S-1/A 1 d211300ds1a.htm AMENDMENT NO. 5 TO FORM S-1 Amendment No. 5 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on November 30, 2011

Registration No. 333-176483

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20594

 

 

 

AMENDMENT NO. 5

TO

FORM S-1

REGISTRATION STATEMENT

Under the Securities Act of 1933

 

 

 

Jive Software, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware   7372   42-1515522

(State or other jurisdiction of

incorporation or organization)

  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

325 Lytton Avenue, Suite 200

Palo Alto, California 94301

(650) 319-1920

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

 

 

 

Anthony Zingale

Chief Executive Officer

Jive Software, Inc.

325 Lytton Avenue, Suite 200

Palo Alto, California 94301

(650) 319-1920

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

 

 

 

Copies to:

 

Jeffrey D. Saper, Esq.

Robert G. Day, Esq.

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

William R. Pierznik, Esq.

Jive Software, Inc.

325 Lytton Avenue, Suite 200

Palo Alto, California 94301

(650) 319-1920

 

Gordon K. Davidson, Esq.

Jeffrey R. Vetter, Esq.

James D. Evans, Esq.

Fenwick & West LLP

801 California Street

Mountain View, California 94041

(650) 988-8500

 

Approximate date of commencement of the 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.  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

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

 

Large accelerated filer   ¨     Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)   Smaller reporting company   ¨

 

CALCULATION OF REGISTRATION FEE

 

 

Title Of Each Class Of

Securities To Be Registered

 

Amount

To Be

Registered(1)

 

Proposed Maximum
Aggregate

Offering Price

Per Share

 

Proposed

Maximum

Aggregate

Offering Price(2)

  Amount Of
Registration Fee(3)

Common Stock, par value $0.0001 per share

  13,455,540   $10.00   $134,555,400   $15,570.42

 

 

(1)   Includes 1,755,070 shares that the underwriters have the option to purchase.
(2)   Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3)   The registration fee is equal to the sum of (a) the product of (i) the proposed maximum aggregate offering price of $100,005,483, as previously proposed on the initial filing of this Registration Statement on August 24, 2011 and (ii) the then-current statutory rate of $116.10 per $1,000,000 ($11,611.00 was previously paid) and (b) the product of (i) the marginal increase of $34,549,917 in the proposed maximum aggregate offering price hereunder and (ii) the current statutory rate of $114.60 per $1,000,000 ($3,959.42 is being paid in conjunction with this filing).

 

 

 

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

 

 


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LOGO

Subject To Completion. Dated November 30, 2011.

11,700,470 Shares

COMMON STOCK

Jive Software, Inc. is offering 8,333,333 shares of common stock and the selling stockholders are offering 3,367,137 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price of our common stock will be between $8.00 and $10.00 per share.

We have applied to list our common stock on the Nasdaq Global Select Market under the symbol “JIVE.”

Upon completion of this offering, our executive officers, directors and 5% or greater stockholders and their affiliates will beneficially own, collectively, approximately 73.5% of our outstanding common stock.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.

PRICE $             A SHARE

Price to Public

Underwriting Discounts and Commissions

Proceeds to Jive

Proceeds to Selling Stockholders

Per share

$         

$         

$         

$         

Total

$                    

$                    

$                    

$                    

We have granted the underwriters the right to purchase up to an additional 1,755,070 shares of common stock to cover over-allotments.

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

The underwriters expect to deliver the shares to purchasers on                    , 2011.

MORGAN STANLEY

GOLDMAN, SACHS & CO.

CITIGROUP

UBS INVESTMENT BANK

BMO CAPITAL MARKETS

WELLS FARGO SECURITIES

Prospectus dated                     , 2011

The information in this prospectus is not complete and may be changed. We and the selling stockholders 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 we and the selling stockholders are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.


Table of Contents

LOGO


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements

     31   

Industry and Market Data

     32   

Use of Proceeds

     33   

Dividend Policy

     33   

Capitalization

     34   

Dilution

     36   

Selected Consolidated Financial Data

     38   

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

     41   

Business

     70   

 

     Page  

Management

     85   

Executive Compensation

     93   

Certain Relationships and Related Transactions

     113   

Principal and Selling Stockholders

     116   

Description of Capital Stock

     119   

Shares Eligible for Future Sale

     124   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     126   

Underwriters

     130   

Legal Matters

     136   

Experts

     136   

Where You Can Find More Information

     136   

Index to Financial Statements

     F-1   
 

 

 

 

You should rely only on the information contained in this prospectus or contained in any free writing prospectus filed with the Securities and Exchange Commission. Neither we, the selling stockholders, nor the underwriters have authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus or a free writing prospectus is accurate only as of its date, regardless of its time of delivery, or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Through and including                     , 2012 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

For investors outside the United States: Neither we, the selling stockholders, nor 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. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

 

Jive, Jive Software, our company logo, Jive Engage Platform, Jive Apps Market, The New Way to Business, Jive What Matters and other trademarks or service marks of Jive Software appearing in this prospectus are the property of Jive Software. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders.

 

 

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PROSPECTUS SUMMARY

 

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

 

JIVE SOFTWARE, INC.

 

Our Mission

 

Jive’s mission is to change the way that work gets done. We believe that our social business software unleashes creativity, drives innovation and improves productivity by increasing engagement within the enterprise, as well as with customers and partners. We believe that just as consumer social technologies are changing the way we live, social business software is transforming the way we work.

 

Overview

 

We provide a social business software platform that we believe improves business results by enabling a more productive and effective workforce through enhanced communication and collaboration both inside and outside the enterprise. We believe our platform is intuitive, easy to use, flexible and scalable, and can be provided as a public cloud service or as a private cloud solution. We are focused on unlocking the power of the enterprise social graph — the extended social network of an enterprise, encompassing relationships among its employees, customers and partners, as well as their interactions with people and content. Organizations deploy our platform to improve strategic decision making and employee productivity, enhance revenue opportunities, lower operational costs and increase customer retention.

 

Our comprehensive Jive Engage Platform enables collaboration across two principal communities: employees within the enterprise and customers and partners outside the enterprise. Internally, the Jive Engage Platform is used as a communications tool and collaborative workspace that supports and enhances knowledge sharing, facilitates communication within and across organizational boundaries, and enables individuals to work together to achieve common business goals. Externally, customers and partners of the enterprise use our platform to connect socially with one another, as well as with the enterprise, in a structured online community that allows users to ask questions, post answers and communicate about a product or particular issue. Our solution also taps into the social web by integrating relevant content and connections across the social networking landscape, enabling enterprises to improve their interactions with customers, leverage feedback to deliver improved products and services, and respond more quickly to market opportunities.

 

Our social business software platform has been successfully deployed in complex environments with tens of thousands of employees internally and millions of users externally. We provide our platform both as a public cloud service and as a private cloud solution that integrates with application services from the public cloud. Our deployment model enables access through web browsers, desktop applications and mobile devices. Our platform integrates with and leverages legacy, on-premise and hosted enterprise systems such as email, content management, customer relationship management, marketing automation, product development, eCommerce, instant messaging and other related applications. We also recently introduced the Jive Apps Market, which enables customers and third parties to develop applications that leverage our platform and utilize the enterprise social graph.

 

Our social business software has been recognized as a leading platform by industry analysts. Gartner, Inc., or Gartner, has recognized us as a market leader in three distinct reports: the “Magic Quadrant for Social Software for the Workspace,” the “Magic Quadrant for Externally Facing Social Software” and the “Magic

 

 

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Quadrant for Social Customer Relationship Management.”* Forrester Research, Inc., or Forrester, lists us as a leader in two reports: “The Forrester Wave: Enterprise Social Platforms, Q3 2011” and “The Forrester Wave: Community Platforms, Q4 2010.”*

 

We sell our platform primarily through a direct sales force both domestically and internationally. As of September 30, 2011, we had 657 enterprise Jive Engage Platform customers with over 17 million users within these customers and their communities. Some of our top 10 customers by annual contract value for the year ended December 31, 2010 and nine months ended September 30, 2011 include Hewlett-Packard Company, SAP AG, T-Mobile and UBS AG.

 

Our annual subscription license and ratable revenue recognition model provides financial visibility through renewable revenues and cash flows. In addition, our model provides for long-term operating leverage as customer acquisition costs and other costs are lower for renewal customers. For the years ended December 31, 2008, 2009 and 2010, and for the nine months ended September 30, 2011, our total revenues were $16.9 million, $30.0 million, $46.3 million and $54.8 million, respectively. For the years ended December 31, 2008, 2009 and 2010, and for the nine months ended September 30, 2011, our billings, a non-GAAP measure, were $23.3 million, $36.1 million, $71.8 million and $68.9 million, respectively. We recorded net losses of $11.3 million, $4.8 million, $27.6 million and $38.1 million for the years ended December 31, 2008, 2009 and 2010, and for the nine months ended September 30, 2011, respectively. For a discussion of the limitations associated with using billings rather than total revenues and a reconciliation to total revenues, see “Summary Consolidated Financial Data—Non-GAAP Financial Measure: Billings.”

 

Industry

 

Impact of Social Networking

 

We believe the rise of social networking applications, such as Facebook, LinkedIn and Twitter, is creating demand for enhanced communication and collaboration capabilities in the workplace. Since its founding in 2004, Facebook has disclosed more than 800 million active users. LinkedIn, the largest professional network, has disclosed over 120 million members. These social networking websites and related tools not only enable individuals to easily communicate and share their opinions and recommendations, but also amplify the voices of marketplace participants and thus have profound implications on how consumers purchase goods and services. Individuals are becoming accustomed to connecting with others via an activity stream, through “friend” and “follow” relationships, and through links and “likes.” As a result, individuals are more connected in their personal lives today than ever before.

 

The Need for a New Way to Business

 

Despite the consumer social technology revolution, we believe little has changed in the enterprise. Over the past several decades, enterprises have invested heavily in legacy software applications to facilitate and manage internal and external communications, share documents, and collaborate within and among teams. Unlike consumer social networking applications, which are organized around people, we believe most enterprise applications are architected around data to automate business processes, increase transactional efficiency, keep records, comply with regulations and process information. Many existing software applications within an enterprise are deployed in a dedicated functional area or to automate a single business process, with myriad point solutions for individual business functions and departments. Further, we believe many legacy enterprise applications designed to manage relationships external to an enterprise simply present static information and pre-defined content, rather than enable the real-time, interactive engagement demanded by customers. As a result of these data-centric architectures and legacy deployment models, we believe enterprises and their employees, customers and partners struggle to effectively discover information and share knowledge both within the enterprise and across enterprise boundaries.

 

  *   See “Industry and Market Data.”

 

 

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Adoption of Social Business Software

 

Social business software has the potential to significantly improve how enterprises collaborate and share information with employees, customers and partners through unlocking the power of the enterprise social graph. We believe the deployment of social business software is increasingly becoming a mission critical initiative for business and information technology, or IT, executives. We believe that the addressable market for social business software encompasses the overall market for collaborative applications, which IDC estimates will be $10.3 billion by 2013.* Additionally, we believe social business software has begun to displace the functionality of, and derive budget historically set aside for, adjacent application areas, including content management, customer relationship management, marketing automation and enterprise portals.

 

Our Solution

 

We deliver a social business software platform that features the innovation, creativity and ease of use found in consumer applications, combined with the security, flexibility and scalability necessary for enterprise deployment.

 

Our solution includes the following key elements:

 

   

Unified social software platform for the enterprise. We offer an enterprise-class social software platform, purpose-built to enable our customers to manage workplace communication and collaboration. Our solution can be deployed across all employees, functional departments and business units.

 

   

Communities for employees, customers and partners. Our solution enables our customers to operate both internal and external communities by offering a platform that allows communication and collaboration between and among employees, customers and partners.

 

   

Discovery of relevant information and experts. Our platform includes a proprietary recommendation engine that helps users connect to and easily locate relevant information and experts on an enterprise-wide basis across departmental and geographic boundaries, as well as across externally-facing customer and partner communities.

 

   

Scalable and secure. Our platform is capable of supporting large deployments, including those with complex environments with tens of thousands of employees internally and millions of users externally. We provide tools to help our customers manage the critical elements of application security, including authentication, authorization and regulatory compliance.

 

   

Integration with existing enterprise applications. Our platform integrates with legacy IT infrastructure and a broad range of existing enterprise applications — including email, content management, customer relationship management, marketing automation, product development, eCommerce and instant messaging — and enables access from mobile devices, browsers, desktop applications, collaboration applications and consumer social platforms.

 

   

Enterprise applications market built on open standards. We enable customers and third parties to develop applications that leverage our platform through our recently introduced Jive Apps Market, built on the industry standard OpenSocial specifications, which allow social graph data to be shared between browser-based applications. Users can easily find, purchase and install applications tailored to meet specific business needs in a variety of industries and business functions, enabling further innovation and functionality on our platform. Developers can leverage the enterprise social graph to make applications more social and broaden their reach.

 

   

Readily deployable and configurable solution. Our platform has been developed to facilitate easy deployment with familiar interfaces. We offer our customers the ability to configure our solutions to deliver the specific functionality and user experience they want for their end-users, and the ability to modify the look and feel of our solutions to conform to their branding or other requirements.

 

  *   See “Industry and Market Data.”

 

 

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Public cloud and private cloud delivery. Our customers can use our platform on demand through the public cloud, or via a private cloud. This flexible delivery model allows us to meet a variety of security and cost requirements and better address the needs of each customer, and enables us to target a wider range of potential customers.

 

Our Strategy

 

We intend to extend our industry leadership in social business software. The principal elements of our strategy include:

 

   

Grow our customer base. In order to grow our customer base, we are investing heavily in our direct sales efforts in the United States, Europe and South America. We also intend to expand into Asia.

 

   

Expand business with existing customers. We intend to expand deployment of our solution with existing customers by, among other things, migrating them from a single external community or departmental deployment to broader implementations over time, including the upsell of additional users, page views, modules and additional communities.

 

   

Innovate and extend our technology and product leadership. We intend to expand our current platform and extend our product leadership by developing and acquiring innovative technologies and products, and leveraging the innovation of our partners in the Jive Apps Market.

 

   

Develop the Jive ecosystem. We intend to continue to develop the Jive ecosystem by enabling customers and other third parties to create applications that integrate with our platform. We further intend to increase the number of our Jive Alliance Partners that provide strategic advisory, business transformation and customization services for our solutions.

 

Selected Risks Associated with Our Business

 

Our business is subject to numerous risks and uncertainties, including those highlighted here and described in further detail in “Risk Factors” immediately following this Prospectus Summary. You should carefully read “Risk Factors” beginning on page 10 for a detailed explanation of these risks before investing in our common stock. Some of these risks include:

 

   

we have a limited operating history, a history of cumulative losses and we do not expect to be profitable for the foreseeable future;

 

   

our future growth is, in large part, dependent upon the widespread adoption of social business software by enterprises and it is difficult to forecast the rate at which this will happen;

 

   

the market for social business software is in its early stages of development and intensely competitive;

 

   

we cannot accurately predict new subscription, subscription renewal or upsell rates and the impact these rates may have on our future revenues;

 

   

we rely on a third-party service provider to host some of our products;

 

   

our security measures could be breached and unauthorized access to customer data could be obtained;

 

   

potential third party intellectual property infringement claims; and

 

   

our quarterly results can fluctuate due to a number of factors, and the value of our stock could decline substantially.

 

Following this offering, our executive officers, directors and 5% or greater stockholders and their affiliates will beneficially own, collectively, approximately 73.5% of our outstanding common stock, or 71.5% if the

 

 

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underwriters exercise in full their over-allotment option. As a result, these stockholders will be able to determine substantially all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets.

 

Corporate Information

 

We were incorporated in the state of Delaware in February 2001. Our principal executive offices are located at 325 Lytton Avenue, Suite 200, Palo Alto, California 94301. Our main phone number is (650) 319-1920 and our website address is www.jivesoftware.com. Information contained on our website is not a part of, and is not incorporated into, this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only. Unless the context requires otherwise, the words “Jive,” “Jive Software,” “we,” “company,” “us” and “our” refer to Jive Software, Inc. and our wholly owned subsidiaries.

 

 

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THE OFFERING

 

Common stock offered by us

   8,333,333 shares

Common stock offered by the selling stockholders

   3,367,137 shares

Total

   11,700,470 shares

Over-allotment option

   1,755,070 shares

Common stock to be outstanding after this offering

   57,299,381 shares, or 59,054,451 shares if the underwriters exercise their option to purchase additional shares in full based on the number of shares of common stock outstanding as of September 30, 2011.

Use of proceeds

   We intend to use approximately $20 million of the net proceeds we receive from this offering to pay down our outstanding loans. We also intend to use the net proceeds from this offering for general corporate purposes, including working capital and potential acquisitions. We will not receive any of the proceeds from the sale of shares to be offered by the selling stockholders. See “Use of Proceeds.”

Proposed Nasdaq symbol

   “JIVE”

 

The number of shares of our common stock to be outstanding after this offering is based on 48,033,743 shares of common stock outstanding as of September 30, 2011 and excludes:

 

   

16,274,820 shares of our common stock issuable upon the exercise of outstanding options, with a weighted average exercise price of $2.94 per share (including 932,305 shares of our common stock that we expect to be sold in this offering by certain selling stockholders upon the exercise of vested options at the closing of this offering);

 

   

511,604 unallocated shares of common stock available for future issuance pursuant to our 2007 Stock Incentive Plan;

 

   

858,651 shares of our common stock that are issued and outstanding but that were subject to a right of repurchase by us at September 30, 2011 and therefore not included in stockholders’ equity (deficit); and

 

   

4,010,955 shares of our common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective upon completion of this offering.

