenses:
                                               
Sales and marketing
    3,557       4,025       4,352       4,948       5,289       6,720  
Research and development
    1,828       2,075       1,927       1,750       2,225       2,628  
General and administrative
    1,196       1,258       1,311       1,522       1,870       1,949  
Amortization — other intangibles
    232       235       236       239       278       201  
                                                 
Total operating expenses
    6,813       7,593       7,826       8,459       9,662       11,498  
                                                 
Income (loss) from operations
    (1,463 )     543       1,915       1,519       (272 )     (1,553 )
Other income (expense):
                                               
Interest income
    44       17       9       8       53       67  
Interest expense
    (94 )     (53 )     (52 )     (37 )     (17 )     (11 )
Other income (expense)
    (94 )     (37 )     (40 )     (38 )     (180 )     9  
                                                 
Income (loss) before income taxes
    (1,607 )     470       1,832       1,452       (416 )     (1,488 )
Income tax expense
                                   
                                                 
Net income (loss)
  $ (1,607 )   $ 470     $ 1,832     $ 1,452     $ (416 )   $ (1,488 )
                                                 
 


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    Three Months Ended  
    Mar. 31,
    Jun. 30,
    Sep. 30,
    Dec. 31,
    Mar. 31,
    Jun. 30,
 
    2006     2006     2006     2006     2007     2007  
    (unaudited)  
    (percentage of revenue)  
 
Revenue:
                                               
Software, maintenance & hosting
    52 %     53 %     51 %     54 %     53 %     60 %
Professional services
    48       47       49       46       47       40  
                                                 
Total revenue
    100       100       100       100       100       100  
Cost of revenue:
                                               
Software, maintenance & hosting
    6       5       5       4       5       6  
Amortization — technology
                                   
Professional services
    41       31       27       27       29       30  
                                                 
Total cost of revenue
    47       36       32       31       34       36  
                                                 
Gross profit
    53       64       68       69       66       64  
Operating expenses:
                                               
Sales and marketing
    35       32       31       34       37       43  
Research and development
    18       16       14       12       16       17  
General and administrative
    12       10       9       10       13       13  
Amortization — other intangibles
    2       2       2       2       2       1  
                                                 
Total operating expenses
    67       60       56       58       68       74  
                                                 
Income (loss) from operations
    (14 )     4       12       11       (2 )     (10 )
Other income (expense):
                                               
Interest income
                                   
Interest expense
    (1 )                              
Other income (expense)
    (1 )                       (1 )      
                                                 
Income (loss) before income taxes
    (16 )     4       12       11       (3 )     (10 )
Income tax expense
                                   
                                                 
Net income (loss)
    (16 )%     4 %     12 %     11 %     (3 )%     (10 )%
                                                 
 
Quarterly Timing of Revenue
 
Since the fourth quarter of 2006, our business strategy has been to emphasize licensing our software on a recurring revenue basis under term licenses, as opposed to a perpetual license model. Because recurring license arrangements result in longer periods of time over which revenue from a customer arrangement is recognized as compared to current perpetual license recognition, we may recognize less revenue in a given quarter than we would have had we continued with a predominantly perpetual license business model. Similarly, a decrease in new or renewed recurring licenses in any one quarter will not necessarily be reflected fully in the total revenue for that quarter and may negatively affect our revenue in future quarters. Results may also vary from quarter to quarter due to a number of factors, many of which are beyond our control, including spending priorities and mandatory budget cycles of our customers and prospects, market acceptance of new solutions or enhancements by us or our competitors and price competition.

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Seasonality
 
In many of our customer relationships, we have mutually agreed to set annual renewal periods to match our customers’ annual budgeting cycles. As a result, a substantial percentage of our recurring revenue is contractually renewed at the beginning of the calendar year. This has led to a higher percentage of cash collections occurring in our first and fourth quarters of each year, with substantially less recurring revenue cash flows in the second and third quarters. In addition, we have historically experienced our highest sales bookings in our fourth quarter, which we believe in part is due to our customers’ annual budgeting cycles.
 
Liquidity and Capital Resources
 
Since our inception in 1998, we have financed our operations primarily through cash flows from operations, driven by revenue and net income growth, proceeds from the issuance of preferred stock and our line of credit. We have also entered into term notes to provide financing related to our acquisitions in 2004 and 2005.
 
As of June 30, 2007, we had approximately $6.0 million in cash and cash equivalents and $6.7 million in accounts receivable. In addition, we have $9.5 million in available borrowings under a line of credit. For the six months ended June 30, 2007 and the years ended December 31, 2006 and 2004, we have had positive operating cash flows. We have no outstanding debt as of June 30, 2007.
 
We believe our existing cash and cash equivalents, operating cash flows and net proceeds of this offering will meet our anticipated cash needs for at least the next twelve months. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, the introduction of new products, and the expansion of our sales and marketing and research and development activities. To the extent that our cash and cash equivalents, operating cash flows and net proceeds of this offering are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies and/or products. In the event we require additional cash resources, we may not be able to obtain bank credit arrangements or obtain equity or debt financing on terms acceptable to us or at all.
 
Preferred Stock and Other Equity Issuances
 
We raised $20.0 million of net proceeds through the issuance of Series A preferred stock in 2000. We raised an additional $11.9 million of net proceeds through the sale of Series A1 preferred stock in 2002. In 2005 and 2006, we raised $14.5 million of net proceeds through the sale of Series A2 preferred stock. All of the shares of our preferred stock will convert into common stock upon completion of this offering. In addition, we received proceeds from exercises of common stock options in the amounts of $164,000, $60,000 and $12,000 in the years ended December 31, 2006, 2005 and 2004, respectively, and $16,000 in the six months ended June 30, 2007.
 
Credit facility borrowing
 
In September 2004, we entered into a financing arrangement with a bank that provided a line of credit of up to $4.0 million based on eligible accounts receivable. The line of credit matured on September 27, 2005. The line of credit was secured by all of our assets including intellectual property. Interest on the line of credit was payable monthly at the prime rate plus 0.75%, but not less than 5.0%. The line of credit also provides for an unused revolving line facility fee equal to 0.25% of the unused borrowing average for the year.
 
