S-1 1 d685408ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on May 19, 2015.

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

XACTLY CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7372   11-3744289

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

300 Park Avenue, Suite 1700

San Jose, California 95110

(408) 977-3132

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

 

 

Christopher W. Cabrera

Chief Executive Officer

Xactly Corporation

300 Park Avenue, Suite 1700

San Jose, California 95110

(408) 977-3132

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

 

 

Copies to:

 

Donna M. Petkanics

Michael E. Coke

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Colleen M. Pouliot

General Counsel and Secretary

Xactly Corporation

300 Park Avenue, Suite 1700

San Jose, California 95110

(408) 977-3132

 

Alan F. Denenberg

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, California 94025

(650) 752-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

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

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

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

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
  

Proposed

Maximum

Aggregate

Offering Price(1)(2)

  

Amount of

    Registration Fee    

Common Stock, par value $0.001 per share

   $75,000,000    $8,715

 

 

 

(1)   Includes the aggregate offering price of any additional shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2)   Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

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

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated                     , 2015

Preliminary prospectus

                     shares

 

LOGO

Common stock

This is an initial public offering of shares of common stock of Xactly Corporation. Prior to this offering, there has been no public market for our common stock. We are offering                  shares of our common stock. The initial public offering price is expected to be between $         and $         per share.

We intend to apply to list our common stock on the New York Stock Exchange under the symbol “XTLY.”

We are an “emerging growth company” as that term is defined under the federal securities laws and, as such, have elected to comply with certain reduced U.S. public company reporting requirements for this prospectus and future filings.

Investing in our common stock involves a high degree of risk. See “Risk factors” beginning on page 12.

 

         Per share                Total        

Initial public offering price

      $                               $                        

Underwriting discounts and commissions(1)

      $            $     

Proceeds to Xactly, before expenses

      $            $     

 

(1)   

See “Underwriting” for a description of the compensation payable to the underwriters.

The underwriters have an option for a period of 30 days to purchase up to                 additional shares of our common stock at the initial public offering price, less underwriting discounts and commissions, solely to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                 , 2015.

 

J.P. Morgan   Deutsche Bank Securities  
UBS Investment Bank  
Needham & Company   Oppenheimer & Co.  

            , 2015


Table of Contents

Table of contents

 

    Page  

Prospectus summary

    1   

Risk factors

    12   

Special note regarding forward-looking statements

    37   

Industry and market data

    39   

Use of proceeds

    40   

Dividend policy

    40   

Capitalization

    41   

Dilution

    43   

Selected consolidated financial data

    46   

Management’s discussion and analysis of financial condition and results of operations

    48   

Letter from our Chief Executive Officer

    73   

Business

    74   

Management

    89   

Executive compensation

    97   

Certain relationships, related party and other transactions

    110   

Principal stockholders

    112   

Description of capital stock

    115   

Shares eligible for future sale

    120   

Material U.S. federal income tax and estate tax consequences to non-U.S. holders

    123   

Underwriting

    127   

Legal matters

    134   

Experts

    134   

Where you can find more information

    134   

Index to consolidated financial statements

    F-1   

Through and including                 , 2015 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

For investors outside the United States (U.S.): Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the U.S. Persons outside the U.S. who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, this offering and the distribution of this prospectus outside of the U.S.

 

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Prospectus summary

This summary highlights selected information appearing elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This summary may not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including the sections titled “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Unless the context otherwise requires, we use the terms “Xactly,” the “Company,” “we,” “us” and “our” in this prospectus to refer to Xactly Corporation and, where appropriate, our consolidated subsidiaries.

Overview

Xactly is a leading provider of enterprise-class, cloud-based, incentive compensation solutions for employee and sales performance management. We address a critical business need: to incentivize employees and align their behaviors with company goals. Our solutions allow organizations to make better strategic decisions, optimize behaviors, increase sales and employee performance, improve margins, increase operational efficiencies, mitigate risk, design better incentive compensation plans and reduce error rates in incentive compensation calculations. We were the first 100% cloud-based, multi-tenant provider focusing solely on the incentive compensation and employee and sales performance management market and we achieved our leadership position through domain expertise and innovative technology. We deliver our solutions through a Software-as-a-Service (SaaS) business model.

We believe that our solutions are strategic for our customers. We go beyond automation by providing our customers with commercially actionable insights so that they can optimize their employees’ behaviors. We believe that we are the first and only company to make commercially available insights derived from an empirical set of aggregated and anonymized data which helps customers make fact-based decisions to motivate employees and drive business performance. Our solutions help executives design, manage and analyze incentive programs and provide visibility into employee and incentive program performance. At the same time, employees use our solutions to monitor, estimate and track their own and their team’s performance in real-time, and modify their behaviors to maximize their payout consistent with company goals.

The design and management of incentive compensation is often highly complex. Traditional systems such as spreadsheets, manual processes and homegrown solutions are inadequate to deal with the complexity associated with variable forms of pay, such as commissions, bonuses and non-cash rewards. According to an August 2014 research study by Aon Hewitt, 91% of organizations currently offer a variable pay program for their broad based employee populations and expect to spend 13% of payroll on variable pay. Further, according to Aon Hewitt, variable pay budgets and spending have nearly doubled in the last 20 years.

We have a diverse and rapidly growing customer base ranging from FORTUNE 50 enterprises to small, emerging companies in a variety of industries such as business & financial services, communications, high-tech manufacturing, life sciences, media & internet and SaaS & traditional software, which provides us with large, unique, industry-specific data sets. Customers use our solutions to manage and incent a broad range of employees, from bank tellers to post office employees to sales people.

We strive to be a thought leader in incentives and employee performance, identifying and interpreting emerging trends, shaping and guiding industry dialogue, and creating and sharing best practices. Our thought leadership is based on our big-data insights as well as our significant industry experience. We deliver our

 

 

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thought leadership and innovation through the expertise of our employees as well as the authoring and dissemination of information about incentives that complement and leverage our technology solutions. We believe our thought leadership differentiates us and allows us to increase the value of our solutions to our customers.

We have achieved significant growth. As of January 31, 2015, we had approximately 194,000 subscribers, compared to approximately 140,000 subscribers as of January 31, 2014, representing an increase of approximately 39%. We estimate that during the 2014 calendar year approximately 24% of the payees whose compensation was administered through our solution were in non-sales roles. While approximately 54% of our customers were enterprise and mid-market companies, we derived approximately 91% of our revenue from enterprise and mid-market customers for the fiscal year ended January 31, 2015. As of January 31, 2015, we had approximately 725 customers.

We offer our solutions on a subscription basis, typically through non-cancellable contracts with one to three year terms, which provides us with visibility into a substantial portion of our future revenue. We had total revenue of $36.3 million, $47.2 million and $61.1 million for the fiscal years ended January 31, 2013, 2014 and 2015, respectively, resulting in year-over-year increases of 30% and 29%. Our subscription revenue for the fiscal years ended January 31, 2013, 2014 and 2015 was $27.5 million, $35.9 million and $47.3 million, respectively, resulting in year-over-year increases of 30% and 32%. We have made and expect to continue to make significant investments to support our growth and our transition to becoming a public company, and accordingly have incurred net losses of $9.4 million, $14.5 million and $18.5 million for the fiscal years ended January 31, 2013, 2014 and 2015, respectively.

Industry background

Market overview and history.    To determine variable pay and communicate results, companies have traditionally used spreadsheets or other manual processes that are often error-prone and are not designed for use by mobile users. Spreadsheets, manual processes and homegrown systems tend to provide untimely results with limited visibility, are difficult to understand, and are difficult to integrate with customer relationship management (CRM), configure price quote (CPQ), human capital management (HCM), supply chain management (SCM) and enterprise resource planning (ERP) applications. The incentive compensation programs employed by today’s companies have increased in complexity as management teams seek to implement more innovative variable compensation structures and use incentive compensation plans more broadly across their organizations. The importance and complexity of incentive compensation programs drive a need for sophisticated employee and sales performance management solutions.

Emergence of cloud-based solutions.    Over the past decade, cloud-based solutions have emerged, enabling enterprises to improve a range of business and technology operations. In comparison to legacy systems, cloud-based solutions can provide a number of benefits to enterprises, including improved application performance, broader user adoption, simpler integration, greater flexibility and lower costs of ownership. According to IDC, the worldwide SaaS and cloud software market reached $39.3 billion in revenue in 2013, a 22.6% year-over-year growth rate, and will grow to $102.9 billion by 2018, at a compound annual growth rate of 21.3%, compared to an expected compound annual growth rate of 6.3% for the broader software market for the same time period.

 

 

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Market challenges.    Although many companies have invested in legacy and manual incentive compensation systems, these solutions often do not meet the evolving needs of today’s companies for a number of reasons, including:

Expensive to install, implement and maintain.    Legacy systems have generally been deployed on-premise, requiring substantial investments in infrastructure and resources in order to enhance, upgrade and maintain such systems.

Difficult to integrate.    Legacy sales performance management systems are composed of numerous discrete applications that frequently do not integrate well with each other.

Limited mobility.     On-premise systems often lack accessibility and visibility into information in real time and often use outdated technology, making it difficult for the business user to view and interact with information through their mobile devices.

Slower innovation.    Legacy systems are often associated with slow innovation and long product development cycles that can easily extend a year or longer.

Market opportunity.    Incentive compensation and employee and sales performance management continue to increase in importance for both companies and employees. According to a 2012 Harvard Business Review article, U.S. companies alone spent more than $800 billion on sales force compensation each year, representing the single largest marketing investment for most business-to-business companies.

The addressable market for incentive compensation and employee and sales performance management is large and significantly underpenetrated by commercial solutions. According to CSO Insights, spreadsheets continue to be the dominant tool for both calculating and managing commissions and designing and managing sales territories, with only 12.7% of companies using a commercial incentive compensation management system as their primary method in 2014.

We believe the relatively low market penetration of automated sales performance management (SPM) solutions highlights the nascent nature of our market. According to Gartner in 2015, “the SPM market has continued to mature in the last year, growing into a market of more than $2 billion, as measured by spend on all software, consulting and managed services across SPM and human capital management (HCM) providers (where HCM functions are used for sales processes).” Further, “Gartner also estimates, based on analysis of inquiries and vendors’ feedback, that less than 5% of all companies using at least one SPM solution have implemented the full set of SPM functionality.” Finally, according to Gartner, “by 2017, 15% of organizations will use crowdsourced benchmarks to design their incentive compensation plans.”

We believe the total addressable market is significantly larger than the market currently being served. Based on our internal analysis and industry experience, together with third-party data, we estimate the total addressable market was approximately $7 billion in 2014. We estimate that the number of persons in sales and related occupations in the United States and the European Union was 14 million and 15.6 million in 2013, respectively, based on reports by the U.S. Bureau of Labor Statistics and by ICF and Cedefop for the European Commission. We then applied what we believe is a reasonable 15% discount to this total of 29.6 million people. Finally, we multiplied the result by our fiscal year 2015 average subscription revenue per subscriber, which was approximately $280. Our estimate of the total addressable market of approximately $7 billion does not account for revenue from potential sales to non-sales employees, markets outside the United States and the European Union and for professional services.

 

 

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Our solutions

Our solutions include the following key attributes:

Automation.    Our solutions automate costly and cumbersome processes, such as estimating and calculating commissions and bonuses, assigning sales territories, forecasting accruals and modeling business outcomes. As a result, our solutions enhance productivity by allowing companies to focus on the strategic aspects of incentive compensation.

Intuitive user experience.    We designed the user interface and user workflows of our solutions to align with the way users naturally think and act. Our focus on an intuitive and simple user experience enables the adoption of our solutions by even novice users with minimal training. We believe that we enable our customers to generate higher productivity and better business results through broad access to more timely and reliable information.

Mobility.    We offer mobile solutions for phones and tablets across the major operating systems so our subscribers have convenient, anytime, anywhere access to performance information in real time, allowing them to optimize their performance no matter where and when. We believe these characteristics result in greater user adoption and higher utilization of our solutions.

Scalable, secure and reliable cloud architecture.    Our solutions are 100% cloud-based, built upon a multi-tenant, single instance architecture. Our platform architecture allows all of our customers to use a single and most updated version of our solutions, which enables us to accelerate our speed of implementation, upgrades and support.

Data integration with other business applications.    Our open application programming interfaces (APIs) allow our customers to integrate our solutions into their existing business processes and systems. Our customers use our APIs to import data into our solutions from CRM, ERP, HCM and CPQ solutions, such as those provided by Microsoft Corporation (Microsoft), Oracle Corporation (Oracle), salesforce.com, inc. (Salesforce), SAP AG (SAP) and Workday, Inc. (Workday), as well as to extract data from our solutions for use in CRM, finance and payroll solutions such as those provided by Automatic Data Processing, Inc. (ADP), Ceridian HCM Holding Inc. (Ceridian) and Paychex, Inc. (Paychex).

Actionable big data.    We believe that we are the only company that has empirical incentive compensation data combined with the associated metadata across companies and multiple industries. We anonymize and aggregate the data from the billions of transactions we process annually, allowing us to provide value-added, commercially actionable insights. The commercial insights derived from our data help customers make fact-based decisions to motivate employees and drive business performance.

Key customer benefits

Finance leaders.    Our solutions help finance leaders gain control of incentive compensation, mitigate risk and increase accuracy through automation, which create more efficient workflows. In addition, finance executives can make better strategic decisions, design optimal plans and forecast and monitor the performance of their incentive compensation expenditures.

Compensation administrators.    Compensation administrators more quickly and accurately process incentive compensation using our solutions, leading to faster, more accurate financial closes with fewer disputes and greater trust from the sales teams they support. Moreover, they can add strategic value to their organizations by providing analyses and insights into compensation expenditures beyond simply managing the compensation process.

 

 

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Sales leaders.    We help sales leaders inspire performance, drive top line results and align employee behaviors with company goals. Our solutions allow sales leaders to incent the right behaviors, bring visibility to front-line sales representatives, coach them to drive better results and adjust incentives to better compete in a complex, competitive environment.

Technology leaders.    We help chief information officers support business users more effectively while adding strategic value to the organization. Our customers are able to quickly implement and easily integrate our solutions with other systems and applications. Chief information officers can safely and securely scale their companies for growth since they do not have to manage costly hardware and are assured of always using the latest version of our solutions.

Human resources teams.    We help human resources teams inspire performance by enabling companies to bring incentive compensation not only to sales teams, but to all employees. With our solutions, human resources professionals can retain top talent by incenting and rewarding the right behavior and delivering incentives with timeliness, visibility and transparency.

Our growth strategy

The key elements of our growth strategy include:

Acquire new customers.    We believe the market for incentive compensation and employee and sales performance management is large and underserved, and there is substantial opportunity for us to continue to increase the size of our customer base across a broad range of industries. We intend to continue to make investments in our business to pursue this market opportunity.

Sell more subscriptions and modules to our existing customer base.    Frequently, an organization will purchase our solutions for one division and later expand its deployment to other divisions within the organization. We believe there is a significant opportunity for us to sell more subscriptions to existing customers as well as to increase the number of modules deployed by our existing customers.

Enhance existing offerings and develop new solutions.    We have made and will continue to make significant investments in engineering and development to enhance our existing solutions, and to expand the number of our solutions and modules. For example, we launched two new products in 2014: Xactly Insights and Xactly Quota.

Expand internationally.    We estimate that approximately 28% of our subscribers are located outside of the U.S., based on a representative sample of our user logins during the last two months of the fiscal year ended January 31, 2015. Given our cloud-based architecture and the highly scalable nature of our solutions, we believe our solutions are particularly well-suited to large, dynamic enterprises with complex, global operations. We plan to expand our sales capability internationally by expanding our direct sales force and by collaborating with partners around the world.

Develop our partner ecosystem.    We have established relationships with other organizations to sell and deliver our solutions to customers. These relationships include platform partners, referral partners and consulting and implementation partners. We plan to expand our partner ecosystem in order to increase our market reach.

Pursue selective acquisitions.    From time to time, we may seek to acquire businesses and technologies that would increase our value proposition for our customers.

 

 

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Risks affecting us

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

 

We have a history of losses, and we may not be able to generate sufficient revenue to achieve or maintain profitability.

 

 

Our business substantially depends on the continued growth in demand for incentive compensation and employee and sales performance management solutions.

 

 

As the market for cloud-based solutions evolves, we may be forced to change the prices we charge for our solutions or the pricing model on which our solutions are based, which may harm our business.

 

 

If we are unable to successfully respond to technological trends, achieve market acceptance, attract new customers, retain existing customers, sell additional modules or increase the number of subscribers at existing customers, our operating results will suffer.

 

 

Our quarterly operating results may fluctuate significantly and be unpredictable, and because we recognize revenue from subscriptions over the term of the relevant contract, downturns or upturns in sales are not immediately reflected in full in our operating results.

 

 

If we are unable to maintain, develop and grow our relationships with platform partners, or if we do not or cannot maintain the compatibility of our solutions with third-party applications that our customers use, our business will suffer.

 

 

Development of our solutions is costly and may not produce successful solutions, and if our software fails due to defects, our customers experience interruptions to, or degraded performance of, our solutions or we experience security breaches, our operating results will suffer.

 

 

The concentration of our capital stock ownership with insiders upon the completion of this offering will likely limit your ability to influence corporate matters, including the ability to influence the outcome of director elections and other matters requiring stockholder approval.

Corporate information

Our principal executive offices are located at 300 Park Avenue, Suite 1700, San Jose, California 95110, and our telephone number is (408) 977-3132. Our website is www.xactlycorp.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and should not be relied on in determining whether to make an investment decision. We were incorporated in Delaware in March 2005.

Xactly, the Xactly logo, “Inspire Performance,” and other trademarks or service marks of Xactly appearing in this prospectus are the property of Xactly. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders. We have omitted the ® and TM designations, as applicable, for the trademarks used in this prospectus.

We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act). We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

 

 

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The offering

 

Common stock offered by us

                 shares

 

Common stock to be outstanding after this offering

                 shares

 

Over-allotment option

The underwriters have a 30-day option to purchase up to an additional                  shares of common stock from us solely to cover over-allotments.

 

Use of proceeds

We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We also may use a portion of the net proceeds to acquire or invest in complementary businesses, products, services, technologies or other assets. However, we do not have agreements or commitments for any specific acquisitions or investments at this time. See “Use of proceeds.”

 

Proposed NYSE symbol

“XTLY”

The number of shares of our common stock to be outstanding after this offering is based on 83,016,636 shares of our common stock outstanding as of January 31, 2015, and excludes:

 

 

18,816,161 shares of common stock issuable upon the exercise of options outstanding as of January 31, 2015, with a weighted-average exercise price of $0.82 per share;

 

 

203,550 shares of common stock issuable upon the exercise of options granted after January 31, 2015, through March 31, 2015, with a weighted-average exercise price of $2.29 per share;

 

 

1,599,850 shares of common stock issuable upon the exercise and conversion of options to purchase shares of our Series E convertible preferred stock outstanding as of January 31, 2015, with an exercise price of $0.2395 per share;

 

 

warrants to purchase an aggregate of 2,957,415 shares of our convertible preferred stock that were outstanding as of January 31, 2015 that will either be exercised or converted into warrants to purchase an aggregate of 2,957,415 shares of our common stock, with a range of expiration dates beginning on the closing of this offering (with respect to the 864,728 warrants to purchase our Series F convertible preferred stock) to up to ten years following the effectiveness of the registration statement to which this prospectus is a part, in connection with the completion of this offering, with a weighted-average exercise price of $2.03 per share; and

 

 

                shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of             shares of common stock reserved for future issuance under our 2005 Stock Plan (the 2005 Stock Plan) as of March 31, 2015,                 shares of common stock reserved for future issuance under our 2015 Equity Incentive Plan (the 2015 Plan), which will become effective in connection with this offering,                 shares of common stock reserved for future issuance under our 2015 Employee Stock Purchase Plan (the 2015 ESPP), which will become effective in connection with this offering, and shares that become available under the 2015 Plan and the 2015 ESPP pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in “Executive compensation—Employee benefit and stock plans.”

 

 

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Unless otherwise noted, the information in this prospectus reflects and assumes the following:

 

 

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

 

 

the filing of our amended and restated certificate of incorporation in connection with the completion of this offering; and

 

 

no exercise by the underwriters of their option to purchase additional shares of common stock from us in this offering.