 

Unless otherwise stated, information in this prospectus (except for historical financial statements) reflects and assumes the following:

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the completion of the offering;

 

   

the automatic conversion of all shares of our outstanding convertible preferred stock into an aggregate of 23,082,367 shares of our common stock immediately prior to the completion of this offering;

 

 

 

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the net exercise of an outstanding warrant into an aggregate of 15,935 shares of our common stock, assuming an initial public offering price of $9.00 per share, the midpoint of the price range set forth on the cover page of this prospectus;

 

   

no exercise of options outstanding, except for 932,305 shares of common stock expected to be issued and sold in this offering upon the exercise of vested stock options; and

 

   

no exercise of the underwriters’ over-allotment option.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following tables summarize the consolidated financial data for our business. You should read this summary consolidated financial data in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all included elsewhere in this prospectus.

 

We derived the summary consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010 from our audited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated statements of operations data for the nine months ended September 30, 2010 and 2011, and the unaudited consolidated balance sheet data as of September 30, 2011, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited financial information on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in any future period, and our interim results are not necessarily indicative of the results to be expected for the full fiscal year.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2008     2009     2010     2010     2011  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data(1):

          

Revenues:

          

Products

   $ 13,270      $ 24,319      $ 37,827      $ 25,924      $ 46,092   

Professional services

     3,662        5,675        8,441        5,672        8,679   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     16,932        29,994        46,268        31,596        54,771   

Cost of revenues:

          

Products

     2,827        4,133        9,870        6,644        15,208   

Professional services

     4,876        5,467        9,836        6,877        9,146   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     7,703        9,600        19,706        13,521        24,354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     9,229        20,394        26,562        18,075        30,417   

Operating expenses:

          

Research and development

     6,345        8,047        18,278        12,877        23,320   

Sales and marketing

     12,423        14,057        28,592        20,510        31,757   

General and administrative

     1,777        2,905        6,746        5,298        9,120   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     20,545        25,009        53,616        38,685        64,197   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (11,316     (4,615     (27,054     (20,610     (33,780

Total other income (expense), net(2)

     (4     (223     (495     (201     (8,068
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for (benefits from) income taxes

     (11,320     (4,838     (27,549     (20,811     (41,848

Provision for (benefit from) income taxes

            (52     91        64        (3,710
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (11,320   $ (4,786   $ (27,640   $ (20,875   $ (38,138
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share(3)

   $ (0.55   $ (0.23   $ (1.25   $ (0.95   $ (1.61
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in per share calculations

     20,465        20,533        22,096        21,882        23,741   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma basic and diluted net loss per common share(4)

       $ (0.67     $ (0.81
      

 

 

     

 

 

 

Shares used in pro forma per share calculations(4)

         41,320          46,824   
      

 

 

     

 

 

 

Other Financial Data:

          

Billings(5)

   $ 23,327      $ 36,131      $ 71,846      $ 46,014      $ 68,880   

 

 

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  (1)   Stock-based compensation was included in the consolidated statements of operations data as follows:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
       2008          2009          2010            2010              2011      
     (in thousands)  

Cost of revenues

   $ 53       $ 85       $ 158       $ 105       $ 311   

Research and development

     134         112         528         325         1,764   

Sales and marketing

     177         257         823         544         3,234   

General and administrative

     69         145         1,895         1,636         2,215   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 433       $ 599       $ 3,404       $ 2,610       $ 7,524   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (2)   Non-cash expense recorded in total other income (expense), net related to the change in fair value of our preferred stock warrant liability was zero in the years ended December 31, 2008 and 2009, and $0.2 million and $7.2 million in the year ended December 31, 2010, and the nine months ended September 30, 2011, respectively. See further discussion regarding the preferred stock warrants on page 114.
  (3)   See note 13 of notes to our consolidated financial statements for detailed information regarding the net loss per common share calculation.
  (4)   See notes 2 and 13 of notes to our consolidated financial statements for detailed information regarding the pro forma net loss per common share calculation.
  (5)   Billings is a non-GAAP measure, please see the reconciliation of total revenues to billings on page 10.

 

     As of September 30, 2011  
     Actual     Pro
Forma(1)
     Pro Forma  As
Adjusted(2)(3)
 
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 72,605      $ 72,605       $ 120,864   

Working capital

     27,781        27,781         76,040   

Total assets

     143,944        143,944         192,203   

Current and long-term debt

     32,919        32,919         12,919   

Redeemable and convertible preferred stock

     105,010                  

Total stockholders’ equity (deficit)

     (77,349     27,661         95,920   

 

  (1)   The pro forma column reflects the automatic conversion of all outstanding shares of our convertible preferred stock into 23,082,367 shares of our common stock.
  (2)   The pro forma as adjusted column reflects (i) the net exercise of an outstanding warrant into a total of 15,935 shares of our common stock prior to the completion of this offering; (ii) the sale by us of 8,333,333 shares of our common stock offered by this prospectus at an assumed initial public offering price of $9.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; (iii) the application of the net proceeds we will receive from this offering in the manner described in “Use of Proceeds”; and (iv) the exercise of 932,305 vested options to purchase shares of our common stock, at a weighted average exercise price of $1.23 per share, that we expect to be sold in this offering by certain selling stockholders at the closing of this offering.
  (3)   A $1.00 increase (decrease) in the assumed initial public offering price of $9.00 per share would increase (decrease) the amount of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $7.8 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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Non-GAAP Financial Measure: Billings

 

We monitor billings, a non-GAAP measure, in addition to other financial measures presented in accordance with generally accepted accounting principles, or GAAP, to manage our business, make planning decisions, evaluate our performance and allocate resources. We believe that this non-GAAP measure offers valuable supplemental information regarding the performance of our business, and will help investors better understand the sales volumes and performance of our business.

 

Our use of billings, a non-GAAP measure, has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for total revenues or an analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Billings is not a substitute for total revenues, as billings are recognized when invoiced, while revenue is recognized ratably over the contract term;

 

   

Billings can include fees paid for license terms greater than 12 months and therefore does not always closely match with the timing of delivery of support, maintenance, and hosting services and the costs associated with delivering those services;

 

   

Billings would not exclude any agreements that contain customer acceptance provisions that would require deferral of revenue required under GAAP; and

 

   

Other companies, including companies in our industry, may not use billings, may calculate billings differently or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of billings as a comparative measure.

 

We consider billings a significant performance measure and a leading indicator of future recognized revenue based on our business model of billing for subscription licenses annually and recognizing revenue ratably over the subscription term. The billings we record in any particular period reflect sales to new customers plus subscription renewals and upsell to existing customers, and represent amounts invoiced for product subscription license fees and professional services. We typically invoice the customer for subscription license fees in annual increments upon initiation of the initial contract or subsequent renewal. In addition, historically we have had some arrangements with customers to purchase subscription licenses for a term greater than 12 months, most typically 36 months, in which case the full amount of the agreement will be recognized as billings if the customer is invoiced for the entire term, rather than for an annual period.

 

The following table sets forth our reconciliation of total revenues to billings for the periods shown:

 

     Year Ended December 31,     Nine Months Ended September 30,  
     2008     2009     2010             2010                     2011          
     (in thousands)  

Total revenues

   $ 16,932      $ 29,994      $ 46,268      $ 31,596      $ 54,771   

Deferred revenue, end of period

     18,480        24,617        50,195        39,035        64,304   

Less: deferred revenue, beginning of period

     (12,085     (18,480     (24,617     (24,617     (50,195
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Billings

   $ 23,327      $ 36,131      $ 71,846      $ 46,014      $ 68,880   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the financial statements and related notes, and any related free writing prospectus before deciding whether to purchase shares of our common stock. If any of the following risks are realized, in whole or in part, our business, operating results and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

 

Risks Related to Our Business and Industry

 

We have a history of cumulative losses and we do not expect to be profitable for the foreseeable future.

 

We have incurred losses in each of the last five years, including a net loss of $27.6 million in 2010 and an additional net loss of $38.1 million in the nine months ended September 30, 2011. At September 30, 2011, we had an accumulated deficit of $92.1 million. As we continue to invest in infrastructure, development of our solutions and sales and marketing, our operating expenses will increase significantly. Additionally, to accommodate future growth, we are in the process of transitioning our customer data centers from a third-party service provider to a co-located facility managed by our internal network operations team. This transition will require significant up front capital expenditures and these costs and expenses will be incurred before we realize any associated incremental billings or revenues. As a result, our losses in future periods may be significantly greater than the losses we would incur if we developed our business more slowly. In addition, we may find that these efforts are more expensive than we currently anticipate or that they may not result in increases in our revenues or billings. Although we have experienced revenue growth in recent periods, you should not consider our recent revenue growth or growth rates as indicative of our future performance. We do not expect to be profitable on a GAAP basis in the foreseeable future and we cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability.

 

We have a limited operating history, which makes it difficult to predict our future operating results.

 

Although we were incorporated in 2001, our current platform, the Jive Engage Platform, was not introduced until 2007 and, at that time, we began offering our platform on a subscription basis for internal and external communities. As a result of our limited operating history, our ability to forecast our future operating results is limited and subject to a number of uncertainties, including our ability to plan for and model future growth. We have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described in this prospectus. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.

 

Our future growth is, in large part, dependent upon the widespread adoption of social business software by enterprises and it is difficult to forecast the rate at which this will happen.

 

Social business software for enterprises is at an early stage of technological and market development and the extent to which social business software will become widely adopted remains uncertain. It is difficult to predict customer adoption rates, customer demand for our platform, the future growth rate and size of this market or the entry of competitive solutions. Any expansion of the social business software market depends on a number of factors, including the cost, performance and perceived value associated with social business software. If social business software does not achieve widespread adoption, or there is a reduction in demand for social business software caused by a lack of customer acceptance, technological challenges, weakening economic conditions, competing technologies and products, decreases in corporate spending or otherwise, it could result in lower billings, reduced renewal rates or decreased revenue and our business could be adversely affected. Additionally,

 

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mergers or consolidations among our customers could reduce the number of our customers and could adversely affect our revenues and billings. In particular, if our customers are acquired by entities that are not our customers, or that use fewer of our solutions, or that have more favorable contract terms and choose to discontinue, reduce or change the terms of their use of our platform, our business and operating results could be materially and adversely affected.

 

The market for social business software is in its early stages of development and intensely competitive, and if we do not compete effectively, our business would be harmed.

 

The market for social business software is relatively new, highly competitive and rapidly evolving with new competitors entering the market. We expect the competitive landscape to intensify in the future as a result of regularly evolving customer needs and frequent introductions of new products and services. We currently compete with large well-established multi-solution enterprise software vendors, stand-alone enterprise software application providers, and smaller software application vendors. Our primary competition currently comes from large well-established enterprise software vendors such as Microsoft Corporation and IBM Corporation, both of which are significantly larger than we are, have greater name recognition, larger customer bases, much longer operating histories, significantly greater financial, technical, sales, marketing and other resources, and are able to provide comprehensive business solutions that are broader in scope than the solution we offer. These well established vendors may have preexisting relationships with our existing and potential customers and to the extent our solutions are not viewed as being superior in features, function and integration or priced competitively to existing solutions, we might have difficulty displacing them. We also compete with stand alone enterprise software applications that are beginning to add social features to their existing offerings, including salesforce.com, inc. Some of these companies have large installed bases of active customers that may prefer to implement social business software solutions that are provided by an existing provider of customer management software, and these companies may be able to offer discounts and other pricing incentives that make their solutions more attractive. In addition, large social and professional networking providers with greater name recognition, financial resources and other resources may add social business applications to their existing applications, resulting in increased competition.

 

Some potential customers, particularly large enterprises, may elect to develop their own internal solutions. In addition, some of our competitors offer their solutions at a lower price or at no cost, which has resulted in pricing pressures and increased competition. If we are unable to price our solutions appropriately, our operating results could be negatively impacted. In addition, lower margins, pricing pressures and increased competition generally could result in reduced sales and billings, losses or the failure of our platform to achieve or maintain more widespread market acceptance, any of which could harm our business. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their product offerings or resources. Current or potential competitors may be acquired by third parties with greater available resources and as a result of such acquisitions, might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their solutions, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their offerings more quickly than we do. If we are unable to compete effectively for a share of our market, our business, operating results and financial condition could be materially and adversely affected.

 

We cannot accurately predict new subscription, subscription renewal or upsell rates and the impact these rates may have on our future revenues and operating results.

 

In order for us to improve our operating results and continue to grow our business, it is important that we continually attract new customers and that existing customers renew their subscriptions with us when their existing contract term expires. Our existing customers have no contractual obligation to renew their subscriptions after the initial subscription period and we cannot accurately predict renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including, but not limited to, their satisfaction with our platform and our customer support, the frequency and severity of outages, our product uptime or latency, the pricing of our, or competing, software or professional services, the effects of global economic conditions, and

 

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reductions in spending levels or changes in our customers’ strategies regarding social collaboration tools. If our customers renew their subscriptions, they may renew for fewer users or page views, for shorter contract lengths, or on other terms that are less economically beneficial to us. If customers enter into shorter initial subscription periods, the risk of customers not renewing their subscriptions with us would increase. We have limited historical data with respect to rates of customer renewals, so we may not accurately predict future renewal trends. We cannot assure you that our customers will renew their subscriptions, and if our customers do not renew their agreements or renew on less favorable terms, our revenues may grow more slowly than expected or decline and our billings may be adversely impacted.

 

To the extent we are successful in increasing our customer base, we could incur increased losses because costs associated with generating customer agreements and performing services are generally incurred up front, while revenue is generally recognized ratably over the term of the agreement. This risk is particularly applicable for those customers who choose to implement our platform in the public cloud. If new customers sign agreements with short initial subscription periods and do not renew their subscriptions, our operating results could be negatively impacted due to the up front expenses associated with our sales and implementation efforts.

 

In order for us to improve our operating results, it is important that our customers make additional significant purchases of our functionality and offerings, including additional modules, users or page views, communities or professional services. If our customers do not purchase additional functionality or offerings, our revenues may grow more slowly than expected. Additionally, increasing incremental sales to our current customer base requires increasingly sophisticated and costly sales efforts that are targeted at senior management. We also invest various resources targeted at expanding the utilization rates of our platform. There can be no assurance that our efforts would result in increased sales to existing customers, or upsells, and additional revenue. If our efforts to upsell to our customers are not successful, our business would suffer.

 

Our quarterly results are likely to fluctuate due to a number of factors, and the value of our stock could decline substantially.

 

Our quarterly operating results are likely to fluctuate as a result of a variety of factors, many of which are outside our control. If our quarterly financial results fall below the expectations of investors or any securities analysts who follow our stock, the price of our common stock could decline substantially. Fluctuations in our quarterly financial results may be caused by a number of factors, including, but not limited to, the following:

 

   

the renewal rates for our platform;

 

   

upsell rates for our solutions and services;

 

   

changes in deferred revenue balances due to changes in the average duration of subscriptions, rate of renewals and the rate of new business growth;

 

   

changes in the mix of the average term length and payment terms;

 

   

order sizes in any given quarter;

 

   

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

 

   

changes in our pricing policies, whether initiated by us or as a response to competitive or other factors;

 

   

the cost and timing associated with, and management effort for, the introduction of new features to our platform;

 

   

the rate of expansion and productivity of our sales force;

 

   

the length of the sales cycle for our platform;

 

   

new solution introductions by our competitors;

 

   

our success in selling our platform to large enterprises;

 

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

 

   

timing of additional investments in the development of our platform;

 

   

disruptions in our hosting services and potential refunds to customers;

 

   

security breaches and potential financial penalties to customers;

 

   

purchases of new equipment and bandwidth in connection with planned data center expansion;

 

   

regulatory compliance costs;

 

   

the timing of customer payments and payment defaults by customers;

 

   

the impact on services margins as a result of the use of third party contractors to fulfill demand;

 

   

costs associated with acquisitions of companies and technologies;

 

   

potential goodwill impairment charges related to prior acquisitions;

 

   

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

 

   

the impact of new accounting pronouncements; and

 

   

the timing of stock awards to employees.

 

Additionally, our fourth quarter has historically been our strongest quarter for new billings and renewals. This pattern may be amplified over time if the number of customers with renewal dates occurring in the fourth quarter continues to increase. Furthermore, our quarterly sales cycles are frequently weighted toward the end of the quarter, with an increased volume of sales in the last few weeks of each quarter, which may impact our billings significantly.

 

Due to our evolving business model, the rapid pace of technological change, the unpredictability of the emerging market in which we participate and potential fluctuations in future general economic and financial market conditions, we may not be able to accurately forecast our rate of growth. We plan our expense levels and investments on estimates of future revenue and future anticipated rate of growth. We may not be able to adjust our spending quickly enough if the addition of new customers, the upsell rate for existing customers or the price for which we are able to sell our platform falls short of our expectations. As a result, we expect that our billings, operating results and cash flows may fluctuate significantly and comparisons of our billings, revenues, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance.

 

We believe that our quarterly operating results, including the levels of our revenues and billings, may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of any one quarter as an indication of future performance.

 

Our sales cycle can be long and unpredictable, particularly with respect to large enterprises, and we may have to delay revenue recognition for some of the more complex transactions, which could harm our business and operating results.

 

The timing of our sales is difficult to predict. Our sales efforts involve educating our customers about the use, technical capabilities and benefits of our platform. Customers often undertake a prolonged product-evaluation process, which frequently involves not only our solutions but also those of our competitors. As we continue to target our sales efforts at larger enterprise customers, we will face greater costs, longer sales cycles and less predictability in completing some of our sales. In this market segment, the customer’s decision to subscribe to our platform may be an enterprise-wide decision and, if so, may require us to provide even greater levels of education regarding the use and benefits of our platform. In addition, prospective enterprise customers

 

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may require customized features and functions unique to their business process and may require acceptance testing related to those unique features. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, increasing costs and time required to complete sales and diverting our own sales and professional services resources to a smaller number of larger transactions, while potentially requiring us to delay revenue recognition on some of these transactions until the acceptance requirements have been met.

 

We rely on a third-party service provider to host some of our solutions and any interruptions or delays in services from this third party could impair the delivery of our products and harm our business.