In June 2005, in connection with the acquisition of DoubleClick EMS, we amended our line of credit with the bank to increase the availability under the line of credit to $10.0 million, subject to borrowing base requirements. In connection with this amendment, we issued $125,000 of warrants to the bank, which are exercisable for Series A2 preferred stock at an exercise price of $1.037 per share. We borrowed $6.0 million under the revolving line of credit in June 2005, to fund a portion of the acquisition price of DoubleClick EMS. The borrowing base is determined based on eligible accounts receivable and unrestricted cash. In connection with the amendment to the credit facility, the bank replaced the original financial covenant requirements with a minimum bookings covenant and a minimum covenant relating to earnings before income taxes, depreciation and amortization commencing with the quarter ended June 30, 2005. Interest on the line of credit is payable monthly at the prime rate plus 0.75%, but cannot be less


53


 

than 5.0%. The interest rate in effect at December 31, 2006 and 2005 was 9.0% and 8.0%, respectively. Under an amendment entered into in July 2007, the maturity date of the line of credit was extended to December 31, 2007, and we amended certain covenants related to minimum revenue, foreign accounts receivable and acquisitions. In January 2007, we repaid the full amount of borrowings under this line of credit, and we had availability of approximately $9.5 million as of June 30, 2007.
 
We also have provided a letter of credit to the landlord of our leased primary office space in the amount of $500,000 as security for all of our obligations under the terms of the lease. The letter of credit is renewable annually and does not expire until ninety days after the expiration or earlier termination of the lease.
 
Discussion of Cash Flows
 
Six Months Ended June 30, 2007
 
Net cash provided by operating activities for the six months ended June 30, 2007 was approximately $3.7 million. Net cash provided by operating activities in 2007 primarily was a result of our net loss of $1.9 million, after adding back the effect of the increase in deferred revenue of approximately $5.3 million and other non-cash charges such as depreciation and amortization expense of approximately $1.1 million and stock-based compensation expense of $174,000. We also experienced an increase in cash of $1.8 million related to our change in pledge cash requirements. Partially offsetting these net increases in cash was a $1.2 million increase in prepaid and other assets.
 
Net cash used in investing activities for the six months ended June 30, 2007 was approximately $1.0 million, which primarily was used for purchases of property and equipment to further develop and enhance our software and infrastructure.
 
Net cash used in financing activities for the six months ended June 30, 2007 was approximately $2.2 million, which primarily related to debt repayments of approximately $2.0 million.
 
Six Months Ended June 30, 2006
 
Net cash provided by operating activities for the six months ended June 30, 2006 was approximately $1.8 million. Net cash provided by operating activities for the six months ended June 30, 2006 primarily was a result of our net loss of approximately $1.1 million, after adding back the effect of the increase in deferred revenue of approximately $3.5 million and other non-cash charges such as depreciation and amortization expense of $846,000 and stock-based compensation expense of $105,000. We also experienced an increase in cash of $1.4 million related to our change in pledged cash requirements. Partially offsetting these positive cash effects was an increase in accounts receivable of approximately $1.8 million.
 
Net cash used in investing activities for the six months ended June 30, 2006 was $689,000, which primarily was used for purchases of property and equipment to further develop and enhance our software and infrastructure.
 
Net cash used in financing activities for the six months ended June 30, 2006 was approximately $1.0 million, which primarily related to debt repayments of approximately $2.2 million. Partially offsetting this cash outflow was an increase of $1.1 million in cash related to the issuance of our Series A2 preferred stock in 2006.
 
Year Ended December 31, 2006
 
Net cash provided by operating activities for the year ended December 31, 2006 was approximately $4.1 million. Net cash provided by operating activities in 2006 primarily was a result of our net income of approximately $2.1 million, after adding back the increase in deferred revenue of approximately $2.8 million and other non-cash charges such as depreciation and amortization expense of approximately $1.8 million and stock-based compensation expense of $246,000. Partially offsetting these positive cash effects was an increase in accounts receivable of approximately $2.3 million.
 
Net cash used in investing activities for the year ended December 31, 2006 was approximately $2.4 million, which primarily was used for purchases of property and equipment to further develop and enhance our software and


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infrastructure. Additionally, we paid $797,000 in contingent purchase price related to our acquisition of Then, Limited.
 
Net cash used in financing activities for the year ended December 31, 2006 was approximately $1.7 million, which primarily related to debt repayments of approximately $3.0 million. Partially offsetting this cash outflow was an increase of $1.1 million in cash related to the issuance of our Series A2 preferred stock in 2006.
 
Year Ended December 31, 2005
 
Net cash used in operating activities for the year ended December 31, 2005 was approximately $1.2 million. Net cash used by operating activities in 2005 primarily was a result of our net loss of approximately $4.8 million, after adding back the effect of the increase in deferred revenue of approximately $3.0 million and other non-cash charges such as depreciation and amortization expense of approximately $1.5 million. Partially offsetting these positive cash effects was a decrease in cash of approximately $1.4 million related to our change in pledged cash requirements.
 
Net cash used in investing activities for the year ended December 31, 2005 was approximately $16.5 million, which was used primarily for the acquisition of DoubleClick EMS.
 
Net cash provided by financing activities for the year ended December 31, 2005 was approximately $18.1 million, which primarily related to the issuance of our Series A2 preferred stock in 2005 in exchange for proceeds of approximately $13.2 million. We also received cash proceeds from a note payable of approximately $10.4 million and proceeds from our credit facility of approximately $4.9 million, offset by approximately $10.5 million in repayments on borrowings.
 
Year Ended December 31, 2004
 
Net cash provided by operating activities for the year ended December 31, 2004 was approximately $2.7 million. Net cash provided by operating activities in 2004 primarily was a result of our net loss of approximately $1.1 million, after adding back the effect of the increase in accrued expenses of $1.5 million, the increase in deferred revenue of approximately $1.1 million and other non-cash charges such as depreciation and amortization expense of $907,000.
 
Net cash used in investing activities for the year ended December 31, 2004 was approximately $3.7 million, which primarily was used for the acquisition of Then, Limited.
 
Net cash used in financing activities for the year ended December 31, 2004 was $407,000, which related primarily to payments on our capital lease obligations and repayments on borrowings.
 
Contractual Obligations and Commitments
 
As of June 30, 2007, our principal commitments consist of obligations under facility and equipment leases, including leases for office space. The following table sets forth a summary of our contractual obligations as of June 30, 2007:
 
                                         
    Payments Due by Period  
          Less Than
                More Than
 
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (in thousands)  
 
Operating lease obligations
  $ 8,542     $ 986     $ 2,014     $ 1,779     $ 3,763  
                                         
 
Off-Balance Sheet Arrangements
 
As of June 30, 2007, we did not have any off-balance sheet arrangements.


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Quantitative and Qualitative Disclosures About Market Risk
 
Foreign Currency Exchange Risk
 
Our operating results and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and the British pound. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations. Some of our agreements with foreign customers involve payments in denominations other than the U.S. dollar, which may create foreign currency exchange risks for us. Revenue denominated in currencies other than the U.S. dollar was immaterial in the six months ended June 30, 2007 and in the years ended December 31, 2006, 2005 and 2004.
 