 

 

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Summary consolidated financial data

The following tables summarize our consolidated financial and other data. We have derived the summary consolidated statement of operations data for the fiscal years ended January 31, 2013, 2014 and 2015 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial and other data should be read in conjunction with the section titled “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

Consolidated statements of operations data (in thousands, except per share data):

 

      Fiscal year ended
January 31,
 
      2013      2014      2015  

Revenue:

        

Subscription services

     $27,519         $35,893         $47,309   

Professional services

     8,806         11,327         13,802   
  

 

 

 

Total revenue

     36,325         47,220         61,111   
  

 

 

 

Cost of revenue:

        

Subscription services(1)

     8,741         9,561         11,717   

Professional services(1)

     8,510         9,990         13,325   
  

 

 

 

Total cost of revenue

     17,251         19,551         25,042   
  

 

 

 

Gross profit

     19,074         27,669         36,069   
  

 

 

 

Operating expenses:

        

Research and development(1)

     6,567         9,114         11,867   

Sales and marketing(1)

     15,410         20,532         28,877   

General and administrative(1)

     5,424         7,901         10,087   

Legal settlement

             2,000           

Amortization of intangibles

     725         725         707   
  

 

 

 

Total operating expenses

     28,126         40,272         51,538   
  

 

 

 

Operating loss

     (9,052)         (12,603)         (15,469)   

Total other expense

     (173)         (1,916)         (2,798)   
  

 

 

 

Loss before income taxes

     (9,225)         (14,519)         (18,267)   

Income tax expense

     147         24         265   
  

 

 

 

Net loss

     $(9,372)         $(14,543)         $(18,532)   
  

 

 

 

Net loss per share attributable to common stockholders:

        

Basic and diluted

     $(1.04)         $(1.43)         $(1.67)   
  

 

 

 

Weighted-average number of shares used in computing net loss per share attributable to common stockholders:

        

Basic and diluted

     9,011         10,154         11,074   
  

 

 

 

Pro forma net income (loss) per share-basic and diluted(2)

           $(0.22)   
  

 

 

 

 

 

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      Fiscal year ended
January 31,
 
      2013      2014      2015  

Weighted-average shares used in computing pro forma net loss per share-basic and diluted(2)

           84,162   
  

 

 

 

Other financial data:

        

Adjusted EBITDA(3)

     $(6,716)         $(7,755)         $(11,132)   

 

(1)   Stock-based compensation expense is included in our results of operations as follows (in thousands):

 

      Fiscal year ended
January 31,
 
          2013              2014              2015      

Cost of subscription services

   $ 61       $ 74       $ 237   

Cost of professional services

     33         43         61   

Research and development

     84         134         272   

Sales and marketing

     156         165         312   

General and administrative

     181         280         776   
  

 

 

 

Total stock-based compensation

   $ 515       $ 696       $ 1,658   

 

 

 

(2)   See Note 12 to our consolidated financial statements for an explanation of the method used to calculate the unaudited pro forma basic and diluted net loss per share for the fiscal year ended January 31, 2015. All shares to be issued in this offering were excluded from the unaudited pro forma basic and diluted net loss per share calculation.

 

(3)   We calculate Adjusted EBITDA to analyze our financial results and believe that it is useful to investors as a supplement to measures prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance. We believe that Adjusted EBITDA, a non-GAAP financial measure, helps illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses that we exclude from Adjusted EBITDA. Furthermore, we use this measure to establish budgets and operational goals for managing our business and evaluating our performance. We also believe that Adjusted EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry.

 

       Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP and our calculation of Adjusted EBITDA may differ from that of other companies in our industry. We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of these limitations, presentation of our financial statements in accordance with U.S. GAAP and reconciliation of Adjusted EBITDA to the most directly comparable U.S. GAAP measure, net loss. We calculate Adjusted EBITDA as net loss before (i) other income (expense), net, which includes interest expense, the change in fair value of convertible preferred stock warrant liabilities and other income and expense, (ii) income tax expense, (iii) depreciation and amortization of property and equipment, (iv) amortization of intangible assets, (v) amortization of debt issuance costs, (vi) stock-based compensation and (vii) any applicable, non-recurring or unusual charges as we may determine from time to time, including legal settlement charges in connection with a legal matter (which was not inclusive of legal defense costs).

 

     The following provides a reconciliation of net loss to Adjusted EBITDA (in thousands):

 

      Fiscal year ended
January 31,
 
          2013             2014             2015      

Net loss

   $ (9,372   $ (14,543   $ (18,532

Non-GAAP adjustments:

      

Interest expense

     176        1,518        3,087   

Provision for income taxes

     147        24        265   

Depreciation and amortization

     1,096        1,427        1,972   

Amortization of intangibles

     725        725        707   

Stock-based compensation

     515        696        1,658   

Increase (decrease) in fair value of convertible preferred stock warrant liabilities

     (8     415        (309

Other (income) expense, net

     5        (17     20   

Legal settlement

            2,000          
  

 

 

 

Adjusted EBITDA

   $ (6,716   $ (7,755   $ (11,132

 

 

 

 

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Consolidated balance sheet data (in thousands):

 

      As of
January 31, 2015
 
     Actual     Pro forma(1)     

Pro forma

as adjusted(2)

 

 

 

Cash and cash equivalents

   $ 19,325      $                        $                            

Working capital deficit

     (6,791     

Total assets

     52,695        

Deferred revenue

     34,143        

Debt and capital lease obligations, current and long-term

     26,918        

Convertible preferred stock warrant liabilities

     5,885        

Convertible preferred stock

     83,018        

Total stockholders’ equity (deficit)

     (25,412     

 

 

 

(1)   The pro forma column reflects (i) the filing of our amended and restated certificate of incorporation and the automatic conversion of all outstanding shares of convertible preferred stock into an aggregate of 71,488,311 shares of common stock and (ii) the conversion of all warrants to purchase shares of convertible preferred stock into warrants to purchase an aggregate of 2,957,415 shares of common stock, as if such conversions had occurred on January 31, 2015.

 

(2)   The pro forma as adjusted column gives effect to the pro forma adjustments set forth in footnote (1) above and the sale by us of shares of common stock in this offering, at an assumed initial public offering price of $         per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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Risk factors

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

Risks related to our business

We have a history of losses, and we may not be able to generate sufficient revenue to achieve or maintain profitability.

We generated net losses of $9.4 million, $14.5 million and $18.5 million for the fiscal years ended January 31, 2013, 2014 and 2015, respectively. As of January 31, 2015 we had an accumulated deficit of $115.8 million. We will need to generate and sustain increased revenue levels in future periods in order to become and remain profitable. We intend to continue to expend significant funds to expand our marketing and sales operations, develop and enhance our incentive compensation and employee and sales performance management solutions, meet the increased compliance requirements associated with our transition to, and operation as, a public company, scale our professional services capabilities and expand into new markets. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenue enough to offset our higher operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described in this prospectus, and unforeseen expenses, difficulties, complications and delays and other unknown events. We may not be able to maintain or increase our revenue levels, and we expect to incur losses for the foreseeable future and may not be able to achieve or sustain profitability.

Our business substantially depends on the continued growth in demand for incentive compensation and employee and sales performance management solutions.

The market for incentive compensation and employee and sales performance management services and products, is relatively new and evolving. We believe one of our key challenges is to be able to demonstrate the benefit of our solutions and services to prospective customers such that they place purchases of our solutions and services at a higher priority relative to other projects to which they allocate a portion of their budget, including the maintenance or renewal of their existing solutions. Organizations with existing homegrown, manual, spreadsheet or on-premise solutions may be reluctant or unwilling to migrate to a cloud-based solution like ours for a variety of reasons, including the perceived implementation costs and ongoing subscription costs. Our financial performance depends in large part on continued growth in the number of organizations adopting incentive compensation management, employee and sales performance management and other related solutions, and particularly cloud-based solutions, to manage the performance of their sales and non-sales organizations. The market for incentive compensation and employee and sales performance management solutions may not develop as we expect, or at all.

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. Forecasts relating to, among other things, the expected growth in the SaaS and cloud software market or the market for incentive compensation and employee and sales performance management solutions may prove to be inaccurate. Demand for incentive compensation and employee and sales performance management solutions depends substantially on the adoption of variable compensation practices by organizations, and such practices may not be adopted in accordance with our expectations or at all. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all. In any of these cases, our business and operating results will be adversely affected.

 

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Cloud-based incentive compensation solutions such as ours represent a relatively recent approach to addressing incentive compensation challenges, and we may be forced to change the prices we charge for our solutions or the pricing model upon which they are based as the market for these types of solutions evolves, which may harm our business.

The market for cloud-based solutions to address incentive compensation challenges is still developing. Competitive dynamics may cause pricing levels and pricing models to change, as the market matures and as existing and new market participants introduce new types of solutions and different approaches to enable organizations to address their incentive compensation management needs. As a result, we may be forced to reduce the prices we charge for our solutions or the pricing model on which they are based, and may be unable to renew existing customer agreements or enter into new customer agreements at the same prices and upon the same terms that we have historically, which could have a material adverse effect on our revenue, gross margin and operating results.

We compete in a highly competitive market, and competitive pressures from existing and new companies may adversely impact our business, revenue, growth rates and market share.

The market for incentive compensation solutions for employee and sales performance management is highly competitive and significantly fragmented. With the introduction of new technologies and the potential entry of new competitors into the market, we expect competition to increase and intensify in the future, which could harm our ability to increase sales, maintain or increase renewals and maintain our prices. We compete primarily with companies offering incentive compensation and employee and sales performance management applications via hybrid cloud-based and on-premise solutions. We also compete with spreadsheets, homegrown systems, and toolsets and products developed by software providers that allow customers to build new applications that run on the customers’ current infrastructure or as hosted services. Our competitors include Callidus Software Inc. (Callidus), Cognos (a division of International Business Machines Corporation) (Cognos) and Oracle.

Competition could significantly impede our ability to sell our incentive compensation and employee and sales performance management solutions on terms favorable to us. Our current and potential competitors may develop and market new technologies that render our existing or future solutions less competitive, unmarketable or obsolete. In addition, if these competitors develop products with similar or superior functionality to our solutions, including big data analysis and benchmarking capabilities, streamlined user experiences or real-time mobile accessibility we may need to decrease the prices for our solutions in order to remain competitive. If we are unable to maintain our current pricing due to competitive pressures, our margins will be reduced and our operating results will be negatively affected.

Some of our current competitors have, and future competitors may have, greater financial, technical, marketing and other resources, greater resources to devote to the development, promotion, sale and support of their products and services, more extensive customer bases and broader customer relationships and longer operating histories and greater name recognition. As a result, these competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. In a few cases, some competitors may also be able to offer competing solutions at little or no additional cost by bundling them with their existing suite of solutions. In addition, if one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. If we are unable to compete with such companies, the demand for our incentive compensation and employee and sales performance management solutions could decline substantially.

 

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We operate in a rapidly evolving market and if we are unable to introduce new solutions or make enhancements to our existing solutions that successfully respond to emerging technological trends and achieve market acceptance, our growth rates would likely decline and our business, operating results and competitive position could suffer.

Incentive compensation solutions and cloud-based software markets are generally characterized by:

 

 

rapid technological advances;

 

changing customer needs; and

 

frequent new product introductions and enhancements.

To keep pace with technological developments, satisfy increasingly sophisticated customer requirements, achieve market acceptance and effectively respond to competition, we must quickly identify emerging trends and requirements, accurately define and design enhancements and improvements for existing solutions and services, and introduce new solutions and services. Accelerated introductions and short product life cycles for solutions and services require high levels of expenditures for research and development that could adversely affect our operating results. In addition, as we expand our business and target new industry verticals, we may be required to develop additional features for our solutions, expand our expertise in certain areas and add sales and support personnel possessing familiarity with relevant industry verticals.

Our growth strategy depends, in part, on our ability to develop and launch new solutions on a timely basis. For example, in 2014, we launched two new products, Xactly Insights and Xactly Quota. If existing and potential customers do not perceive the benefits of these new offerings, a market may not develop or may develop more slowly than we expect, either of which would adversely affect our revenue growth prospects. We also face the risk that customers may not understand or be willing to bear the cost of incorporating these newer solutions into their organizations. In addition, we have limited experience in pricing any new solutions, such as Xactly Insights and Xactly Quota, which could result in underpricing that adversely affects our expected financial performance, or overpricing that inhibits our customers’ acceptance of such new solutions. Even if the initial development and commercial introduction of any new solutions are successful, we cannot assure you that they will achieve widespread market acceptance or that any market acceptance will be sustainable over the longer term.

Moreover, new solutions that we develop may not be introduced in a timely manner. If we are unable to successfully develop or enhance existing solutions, or if we fail to position and price our solutions to meet market demand, our business and operating results will be adversely affected.

If we are unable to attract new customers, our revenue growth will be adversely affected.

To increase our revenue, we must add new customers, increase the number of subscribers at existing customers and sell additional modules to current customers. As our industry matures or as competitors introduce lower cost and/or differentiated products or services that are perceived to compete with ours, our ability to sell based on pricing, technology and functionality could be impaired. As a result, we may be unable to attract new customers at rates or on terms that would be favorable or comparable to prior periods, which could have an adverse effect on our revenue and growth.

Our sales cycles to our enterprise customers can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are difficult to predict and may vary substantially from period to period, which may cause our operating results to fluctuate significantly.

Our sales efforts involve educating prospective customers and our existing customers about the use, technical capabilities and benefits of our solutions. In general, the enterprise customers we target may undertake a significant evaluation process before purchasing our solutions. As we continue to pursue enterprise customers,

 

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we may face greater costs, longer sales cycles and less predictability in completing such sales. We may spend substantial time, effort and money on our sales efforts without any assurance that our efforts will produce any sales. Events affecting our customers’ businesses may occur during the sales cycle that could affect the size or timing of a purchase, contributing to more unpredictability in our business and operating results.

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

In order for us to improve our operating results, it is important that our customers renew their agreements with us when their contract terms expire and also purchase additional solutions and modules and add additional subscribers. Our customers have no obligation to renew their subscriptions after the initial subscription period, and we cannot assure you that customers will renew subscriptions with the same or higher number of modules, if at all. In the past, some of our customers have elected not to renew their agreements with us or have renewed their agreements with a lower number of subscribers or with fewer modules. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our solutions, pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, reduced hiring by our customers, reductions in our customers’ spending levels or the loss of an executive sponsor at a customer. If our customers do not renew their subscriptions, renew on less favorable terms, fail to purchase additional solutions or modules, or fail to add additional subscriptions, our revenue may decline, and our operating results may be harmed.

Shifts over time in the mix of sizes or types of organizations that purchase our solutions or changes in the components of our solutions purchased by our customers could negatively affect our operating results.

Our strategy is to sell our incentive compensation and employee and sales performance management solutions to organizations of broadly different sizes, from FORTUNE 50 enterprises to small, emerging companies. Our gross margins can vary depending on numerous factors related to the implementation and use of our incentive compensation and sales performance management solutions, including the sophistication and intensity of our customers’ use of our solutions and the level of professional services and support required by a customer. Sales to enterprise customers may entail longer sales cycles and more significant selling efforts, and the prices we charge each customer per subscriber are driven, in part, by subscriber attributes and the number of subscribers for which that customer has contracted, with generally lower prices per subscriber for larger contracts consistent with industry practice.

Selling to small, emerging companies may involve smaller contract sizes, higher relative selling costs, greater risk of non-renewal and greater credit risk and uncertainty. If the mix of organizations that purchase our solutions changes, or the mix of solution components purchased by our customers changes, our gross margins could decrease and our operating results could be adversely affected.

Because our long-term growth strategy involves further expansion of our sales to customers outside the U.S., our business will be increasingly susceptible to risks associated with international operations.

A component of our growth strategy involves the further expansion of our operations and customer base internationally. For the fiscal year ended January 31, 2015, revenue generated outside of the U.S. was approximately 8% of our total revenue. In addition, a number of our customers are U.S. companies with employees abroad, and we estimate that approximately 28% of our subscribers are located outside of the U.S., based on a representative sample of our user logins during the last two months of the fiscal year ended January 31, 2015. We currently have international offices outside of the U.S. in the United Kingdom for sales and

 

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marketing and support and India for research and development, support and professional services. In the future, we may expand to other international locations. Our current international operations and future initiatives will involve a variety of risks, including:

 

 

changes in a specific country’s or region’s political or economic conditions;

 

 

unexpected changes in regulatory requirements, taxes or trade laws;

 

 

more stringent regulations relating to data security and the unauthorized use of, or access to, commercial and personal information, particularly in the European Union (E.U.), including, in certain jurisdictions such as Germany, the requirement to locate our data in data centers in such jurisdiction;

 

 

differing labor regulations, especially in the E.U., where labor laws are generally more advantageous to employees as compared to the U.S., including deemed hourly wage and overtime regulations in these locations;

 

 

challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;

 

 

difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems;

 

 

increased travel, real estate, infrastructure and legal compliance costs associated with international operations;

 

 

currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost and risk of entering into hedging transactions if we chose to do so in the future;

 

 

limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;

 

 

laws and business practices favoring local competitors or general preferences for local vendors;

 

 

limited or insufficient intellectual property protection;

 

 

political instability or terrorist activities;

 

 

exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977 and similar laws and regulations in other jurisdictions; and

 

 

adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash.

Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and operating results will suffer.

Because we recognize revenue from subscriptions over the term of the relevant contract, downturns or upturns in sales are not immediately reflected in full in our operating results.

As a subscription-based business, we recognize revenue over the terms of each of our contracts, which are typically from one to three years. As a result, much of the revenue we report each quarter results from contracts entered into during previous quarters. Consequently, a shortfall in demand for our solutions and professional services or a decline in new or renewed contracts in any one quarter may not significantly reduce our revenue for that quarter but could negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new sales or renewals of our solutions will not be reflected in full in our operating results until future periods. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any quarter, as revenue from new customers must be recognized over the applicable term of the contracts.

 

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Our quarterly operating results may fluctuate significantly and be unpredictable, which makes our future operating results difficult to predict and could cause the trading price of our common stock to decline.

Our quarterly operating results have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance, and comparing our operating results on a period-to-period basis may not be meaningful. In addition to the other risks described in this prospectus, factors that may affect our quarterly operating results include the following:

 

 

changes in spending on incentive compensation or sales performance management solutions by our current or prospective customers;

 

 

pricing of our solutions;

 

 

acquisition of new customers and new subscribers at current customers and the sale of additional modules to current customers;

 

 

customer renewal rates and the number of subscribers and additional modules for which agreements are renewed;

 

 

customer delays in purchasing decisions in anticipation of new products or product enhancements by us or our competitors;

 

 

budgeting cycles of our customers;

 

 

changes in the competitive dynamics of our market, including consolidation among competitors or customers;

 

 

the amount and timing of operating expenses, particularly research and development and marketing and sales expenses (including marketing events and commissions and bonuses associated with performance), and employee benefit expenses;

 

 

the amount and timing of any third-party disputes, litigation or intellectual property threats or litigation;

 

 

the amount and timing of non-cash expenses, including stock-based compensation, goodwill impairments, unusual items and other non-cash charges;

 

 

the amount and timing of costs associated with recruiting and training new employees;

 

 

the amount and timing of cash collections from our customers and the relative mix of quarterly, semi-annual and annual billings;

 

 

the introduction and adoption of our solutions and services in markets outside of the U.S.;

 

 

unforeseen costs and expenses related to the expansion of our business, operations and infrastructure;

 

 

the costs and timing of costs associated with our data center facilities;

 

 

changes in the levels of our capital expenditures;

 

 

foreign currency exchange rate fluctuations; and

 

 

general economic and political conditions in our markets.

If we are unable to maintain, develop and grow our relationships with platform partners, or if we do not or cannot maintain the compatibility of our solutions with third-party applications that our customers use, our business will suffer.

We integrate our solutions with third-party applications and platforms. Our platform partners include Oracle, Salesforce and SAP. Our APIs allow our customers to integrate our solutions into their existing business

 

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processes and systems. Our customers use our APIs to import data into our solutions from CRM, ERP, HCM and CPQ solutions, such as those provided by Microsoft Corporation, Workday, Inc. and our platform partners, as well as to extract data from our solutions for use in CRM, finance and payroll solutions. The functionality and popularity of our incentive compensation and employee and sales performance management solutions depends, in part, on our ability to integrate our solutions with these third-party applications and platforms. Any deterioration in our relationship with any third-party applications provider or platform partner would harm our business and adversely affect our operating results.

Our business may be harmed if any platform partner:

 

 

discontinues or limits our access to its APIs;

 

 

terminates or does not allow us to renew or replace our contractual relationship;

 

 

modifies its terms of service or other policies, including fees charged to, or other restrictions on, us or other application developers, or changes how customer information or other data may be accessed by us, our customers, or other application developers;

 

 

establishes more favorable relationships with one or more of our competitors, or acquires one or more of our competitors and offers competing services; or

 

 

otherwise develops its own competitive offerings.

In addition, we have benefited from these platform partners’ brand recognition, reputations, referrals and customer bases. Any losses or shifts in the referrals from or the market position of these platform partners in general, in relation to one another or to new competitors or new technologies could lead to losses in our relationships or customers, or our need to identify or transition to alternative channels for marketing our solutions.

Third-party providers of applications may change their APIs or 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 and access to those applications and platforms in an adverse manner. Such changes could functionally limit or terminate our ability to use these third-party applications and platforms in conjunction with our solutions, which could negatively impact our offerings and harm our business. If we fail to integrate our solutions with new third-party applications and platforms that our customers use, we may not be able to offer the functionality that our customers need, which would negatively impact our ability to reach our prospective customers and generate revenue and adversely impact our business.