 

We currently outsource our hosting services to SunGard Availability Services LP, or SunGard. These services are provided by three of SunGard’s data centers worldwide. We do not control the operation of SunGard’s facilities. These facilities are vulnerable to damage or interruption from natural disasters, fires, power loss, telecommunications failures and similar events. They are also subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The occurrence of any of these disasters, a decision by SunGard to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our service. Furthermore, the availability of our platform could be interrupted by a number of additional factors, including our customers’ inability to access the Internet, the failure of our network or software systems due to human or other error, security breaches or ability of the infrastructure to handle spikes in customer usage. We may be required to issue credits or refunds or indemnify or otherwise be liable to customers or third parties for damages that may occur resulting from certain of these events. For example, in January 2011, we experienced a hosting outage, which impacted some of our customers for up to 14 hours. As a result of this outage, we provided service credits to certain customers. If we experience similar outages in the future, we may experience customer dissatisfaction and potential loss of confidence, which could harm our reputation and impact future revenues from these customers.

 

A rapid expansion of our business could cause our network or systems to fail.

 

In the future, we may need to expand our hosting operations at a more rapid pace than we have in the past, spend substantial amounts to purchase or lease data centers and equipment, upgrade our technology and infrastructure to handle increased customer demand and introduce new solutions. For example, if we secure a large customer or a group of customers which require significant amounts of bandwidth or storage to enable their community, we may need to increase bandwidth, storage, power or other elements of our hosting operations and our existing systems may not be able to scale in a manner satisfactory to our existing or prospective customers. Any such expansion could be expensive and complex and result in inefficiencies or operational failures and could reduce our margins.

 

Our planned transition from third-party hosted data centers for our public cloud customers to our own managed facilities is expensive and complex, and could result in inefficiencies or operational failure and increased risk.

 

Our planned transition from data centers managed by a third-party service provider to a co-located facility managed by our internal network operations team is complex, could result in operational inefficiencies or operational failures and will require significant up front capital expenditures for equipment and infrastructure as well as increased personnel expense. We expect these investments will have a negative impact on margins in the near term. In this regard, we anticipate making capital expenditures of approximately $3.0 million during the first quarter of 2012 for purchases of network equipment, as well as for additional hosting services. If it takes longer than we expect to complete this transition, the negative impact on our operating results would likely exceed our initial expectations, particularly if the scope of the project grows and we deploy additional resources and hire additional personnel to complete the project. Additionally, to the extent that we are required to add data center capacity to accommodate customer demands for additional bandwidth or storage to enable their communities, we may need to significantly increase the bandwidth, storage, power or other elements of our hosting operations, and the costs associated with adjustments to our data center architecture could also negatively affect our margins and operating results.

 

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There is an increased risk that service interruptions may occur as a result of our data center transition or other unforeseen issues. Even after we transition our data centers, we will remain subject to the continued risks associated with data center operations, including security and privacy compliance, the maintenance of appropriate data security certifications, risks of disruptions or delays in services and other factors. Our failure to effectively manage these risks could damage our reputation and result in a financial liability or a loss of customers, which would harm our business and operating results.

 

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

 

Our hosting operations involve the storage and transmission of data, and security breaches could result in the loss of this information, litigation, indemnity obligations and other liability. While we have security measures in place and we try to contractually prevent our customers from loading sensitive health, personal and financial information into our platform, we do not monitor or review the content that our customers upload and store and, therefore, we have no direct control over the substance of the content within our hosted communities. Therefore, if customers use our platform for the transmission or storage of personally identifiable information and our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, our reputation could be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability to attract new customers and increase engagement by existing customers, cause existing customers to elect to not renew their subscriptions, subject us to third-party lawsuits, regulatory fines or other action or liability, thereby harming our operating results.

 

Because our platform could be used to collect and store personal information of our customers’ employees or customers, privacy concerns could result in additional cost and liability to us or inhibit sales of our platform.

 

Personal privacy has become a significant issue in the United States and in many other countries where we offer our solutions. The regulatory framework for privacy issues worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act (HIPAA) of 1996 and state breach notification laws. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply, including the Data Protection Directive established in the European Union and the Federal Data Protection Act recently passed in Germany.

 

In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our solutions. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and harm our business.

 

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

 

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We have experienced rapid growth in recent periods. If we fail to manage such growth and our future growth effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.

 

We have experienced significant growth in recent periods. For example, we grew from 159 employees at December 31, 2009 to 392 at September 30, 2011. This growth has placed, and any future growth may place, a significant strain on our management and operational infrastructure, including our hosting operations. Our success will depend, in part, on our ability to manage these changes effectively. We will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Failure to effectively manage growth could result in declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties. Any failure to effectively manage growth could adversely impact our business and reputation.

 

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

 

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy and the transmission of certain types of content using the Internet. For example, the State of California has adopted legislation requiring operators of commercial websites that collect personal information from California residents to conspicuously post and comply with privacy policies that satisfy certain requirements. Several other U.S. states have adopted legislation requiring companies to protect the security of personal information that they collect from consumers over the Internet, and more states may adopt similar legislation in the future. Additionally, the Federal Trade Commission has used its authority under Section 5 of the Federal Trade Commission Act to bring actions against companies for failing to maintain adequate security for personal information collected from consumers over the Internet and for failing to comply with privacy-related representations made to Internet users. The U.S. Congress has at various times proposed federal legislation intended to protect the privacy of Internet users and the security of personal information collected from Internet users that would impose additional compliance burdens upon companies collecting personal information from Internet users, and the U.S. Congress may adopt such legislation in the future. The European Union also has adopted various directives regulating data privacy and security and the transmission of content using the Internet involving residents of the European Union, including those directives known as the Data Protection Directive, the E-Privacy Directive, and the Privacy and Electronic Communications Directive, and may adopt similar directives in the future. Several other countries, including Canada and several Latin American countries, have constitutional protections for, or have adopted legislation protecting, individuals’ personal information. Additionally, some federal, state, or foreign governmental bodies have established laws which seek to censor the transmission of certain types of content over the Internet, such as the German Multimedia Law of 1997. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. Increased enforcement of existing laws and regulations, as well as any laws, regulations, or changes that may be adopted or implemented in the future, could limit the growth of the use of public cloud applications or communications generally, result in a decline in the use of the Internet and the viability of Internet-based applications such as our public cloud solutions and reduce the demand for our social business software platform.

 

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

 

We operate in a dynamic environment characterized by rapidly changing technologies and industry and legal standards. The introduction of new social business software solutions by our competitors, the market acceptance of solutions based on new or alternative technologies, or the emergence of new industry standards could render our platform obsolete. Our ability to compete successfully, attract new customers and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing social

 

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business software platform and to continually introduce or acquire new features that are in demand by the market we serve. The success of any enhancement or new solution depends on several factors, including timely completion, adequate quality testing, introduction and market acceptance. Any new platform or feature that we develop or acquire may not be introduced in a timely or cost-effective manner, may contain defects or may not achieve the broad market acceptance necessary to generate significant revenue. If we are unable to anticipate or timely and successfully develop or acquire new offerings or features or enhance our existing platform to meet customer requirements, our business and operating results will be adversely affected.

 

We recently launched our Jive Apps Market. We have devoted significant resources to the development of this new offering and we plan to continue to invest in its growth and adoption. The success of the Jive Apps Market depends, in part, on the willingness of third-party developers to build applications that are complementary to our platform. The Jive Apps Market, as well as other future initiatives, may present new and difficult technology challenges and end-users may choose not to adopt our new solutions, which would harm our operating results. Additionally, the Jive Apps Market includes applications that are built by third-party application developers. This may subject us to additional risks, including the risk that such applications, in particular those developed by smaller, independent developers, cause harm to our reputation and subject us to liability due to, for example, quality issues, the lack of sufficient security within the application, infringement of third-party intellectual property and the introduction of viruses, any of which could harm our business.

 

Our platform must integrate with a variety of operating systems, software applications and hardware that are developed by others and, if we are unable to devote the necessary resources to ensure that our solutions interoperate with such software and hardware, we may fail to increase, or we may lose, market share and we may experience a weakening demand for our platform.

 

Our social business software platform must integrate with a variety of network, hardware and software platforms, including Microsoft Office, and we will need to continuously modify and enhance our platform to adapt to changes in Internet-related hardware, software, communication, browser and database technologies. Any failure of our solutions to operate effectively with future network platforms and technologies could reduce the demand for our platform, result in customer dissatisfaction and harm our business. If we are unable to respond in a timely manner to these changes in a cost-effective manner, our solutions may become less marketable and less competitive or obsolete and our operating results may be negatively impacted. In addition, an increasing number of individuals within the enterprise are utilizing devices other than personal computers, such as mobile phones and other handheld devices, to access the Internet and corporate resources and conduct business. If we cannot effectively make our platform available on these mobile devices, we may experience difficulty attracting and retaining customers.

 

We derive a substantial portion of our revenues from a single software platform.

 

We derive a substantial portion of our total revenues from sales of a single software platform, the Jive Engage Platform, and related modules. As such, any factor adversely affecting sales of this platform, including product release cycles, market acceptance, product competition, performance and reliability, reputation, price competition, and economic and market conditions, could harm our business and operating results.

 

Our business could be adversely affected if our customers are not satisfied with our implementation, customization or other professional services provided by us.

 

Our business depends on our ability to satisfy our customers and meet our customers’ business needs. If a customer is not satisfied with the type of solutions and professional services we deliver, we could incur additional costs to remedy the situation, the profitability of that work might be impaired, and the customer’s dissatisfaction with our services could damage our ability to obtain additional services from that customer. If we are not able to accurately estimate the cost of services requested by the customer, it might result in providing services on a discounted basis or free of charge until customer satisfaction is achieved. In addition, negative publicity related to our customer relationships, regardless of its accuracy, may further damage our business by

 

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affecting our ability to compete for new business with current and prospective customers. Further, we have customer payment obligations not yet due that are attributable to software we have already delivered. These customer obligations are typically not cancelable, but will not yield the expected revenues and cash flow if the customer defaults and fails to pay amounts owed, which could have a negative impact on our financial condition and operating results.

 

Additionally, large enterprises may request or require customized features and functions unique to their particular business processes. If prospective large customers require customized features or functions that we do not offer, then the market for our platform will be more limited and our business could suffer. In addition, supporting large enterprise customers could require us to devote significant development services and support personnel and strain our personnel resources and infrastructure. If we are unable to address the needs of these customers in a timely fashion or further develop and enhance our platform, these customers may not renew their subscriptions, seek to terminate their relationship, renew on less favorable terms, or fail to purchase additional features. If any of these were to occur, our revenues and billings may decline and we may not realize significantly improved operating results.

 

We might experience significant errors or security flaws in our platform.

 

Despite testing prior to their release, software products frequently contain undetected errors, defects or security vulnerabilities, especially when initially introduced or when new versions are released. Errors in our platform could affect the ability of our platform to work with other hardware or software products, impact functionality and delay the development or release of new solutions or new versions of solutions and adversely affect market acceptance of our platform. The detection and correction of any bugs or security flaws can be time consuming and costly. Some errors in our platform and related solutions may only be discovered after installation and use by customers. Any errors, defects or security vulnerabilities discovered after commercial release or contained in custom implementations could result in loss of revenues or delay in revenue recognition, loss of customers or increased service and warranty cost, any of which could adversely affect our business, financial condition and results of operations. Our platform has contained and may contain undetected errors, defects or security vulnerabilities that could result in data unavailability, data security breaches, data loss or corruption or other harm to our customers. Undiscovered vulnerabilities in our platform could expose them to hackers or other unscrupulous third parties who develop and deploy viruses, worms, and other malicious software programs that could attack our solutions. Actual or perceived security vulnerabilities in our platform could harm our reputation and lead some customers to cancel subscriptions, reduce or delay future purchases or use competitive solutions.

 

Failure to adequately expand our direct sales force will impede our growth.

 

We will need to continue to expand and optimize our sales and marketing infrastructure in order to grow our customer base and our business. We plan to continue to expand our direct sales force, both domestically and internationally. Identifying and recruiting qualified personnel and training them in the use of our platform require significant time, expense and attention. It can take nine to 12 months or longer before our sales representatives are fully trained and productive. Our business may be harmed if our efforts to expand and train our direct sales force do not generate a corresponding significant increase in billings and revenues. In particular, if we are unable to hire, develop and retain talented sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our billings and revenues or grow our business.

 

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

 

Our future growth will depend on our ability to enter into successful strategic relationships with third parties. For example, we are investing resources in building our indirect sales channel by establishing relationships with third-parties to facilitate incremental sales, and to implement and customize our platform. In addition, we are also establishing relationships with other third-parties to develop integrations with compatible technology and content. These relationships may not result in additional customers or enable us to generate

 

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significant billings or revenues. Identifying partners, negotiating and documenting relationships with them require significant time and resources. Our agreements for these relationships are typically non-exclusive and do not prohibit the other party from working with our competitors or from offering competing services. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenues and billings could be impaired and our operating results would suffer.

 

Our use of open source technology could impose limitations on our ability to commercialize our platform.

 

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

 

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

 

The software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual property and proprietary rights. Companies in this industry are often required to defend against litigation claims that are based on allegations of infringement or other violations of intellectual property rights. Our technologies may not be able to withstand any third-party claims or rights against their use. As a result, our success depends upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties have claimed and may claim that we infringe upon their intellectual property rights, and we may be found to be infringing upon such rights. In the future, we may be the subject of claims that our platform and underlying technology infringe or violate the intellectual property rights of others. As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our solutions, or require that we comply with other unfavorable terms. Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results. As most of our customer and partner agreements obligate us to provide indemnification in connection with any such litigation and to obtain licenses, modify our platform, or refund fees, we have in the past been, and may in the future be, requested to indemnify our customers and business partners. We expect that the occurrence of infringement claims is likely to grow as the market for social business software grows. Accordingly, our exposure to damages resulting from infringement claims could be increased and this could further exhaust our financial and management resources.

 

The outcome of any litigation, regardless of its merits, is inherently uncertain. Any intellectual property claim or lawsuit could be time-consuming and expensive to resolve, divert management attention from executing our business plan and require us to change our technology, change our business practices and/or pay monetary damages or enter into short- or long-term royalty or licensing agreements. In addition, in certain circumstances, such as those in which the opposing parties are large and well-funded companies, we may face a more expensive and protracted path to resolution of such claims or lawsuits.

 

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

 

Our success and ability to compete depend in part upon our intellectual property. We primarily rely on a combination of copyright, trade secret and trademark laws, as well as confidentiality procedures and contractual

 

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restrictions with our employees, customers, partners and others to establish and protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate or we may be unable to secure intellectual property protection for all of our solutions. In particular, we have only recently begun to implement a strategy to seek patent protection for our technology.

 

Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. The enforcement of our intellectual property rights also depends on our legal actions against these infringers being successful, but we cannot be sure these actions will be successful, even when our rights have been infringed. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business and operating results might be harmed. In addition, defending our intellectual property rights might entail significant expense and the diversion of management resources. Any of our intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Any patents issued in the future may not provide us with competitive advantages, or may be successfully challenged by third parties.

 

Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective protection of our intellectual property may not be available to us in every country in which our solutions are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.

 

We might be required to spend significant resources to monitor and protect our intellectual property rights, and our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Litigation to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management, whether or not it is resolved in our favor, and could ultimately result in the impairment or loss of portions of our intellectual property.

 

Because we generally recognize revenue from subscriptions for our platform ratably over the term of the agreement, near term changes in sales may not be reflected immediately in our operating results.

 

We generally recognize revenue from customers ratably over the term of their agreements, which typically range from 12 to 36 months. As a result, most of the revenue we report in each quarter is derived from the recognition of deferred revenue relating to subscription agreements entered into during previous quarters or years. Consequently, a decline in new or renewed subscriptions in any one quarter is not likely to be reflected immediately in our revenue results for that quarter. Such declines, however, would negatively affect our revenue in future periods and the effect of significant downturns in sales and market acceptance of our solutions, and potential changes in our rate of renewals, may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our total revenues through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term. In some instances, our customers choose to pre-pay the entire term of their multi-year subscriptions up front. As a result, billings can fluctuate significantly from quarter to quarter.

 

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

 

We sell our platform primarily through our direct sales organization, which is comprised of inside sales and field sales personnel and is located in a variety of geographic regions, including the United States, South America and Europe. We also intend to expand into Asia. Sales outside of the United States represented approximately 20% and 23% of our total revenues for the year ended December 31, 2010 and nine months ended September 30, 2011, respectively. As we continue to expand the sale of our social business software platform to customers located outside the United States, our business will be increasingly susceptible to risks associated with

 

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international operations. However, we have a limited operating history outside the United States, and our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to particular challenges of supporting a rapidly growing business in an environment of diverse cultures, languages, customs, legal systems, alternate dispute systems and regulatory systems. The risks and challenges associated with international expansion include:

 

   

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

 

   

laws and business practices favoring local competitors;

 

   

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

 

   

compliance with anti-bribery laws, including compliance with the Foreign Corrupt Practices Act;

 

   

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

 

   

ability to provide local hosting services;

 

   

different pricing environments, including invoicing and collecting in foreign currencies and associated foreign currency exposure;

 

   

difficulties in staffing and managing foreign operations and the increased travel, infrastructure and legal compliance costs associated with international operations;

 

   

different or lesser protection of our intellectual property rights;

 

   

difficulties in enforcing contracts and collecting accounts receivable, longer payment cycles and other collection difficulties; and

 

   

regional economic and political conditions.

 

Additionally, a substantial majority of our international customers currently pay us in U.S. dollars and, as a result, fluctuations in the value of the U.S. dollar and foreign currencies may make our platform more expensive for international customers, which could harm our business. In the future, an increasing number of our customers may pay us in foreign currencies. Any fluctuation in the exchange rate of these foreign currencies may negatively impact our business. If we are unable to successfully manage the challenges of international operations and expansion, our growth could be limited, and our business and operating results could be adversely affected.