As of June 30, 2007, we had $1.3 million of receivables denominated in currencies other than the U.S. dollar. If the foreign exchange rates fluctuated by 10% as of June 30, 2007, our foreign exchange exposure would have fluctuated by $130,000. In addition, our subsidiaries have intercompany accounts that are eliminated in consolidation, but that expose us to foreign currency exchange rate exposure. Exchange rate fluctuations on short-term intercompany accounts are reported in other income (expense). Exchange rate fluctuations on long-term intercompany accounts, which are invested indefinitely without repayment terms, are recorded in other comprehensive income (loss) in stockholders’ equity.
 
Interest Rate Risk
 
At June 30, 2007, we had unrestricted cash and cash equivalents totaling $6.0 million. These amounts were invested primarily in money market funds and were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Decreases in interest rates, however, would reduce future investment income.
 
Recent Accounting Pronouncements
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities, providing companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles, or GAAP, have required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. SFAS No. 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 requires us to provide additional information that will help investors and other users of financial statements to more easily understand the effect of our choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which we have chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective for us on January 1, 2008. We do not believe that the adoption of this Statement will have a significant impact on our operating results or financial position.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Where applicable, SFAS No. 157 simplifies and codifies related guidance within GAAP. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact from adopting SFAS No. 157 on our financial statements, although we do not currently believe that the adoption of SFAS No. 157 will have a significant impact on our operating results or financial position.
 
In September 2006, the SEC released Staff Accounting Bulletin, or SAB, No. 108 which provides guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB No. 108 requires entities to quantify the effects of unadjusted errors using both a balance sheet and an income statement approach. Entities are required to evaluate whether either approach results in a


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quantifying misstatement that is material. We adopted SAB No. 108 effective 2006. The adoption of SAB No. 108 did not have an impact on our results of operations or financial position.
 
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions, including a rollforward of tax benefits taken that do not qualify for financial statement recognition. We adopted FIN 48 effective January 1, 2007. The cumulative effect of initially adopting FIN 48 will be recorded as an adjustment to opening retained earnings for that year and will be presented separately. Only tax positions that meet the more likely than not threshold at the effective date may be recognized upon adoption of FIN 48. The impact of our reassessment of our tax positions in accordance with FIN 48 was immaterial.


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BUSINESS
 
Overview
 
We are a leading provider of marketing software and services that automate a broad spectrum of marketing processes, and enhance the productivity and performance of marketing organizations. Our integrated suite of applications, Aprimo Enterprise, improves alignment across the Marketing Value Chain, which we define as the business processes that connect enterprise marketing departments with external marketing suppliers and enable the execution of marketing programs across multiple channels. Aprimo Enterprise is based on the Enterprise Marketing Backbone, our innovative service oriented architecture, which automates and unifies a broad range of marketing processes. We provide solutions primarily to large enterprises and medium-sized businesses worldwide, including AT&T Inc., Bank of America, N.A., Capital One Services, Inc., The Home Depot U.S.A. Inc., Honda Motor Europe Ltd., Intel Corporation, Merck & Co., Inc., Nestlé S.A., Sprint Nextel Corporation, Target Corporation, Toyota Motor Corporation and Warner Bros. Entertainment, Inc.
 
Marketing is one of the most critical enterprise functions, with worldwide expenditures on marketing activities exceeding $1 trillion annually. Marketing professionals are responsible for a wide range of activities, including the development of product strategy, brand and company promotion, and pricing and channel placement programs. In carrying out these responsibilities, marketing professionals must manage and analyze significant amounts of market data, optimize their business processes across the Marketing Value Chain and make critical strategic decisions in real time. Marketing professionals are further challenged by the increasing complexity of the marketplace, the proliferation of media channels, greater fiscal accountability for marketing expenditures and the integration of traditional marketing channels and the Internet. Despite these challenges, few organizations have effectively automated their marketing functions, and most continue to rely on a mix of manual processes, internally developed applications and discrete software tools to manage their marketing activities.
 
Aprimo Enterprise, our flagship solution, enables marketing professionals to better manage and optimize marketing expenditures and enhance their productivity by digitizing marketing processes from end to end. Our solutions meet the unique challenges inherent in the day-to-day activities of marketing professionals, which include managing assets and content, maintaining brand consistency, tracking expenditures, optimizing customer contacts, measuring advertising campaign results and increasing the volume of high-value sales leads. By implementing our solutions, we believe our customers benefit from increased revenue through more sales leads and higher response rates, lower costs through the elimination of expensive rework, reduced time to market through streamlined production and approval workflows and improved efficiency of overall marketing operations through automated resource planning and management. Aprimo Enterprise is highly scalable, with implementations generally ranging from 10 to 5,000 users. Moreover, Aprimo Enterprise is highly configurable and provides role-based functionality for all users within the marketing organization through six main solution sets: Planning and Financial Management, Production Management and Workflow, Brand Content Management, Campaign Management and Planning, Lead Management and B2B Marketing. Our customers can choose to implement any of our six solution sets individually or combined within our fully integrated marketing management platform.
 
Additionally, we offer Aprimo Professional, a web-based, on-demand solution, which is delivered as a multi-tenant subscription service, specifically designed for medium-sized businesses and marketing workgroups within larger organizations. Aprimo Professional also serves as an entry point at key accounts that have a high potential for future growth through significant cross sell opportunities. We also offer Aprimo Agency, a role-based solution specifically designed to help marketing agencies increase efficiency and differentiate their offerings in a highly competitive market.
 
A significant portion of our revenue is contacted prior to the period in which it is recorded. For example, by the end of the fourth quarter of 2006, we had contracted over 80% of our revenue for the first quarter of 2007. We expect this trend to continue.
 
We increased our revenue 69% from $30.5 million in 2005 to $51.6 million in 2006. In addition, our revenue increased 31% from $22.8 million for the six months ended June 30, 2006 to $29.8 million for the six months ended June 30, 2007. We generated approximately 80% of our revenue in 2006 from customers in the United States and approximately 20% from international customers.


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Our Industry
 
Marketing is one of the most critical enterprise functions. Marketing professionals seek to understand needs of customers and prospects, and develop products and services with specifications to meet those demands. In addition, upon developing a product or service, marketing professionals must then develop a pricing strategy that balances customer demand and costs to the organization to maximize profitability. Marketing professionals are responsible for promoting their products, brand and company and building consumer awareness through advertising, sales promotion, publicity, direct marketing, events, sponsorships and packaging. Finally, marketing professionals must optimize the placement, or distribution, of products to customers. Marketing professionals can choose from a variety of channels, geographies, industries and consumer segments when developing their overall marketing strategies. In performing these functions, marketing professionals interact with an external network of marketing suppliers including creative agencies, telemarketing providers, marketing service providers, public relations agencies, web development agencies, printers and fulfillment organizations, and loyalty and market researchers.
 
