UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-35125

RESPONSYS, INC.

(Exact name of the registrant as specified in its charter)

Delaware	77-0476820
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1100 Grundy Lane, 3rd Floor San Bruno, California	94066
(Address of principal executive offices)	(Zip Code)

(650) 745-1700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 30, 2013, there were approximately 49,365,392 shares of the registrant’s common stock outstanding.

RESPONSYS, INC.

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION		3
ITEM 1. FINANCIAL STATEMENTS		3
Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 (Unaudited)		3
Condensed Consolidated Statements of Income for the Three Months Ended March  31, 2013 and 2012 (Unaudited)		4
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March  31, 2013 and 2012 (Unaudited)		5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March  31, 2013 and 2012 (Unaudited)		6
Notes to Condensed Consolidated Financial Statements (Unaudited)		7
ITEM  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		26
ITEM 4. CONTROLS AND PROCEDURES		27
PART II. OTHER INFORMATION		28
ITEM 1. LEGAL PROCEEDINGS		28
ITEM 1A. RISK FACTORS		28
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		42
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		42
ITEM 4. MINE SAFETY DISCLOSURES		42
ITEM 5. OTHER INFORMATION		42
ITEM 6. EXHIBITS		43
SIGNATURES		44

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RESPONSYS, INC.

Condensed Consolidated Balance Sheets

(Unaudited; in thousands, except per share data)

	As of March  31, 2013			As of December  31, 2012
Assets
Current assets:
Cash and cash equivalents	$	106,263		$	106,656
Accounts receivable, net of allowances of $276 and $158 as of March 31, 2013 and December 31, 2012, respectively		33,508			28,065
Deferred taxes—current		5,997			5,997
Prepaid expenses and other current assets		5,405			2,803
Total current assets		151,173			143,521
Property and equipment—net		23,494			18,426
Goodwill		17,298			17,335
Intangible assets—net		2,188			2,925
Deferred taxes—noncurrent		2,744			4,100
Other assets		2,713			2,458
Total assets	$	199,610		$	188,765
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	6,082		$	3,363
Accrued compensation		7,797			8,014
Other accrued liabilities		6,987			4,432
Capital lease obligations—current		901			896
Deferred revenue—current		9,301			8,072
Total current liabilities		31,068			24,777
Capital lease obligations—noncurrent		—			228
Deferred revenue—noncurrent		364			407
Contingent liability		1,513			1,561
Deferred rent		2,823			2,145
Deferred tax—noncurrent		399			482
Other long-term liabilities		758			755
Total liabilities	$	36,925		$	30,355
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $0.0001 par value; 250,000 shares authorized as of March 31, 2013 and December 31, 2012; 49,131 and 48,956 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		5			5
Additional paid-in capital		168,328			165,423
Accumulated deficit		(5,696	)		(7,212	)
Accumulated other comprehensive income		48			194
Total stockholders’ equity		162,685			158,410
Total liabilities and stockholders’ equity	$	199,610		$	188,765

See notes to condensed consolidated financial statements.

3

RESPONSYS, INC.

Condensed Consolidated Statements of Income

(Unaudited; in thousands, except per share data)

	Three Months Ended March 31,
	2013			2012
Revenue:
Subscription	$	33,552		$	27,205
Professional services		14,949			10,849
Total revenue		48,501			38,054
Cost of revenue:
Subscription		9,088			7,445
Professional services		12,492			9,920
Total cost of revenue		21,580			17,365
Gross profit		26,921			20,689
Operating expenses:
Research and development		4,140			3,802
Sales and marketing		13,833			9,061
General and administrative		5,725			4,171
Total operating expenses		23,698			17,034
Operating income		3,223			3,655
Other income (expense), net:
Interest income		28			27
Interest expense		(25	)		(92	)
Other income (expense), net		(336	)		17
Total other expense, net		(333	)		(48	)
Income before income taxes		2,890			3,607
Provision for income taxes		(1,374	)		(1,535	)
Equity in net income of unconsolidated affiliates		—			25
Net income	$	1,516		$	2,097
Net income per share:
Basic	$	0.03		$	0.04
Diluted	$	0.03		$	0.04
Shares used in computation of net income per share:
Basic		49,053			47,809
Diluted		53,456			53,218

See notes to condensed consolidated financial statements.

4

RESPONSYS, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited; in thousands)

	Three Months Ended March 31,
	2013			2012
Net income	$	1,516		$	2,097
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax effect of zero		(146	)		410
Unrealized short-term investment losses, net of tax effect of zero		—			(3	)
Total other comprehensive income (loss)		(146	)		407
Comprehensive income	$	1,370		$	2,504

See notes to condensed consolidated financial statements.

5

RESPONSYS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited; in thousands)

	Three Months Ended March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	1,516		$	2,097
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for bad debts		118			84
Depreciation and amortization		3,081			2,457
Stock-based compensation		2,593			1,398
Deferred taxes		1,316			602
Excess tax expense and (benefits) from stock-based compensation		36			(639	)
Equity in net income of unconsolidated affiliates		—			(25	)
Other		5			92
Changes in operating assets and liabilities—net of business acquired:
Accounts receivable		(5,563	)		(460	)
Prepaid expenses and other current assets		(2,621	)		(260	)
Other assets		(262	)		(95	)
Accounts payable		1,877			451
Accrued compensation		(173	)		(1,596	)
Other accrued liabilities		676			1,088
Deferred revenue		1,189			454
Other long-term liabilities		635			45
Net cash provided by operating activities		4,423			5,693
Cash flows from investing activities:
Purchases of property and equipment		(3,639	)		(1,936	)
Addition of capitalized software development costs		(1,063	)		—
Purchase of short-term investments		—			(4,007	)
Redemption of short-term investments		—			8,661
Purchase of equity interest		—			(1,772	)
Net cash (used in) provided by investing activities		(4,702	)		946
Cash flows from financing activities:
Proceeds from issuance of common stock		290			332
Proceeds from early-exercised stock options		—			(4	)
Principal payments on capital lease obligations		(222	)		(219	)
Excess tax expense and (benefits) from stock-based compensation		(36	)		639
Net cash provided by financing activities		32			748
Effect of foreign exchange rate changes on cash and cash equivalents		(146	)		146
Net increase (decrease) in cash and cash equivalents		(393	)		7,533
Cash and cash equivalents at beginning of period		106,656			73,456
Cash and cash equivalents at end of period	$	106,263		$	80,989
Noncash financing and investing activities:
Purchase of property and equipment on account	$	2,734		$	257
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	14		$	23
Cash paid during the period for taxes	$	224		$	61

See notes to condensed consolidated financial statements.

6

Responsys, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Responsys, Inc. (the “Company”) was incorporated in California in February 1998 and reincorporated from the state of California to the state of Delaware in March 2011. The Company’s solution is comprised of its on-demand software and professional services. The Company’s core offering, the Responsys Interact Suite, provides marketers with a set of integrated applications to create, execute, optimize and automate marketing campaigns across the key interactive channels—email, mobile, social, the web and display. The Company has offices in North America, Australia, Denmark, India and the United Kingdom, and its principal markets are in North America, Asia Pacific and Europe.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2012. In the opinion of management, the condensed consolidated financial statements include all adjustments necessary for a fair presentation of the results of the interim periods. Such adjustments include only normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year or any future interim period.

There have been no changes in the Company’s significant accounting policies for the three months ended March 31, 2013 as compared to the significant accounting policies described in its Form 10-K for the year ended December 31, 2012.

Principles of Consolidation.

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

Use of Estimates.

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates and assumptions relate to management’s determination of the estimated selling prices of subscriptions and professional services, the fair values of issued equity awards, the fair value of the additional equity purchase in Responsys Denmark A/S (“Responsys Denmark”), the valuation of intangible assets acquired in business combinations and the valuation allowance on deferred tax assets. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates.

Income Taxes.

In interim periods, the Company computes its provision for income taxes by applying the estimated annual effective tax rate to income before taxes and adjusting the provision for discrete tax items recorded in the period.

Net Income Per Share.

Basic net income per common share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. The weighted-average number of shares of common stock used to calculate the Company’s basic net income per common share excludes those shares subject to repurchase related to stock options that were exercised prior to vesting as these shares are not deemed to be issued for accounting purposes until they vest. Diluted net income per common share is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, stock options to purchase common stock, and common stock subject to repurchase are considered to be common stock equivalents.

7

Accounting Standards Adopted During 2012.

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income, which requires companies to present the components of net income and other comprehensive income either in a single continuous statement or in two separate but consecutive statements. ASU No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU No. 2011-05 does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. Additionally, ASU No. 2011-05 does not affect the calculation or reporting of earnings per share. ASU 2011-05 is effective for reporting periods beginning after December 15, 2011. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-12 defers the changes in ASU No. 2011-05 that pertain to how, when and where reclassification adjustments are presented. The Company adopted these ASUs retrospectively effective January 1, 2012 and elected to present comprehensive income in a separate statement immediately following the condensed consolidated statements of income. The adoption had no effect on the Company’s financial position or results of operations.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which is intended to result in convergence between GAAP and International Financial Reporting Standards requirements for measurement of, and disclosures about, fair value. ASU No. 2011-04 clarifies or changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The Company adopted this ASU prospectively, as required, effective January 1, 2012. The adoption did not have a material effect on the Company’s financial position or results of operations.

8

3. NET INCOME PER SHARE

Basic and diluted net income per share is calculated as follows (in thousands, except per share data):

	Three Months Ended March 31,
	2013		2012
Net income:
Numerator:
Net income, basic and diluted	$	1,516		2,097
Denominator:
Basic shares:
Weighted-average shares used in computing basic net income per share		49,053		47,809
Diluted shares:
Weighted-average shares used in computing basic net income per share		49,053		47,809
Effect of potentially dilutive securities:
Employee stock options		4,181		5,356
Restricted stock units		143		10
Repurchaseable stock options		15		43
Employee stock purchase plan		64		—
Weighted-average shares used in computing diluted net income per share		53,456		53,218
Net income per share:
Basic	$	0.03	$	0.04
Diluted	$	0.03	$	0.04

Potential shares of common stock that were excluded from the computation of net income per share as they were anti-dilutive using the treasury-stock method are as follows (in thousands):

	Three Months Ended March 31,
	2013		2012
Employee stock options		3,118		2,829
Repurchaseable stock options		—		—
Restricted stock units		392		387
Total		3,510		3,216

9

4. PROPERTY AND EQUIPMENT—NET

Property and equipment consists of the following (in thousands):

	As of			As of
	March 31, 2013			December 31, 2012
Computers and equipment	$	36,242		$	30,797
Software		9,537			9,394
Furniture and fixtures		2,705			2,614
Capitalized software		6,022			4,764
Leasehold improvements		3,964			3,496
Total property and equipment—cost		58,470			51,065
Less: accumulated depreciation		(34,976	)		(32,639	)
Total property and equipment—net	$	23,494		$	18,426

Depreciation expense was as follows (in thousands):

	Three Months Ended March 31,
	2013		2012
Depreciation expense	$	2,376	$	1,866

Capitalized software includes internally developed software costs associated with our on-demand platform and internal use software costs associated with the Company’s project to implement a new enterprise resource planning system. The Company capitalized $1.3 million and no costs for the three months ended March 31, 2013 and 2012, respectively. Capitalized software, net of accumulated amortization, was $4.0 million as of March 31, 2013 and $3.0 million as of December 31, 2012, respectively.