 

We recently completed three acquisitions and may acquire or invest in other companies or technologies in the future, which could divert management’s attention, result in additional dilution to our stockholders, increase expenses, disrupt our operations and harm our operating results.

 

We have in the past acquired, and we may in the future acquire or invest in, businesses, products or technologies that we believe could complement or expand our platform, enhance our technical capabilities or otherwise offer growth opportunities. We cannot assure you that we will realize the anticipated benefits of these or any future acquisition. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses related to identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

 

There are inherent risks in integrating and managing acquisitions. If we acquire additional businesses, we may not be able to assimilate or integrate the acquired personnel, operations and technologies successfully or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

 

   

unanticipated costs or liabilities associated with the acquisition;

 

   

incurrence of acquisition-related costs, which would be recognized as a current period expense;

 

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inability to generate sufficient revenues to offset acquisition or investment costs;

 

   

the inability to maintain relationships with customers and partners of the acquired business;

 

   

the difficulty of incorporating acquired technology and rights into our platform and of maintaining quality standards consistent with our brand;

 

   

delays in customer purchases due to uncertainty related to any acquisition;

 

   

the need to implement additional controls, procedures and policies;

 

   

challenges caused by distance, language and cultural differences;

 

   

harm to our existing business relationships with business partners and customers as a result of the acquisition;

 

   

the potential loss of key employees;

 

   

use of resources that are needed in other parts of our business;

 

   

the inability to recognize acquired revenues in accordance with our revenue recognition policies, and the loss of acquired deferred revenue; and

 

   

use of substantial portions of our available cash or the incurrence of debt to consummate the acquisition.

 

In addition, a significant portion of the purchase price of companies we acquire may be allocated to goodwill and other intangible assets, which must be assessed for impairment at least annually. Also, contingent considerations related to acquisitions will be remeasured to fair value at each reporting period, with any changes in the value recorded as income or expense. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on the impairment assessment process, which could harm our results of operations.

 

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer.

 

Weakened global economic conditions may adversely affect our industry, business and results of operations in ways that may be hard to predict or defend against.

 

Our overall performance depends in part on domestic and worldwide economic conditions, which may remain challenging for the foreseeable future. Financial developments seemingly unrelated to us or to our industry may adversely affect us over the course of time. The United States and other key international economies have been impacted by threatened sovereign defaults and ratings downgrades, falling demand for a variety of goods and services, restricted credit, going concern threats to major multinational companies, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty. These conditions affect the rate of information technology spending and could adversely affect our customers’ ability or willingness to purchase our social business software platform, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscriptions, or affect renewal rates, all of which could adversely affect our operating results. We cannot predict the timing, strength or duration of the economic recovery or any subsequent economic slowdown, worldwide, in the United States, or in our industry.

 

Catastrophic events may disrupt our business.

 

Our corporate headquarters are located in Palo Alto, California and we are considering transitioning our data centers to a co-located facility located along the west coast of the United States. The west coast, and California in particular, are active earthquake zones. Additionally, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems and our website for our development, marketing, operational,

 

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support, hosted services and sales activities. In the event of a major earthquake or catastrophic event such as fire, power loss, telecommunications failure, cyber attack, war or terrorist attack, we may be unable to continue our corporate operations and may endure system interruptions, reputational harm, loss of intellectual property, delays in our product development, lengthy interruptions in our services, breaches of data security and loss of critical data, all of which could harm our future operating results.

 

We might require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

 

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.

 

The forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you our business will grow at similar rates, if at all.

 

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. Forecasts relating to the expected growth in the social business software market and other markets may prove to be inaccurate. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.

 

There are limitations on the effectiveness of controls and the failure of our control systems may materially and adversely impact us.

 

We do not expect that disclosure controls or internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems to prevent error or fraud could materially and adversely impact us.

 

The intended operational and tax benefits of our corporate structure and intercompany arrangements depend on the application of the tax laws of various jurisdictions and how we operate our business, and may be challenged by tax authorities.

 

Our corporate structure and intercompany agreements with our foreign subsidiaries are intended to optimize our operating structure and our worldwide effective tax rate, including the manner in which we develop and use our intellectual property, manage our cash flow and the pricing of our intercompany transactions. Our foreign subsidiaries operate under cost plus transfer pricing agreements with us. These agreements provide for sales,

 

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support and development activities for our benefit. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing technology or our transfer pricing arrangements, or determine that the manner in which we operate our business does not achieve the intended tax objectives, which could increase our international tax exposure and harm our operating results.

 

We depend on our senior management team and the loss of one or more key employees or groups could harm our business and prevent us from implementing our business plan in a timely manner.

 

Our success depends largely upon the continued services of our executive officers, which includes key leadership in the areas of research and development, marketing, sales, services and the general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our platform and other solutions.

 

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

 

Because competition for our target employees is intense, we may not be able to attract and retain the highly skilled employees we need to support our operations and growing customer base.

 

In the software industry, there is substantial and continuous competition for software engineers with high levels of experience in designing, developing and managing software, as well as competition for sales executives and operations personnel. We may not be successful in attracting and retaining qualified personnel. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In addition, job candidates and existing employees often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock declines, it may adversely affect our ability to retain highly skilled employees. In addition, since we expense all stock-based compensation, we may periodically change our stock compensation practices, which may include reducing the number of employees eligible for options or reducing the size of equity awards granted per employee. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

 

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

 

We believe that a critical component to our success has been our corporate culture. We have invested substantial time and resources in building our team. As we grow and develop the infrastructure of a public company, we may find it difficult to maintain these important aspects of our corporate culture. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.

 

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

 

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the listing requirements of the securities exchange on which our common stock will be traded and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results

 

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and maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future, which will increase our costs and expenses.

 

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

 

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our Audit Committee and Compensation Committee, and qualified executive officers.

 

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal controls over financial reporting. We may not complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

 

We will be required, pursuant to the Exchange Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our auditors have issued an attestation report on our management’s assessment of our internal controls.

 

We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to provide these reports. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to attest to management’s report on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.

 

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Risks Related to Our Common Stock and this Offering

 

Our share price is likely to be volatile and could decline following this offering, and you may be unable to sell your shares at or above the offering price, if at all.

 

Prior to this offering, there has not been a public market for our common stock. An active public market for these shares may never develop or be sustained, which could affect your ability to sell your shares and could depress the market price of your shares. The initial public offering price for the shares of our common stock will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of our common stock could be subject to wide fluctuations in response to many risk factors described in this prospectus, and others beyond our control, including:

 

   

actual or anticipated fluctuations in our financial condition and operating results;

 

   

changes in projected operational and financial results;

 

   

addition or loss of significant customers;

 

   

changes in laws or regulations applicable to our business;

 

   

actual or anticipated changes in our growth rate relative to our competitors;

 

   

announcements of technological innovations or new offerings by us or our competitors;

 

   

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;

 

   

additions or departures of key personnel;

 

   

issuance of new or updated research or reports by securities analysts;

 

   

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

   

sales of our common stock by us or our stockholders;

 

   

fluctuations in the trading volume of our shares, or the size of our public float;

 

   

the expiration of contractual lockup agreements; and

 

   

general economic, legal, regulatory and market conditions unrelated to our performance.

 

In addition, if the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations.

 

If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.

 

The concentration of ownership of our capital stock among our existing officers and directors may prevent new investors from influencing significant corporate decisions.

 

Following this offering, our executive officers, directors and 5% or greater stockholders and their affiliates will beneficially own, collectively, approximately 73.5% of our outstanding common stock, or 71.5% if the underwriters exercise in full their over-allotment option. As a result, these stockholders will be able to determine substantially all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration

 

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of ownership could limit the ability of other stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. For further information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, see “Principal and Selling Stockholders” on page 116.

 

Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur, could reduce the price that our common stock might otherwise attain and may dilute your voting power and your ownership interest in us.

 

Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. Based on the total number of outstanding shares of our common stock as of September 30, 2011 upon completion of this offering, we will have 57,299,381 shares of common stock outstanding, assuming no exercise of our outstanding options.

 

All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act.

 

Subject to certain exceptions described under the caption “Underwriters,” we and all of our directors and officers and substantially all of our equity holders have agreed not to offer, sell or agree to sell, directly or indirectly, any shares of common stock without the permission of the representatives of Morgan Stanley & Co. LLC and Goldman, Sachs & Co. for a period of 180 days from the date of this prospectus. When the lockup period expires, we and our locked-up security holders will be able to sell our shares in the public market. In addition, the underwriters may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. See the section of this prospectus captioned “Shares Eligible for Future Sale” for more information. Sales of a substantial number of such shares upon expiration, or the perception that such sales may occur, or early release of the lock-up, could cause our share price to fall or make it more difficult for you to sell your common stock at a time and price that you deem appropriate.

 

Based on shares outstanding as of September 30, 2011, holders of up to approximately 40,404,104 shares, or 70.5%, of our common stock will have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register the offer and sale of all shares of common stock that we may issue under our equity compensation plans.

 

We may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition, investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.

 

We have broad discretion to determine how to use the funds raised in this offering, and we may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

 

The net proceeds from this offering may be used for repayment of debt and general corporate purposes, including working capital, sales and marketing activities, general and administrative matters, capital expenditures, and potential acquisitions of, or investments in, complementary solutions, technologies, services, solutions or business. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our operating results or market value. Until the net proceeds are used, they may be placed in investments that do not produce

 

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significant income or that may lose value. If we do not invest or apply the proceeds of this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

 

Because the initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.

 

The initial public offering price will be substantially higher than the pro forma net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate dilution of $7.84 per share, the difference between the price per share you pay for our common stock and its pro forma net tangible book value per share as of September 30, 2011, after giving effect to the issuance of 8,333,333 shares of our common stock in this offering. See “Dilution” on page 36.

 

If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research reports about our business, our share price and trading volume could decline.

 

The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

Our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.

 

Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon the closing of this offering contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors that are not nominated by the current members of our board of directors or take other corporate actions, including effecting changes in our management. These provisions include:

 

   

a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

   

the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;

 

   

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

   

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

   

the requirement that a special meeting of stockholders may be called only by the chairman of our board of directors, our president, our secretary, or a majority vote of our board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

   

the requirement for the affirmative vote of holders of at least 66 2/3 percent of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend the

 

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provisions of our amended and restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws, which may inhibit the ability of an acquiror to effect such amendments to facilitate an unsolicited takeover attempt;

 

   

the ability of our board of directors, by majority vote, to amend the bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquiror to amend the bylaws to facilitate an unsolicited takeover attempt; and

 

   

advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.

 

In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus, including “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

 

   

our ability to timely and effectively scale and adapt our existing technology and network infrastructure;

 

   

our ability to increase adoption of our platform by our customers’ internal and external users;

 

   

our ability to protect our users’ information and adequately address privacy concerns;

 

   

our ability to maintain an adequate rate of growth;

 

   

our future expenses;

 

   

the effects of increased competition in our market;

 

   

our ability to effectively manage our growth;

 

   

our ability to successfully enter new markets and manage our international expansion;

 

   

our ability to maintain, protect and enhance our brand and intellectual property;

 

   

the attraction and retention of qualified employees and key personnel; and

 

   

other risk factors included under “Risk Factors” in this prospectus.

 

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

 

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INDUSTRY AND MARKET DATA

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our solutions. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information and cannot assure you of its accuracy or completeness. While we believe the market position, opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

Some of the industry and market data contained in this prospectus are based on independent industry publications, including those generated by IDC, McKinsey, Forrester and Gartner or other publicly available information. This information involves a number of assumptions and limitations. Although we believe that each source is reliable as of its respective date, neither we nor the underwriters have independently verified the accuracy or completeness of this information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications.

 

The Gartner Reports described herein represent data, research opinion or viewpoints published as part of a syndicated subscription service, by Gartner, and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Prospectus) and the opinions expressed in the Gartner Reports are subject to change without notice. The Magic Quadrants are copyrighted 2011 by Gartner, Inc. and are reused with permission. The Magic Quadrant is a graphical representation of a marketplace at and for a specific time period. It depicts Gartner’s analysis of how certain vendors measure against criteria for that marketplace, as defined by Gartner. Gartner does not endorse any vendor, product or service depicted in the Magic Quadrant, and does not advise technology users to select only those vendors placed in the “Leaders” quadrant. The Magic Quadrant is intended solely as a research tool, and is not meant to be a specific guide to action.

 

In certain instances the sources of the industry and market data contained in this prospectus are identified by superscript notations. The sources of these data are provided below:

 

   

Gartner, Inc. “Magic Quadrant for Social Software in the Workplace” by Nikos Drakos et al., Aug. 25, 2011;

 

   

Gartner, Inc. “Magic Quadrant for Externally Facing Social Software” by Jeffrey Mann et al., Aug. 25, 2011;

 

   

Gartner, Inc. “Magic Quadrant for Social CRM” by Adam Sarner et al., July 25, 2011;

 

   

“The Forrester WaveTM: Community Platforms, Q4 2010” Forrester Research, Inc. November 1, 2010;

 

   

“The Forrester WaveTM: Enterprise Social Platforms, Q3 2011” Forrester Research, Inc. August 24, 2011; and

 

   

IDC. Worldwide Collaborative Applications, 2011-2015 Forecast by Erin Traudt. Doc #228926. June 2011.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from the sale of the shares of our common stock offered by us will be approximately $67.1 million, based on an assumed initial public offering price of $9.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $81.8 million. A $1.00 increase or decrease in the assumed initial public offering price of $9.00 per share would increase or decrease the net proceeds to us from this offering by approximately $7.8 million, assuming the number of shares offered by us, as indicated on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of common stock by the selling stockholders.

 

The principal purposes of this offering are to increase our financial flexibility, increase our visibility in the marketplace and create a public market for our common stock. Additionally, we intend to use approximately $20 million of the net proceeds we receive from this offering to pay down the balances outstanding under our term loan and senior term loan. We incurred this indebtedness in May 2011 in connection with our acquisition of OffiSync. As of September 30, 2011, we had total indebtedness of $29.0 million outstanding under these loans. The term loan component has a maturity date of March 1, 2016 and has a fixed interest rate of 10.0% per annum, and the senior term loan component has a maturity date of May 1, 2015 and bears interest at a rate of prime plus 0.375%, or 3.625%, as of September 30, 2011.

 

As of the date of this prospectus, except as described above, we cannot specify with certainty all of the other particular uses for the net proceeds from this offering. However, we expect to use the remaining net proceeds to us from this offering primarily for general corporate purposes, including headcount expansion, investments in our data center, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments.

 

Management’s plans for the remaining proceeds of this offering are subject to change due to unforeseen events and opportunities, and the amounts and timing of our actual expenditures depend on several factors. Accordingly, our management team will have broad discretion in using the remaining net proceeds from this offering. Pending the use of proceeds from this offering, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the United States government.

 

DIVIDEND POLICY

 

We have never declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our capital stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to applicable laws and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant. In addition, our amended and restated loan and security agreement with Silicon Valley Bank restricts our ability to pay dividends.

 

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CAPITALIZATION

 

The following table summarizes our cash and cash equivalents and our capitalization as of September 30, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to the automatic conversion of all outstanding shares of convertible preferred stock into an aggregate of 23,082,367 shares of common stock upon the completion of this offering; and

 

   

on a pro forma as adjusted basis, giving effect to (i) the sale by us of 8,333,333 shares of common stock in this offering, at an assumed initial public offering price of $9.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; (ii) the application of the net proceeds we will receive from this offering in the manner described in “Use of Proceeds”; (iii) the net exercise of the outstanding warrant for an aggregate of 15,935 shares of our common stock, assuming an initial public offering price of $9.00 per share, the midpoint of the price range set forth on the cover page of this prospectus; and (iv) the exercise of 932,305 vested options to purchase shares of our common stock, at a weighted average exercise price of $1.23 per share, that we expect to be sold in this offering by certain selling shareholders at the closing of this offering.

 

The information below is illustrative only and cash and cash equivalents, total stockholders’ equity and total capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30, 2011  
     Actual         Pro Forma         Pro Forma
As Adjusted
 
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 72,605      $ 72,605      $ 120,864   
  

 

 

   

 

 

   

 

 

 

Revolving credit facility

   $ 4,048      $ 4,048      $ 4,048   

Long-term debt, current and long-term portions

     28,871        28,871        8,871   
  

 

 

   

 

 

   

 

 

 

Total short- and long-term debt

     32,919        32,919        12,919   

Redeemable and convertible preferred stock, $0.0001 par value: 23,082,367 shares authorized and 23,082,367 shares issued and outstanding, actual; 10,000,000 shares authorized, and no shares issued or outstanding, pro form and pro forma as adjusted

     105,010        —          —     

Stockholders’ equity (deficit):

      

Common stock, $0.0001 par value. 70,000,000 shares authorized, actual; 70,000,000 shares authorized, pro forma; and 290,000,000 shares authorized pro forma as adjusted. 24,935,441 shares outstanding, actual; 48,033,743 shares outstanding, pro forma; and 57,299,381 outstanding, pro forma as adjusted

     4        6        7   

Less 6,425,406 shares of treasury stock, at cost

     (3,352     (3,352     (3,352

Additional paid-in capital

     18,063        123,071        191,329   

Accumulated deficit

     (92,059     (92,059     (92,059

Accumulated other comprehensive income

     (5     (5     (5
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (77,349     27,661        95,920   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 60,580      $ 60,580      $ 108,839   
  

 

 

   

 

 

   

 

 

 

 

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The number of shares of our common stock to be outstanding after this offering is based on 48,033,743 shares outstanding as of September 30, 2011 and excludes:

 

   

16,274,820 shares of our common stock issuable upon the exercise of outstanding options, with a weighted average exercise price of $2.94 per share (including 932,305 shares of our common stock that we expect to be sold in this offering by certain selling stockholders upon the exercise of vested options at the closing of this offering);

 

   

511,604 additional shares of common stock reserved for issuance under our 2007 Stock Incentive Plan;

 

   

858,651 shares of our common stock that are issued and outstanding but that were subject to a right of repurchase by us at September 30, 2011 and therefore not included in stockholders’ equity (deficit); and

 

   

4,010,955 shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective upon completion of this offering.