To date, few organizations have effectively automated their marketing functions, and most continue to rely on a variety of manual processes, internally developed applications and discrete software tools, or point products, for their marketing activities. The point products typically used by marketing organizations were not designed to meet the specific needs of marketing professionals and generally include office productivity tools such as Microsoft Office, design tools such as Adobe, certain functionalities of enterprise application systems offered by providers such as SAP AG and Oracle Corporation and a variety of custom-built solutions. In many cases, marketing professionals even rely on manual processes, such as mailing hard copies of budgets, work plans and creative copy, to manage marketing activities and communicate with marketing suppliers. As such, marketing remains one of the least automated functions within increasingly integrated enterprises.
 
The marketing software and services market is large and growing due to the significant amount of marketing expenditures that must be managed, the increasing complexity of the marketplace and the Marketing Value Chain, and the increasing accountability demanded of marketing organizations. Our total addressable market includes inter-related market segments, such as Enterprise Marketing Management, Marketing Resource Management, Marketing Analytics, Campaign Management, Marketing Performance Management and Lead Management. Our total opportunity is further enhanced by the demand for integrated marketing platforms as opposed to point products, our ability to integrate the marketing organization and other enterprise functions, and our deployments that extend beyond the enterprise to connect with third-party marketing suppliers. According to a 2006 Gartner report, more than 50% of the marketing staff within global companies will use enterprise software by 2010, compared with fewer than 20% that do so today.
 
We expect our growth to continue due to a number of evolving challenges faced by marketing organizations, including:
 
Increasing Challenges of the Marketplace.  Marketing professionals are facing increasing challenges, as marketing and media channels proliferate, consumers become better informed and harder to reach and the number of product offerings available to consumers rapidly increases. As a result of messaging fatigue, consumers increasingly seek to limit the number of marketing messages they receive by using technologies such as DVRs, commercial free radio and SPAM filters. Additionally, the number of media channels through which marketing professionals can choose to target consumers has grown rapidly and includes over 100 million websites, up to 300 television channels per market, 17,000 magazine titles and 14,000 radio stations. The total number of products being marketed to consumers continues to rapidly increase as enterprises develop more personalized products and reduce cycle times for new product introductions.
 
Growing Complexity of the Marketing Value Chain.  The Marketing Value Chain consists of an increasingly complicated network of entities including the internal marketing organization, external marketing suppliers, numerous channels, and all customers and prospective customers. In particular, the internal marketing organization is a loosely interconnected group of marketing departments including corporate, business unit, brand and geographical marketing groups. Furthermore, each of these internal departments can interact with its own external network of marketing suppliers, including creative agencies, telemarketing providers, marketing service providers, public relations agencies, web development agencies, printers and fulfillment organizations, and loyalty and market researchers. Given the complexity of the Marketing Value Chain, marketing professionals face difficult challenges


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which include managing assets and content, maintaining brand consistency, tracking expenditures, optimizing customer contacts, measuring advertising campaign results and increasing the volume of high-value sales leads.
 
Greater Accountability of the Marketing Organization.  Marketing organizations face greater fiscal accountability today than ever before and marketing expenditures increasingly must demonstrate an expected return on investment, or ROI. Regulations such as the Sarbanes-Oxley Act, which mandates internal controls over financial reporting, require marketing expenditures to be aligned with business objectives, visible across business units and geographies, and optimized and transparent across external marketing suppliers. Additionally, organizations are placing greater attention on risk management due to increasing legal and regulatory compliance requirements on marketing offers, promotions and communications, including new privacy regulations such as “no call” lists and anti-spam laws.
 
Lack of Flexible, Comprehensive Marketing Platforms.  While most disciplines within the enterprise, such as finance, sales, manufacturing, human resources, customer service and supply chain management, have implemented comprehensive software solutions to automate their workflows, business processes and data collection requirements, marketing organizations have historically lacked a unified platform to manage marketing activities and support their unique business requirements. Few organizations have effectively automated their entire marketing functions, and most continue to rely on manual processes, internally developed software, office productivity tools, such as Microsoft Office or Adobe software, and numerous other point products. As such, marketing remains one of the least automated functions within increasingly integrated enterprises, and organizations are recognizing the growing challenge to remove the workflow bottlenecks inherent in marketing using manual processes and point products, which limit the marketing productivity and ROI of marketing expenditures.
 
Integration of Traditional Marketing Channels and the Internet.   Through the last decade, a new paradigm has emerged as marketing professionals now reach customers through the Internet. A second generation of applications and channels collectively known as Web 2.0 has extended this paradigm to include blogging, social networking, and user-generated content. While marketing expenditures in these channels remain relatively small compared to traditional marketing expenditures, online advertising is projected to approach 9% of total advertising expenditures by 2011, according to a 2007 IDC report, and is critical to the success of most marketing efforts. As a result, marketing professionals must execute in an environment where brand strategy must be rationalized across traditional mass media and direct marketing channels, as well as online channels. Effectively marketing across multiple channels requires technology solutions that can operate within the digital domain and coordinate activities across a number of channels within an integrated platform. Marketing professionals have traditionally lacked a multi-channel technology solution that operates across offline and online channels.
 
Given the mounting challenges marketing organizations face, there is a need for a comprehensive software solution to automate and digitize marketing processes across the entire Marketing Value Chain; adaptable workflow technology to manage proprietary business processes; a unified platform that integrates marketing processes with other enterprise functions; and integrated real-time reporting for marketing performance management. We believe that a significant market opportunity exists for us to deliver our comprehensive marketing platform to meet the specific needs of large enterprises and medium-sized businesses.
 
Our Solution
 
We deliver a comprehensive software solution that enables our customers to automate their entire Marketing Value Chain, thereby increasing their marketing productivity and enhancing overall marketing performance. Aprimo Enterprise is a scalable platform that digitizes marketing processes from end to end and automates all areas of the marketing function, including financial management and planning, workflow management, brand content management, campaign management and lead management. Through the Enterprise Marketing Backbone, our service oriented architecture, Aprimo Enterprise integrates marketing with other enterprise functions, such as sales and finance. Our solutions are highly configurable, provide role-based functionality to all marketing users, and are highly scalable with implementations generally ranging from 10 to 5,000 users.
 
By implementing our solutions, we believe our customers benefit from:
 
  •  revenue gains through more sophisticated and effective marketing programs;


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  •  cost savings through optimized investment and resource allocation; and
 
  •  real-time measurement and insight into marketing performance, which improves the productivity of the marketing organization.
 