Equipment financed under capital leases is included in computers and equipment as follows (in thousands):

	As of March 31,  2013			As of December 31, 2012
Capitalized value	$	3,333		$	3,333
Accumulated depreciation		(1,894	)		(1,774	)
Net	$	1,439		$	1,559

5. GOODWILL

Goodwill consists of the following (in thousands):

Balance—December 31, 2012	$	17,335
Additions		—
Foreign currency translation		(37	)
Balance—March 31, 2013	$	17,298

The functional currency of Responsys Pty Ltd, where the majority of goodwill is recorded, is the local currency. Accordingly, the goodwill denominated in foreign currency is translated into U.S. dollars using the exchange rate in effect at period end. Adjustments are included in foreign currency translation adjustment in the condensed consolidated statements of comprehensive income.

10

6. INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):

	As of March 31, 2013							As of December 31, 2012
	Gross Value		Accumulated Amortization			Net		Gross Value		Accumulated Amortization			Net
Customer lists	$	6,653	$	(5,397	)	$	1,256	$	6,664	$	(4,802	)	$	1,862
Reacquired right		1,110		(277	)		833		1,145		(191	)		954
Trade name		232		(232	)		—		232		(232	)		—
Other		188		(89	)		99		188		(79	)		109
	$	8,183	$	(5,995	)	$	2,188	$	8,229	$	(5,304	)	$	2,925

The estimated future amortization expense related to intangible assets as of March 31, 2013, is as follows (in thousands):

	Amortization
2013—remaining	$	1,057
2014		738
2015		376
2016		17
2017		—
Thereafter		—
Total amortization	$	2,188

Amortization expense was as follows (in thousands):

	Three Months Ended March 31,
	2013		2012
Amortization expense	$	690	$	591

7. EQUITY INVESTMENTS

The Company’s equity investments consist of an investment in PM Comunicação LTDA (“Pmweb”), which is accounted for using the cost method and is further described below. Pmweb is a customer relationship management and digital marketing company in Brazil. The carrying value of this investment is included in other assets on the condensed consolidated balance sheets and is $1.8 million as of March 31, 2013 and December 31, 2012. In March 2012, the Company entered into an agreement with the quotaholders of Pmweb under which the Company purchased 19.9% of the outstanding quotas of Pmweb from the quotaholders for a total purchase price of $1.7 million. In connection with the purchase of the quotas, the Company also made a direct investment in Pmweb of $70,000.

The Company holds a call option to purchase the remaining 80.1% of Pmweb’s outstanding equity exercisable at the Company’s discretion at any time prior to March 31, 2014. The exercise price of the call option is based on Pmweb’s actual earnings before interest, taxes, depreciation and amortization for 2013. The Company also holds a put option under which it may sell its 19.9% investment in Pmweb to the quotaholder specified in the agreement in the event of any change in Pmweb’s corporate purpose at the Company’s original purchase price.

The Company accounts for its investment in Pmweb using the cost method, as its investment is less than 20% and it does not have significant influence or control over Pmweb.

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8. COMMITMENTS AND CONTINGENCIES

Lease and Other Commitments.

The Company leases office space and certain fixed assets under non-cancelable operating and capital leases with various expiration dates. During the three months ended March 31, 2013, the Company entered into new lease agreements for additional office space in Chicago, Illinois and San Francisco, California. The Chicago lease has a 7-year term and was signed in February, 2013 and commences in May, 2013. The San Francisco lease includes a four-year term that commenced in March, 2013. Total minimum future payments under these agreements as of March 31, 2013 are as follows (in thousands):

	Operating Leases		Capital Leases			Other
2013—remaining	$	3,796	$	692		$	3,520
2014		5,293		230			4,111
2015		5,021		—			3,627
2016		4,649		—			599
2017		3,114		—			—
Thereafter		2,781		—			—
Total minimum lease payments	$	24,654	$	922		$	11,857
Less: amount representing interest				(21	)
Present value of minimum lease payments				901
Less: current portion of capital lease obligations				(901	)
Capital lease obligations—noncurrent			$	—

Legal Proceedings.

From time to time, the Company may become involved in various legal proceedings in the ordinary course of its business, and may be subject to third-party infringement claims. Even claims that lack merit could result in significant legal expenses and diversion of management resources. In August 2012, Rpost Holdings, Inc. and related entities (collectively, “Rpost”) filed suit against the Company in the United States District Court for the Eastern District of Texas alleging infringement of various patents by the Company’s email marketing services. The Company has since settled the matter for an immaterial amount.

Indemnification.

From time to time, and in the normal course of business, the Company may agree to indemnify third parties with whom it enters into contractual relationships, including customers, vendors, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third-party claims that the Company’s products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, payments made by the Company under these obligations have not been material.

9. ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income consists of the following (in thousands):

	As of March 31, 2013		As of December 31, 2012
Accumulated foreign currency translation adjustments	$	48	$	196
Unrealized investment loss		—		(2	)
Total accumulated other comprehensive income	$	48	$	194

10. STOCK-BASED COMPENSATION

The Company has two stock-based compensation plans, the 2011 Equity Incentive Plan (the “2011 Plan”), which became effective in April 2011, and the 1999 Stock Plan (the “1999 Plan”). The Company currently grants awards only under the 2011 Plan. Outstanding options granted under the 1999 Plan remain outstanding and subject to the terms of the 1999 Plan and stock option agreements, until they are exercised, terminate or expire pursuant to their terms. In accordance with the provisions of the 2011 Plan, the board of directors authorized a 2.0 million share increase in the number of shares reserved under the 2011 Plan in January 2013.

12

In April 2012, the Company adopted the 2012 Employee Stock Purchase Plan (“Purchase Plan”). As of March 31, 2013, the Company had reserved a total of 1.5 million shares of common stock for future issuance under the Purchase Plan. Under the Purchase Plan, eligible employees may defer an amount not to exceed 15% of the employee’s compensation to purchase common stock of the Company. The purchase price per share is 85% of the lesser of the fair market value of the common stock on the first day of the applicable offering period or on the purchase date, as defined in the Purchase Plan. The Purchase Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.

Options granted under the 1999 Plan are immediately exercisable. The 1999 Plan provides that unvested shares that are exercised are subject to repurchase by the Company upon termination of employment at the original price paid for the shares. Unvested shares that are subject to repurchase are not considered outstanding for accounting purposes. However, such shares are reflected as exercised in the summary of option activity as of March 31, 2013. Information regarding shares subject to repurchase is as follows (in thousands):

	As of March 31, 2013		As of December 31, 2012
Shares subject to repurchase		36,458		45,443
Liability recorded	$	163	$	201

A summary of the activity under the 1999 Plan and 2011 Plan and related information is as follows (in thousands, except per share data):

				Options Outstanding
	Shares Available for Grant			Number of Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Balance—December 31, 2012		8,656			9,799			5.38	$	5.68	$	29,940
Options authorized		2,000			—
Options exercised		—			(125	)		2.31
Options canceled		19			(19	)		7.62
Restricted stock unit activity		(1,482	)		—
Balance—March 31, 2013		9,193			9,655
Vested and exercisable—March 31, 2013					7,075			2.76		4.48		46,464
Vested and expected to vest—March 31, 2013					9,622		$	5.39	$	5.42	$	48,873

There were no stock options granted during the three months ended March 31, 2013 and 2012. The total intrinsic value of options exercised during the three months ended March 31, 2013 and 2012 was $0.7 million and $3.6 million, respectively.

As of March 31, 2013, there was approximately $18.0 million of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average remaining vesting period of approximately 3.5 years.

Restricted stock unit activity is as follows (in thousands):

				Weighted-Average		Aggregate
	Number of Shares			Fair Value		Intrinsic Value
Balance—December 31, 2012		1,176		$	10.71		7,014
Granted		1,512			6.84
Released		(41	)		11.60
Forfeited		(30	)		10.13
Balance—March 31, 2013		2,617
Expected to be released—March 31, 2013		2,390		$	8.35	$	21,149

As of March 31, 2013, there was approximately $20.0 million of total unrecognized compensation related to restricted stock units (“RSUs”), which is expected to be recognized over a weighted-average remaining vesting period of approximately 2.9 years.

13

Stock-based compensation expense included in the Company’s cost of revenue and operating expenses within the accompanying consolidated statements of income is as follows (in thousands):

	Three Months Ended March 31,
	2013		2012
Cost of revenue	$	677	$	354
Research and development		214		238
Sales and marketing		848		362
General and administrative		854		444
Total stock-based compensation expense	$	2,593	$	1,398

Stock-based compensation expense related to each type of award is as follows (in thousands):

	Three Months Ended March 31,
	2013		2012
Non-performance-based stock options	$	849	$	1,032
Performance-based stock options		55		132
ESPP		149		—
RSUs		1,114		234
Performance-based RSUs		426		—
Total stock-based compensation expense	$	2,593	$	1,398

The Company determines the fair value of RSUs to be the fair market value of the shares of common stock underlying the RSUs at the date of grant.

In accordance with ASC 718-20, the Company estimates potential forfeitures for stock grants and adjusts stock-based compensation expense accordingly. The estimate of potential forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of stock-based compensation expense to be recognized in future periods.

11. INCOME TAXES

The provision for income taxes is as follows (dollars in thousands):

	As of March 31
	2013			2012
Provision for income taxes	$	(1,374	)	$	(1,535	)
Effective tax rate		47.5	%		42.6	%

The expected income tax provision derived from applying the federal statutory rate to the Company’s income before income tax provision for the three months ended March 31, 2013 and 2012 differed from the Company’s recorded income tax provision primarily due to various income tax credits and permanent differences related to non-deductible stock-based compensation expenses, and the reinstatement of the 2012 federal research credit under the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013 and the benefit of which was recorded by the Company as a discrete item in the current quarter. During the quarter ended March 31, 2013, our effective tax rate was reduced to 47.5% due to the aforementioned discrete item and as such, the Company’s effective tax rate for the three months ended March 31, 2013 is not necessarily indicative of the effective tax rate that may be expected for the year ending December 31, 2013. In addition, individual items reported as adjustments to the annual effective tax rate are not substantially different from pre-tax income. As such, relatively small changes in our forecasted profitability for fiscal 2013 can have a significant effect on our projected annual effective tax rate since individual permanent adjustments will have a greater impact as a percentage of pre-tax income.

Topic 740—Income Taxes prescribes that an income tax position is required to meet a minimum recognition threshold before being recognized in the financial statements. The Company’s gross unrecognized income tax benefits were $2.0 million as of March 31, 2013 and December 31, 2012, respectively. No significant interest or penalties have been recorded to date.

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12. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Further, entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

• Level 1—Quoted prices in active markets for identical assets or liabilities.

• Level 2—Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.

• Level 3—Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect the entity’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The assets measured at fair value on a recurring basis and the input categories associated with those assets are as follows (in thousands):

	As of March 31, 2013
	Fair Value		Quoted Prices  in Active Markets for Identical Assets (Level 1)		Significant Other  Observable Inputs (Level 2)		Significant Other  Unobservable Inputs (Level 3)
Assets:
Money market funds (1)	$	91,299	$	91,299	$	—	$	—
Liabilities:
Contingent consideration payable (2)	$	1,513	$	—	$	—	$	1,513

	As of December 31, 2012
	Fair Value		Quoted Prices  in Active Markets for Identical Assets (Level 1)		Significant Other  Observable Inputs (Level 2)		Significant Other  Unobservable Inputs (Level 3)
Assets:
Money market funds (1)	$	80,281	$	80,281	$	—	$	—
Liabilities:
Contingent consideration payable (2)	$	1,561	$	—	$	—	$	1,561

⁽¹⁾ Included in Cash and cash equivalents on the Balance Sheet.