Our development of solutions is costly, and our current development efforts may not produce successful solutions and may achieve delayed, or lower than expected, benefits, which could harm our operating results.

In order to remain competitive, we must continue to develop new solutions and modules and enhancements to our existing solutions. Maintaining adequate research and development personnel and resources to meet the demands of the market is essential. If we are unable to develop high-quality solutions for any reason, such as high employee turnover, lack of management ability or a lack of other research and development resources, we may miss market opportunities. Further, our competitors may expend a considerably greater amount of funds on their research and development programs, and those that do not may be acquired by larger companies that could allocate greater resources to our competitors’ research and development programs. Our failure to maintain adequate research and development resources or to compete effectively with the research and development programs of our competitors could materially adversely affect our business.

In addition, because our service is designed to operate on a variety of network hardware and software platforms using a standard browser or our mobile applications, we will need to continuously modify and

 

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enhance our service to keep pace with changes in internet-related hardware, software, communication, browser, database and mobile technologies. We may not be successful in either developing these modifications and enhancements or in timely bringing them to market. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses. Any failure of our service to operate effectively with future network platforms and technologies could reduce the demand for our service, result in customer dissatisfaction and harm our business.

Interruptions to or degraded performance of our solutions or cloud-based data centers managed by us or third parties could result in customer dissatisfaction, damage to our reputation, loss of customers, limited growth and reduction in revenue.

We currently serve our customers from data centers located in Virginia and California, with most of these data center operations managed by third parties, and some managed by us beginning in April 2015. The continuous availability of our service depends on the operations of those facilities, on a variety of network service providers, on third-party vendors and on our own data center operations staff. In addition, we depend on our operations staff and our third-party facility providers’ ability to protect these facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts, cyber-attacks and similar events. If there are any lapses of service or damage to a facility, we could experience lengthy interruptions in our service as well as delays and additional expenses in arranging new facilities and services. Even with current and planned disaster recovery arrangements, which, to date, have not been tested in an actual crisis, our business could be harmed.

We designed our system infrastructure and own, lease or contract through managed service providers the hardware used for our services. Design and mechanical errors, spikes in usage volume and failure to follow operations protocols and procedures could cause interruptions in our service or our systems to fail. Any interruptions or delays in our service, whether as a result of third-party error, our own error, natural disasters, criminal acts, security breaches or other causes, whether accidental or willful, could harm our relationships with customers, harm our reputation and cause our revenue to decrease and/or our expenses to increase. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could further reduce our revenue, subject us to liability and cause us to issue credits or cause customers not to renew their subscriptions, any of which could materially adversely affect our business.

We have historically had limited experience managing data center operations ourselves, and we may lack the required expertise to manage these new operations effectively. We may have difficulty recruiting or retaining qualified personnel who can provide such data center management services. Also, the third-party managers of our other data center operations are under no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we may be required to move to new data centers, and we may incur significant costs and possible service interruptions in connection with such a move.

If our software fails due to defects or similar problems, and if we fail to correct any defect or other software problems, we could lose customers, become subject to service performance or warranty claims or incur significant costs.

Our solutions and the systems infrastructure underlying our platform are inherently complex and may contain material defects or errors. We have from time to time found defects in our solutions and may discover additional defects in the future. We may not be able to detect and correct defects or errors before customers begin to use our solutions. Consequently, we or our customers may discover defects or errors after our

 

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solutions have been implemented. These defects or errors could also cause inaccuracies in the data we collect, process or produce for our customers, or even the loss, damage or inadvertent release of such confidential or personal data. Any problem in connection with our regularly-scheduled system maintenance may lead to unplanned system downtime. Even if we are able to implement the bug fixes and upgrades in a timely manner, any defects or inaccuracies in the data we collect, process or produce for our customers, or the loss, damage, unauthorized access to or inadvertent release of such confidential or personal data could expose us to substantial liability and cause our reputation to be harmed, could lead to customers electing not to purchase or renew their agreements with us and subject us to service performance credits, warranty claims or increased insurance costs. The costs associated with any material defects, errors or other performance problems in or affecting in our solutions or the systems underlying our platform may be substantial and could materially adversely affect our operating results.

Our efforts to market and sell solutions to small, emerging companies may not be successful which may lead to greater expenses and lower revenue.

Our success depends, in part, on our ability to attract and retain customers that are small, emerging companies, such as those we target with our Xactly Incent Express product. These customers are challenging to reach, acquire and retain in a cost-effective manner. Selling to and retaining these smaller companies can be more difficult than selling to and retaining large enterprise customers because smaller companies generally have high business failure rates, are price-sensitive, are difficult to reach with targeted sales campaigns, have lower renewal rates and generate less revenue. In addition, smaller companies frequently have limited budgets and may choose to spend funds on items other than our solutions. If these organizations experience economic hardship, they may be unwilling or unable to expend resources on technology software and services. If we are unable to market and sell our solutions to these smaller companies with competitive pricing and in a cost-effective manner, our ability to grow our revenue will be harmed.

Our implementation cycles can be long and encounter unforeseen complications with customer integrations of our solutions. Any delay with our implementations could lead to increased costs and dissatisfied customers.

We may face unexpected challenges with some customers or more complicated implementations of our solutions with such customers. It may be difficult or expensive to implement our solutions if a customer has unexpected data, hardware or software technology challenges, or complex or unanticipated business requirements. Any difficulties or delays in the initial implementation could cause customers to delay or forego future purchases of our solutions, in which case our business, operating results and financial condition would be adversely affected.

Our use of distributed product development, support and professional services may prove difficult to manage to allow us to produce new solutions and services and provide professional services in order to drive growth.

Certain of our engineering services for product development, customer technical support and professional consulting services are performed in remote offices including our subsidiary located in India. Our use of distributed personnel to perform new product and services development, and provide support and professional consulting efforts has required, and will continue to require, detailed technical and logistical coordination. We must ensure that our distributed personnel are aware of and understand development specifications and customer support, implementation and configuration requirements and that they can meet applicable timelines or, if they are not met, that any delays are not significant. We may not be able to maintain acceptable standards of quality in support, product development and professional services. If we are unable to retain or attract personnel in our distributed locations our attempts to drive growth through new solutions and margin improvements in technical support and professional services may be negatively impacted, which would adversely affect our results of operations.

 

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Weakened U.S. and global economic conditions may harm our industry, business and operating results, including as a result of decreasing demand for our solutions by our customers.

Our overall performance depends in part on U.S. and worldwide economic conditions, especially as the macroeconomic environment impacts our customers. Key economies have experienced downturns in the past in which economic activity was impacted by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. These conditions may affect the rate of information technology spending generally and could adversely affect our customers’ ability or willingness to purchase our solutions and professional services, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscription contracts, or affect renewal rates, all of which could adversely affect our operating results. In particular, if any such economic slowdown disproportionately impacts any particular industry verticals of our customers, we may face diminished demand for our solutions or a contraction of subscribers and modules, which would significantly harm our revenue and results of operations.

We may not be able to scale our business quickly enough to meet our customers’ growing needs and if we are not able to grow efficiently, our operating results could be harmed.

As usage of our incentive compensation and employee and sales performance management solutions grows, we will need to devote additional resources to improving our platform architecture, integrating with third-party systems and maintaining infrastructure performance. In addition, we will need to appropriately scale our internal business systems and our customer support and professional services organization to serve our enterprise customers and our growing customer base. We will also need to scale our network of partners, including hiring and contracting with additional third-party service providers, as well as scale our data center capabilities. Any failure of or delay in these efforts could cause impaired system performance and reduced customer satisfaction. These issues could reduce the attractiveness of our solutions to customers, resulting in decreased sales to new customers, lower renewal rates by existing customers, the issuance of service credits or requested refunds, which could impede our revenue growth and harm our reputation. Even if we are able to upgrade our systems and expand our staff, any such expansion will be expensive and could be complex, requiring management time and attention. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure. Moreover, there are inherent risks associated with upgrading, improving and expanding our information technology systems. We cannot be sure that the expansion and improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all. These efforts may reduce revenue and our margins and adversely affect our operating results.

Failure to effectively develop and expand our marketing and sales capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solutions.

Our ability to increase our customer base and achieve broader market acceptance of our incentive compensation and employee and sales performance management solutions will depend to a significant extent on our ability to expand our marketing and sales operations. We plan to continue expanding our sales force and third-party partners, both domestically and internationally. These efforts will require us to invest significant financial and other resources. In addition, the cost to acquire customers is high due to these marketing and sales efforts. Our business will be seriously harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve anticipated revenue growth from expanding our sales force if we are unable to hire, develop and retain talented sales personnel, if our new sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if our sales and marketing programs are not otherwise effective.

 

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We engage partners to promote, sell, integrate and support our solutions, and we intend to seek expansion of our international partner network. Any failure to effectively develop and manage this distribution channel could adversely affect our ability to generate revenue from the sale of our solutions.

We rely on third-party service providers to provide certain services to us and/or our customers, as well as indirect sales partners to pursue additional channel and agency distribution partnerships. Our future growth in revenue and ability to achieve and sustain profitability depends, in part, on our ability to identify, establish and retain successful third-party service provider relationships, including internationally, which will take significant time and resources and involve significant risk. If any of these third-party service providers stop supporting our solution or if our network of providers does not expand, we will likely have to expand our internal team to meet the needs of our customers, which could increase our operating costs and result in lower margins. To the extent that we are unable to recruit alternative partners, or to expand our internal team, our revenue and operating results would be harmed.

If we fail to maintain our thought leadership position in incentives and employee performance, our business may suffer.

We believe that maintaining our thought leadership position in incentives and employee performance is an important element in attracting new customers. We devote significant resources to developing and maintaining our thought leadership position, with a focus on identifying and interpreting emerging trends in incentive compensation, shaping and guiding industry dialogue, and creating and sharing proposed best practices. Our activities related to developing and maintaining our thought leadership may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in such effort. We rely upon the continued services of our management and employees with domain expertise in incentives and employee performance, and the loss of any key management or employees in this area could harm our competitive position and reputation. If we fail to successfully grow and maintain our thought leadership position, or incur substantial expenses in our attempts to do so, we may not attract enough new customers or retain our existing customers, and our business could suffer.

We rely on our management team and other key employees, and the loss of one or more key employees could harm our business.

Our success and future growth depend upon the continued services of our management team, including Christopher Cabrera, our founder and Chief Executive Officer, and other key employees in the areas of research and development, marketing, sales, services and general and administrative functions. From time to time, there may be changes in our management team resulting from the hiring or departure of executives, which could disrupt our business. We also are dependent on the continued service of our existing software engineers and our key sales personnel. We may terminate any employee’s employment at any time, with or without cause, and any employee may resign at any time, with or without cause. In addition, our executive officers and certain other management-level employees benefit from change of control severance agreements in which an involuntary termination by us without cause or a voluntary termination by the employee for good reason within one year after a change of control transaction, will result in acceleration of equity vesting and cash severance payments for the individual, which would increase the cost to us of any such departure. We do not maintain key man life insurance on any of our employees. The loss of one or more of our key employees could harm our business.

The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.

To execute our business strategy, we must attract and retain highly qualified personnel. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing and managing cloud-based software, as well as for skilled sales and operations professionals, and we may not be successful in attracting and retaining the professionals we need. Also, sales compensation

 

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management experts and enterprise sales professionals are very important to our success and are difficult to replace. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly-skilled employees with appropriate qualifications. In particular, we have experienced a very competitive hiring environment in the San Francisco Bay Area, where we are headquartered. Many of the companies with which we compete for experienced personnel have greater resources than we do. In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the stock options or other equity incentives they are to receive in connection with their employment. Following this offering, it may be more difficult to attract new employees, some of whom may prefer to work for a private company with the possibility of a future initial public offering. If the price of our stock declines, or experiences significant volatility, our ability to attract or retain key employees will be adversely affected. If we fail to attract new personnel or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.

If we fail to enhance our brand, our ability to expand our customer base will be impaired and our financial condition may suffer.

We believe that our development of the Xactly brand is important to achieving awareness of our existing and future incentive compensation and employee and sales performance management solutions, and, as a result, is important to attracting new customers, maintaining existing customers and continuing our relationship with key platform partners. We also believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful incentive compensation and employee and sales performance management solutions at competitive prices. In the past, our efforts to build our brand have involved significant expenses. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in building our brand.

If we fail to forecast our revenue accurately, or if we fail to match our expenditures with corresponding revenue, our operating results could be adversely affected.

Because our recent growth has resulted in the expansion of our business, we do not have a long history upon which to base forecasts of future operating revenue. In addition, for our enterprise customers, the lengthy sales cycle for the evaluation and implementation of our solutions, which typically extends for several months, may also cause us to experience a delay between increasing operating expenses for such sales efforts, and, upon successful sales, the generation of corresponding revenue. Accordingly, we may be unable to prepare accurate internal financial forecasts or replace anticipated revenue that we do not receive as a result of delays arising from these factors. As a result, our operating results in future reporting periods may be significantly below the expectations of equity research analysts or investors, which could harm the price of our common stock.

If we fail to offer high-quality professional services and customer support, our business and reputation would suffer.

High-quality professional services and customer support are important for the successful marketing and sale of our solutions, the renewal of existing customers, the addition of subscribers at existing customers and the sale of additional solutions to existing customers. Providing these professional services requires that our customer support personnel and implementation partners have specific incentive compensation and employee and sales performance management knowledge and expertise, making it more difficult for us to hire qualified personnel and to scale up our support operations due to the extensive training required. The importance of high-quality performance services and customer support will increase as we expand our business and pursue new customers. Also, as we rely more on our implementation partners to deliver our solutions to our customers and provide necessary support, our ability to manage and ensure the successful implementation of our solutions will be further limited. If we or our implementation partners fail to help our customers effectively implement

 

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our solutions, resolve post-deployment issues and provide ongoing support, our ability to sell additional functionality and professional services to existing customers may suffer and our reputation with existing or potential customers may be harmed.

If we are unable to protect our intellectual property rights, our competitive position, ability to protect our proprietary technology and our brand could be harmed or we could be required to incur significant expense to enforce our rights.

Our success is dependent, in part, upon our proprietary technology and content, including software, databases, confidential information and know-how, the protection of which is crucial to the success of our business. We rely on a combination of patents, copyrights, trademarks, service marks, domain names, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our solutions and services. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Any of our patents, trademarks or other intellectual property rights may be challenged, infringed, misappropriated, or circumvented by others or invalidated through administrative process or litigation. The steps we take to protect our intellectual property may not prevent the misappropriation or misuse of our intellectual property, or deter independent development of similar intellectual property by others. Confidentiality and non-disclosure agreements may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property or technology. Some aspects of our business and services also rely on technologies, software and content developed by or licensed from third parties, and we may not be able to maintain our relationships with such third parties or enter into similar relationships in the future on reasonable terms or at all.

While we have three U.S. patent applications pending, those applications and any patent applications that we may file in the future may not result in issued patents, and we may be unable to obtain protection for the covered technology. In addition, any patents issued in the future or other intellectual property may not provide us with competitive advantages, or may be successfully challenged or invalidated by third parties through administrative process or litigation. Effective trademark, trade secret, patent, copyright and domain name protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Additional uncertainty may result from changes to intellectual property legislation enacted in the U.S. and elsewhere, and from interpretations of intellectual property laws by applicable courts and agencies. Despite our precautions, it may be possible for unauthorized third parties to copy our solutions or to use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our solutions may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some countries do not protect proprietary and intellectual property rights to the same extent as the laws of the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate. To the extent we expand our international activities, our exposure to unauthorized copying and use of our solutions and proprietary information may increase. We may be required to spend significant resources to monitor and protect our intellectual property rights. We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights, including as counterclaims to any intellectual property litigation. Litigation is inherently uncertain, and any litigation, whether as a plaintiff or defendant and whether or not it is resolved in our favor, could result in significant expense to us and the invalidation or narrowing of the scope of our intellectual property and could divert the efforts of our technical and management personnel.

 

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We have been and may in the future be sued by third parties for various claims including alleged infringement of proprietary rights.

We have been and may in the future be involved in various legal matters arising from our business activities. Such future actions may include claims, suits, government investigations and other proceedings alleging that we, our customers, our licensees, or parties indemnified by us have infringed, misappropriated, or otherwise violated the intellectual property rights or other rights of third parties, or have violated commercial, corporate and securities, labor and employment, wage and hour, and other laws and regulations. For example, we may be subject to claims that we are infringing the patent, trademark or copyright rights of third parties, or that our employees have misappropriated or divulged their former employers’ trade secrets or confidential information.

The cloud-based and business-to-business software and internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. For example, we settled intellectual property and related litigation with one of our competitors in 2013. We have received, and in the future may receive, communications from third parties, including practicing entities and non-practicing entities, claiming that we have infringed, misappropriated or otherwise violated their proprietary rights or intellectual property.

We and our customers or partners may in the future be sued by third parties for alleged infringement of their claimed proprietary rights. Our technologies may be subject to injunction if they are found to infringe the rights of a third party or we may be required to pay damages, or both. Many of our agreements with customers and partners require us to indemnify them for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim.

The outcome of any claims or litigation, regardless of the merits, is inherently uncertain. Any claims and lawsuits, and the disposition of such claims and lawsuits, whether through settlement or licensing discussions, or litigation, could be time-consuming and expensive to resolve, divert management attention from executing our business plan, result in efforts to enjoin our activities, lead to attempts on the part of other parties to pursue similar claims, adversely affect our relationships with our current or future customers and partners, cause delays or stoppages in providing our services, necessitate incurring significant legal fees and, in the case of intellectual property claims, require us to change our technology, change our business practices and/or pay monetary damages or enter into short- or long-term royalty or licensing agreements. Some claimants may have substantially greater resources, including larger patent portfolios, than we do and may be able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. In addition, patent holding companies that focus on extracting royalties and settlements by enforcing patent rights may target us. Liability for monetary damages against us may be tripled and may include attorneys’ fees, or, in some circumstances, damages against our customers and partners, and we may be prohibited from developing, commercializing or continuing to provide some or all of our services unless we obtain licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, which may not be available on commercially favorable terms, or at all.

Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our services to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results. In addition, depending on the nature and timing of any such dispute, an unfavorable resolution of a legal matter could materially affect our future results of operation or cash flows or both.

In addition, our exposure to risks associated with various claims, including the use of intellectual property, may be increased as a result of acquisitions of other companies, or as we expand the complexity, scope and public profile of our business. For example, we may have a lower level of visibility into the development process with

 

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respect to intellectual property or the care taken to safeguard against infringement risks with respect to the acquired company or technology. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition.

We use open source software in our solutions, which could subject us to litigation or other actions.

We use open source software in our platform and we intend to continue to use open source software in the future. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products or alleging that these companies have violated the terms of an open source license. As a result, we could be subject to lawsuits by parties claiming ownership of what we believe to be open source software or alleging that we have violated the terms of an open source license. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our solutions. In addition, if we were to combine our proprietary software solutions with open source software in certain manners, we could, under certain open source licenses, be required to publicly release the source code of our proprietary software solutions. If we inappropriately use open source software, we may be required to re-engineer our solutions, discontinue the sale of our solutions, release the source code of our proprietary software to the public at no cost or take other remedial actions. Although we have taken steps to control our use of open source software, many open source licenses have not been interpreted by courts, and we cannot be certain that our processes for controlling our use of open source software in our products have been or will be effective. There is a risk that open source licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions, which could adversely affect our business, operating results and financial condition.

If our security measures or those of our customers are compromised or unauthorized access to customer data is otherwise obtained, our solutions may be perceived as not being secure, customers may curtail or cease their use of our solutions, our reputation may be harmed and we may incur significant liabilities.

Our operations involve the storage and transmission of customer data, including, in some cases, personally identifiable information, and any unauthorized access to, loss of or unauthorized disclosure of this information, as a result of a security incident, employee, customer or partner error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise could result in litigation, substantial liability, regulatory investigations or fines, indemnity obligations and other possible liabilities, as well as negative publicity, any of which could damage our reputation, impair our sales and harm our business. Cyber-attacks and other malicious internet-based activity continue to increase generally, and cloud-based platform providers have been targeted. In addition, if the security measures of any of our customers or platform partners are compromised, even without any actual compromise of our own systems, we may face substantial liability or negative publicity or reputational harm if our customers, platform partners or anyone else incorrectly attributes the blame for such security breaches to us or our systems. We may be unable to anticipate or prevent techniques used to obtain unauthorized access to or to sabotage our systems because they change frequently and generally are not detected until after an incident has occurred. As we increase our customer base and our brand becomes more widely known and recognized, we may become more of a target for third parties seeking to compromise our security systems or gain unauthorized access to our customers’ data.

Many governments have enacted laws requiring companies to notify individuals of data security incidents involving certain types of personal data. In addition, some of our customers contractually require notification of any data security compromise. Security compromises experienced by our competitors, by our platform partners, by our customers or by us may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise in our industry, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to

 

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attract new customers, cause existing customers to elect not to renew their subscriptions or subject us to third-party lawsuits, regulatory fines or other action or liability, which could materially and adversely affect our business and operating results.