 

A $1.00 increase or decrease in the assumed initial public offering price of $9.00 per share of our common stock in this offering would increase or decrease each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $7.8 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

 

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Pro forma net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after completion of this offering.

 

Our pro forma net tangible deficit as of September 30, 2011 before giving effect to this offering was $1.7 million, or $0.04 per share, based on the total number of shares of our common stock outstanding as of September 30, 2011, assuming the conversion of all outstanding shares of our preferred stock into 23,082,367 shares of our common stock and the net exercise of the outstanding warrant into a total of 15,935 shares of our common stock, assuming an initial public offering price of $9.00 per share, the midpoint of the price range set forth on the cover page of this prospectus.

 

After giving effect to our sale of shares of common stock in this offering at the initial public offering price of $9.00 per share, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of September 30, 2011 would have been $66.6 million, or $1.16 per share. This represents an immediate increase in net tangible book value of $1.20 per share to existing stockholders and an immediate dilution in net tangible book value of $7.84 per share to purchasers of our common stock in this offering, as illustrated in the following table:

 

Assumed initial public offering price per share

     $ 9.00   

Pro forma net tangible book value (deficit) per share as of September 30, 2011, before giving effect to this offering

   $ (0.04  

Increase in pro forma net tangible book value (deficit) per share attributable to new investors in this offering

     1.20     
  

 

 

   

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

       1.16   
    

 

 

 

Dilution per share to new investors in this offering

     $ 7.84   
    

 

 

 

 

If the underwriters exercise their option to purchase additional shares of our common stock in full, the pro forma as adjusted net tangible book value per share would be $1.38 per share, the increase in pro forma net tangible book value per share to existing stockholders would be $1.42 per share and the dilution per share to new investors purchasing shares in this offering would be $7.62 per share.

 

The following table presents, on a pro forma basis as of September 30, 2011, after giving effect to the sale of 8,333,333 shares of common stock and the automatic conversion of all convertible preferred stock into 23,082,367 shares of common stock; and the net exercise of the outstanding warrant into a total of 15,935 shares of our common stock upon the closing of this offering, the differences between the existing stockholders and the purchasers of shares in this offering with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share (in thousands, except percentages and per share data):

 

     Shares Purchased     Total Consideration     Average
Price

Per  Share
 
     Number      Percent     Amount      Percent    
     (dollars in thousands, except per share data)  

Existing stockholders

     48,966,048         85.5   $ 124,773         62.5   $ 2.55   

New public investors

     8,333,333         14.5        75,000         37.5        9.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     57,299,381         100.0   $ 199,773         100.0     3.49   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

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Sales of shares of common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to 45,598,911, or approximately 79.6% of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to 11,700,470, or approximately 20.4% of the total shares of common stock outstanding after this offering.

 

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters exercise their over-allotment option in full, our existing stockholders would own 77.2% and our new investors would own 22.8% of the total number of shares of our common stock outstanding after this offering.

 

The foregoing discussions and calculations are based on 48,033,743 shares of our common stock outstanding as of September 30, 2011 and exclude:

 

   

16,274,820 shares of our common stock issuable upon the exercise of outstanding options, with a weighted average exercise price of $2.94 per share (including 932,305 shares of our common stock that we expect to be sold in this offering by certain selling stockholders upon the exercise of vested options at the closing of this offering);

 

   

511,604 additional shares of common stock reserved for issuance under our 2007 Stock Incentive Plan;

 

   

858,651 shares of our common stock that are issued and outstanding but that were subject to a right of repurchase by us at September 30, 2011 and therefore not included in stockholders’ equity (deficit); and

 

   

4,010,955 shares of our common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective upon completion of this offering.

 

To the extent that any outstanding options are exercised, new investors will experience further dilution.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included in this prospectus. The selected consolidated financial data included in this section are not intended to replace our consolidated financial statements and the related notes included in this prospectus.

 

The consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010, and consolidated balance sheet data as of December 31, 2009 and 2010, were derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2006 and 2007, and consolidated balance sheet data as of December 31, 2006, 2007 and 2008, were derived from our audited consolidated financial statements, as adjusted for a change in accounting principle (see note 2(h) to notes of our consolidated financial statements), not included in this prospectus. The consolidated statements of operations data and balance sheet data as of and for the nine months ended September 30, 2010 and 2011 were derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, that management considers necessary for the fair presentation of the financial information set forth in those statements. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods, and the results for the nine months ended September 30, 2011 are not necessarily indicative of results to be expected for the full year or for any other period.

 

    Year Ended December 31,     Nine Months  Ended
September 30,
 
    2006     2007     2008     2009     2010         2010             2011      
                                  (unaudited)  
    (in thousands, except per share data)  

Consolidated Statements of Operations Data(1):

             

Revenues:

             

Products

  $ 2,450      $ 6,453      $ 13,270      $ 24,319      $ 37,827      $ 25,924      $ 46,092   

Professional services

    428        1,450        3,662        5,675        8,441        5,672        8,679   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    2,878        7,903        16,932        29,994        46,268        31,596        54,771   

Cost of revenues:

             

Products

    88        942        2,827        4,133        9,870        6,644        15,208   

Professional services

    824        1,916        4,876        5,467        9,836        6,877        9,146   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    912        2,858        7,703        9,600        19,706        13,521        24,354   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,966        5,045        9,229        20,394        26,562        18,075        30,417   

Operating expenses:

             

Research and development

    1,720        3,214        6,345        8,047        18,278        12,877        23,320   

Sales and marketing

    1,270        5,185        12,423        14,057        28,592        20,510        31,757   

General and administrative

    576        670        1,777        2,905        6,746        5,298        9,120   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    3,566        9,069        20,545        25,009        53,616        38,685        64,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (1,600     (4,024     (11,316     (4,615     (27,054     (20,610     (33,780

Total other income (expense), net(2)

    53        222        (4     (223     (495     (201     (8,068
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (1,547     (3,802     (11,320     (4,838     (27,549     (20,811     (41,848

Provision for (benefit from) income taxes

           88               (52     91        64        (3,710
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (1,547   $ (3,890   $ (11,320   $ (4,786   $ (27,640   $ (20,875   $ (38,138
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share(3)

  $ (0.07   $ (0.17   $ (0.55   $ (0.23   $ (1.25   $ (0.95   $ (1.61
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in per share calculations

    22,955        22,391        20,465        20,533        22,096        21,882        23,741   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma basic and diluted net loss per common share(4)

          $ (0.67     $ (0.81
         

 

 

     

 

 

 

Shares used in pro forma per common share calculations(4)

            41,320          46,824   
         

 

 

     

 

 

 

 

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  (1)   Stock-based compensation was included in the consolidated statements of operations data as follows:

 

     Year Ended December 31,      Nine Months
Ended
September 30,
 
     2006      2007      2008      2009      2010      2010      2011  
     (in thousands)  

Cost of revenues

   $       $ 19       $ 53       $ 85       $ 158       $ 105       $ 311   

Research and development

             55         134         112         528         325         1,764   

Sales and marketing

             68         177         257         823         544         3,234   

General and administrative

             44         69         145         1,895         1,636         2,215   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $       $ 186       $ 433       $ 599       $ 3,404       $ 2,610       $ 7,524   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (2)   Non-cash expense recorded in total other income (expense), net related to the change in fair value of our preferred stock warrant liability was zero in the years ended December 31, 2006, 2007, 2008 and 2009, and $0.2 million and $7.2 million in the year ended December 31, 2010, and the nine months ended September 30, 2011, respectively. See further discussion regarding the preferred stock warrants on page 114.
  (3)   See note 13 of notes to our consolidated financial statements for detailed information regarding the net loss per share calculation.
  (4)   See notes 2 and 13 of notes to our consolidated financial statements for detailed information regarding the pro forma net loss per share calculation.

 

    As of December 31,     As of
September 30,

2011
 
    2006     2007     2008     2009     2010    
    (in thousands)  

Consolidated Balance Sheet Data:

           

Cash and cash equivalents

  $ 2,111      $ 12,220      $ 9,520      $ 22,078      $ 43,348      $ 72,605   

Working capital (deficit)

    (917     8,568        (2,961     3,677        14,055        27,781   

Total assets

    3,775        18,003        16,776        34,122        77,540        143,944   

Preferred stock warrants

                                264          

Current and long-term debt

    99        1,798        3,999        4,122        9,248        32,919   

Redeemable and convertible preferred stock

           15,300        15,381        27,633        57,561        105,010   

Total stockholders’ deficit

    (479     (12,372     (23,119     (27,816     (50,035     (77,349

 

Non-GAAP Financial Measure: Billings

 

We monitor billings, a non-GAAP measure, in addition to other financial measures presented in accordance with GAAP, to manage our business, make planning decisions, evaluate our performance and allocate resources. We believe that this non-GAAP measure offers valuable supplemental information regarding the performance of our business, and will help investors better understand the sales volumes and performance of our business.

 

Our use of billings, a non-GAAP measure, has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for total revenues or an analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Billings is not a substitute for total revenues, as billings are recognized when invoiced, while revenue is recognized ratably over the contract term;

 

   

Billings can include fees paid for license terms greater than 12 months and therefore does not always closely match with the timing of delivery of support, maintenance, and hosting services and the costs associated with delivering those services;

 

   

Billings would not exclude any agreements that contain customer acceptance provisions that would require deferral of revenue required under GAAP; and

 

   

Other companies, including companies in our industry, may not use billings, may calculate billings differently or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of billings as a comparative measure.

 

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     Year Ended December 31,      Nine Months Ended
September 30,
 
     2008      2009      2010      2010      2011  
     (in thousands)  

Billings

   $ 23,327       $ 36,131       $ 71,846       $ 46,014       $ 68,880   

 

We consider billings, a non-GAAP measure, a significant performance measure and a leading indicator of future recognized revenue based on our business model of billing for subscription licenses annually and recognizing revenue ratably over the subscription term. The billings we record in any particular period reflect sales to new customers plus subscription renewals and upsell to existing customers, and represent amounts invoiced for product subscription license fees and professional services. We typically invoice the customer for subscription license fees in annual increments upon initiation of the initial contract or subsequent renewal. In addition, historically we have had some arrangements with customers to purchase subscription licenses for a term greater than 12 months, most typically 36 months, in which case the full amount of the agreement will be recognized as billings if the customer is invoiced for the entire term, rather than for an annual period.

 

The following table sets forth our reconciliation of total revenues to billings for the periods shown:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2008     2009     2010     2010     2011  
                       (unaudited)  
    

(in thousands)

 

Total revenues

   $ 16,932      $ 29,994      $ 46,268      $ 31,596      $ 54,771   

Deferred revenue, end of period

     18,480        24,617        50,195        39,035        64,304   

Less: deferred revenue, beginning of period

     (12,085     (18,480     (24,617     (24,617     (50,195
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Billings

   $ 23,327      $ 36,131      $ 71,846      $ 46,014      $ 68,880   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this prospectus.

 

Overview

 

We provide a social business software platform that improves business results through enhanced internal and external communication and collaboration among employees, customers and partners. We believe organizations that deploy our platform will be able to achieve increased employee productivity, boost brand loyalty, lower operational costs and accelerate strategic decision making.

 

Our company was founded in February 2001 to commercialize Jive Forums, a discussion-based Internet forums technology used by enterprises for external support communities. Between 2001 and 2005, we primarily generated revenue through the sale of Jive Forums and an internally developed instant messenger product, which we subsequently contributed to the open source community. In 2006, we began enhancing our Jive Forums technology with the goal of creating a social business platform that would provide enterprises with rich and engaging communities that connect employees, customers and partners.

 

In February 2007, we launched the Jive Engage Platform. Based on our initial success with this new product strategy and our desire to invest more heavily in the growth of our company, in August 2007, we raised our first external capital. This initial funding allowed us to further develop our platform and to capitalize on the emerging trend for social communication both inside and outside the enterprise.

 

Since the initial release of the Jive Engage Platform in 2007, we have continued to enhance our platform with features and functions that bring the benefits of social collaboration to the enterprise. In June 2011, we introduced the latest version of the Jive Engage Platform, “Jive 5.0.” This release included advanced social features, proprietary recommendation technology, an application marketplace and enhanced integration with Microsoft Office. We built the Jive Engage Platform through internal research and development and augmented this development with three small acquisitions targeted at expanding the functionality of our core platform: Filtrbox in January 2010; Proximal Labs in March 2011; and OffiSync in May 2011.

 

We offer the Jive Engage Platform on a subscription basis, deployed in a private or public cloud and used for internal or external communities. We generate revenues from platform subscription fees as well as professional services fees for configuration, implementation and training. We recognize revenues from subscriptions ratably over the term of the contract, and professional services fees ratably over the subscription term as those services are delivered.

 

We have achieved significant revenue growth in recent periods. In 2010 and in the nine months ended September 30, 2011, our total revenues were $46.3 million, which represented a 54% increase from 2009 total revenues, and $54.8 million, which represented a 73% increase over the comparable period in 2010, respectively. For 2010 and for the nine months ended September 30, 2011, 20% and 23% of our total revenues, respectively, were derived from customers located outside the United States. In 2010 and for the nine months ended September 30, 2011, we incurred net losses of $27.3 million and $38.1 million, respectively.

 

We intend to continue to invest in development of our solutions, our infrastructure and sales and marketing to drive long-term growth. As a result of these planned investments, we do not expect to be profitable on a GAAP basis for the foreseeable future. We are in the process of transitioning our data centers from a third-

 

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party service provider to a co-located facility managed by our internal network operations team. This transition is designed to accommodate future growth, lower our operating costs and increase service levels, but will require significant up front capital expenditures for equipment and infrastructure as well as increased personnel expense. In this regard, we anticipate making capital expenditures of approximately $3.0 million during the first quarter of 2012 for purchases of network equipment, as well as for additional hosting services. We expect that the data center transition will have a negative impact on our margins in the near term, but, as our data centers scale with our anticipated customer growth, we expect that a long-term effect of this transition will be to improve our margins. In addition, we expect to continue to invest in our product development efforts to add additional features and functionality that will enable our customers to derive more value and increase adoption. It is difficult for us to accurately predict subscription renewal or upsell rates and to forecast the rate or degree of adoption of social business software in the enterprise, making it difficult for us to predict the impact that our investments in product development will have on future revenues. We continue to invest in our field sales, inside sales and services organization to drive additional revenue and support the growth of our customer base. Any investments that we make in our field sales, inside sales and services organization will occur in advance of our experiencing any benefits from such investments, and so it is difficult for us to determine if we are efficiently allocating our resources in these areas.

 

Key Metrics

 

In addition to GAAP metrics such as total revenues and gross margin, we also regularly review billings, a non-GAAP measure, and the number of Jive Engage Platform customers to evaluate our business, measure our performance, identify trends affecting our business, allocate capital and make strategic decisions.

 

LOGO

 

  (1)   Billings is a non-GAAP measure. See “Selected Consolidated Financial Data—Non-GAAP Financial Measure: Billings” for a reconciliation of total revenues to billings for the periods shown.

 

Billings

 

We monitor Billings, a non-GAAP measure, in addition to other financial measures presented in accordance with GAAP, to manage our business, make planning decisions, evaluate our performance and allocate resources. We believe that this non-GAAP measure offers valuable supplemental information regarding the performance of our business, and will help investors better understand the sales volumes and performance of our business.

 

Our use of Billings, a non-GAAP measure, has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for total revenues or an analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Billings is not a substitute for total revenues, as billings are recognized when invoiced, while revenue is recognized ratably over the contract term;

 

   

Billings can include fees paid for license terms greater than 12 months and therefore does not always closely match with the timing of delivery of support, maintenance, and hosting services and the costs associated with delivering those services;

 

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Billings would not exclude any agreements that contain customer acceptance provisions that would require deferral of revenue required under GAAP; and

 

   

Other companies, including companies in our industry, may not use billings, may calculate non-GAAP measures differently or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP measures as comparative measures.

 

We consider billings a significant performance measure and a leading indicator of future recognized revenue based on our business model of billing for subscription licenses annually and recognizing revenue ratably over the subscription term. The billings we record in any particular period reflect sales to new customers plus subscription renewals and upsell to existing customers, and represent amounts invoiced for product subscription license fees and professional services. We typically invoice our customers for subscription fees in annual increments upon initiation of the initial contract or subsequent renewal. In addition, we have also entered into arrangements with customers to purchase subscriptions for a term greater than 12 months, most typically 36

months. For subscriptions greater than 12 months, the customer has the option of being invoiced annually or paying for the full amount up front. If the customer elects to pay the full amount up front, the total amount billed for the entire term will be reflected in billings. If the customer elects to be invoiced annually, only the amount billed for the 12-month period will be included in billings. The portion of subscription terms under contract and not yet invoiced is considered backlog and is not reflected on our consolidated balance sheet as deferred revenue. As of September 30, 2011, we had backlog of approximately $26.3 million compared with backlog of approximately $15.4 million as of December 31, 2010. Of the $26.3 million in backlog as of September 30, 2011, approximately 42% is expected to be billed and recognized as revenue within the fiscal year ended December 31, 2012. Billings for consulting services typically occur on a bi-weekly basis as the services are delivered.

 

Billings are initially recorded as current or long-term deferred revenue and are recognized as revenue when all of the revenue recognition criteria discussed under our accounting policies, as described in “—Critical Accounting Policies and Estimates—Revenue Recognition,” have been satisfied. We reconcile total revenues to billings by adding revenue to the change in deferred revenue in a given period.

 

Billings increased 55% from 2008 to 2009 and 99% from 2009 to 2010. In addition, in the nine months ended September 30, 2011, billings increased 50% over the nine months ended September 30, 2010. The increase in billings was primarily driven by the addition of new customers with larger initial deployments and increased upsell of our products to existing customers. In addition, in the second half of 2010, $10.5 million of our billings related to up front payments for multi-year subscriptions.