⁽²⁾ Included in Other long-term liabilities on the Balance Sheet.

The contingent consideration payable of $1.5 million is classified within Level 3 because the liability is valued using unobservable inputs. The inputs include the expected future cash flows of Responsys Denmark during the contingency period, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the Shareholders’ Agreement. Any changes in the liability are recorded in our statement of operations until the liability is settled. Subsequent to the date of the acquisition, the fair value of the contingent consideration payable has only changed as the result of foreign currency fluctuations, as the amount is payable in Danish krone.

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13. SEGMENT INFORMATION

The Company is organized and operates in one reportable industry segment.

Revenue by geographic region is based on the billing address of the customer. Subscription and professional services revenue by geographic region were as follows (in thousands):

	Three Months Ended March 31,
	2013		2012
Subscription
United States	$	26,474	$	22,070
International		7,078		5,135
Professional services
United States		11,495		7,918
International		3,454		2,931
Total revenue	$	48,501	$	38,054

No individual country other than the United States accounts for 10% or more of total revenue. No individual customer accounted for 10% or more of total revenue or accounts receivable.

Property and equipment by geographic region were as follows (in thousands):

	As of March 31,		As of December 31,
	2013		2012
United States	$	22,970	$	17,826
International		524		600
Total property and equipment - net	$	23,494	$	18,426

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2012 included in our Form 10-K for the year ended December 31, 2012. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a leading provider of on-demand software that enables companies to engage in relationship marketing across the interactive channels that consumers are embracing today—email, mobile, social, the web and display. The Responsys Interact Suite, the core element of our solution, provides marketers with a set of integrated applications to create, execute, optimize and automate marketing campaigns. Our solution is comprised of our on-demand software and our professional services, all focused on enabling the marketing success of our customers.

The following are some of the more significant milestones in our corporate history during the past few years:

• In April 2010, we added mobile and social functionality to Interact Campaign to coordinate the creation, scheduling, automation and tracking of short message service, or text message, marketing campaigns and promotions to consumers who engage with our customers’ brands such as Facebook fans or Twitter followers.

• In July 2010, we acquired a non-controlling, fifty-percent equity interest in Eservices Group Pty Ltd, or Eservices, a privately-held company headquartered in Melbourne, Australia, and in January 2011 we acquired the remaining equity interests in Eservices for $8.2 million. Following the acquisition, the company was renamed Responsys Pty Ltd. We began to consolidate our results with those of Eservices beginning in January 2011. We acquired Eservices to expand the scope of our business internationally, increase our customer base and grow our professional services and sales teams.

• In October 2011, we introduced Responsys Interact for Display, which allows marketers to add display advertising to their cross-channel marketing programs. This offering enables marketers to leverage CRM and behavioral data to target the serving of relevant display ads to consumers at opportune times in the customer lifecycle.

• In March 2012, we purchased 19.9% of the outstanding quotas of Pmweb from the quotaholders for a total purchase price of $1.7 million. We also made a direct investment in Pmweb of $70,000. Pmweb is a customer relationship management and digital marketing company in Brazil.

• In July 2012, we purchased an additional 47.5% equity interest in Responsys Denmark for $2.3 million, bringing our total ownership to 95%. Responsys Denmark is a reseller of the Responsys’ suite of product offerings and provides related professional services.

We derive revenue from subscriptions to our on-demand software including the associated messaging service and related professional services. As part of a subscription, a customer commits to a minimum monthly or quarterly fee that permits a customer to send up to a specified number of email messages. If a customer sends additional messages above the contracted level, the customer is required to pay additional per-message fees. No refunds or credits are given if a customer sends fewer messages than the contracted level. Customer agreements are non-cancelable for a minimum period, generally one year but ranging up to three years. Revenue from messages sent above contracted levels during the last three years has historically ranged from approximately 20% to 25% of our subscription revenue in any given 12-month period but varies from quarter to quarter due to seasonal, macroeconomic and other factors. Subscription revenue accounted for 69.2% and 71.5% of our total revenue for the three months ended March 31, 2013 and 2012, respectively. Subscription revenue is driven primarily by demand from existing customers, which includes their contractually committed messaging volumes and messages sent above these contracted levels. To date, our customers have primarily used email messages for their marketing campaigns, and email will continue to be the primary driver of our subscription revenue in the foreseeable future. However, if customers increase their use of other interactive channels in the future, we anticipate that revenue associated with email campaigns will decrease as a percentage of subscription revenue. Although revenue associated with our mobile, social, the web and display channels has not been material to date, we believe that our cross-channel capabilities have been important factors in our new customers’ purchasing decisions.

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Deferred revenue primarily consists of the unearned portion of billed professional services fees or fees associated with our on-demand software. As we bill nearly all our customers on a monthly or quarterly basis, our deferred revenue balance does not serve as a primary source of our future subscription revenue.

We sell subscriptions to our on-demand software and professional services primarily through a direct sales force. We target enterprise and larger mid-market companies that seek to implement more advanced marketing programs across interactive channels. Our customers are of varied size across a wide variety of industries, including retail and consumer, travel, financial services and technology. Our revenue from outside the United States as a percentage of total revenue was 21.7% and 21.2% for the three months ended March 31, 2013 and 2012, respectively.

Our revenue growth over these periods has been driven by an increased number of customers with higher subscription fees. Over the past three years, we have added larger enterprise customers with higher subscription commitments, higher messaging volumes and greater professional services demands. Our subscription revenue fluctuates as a result of seasonal variations in our business, principally due to timing of our customers’ sales and marketing cycles. We have historically had higher subscription revenue in our fourth quarter than in other quarters during a given calendar year, primarily due to revenue from messages sent above contracted levels by our retail and consumer customers. Our cost of revenue and operating expenses have increased in absolute dollars over this period due to our need to increase headcount, bandwidth and capacity to support larger messaging volumes and the overall increased size of our business. We expect that our cost of revenue and operating expenses will continue to increase in absolute dollars as we continue to invest in our growth and incur additional costs as a public company.

Key Metrics

We regularly review a number of metrics to evaluate trends, measure our performance, establish budgets and make strategic decisions. We discuss revenue, gross margin, and the components of operating income and margin below under “Results of Operations” and we discuss other key metrics below.

Subscription Dollar Retention Rate.

We believe that our ability to retain our customers and expand their use of our software over time is an indicator of the stability of our revenue base and the long-term value of our customer relationships. We assess our performance in this area using a metric we refer to as our Subscription Dollar Retention Rate. Our Subscription Dollar Retention Rate metric is calculated by dividing (a) Retained Subscription Revenue by (b) Retention Base Revenue. We define Retention Base Revenue as subscription revenue from all customers in the prior period, and we define Retained Subscription Revenue as subscription revenue from that same group of customers in the current period. Our Subscription Dollar Retention Rate has averaged above 100% over the four quarters in each of the last three years and through the three months ended March 31, 2013.

Number of Customers.

We believe that our ability to expand our customer base is an indicator of our market penetration and growth of our business as we continue to invest in our direct sales force and marketing initiatives. We define our number of customers as of the end of a particular quarter as the number of direct-billed subscription customers with $3,000 or more in subscription revenue from contractually committed messaging for that quarter. We had 415 and 346 customers as of March 31, 2013 and 2012, respectively.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an on-going basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

There have been no changes in the accounting policies for which we make critical accounting estimates in the preparation of our condensed consolidated financial statements during the three months ended March 31, 2013 as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K for the year ended December 31, 2012.

New Accounting Pronouncements

Accounting Standards Adopted During 2012.

See Note 2, “Summary of Significant Accounting Policies—Accounting Standards Adopted During 2012,” of Notes to Condensed Consolidated Financial Statements for a discussion of the effect of new accounting pronouncements.

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Results of Operations

The following tables set forth selected consolidated statements of income data for each of the periods indicated.

	Three Months Ended March 31,
	2013			2012
	(in thousands)
Revenue:
Subscription	$	33,552		$	27,205
Professional services		14,949			10,849
Total revenue		48,501			38,054
Cost of revenue: (1)
Subscription		9,088			7,445
Professional services		12,492			9,920
Total cost of revenue		21,580			17,365
Gross profit		26,921			20,689
Operating expenses:
Research and development (1)		4,140			3,802
Sales and marketing (1)		13,833			9,061
General and administrative (1)		5,725			4,171
Total operating expenses		23,698			17,034
Operating income		3,223			3,655
Other expense, net		(333	)		(48	)
Income before income taxes		2,890			3,607
Provision for income taxes		(1,374	)		(1,535	)
Equity in net income of unconsolidated affiliates		—			25
Net income	$	1,516		$	2,097

⁽¹⁾  Total cost of revenue and operating expenses include the following amounts related to stock-based compensation:

	Three Months Ended March 31,
	2013		2012
	(in thousands)
Cost of revenue	$	677	$	354
Research and development		214		238
Sales and marketing		848		362
General and administrative		854		444
Total costs and expenses	$	2,593	$	1,398

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The following tables set forth selected consolidated statements of income data for each of the periods indicated as a percentage of total revenue.

	Three Months Ended March 31,
	2013			2012
Revenue:
Subscription		69.2	%		71.5	%
Professional services		30.8			28.5
Total revenue		100.0			100.0
Cost of revenue:
Subscription		18.7			19.6
Professional services		25.8			26.1
Total cost of revenue		44.5			45.7
Gross profit		55.5			54.3
Operating expenses:
Research and development		8.5			10.0
Sales and marketing		28.5			23.8
General and administrative		11.8			11.0
Total operating expenses		48.8			44.8
Operating income		6.7			9.5
Other expense, net		(0.7	)		(0.1	)
Income before income taxes		6.0			9.4
Provision for income taxes		(2.8	)		(4.0	)
Equity in net income of unconsolidated affiliates		—			0.1
Net income		3.2	%		5.5	%

Comparison of Three Months Ended March 31, 2013 and 2012

Revenue.

	Three Months Ended March 31,
	2013			2012			Change in
							$		%
	(dollars in thousands)
Subscription revenue	$	33,552		$	27,205		$	6,347		23.3	%
Percentage of total revenue		69.2	%		71.5	%
Professional services revenue	$	14,949		$	10,849		$	4,100		37.8	%
Percentage of total revenue		30.8	%		28.5	%

Subscription Revenue.

We derive our subscription revenue from subscriptions to our on-demand software. Subscription revenue primarily consists of revenue from contractually committed messaging and revenue from messages sent above contracted levels. Customer agreements are non-cancelable for a minimum period, generally one year but ranging up to three years. Our contracts provide our customers with access to our on-demand software which allows them to send up to a committed number of messages during each month or quarter over the contract term. If customers exceed the specified messaging volume, per-message fees are billed for the excess volume, generally at rates equal to the contracted minimum per-message fee. If customers send less than the specified number of messages, no rollover credit or refunds are given.

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We recognize subscription revenue equal to the lesser of (1) the cumulative amount of the aggregate contractually committed subscription fee on a straight-line basis over the subscription term less amounts previously recognized or (2) the cumulative amount we have the right to invoice our customer less amounts previously recognized, provided that an enforceable contract has been signed by both parties, access to our software has been granted to the customer, the fee for the subscription is fixed or determinable and collection is reasonably assured. Revenue for messages sent above contractually committed messaging levels is recognized in the period in which the messages are sent. We also derive revenue from setup fees to activate the service. The setup fees are initially recorded as deferred revenue and recognized as revenue ratably over the estimated life of the customer relationship.