The limitations of liability provisions in our contracts and our insurance coverage may not be enforceable or adequate.

There can be no assurance that any limitations of liability provisions in our contracts would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim, including any intellectual property claims, claims relating to a data security breach, or other claims for which we must indemnify our customers or partners. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operating results.

Data usage limitations, privacy and data protection concerns, evolving regulation of the internet, cross-border data transfers and other domestic or foreign regulations may limit the use and adoption of our solutions and adversely affect our business.

Our customers can use our solutions to store contact and other personal or identifying information regarding some of their employees. As internet commerce continues to evolve, increasing regulation by federal, state or foreign governments and agencies becomes more likely. For example, increased regulation is occurring in the areas of data privacy and data protection, both in the U.S. and internationally, and privacy- and data security-related regulatory obligations are evolving. New and modified laws and regulations applying to the solicitation, collection, processing, use and security of personal information could affect our or our customers’ ability to use data, potentially reducing demand for our solutions, imposing greater compliance burdens on us or our customers and restricting our ability to store, process and share data with our customers.

We use our customers’ data in an aggregated and anonymized format for our solutions. Privacy and data protection-related concerns may cause our customers’ employees or contacts to resist providing the personal data necessary to allow our customers to use our solutions effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our solutions in certain industries and in certain countries.

We may be subject to future foreign regulation requiring data collected or used within such foreign jurisdiction to reside there. Foreign data privacy laws and regulations, such as the E.U.’s Data Protection Directive, and the country-specific laws and regulations that implement the directive, also govern the processing of personally identifiable data, and may be stricter than U.S. laws. The E.U. currently is considering adoption of a General Data Protection Regulation, to supersede the Data Protection Directive, which may cause E.U. data privacy laws to be more stringent and to provide for greater penalties for noncompliance. The E.U. has indicated that it will recommend suspension of the U.S. / E.U. Safe Harbor Framework, under which we are permitted to transfer personal data regarding E.U. data subjects to the U.S., as part of the General Data Protection Regulation. If restrictions are adopted by the E.U. that prohibit the transfer of our data regarding E.U. data subjects to the U.S., we may have to create duplicative, and potentially expensive, information technology infrastructure and business operations in Europe, which may hinder our expansion plans in Europe or render such plans commercially infeasible. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to us or to the businesses of our customers may be substantial and may limit the use and adoption of our solutions and reduce overall demand, may require us to change our business practices

 

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in a manner that could compromise our ability to effectively pursue our growth strategy, or may lead to significant fines, penalties or liabilities for any noncompliance with such privacy laws or regulations.

In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new or additional self-regulatory standards that may place additional burdens on our customers or on us. If the gathering of personal information were to be curtailed in this manner, our solutions would be less effective and we would be required to work with our customers to modify such information on our solutions, which may reduce demand for our solutions and harm our business.

We may expand through acquisitions of, or investments in, other companies, which may divert our management’s attention and result in additional dilution to our stockholders, and we may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions.

We may in the future seek to acquire or invest in businesses, products or technologies that we believe could complement or expand our solutions, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not the acquisitions are completed. In addition, we have limited experience in acquiring other businesses, having acquired one company in 2009. If we acquire additional businesses, we may not be able to successfully integrate the acquired personnel, operations and technologies, maintain relationships with customers or partners or effectively manage the combined business following the acquisition. We may not be able to find and identify desirable acquisition targets or be successful in entering into an agreement with any particular target. We also 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, solution quality or architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or client issues. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could impact our cash flows and subject us to restrictive covenants that could inhibit our business, any of which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations or if we are unable to successfully integrate it, our business and operating results may suffer.

We may not be able to utilize a significant portion of our net operating loss or research tax credit carryforwards, which could adversely affect our future liquidity position.

As of January 31, 2015, we had approximately $198.7 million and $67.5 million of federal and state net operating loss carryforwards, which if not utilized will begin to expire in 2019 for federal purposes and began to expire in 2015 for state purposes. These net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could require additional cash expenditures for income taxes in the future. In addition, under Section 382 of the Internal Revenue Code of 1986 (the Code), our ability to utilize net operating loss carryforwards or other tax attributes in any taxable year may be limited if we experience an “ownership change.” Under Section 382 of the Code, an “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50% over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. It is possible that prior ownership changes, an ownership change in connection with this offering, or any future ownership change could have a material effect on the use of our net operating loss carryforwards or other tax attributes.

 

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We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future research and development needs, to protect and enforce our intellectual property, and to meet other needs.

As of January 31, 2015, we had total outstanding indebtedness of approximately $26.9 million drawn under various credit facilities. The degree to which we are leveraged could have negative consequences, including the following:

 

 

we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions;

 

 

our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, litigation, general corporate or other purposes may be limited; and

 

 

a substantial portion of our cash flows from operations in the future may be required for the payment of the principal amount of our existing indebtedness when it becomes due at maturity, which is currently scheduled for August 2016, with respect to indebtedness under our Amended and Restated Loan and Security Agreement with Silicon Valley Bank (SVB) and October 2017 with respect to both our Amended and Restated Loan and Security Agreement with Wellington Financial LP (Wellington) and our Mezzanine Loan and Security Agreement with SVB.

A failure to comply with the covenants and other provisions of our credit agreements could result in events of default under such agreements, which could permit acceleration of all of our outstanding indebtedness. Any required repayment of the principal amount of our existing indebtedness as a result of a fundamental change or acceleration of our existing indebtedness would reduce our cash on hand such that we would not have those funds available for use in our business.

Financing agreements to which we are party or may become party may contain operating and financial covenants that restrict our business and financing activities.

Our existing credit facilities with certain lenders contain certain operating and financial restrictions and covenants, including a prohibition on the incurrence of certain indebtedness and liens, a prohibition on certain investments, a prohibition on paying dividends on our common stock, restrictions against certain merger and consolidation transactions, certain restrictions against the disposition of assets and the requirement to maintain a minimum level of liquidity. These restrictions and covenants, as well as those contained in any future financing agreements that we may enter into, restrict our ability to finance our operations, engage in, expand or otherwise pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control, and breaches of these covenants could result in a default under the credit agreement and any future financing agreements that we may enter into. If not waived, defaults could cause our outstanding indebtedness under our credit agreement and any future financing agreements that we may enter into to become immediately due and payable.

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value-added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.

We do not collect sales and use, value-added and similar taxes in all jurisdictions in which we have sales of our solutions or related services where we do not believe that such taxes are applicable. Sales and use, value-added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect the results of our operations.

 

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Violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-bribery laws could adversely impact our business, financial condition and results of operations.

The U.S. Foreign Corrupt Practices Act (FCPA) and similar anti-bribery laws in other jurisdictions prohibit companies and their intermediaries and agents from making improper payments to foreign officials, including employees of government owned businesses, as well as private organizations, for the purpose of obtaining or retaining business. During the last few years, the United States Department of Justice and the SEC have brought an increasing number of FCPA enforcement cases, many resulting in very large fines and deferred criminal prosecutions.

We have prepared anti-corruption policies, to be in effect upon the completion of this offering, to mandate compliance with the FCPA and other similar anti-bribery laws and expect to design and implement a plan that seeks to ensure compliance with those policies. However, there can be no assurance that our employees and third-party intermediaries will comply with the FCPA and similar anti-bribery laws and the policies that we implement to seek to ensure compliance with them. Violations of the FCPA or other foreign anti-bribery laws, or allegations of such violations, could disrupt our business and cause us to suffer civil and criminal financial penalties and other sanctions, which may have a material adverse impact on our business, financial condition and results of operations.

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problems such as network security breaches, computer viruses or terrorism.

We rely heavily on our data centers, network infrastructure and information technology systems for our business operations. A disruption or failure of these systems in the event of a terrorist attack, online or hacker attack, earthquake, fire, flood, power loss, telecommunications failure, or other similar catastrophic event could cause system interruptions, delays in accessing our service, reputational harm and loss of critical data or could prevent us from providing our solutions to our customers. Our service is delivered from data centers operated by a third party in Virginia and California. In addition, we are headquartered and most of our employees reside in the San Francisco Bay Area, an area susceptible to earthquakes, and a major earthquake or other catastrophic event could affect our employees, who may not be able to access our systems or otherwise continue to provide our solutions to our customers. A catastrophic event that results in the destruction or disruption of our data centers, or our network infrastructure or information technology systems, or access to our systems, could affect our ability to conduct normal business operations and adversely affect our operating results.

Risks relating to owning our common stock and this offering

There has been no prior market for our common stock and an active market may not develop or be sustained, and you may not be able to resell your shares at or above the initial public offering price, if at all.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock has been determined through negotiations between the underwriters and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon closing of this offering or, if it does develop, it may not be sustainable, which could adversely affect your ability to sell your shares and could depress the market price of our common stock.

 

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Our stock price may be volatile and may decline regardless of our operating performance resulting in substantial losses for investors purchasing shares in this offering.

The trading prices of the securities of technology companies, including providers of cloud-based software, have been highly volatile. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

 

actual or anticipated fluctuations in our revenue and other operating results, including as a result of the addition or loss of customers;

 

 

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

 

 

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 ratings and financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

 

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

 

 

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

 

 

announcements by us with regard to the effectiveness of our internal controls and our ability to accurately report financial results;

 

 

new laws or regulations or new interpretations of existing laws or regulations applicable to our business or our industry;

 

 

lawsuits threatened or filed against us;

 

 

changes in key personnel; 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.

Substantial future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.

The market price for our common stock could decline as a result of the sale of substantial amounts of our common stock, particularly sales by our directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares. Based on shares outstanding as of January 31, 2015, upon completion of this offering, we will have outstanding approximately                 million shares of common

 

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stock, approximately                 million of which are subject to the 180-day contractual lock-up more fully described in “Underwriting.” The representatives of the underwriters may permit our officers, directors, employees and stockholders to sell shares prior to the expiration of the lock-up agreements.

After this offering, holders of an aggregate of                 shares of our common stock as of January 31, 2015, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. Substantially all of these shares are subject to the 180-day contractual lock-up referred to above.

In addition, the shares of common stock subject to outstanding options under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. See “Shares eligible for future sale” for a more detailed description of sales that may occur in the future.

If a substantial number of shares are sold, or if it is perceived that they will be sold, in the public market, before or after the expiration of the 180-day contractual lock-up period, the trading price of our common stock could decline substantially.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution of $                 in the pro forma net tangible book value per share as of January 31, 2015 after giving effect to this offering, based on an assumed initial public offering price of $                 per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon exercise of any warrant, upon exercise of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under our equity incentive plans or if we otherwise issue additional shares of our common stock at a price per share below the initial public offering price per share. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

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

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. If no or few securities or industry analysts cover our company, the trading price for our stock would be negatively impacted. If one or more of the analysts who covers us downgrades our stock or publishes incorrect or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

The concentration of our capital stock ownership with insiders upon the completion of this offering will likely limit your ability to influence corporate matters, including the ability to influence the outcome of director elections and other matters requiring stockholder approval.

We anticipate that our executive officers, directors, current 5% or greater stockholders and affiliated entities will together beneficially own approximately         % of our common stock outstanding after this offering based on shares outstanding as of             , 2015. As a result, these stockholders, acting together, will have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders,

 

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including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

Our management will have broad discretion in the use of the net proceeds that we receive in this offering.

Our management will have broad discretion as to how to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds in ways that increase the value of your investment. We intend to use the net proceeds for working capital and other general corporate purposes. We may use a portion of the net proceeds to expand our current business through acquisitions of other businesses, products and technologies. Until we use the net proceeds from this offering, we plan to invest them, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds to invest in future growth opportunities. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could seriously harm our business and operating results. If we incur debt, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue additional equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.

The requirements of being a public company will subject us to increased costs and may strain our resources and divert management’s attention.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the rules and regulations of the New York Stock Exchange. The requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.

The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing the costly process of implementing and testing our systems to report our results as a public company, to continue to manage our growth and to implement internal controls. We will be required to implement and maintain various other control and business systems related to our equity, finance, treasury, information technology, other recordkeeping systems and other operations. As a result of this implementation and maintenance, management’s attention may be diverted from other business concerns, which could adversely affect our business. Furthermore, we rely on third-party software and system providers for ensuring our reporting obligations and effective internal controls, and to the extent these third parties fail to provide adequate service

 

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including as a result of any inability to scale to handle our growth and the imposition of these increased reporting and internal controls and procedures, we could incur material costs for upgrading or switching systems and our business could be materially affected.

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

In addition, we expect these laws, rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain appropriate levels of coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the time and resources of our management and adversely affect our business and operating results.

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

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting commencing with our annual report covering the fiscal year ending January 31, 2017. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Prior to this offering, we have never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner. In addition, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the JOBS Act. If we are unable 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

 

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management evaluations 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.

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. In the event that we are not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced financial disclosure obligations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering. We may choose to take advantage of some but not all of these reduced reporting burdens. If we take advantage of any of these reduced reporting burdens in future filings, the information that we provide our security holders may be different than you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act) for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

We do not intend to pay dividends following the completion of this offering.

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. In addition, our Amended and Restated Loan and Security Agreement with SVB, our Amended and Restated Loan and Security Agreement with Wellington and our Mezzanine Loan and Security Agreement with

 

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SVB prohibit us from paying cash dividends, and future financing or credit agreements may contain similar restrictions. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. Investors seeking cash dividends should not purchase our common stock.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective upon the closing of this offering, include provisions that:

 

 

authorize “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

 

 

create a classified board of directors whose members serve staggered three-year terms;

 

 

specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of the board, the chief executive officer or the president;

 

 

prohibit stockholder action by written consent;

 

 

establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;

 

 

provide that our directors may be removed only for cause;

 

 

provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;

 

 

specify that no stockholder is permitted to cumulate votes at any election of directors;

 

 

authorize our board of directors to modify, alter or repeal our amended and restated bylaws; and

 

 

require supermajority votes of the holders of our common stock to amend specified provisions of our charter documents.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us in certain circumstances.

Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

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Special note regarding forward-looking statements

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “can,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

 

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses, ability to generate cash flow and ability to achieve and maintain future profitability;

 

 

our ability to anticipate market needs and timely develop new and enhanced solutions and services to meet those needs, and our ability to successfully monetize them;

 

 

the evolution of technology affecting our solutions, services and markets;

 

 

the impact of competition in our industry and innovation by our competitors;

 

 

the anticipated trends, growth rates and challenges in our business and in the markets in which we operate;

 

 

maintaining and expanding our customer base and our relationships with other companies;

 

 

our liquidity and working capital requirements;

 

 

our anticipated growth and growth strategies and our ability to effectively manage that growth and effect these strategies;

 

 

our ability to sell our solutions and expand internationally;

 

 

our failure to anticipate and adapt to future changes in our industry;

 

 

our reliance on our third-party service providers;

 

 

the impact of any failure of our solutions;

 

 

our ability to hire and retain necessary qualified employees to expand our operations;

 

 

our ability to adequately protect our intellectual property;

 

 

the anticipated effect on our business of litigation to which we are or may become a party;

 

 

our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the U.S. and internationally;

 

 

the increased expenses and administrative workload associated with being a public company;

 

 

our ability to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;

 

 

our use of the net proceeds from this offering;

 

 

the estimates and estimate methodologies used in preparing our consolidated financial statements and determining option exercise prices;

 

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the future trading prices of our common stock and the impact of securities analysts’ reports on these prices; and

 

 

other factors discussed in this prospectus in the sections titled “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations,” and “Business.”

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results and growth prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. Further, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.

 

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Industry and market data

This prospectus contains estimates and other statistical data, including those relating to our industry and the market in which we operate, that we have obtained or derived from industry publications and reports. These industry publications and reports generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. Based on our industry experience, we believe that the publications and reports are reliable and that the conclusions contained in the publications and reports are reasonable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk factors.” These and other factors could cause actual results to differ materially from those expressed in the industry publications and reports.

The sources of industry and market data contained in this prospectus are listed below:

 

(1)   Aon Hewitt’s 2014 U.S. Salary Increase Survey, published August 2014.

 

(2)   CSO Insights’ 2014 Sales Compensation & Performance Management Study, published April 2014.

 

(3)   Gartner’s “Magic Quadrant for Sales Performance Management,” published January 6, 2015.

 

(4)   “Motivating Salespeople: What Really Works” by Thomas Steenburgh and Michael Ahearne, Harvard Business Review, July 1, 2012.

 

(5)   International Data Corporation’s Worldwide SaaS and Cloud Software 2014-2018 Forecast and 2013 Vendor Shares, published July 2014.

 

(6)   United States Department of Labor – Bureau of Labor Statistics, “Occupational Employment and Wages – May 2013,” published April 1, 2014.

 

(7)   EU Skills Panorama (2014) Sales workers Analytical Highlight, prepared by ICF and Cedefop for the European Commission, published December 2014.

The Gartner Report described herein (Gartner Report) represents data, research opinion or viewpoints published as part of a syndicated subscription service, by Gartner, Inc. (Gartner). Each Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Report are subject to change without notice.

 

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Use of proceeds

We estimate that the net proceeds to us from the sale of shares of our common stock in this offering will be $        million, based on an assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option to purchase additional shares from us in full, we estimate that our net proceeds would be $        million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share would increase or decrease the net proceeds that we receive from this offering by $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of common stock offered by us would increase or decrease the net proceeds that we receive from this offering by $        million, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our financial flexibility, improve brand awareness, create a public market for our common stock and facilitate our future access to the public capital markets. We expect to use the net proceeds that we will receive from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds that we receive to acquire or invest in complementary businesses, products, services, technologies or other assets. However, we do not have agreements or commitments for any specific acquisitions or investments at this time.

We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering. Accordingly, we will have broad discretion in using these proceeds. Furthermore, the amount and timing of our actual expenditures will depend on numerous factors, including the cash used in or generated by our operations, the status of our development, the level of our sales and marketing activities, the pace of our international expansion plans and our investments and acquisitions. Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds that we receive in this offering in short-term and intermediate-term interest-bearing obligations, investment-grade investments, certificates of deposit or direct or guaranteed obligations of the U.S. government. We cannot predict whether the invested proceeds will yield a favorable return.

Dividend policy

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. In addition, unless waived, the terms of our Amended and Restated Loan and Security Agreement with SVB, our Amended and Restated Loan and Security Agreement with Wellington and our Mezzanine Loan and Security Agreement with SVB prohibit us from paying cash dividends.

 

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Capitalization

The following table shows our cash and cash equivalents and our capitalization as of January 31, 2015 on:

 

 

an actual basis;

 

 

a pro forma basis, giving effect to (1) the filing of our amended and restated certificate of incorporation, (2) the automatic conversion of all outstanding shares of convertible preferred stock into an aggregate of 71,488,311 shares of common stock immediately prior to the completion of this offering and (3) the conversion of all warrants to purchase shares of convertible preferred stock into warrants to purchase an aggregate of 2,957,415 shares of common stock, as if such conversions had occurred immediately prior to the offering, and the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital; and

 

 

a pro forma as adjusted basis, giving further effect to the sale by us of                shares of common stock in this offering, at an assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table together with “Management’s discussion and analysis of financial condition and results of operations” and our financial statements and the related notes appearing elsewhere in this prospectus.

 

      As of
January 31, 2015
 
(in thousands, except share and per share data)    Actual     Pro forma     Pro forma
as adjusted
 

 

 

Cash and cash equivalents

   $ 19,325      $ 19,325      $     
  

 

 

 

Debt and capital lease obligations, current and long-term

   $ 26,918      $ 26,918      $               

Convertible preferred stock warrant liabilities

     5,885            

Stockholders’ equity (deficit):

      

Convertible preferred stock, $0.001 par value; 79,000,000 shares authorized and 71,488,311 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     83,018            

Preferred stock, $0.001 par value; no shares authorized, issued or outstanding, actual; 20,000,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted

         

 

  

 

Common stock, $0.001 par value; 120,000,000 shares authorized and 11,528,325 shares issued and outstanding, actual; 1,000,000,000 shares authorized, 83,016,636 issued and outstanding, pro forma; 1,000,000,000 shares authorized,                  shares issued and outstanding, pro forma as adjusted

     12        83     

Additional paid-in capital

     7,413        96,245     

Accumulated other comprehensive loss

     (96     (96  

Accumulated deficit

     (115,759     (115,759  
  

 

 

 

Total stockholders’ equity (deficit)

     (25,412     (19,527  
  

 

 

 

Total capitalization

   $ 7,391      $ 7,391      $               

 

 

 

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The total number of shares of our common stock to be outstanding after this offering used in this prospectus is based on 83,016,636 shares of our common stock (including convertible preferred stock on an as converted basis) outstanding as of January 31, 2015, excluding:

 

 

18,816,161 shares of common stock issuable upon the exercise of options outstanding as of January 31, 2015, with a weighted-average exercise price of $0.82 per share;

 

 

203,550 shares of common stock issuable upon the exercise of options granted after January 31, 2015, through March 31, 2015, with a weighted-average exercise price of $2.29 per share;

 

 

1,599,850 shares of common stock issuable upon the exercise and conversion of options to purchase shares of our Series E convertible preferred stock outstanding as of January 31, 2015, with an exercise price of $0.2395 per share;

 

 

warrants to purchase an aggregate of 2,957,415 shares of our convertible preferred stock that were outstanding as of January 31, 2015 that will either be exercised or converted into warrants to purchase an aggregate of 2,957,415 shares of our common stock, with a range of expiration dates beginning on the closing of this offering (with respect to the 864,728 warrants to purchase our Series F convertible preferred stock) to up to ten years following the effectiveness of the registration statement to which this prospectus is a part, in connection with the completion of this offering, with a weighted-average exercise price of $2.03 per share; and

 

 

                shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of                  shares of common stock reserved for future issuance under the 2005 Stock Plan as of March 31, 2015,                 shares of common stock reserved for future issuance under the 2015 Plan, which will become effective in connection with this offering,                 shares of common stock reserved for future issuance under the 2015 ESPP, which will become effective in connection with this offering, and shares that become available under the 2015 Plan and the 2015 ESPP pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in “Executive compensation—Employee benefit and stock plans.”