Our Competitive Strengths
 
We believe that our leading market position results from several key competitive strengths, including:
 
Unified Platform for Marketing.  Our applications are built upon a unified platform that connects and automates communications, data and business processes across thousands of users located within numerous disparate groups in the marketing organization. Our flexible platform can improve the productivity of our customers’ marketing organizations and can be rapidly configured to meet the specific needs of marketing organizations within numerous industry verticals, including financial services, life sciences, media and entertainment, retail, high technology, telecommunications and consumer packaged goods.
 
Comprehensive Service Oriented Architecture.  The Enterprise Marketing Backbone, our innovative service oriented architecture, underlies each of our solution sets and enables them to function as a unified application. The Enterprise Marketing Backbone offers a modular design that provides core services such as calendar and workflow to support a wide variety of marketing activities. We believe our customers benefit from increased agility within their marketing organizations as they can rapidly and cost-effectively assemble and modify business processes in response to changing market requirements. The Enterprise Marketing Backbone also enables interoperability between Aprimo Enterprise and other enterprise applications such as Enterprise Resource Planning, or ERP, Customer Relationship Management, or CRM, and Enterprise Content Management, or ECM. The Enterprise Marketing Backbone further provides real-time open connectivity to data located in various enterprise applications and databases, enabling marketing professionals to automatically synchronize their databases to financial, sales and management systems.
 
Robust Marketing Knowledgebase.  The foundation for our enterprise marketing platform is the Aprimo Knowledgebase, a comprehensive data repository that captures critical marketing information about customers, financials, best practice workflows, calendars, activities, assets, sales and suppliers. The Aprimo Knowledgebase differentiates us from our competitors because of its open and extensible data model, which is designed to support all applications within our platform. It serves to accelerate customer implementations, provide access to best practices, and ensure consistent delivery of functionality. The Aprimo Knowledgebase supports real-time operations and records all activities and transactions, providing customers with an auditable system of record for all of their activities.
 
Exclusive Focus on Providing Marketing Technology.  Our innovative portfolio of over 30 products functions within our common platform and is exclusively focused on meeting the broad and varied needs of marketing professionals. By leveraging our domain expertise and knowledge, we have focused on continuing to develop and improve our marketing technology, enhancing our customers’ productivity and providing them with unique marketing insights that enable their entire marketing organizations to support the brand promise and business strategies. Accordingly, Gartner has recognized us as a leader in providing Marketing Resource Management software and services and as a visionary in the Enterprise Marketing Management software space.
 
Pervasive Deployments within our Customer Base.  Our customers have broadly deployed our solutions and use them throughout their marketing organizations. Our products have been licensed to over 75,000 marketing professionals and other users located in more than 40 countries and are built on a common, universal architecture that supports multiple languages, data formats and currencies. In contrast to point solutions with narrow user bases, our solutions are broadly adopted and widely used within our customers’ businesses, which creates significant switching costs.


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Our Growth Strategy
 
We intend to strengthen our position as a leading provider of superior technology solutions for marketing organizations. The key elements of our growth strategy include:
 
Continue to Grow our Customer Base.  Our installed base of over 175 customers represents a small fraction of the enterprises that could benefit from our solutions. Marketing organizations are significantly under-penetrated by packaged software applications, creating a large opportunity to grow our customer base as we replace custom developed, in-house software and point products. According to a 2006 Gartner report, more than 50% of the marketing staff within global companies will use enterprise software by 2010, compared with fewer than 20% that do so today. We intend to target new customers through our expanding sales force and growing network of partners.
 
Further Expand our Existing Customer Relationships.  We believe that our existing customer relationships present a substantial opportunity for growth. In 2006, less than 20% of our new customers purchased all six of the Aprimo Enterprise solution sets, providing us with a substantial opportunity to cross sell additional solution sets to existing customers. Approximately 14% of our customers have been using Aprimo Enterprise for at least the last three years. These customers have collectively increased their investment in our solutions by approximately 300% following their initial purchases. Our customer lifetime value grows as our customers deploy our software to additional users within their marketing organizations, purchase additional solution sets and expand our platform’s footprint across their entire Marketing Value Chain, including to additional corporate marketing departments, business units, geographies and marketing suppliers.
 
Maintain Focus on Developing Innovative Solutions.  We believe that our focus on providing a broad suite of integrated applications for the marketing organization will allow us to grow our customer base significantly. We plan to continue to invest in developing new products which will create additional entry points into the Marketing Value Chain and significant cross sell opportunities within our existing customer base. Our component-based Enterprise Marketing Backbone enables us to rapidly and cost effectively develop new features and release new role-based applications to address the constantly evolving challenges faced by our customers. In addition, we intend to continually enhance our existing products by developing new features that will further strengthen our market position and expand the number of marketing professionals using our software.
 
Continue to Strengthen and Expand our Partner Relationships.   We have developed strategic relationships with systems integrators, marketing service providers and complementary software vendors to increase the distribution and market awareness of our solutions. Our partners led or participated in approximately 50% of our sales transactions for Aprimo Enterprise and Aprimo Agency and a significant and growing percentage of our deployments. Our partners led or participated in approximately 67% of our new customer implementations in the first half of 2007, compared to approximately 43% in 2006 and approximately 38% in 2005. We believe we have a significant opportunity to drive revenue growth, expand our global market reach and increase our delivery capacity through partnerships. We intend to grow these alliances as we increasingly co-market with our partners to deliver integrated solutions for digitizing the entire Marketing Value Chain. In addition, as we expand our partner relationships, we seek to increasingly use this channel to generate additional inbound customer leads.
 
Grow our International Operations.  There is significant global demand for our solutions and we believe there is a large market opportunity located outside of the United States. This demand is driven by both international customers, and projects that originate within the United States but contain significant global components. We currently have international sales offices in Australia, Belgium, Canada, France, Germany, Luxembourg, the Netherlands, Sweden and the United Kingdom, and in 2006, we generated approximately 20% of our revenue from international customers. While we expect this percentage to stay relatively constant in the near term, our strategy is to expand our sales in Europe, the Middle East, Africa and Asia-Pacific by expanding our direct sales force and partner relationships in these locations.
 
Selectively Pursue Acquisitions of Complementary Businesses and Technologies.  We acquired Then, Limited and DoubleClick EMS in 2004 and 2005, respectively, and we plan to selectively pursue acquisitions of businesses and technologies that will extend our solution sets, accelerate our customer and revenue growth, and provide access to new and emerging markets. We currently have no plans, proposals or arrangements with respect to any specific acquisition.