Subscription revenue for the three months ended March 31, 2013 increased by $6.3 million, or 23.3%, over the three months ended March 31, 2012. The increase was primarily due to an increase in contractually committed messaging of $5.0 million from new customers partially offset by a decrease of $0.8 million from existing customers. In addition, revenue from messages sent above contracted levels increased from $6.9 million for the three months ended March 31, 2012, to $9.0 million for the three months ended March 31, 2013. Messages sent above contracted levels accounted for 27.0% and 25.2% of subscription revenue for the three months ended March 31, 2013 and 2012, respectively.

Professional Services Revenue.

Professional services revenue consists primarily of fees associated with campaign services, creative and strategic marketing services, technical services and education services. Our professional services are not required for customers to begin using our on-demand software. Our professional services engagements are typically billed on a fixed fee, time and materials or unit basis.

Professional services revenue for the three months ended March 31, 2013 increased by $4.1 million, or 37.8% over the three months ended March 31, 2012. The increase was primarily due to an increase of $0.6 million from existing customers and $3.5 million from new customers.

Cost of Revenue.

	Three Months Ended March 31,
	2013			2012			Change in
							$		%
	(dollars in thousands)
Cost of subscription revenue	$	9,088		$	7,445		$	1,643		22.1	%
Percentage of subscription revenue		27.1	%		27.4	%
Gross margin		72.9	%		72.6	%
Cost of professional services revenue	$	12,492		$	9,920		$	2,572		25.9	%
Percentage of professional services revenue		83.6	%		91.4	%
Gross margin		16.4	%		8.6	%

Cost of Subscription Revenue.

Cost of subscription revenue primarily consists of hosting costs, data communications expenses, personnel and related costs, including salaries and employee benefits, allocated overhead, software license fees, costs associated with website development activities, amortization expenses associated with capitalized software and depreciation and amortization expenses associated with computer equipment. To date, the amortization expense associated with capitalized software has not been material to our cost of subscription revenue. Expenses related to hosting and data communications are affected by the number of customers using our on-demand software, the complexity and frequency of their use, the volume of messages sent and the amount of data processed and stored. We plan to continue to significantly expand our capacity to support our growth, which will result in higher cost of subscription revenue in absolute dollars.

Cost of subscription revenue for the three months ended March 31, 2013 increased by $1.6 million over the three months ended March 31, 2012. The increase in costs was primarily due to an increase of $0.6 million of hardware and software costs, $0.3 million of increased service costs to support higher levels of revenue, $0.2 million for data center equipment and network infrastructure to support the operation of our on-demand software, and $0.1 million of stock-based compensation expense.

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Cost of Professional Services Revenue.

Cost of professional services revenue primarily consists of personnel and related costs and allocated overhead. Our cost associated with providing professional services is significantly higher as a percentage of revenue than our cost of subscription revenue due to the labor costs associated with providing professional services. As it takes several months to ramp up a productive professional services consultant, we generally increase our professional services capacity ahead of associated professional services revenue, which can result in lower margins in the given investment period. We expect the number of professional services personnel to increase in the future, which will result in higher cost of professional services revenue in absolute dollars.

Cost of professional services revenue for the three months ended March 31, 2013 increased by $2.6 million over the three months ended March 31, 2012. The increase in costs was primarily due to the addition of new employees of $1.2 million, $0.4 million of increased consulting expense, $0.2 million increase in facilities expenses and $0.2 million increase in stock-based compensation expense.

Operating Expenses.

Research and Development.

	Three Months Ended March 31,
	2013			2012			Change in
							$		%
	(dollars in thousands)
Research and development	$	4,140		$	3,802		$	338		8.9	%
Percentage of total revenue		8.5	%		10.0	%

Research and development expenses primarily consist of personnel and related costs for our product development and product management employees and allocated overhead. Our research and development efforts have been devoted primarily to increasing the functionality and enhancing the ease of use of our on-demand software and to improving scalability and performance. We expect that in the future, research and development expenses will increase in absolute dollars as we extend our on-demand software offerings and develop new technologies and capabilities.

Research and development expenses for the three months ended March 31, 2013 increased by $0.3 million over the three months ended March 31, 2012. The increase was primarily due to $0.7 million in personnel expenses related to the addition of new employees and $0.2 million for increased equipment and facilities expense, offset by $0.5 million related to research and development expense capitalized for internal use software and a decrease of $0.2 million in consulting expense.

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Sales and Marketing.

	Three Months Ended March 31,
							Change in
	2013			2012			$		%
	(dollars in thousands)
Sales and marketing	$	13,833		$	9,061		$	4,772		52.7	%
Percentage of total revenue		28.5	%		23.8	%

Sales and marketing expenses primarily consist of personnel and related costs for our sales and marketing employees, the cost of marketing programs, promotional events and webinars (net of amounts received from sponsors and participants), amortization of our intangible assets, and allocated overhead. We expense sales commissions when the customer contract is signed because our obligation to pay a sales commission arises at that time. We plan to continue to invest in sales and marketing by increasing the number of direct sales personnel in order to add new customers and increase penetration within our existing customer base, expanding our domestic and international sales and marketing activities, building brand awareness and sponsoring additional marketing events. We expect that in the future, sales and marketing expenses will increase in absolute dollars and will continue to be our largest cost.

Sales and marketing expenses for the three months ended March 31, 2013 increased by $4.8 million over the three months ended March 31, 2012. The increase was primarily due to $2.3 million in personnel expenses related to the addition of new employees, $1.0 million in commission expense, $0.5 million in stock–based compensation expense, $0.2 million training expense and $0.2 million in advertising expense.

General and Administrative.

	Three Months Ended March 31,
							Change in
	2013			2012			$		%
	(dollars in thousands)
General and administrative	$	5,725		$	4,171		$	1,554		37.3	%
Percentage of total revenue		11.8	%		11.0	%

General and administrative expenses consist primarily of personnel and related costs for administrative employees and allocated overhead. In addition, general and administrative expenses include professional fees, bad debt expenses and other corporate expenses. We anticipate that we will incur additional costs for personnel, systems and professional services as we grow and operate as a public company, including higher legal, accounting and insurance expenses, and the additional costs to achieve and maintain compliance with Section 404 of the Sarbanes-Oxley Act. Accordingly, we expect that in the future, general and administrative expenses will increase in absolute dollars.

General and administrative expenses for the three months ended March 31, 2013 increased by $1.6 million over the three months ended March 31, 2012. The increase was primarily due to $0.9 million in personnel expenses related to the addition of new employees, $0.5 million in legal and accounting fees, and $0.4 million increase in stock-based compensation expense, partially offset by a $0.2 million decrease in consulting expense.

Total Other Expense, Net.

	Three Months Ended March 31,
							Change in
	2013			2012			$			%
	(dollars in thousands)
Other expense, net	$	(333	)	$	(48	)	$	(285	)		593.8	%

Other expense primarily consists of interest income, interest expense and foreign exchange gains (losses). Interest income represents interest received on our cash, cash equivalents and short-term investments. Interest expense is primarily associated with our outstanding capital leases. Foreign exchange gains (losses) relate to transactions denominated in currencies other than the functional currency.

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Other expense, net for the three months ended March 31, 2013 increased over the three months ended March 31, 2012. The change in total other expense, net was primarily due to foreign currency exchange fluctuations.

Provision for Income Taxes.

	Three Months Ended March 31,
							Change in
	2013			2012			$		%
	(dollars in thousands)
Provision for income taxes	$	(1,374	)	$	(1,535	)	$	161		(10.5	)%
Effective tax rate		47.5	%		42.6	%

The provision for income taxes for the three months ended March 31, 2013 decreased over the three months ended March 31, 2012. The income tax provision for the three months ended March 31, 2013 differed from that for the three months ended March 31, 2012 primarily due to various income tax credits and permanent differences related to non-deductible stock-based compensation expenses, and the reinstatement of the 2012 federal research credit under the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013 and the benefit of which was recorded by the Company as a discrete item in the current quarter. The effective tax rate was 47.5% and 42.6% for the three months ended March 31, 2013 and 2012, respectively.

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Equity in Net Income of Unconsolidated Affiliate.

	Three Months Ended March 31,
					Change in
	2013		2012		$			%
	(dollars in thousands)
Equity in net income of unconsolidated affiliate	$	—	$	25	$	(25	)		(100.0	)%

Equity in net income of unconsolidated affiliate represents our proportionate share of operating results from our non-controlling equity investment in Responsys Denmark prior to the date of acquisition.

Liquidity.

	Three Months Ended March 31,
	2013			2012
	(in thousands)
Net cash provided by operating activities	$	4,423		$	5,693
Net cash provided by (used in) investing activities		(4,702	)		946
Net cash provided by financing activities		32			748
Effect of foreign exchange rate changes on cash and cash equivalents		(146	)		146
Net increase (decrease) in cash and cash equivalents	$	(393	)	$	7,533

To date, we have financed our operations primarily through private placements of preferred stock and common stock, our initial public offering and cash from operating activities. As of March 31, 2013, we had $106.3 million of cash and cash equivalents and $120.1 million of working capital.

Net Cash Provided by Operating Activities.

Cash provided by operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business, the increase in the number of customers using our on-demand software and professional services and the amount and timing of customer payments. Cash provided by operations has historically resulted from net income driven by sales of subscriptions to our on-demand software and professional services adjusted for non-cash expense items such as depreciation and amortization of property and equipment, stock-based compensation and changes in our deferred tax assets.

For the three months ended March 31, 2013, net cash provided by operating activities was primarily the result of $1.5 million of net income, increased by non-cash items such as depreciation and amortization of $3.1 million, stock-based compensation of $2.6 million, and $1.3 million of deferred taxes. Combined changes in operating assets and liabilities decreased $4.2 million in cash. Sources of cash totaled $4.4 million and were primarily related to increases in accounts payable of $1.9 million and deferred revenue of $1.2 million. Uses of cash totaled $8.6 million and were primarily related to a $5.6 million increase in accounts receivable attributable to the growth in revenue and $1.1 million in prepaid expense related to our annual trade show.

Net Cash Provided by (Used in) Investing Activities.

For the three months ended March 31, 2013, cash used in investing activities consisted of $3.6 million for purchases of property and equipment and $1.1 million of internal use capitalized software related to internally developed software associated with our on-demand platform and internal-use software associated with our enterprise resource planning project. In general, our purchases of property and equipment are primarily for data center equipment and network infrastructure to support the operation of our on-demand software and computer equipment for our increasing employee headcount.

Net Cash Provided by Financing Activities.

For the three months ended March 31, 2013, cash provided by financing activities consisted of $0.3 million in proceeds from the issuance of our common stock in connection with stock option exercises. Cash used in financing activities consisted of $0.2 million in payments in connection with our capital lease obligations.

Capital Resources.

We believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts and expansion into new territories, and the timing of introductions of new features and enhancements to our on-demand software. To the extent that existing cash and cash equivalents and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. We may also seek to invest in, or acquire complementary businesses, applications or technologies, any of which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

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Commitments.