 

Jive Engage Platform Customers

 

We define the number of platform customers as any customer under active contract for the Jive Engage Platform that carries a balance in our deferred revenue account at the end of any measurement period. While a single customer may have multiple internal and external communities to support distinct departments, operating segments or geographies, we only include the customer once for purposes of this metric. We believe the number of Jive Engage Platform customers is a leading indicator of our future revenues, billings and upsell opportunities.

 

Our Jive Engage Platform customer count increased 25% from 374 at December 31, 2008 to 468 at December 31, 2009, and 26% to 590 at December 31, 2010. Our product revenue growth for the same periods was 83% and 56%, respectively. From September 30, 2010, our Jive Engage Platform customer count increased 18% from 558 to 657 at September 30, 2011. Our product revenue growth for the same period was 78%. Our total revenues have grown at a faster rate than our customer count as we have realized greater upsell with our existing customers and as the average contract size has increased over that time.

 

Factors Affecting our Performance

 

Investment in growth. We have aggressively invested, and intend to continue to invest, in expanding our operations, headcount increases and technology development to support our growth. As a result, we have

 

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incurred net losses in most quarters since 2007. While we expect our total operating expenses to increase in the foreseeable future, particularly as we continue to expand our sales, development and hosting operations, we expect that such increases would occur at a slower rate relative to the last six quarters because of the completion of key development projects such as the release of Jive 5.0 in June 2011.

 

Enterprise adoption. Our billings and revenue growth are driven by the pace of adoption and penetration of social applications and platforms in the enterprise. We are investing considerable resources in continuing to build a platform that integrates with legacy enterprise applications across departments and functions to facilitate faster deployment and adoption. We have aggressively invested, and intend to continue to invest, to ensure that our platform integrates effectively with existing enterprise applications, such as Microsoft Office, including desktop applications such as Microsoft Outlook and SharePoint. We have introduced the Jive Apps Market, which provides a secure gateway to additional cloud-based social applications that integrate with and complement the Jive Engage Platform and that are developed by our customers and third-party developers. The degree of adoption of social applications and platforms in the enterprise will drive our ability to acquire new customers and increase renewal rates and upsell opportunities, which will affect our future financial performance.

 

Renewal rates. As the substantial majority of our subscriptions are for annual terms, in order for us to continue to grow our business it is important that existing customers renew their subscriptions after the existing subscription term expires. The extent to which our customers renew our contracts will affect our billings and recognized revenue in future periods. We measure renewal rates on transactions with annual subscription values over $50,000. We focus on renewal rates with annual subscription values over $50,000 because we believe that those transactions best represent customers who have made a significant investment in their Jive deployment. We believe measuring these customers over time gives us the best indicator for the growth of our business and the potential for incremental business as they renew and expand their deployment. Our average dollar based renewal rate, excluding upsell, for transactions over $50,000 was 69.3%, 92.8% and 95.3% for the years ended December 31, 2008, 2009 and 2010, and 93.1% and 92.9% for the nine months ended September 30, 2010 and 2011. Of our total renewal billings, on a dollar basis, these renewals represented 51.6%, 74.6%, and 75.3% for the years ended December 31, 2008, 2009 and 2010, and 71.8% and 79.2% for the nine months ended September 30, 2010 and 2011. Additionally, by including the upsell of incremental users, page views, modules and communities, our renewal rates can be increased meaningfully, including achieving renewal rates greater than 100%. Including upsell, our average renewal rate for transactions over $50,000 was 122.0%, 122.3% and 113.6% for the years ended December 31, 2008, 2009 and 2010, and 111.2% and 124.6% for the nine months ended September 30, 2010 and 2011.

 

We calculate our renewal rates by taking the actual dollar amount of contracts renewed for a given period and comparing those actual renewals to the dollar amount of contracts expiring in that same period. The renewal rate is derived by using the actual dollar amount renewed as the numerator and the total renewable contract amount as the denominator. For example, if we have an annual subscription license that expires on December 15th, the dollar amount expected to be invoiced from renewing that license substantially on the same terms would be included in total renewable contract amounts for that period (the denominator). If that license is ultimately renewed, the actual amount invoiced for that renewal would be included in the actual dollar amount renewed for that period (the numerator) regardless of when the renewal occurred. Additionally, upsell renewal rates are calculated in the same manner as standard renewal rates, as described above, except that for upsell renewal rates, any incremental sales to customers within the preceding contract term are added to the numerator, with no change to the denominator.

 

Upsell opportunity. We are focused on selling additional modules and licensing additional users and page views after the initial deployment of our platform. In order for us to grow our revenues, it is important that our customers make additional significant purchases of our solutions. Increased upsell as customers expand their deployments or deploy new communities is a leading indicator of user adoption and the success of the deployment. We believe this upsell opportunity leads to increased revenues over the lifecycle of a customer relationship. With our most significant customers we have realized upsell in annual billings that can be multiples of the value of those customers’ initial purchases. Because customer acquisition and implementation costs are generally incurred up front, we expect profitability to increase over the life of a customer relationship.

 

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Transition of hosting operations. To date, we have primarily utilized third-party data center services to host our public cloud customers. To accommodate anticipated future growth, lower our costs to deliver our social business software platform and increase service levels to our public cloud customers, we are in the process of transitioning our data centers from a third-party service provider to a co-located facility managed by our internal network operations team. This transition will require significant up front capital expenditures for equipment that we will purchase and infrastructure as well as increased personnel expense. We expect that these up front expenditures, coupled with continued utilization of third-party data center services for our existing customers through 2012, may continue to have a negative impact on margins in the near term. As our data centers scale with our anticipated customer growth, and as we transition our existing customers to our data centers, we expect that a long-term effect of this transition will be to improve our margins.

 

Mix of revenue derived from public and private cloud deployments. We deliver our platform both as a public cloud service and as a private cloud solution. The percentage of product revenues derived from public cloud deployments was 55% in 2010 and 61% in the nine months ended September 30, 2011. We expect this percentage to increase over time, although revenues derived from private cloud deployments will remain significant as certain customers may deploy our solutions on their internal systems for compliance and security reasons as well as other factors. Our public cloud deployments typically require fewer complex customizations resulting in higher services gross margins. In addition, we believe as a result of our mix of public versus private cloud deployments continues to shift to the public cloud, the proportion of services billings to license billings will continue to decrease. We expect the long-term effect of these changes will be to improve our margins.

 

Components of Results of Operations

 

Revenues

 

We generate revenues primarily in the form of software subscription fees and professional services for configuration, implementation and other services related to our software. We offer our products with terms typically ranging from 12 to 36 months. In addition to sales of our platform, our revenues include fees for sales of modules, additional users and page views. While subscription-based licenses make up the substantial majority of our product revenues, in limited instances we license our software to customers on a perpetual basis, with ongoing support and maintenance services. Revenues generated through the sale of subscription licenses also include fees for updates and maintenance. We recognize revenue from professional services ratably over the subscription term when they are bundled with a subscription license, because we do not have fair value of all the various services. These amounts, when recognized, are classified as professional services revenues on our consolidated statements of operations based on the hourly rates at which they are billed.

 

Cost of Revenues

 

Cost of product revenues includes all direct costs to produce and distribute our product offerings, including data center and support personnel, depreciation and maintenance related to equipment located at our hosting service provider, salaries, web hosting services expense for public cloud implementations, third-party royalty costs, benefits, amortization of acquired intangible assets and stock-based compensation.

 

Cost of professional services revenues includes all direct costs to provide our professional services, which primarily include salaries, consulting and outside services, and benefits and stock-based compensation for our professional services personnel. We recognize expenses related to our professional services organization as they are incurred, while any associated professional services revenues are recognized ratably over the subscription term.

 

Cost of revenues also includes allocated overhead costs for facilities and information technology. Allocated costs for facilities consist of rent and depreciation of equipment and leasehold improvements related to our facilities. Our allocated costs for information technology include costs for compensation of our information technology personnel and the cost associated with our information technology infrastructure. Our overhead costs are allocated to all departments based on headcount.

 

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We expect that cost of revenues may increase in the future depending on the growth rate of our new customers and billings and our need to support the implementation, hosting and support of those new customers. We also expect that cost of revenues as a percentage of total revenues could fluctuate from period to period depending on growth of our services business and any associated costs relating to the delivery of services, the timing of sales of products that have royalties associated with them, the amount and timing of amortization of intangibles from acquisitions and the timing of significant expenditures. Additionally, we recognize services expenses as incurred while we recognize services revenues ratably over the subscription term. We intend to continue to invest additional resources in expanding the delivery capability of our product and other services. The timing of these additional expenses could affect our cost of revenues, both in terms of absolute dollars and as a percentage of total revenues, in any particular quarterly or annual period.

 

Research and Development

 

Research and development expenses are expensed as incurred. These expenses include salaries, benefits and stock-based compensation for our engineers and developers, allocated facilities costs and payments to third parties for research and development of new software. We focus our research and development efforts on developing new versions of our platform with new and expanded features. We believe that continued investment in our technology is important for our future growth, and as a result, we expect research and development expenses to increase in absolute dollars although they may fluctuate as a percentage of total revenues.

 

Sales and Marketing

 

Sales and marketing expenses primarily consist of salaries, incentive compensation and benefits, travel expense, marketing program fees, partner referral fees and stock-based compensation. Sales incentive compensation is recorded as a component of sales and marketing expense as earned. Sales incentive compensation is earned at the time a customer enters into a binding purchase agreement while associated revenue is recognized ratably over the subscription term. In addition, sales and marketing expenses include customer acquisition marketing, branding, advertising, customer events and public relations costs, as well as allocated facilities costs. We plan to continue to invest heavily in sales and marketing to expand our global operations, increase revenues from current customers, continue building brand awareness and expand our indirect sales channel. We expect sales and marketing expenses to increase in absolute dollars and continue to be our largest expense in absolute dollars and as a percentage of total revenues, although they may fluctuate as a percentage of total revenues.

 

General and Administrative

 

General and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, legal, information technology, human resources and other administrative employees. In addition, general and administrative expenses include legal and accounting services, outside consulting, facilities and other supporting overhead costs not allocated to other departments. We expect that our general and administrative expenses will increase in absolute dollars and as a percentage of total revenues in the near term as we continue to expand our business and incur additional expenses associated with being a publicly traded company.

 

Other Income (Expense), Net

 

Other income (expense), net consists primarily of interest expense on our outstanding debt, changes in the fair value of our Series C preferred stock warrants and foreign exchange gains and losses. The Series C preferred stock warrants were exercised late in the third quarter of 2011 and therefore we will no longer incur charges related to our warrants.

 

Provision for Income Taxes

 

Provision for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign tax jurisdictions. Since we have generated net losses, we have fully reserved against any potential future benefits for loss carryforwards and research and development and other tax credits.

 

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Results of Operations

 

$(00,000 $(00,000 $(00,000 $(00,000 $(00,000
     Year Ended December 31,     Nine Months Ended
September 30,
 
     2008     2009     2010     2010     2011  
     (in thousands)  

Consolidated Statements of Operations Data(1):

  

Revenues:

          

Products

   $ 13,270      $ 24,319      $ 37,827      $ 25,924      $ 46,092   

Professional services

     3,662        5,675        8,441        5,672        8,679   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     16,932        29,994        46,268        31,596        54,771   

Cost of revenues:

          

Products

     2,827        4,133        9,870        6,644        15,208   

Professional services

     4,876        5,467        9,836        6,877        9,146   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     7,703        9,600        19,706        13,521        24,354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

          

Products

     10,443        20,186        27,957        19,280        30,884   

Professional services

     (1,214     208        (1,395     (1,205     (467
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     9,229        20,394        26,562        18,075        30,417   

Operating expenses:

          

Research and development

     6,345        8,047        18,278        12,877        23,320   

Sales and marketing

     12,423        14,057        28,592        20,510        31,757   

General and administrative

     1,777        2,905        6,746        5,298        9,120   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     20,545        25,009        53,616        38,685        64,197   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (11,316     (4,615     (27,054     (20,610     (33,780

Total other income (expense), net(2)

     (4     (223     (495     (201     (8,068
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for (benefit from) income taxes

     (11,320     (4,838     (27,549     (20,811     (41,848

Provision for (benefit from) income taxes

            (52     91        64        (3,710
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (11,320   $ (4,786   $ (27,640   $ (20,875   $ (38,138
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1)   Stock-based compensation was included in the consolidated statements of operations data as follows:

 

$(00,000 $(00,000 $(00,000 $(00,000 $(00,000
     Year Ended December 31,      Nine Months Ended
September 30,
 
       2008          2009          2010            2010              2011      
     (in thousands)  

Cost of revenues

   $ 53       $ 85       $ 158       $ 105       $ 311   

Research and development

     134         112         528         325         1,764   

Sales and marketing

     177         257         823         544         3,234   

General and administrative

     69         145         1,895         1,636         2,215   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 433       $ 599       $ 3,404       $ 2,610       $ 7,524   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (2)   Non-cash expense recorded in other expense, net related to the change in fair value of our preferred stock warrant liability was zero in the years ended December 31, 2008 and 2009, and $0.2 million and $7.2 million in the year ended December 31, 2010, and the nine months ended September 30, 2011, respectively.

 

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Nine Months Ended September 30, 2010 and 2011

 

Revenues

 

     Nine Months Ended September 30,                
             2010                      2011              $ Change      % Change  
     (dollars in thousands)         

Products

   $ 25,924       $ 46,092       $ 20,168         77.8

Professional services

     5,672         8,679         3,007         53.0
  

 

 

    

 

 

       

Total revenues

   $ 31,596       $ 54,771         23,175         73.3
  

 

 

    

 

 

       

 

The increase in products revenues was primarily the result of an increase in the aggregate number of Jive Engage Platform customers from 558 at September 30, 2010 to 657 at September 30, 2011, as well as a 32.0% increase in our average transaction size for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Of the 32.0%, or 10.6 points, increase in average transaction size, approximately one-third was attributable to upsell transaction sizes, with the remainder attributable to increase average transaction sizes for new customers and our existing customer renewal base. Our average transaction size attributable to our existing customer renewal base increases as a result of the addition of the prior periods new and upsell transactions being included in the current periods renewal base. The increase in Jive Engage Platform customers was primarily driven by our increased investment in sales and marketing and the increase in average transaction size was primarily due to increases in users and page views purchased per transaction as a result of increased adoption of our products.

 

The increase in professional services revenues was primarily due to increased demand for customization and unique branding. However, the percentage increase in professional services revenues was 24.8% less than the like period increase in products revenues due to the increased mix of products revenues generated from renewals, which typically require less professional services support.

 

Cost of Revenues and Gross Margin

 

     Nine Months Ended September 30,               
             2010                     2011             $ Change      % Change  
     (dollars in thousands)         

Cost of products revenues

   $ 6,644      $ 15,208      $ 8,564         128.9

Products gross margin

     74.4     67.0     

 

     Nine Months Ended September 30,               
             2010                     2011             $ Change      % Change  
     (dollars in thousands)         

Cost of professional services revenues

   $ 6,877      $ 9,146      $ 2,269         33.0

Professional services gross margin

     (21.2 )%      (5.4 )%      

 

The increase in cost of products revenues was primarily due to the increase in products sales with a $2.1 million increase in salaries and benefits, a $1.5 million increase in third-party hosting services, a $0.9 million increase in third-party royalties, a $0.7 million increase in third-party consulting fees and an increase in acquisition related charges of $1.4 million. Additionally, as we have begun to transition our data center infrastructure to a model in which we own our data center equipment, the related depreciation and maintenance expense increased $1.0 million.

 

The decline in products gross margin was attributable to our third-party data center costs and increased headcount in our hosting department due to increased activity and scaling for future growth, and an increase in amortization of acquired intangibles.

 

The increase in cost of professional services revenues was primarily due to the increase in sales, partially offset by improvements to gross margin by increasing the proportion of full-time professional services employees in relation to more expensive third-party consultants. Additionally, we recognize professional services expense as incurred, while services revenue is recognized ratably over the subscription term.

 

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Table of Contents

Research and Development

 

     Nine Months Ended September 30,     $ Change      % Change  
             2010                     2011               
     (dollars in thousands)         

Research and development

   $ 12,877      $ 23,320      $ 10,443         81.1

Percentage of total revenues

     40.8     42.6     

 

The increase in research and development expenses was primarily due to a $7.9 million increase in salaries and benefits, which included a $1.4 million increase in stock-based compensation and a $1.7 million increase in signing bonuses for new hires associated with acquisitions in the nine months ended September 30, 2011, and a $1.0 million increase in amortization of intangibles related to the Proximal Labs acquisition.

 

Sales and Marketing

 

     Nine Months Ended September 30,     $ Change      % Change  
             2010                     2011               
     (dollars in thousands)         

Sales and marketing

   $ 20,510      $ 31,757      $ 11,247         54.8

Percentage of total revenues

     64.9     58.0     

 

The increase in sales and marketing was primarily due to a $9.3 million increase in salaries and benefits, which included a $2.7 million increase in stock-based compensation and a $1.8 million increase in sales commissions, and a $0.8 million increase in travel costs.

 

General and Administrative

 

     Nine Months Ended September 30,     $ Change      % Change  
             2010                     2011               
     (dollars in thousands)         

General and administrative

   $ 5,298      $ 9,120      $ 3,822         72.1

Percentage of total revenues

     16.8     16.7     

 

The increase in general and administrative expenses was primarily due to a $1.6 million increase in salaries and benefits, which included a $0.6 million increase in stock-based compensation expense, a $1.1 million increase in legal costs and a $1.2 million increase in other expenses for travel, corporate insurance and facilities and consulting fees.

