Fair Value

9 Months Ended

Sep. 30, 2011

Fair Value [Abstract]

FAIR VALUE

8. FAIR VALUE

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value as follows:

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

Level 2—Other inputs that are directly or indirectly observable in the marketplace

Level 3—Unobservable inputs that are supported by little or no market activity

The carrying value of the Company’s financial instruments, including cash, short-term investments, accounts receivable and accounts payable, approximate their fair value because of their short-term nature. The Company measures cash equivalents, which are comprised of money market fund deposits, short-term investments, which are comprised of commercial paper and U.S. government agency bonds, and a contingent liability at fair value. At September 30, 2011 and December 31, 2010, the money market funds and U.S. government agency bonds were valued based upon quoted prices for the specific securities in an active market and therefore classified as Level 1. At September 30, 2011, the commercial paper was valued on the basis of valuations provided by third-party pricing services, as derived from such services’ pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security, and are therefore classified as Level 2. The Level 3 liability consists of contingent consideration related to the SmartReply acquisition in the form of an earn-out for a maximum of $8.9 million that may become payable in annual installments over the next three years with contingencies based upon year-over-year revenue growth relative to the Company’s mobile services business. The fair value of the contingent consideration was estimated by applying an income approach. The measure is based on significant inputs that are unobservable in the market. Key assumptions include a discount rate of 18.5% and probability weighted estimates of future revenues of the acquired business.

Assets and liabilities measured at fair value on a recurring basis consisted of the following types of instruments as of September 30, 2011 and December 31, 2010 (in thousands):

	Fair Value Measurements at Reporting Date Using
	Quoted Prices
	in Active Markets
	for Identical		Significant Other		Significant
	Instruments		Observable Inputs		Unobservable Inputs
September 30, 2011	(Level 1)		(Level 2)		(Level 3)		Total Balance
Assets:
Money market fund deposits	$	19,791	$	—	$	—	$	19,791
Short-term investments:
Commercial paper		—		4,797		—		4,797
U.S. government agency bonds		2,634		—		—		2,634
Liabilities:
Liability for contingent consideration		—		—	$	1,205	$	1,205
December 31, 2010
Assets:
Money market fund deposits	$	33,134		—		—	$	33,134

The liability for contingent consideration increased $47,000 from $1,158,000 for the three months ended September 30, 2011 due to a fair value adjustment based upon the passage of time and present value considerations.