We generally do not enter into long-term minimum purchase commitments. Our principal commitments consist of obligations under capital leases for equipment and operating leases for our facilities, including facilities for our data center. During the three months ended March 31, 2013, we entered into new lease agreements for additional office in Chicago and San Francisco. The following summaries our commitments as of March 31, 2013:

			Payment Due by Period
			Less than		1-3		4-5		More than
	Total		1 Year		Years		Years		5 Years
Operating lease obligations	$	24,654	$	5,155	$	10,239	$	7,231	$	2,029
Capital lease obligations		922		922		—		—		—
Other		11,857		4,827		7,030		—		—
Total contractual obligations	$	37,433	$	10,904	$	17,269	$	7,231	$	2,029

From time to time, in the normal course of business, we indemnify third parties with whom we enter into contractual relationships, including customers, vendors, lessors, and parties to other transactions, with respect to certain matters. We have agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third-party claims that our on-demand software when used for its intended purpose infringes the intellectual property rights of such other third parties, or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to our limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, payments made under these obligations have not been material.

Off-Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk.

Our expenses are incurred primarily in the United States, Australia, the United Kingdom, Denmark and India. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. Certain of our cash, accounts receivable and payable balances are denominated in a currency other than the functional currency of the respective entity. Therefore, a portion of our operating results are subject to foreign currency risks. The effect of an immediate 10% adverse change in exchange rates as of March 31, 2013 would be a loss of approximately $0.5 million. As of March 31, 2013, we did not have outstanding hedging contracts, although we may enter into such contracts in the future. We intend to monitor our foreign currency exposure. Future exchange rate fluctuations may have a material negative impact on our business.

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Interest Rate Sensitivity.

Interest income and expense are sensitive to changes in the general level of U.S. interest rates. Our cash equivalents are invested primarily in money market funds, for which the interest rates vary with the current market rates. Therefore, there is minimal risk to the principal invested in these funds. Our short-term investments are in U.S. Treasury and Agency bonds. The interest rates on these instruments are fixed but current U.S. Treasury policy indicates that interest rates are not likely to rise in the near term. Therefore, we believe there is minimal risk to the principal invested in these instruments. A 10% increase in interest rates as of March 31, 2013 would not have a material impact on the fair value of our cash equivalents and short-term investments.

ITEM 4. CONTROLS AND PROCEDURES

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2013, our CEO and CFO have concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Controls Over Financial Reporting

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 8, “Commitments and Contingencies—Legal Proceedings” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

ITEM 1A. RISK FACTORS

Investing in our common stock involves a high degree of risk. We operate in a dynamic and rapidly changing industry that involves numerous risks and uncertainties. The risks and uncertainties described below are not the only ones we face. Other risks and uncertainties, including those that we do not currently consider material, may impair our business. If any of the risks discussed below actually occur, our business, financial condition, operating results and future prospects could be materially adversely affected. This could cause the trading price of our common stock to decline, and you could lose part or all of your investment.

We may not maintain profitability in the future.

Although we have been profitable for several years, we expect to make significant future investments to develop and expand our business which may reduce profitability and related gross margin compared to prior periods. As a result of these expenditures, we will have to generate and sustain increased revenue to maintain future profitability. While our revenue has grown in recent periods, this growth may not be sustainable, and we may not achieve sufficient revenue to maintain profitability. In future periods, our revenue could decline or grow more slowly than we expect. We may also incur significant losses in the future for any number of reasons, including risks described elsewhere in this report. Furthermore, we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that could negatively affect our operations. Accordingly, we may not be able to maintain profitability.

The market in which we participate is intensely competitive, and our results could be adversely affected by pricing pressure or other competitive dynamics.

The market for interactive marketing solutions is highly fragmented, competitive and rapidly changing. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our prices. We face intense competition from software companies that develop marketing technologies and from marketing services companies that provide interactive marketing services. Our primary competitors include: technology providers such as Aprimo, Inc., which was acquired by Teradata Corporation, BlueHornet, a subsidiary of Digital River, Inc., ExactTarget, Inc., Silverpop Systems Inc., and StrongMail Systems, Inc.; and marketing services providers such as Acxiom Digital, Epsilon Data Management LLC, Experian CheetahMail and Yesmail, a division of infoGROUP Inc.

We may also face competition from new companies entering our market, which may include large established businesses, such as Adobe Systems Incorporated, Google Inc., IBM, Microsoft Corporation, Oracle Corporation, salesforce.com, inc., SAP AG or Yahoo! Inc., each of which currently offers, or may in the future offer, email marketing or related applications such as applications for customer relationship management, analysis of internet data and marketing automation. If these companies decide to develop, market or resell competitive interactive marketing products or services, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed. We may also experience competition from the in-house information technology capabilities of current and prospective customers.

Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, be able to devote greater resources to the development, promotion, sale and support of their products and services, have more extensive customer bases and broader customer relationships than we have, and may have longer operating histories and greater name recognition than we have. As a result, these competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. In some cases, these vendors may also be able to offer interactive marketing applications at little or no additional cost by bundling them with their existing applications. If we are unable to compete with such companies, the demand for our on-demand software could substantially decline.

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We may experience quarterly fluctuations in our operating results due to factors that make our future results difficult to predict and could cause our operating results to fall below investor or analyst expectations, or our guidance.

Our quarterly operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as indicative of our future performance. If our revenue or operating results fall below the expectations of investors or securities analysts, or below any guidance we may provide to the market, the price of our common stock could decline substantially.

Our operating results have varied in the past. In addition to other risk factors listed in this section, factors that may affect our quarterly operating results include the following:

• demand for our on-demand software and related services and the size and timing of sales;

• the volume of email messages sent above contracted levels for a particular quarter and the amount of any associated additional charges;

• customer renewal rates, and the pricing and volume commitments of such renewals;

• customers delaying purchasing decisions in anticipation of new products or product enhancements by us or our competitors;

• market acceptance of our current and future products and services;

• changes in spending on interactive marketing or information technology and software by our current and/or prospective customers;

• budgeting cycles of our customers;

• changes in the competitive dynamics of our industry, including consolidation among competitors or customers and pricing pressure;

• our lengthy sales cycle;

• lengthy or delayed implementation times for new customers or customers that upgrade to the current version of our on-demand software;

• the timing of recognizing revenue in any given quarter as a result of revenue recognition rules;

• the amount of services sold and the amount of fixed fee services, which can affect gross margin;

• our ability to control costs, including our operating expenses;

• the amount and timing of operating expenses, particularly sales and marketing, related to the maintenance and expansion of our business, operations and infrastructure;

• network outages or security breaches and any associated expenses;

• foreign currency exchange rate fluctuations;

• write-downs, impairment charges or unforeseen liabilities related to acquisitions;

• failure to successfully manage any acquisitions; and

• general economic and political conditions in our domestic and international markets.

Based upon all of the factors described above, we have a limited ability to forecast the amount and mix of future revenue and expenses, and as a result, our operating results may from time to time fall below our estimates or the expectations of public market analysts and investors.

Our quarterly results reflect seasonality in revenue from our on-demand software and professional services, which can make it difficult for us to achieve sequential revenue growth or could result in sequential revenue declines.

We have generally experienced higher levels of revenue and gross profit during the fourth quarter, primarily due to our customers’ increased marketing activity during the holiday shopping season, as compared to the preceding and subsequent quarters. Since the majority of our expenses are personnel-related and includes salaries, stock-based compensation, benefits and incentive-based compensation plan expenses, we have not experienced significant seasonal fluctuations in the timing of our expenses from period to period, except for the period in which our annual Interact user conference occurs. Although these seasonal factors can be common in the marketing sector, historical patterns should not be considered indicative of our future revenue activity or performance.

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

We recognize subscription revenue over the term of our customer agreements, which typically range from one to three years. As a result, most of our quarterly subscription revenue results from agreements entered into during previous quarters. Consequently, a shortfall in demand for our on-demand software and related services in any quarter may not significantly reduce our subscription revenue for that quarter, but could negatively affect subscription revenue in future quarters. We may be unable to adjust our cost structure to compensate for this potential shortfall in subscription revenue. Accordingly, the effect of significant downturns in sales of subscriptions to our on-demand software and related services 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 subscription revenue through additional sales in any period, as subscription revenue from new customers must be recognized over the applicable subscription terms.

If we are unable to attract new customers or sell additional functionality and services to our existing customers, our revenue growth will be adversely affected.

To increase our revenue, we must add new customers, sell additional functionality to existing customers and encourage existing customers to renew their subscriptions on favorable terms. As the interactive marketing industry matures, as interactive channels develop further, or as competitors introduce lower cost and/or differentiated products or services that are perceived to compete with ours, our ability to compete with respect to pricing, technology and functionality could be impaired. In such event, we may be unable to renew our agreements with existing customers or attract new customers or new business from existing customers on terms that would be favorable or comparable to prior periods, which could have a material adverse effect on our revenue, gross margin and other operating results.

Our future growth could be constrained if mobile, social, the web and display do not become significant relationship marketing channels or if existing customers do not want to migrate to the latest version of our on-demand software.

The growth of our business depends in part on the acceptance and growth of mobile, social, the web and display as relationship marketing channels. While email has been widely used for relationship marketing, relationship marketing via mobile, social, the web and display is just emerging. We released our mobile and social offerings on our newer on-demand software platform in April 2010 and we released our display offering in October 2011. Even if mobile, social, the web and display become widely adopted relationship marketing channels, we cannot assure you that our mobile and social offerings will gain traction with current or new customers. A substantial minority of our current customers are on the older version of our on-demand software and would be required to migrate to the latest version of our on-demand software in order to execute fully integrated campaigns across mobile, social, the web and display channels. These customers may not want to spend the time and resources necessary to complete this migration.

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

It is uncertain whether businesses will make significant investments in interactive marketing software, and if they do, whether they will purchase subscriptions to on-demand, or SaaS, software for this function. The market for on-demand software, in general, and for interactive marketing software, in particular, is relatively new, and it is uncertain whether such software will achieve and sustain high levels of demand and market acceptance. Our success will largely depend on whether enterprises will be willing to increase their use of on-demand software in general, and for interactive marketing in particular. Many enterprises have invested substantial personnel and financial resources to integrate traditional on-premise enterprise software into their businesses and therefore may be reluctant or unwilling to migrate to on-demand software. Furthermore, some enterprises may be reluctant or unwilling to use on-demand software because they have concerns regarding the security and other risks associated with the SaaS technology delivery model. If enterprises do not perceive the overall benefits of on-demand software, then the market may develop more slowly than we expect, either of which would significantly and adversely affect our operating results. Accordingly, we cannot assure you that an on-demand model for interactive marketing software will achieve and sustain the high level of market acceptance that is critical for the success of our business

Our growth depends largely on our ability to sell our on-demand software and related services to new enterprise customers, which makes our sales cycle unpredictable, time-consuming and expensive.

The enterprise customers we target typically undertake a significant evaluation process before purchasing enterprise software, which can last from several months to a year or longer. Events may occur during the sales cycle that could affect the size or timing of a purchase, and this may lead to more unpredictability in our business and operating results. We may spend substantial time, effort and money on our sales efforts without any assurance that our efforts will produce any revenue.

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In addition, we may face unexpected implementation challenges with some enterprise customers. It may be difficult or expensive to implement our on-demand software if the customer has unexpected data, hardware or software technology issues, or complex or unanticipated business requirements. Any difficulties or delays in the initial implementation could cause customers to reject our on-demand software or delay or cancel future purchases, in which case our business, operating results and financial condition would be harmed.

We derive a significant percentage of our total revenue from the retail and consumer, travel, financial services and technology industries, and any downturn in these industries could harm our business.