 

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Dilution

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

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our pro forma net tangible book value as of January 31, 2015 was $        million, or $        per share, based on the total number of shares of our common stock outstanding as of January 31, 2015, after giving effect to the pro forma adjustments referenced under “Capitalization,” which will occur upon the completion of this offering.

After giving effect to (i) the pro forma adjustments referenced under “Capitalization” and (ii) the receipt of the net proceeds from the sale of                shares of common stock by us at an assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of January 31, 2015 would have been approximately $        million, or $        per share. This represents an immediate increase in pro forma net tangible book value of $        per share to our existing stockholders and an immediate dilution of $        per share to investors purchasing shares of common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution on a per share basis:

 

                  

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of January 31, 2015

   $                   

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

     
  

 

 

    

Pro forma as adjusted net tangible book value per share immediately after this offering

     
     

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

      $     

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share, after giving effect to this offering, by $        and would increase or decrease, as applicable, dilution in pro forma net tangible book value per share to new investors in this offering by $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. In addition, to the extent any outstanding options to purchase common stock are exercised, new investors will experience further dilution.

If the underwriters exercise their over-allotment option to purchase additional shares from us in full, the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering would be $         per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $        per share.

We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 shares in the number of shares we are offering would increase or decrease, as applicable, our pro

 

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forma as adjusted net tangible book value by approximately $        million, or $        per share, and the pro forma dilution per share to new investors in this offering by $        per share, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only and will change based on the actual initial public offering price, number of shares and other terms of this offering determined at pricing.

The following table summarizes, on the pro forma as adjusted basis described above as of January 31, 2015, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors purchasing shares in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range set forth on the front cover of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

      Shares purchased      Total consideration      Average
price per
share
 
     Number    Percent      Amount      Percent     

 

 

Existing stockholders

        %       $                      %       $            

New investors

        %       $           %       $     

 

 

Total

        100%       $           100%      

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors and total consideration paid by all stockholders by approximately $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. In addition, to the extent any outstanding options to purchase common stock are exercised, new investors will experience further dilution.

If the underwriters exercise their over-allotment option to purchase additional shares from us in full, our existing stockholders would own    % and our new investors would own    % of the total number of shares of our common stock outstanding upon the completion of this offering.

The foregoing discussion and tables exclude:

 

 

18,816,161 of common stock issuable upon the exercise of options outstanding as of January 31, 2015, with a weighted-average exercise price of $0.82 per share;

 

 

203,550 shares of common stock issuable upon the exercise of options granted after January 31, 2015, through March 31, 2015, with a weighted-average exercise price of $2.29 per share;

 

 

1,599,850 shares of common stock issuable upon the exercise and conversion of options to purchase shares of our Series E convertible preferred stock outstanding as of January 31, 2015, with an exercise price of $0.2395 per share;

 

 

warrants to purchase an aggregate of 2,957,415 shares of our convertible preferred stock that were outstanding as of January 31, 2015 that will either be exercised or converted into warrants to purchase an aggregate of 2,957,415 shares of our common stock, with a range of expiration dates beginning on the closing of this offering (with respect to the 864,728 warrants to purchase our Series F convertible preferred stock) to up to ten years following the effectiveness of the registration statement to which this prospectus is a part, in connection with the completion of this offering, with a weighted-average exercise price of $2.03 per share; and

 

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                shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of                  shares of common stock reserved for future issuance under the 2005 Stock Plan as of March 31, 2015,                 shares of common stock reserved for future issuance under the 2015 Plan, which will become effective in connection with this offering,                 shares of common stock reserved for future issuance under the 2015 ESPP, which will become effective in connection with this offering, and shares that become available under the 2015 Plan and the 2015 ESPP pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in “Executive compensation—Employee benefit and stock plans.”

 

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Selected consolidated financial data

You should read the following selected consolidated financial and other data in conjunction with the section titled “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

We have derived the following selected consolidated statements of operations data for the fiscal years ended January 31, 2013, 2014 and 2015 and the selected consolidated balance sheet data as of January 31, 2014 and 2015 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

      Fiscal year ended
January 31,
 
(in thousands, except per share data)    2013     2014     2015  

 

 
                    

Revenue:

      

Subscription services

   $ 27,519      $ 35,893      $ 47,309   

Professional services

     8,806        11,327        13,802   
  

 

 

 

Total revenue

     36,325        47,220        61,111   

Cost of revenue:

      

Subscription services(1)

     8,741        9,561        11,717   

Professional services(1)

     8,510        9,990        13,325   
  

 

 

 

Total cost of revenue

     17,251        19,551        25,042   
  

 

 

 

Gross profit

     19,074        27,669        36,069   
  

 

 

 

Operating expenses:

      

Research and development(1)

     6,567        9,114        11,867   

Sales and marketing(1)

     15,410        20,532        28,877   

General and administrative(1)

     5,424        7,901        10,087   

Legal settlement

            2,000          

Amortization of intangibles

     725        725        707   
  

 

 

 

Total operating expenses

     28,126        40,272        51,538   
  

 

 

 

Operating loss

     (9,052     (12,603     (15,469

Total other expense

     (173     (1,916     (2,798
  

 

 

 

Loss before income taxes

     (9,225     (14,519     (18,267

Income tax expense

     147        24        265   
  

 

 

 

Net loss

   $ (9,372   $ (14,543   $ (18,532
  

 

 

 

Net loss attributable to common stockholders

   $ (9,372   $ (14,543   $ (18,532
  

 

 

 

 

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      Fiscal year ended January 31,  
(in thousands, except per share data)    2013     2014     2015  

 

 

Net loss per share attributable to common stockholders:

      

Basic and diluted

   $ (1.04   $ (1.43   $ (1.67
  

 

 

 

Weighted-average number of shares used in computing net loss per share attributable to common stockholders:

      

Basic and diluted

     9,011        10,154        11,074   
  

 

 

 

Pro forma net income (loss) per share:

      

Basic and diluted

       $ (0.22
  

 

 

 

Weighted-average shares used in computing pro forma net loss per share:

      

Basic and diluted

         84,162   

 

 
(1)   Stock-based compensation expense is included in our results of operations as follows (in thousands):

 

      Fiscal year ended
January 31,
 
          2013              2014              2015      
                      

Cost of subscription services

   $ 61       $ 74       $ 237   

Cost of professional services

     33         43         61   

Research and development

     84         134         272   

Sales and marketing

     156         165         312   

General and administrative

     181         280         776   
  

 

 

 

Total stock-based compensation

   $ 515       $ 696       $ 1,658   

 

 

Consolidated balance sheet data (in thousands):

 

      As of
January 31,
 
     2014     2015  

 

 
              

Cash and cash equivalents

   $ 12,452      $ 19,325   

Working capital deficit

     (11,151     (6,791

Total assets

     39,760        52,695   

Deferred revenue

     29,531        34,143   

Debt and capital lease obligations, current and long-term

     15,079        26,918   

Convertible preferred stock warrant liabilities

     2,616        5,885   

Convertible preferred stock

     75,454        83,018   

Total stockholders’ equity (deficit)

     (17,318     (25,412

 

 

 

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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 our consolidated financial statements and related notes included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk factors” and “Special note regarding forward-looking statements.” Our fiscal year end is January 31 and our fiscal quarters end on April 30, July 31, October 31, and January 31.

Overview

We are a leading provider of enterprise-class, cloud-based incentive compensation solutions for employee and sales performance management. We address a critical business need: to incentivize employees and align their behaviors with company goals. Our solutions allow organizations to make better strategic decisions, optimize behaviors, increase sales and employee performance, improve margins, increase operational efficiencies, mitigate risk, design better incentive compensation plans and reduce error rates in incentive compensation calculations. We were the first 100% cloud-based, multi-tenant provider focusing solely on the incentive compensation and employee and sales performance management market and we achieved our leadership position through domain expertise and innovative technology. We deliver our solutions through a SaaS business model.

We were founded in March 2005 and initially we focused on providing incentive compensation solutions for sales personnel. As we have grown, we have expanded our solutions to serve all types of employees across a variety of industries and companies, ranging from FORTUNE 50 enterprises to small, emerging companies. Our initial commercially available solution was Xactly Incent Enterprise, our flagship solution, which helps large enterprise and mid-market companies manage the critical elements of incentive compensation. In 2010, we introduced Xactly Incent Express, our incentive compensation solution that provides streamlined functionality targeted to companies with fewer than 350 employees. In 2013, we introduced Xactly Objectives, a solution for both sales and non-sales personnel, allowing managers and employees to collaboratively track and achieve individual and shared goals. In August 2014, we introduced Xactly Insights, a solution which helps our customers make fact-based decisions to motivate employees and drive business performance using our empirical set of aggregated and anonymized data. In addition, over the years, we have also introduced modules that augment Xactly Incent Enterprise, such as analytics, modeling, automated workflows and approvals and credit assignment.

Our customer base has been predominantly located in the U.S., and we plan to grow our customer base internationally. However, a number of our customers are U.S. companies with employees abroad. We estimate that approximately 28% of our subscribers are located outside of the U.S., based on a representative sample of our user logins during the last two months of the fiscal year ended January 31, 2015. For the fiscal year ended January 31, 2015, approximately 92% of our revenue was from U.S. customers. We market our solutions and services through our direct sales force and sales support staff, and we also rely on partners to refer opportunities to our sales force.

Because we offer our solutions on a subscription basis, we have visibility into a substantial portion of our future revenue. Subscriptions are typically sold through non-cancellable contracts with one to three year terms. Subscription fees are primarily based on the number of subscribers per customer per month. We generally

 

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invoice customers annually in advance. The prices we charge a customer per subscriber are driven, in part, by subscriber attributes and the number of subscribers for which that customer has contracted, with generally lower prices per subscriber for larger contracts consistent with industry practice. Changes in competitive or market conditions may also cause us to reduce the prices we charge for our solutions or revise the pricing model upon which they are based. We recognize subscription services revenue ratably over the term of the contract, and amounts billed in excess of revenue recognized for the period are reported as deferred revenue on our consolidated balance sheet. Our deferred revenue does not include the unbilled portion of subscription agreements.

We also derive revenue from professional services. Professional services include revenue from assisting customers in implementing our solutions and optimizing their uses, such as application configuration, system integration, data transformation and automation services, and education and training services. This revenue is largely driven by the number and mix of implementations performed by us in a quarter. Professional services are billed predominantly on a time-and-materials basis, with some fixed-fee arrangements. Professional services yield lower margins than subscriptions due to the labor-intensive nature of such services. We also have partners who implement our solutions for which we do not receive professional services revenue.

As of January 31, 2015, we had approximately 194,000 subscribers, compared to approximately 140,000 subscribers at January 31, 2014, an increase of approximately 39%. We estimate that during the 2014 calendar year approximately 24% of the payees whose compensation was administered through our solution were in non-sales roles. No single customer accounted for more than 5% of our revenue for the fiscal year ended January 31, 2013, 2014 or 2015. Within our customer base, deployments range from implementations within a single division or geography to enterprise-wide or global deployments. Our growth to date has been a function of growth in new customers, new subscribers at current customers and sales of additional modules to current customers. While approximately 54% of our customers were enterprise and mid-market companies as of January 31, 2015, we derived approximately 91% of our revenue from enterprise and mid-market customers for the fiscal year ended January 31, 2015. We define our enterprise customers as those customers with a minimum of 4,000 employees and our mid-market customers as those customers with at least 350 and less than 4,000 employees. We have sold our solutions to customers in a number of industry verticals, including business & financial services, communications, high-tech manufacturing, life sciences, media & internet and SaaS & traditional software.

We had total revenue of $36.3 million, $47.2 million and $61.1 million for the fiscal years ended January 31, 2013, 2014 and 2015, respectively, resulting in year-over-year increases of 30% and 29%. Our subscription revenue for the fiscal years ended January 31, 2013, 2014 and 2015 was $27.5 million, $35.9 million and $47.3 million, respectively, resulting in year-over-year increases of 30% and 32%. We have made and expect to continue to make significant investments to support our growth and our transition to becoming a public company, and accordingly have incurred net losses of $9.4 million, $14.5 million and $18.5 million for the fiscal years ended January 31, 2013, 2014 and 2015, respectively. We expect to incur losses for the foreseeable future and may not be able to achieve or sustain profitability.

In May 2015, we established the XactlyOne Foundation as a non-profit organization, and we plan to issue 200,000 shares of our common stock to it. The proposed programs of the XactlyOne Foundation include grants, volunteerism and other projects. We believe the XactlyOne Foundation will foster employee morale, strengthen our community presence and provide increased brand visibility. We will incur a non-cash expense in the quarter ending July 31, 2015 equal to the fair value of the shares of our common stock issued to the XactlyOne Foundation.

Our growth strategy includes acquiring new customers, selling more subscriptions and modules to existing customers, enhancing our existing solutions, introducing new solutions and modules, expanding internationally, developing our partner ecosystem and pursuing selective acquisitions. Our continued growth is dependent on

 

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selling more solutions and on a stable or robust economy. A general economic downturn that leads to less hiring or to a reduction in hiring or spending by our customers or potential customers would negatively impact our growth and would adversely affect our operating results. Given our limited experience in operating our business internationally, there is a risk that efforts that we may undertake to expand abroad will not be successful, which would adversely affect our operating results.

Key business metrics

We use the following key business metrics in addition to our U.S. GAAP financial results to evaluate growth trends, measure our performance and make strategic decisions.

Subscribers

The number of subscribers at each of our customers ranges from tens to thousands. As of January 31, 2015, we had approximately 194,000 subscribers. This represents an increase of approximately 39% over the approximately 140,000 subscribers we had as of January 31, 2014. A subscriber is a unique user account purchased by a customer for use by an employee or other customer-authorized user.

Revenue retention rate

We believe that our revenue retention rate provides insight into our ability to retain and grow revenue from our customers. We calculate our revenue retention rate for a particular fiscal year by dividing (i) the implied monthly recurring subscription revenue under customer agreements as of the last day of that fiscal year from those customers that were also customers as of the last day of the prior fiscal year by (ii) the implied monthly recurring subscription revenue under customer agreements from all customers as of the last day of the prior fiscal year. We define implied monthly recurring subscription revenue as the total amount of minimum recurring subscription revenue contractually committed to under each of our customer agreements over the entire term of the agreement, divided by the number of months in the term of the agreement. This calculation includes the impact on our revenue from customer non-renewals, additions or decreases in subscribers, deployments of additional modules or discontinued use of modules by our customers, and price changes for our solutions. This ratio does not reflect implied monthly recurring subscription revenue for new customers added after the last day of the prior fiscal year.

 

      As of
January 31,
 
     2013      2014      2015  

 

 

Subscribers*

     108,000         140,000         194,000   

Revenue retention rate

     102%         102%         104%   

 

 

 

*   Rounded to the nearest thousand.

Key components of our results of operations

Revenue

Subscription services

Subscription services include revenue from our incentive compensation solutions. We generate revenue from subscription services and related support of our solutions, generally pursuant to non-cancellable contracts that

 

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range in duration from one to three years. We typically invoice customers in advance in annual installments for our subscription services. We recognize subscription services revenue ratably over the term of the subscription. Amounts billed in excess of revenue recognized for the period are reported as deferred revenue on our consolidated balance sheet.

Professional services

Professional services include revenue from assisting customers in implementing and optimizing use of our incentive compensation solutions. These services include application configuration, system integration, data transformation and automation services, education and training services and strategic services.

Our professional services are billed predominantly on a time-and-materials basis, with some services billed on a fixed-fee basis. We generally invoice customers monthly as the work is performed for time-and-materials arrangements or on a milestone basis for fixed-fee arrangements. We recognize professional services revenue as the services are performed using the proportional-performance method, with performance based on hours of work performed or upon project completion for certain fixed-fee contracts.

Cost of revenue

Subscription services

Our cost of subscription services consists primarily of data center capacity costs, personnel costs for our data center and customer support departments, software and maintenance costs, third-party royalties and other outside services associated with delivery of our subscription services. In addition, our cost of subscription services includes allocated depreciation and amortization, facilities, insurance and rent expenses.

Professional services

Cost of professional services consists primarily of personnel costs for our professional services delivery team as well as other outside services associated with supplementing our internal staff. In addition, our cost of professional services includes allocated depreciation, facilities, insurance and rent expenses.

Operating expenses

We classify our operating expenses as research and development, sales and marketing, general and administrative expenses and amortization of intangibles.

Research and development expenses consist primarily of personnel costs and outside services. In addition, research and development expenses include allocated depreciation, facilities, insurance and rent expenses. We believe that continued investment in our solutions is important for our growth. We expect our research and development expenses to continue to increase in dollar amount for the foreseeable future, and these expenses may also increase as a percentage of our total revenue, at least in the near term.

Sales and marketing expenses consist primarily of personnel costs, sales commissions, customer-focused events and travel-related expenses. In addition, sales and marketing expenses include allocated depreciation, facilities, insurance and rent expenses. We expect our sales and marketing expenses to continue to increase in dollar amount for the foreseeable future as we expand our sales and marketing efforts domestically and internationally, and these expenses also may increase as a percentage of our total revenue, at least in the near term.

General and administrative expenses consist primarily of personnel costs for finance, accounting, legal, human resources and management information systems personnel. In addition, general and administrative expenses

 

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include outside legal costs, professional fees and all other supporting corporate expenses not allocated to other departments. Following the completion of this offering, we expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, and increased expenses for insurance, investor relations, and professional services. We expect our general and administrative expenses to continue to increase in dollar amount for the foreseeable future, and these expenses also may increase as a percentage of our total revenue, at least in the near term.

Amortization of intangibles includes the amortization of certain acquired customer relationships and contract rights in connection with our acquisition of Centive, Inc. (Centive) in 2009. As of January 31, 2015, all acquired intangible assets have been fully amortized.

Results of operations

The following tables show our results of operations in dollars and as a percentage of our total revenue. The historical results presented below are not necessarily indicative of the results that may be expected for any future period:

 

      Fiscal year ended
January 31,
 
(in thousands)    2013     2014     2015  

 

 
                    

Revenue:

      

Subscription services

   $ 27,519      $ 35,893      $  47,309   

Professional services

     8,806        11,327        13,802   
  

 

 

 

Total revenue

     36,325        47,220        61,111   

Cost of revenue:

      

Subscription services

     8,741        9,561        11,717   

Professional services

     8,510        9,990        13,325   
  

 

 

 

Total cost of revenue

     17,251        19,551        25,042   
  

 

 

 

Gross profit

     19,074        27,669        36,069   
  

 

 

 

Operating expenses:

      

Research and development

     6,567        9,114        11,867   

Sales and marketing

     15,410        20,532        28,877   

General and administrative

     5,424        7,901        10,087   

Legal settlement

            2,000          

Amortization of intangibles

     725        725        707   
  

 

 

 

Total operating expenses

     28,126        40,272        51,538   
  

 

 

 

Operating loss

     (9,052     (12,603     (15,469

Total other expense

     (173     (1,916     (2,798
  

 

 

 

Loss before income taxes

     (9,225     (14,519     (18,267

Income tax expense

     147        24        265   
  

 

 

 

Net loss

   $ (9,372   $ (14,543   $ (18,532

 

 

 

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Percentage of total revenue

 

      Fiscal year ended
January 31,*
 
         2013             2014             2015      

 

 
                    

Revenue:

      

Subscription services

     76     76     77

Professional services

     24        24        23   
  

 

 

 

Total revenue

     100        100        100   

Cost of revenue:

      

Subscription services

     24        20        19   

Professional services

     23        21        22   
  

 

 

 

Total cost of revenue

     47        41        41   
  

 

 

 

Gross profit

     53        59        59   

Operating expenses:

      

Research and development

     18        19        19   

Sales and marketing

     42        43        47   

General and administrative

     15        17        17   

Legal settlement

            4          

Amortization of intangibles

     2        2        1   
  

 

 

 

Total operating expenses

     77        85        84   
  

 

 

 

Operating loss

     (25     (27     (25

Total other expense

            (4)        (5)   
  

 

 

 

Loss before income taxes

     (25     (31     (30

Income tax expense

                     
  

 

 

 

Net loss

     (26 )%      (31 )%      (30 )% 

 

 

 

*   Certain figures may not sum due to rounding.