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Our Offerings
 
Software, Support and Hosting
 
Software.  Aprimo Enterprise is an integrated suite of role-based software applications that automate the entire Marketing Value Chain. Aprimo Enterprise delivers six main solutions sets for marketing professionals: Planning and Financial Management, Production Management and Workflow, Brand Content Management, Campaign Management and Planning, Lead Management and B2B Marketing. Aprimo Enterprise is built on our Enterprise Marketing Backbone, a web based, service oriented architecture, and the Aprimo Knowledgebase, a comprehensive database for marketing professionals. Through the Enterprise Marketing Backbone and Aprimo Knowledgebase, marketing professionals have access to the data and functionality required to perform their jobs more effectively. This unified architecture allows our diverse application suite to function as one platform and allows our software development efforts to be leveraged across all of our solution sets.
 
Planning and Financial Management enables marketing professionals to align marketing expenditures with the goals and objectives of the business. Our customers use Planning and Financial Management to identify their strategic goals and objectives and to plan their expenditures of financial, human and external resources required to achieve target objectives. Planning and Financial Management provides real-time visibility to expenditures so that marketing managers can adjust their activities to stay on plan during changing business conditions. Planning and Financial Management also integrates with financial systems so that expenditures in marketing are reconciled with corporate general ledger accounts. This bridge between marketing and finance supports audit procedures required by Sarbanes Oxley. Planning and Financial Management also enables our customers to calculate ROI for specific activities, as well as for the entire marketing organization.
 
Production Management and Workflow combines a hybrid of workflow management and project management functionality to enable marketing professionals to effectively and efficiently deploy resources. The workflow functionality provides the ability to define sophisticated, repeatable, and non-linear business processes required to complete a certain objective. The project management functionality allows for careful deployment of resources to complete a marketing activity. Production Management and Workflow automates materials production and review processes that are the foundation of traditional marketing organizations. Production Management and Workflow also provides real-time insight into processes so that managers can track critical projects at any given time. Production Management and Workflow accelerates cycle time and reduces the amount of time required for materials development by eliminating the inefficiencies and unreliability that are inherent in manual systems.
 
Brand Content Management manages the full digital asset lifecycle from concept to asset development to distributed access of marketing materials. Brand Content Management serves the needs of marketing professionals who are making investments to develop brand materials that are consistent across geographies with their brand architecture. Brand Content Management contains a robust asset repository and empowers creative staff to access these assets in a productive fashion. It also provides regional offices, dealers, and business partners with the flexibility to customize and localize print and electronic materials while maintaining brand integrity in a cost effective manner. Brand Content Management includes an embedded content repository and also provides integration with industry leading enterprise content management systems.
 
Campaign Management and Planning delivers end to end, multi-channel campaign management, from offer management through segmentation design and execution. Campaign Management and Planning enables database marketing professionals to design and execute sophisticated segmentation schemes against all types of customer data. Campaign Management and Planning also allows organizations to set up templates that enable distributed field marketing personnel to execute campaigns within their local marketplace. Additionally, Campaign Management and Planning manages ad hoc data sources for both customer and prospect multi-channel marketing. When accessing large databases, our segmentation engine utilizes OptiSelect, a patent pending algorithm that optimizes the time required to create segmentation outputs.
 
Lead Management delivers an end to end solution for acquiring, scoring and prioritizing leads, and then distributing them to the sales organizations. Lead Management can increase lead volume by coordinating all marketing activities into one set of messages to all prospective customers. It delivers the ability to define a multi-channel dialogue utilizing e-mail, web and direct interfaces with industry leading CRM and sales force automation


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systems. Lead Management also delivers real-time insights to enable resources to be appropriately reallocated when fluctuations in lead volume result in the need for additional efforts to ensure proper follow up. Lead Management provides a unique capability to receive disposition information from sales force automation systems so that marketing professionals can “close the loop” and better understand the value of their efforts.
 
B2B Marketing provides a fully integrated demand creation solution including data management, campaign management and planning, event management, lead management, and closed loop reporting. At the front end of the B2B marketing process, this solution set coordinates all marketing activities to ensure brand consistency and awareness. B2B Marketing delivers to sales professionals high quality leads that have already been pre-qualified according to selected criteria and consolidated from all sources of leads including corporate websites, events, and call centers. This lead delivery is enhanced by real-time integration with leading sales force automation vendors. B2B Marketing includes a dialogue management product that allows marketing professionals to define multi-step conversations with customers. This can be used to incubate prospects that have needs that are not immediate but may ultimately become valuable customers.
 
Aprimo Enterprise includes several other platform components that are integral to our solution offerings and provide additional functionality. These include:
 
  •  Marketing Performance Management, or MPM, provides functionality to deliver insights into marketing productivity, effectiveness, and contribution to the strategic objectives of the business. MPM enables marketing professionals to create reports and dashboards on all data in the Aprimo Knowledgebase without knowledge of the complex underlying data. Once created, these reports provide real-time insight into the current state of marketing processes under the control of Aprimo Enterprise. For more sophisticated business intelligence requirements, MPM also generates a data mart which combines data from the Aprimo Knowledgebase with other outside data sources, thus enabling a broader view of the marketing function.
 
  •  Integration Workbench enables the configuration of web services that connect Aprimo Enterprise with other applications. Integration Workbench manages inbound web service calls as well as the outbound publishing of our object data to external systems. In situations where customers have repeatable requirements for integration, we have purpose-built adaptors to further reduce the cost of these integration projects.
 
  •  Application Workbench allows our customers to configure our user interface and add new application objects, which are defined within a set of XML files. The Application Workbench does not require programming expertise or knowledge of our XML file structure. It offers intelligent object selection, object properties, and embeddable behavior and enables changes made through the workbench to take effect immediately within the application, thus enabling our customers to align their business processes and user requirements.
 
Aprimo Professional is designed for medium-sized businesses and marketing workgroups within larger organizations. Aprimo Professional also serves as an entry point at key accounts that we believe have high potential for future growth through significant cross sell opportunities. Aprimo Professional is delivered as a web-based, on-demand subscription service (Software as a Service).
 
Additionally, Aprimo Agency enables marketing suppliers to upgrade their manual workflow processes to digital processes and differentiate their offerings in a highly competitive market. By directly linking with their customers’ internal solutions, marketing suppliers can create an electronic bond across solutions and form a unique strategic partnership that is highly protected from competitive pressures.
 
Customer Support.  We believe that superior customer support is critical to retaining and expanding our customer base. Our support and maintenance program includes the right for our customers to receive unspecified software updates, as well as maintenance releases and patches that become available during the maintenance period, which is generally provided on an annual basis. Standard customer care includes telephone and email access to technical support personnel. We provide customer support from our headquarters in Indianapolis, Indiana as well as our regional centers in Raleigh, North Carolina, Birmingham, United Kingdom and Hyderabad, India. We believe that our superior customer support is a contributing factor to our customer retention rate, which was approximately 87% for 2006.