A significant number of our customers are concentrated in the retail and consumer, travel, financial services and technology industries. In particular, we derived approximately half of our revenue from customers in the retail and consumer industry for the quarter ended March 31, 2013. A substantial downturn in these industries may cause our customers to reduce their spending on information technology or interactive marketing. Customers in these industries may delay or cancel information technology or interactive marketing projects, seek to lower their costs by renegotiating vendor contracts, or decrease their usage of our services. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our services.

A limited number of customers account for a significant portion of our revenue, and the loss of a major customer or group of customers could harm our operating results.

Our 20 largest customers accounted for approximately 34% of our total revenue for the three months ended March 31, 2013 and 2012. We cannot be certain that customers that have accounted for significant revenue in past periods, individually or as a group, will renew, will not cancel or will not reduce their usage of our services and, therefore, will continue to generate revenue in any future period. If we lose a major customer or group of customers, or if major customers reduce their commitment levels when they renew, our revenue could decline.

Prolonged economic uncertainties or downturns could materially harm our business.

General worldwide economic conditions are volatile and have experienced significant instability. These conditions make it difficult for our customers and us to accurately forecast and plan future business activities. Uncertainties experienced by our customers could cause them to slow or discontinue spending on our on-demand software and professional services, and could also delay and lengthen sales cycles with prospective customers. Furthermore, challenging economic times may affect our customers’ ability to gain timely access to sufficient credit, which could impair their ability to pay us in a timely manner. If that occurred, we may cease recognizing revenue from certain customers and/or increase our allowance for doubtful accounts, and our financial results would be harmed.

We cannot predict the timing, strength or duration of any economic slowdown or recovery. If the condition of the general economy or markets in which we operate worsens from present levels, our business could be harmed. In addition, even if the overall economy improves, we cannot assure you that the market for interactive marketing software and professional services will experience growth or that we will experience growth.

We have been dependent on the use of email as a means for interactive marketing, and any decrease in the use of email for this purpose would harm our business.

Historically, our customers have used our on-demand software primarily for their email-based interactive marketing campaigns targeted at consumers who have given our customers permission to send them emails. We expect email will continue to be the primary channel used by our customers for the foreseeable future. Government regulations and evolving practices regarding the use of email for marketing purposes could adversely affect the use of this channel for interactive marketing. Consumers’ use of email also depends on the ability of internet service providers, or ISPs, to prevent unsolicited bulk email, or “spam,” from overwhelming consumers’ inboxes. ISPs continually develop new technologies to filter messages deemed to be unwanted before they reach users’ inboxes, which may interfere with our customers’ marketing campaigns. If security problems become widespread, or if ISPs cannot effectively control spam, the use of email as a means of marketing communications may decline. Any decrease in the use of email would reduce demand for our email marketing services and harm our business.

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If our security measures are breached, our on-demand software may be perceived as not being secure. As a result, customers may curtail or stop using our on-demand software, and we may incur significant liabilities.

Security breaches could expose us to a risk of loss or unauthorized disclosure of customer information, litigation, indemnity obligations and other liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to our system or customer information, our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose potential sales and existing customers.

Failure to effectively expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our on-demand software.

Increasing our customer base and achieving broader market acceptance of our on-demand software will depend to a significant extent on our ability to expand our sales and marketing operations and activities. We expect to be substantially dependent on our direct sales force to obtain new customers in the future. Our plan is to continue expanding our direct sales force both domestically and internationally. We believe there is significant competition for direct sales personnel with the sales skills and technical knowledge that we require. Our ability to achieve significant revenue growth in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of direct sales personnel. Newly hired sales personnel require significant training and experience before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we would like, and we may not be able to hire or retain sufficient numbers of qualified individuals in the markets where we do business. Our business will be seriously harmed if these expansion efforts do not generate a corresponding significant increase in revenue.

We use third parties to help grow our business. If we are unable to maintain successful relationships with them, our business could be harmed.

In addition to our direct sales force, we use third parties such as marketing agencies to help promote our on-demand software. Although we do not currently derive a significant amount of revenue through third parties, we may seek to expand sales of subscriptions to our on-demand software through these and other indirect sales channels in the future.

We expect that these third parties will not have an exclusive relationship with us. These third parties may offer customers interactive marketing solutions from several different companies, including solutions that compete with ours. As a result, we cannot be certain they will prioritize or provide adequate resources for selling our solution. In addition, establishing and retaining qualified third parties, as well as training them in our on-demand software and services, require significant time and resources. If we are unable to maintain successful relationships with any of these third parties, our business could be harmed.

We rely on third-party hardware, software and infrastructure that could cause errors or failures that could disrupt or halt our service, and may be difficult to replace.

We rely on hardware, software and infrastructure that are purchased, leased or licensed from third parties in order to offer our on-demand software and related services. For example, we rely on third-party providers to support and provide our mobile and display messaging offerings. This hardware, software and infrastructure may not be available on commercially reasonable terms in the future, or at all. If we lose the right to use any of this hardware, software or infrastructure, it could result in delays in the provisioning of affected components of our on-demand software until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. Furthermore, any errors or defects in third-party hardware, software or infrastructure could result in errors or a failure of our service, which could harm our business.

If we are unable to integrate our on-demand software with certain third-party applications, the functionality of our software could be adversely affected.

The functionality of our on-demand software depends, in part, on our ability to integrate it with third-party applications and data management systems that our customers use to obtain consumer data. In addition, we rely on access to third-party application programming interfaces, or APIs, to provide our social media channel offerings through social media platforms, which currently consist of Facebook and Twitter. Third-party providers of marketing applications and APIs may change the features of their applications and platforms, restrict our access to their applications and platforms or alter the terms governing use of their applications and APIs. Such changes could functionally or financially limit or terminate our ability to use these third-party applications and platforms with our on-demand software, which could negatively impact our offerings and harm our business. Further, if we fail to integrate our software with new third-party applications and platforms that our customers use for marketing purposes, or to adapt to the data transfer requirements of such third-party applications and platforms, we may not be able to offer the functionality that our customers need, which would negatively impact our offerings and, as a result, harm our business.

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Interruptions or delays in service from third-party data center hosting facilities and other third parties could impair the delivery of our service and harm our business.

We currently serve our customers from third-party data center hosting facilities located in Northern California. We also rely on bandwidth providers, ISPs and mobile networks to deliver messages to the customers of our customers. Any damage to, or failure of, our hardware and software or, the systems of our third-party providers could result in interruptions to our service. If for any reason our arrangement with one or more of our data centers is terminated we could experience additional expense in arranging for new facilities and support. In addition, any failure at our data centers could result in interruptions in the availability of our on-demand software, impair the functionality of our on-demand software or impede our ability to deliver our services. The inability of our data centers to meet our capacity needs could also affect the ability for us to scale our operations. As we continue to add data centers, restructure our data management plans, and increase capacity in existing and future data centers, we may move or transfer our data and our customers’ data. Despite precautions taken during such processes and procedures, any unsuccessful data transfers may impair the delivery of our service, and we may experience costs or downtime in connection with the transfer of data to other facilities. Interruptions in the availability of, or impaired functionality of, our on-demand software may reduce our revenue, cause us to issue credits, make refunds or pay penalties, harm our reputation, cause customers to terminate their subscriptions, and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.

Despite precautions taken at our data centers and redundancy in our infrastructure, the occurrence of a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close the facilities without adequate notice, or other unanticipated outages or problems at these facilities could result in lengthy interruptions in the availability of our on-demand software. Even with current and planned disaster recovery arrangements, our business could be harmed. For example, during the fourth quarter of 2012, we experienced hardware failures which resulted in an interruption of service, or outage, and our customers were not able to access our on-demand software platform or send marketing messages to their customers for a period of time. As a result of this outage, our revenues were negatively impacted by approximately $2 million in the fourth quarter of 2012.

As a result of our customers’ increased usage of our on-demand software, we will need to continually improve our computer network and infrastructure to avoid service interruptions or degraded system performance.

As usage of our on-demand software grows and as customers use it for more complicated tasks, we will need to devote additional resources to improving our computer network, our application architecture and our infrastructure in order to maintain the performance of our on-demand software. In addition, we typically experience increased system usage during the fourth quarter, with customers increasing their marketing activity for the holiday shopping season. Any failure or delays in our computer systems could cause service interruptions or slower system performance. If sustained or repeated, these performance issues could reduce the attractiveness of our on-demand software to customers. This could result in lost customer opportunities and lower renewal rates, any of which could hurt our revenue growth, customer loyalty and our reputation. We may need to incur additional costs to upgrade or expand our computer systems and architecture in order to accommodate increased demand if our systems cannot handle current or higher volumes of usage.

Material defects or errors in our on-demand software could harm our reputation, result in significant costs to us and impair our ability to sell our on-demand software.

The software applications underlying our on-demand software are inherently complex and may contain material defects or errors, which may cause disruptions in availability or other performance problems. Any such errors, defects, disruptions in service or other performance problems with our on-demand software, whether in connection with the day-to-day operation, upgrades or otherwise, could damage our customers’ businesses and harm our reputation. If we have any errors, defects, disruptions in service or other performance problems with our on-demand software, customers could elect to allow their contract to lapse, delay or withhold payment to us, or make warranty claims against us, which could result in an increase in our provision for doubtful accounts, an increase in the length of collection cycles for accounts receivable or costly litigation. These errors, defects or disruptions of service could also cause us to lose future sales opportunities with prospective customers

The costs incurred to correct any material defects or errors in our on-demand software may be substantial and could adversely affect our operating results. After the regular releases of our on-demand software, our internal team and our customers may identify defects or errors from time to time. We implement bug fixes and upgrades as part of our regularly scheduled system maintenance. If we do not complete this maintenance according to schedule or if customers are otherwise dissatisfied with the frequency and/or duration of our maintenance services and related system outages, customers could elect to allow their contracts to lapse, delay or withhold payment to us, or cause us to issue credits, make refunds or pay penalties.

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Existing federal, state and foreign laws regulating email and text messaging marketing practices impose certain obligations on the senders of commercial emails and text messages, which could minimize the effectiveness of our on-demand software or increase our operating expenses to the extent financial penalties are triggered.

The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the CAN-SPAM Act, establishes certain requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future emails from the sender. In addition, each of the 50 U.S. states has its own set of anti-spam statutes. Although the CAN-SPAM Act preempts most state restrictions specific to email marketing, it does provide for certain exceptions with respect to state statutory rules that: prohibit material falsity or deception in commercial email messages or headers; forbid unfair competition achieved by unfair or deceptive acts or practices; or proscribe various computer crimes. The full scope of these pre-emption exceptions is not yet settled. Some states—including Utah and Michigan—have instituted do-not-email registries focusing on protection children. Various states’ statutes could impose liabilities and compliance burdens in addition to those imposed by the federal CAN-SPAM Act.

Moreover, some foreign jurisdictions, such as Australia, Canada and the European Union, or EU, have also enacted anti-spam laws, some of which are more restrictive than their U.S. counterparts. The EU Privacy and Electronic Communications Directive requires member states to prohibit the sending of unsolicited commercial communications by e-mail, fax or other electronic messaging systems—such as SMS and MMS—unless the prior consent of the addressee has been obtained (opt-in system).

Similar to the EU, with respect to text message campaigns, regulations implemented by the U.S. Federal Communications Commission, or FCC, pursuant to the CAN-SPAM Act and the Telephone Consumer Protection Act, or TCPA, prohibit companies from sending specified types of commercial text messages unless the recipient has given his or her prior express consent. As to CAN-SPAM itself, its definition of “email” is vague and is still being interpreted by the courts.