Comparison of the fiscal years ended January 31, 2014 and 2015

Revenue

 

 

      Fiscal year ended
January 31,
                 
(dollars in thousands)    2014      % of
Revenue
     2015      % of
Revenue
     Change      % Change  

 

 

Subscription services

   $ 35,893         76%       $ 47,309         77%       $ 11,416         32%   

Professional services

     11,327         24%         13,802         23%         2,475         22%   
  

 

 

 

Total revenue

   $ 47,220         100%       $ 61,111         100%       $ 13,891         29%   

 

 

Total revenue increased by $13.9 million, or 29%, for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014.

Subscription services revenue increased by $11.4 million, or 32%, for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014. The increase was primarily due to the addition of new customers and to a lesser extent, an increase in subscribers at existing customers, as well as the sale of additional products and modules to existing customers. The number of subscribers increased from

 

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approximately 140,000 as of January 31, 2014 to approximately 194,000 as of January 31, 2015, an increase of approximately 39%. The pricing for our subscription services remained relatively consistent over these periods.

Professional services revenue increased by $2.5 million, or 22%, for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014. The increase in professional services revenue related to an increase in implementation and integration services related to the increase in the number of new customers purchasing our subscriptions.

Cost of revenue and gross margin

 

      Fiscal year ended January 31,                  
(dollars in thousands)    2014      % of
Revenue
     2015      % of
Revenue
     Change      % Change  

 

 

Cost of revenue:

                 

Subscription services

   $ 9,561         20%       $  11,717         19%       $ 2,156         23%   

Professional services

     9,990         21%         13,325         22%         3,335         33%   
  

 

 

 

Total cost of revenue

   $ 19,551         41%       $ 25,042         41%       $ 5,491         28%   
  

 

 

 

Gross profit

   $ 27,669          $ 36,069          $ 8,400         30%   

Gross margin

     59%            59%            —%      

 

 

Cost of revenue increased by $5.5 million, or 28%, for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014, primarily due to an increase in personnel costs, royalty costs, outside services and depreciation.

Cost of subscription services increased by $2.2 million, or 23%, for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014, primarily due to an increase of $1.0 million in personnel costs for headcount necessary to support the growth in our subscriber base, a $0.7 million increase in royalty costs and a $0.4 million increase in depreciation.

Cost of professional services increased $3.3 million, or 33%, for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014, primarily due to an increase of approximately $2.9 million in outside services related to increases in the use of contractors required to satisfy demand for implementations as well as a $0.4 million increase in personnel costs primarily due to increases in salaries and bonuses.

Overall gross margin remained consistent at 59% for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014.

Operating expenses

 

      Fiscal year ended January 31,*                 
(dollars in thousands)    2014      % of
Revenue
     2015      % of
Revenue
     Change     % Change  

 

 

Research and development

   $  9,114         19%       $  11,867         19%       $ 2,753        30%   

Sales and marketing

     20,532         43%         28,877         47%         8,345        41%   

General and administrative

     7,901         17%         10,087         17%         2,186        28%   

Legal settlement

     2,000         4%                 —%         (2,000     (100)%   

Amortization of intangibles

     725         2%         707         1%         (18     (2)%   
  

 

 

    

 

 

 

Total operating expenses

   $  40,272         85%       $ 51,538         84%       $ 11,266        28%   

 

 

 

*   Certain figures may not sum due to rounding.

 

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Research and development expenses increased by $2.8 million, or 30%, for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014, primarily due to an increase in personnel costs of $2.8 million related to increases in headcount to support our development and product management teams and an increase of $0.6 million in facilities and other costs related to headcount growth. These increases were partially offset by a decrease of $0.7 million in outside services as we filled contractor roles with full time employees.

Sales and marketing expenses increased by $8.3 million, or 41%, for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014, primarily due to an increase in personnel costs of $3.9 million related to an increase in headcount aimed at increasing revenue. In addition, there was an increase in costs of $2.9 million due to increases in targeted marketing and promotions costs related to lead generation, brand awareness, and customer marketing as well as commission expenses. In addition, the growth in our sales and marketing departments led to increases in facilities, other employee related travel, software, equipment and depreciation costs of $1.5 million to support these departments.

General and administrative expenses increased by $2.2 million, or 28%, for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014, primarily due to an increase in personnel costs of $1.8 million related to an increase in headcount and travel to support our continued growth and an increase of $1.1 million in accounting fees and outside consulting services. These increases were partially offset by a decrease of $0.6 million in legal fees and a decrease of $0.4 million in allocated facilities, insurance and rent due to the relative increase in headcount in other departments.

We entered into a final settlement agreement for a legal matter in the fourth quarter of the fiscal year ended January 31, 2014 and in accordance with U.S. GAAP, we recorded a $2.0 million legal settlement charge during the first quarter of the fiscal year ended January 31, 2014. The final settlement agreement requires us to pay $2.0 million in four equal installments of $0.5 million. The first and second installment payments were due and paid on November 30, 2013, and 2014, respectively, and the remaining two payments are required to be made no later than November 30, 2015 and 2016, respectively.

Amortization of intangibles of $0.7 million was consistent for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014. As of January 31, 2015, all acquired intangible assets have been fully amortized.

Total other expense

 

      Fiscal year ended January 31,*                
(dollars in thousands)    2014     % of
Revenue
    2015     % of
Revenue
    Change     % Change  

 

 

Interest expense

   $ (1,518     (3 )%    $ (3,087     (5 )%    $ (1,569     103%   

(Increase) decrease in fair value of preferred stock warrant liabilities

     (415     (1 )%      309        1     724        NM   

Other income (expense), net

     17        —      (20      %      (37     NM   
  

 

 

 

Total other expense

   $ (1,916     (4 )%    $ (2,798     (5 )%    $ (882     NM   

 

 

 

*   Certain figures may not sum due to rounding.

Interest expense increased by $1.6 million for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014, primarily due to interest accrued on a larger outstanding principal balance under our credit facilities as well as the non-cash amortization of the debt discount related to the warrants issued during the year.

 

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We recorded a $0.4 million expense for the increase in fair value of our preferred stock warrant liabilities outstanding for the fiscal year ended January 31, 2014, primarily as a result of the increase in fair value of the underlying convertible preferred stock. This compared to a $0.3 million benefit for the decrease in fair value of our preferred stock warrant liabilities outstanding for the fiscal year ended January 31, 2015.

Comparison of the fiscal years ended January 31, 2013 and 2014

Revenue

 

      Fiscal year ended January 31,      Change      % Change  
(dollars in thousands)    2013      % of
Revenue
     2014      % of
Revenue
       

 

 

Subscription services

   $ 27,519         76%       $ 35,893         76%       $ 8,374         30%   

Professional services

     8,806         24%         11,327         24%         2,521         29%   
  

 

 

 

Total revenue

   $ 36,325         100%       $ 47,220         100%       $ 10,895         30%   

 

 

Total revenue increased by $10.9 million, or 30%, for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013.

Subscription services revenue increased by $8.4 million, or 30%, for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013. The increase was primarily due to the addition of new customers and to a lesser extent, an increase in subscribers at existing customers, as well as the sale of additional modules to existing customers. The number of subscribers increased from approximately 108,000 as of January 31, 2013 to approximately 140,000 as of January 31, 2014, an increase of approximately 30%. The pricing for our subscription services remained relatively consistent over these periods.

Professional services revenue increased by $2.5 million, or 29%, for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013. The increase in professional services revenue related to an increase in implementation and integration services related to the increase in the number of new customers purchasing our subscriptions.

Cost of revenue and gross margin

 

      Fiscal year ended January 31,      Change      % Change  
(dollars in thousands)    2013      % of
Revenue
     2014      % of
Revenue
       

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cost of revenue:

                 

Subscription services

   $ 8,741         24%       $  9,561         20%       $ 820         9%   

Professional services

     8,510         23%         9,990         21%         1,480         17%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenue

   $ 17,251         47%       $  19,551         41%       $ 2,300         13%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

   $ 19,074          $ 27,669          $ 8,595         45%   

Gross margin

     53%            59%            6%      

 

 

Cost of revenue increased by $2.3 million, or 13%, for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013, primarily due to an increase in personnel costs, outside services and data center capacity costs necessary to support our growth.

Cost of subscription services increased by $0.8 million, or 9%, for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013, primarily due to an increase of $1.1 million in personnel costs for headcount necessary to support the growth in our subscriber base as well as a $0.8 million increase in

 

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software, equipment and depreciation costs associated with our data center and customer operations. These increases were partially offset by a decrease of $0.5 million in the use of outside services as we filled contractor roles with full time employees and a decrease of $0.6 million in royalty costs.

Cost of professional services increased $1.5 million, or 17%, for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013, due to an increase in personnel costs related to increases in headcount and use of contractors required to satisfy demand for implementations.

Overall gross margin increased 6% to 59% for the fiscal year ended January 31, 2014 compared to 53% for the fiscal year ended January 31, 2013, primarily due to the overall growth in our subscription business and a decrease in third-party royalty costs.

Operating expenses

 

      Fiscal year ended January 31,*      Change      % Change  
(dollars in thousands)    2013      % of
Revenue
     2014      % of
Revenue
       

 

 

Research and development

   $ 6,567         18%       $  9,114         19%       $ 2,547         39%   

Sales and marketing

     15,410         42%         20,532         43%         5,122         33%   

General and administrative

     5,424         15%         7,901         17%         2,477         46%   

Legal settlement

             —%         2,000         4%         2,000         —%   

Amortization of intangibles

     725         2%         725         2%                 —%   
  

 

 

 

Total operating expenses

   $ 28,126         77%       $  40,272         85%       $ 12,146         43%   

 

 

 

*   Certain figures may not sum due to rounding.

Research and development expenses increased by $2.5 million, or 39%, for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013, primarily due to an increase in personnel costs of $1.9 million related to increases in headcount to support our development and product management teams, an increase of $0.5 million in outside services as we filled roles with contractors in order to execute on our product development roadmap, and an increase of $0.1 million related to depreciation.

Sales and marketing expenses increased by $5.1 million, or 33%, for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013, primarily due to an increase in personnel costs of $3.2 million related to an increase in headcount and travel aimed at increasing revenue. In addition, there was an increase in costs of $1.6 million due to increases in targeting marketing and promotions costs related to lead generation, brand awareness, partner promotions and customer marketing as well as commission expenses. In addition, the growth in our sales and marketing departments led to increases in software, equipment and depreciation costs of $0.4 million to support these departments.

General and administrative expenses increased by $2.5 million, or 46%, for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013, primarily due to an increase in personnel costs of $0.9 million related to an increase in headcount and travel to support the continued growth of the company, an increase of $0.7 million in legal fees, an increase of $0.6 million in accounting fees and outside consulting services, and an increase of $0.2 million in bad debt.

We entered into a final settlement agreement for a legal matter in the fourth quarter of the fiscal year ended January 31, 2014 and in accordance with U.S. GAAP, we recorded a $2.0 million legal settlement charge during the first quarter of the fiscal year ended January 31, 2014. The final settlement agreement requires us to pay $2.0 million in four equal installments of $0.5 million. The first and second installment payments were due and paid on November 30, 2013 and 2014, respectively. Excluding the $2.0 million legal settlement charge that we

 

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recorded in the fiscal year ended January 31, 2014, our net loss increased $3.1 million to $12.5 million, or 27% of total revenue, for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013.

Amortization of intangibles of $0.7 million was consistent for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013.

Total other expense

 

      Fiscal year ended
January 31,
     Change     % Change  
(dollars in thousands)    2013     % of
Revenue
     2014     % of
Revenue
      

 

 

Interest expense

   $ (176     — %       $ (1,518     (3)%       $ (1,342     NM   

(Increase) decrease in fair value of preferred stock warrant liabilities

     8        — %         (415     (1)%         (423     NM   

Other income (expense), net

     (5     — %         17        — %         22        NM   
  

 

 

 

Total other expense

   $ (173     — %       $ (1,916     (4)%       $ (1,743     NM   

 

 

Interest expense increased by $1.3 million for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013, primarily due to interest accrued on a larger outstanding principal balance under our credit facilities as well as the non-cash amortization of the debt discount related to the warrants issued during the year and recorded as a debt discount.

The increase in the value of our convertible preferred stock warrant liabilities was primarily due to the increase in the fair value of our convertible preferred stock as well as additional warrants that were issued during the fiscal year ended January 31, 2014, which also contributed to an increase in other expense of $0.4 million for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013.

 

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Quarterly results of operations

The following tables set forth our unaudited quarterly consolidated statements of operations data for the eight fiscal quarters ended January 31, 2015. We have prepared the statement of operations for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this prospectus, and, in our opinion, it includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. This information should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly results of operations are not necessarily indicative of our results of operations for any future period.

Consolidated statement of operations data

 

     Three months ended  
(in thousands)     Apr 30,  
2013
   

   Jul 31,   

2013

    Oct 31,
2013
    Jan 31,
2014
      Apr 30,  
2014
       Jul 31,   
2014
    Oct 31,
2014
    Jan 31,
2015
 

 

 

Revenue:

               

Subscription services

  $ 8,324      $ 8,415      $ 8,869      $ 10,285      $ 11,089      $ 11,467      $ 12,109      $ 12,644   

Professional services

    2,779        2,563        2,646        3,339        4,192        3,434        2,935        3,241   
 

 

 

 

Total revenue

    11,103        10,978        11,515      $ 13,624        15,281        14,901        15,044        15,885   

Cost of revenue:

               

Subscription services

    1,828        2,438        2,562        2,733        2,930        2,738        3,035        3,014   

Professional services

    2,325        2,217        2,397        3,051        3,655        3,428        3,071        3,171   
 

 

 

 

Total cost of revenue

    4,153        4,655        4,959        5,784        6,585        6,166        6,106        6,185   
 

 

 

 

Gross profit

    6,950        6,323        6,556        7,840        8,696        8,735        8,938        9,700   
 

 

 

 

Operating expenses:

               

Research and development

    1,963        2,265        2,227        2,659        2,770        2,695        3,241        3,161   

Sales and marketing

    4,420        4,613        5,231        6,268        5,995        8,064        7,733        7,085   

General and administrative

    1,600        1,641        2,073        2,587        3,026        2,112        2,138        2,811   

Legal settlement

    2,000                                                    

Amortization of intangibles

    181        182        181        181        181        181        181        164   
 

 

 

 

Total operating expenses

    10,164        8,701        9,712        11,695        11,972        13,052        13,293        13,221   
 

 

 

 

Operating loss

    (3,214     (2,378     (3,156     (3,855     (3,276     (4,317     (4,355     (3,521

Total other expense

    (68     (693     (608     (547     (586     (651     (404     (1,157
 

 

 

 

Loss before income taxes

    (3,282     (3,071     (3,764     (4,402     (3,862     (4,968     (4,759     (4,678

Income tax expense (benefit)

    20        26        26        (48     23        36        48        158   
 

 

 

 

Net loss

  $ (3,302   $ (3,097   $ (3,790   $ (4,354   $ (3,885   $ (5,004   $ (4,807   $ (4,836

 

 

 

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The following table presents the unaudited consolidated statement of operations data as a percentage of revenue:

 

     Three months ended*  
(in thousands)  

  Apr 30,  

2013

   

  Jul 31,  

2013

   

  Oct 31,  

2013

   

  Jan 31,  

2014

   

  Apr 30,  

2014

   

  Jul 31,  

2014

   

  Oct 31,  

2014

   

  Jan 31,  

2015

 

 

 

Revenue:

               

Subscription services

    75     77     77     75     73     77     80     80

Professional services

    25        23        23        25        27        23        20        20   
 

 

 

 

Total revenue

    100        100        100        100        100        100        100        100   

Cost of revenue:

               

Subscription services

    16        22        22        20        19        18        20        19   

Professional services

    21        20        21        22        24        23        20        20   
 

 

 

 

Total cost of revenue

    37        42        43        42        43        41        41        39   
 

 

 

 

Gross profit

    63        58        57        58        57        59        59        61   
 

 

 

 

Operating expenses:

               

Research and development

    18        21        19        20        18        18        22        20   

Sales and marketing

    40        42        45        46        39        54        51        45   

General and administrative

    14        15        18        19        20        14        14        18   

Legal settlement

    18                                                    

Amortization of intangibles

    2        2        2        1        1        1        1        1   
 

 

 

 

Total operating expenses

    92        79        84        86        78        88        88        83   
 

 

 

 

Operating loss

    (29     (22     (27     (28     (21     (29     (29     (22

Total other expense

    (1     (6     (5     (4     (4     (4     (3     (7
 

 

 

 

Loss before income taxes

    (30     (28     (33     (32     (25     (33     (32     (29

Income tax expense

                                                     (1
 

 

 

 

Net loss

    (30 )%      (28 )%      (33 )%      (32 )%      (25 )%      (34 )%      (32 )%      (30 )% 

 

 

 

*   Certain figures may not sum due to rounding.

Quarterly revenue trends

Our revenue is primarily driven by recurring subscription services. Historically, we have acquired more new customers in the last two quarters of our fiscal year, though the subscription nature of our revenue model effectively spreads the related revenue throughout the year. Our quarterly revenue for professional services may also fluctuate depending on the timing of the acquisition of new customers, our customers’ requests for additional services and the related implementation cycles. We do not receive professional services revenue when we use third-party partners to implement our solutions.

Quarterly gross margin trends

Our gross margin may fluctuate due to changes in our utilization of more expensive outside contract labor to satisfy changing demand for our professional services and when we invest in our operations and support infrastructure for our current and future customer base. In addition, in the three months ended April 30, 2013, we negotiated changes in the terms of our royalty agreement with a third party, which resulted in a higher gross margin in that quarter.

 

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Quarterly operating expenses trends

Quarterly operating expenses are primarily driven by headcount and headcount-related expenses, including variable sales compensation, product development cycles and sales and marketing programs. Research and development costs vary depending on our product development cycles and our general and administrative expenses have fluctuated due to certain legal matters and hiring patterns, although both have been relatively consistent as a percentage of revenue for the past seven quarters. We do experience some seasonality in spending on sales and marketing as we have historically participated in certain trade shows and conferences during the second and third quarters of our fiscal years. However, we cannot assure you that these trends will continue.

We entered into a final settlement agreement for a legal matter in the fourth quarter of the fiscal year ended January 31, 2014 and in accordance with U.S. GAAP, we recorded a $2.0 million legal settlement charge during the first quarter of the fiscal year ended January 31, 2014. The final settlement agreement required us to pay $2.0 million in four equal installments of $0.5 million. The first and second installment payments were due and paid on November 30, 2013 and 2014, respectively, and the remaining two payments are required to be made no later than November 30, 2015 and 2016, respectively.

Liquidity and capital resources

Liquidity

The following table summarizes our cash flows for the periods indicated:

 

      Fiscal year ended
January 31,
 
(in thousands)    2014     2015  

 

 
              

Net cash used in operating activities

   $ (4,641   $ (11,388

Net cash used in investing activities

     (1,945     (3,244

Net cash provided by financing activities

     13,050        21,509   

Cash and cash equivalents

     12,452        19,325   

 

 

We have financed our operations primarily through the sales of our solutions, private placements of our convertible preferred stock and proceeds from our credit facilities in the form of term debt, capital leases and a revolving line of credit. As of January 31, 2014 and 2015, we had $12.5 million and $19.3 million, respectively, of cash and cash equivalents.

In August 2012, we entered into an Amended and Restated Loan and Security Agreement with SVB, which consisted of a $7.0 million revolving line of credit and a $3.0 million term loan facility. We drew $1.5 million on the first tranche of term debt and $1.5 million on the revolving line of credit in August 2012 and September 2012, respectively. In addition, in March 2013, we drew an additional $1.5 million on the second tranche of term debt under the SVB agreement.

In May 2013, we entered into a Loan and Security Agreement with Wellington. The total credit facility consisted of a $10.0 million term loan facility and a $2.0 million operating line. The term loan facility and the operating line each mature on May 31, 2016, which maturity date may be extended to May 31, 2017 and again to May 31, 2018 upon the satisfaction of certain conditions and at our option. We drew $10.0 million on the term loan facility and $2.0 million on the operating line in May 2013. In connection with the Wellington credit facility, we repaid and cancelled the $3.0 million SVB term loan facility and reduced the SVB revolving line of credit from $7.0 million to $5.0 million.

 

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In January 2014, we added an additional $3.0 million term loan facility under the Wellington credit facility. Such additional term loan facility matures on May 31, 2016, which maturity date may be extended to May 31, 2017 and again to May 31, 2018 upon the satisfaction of certain conditions and at our option. We drew $3.0 million on such term loan facility in January 2014. In January 2014, we also increased the revolving line of credit under the SVB credit facility from $5.0 million to $8.0 million and extended the maturity date of such facility to August 20, 2015. We drew down an additional $0.5 million, $2.0 million and $2.5 million on this line of credit in February 2014, July 2014 and October 2014, respectively.