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Hosting Operations.  We serve all our on-demand customers from a single, third-party co-location facility in Indianapolis, Indiana, operated by n/Frame, owned by Continental Broadband, Inc., a Landmark Communications company. This facility provides around-the-clock security personnel, photo identification/access cards, biometric hand scanners and sophisticated fire-suppression systems. The overall physical security of our data center is monitored by digital video surveillance cameras 24 hours a day, seven days a week. Additionally, redundant electrical generators and environmental control devices are used to ensure high availability of all servers and infrastructure components. We own or lease and operate all the hardware and software on which our applications run in this facility.
 
We continuously monitor the performance of our hosting operations. Our site operations team provides all system management, maintenance, monitoring and back-up. We use custom, proprietary tools as well as commercially available tools to monitor our applications. We also provide our customers with an optional capability to monitor their application availability and latency from more than 34 geographic points around the world in five-minute intervals.
 
Aprimo Professional is a multi-tenant subscription service, and all of our Aprimo Professional customers utilize our hosting operations. In addition, we currently host approximately 30% of our Aprimo Enterprise and Aprimo Agency customers, which are provisioned via a single-tenancy, shared infrastructure architecture.
 
Professional Services
 
Our customers require training and consulting to realize the full value from their use of our Aprimo Enterprise and Aprimo Agency products. We provide these services (on-demand or on-premise) for all of our customers. We provide comprehensive classroom training to educate our customers and to certify our employees and partners, either at our training centers or at the customer site. Our customers can choose their preferred implementation approach, either using their internal resources, a third-party consulting organization, or Aprimo Global Services, our internal services organization. We encourage our sales organization to leverage our certified consulting partners wherever possible, and we use a growing percentage of our consulting partners in implementations.
 
We provide on-site enablement training and on-demand training services via the web and telephone for our Aprimo Professional customers.
 
Aprimo Global Services has deep expertise in educating our partners and in deploying our solutions. We utilize a leveraged delivery model consisting of on-site and off-site consultants, including offshore resources where appropriate. We generally provide our professional services on a time and materials basis.
 
Customers
 
We have more than 175 customers and our solutions have been licensed to over 75,000 marketing professionals located in more than 40 countries. Because we are focused on providing a solution that meets the needs of marketing organizations generally, our target markets are not confined to certain industries or geographies.
 
Below is a representative list of our customers as of June 30, 2007:
 
         
Consumer Packaged Goods
 
Financial Services
 
Insurance
 
Amway Corporation
  Bank of America, N.A.   The Chubb Corporation
Del Monte Corporation
  Capital One Services, Inc.   Folksam
Nestlé S.A.
  Fidelity Investments   Norwich Union, an Avivia company
    Prudential    
    Washington Mutual    
 


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Life Sciences
 
Manufacturing/Automotive
 
Media/Communications
 
Boehringer Ingelheim GmbH
  Cummins Inc.   Discovery Communications Inc.
Bristol-Myers Squibb Company
  Honda Motor Europe Ltd.   National Geographic Society
Grey Healthcare
  Peugeot International   Research In Motion Limited
Merck & Co. Inc. 
  Toyota Motor Corporation   Warner Bros. Entertainment Inc.
Wyeth
  Velux    
         
 
         
Retail
 
Technology
 
Telecom/Utilities
 
The Boots Company PLC
  Business Objects SA   AT&T Inc.
The Home Depot U.S.A. Inc. 
  Environmental Systems   Powergen
Target Corporation
  Research Institute, Inc.   Sprint Nextel Corporation
    Intel Corporation    
    nVidia Corporation    
 
No customer accounted for more than 10% of our revenue in 2006 or the six months ended June 30, 2007.
 
Case Studies
 
The following examples illustrate some of the ways our customers are using Aprimo Enterprise to improve their marketing productivity:
 
Cummins Inc.  Cummins Inc. is a global power company that designs, manufactures, distributes and services engines and related systems. Cummins Engine Business Marketing group initially deployed our Campaign Management solution to improve business relationships with its dealer and distributor network. Cummins’ next priority was to improve collateral development processes, seeking to reduce time and expense in creating marketing materials for a dealer and distributor network located in more than 5,000 facilities in 197 countries and territories. With a high volume of jobs and limited resources, Cummins acknowledged that efficiency, accuracy and productivity were essential. Miscommunication, mistakes and rework caused delays, excessive revision cycles and false starts with agencies, which led to unplanned expenses that were estimated to consume 20% of the total collateral development budget. On average, a collateral project was requiring 69 workdays from the beginning of proposal review to the completion of production-ready art.
 
Cummins identified three key drivers affecting project cost and throughput: (1) initiating work through an agency too early in the process, (2) inefficient communication and collaboration with agencies and printers and (3) an undisciplined content review process resulting in numerous revisions per project. To address these challenges, Cummins chose to expand its use of Aprimo Enterprise and deployed our Production and Workflow Management solution. As a result of this Aprimo Enterprise deployment, Cummins has realized a 61% reduction in the average number of days required to complete a collateral project. Agency revisions fell by 78%, and creative development costs per project were reduced by 23%. Cummins achieved additional savings from the elimination of redundant digital asset repositories, and annual savings on asset management fees from outside vendors were reduced by 75%. Recently, Cummins again extended its use of Aprimo Enterprise and deployed our Brand Content Management solution. Cummins now serves distributors and dealers by delivering customizable marketing materials on demand. Supply chain costs have been reduced, along with costs associated with print production, shipping and inventory.
 
Warner Bros. Entertainment Inc.  Warner Bros. Entertainment Inc. is a global media company that creates, produces, distributes, licenses and markets all types of entertainment including theatrical, home entertainment and television. The Warner Bros. marketing team was spending too much valuable time generating manual weekly marketing spend reports that were incapable of providing real-time insights. These reports yielded inaccurate, outdated views for determining future spending decisions and Warner Bros. sought to redesign its allocation of weekly marketing spend.

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Warner Bros. determined that by investing in marketing technology, it could analyze data on a real-time basis, empower its marketing professionals to act within a short period of time and optimize advertising investments across their 840 local markets. Warner Bros. implemented Aprimo Enterprise and deployed our Planning and Financial Management solution to gain insight into marketing expenditures. Warner Bros. also implemented our Production Management and Workflow solution to streamline its weekly media placement process. Sales data is now gathered centrally and synthesized for decision makers in marketing. Using Aprimo Enterprise, Warner Bros. can reallocate its marketing expenditures for the upcoming week, enabling it to invest its advertising spend in a way that maximizes impact with consumers. Warner Bros. is able to allocate increased advertising dollars dynamically to potential high value markets while sparing wasted investment in low value markets. Aprimo Enterprise serves as a system of record, allowing Warner Bros. to further analyze the impact of the marketing optimization process and enabling Warner Bros. to be more precise in its marketing allocations over time.
 