Additionally, our customers collect and use personal information about consumers to conduct their marketing campaigns, which subjects them to federal, state and foreign privacy laws that regulate the use, collection and disclosure of consumers’ personal information. In the EU member states and certain other countries outside the United States, individuals’ right to privacy is more highly regulated and rigidly enforced. Non-compliance with these laws and regulations can carry significant financial penalties for U.S. companies. In the EU, those penalties may be greatly increased by amendments currently being considered to the EU Data Protection Directive.

Our terms and conditions require that our customers comply with all applicable laws, including, among others, the CAN-SPAM Act and the TCPA, in the use of our on-demand software and hold them liable for any violations of such laws. If we become aware that a customer has violated a law applicable to its marketing activities while using our on-demand software and/or breached our terms and conditions, we can suspend or terminate its use of our on-demand software and professional services. We believe that our customers’ use of our on-demand software will comply with existing laws. If the legality of a customer’s usage is challenged, it is possible that the challenger could attempt to also hold us liable. We may not be able to demonstrate adequate compliance with existing or future laws or regulations.

If we were to be found in violation of federal law, applicable state laws not pre-empted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email or text messages, whether as a result of violations by our customers or any determination that we are directly subject to and in violation of the above requirements, we could be required to pay penalties, which would adversely affect our financial performance and significantly harm our reputation and our business.

In addition, federal, state or foreign governments may in the future enact legislation or laws restricting the ability to conduct interactive marketing activities in mobile, social, the web and display channels. Any such restrictions could require us to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers or increase our operating costs or otherwise harm our business.

The standards that private entities use to regulate the use of email have in the past interfered with, and may in the future interfere with, the effectiveness of our on-demand software and our ability to conduct business.

Our customers rely on email to communicate with their customers. Various private entities attempt to regulate the use of email for commercial solicitation. These entities often advocate standards of conduct or practice that significantly exceed current legal requirements and classify certain email solicitations that comply with current legal requirements as spam. Some of these entities maintain “blacklists” of companies and individuals, and the websites, ISPs and internet protocol, or IP, addresses associated with those entities or individuals that do not adhere to those standards of conduct or practices for commercial email solicitations that the blacklisting entity believes are appropriate. If a company’s IP addresses are listed by a blacklisting entity, emails sent from those addresses may be blocked if they are sent to any internet domain or internet address that subscribes to the blacklisting entity’s service or purchases its blacklist.

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From time to time, some of our IP addresses may become listed with one or more blacklisting entities due to the messaging practices of our customers. There can be no guarantee that we will be able to successfully remove ourselves from those lists. Blacklisting of this type could interfere with our ability to market our on-demand software and services and communicate with our customers and, because we fulfill email delivery on behalf of our customers, could undermine the effectiveness of our customers’ email marketing campaigns, all of which could have a material negative impact on our business and results of operations.

Evolving regulations concerning data privacy may restrict our customers’ ability to solicit, collect, process, disclose and use data necessary to conduct effective marketing campaigns and analyze the results or may increase their costs, which could harm our business.

Federal, state and foreign governments have enacted, and may in the future enact, laws and regulations concerning the solicitation, collection, processing, disclosure or use of consumers’ personal information. Such laws and regulations may require companies to implement privacy and security policies, permit users to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personal information for certain purposes. Other proposed legislation could, if enacted, impose additional requirements and prohibit the use of certain technologies that track individuals’ activities on web pages or that record when individuals click through to an internet address contained in an email message. Such laws and regulations could restrict our customers’ ability to collect and use email addresses, page viewing data, and personal information, which may reduce demand for our solution. For example, the European Commission has proposed a comprehensive reform of the European Union’s existing data protection rules to strengthen online privacy rights. The rules that are finally adopted could require changes to our customers’ marketing practices that could reduce demand for our services in the European Union.

Our applications collect, store and report personal information, which raises privacy concerns and could result in liability to us or inhibit sales of subscriptions to our on-demand software.

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. Because many of the features of our applications use, store and report on personal information from our customers, any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy laws, regulations and policies, could result in liability to us, damage our reputation, inhibit sales and harm our business. Furthermore, the costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of our on-demand software and reduce overall demand for it. Privacy concerns, whether or not valid, may inhibit market adoption of our on-demand software.

If our on-demand software is perceived to cause or is otherwise unfavorably associated with invasions of privacy, whether or not illegal, it may subject us or our customers to public criticism. Existing and potential future privacy laws and increasing sensitivity of consumers to unauthorized disclosures and use of personal information may create negative public reactions related to interactive marketing, including marketing practices of our customers. Public concerns regarding data collection, privacy and security may cause some of our customers’ customers to be less likely to visit their websites or otherwise interact with them. If enough consumers choose not to visit our customers’ websites or otherwise interact with them, our customers could stop using our on-demand software. This, in turn, would reduce the value of our service and inhibit or reverse the growth of our business.

Any decrease in opt-in rates or usage habits could reduce the demand for our on-demand software.

It is our policy that our customers may only use our on-demand software to provide marketing content to recipients that have elected to receive marketing communications from them through specified interactive channels such as email, mobile and social. If recipients decrease their overall opt-in rates for these marketing communications or reduce the extent to which they use, or otherwise cease use of, the channels over which these marketing communications are sent, our customers will have a smaller or less addressable group of potential customers to target and they may decide it is not cost effective for them to continue to use our on-demand software. Accordingly, if opt-in rates decline for any reason, including privacy concerns, negative publicity or changes in laws or regulations, or consumer usage of certain interactive marketing channels declines, demand for our on-demand software could decline and our business could be harmed.

Our customers’ violation of our policies and misuse of our on-demand software to transmit negative messages or website links to harmful applications or engage in illegal activity could damage our reputation, and we may face liability for unauthorized, inaccurate or fraudulent information distributed via, or illegal activity conducted using, our on-demand software.

We rely on representations made to us by our customers that their use of our on-demand software will comply with our policies and applicable law. We do not audit our customers to confirm compliance with these representations. Our customers could use our on-demand software to engage in bad acts including transmitting negative messages or website links to harmful applications, sending unsolicited commercial email and reproducing and distributing copyrighted material without permission, reporting inaccurate or fraudulent data or engaging in illegal activity. Any such use of our on-demand software could damage our reputation and we could face claims for damages, copyright or trademark infringement, defamation, negligence or fraud. Moreover, our customers’ promotion of their products and services through our on-demand software may not comply with federal, state and foreign laws. We cannot predict whether our role in facilitating these activities would expose us to liability under these laws or subject us to other regulatory action.

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Even if claims asserted against us do not result in liability, we may incur substantial costs in investigating and defending such claims. If we are found liable for our customers’ activities, we could be required to pay fines or penalties, redesign our on-demand software or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability.

As internet commerce evolves, federal, state and foreign governments may propose and implement new taxes and new laws to regulate internet commerce, which may negatively affect our business.

As internet commerce continues to evolve, increasing regulation by federal, state or foreign governments becomes more likely. Our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws applicable to interactive marketing. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to our customers in the form of increased subscription fees. In addition, federal, state and foreign governmental or regulatory agencies may decide to impose new or additional taxes on services provided over the internet or via email. Such taxes could discourage the use of the internet and email as a means of commercial marketing, which would adversely affect the viability of our on-demand software.

Our operating results may be harmed if we are required to collect sales and use taxes for our subscription services in jurisdictions where we have not historically done so or if our accruals for sales and use taxes are insufficient.

State and local tax jurisdictions have differing rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales, consumption and use taxes to our subscription services in various jurisdictions is unclear. We have recorded sales and use tax liabilities of $0.5 million as of March 31, 2013. It is possible that sales, consumption and use tax audits of our processes and accruals could result in tax liabilities in excess of our estimates. We could also be subject to audits by states and international jurisdictions where we have not accrued tax liabilities. A successful assertion that we should be collecting additional sales, use or other taxes for on our services in jurisdictions where we have not historically done so could result in substantial tax liabilities, on prior and/or future sales, as well as penalties and interest, which could discourage customers from purchasing our application or otherwise harm our business and operating results. Although our agreements indicate that customers are responsible for sales and use tax, attempts to collect old balances are often problematic, particularly with former customers.

We have limited experience with non-volume based pricing models, which we use for some of our newer offerings. If we incorrectly structure these pricing models or are unable to price our offerings in a manner acceptable to our customers, our revenue and operating results may be harmed.

We currently utilize volume-based pricing models for our email, mobile and display messaging offerings. We have limited experience with non-volume based pricing models for some of our newer offerings such as our social offering. If our customers, which have historically used our offerings primarily for their email-based interactive marketing campaigns, do not accept the other pricing models we use for certain newer offerings and may utilize for future offerings, our ability to sell additional functionality on a cost-effective and competitive basis may be hindered, and our revenue and operating results may be adversely affected.

If we fail to develop or protect our brand cost-effectively, our business may be harmed.

We believe that developing and maintaining awareness and the integrity of our brand in a cost-effective manner are important to achieving widespread acceptance of our existing and future offerings and are important elements in attracting new customers. We believe that the importance of brand recognition will increase as competition in our market further intensifies. Successful promotion of our brand will depend on the effectiveness of our marketing efforts and on our ability to provide reliable and useful products and services at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, the increased revenue may not offset the expenses we incur in building our brand. If we fail to promote and maintain our brand successfully or maintain loyalty among our customers, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract new customers or retain our existing customers, and our business may be harmed. We have registered certain of our trademarks worldwide. However, competitors may adopt similar trademarks to ours or purchase keywords that are confusingly similar to our brand names as terms in internet search engine advertising programs, which could impede our ability to build our brand identity and lead to confusion among potential customers of our services.

If we fail to respond to evolving technological changes, our on-demand software could become obsolete or less competitive.

Our industry is characterized by new and rapidly evolving technologies, standards, regulations, customer requirements and frequent product introductions. Accordingly, our future success depends upon, among other things, our ability to develop and introduce new products and services. The process of developing new technologies, products and services is complex, and if we are unable to develop enhancements to, and new features for, our existing on-demand software or acceptable new functionality that keeps pace with technological developments, industry standards, interactive marketing trends or customer requirements, our solution may become obsolete, less marketable and less competitive, and our business could be significantly harmed.

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We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, our financial performance may suffer.

We have expanded our overall business, customer base, employee headcount and operations in recent periods. We increased our total number of regular full-time employees from 308 as of December 31, 2009 to 894 as of March 31, 2013. In January 2011 and July 2012, we completed the acquisition of Eservices in Australia and Responsys Denmark, respectively, which allowed us to add more customers and significantly expanded our operations in the Asia Pacific and Nordic regions. We also have an equity investment in an entity with operations in Brazil. Our expansion has placed, and our expected future growth will continue to place, a significant strain on our managerial, customer operations, research and development, sales and marketing, administrative, financial and other resources. If we are unable to manage our growth successfully, our operating results could suffer.

We rely on our management team and other key employees, and need additional personnel, to grow our business, and the loss of one or more key employees, or our inability to attract and retain qualified personnel, could harm our business.

Our success and future growth depend on the skills, working relationships and continued services of our management team and other key personnel. The loss of any member of our senior management team, including our Chief Executive Officer, could adversely affect our business.

Our future success will also depend on our ability to attract, retain and motivate highly skilled research and development, operations, sales, technical and other personnel in the United States and abroad. Competition for these types of personnel is intense. All of our employees in the United States work for us on an at-will basis. As a result of these factors, we may be unable to attract or retain qualified personnel. Our inability to attract and retain the necessary personnel could adversely affect our business.