In October 2014, we entered into an Amended and Restated Loan and Security Agreement with Wellington, which amended and restated the original May 2013 Loan and Security Agreement. The October 2014 Wellington credit facility consists of a $15.4 million term loan facility, which is a consolidation of the balance outstanding on the term loan and operating line entered into in May 2013, and the new term loan facility matures on October 24, 2017.

In October 2014, we extended the maturity date of the SVB credit facility to August 20, 2016 and provided for increases in the revolving line of credit under such facility from $8.0 million to up to $13.0 million upon the achievement of certain milestones. In November 2014, we achieved the first such milestone and the revolving credit line under the facility was increased to $11.0 million. As of January 31, 2015, we had $4.5 million available under the SVB credit facility.

In October 2014, we entered into a Mezzanine Loan and Security Agreement with SVB, consisting of a $10.0 million mezzanine term loan facility. The mezzanine term loan facility matures on October 24, 2017. We drew $10.0 million on such mezzanine term loan facility in October 2014. In November 2014, Westriver Mezzanine Loans, LLC (Westriver) became a co-lender in the mezzanine term loan facility.

A significant majority of our customers pay in advance for annual subscriptions. Therefore, a substantial source of our cash provided by operating activities is our deferred revenue, which is included on our consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is recognized as revenue in accordance with our revenue recognition policy. As of January 31, 2014 and 2015, we had deferred revenue of $29.5 million and $34.1 million, respectively. Of these amounts, $27.7 million and $31.8 million, respectively, were recorded as current liabilities and are expected to be recorded as revenue in the following fiscal year, provided all other revenue recognition criteria have been met.

Net cash used in operating activities

As of January 31, 2013, 2014 and 2015, we had working capital deficits of $10.0 million, $11.2 million and $6.8 million, respectively. The average quarterly days sales outstanding for the fiscal years ended January 31, 2013, 2014 and 2015 were 79 days, 85 days and 84 days, respectively.

Cash used in operating activities is significantly influenced by the amount of cash we invest in personnel, customer acquisition and infrastructure to support the anticipated growth of our business, the increase in the number of customers using our solutions, and the amount and timing of customer payments. For the periods presented, we have continued to experience increases in sales and marketing expenses combined with increases in investments in personnel and infrastructure, all of which have significantly exceeded the revenue generated from the growth in our subscriber base, driving net losses, which have resulted from negative working capital for the periods presented. As we continue to invest in personnel and infrastructure to support the anticipated growth of our business, we expect working capital deficits and uses of cash in operations, to continue.

We used $4.6 million in cash for operating activities for the fiscal year ended January 31, 2014 compared to $11.4 million in cash used for operating activities for the fiscal year ended January 31, 2015. The $6.8 million increase in cash used for operations was primarily related to a $4.0 million increase in our net loss due to

 

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increased personnel and outside services costs in our research and development and sales and marketing departments aimed at executing on our product development roadmap and driving subscription revenue and increased general and administrative costs associated with supporting the growth of the business. Average days sales outstanding decreased from 85 days for the fiscal year ended January 31, 2014 to 84 days for the fiscal year ended January 31, 2015.

We used $3.0 million in cash for operating activities for the fiscal year ended January 31, 2013 compared to $4.6 million in cash used for operating activities for the fiscal year ended January 31, 2014. The $1.6 million increase in cash used for operations primarily related to a $5.1 million increase in our net loss due to increased personnel and outside services costs in our research and development and sales and marketing departments aimed at executing on our product development roadmap and driving subscription revenue, increased general and administrative costs associated with supporting the growth of the business and a $0.5 million payment related to the legal settlement. The increases in these areas of spending were partially offset by an increase of 6% in our overall gross margins primarily due to improved utilization and increased pricing in professional services. Average days sales outstanding increased from 79 days for the fiscal year ended January 31, 2013 to 85 days for the fiscal year ended January 31, 2014.

Net cash used in investing activities

Our primary investing activities have consisted of capital expenditures to purchase equipment necessary to support our data center facilities and our network and other operations. As our business grows, we expect our capital expenditures to continue to increase.

We used $1.9 million in cash for investing activities for the fiscal year ended January 31, 2014 compared to $3.2 million in cash used for investing activities for the fiscal year ended January 31, 2015. The $1.3 million increase in cash used in investing activities was primarily due to an increase in purchases of property and equipment as we made significant investments in software and equipment to support growth in our customer base as well as sustained growth of headcount levels in all functions of the business. In particular, we made significant investments in enhancing our system architecture during the fiscal year ended January 31, 2015.

We used $0.5 million in cash for investing activities for the fiscal year ended January 31, 2013 compared to $1.9 million in cash used for investing activities for the fiscal year ended January 31, 2014. The $1.4 million increase in cash used in investing activities was primarily due to an increase in purchases of property and equipment as we made significant investments in software and equipment to support growth in our customer base as well as sustained growth of headcount levels in all functions of the business. In particular, we made significant investments in enhancing our system architecture during the fiscal year ended January 31, 2014.

Net cash provided by financing activities

Our primary financing activities during the fiscal years ended January 31, 2014 and 2015 have consisted of proceeds from and payments on our term debt and line of credit with SVB and Wellington, and capital lease obligations entered into to finance investments in personnel and infrastructure as well as the issuance of Series F Convertible Preferred Stock.

We generated $13.1 million in cash from financing activities for the fiscal year ended January 31, 2014 compared to $21.5 million in cash from financing activities for the fiscal year ended January 31, 2015. The $8.4 million increase in cash from financing activities was primarily due to borrowings under the SVB mezzanine credit facility, as well as the issuance of Series F Convertible Preferred Stock, offset by repayments under the SVB credit facility in the fiscal year ended January 31, 2014 and payments of deferred initial public offering costs.

 

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We generated $2.9 million in cash from financing activities for the fiscal year ended January 31, 2013 compared to $13.1 million in cash from financing activities for the fiscal year ended January 31, 2014. The $10.2 million increase in cash from financing activities was primarily due to borrowings under the Wellington credit facility and line of credit, offset by repayments under the SVB credit facility.

Capital resources

As of January 31, 2015, we had cash and cash equivalents of $19.3 million, which were predominantly denominated in U.S. dollars and consisted of bank deposits and money market funds. As of January 31, 2015, $0.3 million of cash was held by our foreign subsidiaries. We incurred net losses of $9.4 million, $14.5 million and $18.5 million during the fiscal years ended January 31, 2013, 2014 and 2015, respectively. In addition, our accumulated deficit as of January 31, 2015 was $115.8 million.

We require access to capital to fund our operations, including general working capital for operating expenses, purchases of property and equipment for our operations, and other needs. We believe that our existing liquidity sources will satisfy our cash requirements and operations (including continued growth in revenue and employees) for at least the next 12 months. We expect that our operating losses and negative cash flows from operations will continue through at least the foreseeable future. To the extent that existing cash and cash from operations are not sufficient to fund our future operations, we may need to raise additional funds through public or private equity or additional debt financing. Although we currently are not a party to any agreement and do not have any understanding with any third parties with respect to potential investments in, or acquisitions of, businesses or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. We cannot assure you that such additional financing will be available at terms acceptable to us, or at all. In addition, we may opportunistically seek to raise additional capital to fund our continued growth. To the extent that we are unsuccessful in additional debt or equity financings, our plans for continued growth may need to be curtailed.

Contractual obligations

The following summarizes our contractual obligations as of January 31, 2015:

 

      Payments due by period  
(in thousands)    Less than
1 year
     1 to 3 years      4 to 5 years      More than
5 years
     Total  

 

 

Operating lease obligations

   $ 1,920       $ 6,128       $ 4,245       $       $ 12,293   

Capital lease obligations (including interest)

     3         2                         5   

Short- and long-term debt obligations

     6,500         25,408                         31,908   

Interest payments on long-term debt obligation(1)

     2,414         6,085                         8,499   

Purchase obligations(2)

     175                                 175   

Legal settlement obligations

     500         500                         1,000   
  

 

 

 

Total

   $ 11,512       $ 38,123       $ 4,245       $       $ 53,880   

 

 

 

(1)   We have included the expected monthly interest payments on our long-term debt obligation based on the fixed rate of interest of 9.5% per year through the maturity date of October 24, 2017. We have also included an expected final interest payment on our long-term debt equal to 7.5% of the outstanding principal balance. The short-term debt relates to a line of credit where the principal may be repaid at any time and, accordingly, interest payments cannot be estimated. As of January 31, 2015, this line of credit consisted of $6.5 million with an interest rate of 5.5% per annum.

 

(2)   Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the normal course of business for which we have not received the goods or services as of January 31, 2015. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services. The aggregate of these items represents our estimate of purchase obligations. In addition, we have other obligations for goods and services entered into in the normal course of business.

 

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The amounts in the table above exclude $2.0 million of income tax liabilities and related interest and penalties related to uncertain tax positions as we are unable to reasonably estimate the timing of settlement of these tax positions. See Note 10 to our consolidated financial statements.

Silicon Valley Bank credit facility

In March 2008, we first entered into a Loan and Security Agreement with SVB. The total credit facility originally consisted of an $8.8 million accounts receivable line of credit and a $3.0 million term loan facility. As of January 31, 2012, the term loan facility was fully repaid and no amount had been borrowed under the revolving line of credit.

In August 2012, we entered into an Amended and Restated Loan and Security Agreement with SVB, to refinance the original SVB credit facility. The total credit facility consisted of a $7.0 million revolving line of credit and a $3.0 million term loan facility. All of our assets are pledged as collateral under this agreement to SVB on a first priority, senior basis, subject to certain limitations. The 2012 agreement contains customary affirmative covenants and customary negative covenants limiting our ability and the ability of our subsidiaries to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions. We must also comply with minimum monthly recurring revenue, minimum cash flow from operations and maximum capital expenditures financial covenants. We were in compliance with all covenants as of January 31, 2015.

In February 2013, we entered into a First Amendment to Amended and Restated Loan and Security Agreement with SVB. The amendment removed the minimum cash flow from operations financial covenant, added a maximum cumulative EBITDA loss financial covenant and set the threshold amounts in the financial covenants for the fiscal year ended January 31, 2015. Additionally, in March 2013, SVB advanced us the additional $1.5 million term loan. The advance carried a variable annual interest rate of 1.75% above the prime rate and required us to make monthly interest only payments for six months. Thereafter, we became obligated to make 30 equal monthly installments of principal and accrued interest, payable at the beginning of each month through the maturity date on such advance of March 1, 2016. In May 2013, in connection with the Wellington credit facility, we entered into a Second Amendment to Amended and Restated Loan and Security Agreement with SVB. The amendment reduced the revolving line of credit to $5.0 million. Upon entering the Wellington credit facility, the outstanding balance of the SVB term loan facility of $2.9 million was repaid. In August 2013, we entered into a Third Amendment to Amended and Restated Loan and Security Agreement with SVB. The amendment removed the maximum cumulative EBITDA loss financial covenant and revised the maximum capital expenditures financial covenant. In January 2014, we entered into a Fourth Amendment to Amended and Restated Loan and Security Agreement with SVB. The amendment, among other things, added a maximum cumulative EBITDA loss financial covenant, revised the maximum capital expenditures covenant, increased the revolving line of credit to $8.0 million and amended the revolving line of credit maturity date to August 20, 2015. In March 2014, we entered into a Fifth Amendment to Amended and Restated Loan and Security Agreement with SVB. The amendment, among other things, revised the maximum cumulative EBITDA loss financial covenant and the monthly minimum recurring revenue covenant. In October 2014, we entered into a Sixth Amendment to the Amended and Restated Loan and Security Agreement. The amendment, among other things, provided for increases in the revolving line of credit to up to $13.0 million upon the achievement of certain milestones and amended the revolving line of credit maturity date to August 20, 2016. In November 2014, we achieved the first such milestone and the revolving credit line under the facility was increased to $11.0 million. As of January 31, 2015, we had $4.5 million available under the SVB credit facility.

 

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Wellington Financial LP credit facility

In May 2013, we first entered into a Loan and Security Agreement with Wellington. The total credit facility consisted of a $10.0 million 36-month, interest only term loan facility and a $2.0 million line of credit. The term loan carries a fixed interest rate of 9.5% per annum. Additional interest will accrue on the unpaid principal amount of the term loan at a per annum rate of 2.5% which will also be due at the maturity date. The line of credit carries a variable interest rate of prime plus 2.5% per annum or 6.0% per annum, whichever is greater. Interest is payable monthly on the outstanding principal amount of the line of credit. Under the line of credit, we may borrow, prepay and re-borrow loans from time to time before the maturity date. All of our assets are pledged as collateral under this agreement to Wellington on a senior basis (currently subordinated to the security interest of SVB by up to $13.0 million in aggregate principal amount), subject to certain limited exceptions. In May 2013, we borrowed $10.0 million under the term loan facility and $2.0 million under the line of credit. The Wellington agreement contains customary affirmative covenants and customary negative covenants limiting our ability and the ability of our subsidiaries to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, make capital expenditures, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions. We must also comply with a minimum EBITDA financial covenant. We were in compliance with all covenants as of January 31, 2015.

In June 2013, we entered into a First Amendment to Loan and Security Agreement to the Wellington credit facility to amend certain administrative post-closing conditions. In August 2013, we entered into a Second Amendment to Loan and Security Agreement to amend the maximum capital expenditures covenant. In January 2014, we entered into a Third Amendment to Loan and Security Agreement to add an additional $3.0 million term loan facility. As amended, the term loan facility and line of credit mature on May 31, 2016, which maturity date can be extended to May 31, 2017 and again to May 31, 2018 upon the satisfaction of certain conditions and at our option. We borrowed $3.0 million under such term loan facility in January 2014.

In October 2014, we entered into an Amended and Restated Loan and Security Agreement with Wellington, which amended and restated the original May 2013 Loan and Security Agreement. The October 2014 Wellington credit facility consolidated the outstanding borrowings under each of the term loan and line of credit into a single $15.4 million term loan facility, which matures on October 24, 2017. The October 2014 Wellington credit facility otherwise contains generally the same terms, conditions and covenants as the original May 2013 Loan and Security Agreement with Wellington, as amended, including a fixed term loan interest rate of 9.5% per annum. As of January 31, 2015, $15.4 million had been drawn under the term loan facility. In addition, in November 2014, we issued warrants to purchase 591,745 shares of our Series D-1 convertible preferred stock to Wellington at an exercise price of $1.90 per share, or, at the option of Wellington, shares of our preferred stock issued at our next round of equity financing. For more information regarding the terms of the warrants to purchase shares of our Series D-1 convertible preferred stock, see Note 6 and Note 8 to our consolidated financial statements.

Silicon Valley Bank mezzanine facility

In October 2014, we entered into a Mezzanine Loan and Security Agreement with SVB, consisting of a $10.0 million mezzanine term loan facility. The mezzanine term loan facility carries a fixed interest rate of 9.5% per annum and matures on October 24, 2017. Substantially all of our assets are pledged as collateral under this agreement to SVB on a subordinated basis (currently subordinated to the security interest of SVB by up to $13.0 million in aggregate principal amount and the security interest of Wellington by up to $15.4 million in aggregate principal amount), subject to certain limited exceptions. In October 2014, we borrowed $10.0 million under the mezzanine term loan facility. The mezzanine agreement contains customary affirmative covenants and customary negative covenants limiting our ability and the ability of our subsidiaries to, among other things,

 

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dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, make capital expenditures, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions. We must also comply with a maximum cumulative EBITDA loss financial covenant as set forth in this agreement. We were in compliance with all covenants as of January 31, 2015. In connection with the Mezzanine Loan and Security Agreement with SVB, in November 2014, we issued warrants to purchase 312,500 shares of our Series D-1 convertible preferred stock to each of SVB and Westriver at an exercise price of $1.90 per share, or, at the option of SVB or Westriver, shares of our preferred stock issued at our next round of equity financing. For more information regarding the terms of the warrants to purchase shares of our Series D-1 convertible preferred stock, see Note 6 and Note 8 to our consolidated financial statements.

Indemnification obligations

In the normal course of business, we provide indemnification of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our services, and from time to time we may be subject to claims by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been significant, but we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.

To the extent permitted under Delaware law, we have agreements whereby we indemnify our directors and officers for certain events or occurrences while the director or officer is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

Contingencies

Other taxes

We conduct operations in many tax jurisdictions throughout the U.S. In many of these jurisdictions, non-income based taxes, such as property taxes, sales and use taxes, and value-added taxes are assessed on our operations in that particular location. While we strive to ensure compliance with these various non-income based tax filing requirements, there have been instances where potential non-compliance exposures have been identified. In accordance with U.S. GAAP, we make a provision for these exposures when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated. We believe that, as of January 31, 2014 and 2015, we have adequately provided for such contingencies. However, it is possible that our results of operations, cash flows, and financial position could be harmed if one or more noncompliance tax exposures are asserted by any of the jurisdictions where we conduct our operations.

Employee agreements

We have various employment agreements with executives and key employees pursuant to which if we terminate such employee’s employment without cause, or if such employee does so for good reason, within one year following a change of control of our company, such employee is entitled to receive certain benefits including cash payments and accelerated vesting of stock options. To date, no triggering events which would cause these provisions to become effective have occurred.

 

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Off-balance sheet arrangements

During the fiscal years ended January 31, 2013, 2014 and 2015, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements.

Quantitative and qualitative disclosures about market risk

We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.

Foreign currency risk

The functional currency of our foreign subsidiaries is generally the local currency. Most of our sales are denominated in U.S. dollars, and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the U.S., the United Kingdom and India. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. During the fiscal years ended January 31, 2013, 2014 and 2015, the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our consolidated financial statements.

Interest rate sensitivity

We had cash and cash equivalents of $12.5 million and $19.3 million as of January 31, 2014 and 2015, respectively. Our cash and cash equivalents are held in cash and short-term money market funds. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income. During the fiscal years ended January 31, 2013, 2014 and 2015, the effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our interest income. In addition, as of January 31, 2014 and 2015, we had approximately $16.5 million and $6.5 million, respectively, in short- and long-term debt with variable interest rate components. A hypothetical increase or decrease in overall interest rates is not expected to have a material impact on our interest expense.

Recent accounting pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued an accounting standards update (ASU) on reporting discontinued operations and disclosures of disposals of components of an entity. The standard changes the requirements for reporting discontinued operations. The amendment is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2014. Early adoption is permitted for disposals that have not been reported in financial statements previously issued. We will apply the provisions of this standard to any future transactions after the effective date which qualify for reporting discontinued operations. We do not expect this standard to have a material impact on our consolidated financial position or results of operations.

 

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In May 2014, the FASB issued an ASU on revenue from contracts with customers, which supersedes the current revenue recognition requirements. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The standard’s effective date will be the first quarter of fiscal year 2018 using one of two adoption methods. We have not determined the potential effects of this standard on our consolidated financial statements or the planned method of adoption.

In August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We will apply the guidance and disclosure provisions of the new standard and assess the impact upon effectiveness.

In April 2015, the FASB issued an ASU on the presentation of debt issuance costs. This ASU amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. We do not expect this standard to have a material impact on our consolidated financial position or results of operations.

Critical accounting policies

We prepare our consolidated financial statements in accordance with U.S. GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. In other cases, management’s judgment is required in selecting among available alternative accounting standards that provide for different accounting treatment for similar transactions. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the amounts we report as assets, liabilities, revenue, costs, and expenses, and affect the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, our actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue recognition

We derive our revenue from two sources: (1) subscription services revenue, which is generated from the sale of subscriptions to our cloud-based offerings of incentive compensation solutions and (2) professional services revenue, which is generated from assisting customers in implementing our solutions and optimizing use.

Subscriptions are typically sold through contracts with one to three year terms. Subscription services fees are based primarily on the number of subscribers per customer per month. Customers are not permitted to take possession of our software.

 

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Professional services include application configuration, system integration, data transformation and automation services, education and training services and strategic services. Professional services are billed predominantly on a time-and-materials basis, with some fixed-fee arrangements. Professional services are performed by us directly or by third-party professional service providers engaged by us. Customers may also choose to perform these services themselves or engage their own third-party service providers.

We recognize revenue when the following criteria are met:

 

 

there is persuasive evidence of an arrangement;

 

the service is being provided to the customer or the solution has been delivered;

 

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

 

the collection of the fees is reasonably assured.

Subscription services are recognized ratably over the term of the arrangement as delivered. Professional services are recognized as the services are performed using the proportional-performance method. Performance is based on hours of work performed, or upon project completion for certain fixed-fee contracts.

We enter into arrangements with multiple deliverables that include subscription and professional services. When subscription services arrangements involve multiple elements that qualify as separate units of accounting, we allocate revenue to each deliverable in a multiple-deliverable arrangement based upon its relative selling price. We determine the selling price for each deliverable using vendor-specific objective evidence (VSOE) of selling price or third-party evidence (TPE) of selling price, if it exists. If neither VSOE nor TPE of selling price exists for a deliverable, we use our best estimated selling price (BESP) for that deliverable. Revenue allocated to each deliverable, limited to the amount not contingent on future performance, is then recognized when the basic revenue recognition criteria are met for the respective deliverable.