Powergen.  Powergen, part of E.ON, is an energy supplier in the United Kingdom, with approximately six million residential and small business customers. In addition, Powergen supplies approximately 13,000 industrial and commercial customers under the E.ON brand. Faced with emerging competitive pressures brought on by deregulation and high levels of customer discontent, Powergen wanted to make major changes in its commercialization processes. Leveraging its rich customer database, Powergen wanted to deliver specialized offers to specific segments of customers in order to improve customer response rates, increase return on marketing investment, and improve relationships with customers. All of this had to be accomplished with a very small marketing team and limited budget.
 
Powergen deployed Aprimo Enterprise, starting with our Campaign Management and Planning solution. This first step of the process has allowed Powergen to achieve its initial objective of dramatically improving the direct marketing processes. Direct mail drops that bulk-delivered the same message and offer to the entire customer base are now highly differentiated down to segments as small as ten customers. Based on this early success, Powergen has expanded its efforts and invested in the Aprimo Enterprise Planning and Financial Management and Production Workflow Management solutions to streamline the management of financials, materials production, and digital assets. Processes that were once managed with paper and disconnected spreadsheets have now been integrated into a comprehensive application that digitizes the entire process from end to end. Powergen’s management believes it now has the desired insight, control and data to enhance its commercialization processes.
 
Honda Motor Europe Ltd.  Honda Motor Europe Ltd.’s United Kingdom Dealer Marketing team desired to enhance and preserve the integrity of its branding and messaging across all of its markets. This required participation from its network of 200 franchised dealers, each of which runs its own marketing activities including Web, direct marketing, local advertising, point of sale materials, public relations and events. A key objective was to increase the number of people who consider the company’s brand when they are purchasing a new car. At the local level, Honda wanted to address this issue by finding a way to translate its innovative national advertising and marketing campaigns into effective dealer marketing.
 
Honda implemented our Brand Content Management solution to deliver a brand portal for dealers to access, customize and subscribe to high-impact advertising and collateral, which they could localize for their own geographies. Corporate marketing’s advertising and design agencies were able to change and update brand content and make it available to dealers on a real-time basis. Before working with us, Honda’s national marketing campaigns required between three to six months to be deployed at a regional level. Now the entire process requires only two or three days. Authorized dealers can select the asset and template they want to use, make desired customizations and request immediate delivery for ad placement. Printed materials can also be received within a couple of days. Additionally, this automated process has removed several hundred dollars of cost from each request, a major savings to auto dealers in a highly competitive, low margin industry. Honda believes our solution is giving their dealers a unique marketing advantage, and Honda saw much improved brand recall at a national level, which supported their increase in sales between 2005 and 2006.
 
Folksam.  Folksam, a leader in the Swedish financial services market providing a range of products in the areas of insurance, savings and loans, is implementing a wide-ranging strategy to win and retain more customers, improve customer loyalty and maximize customer lifetime value. Folksam’s corporate marketing department had relied on several “islands” of technology, including an in-house campaign management system and several


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disparate and disconnected databases. The core marketing processes were manual and were inherently dependent on the experience and knowledge of key staff. Folksam defined a highly visionary five-year plan that would ultimately evolve to a single view of the customer, with all marketing and operational systems accessing one common view of the customer. The plan reflects a truly multi-channel system, with marketing results delivered through the Web and call center and through a variety of traditional direct marketing channels. A centralized contact management system ensures that a customer contact through any channel has an immediate impact on any other communications that follow.
 
After implementing a centralized customer data warehouse, Folksam deployed Aprimo Enterprise to serve as the command and control platform for their entire effort, including our solutions for Campaign Management and Planning, Contact Optimization, Financial Management and Production Workflow Management. One of the early success stories has been the use of our Dialogue Manager product, which is part of the Campaign Management and Planning solution set, to define multi-step “conversations” with customers when certain events occur. This type of event-triggered marketing is critical to insurance companies, which view life events as a critical opportunity to market to customers. Since deploying Aprimo Enterprise, Folksam’s conversion of sales from a particular event-driven campaign has increased from 2% to 10%. Based on the success of this effort, Folksam has identified 70 other event-driven campaigns that it plans to implement using Aprimo Enterprise.
 
Like many of our customers, Folksam now understands that implementing comprehensive multi-channel campaigns demands automation of the entire Marketing Value Chain, not just the customer channel interactions. This is evidenced by Folksam’s broader investment in our software to include solutions for Marketing Resource Management, or MRM. The Aprimo Planning and Financial Management solution helps to reduce campaign cycle times and ensure that activities run to plan and budget. The Production Management and Workflow solution defines and automates the allocation of tasks, deliverables and budgets to specific team members. By merging these MRM applications with technology that enables highly optimized customer interactions, Folksam is better able to achieve its relationship management goals.
 
Sales and Marketing
 
Sales
 
We sell and market our solutions through our direct sales force and our partners, including systems integrators, marketing service providers and complementary software vendors. These partners provide us with leads into key accounts, influence sales opportunities where we are already engaged and extend our value proposition beyond our core product footprint. Our direct sales force is distributed throughout the United States, Europe and Australia.
 
Our direct sales force is comprised of field sales managers, account managers, inside sales, alliance development and sales management personnel. Our field sales managers are responsible for sales to new prospects and significant new opportunities within existing customers. Our account managers concentrate on expanding pre-existing relationships and cultivating customer satisfaction. Our sales efforts are supported by a dedicated pre-sales application consulting team.
 
Marketing
 
Our marketing activities are designed to build our brand, generate broad awareness of Aprimo in our target markets and generate leads for our sales organization. Our marketing programs target the decision-maker in a sales cycle, including the chief marketing officer, the chief information officer, the chief financial officer, the functional heads of marketing and other key technology managers. Additionally, we focus on industry analysts, systems integrators, marketing service providers, trade press, and other industry pundits who exert considerable influence over the product category.
 
We also use our own technology to execute marketing campaigns, collect responses, move prospects through a qualification process and pass those leads on to a sales force automation system. When sales are completed, results are matched back so that our marketing managers can fully understand the impact of their efforts.
 
As our market has expanded, we have placed increasing focus on the identification and cultivation of prospective customers. We focus on identifying individuals who address marketing challenges that we believe align


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with our solutions. We use a combination of marketing communications, direct communications from our sales force, and collaboration with our partners to educate these individuals about the benefits of our solutions, which include enhanced