We are currently expanding and improving our information technology infrastructure and systems. If these implementations are not successful, our operations could be disrupted, which could cause our operating results to suffer.

We are currently expanding and improving our information technology infrastructure and systems to assist us in the management of our growing operations and accommodate our employee, customer and business growth. We anticipate that these improvements will be a long-term investment and that the process will require management time, support and cost. Moreover, there are inherent risks associated with upgrading, improving and expanding information technology systems. We cannot be sure that the improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all. If we do not successfully implement upgrades and other changes on a timely basis or at all, our operations may be disrupted and our quality of service could decline. As a result, our operations and operating results could suffer. In addition, any new system deployments may not operate as we expect, and we may be required to expend significant resources to correct problems or find alternative sources for performing these functions.

Our inability to acquire and integrate other businesses, products or technologies could seriously harm our competitive position.

In order to remain competitive, obtain key competencies or accelerate our time to market, we may seek to acquire additional businesses, products or technologies. To date, we have completed several acquisitions ranging from smaller professional services companies to our largest acquisition, Eservices, in January 2011. We have limited experience in successfully acquiring and integrating businesses, products and technologies. If we identify an appropriate acquisition candidate, we may not be successful in negotiating the terms of the acquisition, financing the acquisition, or effectively integrating the acquired business, product or technology into our existing business and operations. Our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices, or employee or customer issues. In addition, any acquisitions we are able to complete may not achieve the synergies or other benefits we expected to achieve and we may incur write-downs, impairment charges or unforeseen liabilities which could negatively affect our operating results or financial position or could otherwise harm our business. If we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which could affect the market price of our stock. Further, contemplating or completing an acquisition and integrating an acquired business, product or technology will significantly divert management and employee time and resources.

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If we are unable to protect the confidentiality of our proprietary information, the value of our on-demand software could be adversely affected.

We rely largely on our unpatented technology and trade secrets to protect our proprietary information. We generally seek to protect this information by confidentiality, non-disclosure and assignment of invention agreements with our employees, contractors and parties with which we do business. These agreements may be breached and we may not have adequate remedies for any such breach. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse engineering of our technology. Moreover, our trade secrets may be disclosed to or otherwise become known or be independently developed by competitors. To the extent that our employees, contractors, or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it would harm our ability to protect our rights and have a material adverse effect on our business.

Our business may suffer if it is alleged or determined that our technology infringes the intellectual property rights of others.

Our industry is characterized by the existence of a large number of patents and by litigation based on allegations of infringement or other violations of intellectual property rights. Moreover, in recent years, patents and other intellectual property assets have been purchased for the purpose of making infringement claims on companies like ours in order to extract settlements. From time to time, third parties have claimed and may continue to claim that we are infringing upon their patents or other intellectual property rights. For example, we were recently named in a complaint alleging patent infringement. In addition, we may be contractually obligated to indemnify our customers in the event of infringement of a third party’s intellectual property rights. Responding to such claims, regardless of their merit, can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand, and cause us to incur significant expenses. Even if we are indemnified against such costs, the indemnifying party may be unable to uphold its contractual obligations. Further, claims of intellectual property infringement might require us to redesign our application, delay releases, enter into costly settlements or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling our on-demand software. If we cannot or do not license the infringed technology on reasonable terms or at all, or substitute similar technology from another source, our revenue and operating results could be adversely impacted. Additionally, our customers may not purchase our on-demand software if they are concerned that they may infringe third-party intellectual property rights. The occurrence of any of these events may have a material adverse effect on our business.

The success of our business depends on our ability to protect and enforce our intellectual property rights. We rely on a combination of trademark, trade dress, copyright, unfair competition and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights. These laws, procedures and restrictions provide only limited protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology adequately against unauthorized third party copying, infringement or use, which could adversely affect our competitive position.

In order to protect or enforce our intellectual property rights, we may initiate litigation against third parties. Litigation may be necessary to protect our trade secrets or know-how, or determine the enforceability, scope and validity of the proprietary rights of others. Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may have a material adverse effect on our business.

We use open source software in our on-demand software, which may subject us to litigation, require us to re-engineer our applications or otherwise divert resources away from our development efforts.

We use open source software in connection with our on-demand software. From time to time, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software and/or compliance with open source license terms. Therefore, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose the source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur and we may be required to release our proprietary source code, pay damages for breach of contract, re-engineer our applications, discontinue sales in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business.

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We face risks associated with our international operations, including unfavorable regulatory, political, tax and labor conditions, which could limit our growth.

Our ability to grow our business and our future success will depend to a significant extent on our ability to expand our operations and customer base worldwide. We completed our acquisition of Eservices and Responsys Denmark, located in Australia and Denmark, respectively, and commenced software development activities via a subsidiary in India. Operating in foreign countries requires significant resources and management attention, and we have limited experience entering new geographic markets. We cannot assure you that our international efforts will be successful. International sales and operations may be subject to risks such as:

• difficulties in staffing and managing foreign operations;

• burdens of complying with a wide variety of laws and regulations;

• adverse tax burdens and foreign exchange controls making it difficult to repatriate earnings and cash;

• political instability;

• terrorist activities;

• currency exchange rate fluctuations;

• generally longer receivable collection periods than in the United States;

• trade restrictions;

• differing employment practices and laws and labor disruptions;

• preference for local vendors;

• technology incompatibility;

• the imposition of government controls;

• lesser degrees of intellectual property protection;

• a legal system subject to undue influence or corruption; and

• a business culture in which improper sales practices may be prevalent.

We cannot assure you that these factors will not have a material adverse effect on our future international sales and, consequently, on our business.

Catastrophic events could disrupt and cause harm to our business.

We are located in California, an area susceptible to earthquakes. A major earthquake or other natural disaster, fire, act of terrorism or other catastrophic event that results in the destruction or disruption of any of our critical business operations or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be harmed.

Our business is subject to changing regulations regarding corporate governance, disclosure controls, internal control over financial reporting and other compliance areas that will increase both our costs and the risk of noncompliance.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and the rules and regulations of The NASDAQ Stock Market. The requirements of these rules and regulations have increased our legal, accounting and financial compliance costs, made some activities more difficult, time-consuming and costly and placed strain on our personnel, systems and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We must also perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 of the Sarbanes-Oxley Act requires that we incur substantial accounting expense and expend significant management efforts.

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which would require additional financial and management resources.

Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting. Ineffective disclosure controls and procedures or internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.

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Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. If we are not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, if our internal controls are perceived as inadequate or if we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.

A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or current practices may adversely affect our reported financial results or the way we conduct our business. For example, in conjunction with our initial public offering we adopted and retroactively applied a new revenue recognition standard, which may be subject to varying interpretations in the future that could materially impact how we recognize revenue. Accounting for revenue from sales of subscriptions to software is particularly complex, is often the subject of intense scrutiny by the SEC, and will evolve as the Financial Accounting Standards Board, or FASB, continues to consider applicable accounting standards in this area.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may choose to engage in equity or debt financings or enter into credit facilities. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all. Any debt financing obtained 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 pursue business opportunities, including potential acquisitions. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are not able to obtain adequate and necessary financing on satisfactory terms, our ability to grow or support our business, or to respond to business challenges could be significantly limited.

U.S. and global political, credit and financial market conditions may negatively impact or impair the value of and our access to our current portfolio of cash, cash equivalents and investments, including U.S. Treasury securities and U.S.-backed investment vehicles.

Our cash, cash equivalents and investments are held in a variety of interest-bearing instruments, including U.S. Treasury and Agency securities. As a result of the uncertain domestic and global political, credit and financial market conditions, investments in these types of financial instruments pose risks arising from liquidity and credit concerns. Given that future deterioration in the U.S. and global credit and financial markets is a possibility, no assurance can be made that losses or significant deterioration in the fair value of our cash, cash equivalents, or investments will not occur, which could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Further, we maintain our cash and cash equivalents with a number of financial institutions around the world. In the event that any of these institutions experiences financial difficulty, we could find it more difficult to quickly access these funds, which could reduce our ability to financially support our business and operations.

Changes in tax laws or regulations that are applied adversely to us or our customers could increase the costs of our on-demand software and professional services and adversely impact our business.

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted, modified or changed at any time. Those enactments, modifications or changes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. These events could require us or our customers to pay additional taxes on a prospective or retroactive basis, as well as require us or our customers to pay fines and/or penalties and interest for past amounts due. If we raise our prices to offset the costs of these changes, existing and potential future customers may elect not to continue or purchase our on-demand software and professional services. Additionally, new, changed, modified or newly interpreted or applied tax laws could increase our customers’ and our compliance, operating and other costs, as well as the costs of our on-demand software and professional services. Further, these events could decrease the capital we have available to operate our business. Any or all of these events could adversely impact our business and financial performance.

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Our common stock price may be volatile or may decline regardless of our operating performance.

The trading prices of the securities of technology companies have been highly volatile. The market price of our common stock has fluctuated significantly in the past and may continue to do so in the future in response to numerous factors, many of which are beyond our control, including:

• actual or anticipated fluctuations in our revenue and other operating results;

• the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

• failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

• announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

• announcements by us of negative conclusions about our internal controls and our ability to accurately report our financial results;

• changes in operating performance and stock market valuations of software or other technology companies, or those in our industry in particular;

• price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

• lawsuits threatened or filed against us; and

• other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.

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

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

Our directors, executive officers and principal stockholders have substantial influence over us and could delay or prevent a change in corporate control.

Our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, beneficially own, in the aggregate, approximately 41% of our outstanding common stock as of March 31, 2013. As a result, these stockholders, acting together, would have the ability to substantially influence the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to substantially influence the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:

• delaying, deferring or preventing a change in control of us;

• impeding a merger, consolidation, takeover or other business combination involving us; or

• discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

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Delaware law and provisions in our restated certificate of incorporation and bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.

Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including the following:

• our board of directors is classified into three classes of directors with staggered three-year terms;

• only our chairperson of the board, our chief executive officer, our president or a majority of our board of directors is authorized to call a special meeting of stockholders;

• our stockholders are only able to take action at a meeting of stockholders and not by written consent;

• vacancies on our board of directors will be filled only by our board of directors and not by stockholders;

• directors may be removed from office only for cause;

• our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval; and

• advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(b) Use of Proceeds from Public Offering of Common Stock

The Form S-1 Registration Statement (Registration No. 333-1713777) relating to our initial public offering of our common stock was declared effective by the SEC on April 8, 2011 and on April 20, 2011 the offering commenced.

The net offering proceeds to us after deducting underwriters’ discounts and other expenses were approximately $69.8 million, which are currently invested in money market funds.

There has been no material change in our use of proceeds.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6. EXHIBITS

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
31.01	Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a).						X
31.02	Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a).						X
32.01	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*						X
32.02	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*						X
101.1	XBRL Instance Document
101.2	XBRL Taxonomy Extension Schema Document
101.3	XBRL Taxonomy Extension Calculation Linkbase Document
101.4	XBRL Taxonomy Extension Label Linkbase Document
101.5	XBRL Taxonomy Extension Presentation Linkbase Document

* This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 9, 2012	By:	/s/ Daniel D. Springer
		Daniel D. Springer Chief Executive Officer (Principal Executive Officer)
Date: May 9, 2012	By:	/s/ Christian A. Paul
		Christian A. Paul Chief Financial Officer (Principal Financial Officer)

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