 

Other expense, net

 

     Nine Months Ended September 30,     $ Change      % Change  
             2010                     2011               
     (dollars in thousands)         

Other expense, net

     201        8,068        7,867         NM   

Percentage of total revenues

     0.6     14.7     

 

The increase in other expense, net was primarily due to a $7.2 million change in the fair value of the Series C preferred stock warrants and a $0.7 million increase in interest expense.

 

Provision for (benefit from) income taxes

 

     Nine Months Ended September 30,     $ Change     % Change  
             2010                     2011              
     (dollars in thousands)        

Provision for (benefit from) income taxes

     64        (3,710     (3,774     NM   

Percentage of total revenues

     0.2     (6.8 )%     

 

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In the nine months ended September 30, 3011, in connection with the OffiSync acquisition, a deferred tax liability of $3.9 million was established for the book tax basis differences related to specifically identified non-goodwill intangibles. The net liability from the acquisition created an additional source of income to utilize our deferred tax assets and therefore, a corresponding amount of the valuation allowance has been released.

 

Years Ended December 31, 2008, 2009 and 2010

 

Revenues

 

     Year Ended December 31,      2008 to
2009

% Change
    2009 to
2010

% Change
 
     2008      2009      2010       
     (dollars in thousands)               

Products

   $ 13,270       $ 24,319       $ 37,827         83.3     55.5

Professional services

     3,662         5,675         8,441         55.0     48.7
  

 

 

    

 

 

    

 

 

      

Total revenues

   $ 16,932       $ 29,994       $ 46,268         77.1     54.3
  

 

 

    

 

 

    

 

 

      

 

2009 compared to 2010. The increase in products revenues was primarily the result of an increase in the aggregate number of Jive Engage Platform customers from 468 at December 31, 2009 to 590 at December 31, 2010, as well as a 20.4% increase in our average transaction size. Of the 20.4% increase in average transaction size, approximately one-tenth, or 2.0 points, was attributable to upsell transactions with the remainder attributable to increased average transaction sizes for new customers and our renewals from existing customers. The increase in Jive Engage Platform customers was primarily driven by our increased investment in sales and marketing and the increase in average transaction size was due to the continued increased mix of our customers on “Jive 4.0,” as discussed below, as well as increases in users and page views purchased per transaction as a result of increased adoption of our products.

 

The increase in professional services revenues in 2010 compared to 2009 was a direct result of increased products revenues as customers often purchase customization services along with their initial subscription. However, the percentage increase in professional services revenues was 6.8% less than the prior year period increase in products revenues due to the increased mix of products revenues generated from renewals, which typically require less professional services support.

 

2008 compared to 2009. The increase in products revenues was primarily the result of an increase in the aggregate number of Jive Engage Platform customers from 374 at December 31, 2008 to 468 at December 31, 2009, as well as a 54.0% increase in our average transaction size. Of the 54.0% increase in average transaction size, approximately one quarter, or 1.3 points, was attributable to upsell transactions with the remainder attributable to increased average transaction sizes for new customers and our renewals from existing customers. The growth in Jive Engage Platform customers and average annual transaction size in 2009 compared to 2008 was attributed to the introduction of “Jive 4.0” in mid-2009, which was offered at higher license fees on a subscription basis.

 

The increase in professional services revenues in 2009 compared to 2008 was a result of increased products revenues as customers often purchase customization services along with their initial subscription. In addition, we added an education offering in mid-2008 and focused resources on selling training classes.

 

Cost of Revenues and Gross Margin

 

     Year Ended December 31,     2008 to
2009

% Change
    2009 to
2010

% Change
 
     2008     2009     2010      
     (dollars in thousands)              

Cost of products revenues

   $ 2,827      $ 4,133      $ 9,870        46     139

Products gross margin

     78.7     83.0     73.9    
     Year Ended December 31,     2008 to
2009

% Change
    2009 to
2010

% Change
 
     2008     2009     2010      
     (dollars in thousands)              

Cost of professional services revenues

   $ 4,876      $ 5,467      $ 9,836        12     80

Professional services gross margin

     (33.2 )%      3.7     (16.5 )%     

 

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2009 compared to 2010. The increase in products cost of revenues was primarily related to an increase of $2.2 million in third-party web hosting services, an increase of $2.1 million related to third-party royalties and other fees, and an increase of $0.9 million in employee-related costs in our hosting and customer support functions.

 

The decline in product gross margins was attributable to the increase in hosting related expenses as we scaled our hosting capacity both in North America and in Europe in order to meet demand associated with the increasing mix of public cloud versus private cloud customers, and to payments made to third-parties for royalties, primarily related to our module offerings.

 

The increase in cost of professional services revenues was primarily related to an increase of $2.0 million in employee-related costs, which included an increase of $1.5 million in third-party consulting fees and other fees, an increase of $0.7 million in allocated overhead costs.

 

The decrease in professional services gross margin was primarily due to increased utilization of third-party consultants, which incur a higher hourly rate, in order to manage services backlog

 

2008 compared to 2009. The increase in cost of products revenues was primarily related to an increase of $1.1 million in third-party web hosting services and an increase of $0.5 million related to third-party royalties and other fees. The product gross margin increase was primarily due to increased product revenues and a lower ratio of hosting and support headcount as compared to our customer base.

 

The increase in cost of professional services revenues was primarily related to an increase of $1.2 million in employee-related costs and an increase of $0.2 million in allocated overhead costs, partially offset by a $0.6 million decrease in third-party consulting fees and a $0.2 million decrease for other miscellaneous costs, such as travel. The increase in professional services gross margin was primarily due to increased professional services revenues and a decrease in the mix of third-party consultants to full-time employees.

 

Research and Development

 

     Year Ended December 31,     2008 to
2009

% Change
    2009 to
2010

% Change
 
     2008     2009     2010      
     (dollars in thousands)              

Research and development

   $ 6,345      $ 8,047      $ 18,278        26.8     127.1

Percentage of total revenues

     37.5     26.8     39.5    

 

2009 compared to 2010. The increase in research and development expenses in 2010 compared to 2009 was primarily due to an $8.0 million increase in salaries and benefits, which included a $0.4 million increase in stock-based compensation, a $1.8 million increase in allocations for IT and facilities costs and a $0.5 million increase for other miscellaneous costs, such as travel and consulting.

 

2008 compared to 2009. The increase in research and development expenses in 2009 compared to 2008 was primarily due to a $0.7 million increase in salaries and benefits and a $0.7 million increase consulting fees.

 

Sales and Marketing

 

     Year Ended December 31,     2008 to
2009

%  Change
    2009 to
2010

%  Change
 
     2008     2009     2010      
     (dollars in thousands)              

Sales and marketing

   $ 12,423      $ 14,057      $ 28,592        13.2     103.4

Percentage of total revenues

     73.4     46.9     61.8    

 

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2009 compared to 2010. The increase in sales and marketing expenses in 2010 compared to 2009 was primarily due to a $5.7 million increase in salaries and benefits, which included a $0.6 million increase in stock-based compensation, a $3.9 million increase in sales commissions, a $3.3 million increase in marketing programs, an increase of $1.2 million in allocated overhead and a $0.7 million increase in travel and entertainment expenses. These increases were partially offset by a $0.3 million decrease in miscellaneous costs such as consulting fees.

 

2008 compared to 2009. The increase in sales and marketing expenses in 2009 compared to 2008 was primarily due to a $1.2 million increase in marketing programs, a $0.5 million increase in salaries and benefits and a $0.4 million increase in sales commissions, partially offset by a $0.4 million decrease in miscellaneous expenses such as travel and entertainment.

 

General and Administrative

 

     Year Ended December 31,     2008 to
2009

%  Change
    2009 to
2010

%  Change
 
     2008     2009     2010      
     (dollars in thousands)              

General and administrative

   $ 1,777      $ 2,905      $ 6,746        63.5     132.2

Percentage of total revenues

     10.5     9.7     14.6    

 

2009 compared to 2010. The increase in general and administrative expenses in 2010 compared to 2009 was primarily due to a $3.8 million increase in salaries and benefits, which included a $1.8 million increase in stock-based compensation expense. As a result of the company-wide headcount growth, facilities and depreciation expense increased $1.6 million. Also contributing to the increase was a $0.2 million increase in travel expense, a $1.0 million increase in outside consulting costs and other professional fees, and an increase of $1.2 million in IT expenses related to increased headcount and new facilities. These increases were partially offset by an increase of $3.9 million in overhead allocations out of general and administrative to the other functions based on relative headcount.

 

2008 compared to 2009. The increase in general and administrative expenses in 2009 compared to 2008 was primarily due to a $0.8 million increase in facilities costs as we expanded our existing offices and added additional offices in multiple locations in order to recruit from an expanded pool of software engineers. Also contributing to the increase was a $0.3 million increase in legal costs, which increased due to the growth in revenue and related customer contracts.

 

Other expense, net

 

     Year Ended December 31,     2008 to
2009

%  Change
     2009 to
2010

%  Change
 
     2008     2009     2010       
     (dollars in thousands)               

Other expense, net

   $ 4      $ 223      $ 495        NM         122

Percentage of total revenues

     0.0     0.7     1.1     

 

2009 compared to 2010. The increase was primarily related to the loss from the change in the fair value of our series C preferred stock warrants.

 

2008 compared to 2009. The increase was primarily related to interest expense due to the increased balance on our revolving line of credit and additional term loan.

 

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Provision for (benefit from) income taxes

 

     Year Ended December 31,     2008 to
2009

%  Change
     2009 to
2010

%  Change
 
     2008     2009     2010       
     (dollars in thousands)               

Provision for (benefit from) income taxes

   $      $ (52   $ 91        NM         NM   

Percentage of total revenues

     0.0     (0.2 )%      0.2     

 

2009 compared to 2010. We recorded income taxes that were principally attributable to state and foreign taxes.

 

2008 compared to 2009.   We recorded income taxes that were principally attributable to state taxes.

 

Quarterly Results of Operations

 

The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the seven quarters in the period ended September 30, 2011. We have prepared the quarterly data on a consistent basis with the audited consolidated financial statements included in this prospectus. In the opinion of management, the financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 

    Three Months Ended  
       March 31,   
2010
         June 30,     
2010
    September 30,
2010
    December 31,
2010
       March 31,   
2011
         June 30,     
2011
    September 30,
2011
 
    (in thousands, except per share data)  

Consolidated Statements of Operations Data(1):

             

Revenues:

             

Products

  $ 7,448      $ 8,565      $ 9,911      $ 11,903      $ 13,570      $ 15,029      $ 17,493   

Professional services

    1,349        1,885        2,438        2,769        2,497        2,856        3,326   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    8,797        10,450        12,349        14,672        16,067        17,885        20,819   

Cost of revenues:

             

Products

    1,640        2,204        2,800        3,226        3,929        5,132        6,147   

Professional services

    1,941        2,495        2,441        2,959        3,131        2,920        3,095   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    3,581        4,699        5,241        6,185        7,060        8,052        9,242   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Products gross profit

    5,808        6,361        7,111        8,677        9,641        9,897        11,346   

Services gross profit

    (592     (610     (3     (190     (634     (64     231   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    5,216        5,751        7,108        8,487        9,007        9,833        11,577   

Operating expenses:

             

Research and development

    3,521        4,382        4,974        5,401        8,667        7,116        7,537   

Sales and marketing

    5,140        7,050        8,320        8,082        8,838        10,622        12,297   

General and administrative

    2,538        1,425        1,335        1,448        1,790        3,429        3,901   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    11,199        12,857        14,629        14,931        19,295        21,167        23,735   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (5,983     (7,106     (7,521     (6,444     (10,288     (11,334     (12,158

Total other income (expense), net(2)

    (38     (89     (74     (294     (4,171     (8,532     4,635   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for (benefit from) income taxes

    (6,021     (7,195     (7,595     (6,738     (14,459     (19,866     (7,523

Provision for (benefit from) income taxes

    22        21        21        27        30        (3,797     57   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (6,043   $ (7,216   $ (7,616   $ (6,765   $ (14,489   $ (16,069   $ (7,580
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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  (1)   Stock-based compensation was included in the consolidated statements of operations data as follows:

 

    Three Months Ended  
    March 31,
2010
    June 30,
2010
    September 30,
2010
    December 31,
2010
    March 31,
2011
    June 30,
2011
    September 30,
2011
 
    (in thousands)  

Cost of revenues

  $ 28      $ 39      $ 38      $ 53      $ 69      $ 87      $ 155   

Research and development

    54        101        170        203        353        605        806   

Sales and marketing

    148        165        231        279        309        937        1,988   

General and administrative

    1,284        117        235        259        325        710        1,180   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $ 1,514      $ 422      $ 674      $ 794      $ 1,056      $ 2,339        4,129   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (2)   Non-cash expense recorded in total other income (expense), net related to the change in fair value of our preferred stock warrant liability was zero in the three months ended March 31, 2010 and June 30, 2010, and $0.03 million, $0.2 million, $4.1 million and $8.2 million in the three months ended September 30, 2010, December 31, 2010, March 31, 2011, and June 30, 2011, respectively. Non-cash income recorded in total other income (expense), net included $5.2 million related to the change in fair value of our preferred stock warrants in the three months ended September 30, 2011. See further discussion regarding the preferred stock warrants on page 114.

 

The following table sets forth the reconciliation of total revenues to billings, a non-GAAP measure, for the periods shown:

 

    Three Months Ended  
    March 31,
2010
    June 30,
2010
    September 30,
2010
    December 31,
2010
    March 31,
2011
    June 30,
2011
    September 30,
2011
 
    (in thousands)  

Total revenues

  $ 8,797      $ 10,450      $ 12,349      $ 14,672      $ 16,067      $ 17,885      $ 20,819   

Deferred revenue, end of period

    28,015        32,108        39,035        50,195        52,628        58,644        64,304   

Less: Deferred revenue, beginning of period

    (24,617     (28,015     (32,108     (39,035     (50,195     (52,628     (58,644
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Billings

  $ 12,195      $ 14,543      $ 19,276      $ 25,832      $ 18,500      $ 23,901      $ 26,479   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See “Selected Consolidated Financial Data—Non-GAAP Financial Measure: Billings” for more information on billings.

 

We have experienced sequential billings growth in line with our revenues growth in all periods presented, with the exception of the three months ended March 31, 2011 compared to the three months ended December 31, 2010. Due to the fourth quarter seasonality discussed below, the billings recognized in the first quarter of 2011 were sequentially lower than the billings recognized in the fourth quarter of 2010. In addition, in the first quarter of 2011 we recognized a smaller portion of billings for contract terms greater than 12 months where the customer elected to pay for the full contract term up front. This resulted in lower billings in the first quarter of 2011 compared to the previous two quarters. Our billings have grown at a compound annual growth rate of 56% over the seven quarters presented. In the first nine months of 2011, the total amount of billings relating to contract terms exceeding 12 months represented 12% of billings.

 

Total revenues increased sequentially in each of the quarters presented, primarily due to new customers, increased renewals of existing customers, and upselling additional modules and user subscriptions to existing customers. We have historically experienced seasonality in sales of our products, with a higher percentage of our customers entering into new subscription agreements and renewals in the fourth quarter and expect this trend to continue.

 

As a result of the growth in revenues, our gross profit in absolute dollars has increased sequentially in each of the quarters presented.

 

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Total operating expenses have increased in absolute dollars in each of the quarters presented, primarily due to increased salaries and benefits associated with the hiring of additional personnel in sales and marketing, research and development and general and administrative organizations to support the growth of our business. In the first quarter of 2011, we recognized a non-recurring charge of $1.0 million for the amortization of in-process research and development and a $1.6 million expense related to signing bonuses for new hires associated with an acquisition. General and administrative costs declined in the second quarter of 2010 due a $0.8 million stock compensation charge in the first quarter of 2010 related to a stock repurchase from our former Chief Executive Officer. General and administrative costs increased in the first, second and third quarter of 2011 primarily due to increased headcount and outside services fees related to both the overall growth of our business and in preparation for our initial public offering.

 

The changes in other income (expense), net, consist of the quarterly remeasurement to fair market value of our preferred stock warrant liability. The preferred stock warrants were exercised late in the third quarter of 2011 and therefore we will no longer incur charges related to our warrants.

 

Liquidity and Capital Resources

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2008     2009     2010     2010     2011  
     (in thousands)  

Cash flows provided by (used in) operating activities

   $ (3,989   $ 1,712      $ (7,229   $ (9,127   $ (7,071

Cash used in investing activities

     (1,133     (1,019     (7,582     (5,546     (28,729

Cash provided by financing activities

     2,422        11,865        36,081        33,799        65,057   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

   $ (2,700   $ 12,558      $ 21,270      $ 19,126      $ 29,257   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

We have financed our operations primarily through issuances of preferred stock, borrowings under our credit facility and cash generated from customer sales.

 

Our principal source of liquidity at September 30, 2011 consisted of $72.6 million of cash and cash equivalents. Our principal needs for liquidity include funding our operating losses, working capital requirements, capital expenditures, debt service and acquisitions. We believe that our available resources are sufficient to fund our liquidity requirements for at least the next 12 months from September 30, 2011.

 

Cash Flows from Operating Activities

 

Operating activities used $7.1 million of cash in the nine months ended September 30, 2011. The cash flows from operating activities primarily resulted from our net loss of $38.1 million, net non-cash charges of $16.0 million and changes in our operating assets and liabilities as discussed below.

 

Accounts receivable, net increased $4.5 million to $24.8 million at September 30, 2011 compared to $20.3 million at December 31, 2010, primarily as a result of increased billings in the third quarter of 2011 compared to the fourth quarter of 2010, as well as a 9% decrease in the percentage of invoices billed and collected in the same quarter. The decrease in the percentage of invoices billed and collected in the same quarter primarily resulted from the linearity of billings within each respective period, as a larger portion of the third quarter 2011 billings were invoiced in the last month of the period. Accounts payable and other accrued liabilities increased $7.6 million to $13.0 million at September 30, 2011 compared to $5.4 million at December 31, 2010, primarily due to timing of payments and as a result of increased purchases to support growth of our company. Accrued payroll and related liabilities increased $1.2 million to $4.9 million at September 30, 2011 compared to $3.7 million at December 31, 2010, primarily due to an increase in accrued vacation as a result of our increased headcount. Deferred revenue increased $14.1 million to $64.3 million at September 30, 2011 compared to $50.2 million at December 31, 2010, primarily due to of increased billings growth in the nine months ended September 30, 2011.

 

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Operating activities used $7.2 million of cash in 2010. The cash used in operating activities primarily resulted from our net loss of $27.6 million due primarily to the significant investments we incurred to grow our business, adjusted for net non-cash charges of $5.4 million and changes in our operating assets and liabilities, primarily accounts receivable and deferred revenue.

 

Accounts receivable, net increased $12.0 million to $20.3 million at December 31, 2010 compared to $8.3 million at December 31, 2009, primarily as a result of strong billings in the fourth quarter of 2010. Accounts payable and other accrued liabilities increased $1.8 million to $5.4 million at December 31, 2010 compared to $3.6 million at December 31, 2009, primarily due to timing of payments and as a result of increased purchases to support growth of the company. Accrued payroll and related liabilities increased $2.3 million to $3.7 million at December 31, 2010 compared to $1.4 million at December 31, 2009, primarily related to accrued commissions as a result of increased billings. Deferred revenue increased $25.6 million to $50.2 million at December 31, 2010 compared to $24.6 million at December 31, 2009, primarily as a result of increased billings growth.

 

Operating activities provided $1.7 million of cash in 2009. The cash flows from operating activities primarily resulted from cash collection driven by increased billings, resulting in a change in deferred revenue of $6.1 million, offset by our net loss of $4.8 million, net non-cash charges of $1.5 million and changes in our other operating assets and liabilities.

 

Accounts receivable, net increased $3.9 million to $8.3 million as of December 31, 2009 compared to $4.4 million at December 31, 2008, primarily as a result of increased billings throughout 2009 as compared to 2008. Accounts payable and other accrued liabilities increased $2.3 million to $3.6 million as of December 31, 2009 compared to $1.3 million at December 31, 2008, primarily due to timing of payments and as a result of increased purchases to support growth of the company. Accrued payroll and related liabilities increased $1.0 million to $1.5 million as of December 31, 2009 compared to $0.5 million as of December 31, 2008, primarily related to accrued commissions as a result of increased billings. Deferred revenue increased $6.1 million to $24.6 million as of December 31, 2009 compared to $18.5 million as of December 31, 2008, primarily as a result of increased billings growth.

 

Operating activities used $4.0 million of cash in 2008. The cash used in operating activities primarily resulted from our net loss of $11.3 million, net non-cash charges of $0.9 million and changes in our operating assets and liabilities, primarily deferred revenue.

 

Cash Flows from Investing Activities

 

Cash used in investing activities of $28.7 million in the nine months ended September 30, 2011 primarily resulted from $22.9 million used for the acquisitions of OffiSync and Proximal Labs and from $5.8 million used for purchases of property and equipment. We anticipate spending approximately $9.0 million for the purchase of property and equipment in 2011, primarily for the continued build-out of our data centers in order to scale our capacity with our revenue growth.

 

Cash used in investing activities of $7.6 million in 2010 primarily resulted from $4.8 million used for purchases of property and equipment, $2.2 million used for purchases of intangible assets, primarily developed technology used in our platform, and $0.7 million used for the acquisition of Filtrbox.

 

Cash used in investing activities were $1.0 million and $1.1 million, respectively, in 2009 and 2008, primarily resulted from purchases of property and equipment.

 

Cash Flows from Financing Activities

 

Cash from financing activities of $65.1 million in the nine months ended September 30, 2011 resulted from $40.0 million of gross proceeds from the exercise of preferred stock warrants for 3,858,620 shares of Series C preferred stock, $23.6 million of net proceeds from our credit facility, term and senior term loans used to

 

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partially fund the acquisition of OffiSync and capital expenditures, and $2.0 million of gross proceeds from the exercise of stock options.

 

Cash from financing activities of $36.1 million in 2010 primarily resulted from $29.9 million net proceeds from the issuance of Series C preferred stock, $5.1 million of net proceeds from our credit facility and term loans and $1.0 million of proceeds from the exercise of stock options.

 

Cash from financing activities of $11.9 million in 2009 primarily resulted from net proceeds of $12.3 million from the issuance of our Series B preferred stock. In addition, we used $0.9 million for the repurchase of our common stock and received $0.3 million from the exercise of stock options.

 

Cash from financing activities of $2.4 million in 2008 primarily resulted from net proceeds from borrowings of $2.2 million.

 

Loan and Security Agreement

 

In October 2008, we entered into an amended and restated loan and security agreement with Silicon Valley Bank, which was most recently amended in September 2011, which modified certain financial covenants. The agreement sets forth the terms and conditions of the revolving credit facility and terms loans described below. The agreement, as amended, contains various restrictive covenants, including, with respect to adjusted EBITDA, a minimum liquidity ratio, liens on our assets or incurring additional debt, paying dividends, limiting investments and acquisitions and preventing dissolution, liquidation, merger or a sale of our assets without the prior consent of Silicon Valley Bank. As part of the agreement, we granted Silicon Valley Bank a continuing security interest in our personal property, excluding intellectual property and other intangible assets. The agreement also contains usual and customary events of default (subject to certain threshold amounts and grace periods) on the occurrence of events such things as nonpayment of amounts due under the credit facility or the terms loans, violation of the restrictive covenants referred to above, violation of other contractual provisions, or a material adverse change in our business. We were in compliance with all covenants at September 30, 2011.

 

Credit Facility. The loan and security agreement provides for a revolving credit facility, which expires March 31, 2013. Pursuant to the terms of the agreement, we may borrow up to $10.0 million, subject to a borrowing base determined on eligible accounts receivable and subject to a total maximum outstanding of $35.0 million. In addition, the amount available to borrow against the revolving credit facility will be reduced by the value of any outstanding letters of credit. We may utilize letters of credit under the credit facility in amounts up to $2.0 million. At September 30, 2011, we had $0.4 million of outstanding letters of credit and the borrowing limit was $5.6 million, $4.0 million of which was outstanding. Interest accrues at the prime rate (3.25% at September 30, 2011) or the prime rate plus 0.25%, based on a financial covenant. The interest rate on this loan was 3.25% at September 30, 2011. The agreement requires payment of a 0.375% per annum fee on the unused portion of the credit facility.

 

Term Loans. The loan and security agreement provides for a $15.0 million term loan. The proceeds from this loan were used to partially fund the acquisition of OffiSync. We are required to make monthly interest payments. Principal payments will begin April 1, 2013 and will be paid in 36 equal monthly installments. Interest accrues at a fixed rate of 10.0% per annum. This loan matures March 1, 2016. There is no prepayment penalty for this loan.

 

The loan and security agreement also provides for a $15.0 million senior term loan. The proceeds were used to refinance our then existing term loans with Silicon Valley Bank and to partially fund the acquisition of OffiSync. Interest accrues at the prime rate plus 0.375% or 0.625%, based on a financial covenant. The interest rate on this loan at September 30, 2011 was 3.625%. Repayment began June 1, 2011, and is payable in 48 monthly installment payments. Each of the first 24 installment payments is $0.25 million, plus accrued interest; and each of the remaining 24 installment payments is $0.375 million, plus accrued interest. This loan matures June 1, 2015. There is no prepayment penalty for this loan.

 

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Contractual Payment Obligations

 

A summary of our contractual commitments and obligations as of December 31, 2010 was as follows:

 

     Payments Due by Period  
     Total      Less than 1
year
     1-3
years
     3-5
years
     More than 5
years
 
     (in thousands)  

Revolving credit facility

   $ 3,533       $       $ 3,533       $       $   

Term loans

     5,715         1,806         3,519         390           

Estimated interest on revolving credit facility and long-term debt

     140                 137         3           

Letters of credit

     385                 385                   

Purchase order commitments

     1,431         1,144         287                   

Operating leases

     15,897         3,445         5,464         2,866         4,122   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,101       $ 6,395       $ 13,325       $ 3,259       $ 4,122   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

See “Liquidity and Capital Resources—Loan and Security Agreement” for a description of our payment obligations under our revolving credit facility, letters of credit and term loans.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Acquisitions

 

OffiSync Corporation

 

On May 18, 2011, we completed our acquisition of OffiSync, a Seattle, Washington-based company with significant operations in Israel. OffiSync is a provider of connectors to social business software for the Microsoft environment, including Microsoft Outlook and Microsoft Office. We paid $22.7 million of cash and issued 78,110 shares of our common stock, for a total purchase consideration of $23.3 million. In addition, we also issued restricted common stock and assumed unvested stock options for certain employees, which will be recognized as stock-based compensation expense over the requisite service period.

 

Proximal Labs

 

On March 21, 2011, we completed our acquisition of Proximal Labs, a privately-held provider of data technology. We paid $0.5 million of cash and issued 127,054 shares of our common stock, for a total purchase consideration of $1.2 million. In addition, we also issued restricted common stock for certain employees, which will be recognized as stock-based compensation expense over the requisite service period.

 

Filtrbox, Inc.

 

On January 6, 2010, we completed our acquisition of Filtrbox, a privately-held provider of social media monitoring solutions based in Boulder, Colorado. We paid $0.7 million of cash and issued 848,416 shares of our common stock with the value of $1.0 million, for a total purchase consideration of $1.7 million.

 

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Geographic Information

 

Revenues from countries that represented 10% or more of our total revenues, determined based on the location of the end customer, were as follows:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
     2008      2009      2010      2010      2011  
     (in thousands)  

U.S.

   $ 13,862       $ 21,880       $ 36,849       $ 24,688       $ 42,084   

Rest of world(1)

     3,070         8,114         9,419         6,908         12,687   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,932       $ 29,994       $ 46,268       $ 31,596       $ 54,771   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1)   During the year ended December 31, 2009, 11% of total revenues were derived from customers in Germany. No other country exceeded 10% of total revenues during any of the other periods presented.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2008     2009     2010     2010     2011  
     (as % of total revenues)  

U.S.

     81.9     72.9     79.6     78.1     76.8

Rest of world

     18.1        27.1        20.4        21.9        23.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flow and related disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, allowance for doubtful accounts, stock-based compensation, lives and recoverability of equipment and other long-lived assets, including goodwill, and accounting for income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

 

We believe that of our significant accounting policies, which are described in note 1 to our financial statements included in this prospectus, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of operations.

 

Revenue Recognition

 

We generate revenues in the form of product fees and related professional service fees. Product fees include subscription fees, perpetual license fees, associated support and maintenance fees and hosting fees. Professional services primarily consist of fees for configuration, training, consultation and implementation services, which are not essential to functionality. For statement of operations classification purposes, we allocate revenues to professional services based on the hourly rate billed for time and materials arrangements and based on the total fixed fee for fixed fee professional services. We recognize revenue when all of the following conditions are met:

 

   

there is persuasive evidence of an arrangement;

 

   

the product or services have been delivered to the customer;

 

 

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the amount of fees to be paid by the customer is fixed or determinable; and

 

   

the collection of the related fees is reasonably assured.

 

Signed agreements are used as evidence of an arrangement. If a contract signed by the customer does not exist, we have historically used a purchase order as evidence of an arrangement. In cases where both a signed contract and a purchase order exist, we consider the signed contract to be the final persuasive evidence of an arrangement. Software and corresponding license keys are delivered to customers electronically. Electronic delivery occurs when we provide the customer with access to the software. We assess whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. We do not generally offer extended payment terms with typical terms of payment due between 30 and 60 days from delivery of solutions or services. However, for professional services that are billable under a time and materials based arrangement, these fees are neither fixed nor determinable until the work is performed and the fee becomes billable to the customer. We assess collectability of the customer receivable based on a number of factors such as collection history with the customer and creditworthiness of the customer. If we determine that collectability is not reasonably assured, revenue is deferred until collectability becomes reasonably assured, generally upon receipt of cash.

 

We offer subscriptions of our solutions to customers most frequently on a term basis with terms typically ranging from 12 to 36 months. While term-based licenses make up the majority of our total revenues, we have occasionally licensed our solutions to customers on a perpetual basis with on-going support and maintenance services. We recognize license revenue in accordance with software industry specific guidance. Revenues related to term license fees are recognized ratably over the contract term beginning on the date the customer has access to the software license key and continuing through the end of the contract term. For term-based licenses, we do not charge separately for standard support and maintenance, and, therefore, inherent in the license fees are fees for support and maintenance services for the duration of the license term. As fees for support and maintenance are always bundled with the license over the entire term of the contract, we do not have vendor specific objective evidence of fair value for support and maintenance. Revenues generated from perpetual license sales also include support and maintenance services for an initial stated term, both the perpetual license and support and maintenance are recognized ratably over the initial stated term. We do not have fair value for support and maintenance on perpetual licenses as we have not had sufficient consistently priced standalone sales of support and maintenance to support vendor-specific objective evidence, or VSOE, of fair value.

 

License arrangements may also include professional services, such as, installation and training services, which are typically delivered early in the contract term. This combination of solutions and services represent a multiple-element arrangement for revenue recognition purposes. We have determined that we do not have VSOE of fair value for each element of a multiple element sales arrangement and, accordingly, we account for fees received under that multiple element arrangement as a single unit of accounting and recognize the fees for the entire arrangement ratably, commencing on delivery of the software, over the longer of the term of the support and maintenance or the period over which professional services are delivered. Support and maintenance is always the last undelivered element in the arrangement and therefore we recognize the fixed portion of the fees ratably over the support and maintenance term. For contracts with multiple elements, we recognize the license, support and maintenance, and fixed fee professional service revenue ratably over the term of the arrangement beginning upon delivery of the software. We believe this method most closely reflects the economics of the transaction as we deliver access to the software and we begin providing support and maintenance services as of the date the software is delivered.

 

Professional services are offered on both or fixed fee and time and materials hourly billing arrangement. For time and materials based professional services that are part of a multiple-element arrangement where the fees for the professional services are not fixed or determinable upon delivery of the software, revenue is recognized ratably over the contract term as the related fees become fixed. These fees are not considered fixed at the outset of the arrangement and become fixed as the related work is performed and the fees are earned and billed. These services are typically provided early in the contract term with completion typically occurring in the first six months. As these fees become fixed, they are added to the total fee for the multiple-element arrangement and

 

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recognized ratably with all other arrangement fees over the entire contract term. When billed, a cumulative revenue catch-up is calculated as the revenue earned from the date the software was made available to the customer to the date services have been completed, with recognition continuing ratably to the end of the contract term. These amounts when recognized, in our consolidated statements of operations, are classified as professional services revenues based on the hourly rates at which they are billed. If there are significant acceptance clauses associated with the license or services or uncertainty associated with our ability to perform the professional services, revenues are deferred until the acceptance is received or the uncertainty is resolved. We record amounts that have been invoiced, in accordance with the terms of the agreement, in accounts receivable and in deferred revenues or revenues, depending on whether the revenue recognition criteria have been met.

 

Hosting revenues are derived from providing our software solutions in a hosted environment where the customer does not take possession of the software on their premises. Customers have the option to elect to take possession of the software and install on their premises or sub-contract the hosting services through us. Such arrangements are considered software sales as the customer has the same rights to the software license regardless of their election to have us host on their behalf or install on their premises. As a result, the fees associated with license, support and hosted services are recognized as revenue ratably over the term of the arrangement.

 

We occasionally sell professional services separately and recognize revenues resulting from those as professional services are performed. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenues are deferred until the uncertainty is resolved. If acceptance provisions exist within a professional services arrangement, revenues will be deferred until the services are accepted, the acceptance period has expired or cash is received from the customer.

 

Our policy is to record revenues net of any applicable sales, use or excise taxes.

 

Allowance for Doubtful Accounts

 

We maintain an allowance for estimated losses resulting from the inability or refusal of our customers to make required payments. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and the customers’ financial condition, the amount of receivables in dispute, the current receivables aging and current payment patterns. We evaluate the collectability of our accounts receivable balances on a quarterly basis. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts receivable was $0.2 million at both December 31, 2010 and 2009. Bad debt expense was $0.1 million for the years ended December 31, 2010, 2009 and 2008, and the nine months ended September 30, 2011, respectively. If the financial conditions of our customers were to materially change or there were other circumstances that resulted in their inability to pay, the estimates of recoverability of receivables could materially change.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the estimated fair value of the net tangible and intangible assets of acquired entities. We perform a goodwill impairment test annually during the fourth quarter of our fiscal year and more frequently if an event or circumstance indicates that an impairment may have occurred. Such events or circumstances may include significant adverse changes in the general business climate, among other things. The impairment test is performed by determining the reporting unit’s fair value based on estimated discounted future cash flows and considering the estimated fair market value of our common stock. We have determined that we have one reporting unit, which represents the activities of the entire company. If the reporting unit’s carrying value is less than its fair value, then the fair value is allocated to the reporting unit’s assets and liabilities (including any unrecognized intangible assets) as if the fair value was the purchase price to acquire us. The excess of the fair value over the amounts assigned to our assets and liabilities is the implied fair value of the goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

 

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Goodwill of $0.8 million as of December 31, 2010 relates to our acquisition of Filtrbox, which occurred in January 2010. Goodwill of $17.3 million as of September 30, 2011 also includes goodwill related to our acquisition of OffiSync in May 2011. Our impairment test performed in the fourth quarter of 2010 did not indicate any impairment of goodwill.

 

Deferred Tax Asset Valuation Allowance

 

We record deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of the assets and liabilities. Deferred tax assets are reduced by a valuation allowance when it is estimated to become more likely than not that a portion of the deferred tax assets will not be realized. Accordingly, we currently maintain a full valuation allowance against our net deferred tax assets. The valuation allowance totaled $10.8 million and $22.8 million, respectively, as of December 31, 2009 and 2010 and $40.0 million at September 30, 2011.

 

Uncertainty in Income Taxes