We determine VSOE of fair value based on historical standalone sales to customers. In determining VSOE, we require that a substantial majority of the selling prices for our subscription or professional services fall within a reasonably narrow pricing range of the applicable median selling price. We have not yet been able to establish VSOE for our subscription and professional services because we have not historically priced our service offerings within a sufficiently narrow range. When VSOE cannot be established, we apply judgment with respect to whether we can establish a selling price based on TPE. TPE is determined based on third-party prices for similar deliverables when sold separately. Generally, our pricing strategy differs from that of our peers and our services and solutions contain a significant level of differentiation such that the comparable pricing of other offerings with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor services’ selling prices are on a stand-alone basis. As a result, we use BESP as the selling price for our services. We estimate BESP for our solutions and services by considering multiple factors, including, but not limited to, prices we charge for similar offerings, market conditions, competitive landscape, and pricing practices.

Income taxes

Significant judgment may be required in determining our provision for income taxes and evaluating our tax positions. We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments or changes in the tax law or rates. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.

We provide reserves as necessary for uncertain tax positions taken on our tax filings. First, we determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit.

 

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Second, based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement, we recognize any such differences as a liability. Because of our full valuation allowance against the net deferred tax assets, any change in our uncertain tax positions would not impact our effective tax rate.

In evaluating our ability to recover our deferred tax assets, in full or in part, we consider the available positive and negative evidence, including our past results of operations, our forecast of future market growth, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment, in consultation with outside tax advisors, and are consistent with the plans and estimates we use to manage the underlying businesses. Due to the net losses we have incurred and the uncertainty of realizing our deferred tax assets, for all the periods presented, we have a full valuation allowance against our net deferred tax assets.

As of January 31, 2015, we had federal and state net operating loss carryforwards of $198.7 million and $67.5 million, respectively, and federal and state research and development tax credit carryforwards in the amount of $2.4 million and $1.2 million, respectively. In the future, we intend to utilize any carryforwards available to us to reduce our tax payments. These carryforwards may be subject to annual limitations that may result in their expiration before some portion of them has been fully utilized. If not utilized, these carryforwards will begin to expire in 2019 for federal purposes and began to expire in 2015 for state purposes.

Stock-based compensation

We measure and recognize compensation expense for all stock options granted to our employees and directors, based on the estimated fair value of the award on the grant date. We use the Black-Scholes valuation model to estimate the fair value of stock option awards. The fair value is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award on a straight-line basis. We believe that the fair value of stock options granted to non-employees is more reliably measured than the fair value of the services received. As such, the fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase in value, if any, is recognized as expense during the period the related services are rendered. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated common stock fair value, as well as assumptions regarding a number of other complex and subjective variables.

Historically, for all periods prior to this initial public offering, the fair values of the shares of common stock underlying our stock-based awards were estimated on each grant date by our board of directors. In order to determine the fair value of our common stock underlying option grants, our board of directors considered, among other things, contemporaneous valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2004 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Given the absence of a public trading market of our common stock, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including:

 

 

contemporaneous valuations of our common stock performed by unrelated third-party valuation firms;

 

 

our stage of development;

 

 

our operational and financial performance;

 

 

the nature of our services and our competitive position in the marketplace;

 

 

the value of companies that we consider peers based on a number of factors, including similarity to us with respect to industry and business model;

 

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the likelihood of achieving a liquidity event, such as an initial public offering or sale given prevailing market conditions, and the nature and history of our business;

 

 

issuances of preferred stock and the rights, preferences and privileges of our preferred stock relative to those of our common stock;

 

 

current business conditions and projections;

 

 

the history of our company and our introduction of new solutions; and

 

 

the lack of marketability of our common stock.

In valuing our common stock, our board of directors determined the equity value of our Company using both the income and the market approach valuation methods. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry as of each valuation date and is adjusted to reflect the risks inherent in our cash flows. The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to the subject company’s financial results to estimate the value of the subject company.

Since July 2013, we have used the Probability Weighted Expected Return Method, or PWERM, to allocate our equity value among various outcomes. Using the PWERM, the value of our common stock is estimated based upon a probability-weighted analysis of varying values for our common stock assuming possible future events for our Company, such as:

 

 

a “liquidation” scenario, where we assume the Company is dissolved and the book value less the applicable liquidation preferences represents the amount available to the common stockholders;

 

 

a strategic sale in the near term;

 

 

an initial public offering, or IPO; or

 

 

a downside scenario in which we sell the Company at a lower than expected stockholder liquidation value.

Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

For valuations after the completion of this initial public offering, our board of directors will determine the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the New York Stock Exchange on the date of grant.

 

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Letter from our Chief Executive Officer

Dear Prospective Stockholder,

Ten years ago we founded Xactly with a vision to change the world of incentive compensation. We built the company on the simple belief that incentives are motivating forces that shape behaviors and inspire employee performance to achieve better business results. Incentives do not simply drive compensation outcomes, but align employee behaviors with company goals. In the U.S., businesses have paid more than $800 billion a year in sales compensation alone, representing one of the single largest investments for most companies. Over 90% of businesses in the U.S. use some form of variable pay to motivate their employees. We see businesses rapidly moving toward pay-for-performance cultures and we are passionate about helping them use best-in-class incentives that drive the highest levels of performance.

We have grown to over 190,000 subscribers, currently processing on average over 1.2 billion transactions a month, and our customers have paid over $16 billion in incentive payments in the last two calendar years using our service. Our scale, combined with our technology platform, allows us to derive commercial insights that inform our customers on best incentive practices. We use this information to create industry-specific insights to strategically help our customers incent their employees more effectively.

Key to our success are our core values — what we call C.A.R.E. We use these values to guide our behaviors and decisions every day. C.A.R.E. stands for:

 

 

Customer.    Every day we strive to achieve total customer success. We are committed to delivering solutions and services that make our customers thrive. To succeed and earn the trust of our customers we must meet their expectations every single day with every interaction.

 

 

Accountability.    Accountability and integrity are at the core of everything we do. We are accountable for our actions to our customers, our partners and to each other. We do not make commitments we do not intend to keep.

 

 

Respect.    We foster an environment of teamwork and mutual respect. We respect our peers, our customers and our partners. We respect diversity and openness.

 

 

Excellence.    We are passionate about innovation and quality. We strive to achieve excellence in our solutions, services, support and partnerships. We set high standards for excellence and aim to exceed them.

We have reached an important milestone in our history — the opportunity to share our future with you in the public market. We do not see going public as a destination, but simply another step in our journey. We have focused on building a business for the long run, making sure that each brick in the foundation is solid. The capital raised by going public will allow us to build upon this foundation.

We hope you will share in our journey.

Sincerely,

 

/s/ Christopher W. Cabrera

Christopher W. Cabrera

Founder & Chief Executive Officer

 

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Business

Overview

Xactly is a leading provider of enterprise-class, cloud-based, incentive compensation solutions for employee and sales performance management. We address a critical business need: to incentivize employees and align their behaviors with company goals. Our solutions allow organizations to make better strategic decisions, optimize behaviors, increase sales and employee performance, improve margins, increase operational efficiencies, mitigate risk, design better incentive compensation plans and reduce error rates in incentive compensation calculations. We were the first 100% cloud-based, multi-tenant provider focusing solely on the incentive compensation and employee and sales performance management market and we achieved our leadership position through domain expertise and innovative technology. We deliver our solutions through a SaaS business model.

We believe that our solutions are strategic for our customers. We go beyond automation by providing our customers with commercially actionable insights so that they can optimize their employees’ behaviors. We believe that we are the first and only company to make commercially available insights derived from an empirical set of aggregated and anonymized data which helps customers make fact-based decisions to motivate employees and drive business performance. Our solutions help executives design, manage and analyze incentive programs and provide visibility into employee and incentive program performance. At the same time, employees use our solutions to monitor, estimate and track their own and their team’s performance in real-time, and modify their behaviors to maximize their payout consistent with company goals.

The design and management of incentive compensation is often highly complex. Traditional systems such as spreadsheets, manual processes and homegrown solutions are inadequate to deal with the complexity associated with variable forms of pay, such as commissions, bonuses and non-cash rewards. According to an August 2014 research study by Aon Hewitt, 91% of organizations currently offer a variable pay program for their broad based employee populations and expect to spend 13% of payroll on variable pay. Further, according to Aon Hewitt, variable pay budgets and spending have nearly doubled in the last 20 years.

We have a diverse and rapidly growing customer base ranging from FORTUNE 50 enterprises to small, emerging companies in a variety of industries such as business & financial services, communications, high-tech manufacturing, life sciences, media & internet and SaaS & traditional software, which provides us with large, unique, industry-specific data sets. Customers use our solutions to manage and incent a broad range of employees, from bank tellers to post office employees to sales people.

We strive to be a thought leader in incentives and employee performance, identifying and interpreting emerging trends, shaping and guiding industry dialogue, and creating and sharing best practices. Our thought leadership is based on our big-data insights as well as our significant industry experience. We deliver our thought leadership and innovation through the expertise of our employees as well as the authoring and dissemination of information about incentives that complement and leverage our technology solutions. We believe our thought leadership differentiates us and allows us to increase the value of our solutions to our customers.

We have achieved significant growth. As of January 31, 2015, we had approximately 194,000 subscribers, compared to approximately 140,000 subscribers as of January 31, 2014, representing an increase of approximately 39%. We estimate that during the 2014 calendar year approximately 24% of the payees whose compensation was administered through our solution were in non-sales roles. While approximately 54% of our customers were enterprise and mid-market companies, we derived approximately 91% of our revenue from enterprise and mid-market customers for the fiscal year ended January 31, 2015. As of January 31, 2015, we had approximately 725 customers.

 

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We offer our solutions on a subscription basis, typically through non-cancellable contracts with one to three year terms, which provides us with visibility into a substantial portion of our future revenue. We had total revenue of $36.3 million, $47.2 million and $61.1 million for the fiscal years ended January 31, 2013, 2014 and 2015, respectively, resulting in year-over-year increases of 30% and 29%. Our subscription revenue for the fiscal years ended January 31, 2013, 2014 and 2015 was $27.5 million, $35.9 million and $47.3 million, respectively, resulting in year-over-year increases of 30% and 32%. Our professional services revenue for the fiscal years ended January 31 2013, 2014 and 2015 was $8.8 million, $11.3 million and $13.8 million, respectively, year-over-year increases of 29% and 22%, respectively. For the fiscal year ended January 31, 2015, our subscription services revenue accounted for 77% of total revenue and our professional services revenue accounted for the remaining 23%. We have made and expect to continue to make significant investments to support our growth and our transition to becoming a public company, and accordingly have incurred net losses of $9.4 million, $14.5 million and $18.5 million for the fiscal years ended January 31, 2013, 2014 and 2015, respectively.

Industry background

Market overview and history.    To determine variable pay and communicate results, companies have traditionally used spreadsheets or other manual processes that are often error prone and are not designed for use by mobile users. Spreadsheets and manual processes tend to provide untimely results with limited visibility to employees and management and are difficult to understand by employees, encouraging employees to build their own incentive compensation spreadsheets. In addition, spreadsheets, manual processes, and homegrown systems are difficult to integrate with CRM, CPQ, HCM, SCM and ERP applications. The incentive compensation programs employed by today’s companies have increased in complexity as management teams seek to implement more innovative variable compensation structures and use incentive compensation plans more broadly across their organizations. The importance and complexity of incentive compensation programs drive a need for sophisticated employee and sales performance management solutions.

Emergence of cloud-based solutions.    Over the past decade, cloud-based solutions have emerged, enabling enterprises to improve a range of business and technology operations. In comparison to legacy systems, cloud-based solutions can provide a number of benefits to enterprises, including improved application performance, broader user adoption, simpler integration, greater flexibility and lower costs of ownership. Over time, we believe that enterprises will continue to shift their information technology budgets from legacy software, hardware and information technology services to cloud-based solutions. As a result of the functionality and flexibility provided by cloud-based applications, the annual growth rate of the SaaS and cloud software market is expected to be significantly greater than that of the overall software market. According to IDC, the worldwide SaaS and cloud software market reached $39.3 billion in revenue in 2013, a 22.6% year-over-year growth rate, and will grow to $102.9 billion by 2018, at a compound annual growth rate of 21.3%, compared to an expected compound annual growth rate of 6.3% for the broader software market for the same time period.

Market challenges. As outlined above, companies often face numerous challenges associated with incentive compensation and employee and sales performance management, which create the need for an easy-to-use, mobile, effective, cloud-based solution. Although many companies have invested in legacy and manual incentive compensation systems, these solutions often do not meet the evolving needs of today’s companies for a number of reasons, including:

Expensive to install, implement and maintain.    Legacy systems have generally been deployed on-premise, requiring substantial investments in infrastructure and resources in order to enhance, upgrade and maintain such systems. Typically, these solutions are highly customized to reflect the particular nuances of a company at a specific point in time. However, these systems can become outdated due to changes in incentive compensation plan structures, employee turnover and changes in the mobile devices used to access these systems.

 

 

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Difficult to integrate.    Although many legacy sales performance management systems provide adequate functionality in specific areas, these systems are composed of numerous discrete applications that frequently do not integrate well with each other. In order to manage and integrate data across these applications and across broad geographies, many companies have had to engage in lengthy and expensive custom development and system integration projects.

Limited mobility.    Mobility has emerged as a new challenge for on-premise systems. These applications often lack accessibility and visibility into information in real time. Additionally, on-premise applications often use outdated technology making it difficult for the business user to view and interact with information through their mobile devices, greatly limiting the user experience.

Slower innovation.    Legacy systems are often associated with slow innovation and long product development cycles that can easily extend a year or longer. Infrequent product releases make it difficult to meet rapidly evolving market demands leading to less satisfied customers.

Market opportunity.    Incentive compensation and employee and sales performance management continue to increase in importance for both companies and employees. According to a 2012 Harvard Business Review article, U.S. companies alone spent more than $800 billion on sales force compensation each year, representing the single largest marketing investment for most business-to-business companies.

The addressable market for incentive compensation and employee and sales performance management is large and significantly underpenetrated by commercial solutions. According to CSO Insights, spreadsheets continue to be the dominant tool for both calculating and managing commissions and designing and managing sales territories, with only 12.7% of companies using a commercial incentive compensation management system as their primary method in 2014, as shown below:

 

LOGO

We believe the relatively low market penetration of automated SPM solutions highlights the nascent nature of our market. According to Gartner in 2015, “the SPM market has continued to mature in the last year, growing into a market of more than $2 billion, as measured by spend on all software, consulting and managed services across SPM and human capital management (HCM) providers (where HCM functions are used for sales processes).” Further, “Gartner also estimates, based on analysis of inquiries and vendors’ feedback, that less than 5% of all companies using at least one SPM solution have implemented the full set of SPM functionality.” Finally, according to Gartner, “by 2017, 15% of organizations will use crowdsourced benchmarks to design their incentive compensation plans.” We believe that we are the first and only company to make commercially available insights derived from an empirical set of aggregated and anonymized data which helps customers make fact-based decisions to motivate employees and drive business performance.

We believe the total addressable market is significantly larger than the market currently being served. Based on our internal analysis and industry experience, together with third-party data, we estimate the total addressable market was approximately $7 billion in 2014. We estimate that the number of persons in sales and related

 

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occupations in the United States and the European Union was 14 million and 15.6 million in 2013, respectively, based on reports by the U.S. Bureau of Labor Statistics and by ICF and Cedefop for the European Commission. We then applied what we believe is a reasonable 15% discount to this total of 29.6 million people. Finally, we multiplied the result by our fiscal year 2015 average subscription revenue per subscriber, which was approximately $280. Our estimate of the total addressable market of approximately $7 billion does not account for revenue from potential sales to non-sales employees, markets outside the United States and the European Union and for professional services.

Our solutions

We provide cloud-based incentive compensation solutions for employee and sales performance management. Our solutions include the following key attributes:

Automation.    A fundamental purpose of automating incentive processes is to reduce errors and inefficiencies that result from manual or spreadsheet based systems. Our solutions automate costly and cumbersome processes, such as estimating and calculating commissions and bonuses, assigning sales territories, forecasting accruals and modeling business outcomes. As a result, our solutions enhance productivity by allowing companies to focus on the strategic aspects of incentive compensation.

Intuitive user experience.    We designed the user interface and user workflows of our solutions to align with the way users naturally think and act. Our solutions are designed for use by the entire workforce, including top executives, sales, finance and human resources employees. Our focus on an intuitive and simple user experience enables the adoption of our solutions by even novice users with minimal training. We believe that we enable our customers to generate higher productivity and better business results through broad access to more timely and reliable information. For example, our solutions include gamification elements, such as leaderboards and badges, which encourage employees to exceed goals.

Mobility.    We offer mobile solutions for phones and tablets across the major operating systems so our subscribers have convenient, anytime, anywhere access to real-time performance information, allowing them to optimize their performance no matter where and when. We believe these characteristics result in greater user adoption and higher utilization of our solutions.

Scalable, secure and reliable cloud architecture.    Our solutions are 100% cloud-based, built upon a multi-tenant, single instance architecture. A multi-tenant architecture is one that allows multiple customers to use the same hardware and software infrastructure. Our platform architecture allows all of our customers to use a single and most updated version of our solutions, which enables us to accelerate our speed of implementation, upgrades and support. Because we do not need to customize, make improvements or upgrade our solutions for individual customers, our customers benefit from greater scalability, reliability and performance. Our customers have access to Xactly Incent Trust, our trust site that provides real-time availability monitoring of our solutions, including privacy and security information and uptime.

Data integration with other business applications.    Our open APIs allow our customers to integrate our solutions into their existing business processes and systems. Our customers use our APIs to import data into our solutions from CRM, ERP, HCM and CPQ solutions, such as those provided by Microsoft, Oracle, Salesforce, SAP and Workday, as well as to extract data from our solutions for use in CRM, finance and payroll solutions such as those provided by ADP, Ceridian and Paychex.

Actionable big data.    We believe that we are the only company that has empirical incentive compensation data combined with the associated metadata across companies and multiple industries. We anonymize and aggregate the data from the billions of transactions we process annually, allowing us to provide value-added,

 

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commercially actionable insights. Our customers can use this information to design optimal incentive compensation programs to drive the right behaviors and maximize business results. Metadata is the information necessary to interpret large amounts of data and relate sets of data to others to determine correlations. Without this metadata, it is extremely difficult to draw meaningful conclusions from big data.

Key customer benefits

Finance leaders.    Our solutions help finance leaders gain control of incentive compensation, mitigate risk and increase accuracy through automation, which create more efficient workflows. In addition, finance executives can make better strategic decisions, design optimal plans and forecast and monitor the performance of their incentive compensation expenditures.

Compensation administrators.    Compensation administrators more quickly and accurately process incentive compensation using our solutions, leading to faster, more accurate financial closes with fewer disputes and greater trust from the sales teams they support. Moreover, they can add strategic value to their organizations by providing analyses and insights into compensation expenditures beyond simply managing the compensation process.

Sales leaders.    We help sales leaders inspire performance, drive top line results and align employee behaviors with company goals. Our solutions allow sales leaders to incent the right behaviors, bring visibility to front-line sales representatives, coach them to drive better results and adjust incentives to better compete in a complex, competitive environment.

Technology leaders.    We help chief information officers support business users more effectively while adding strategic value to the organization. Our customers are able to quickly implement and easily integrate our solutions with other systems and applications. Chief information officers can safely and securely scale their companies for growth since they do not have to manage costly hardware and are assured of always using the latest version of our solutions.

Human resources teams.    We help human resources teams inspire performance by enabling companies to bring incentive compensation not only to sales teams, but to all employees. With our solutions, human resources professionals can retain top talent by incenting and rewarding the right behavior and delivering incentives with timeliness, visibility and transparency.

Our growth strategy

The key elements of our growth strategy include:

Acquire new customers.    We believe the market for incentive compensation and employee and sales performance management is large and underserved and there is substantial opportunity for us to continue to increase the size of our customer base across a broad range of industries. We intend to continue to make investments in our business to pursue this market opportunity.

Sell more subscriptions and modules to our existing customer base.    Frequently, an organization will purchase our solutions for one division and later expand its deployment to other divisions within the organization. We believe there is a significant opportunity for us to sell more subscriptions to existing customers as well as to increase the number of modules deployed by our existing customers.

Enhance existing offerings and develop new solutions.    We have made and will continue to make significant investments in engineering and development to enhance our existing solutions, and to expand the number of our solutions and modules. For example, we launched two new products in 2014: Xactly Insights and Xactly Quota. We intend to continue to work closely with our customers to develop and execute upon our product roadmap.

 

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Expand internationally.    We estimate that approximately 28% of our subscribers are located outside of the U.S., based on a representative sample of our user logins during the last two months of the fiscal year ended January 31, 2015. We plan to continue growing our customer base internationally as we believe that there is a significant global market opportunity for our solutions. Given our cloud-based architecture and the highly scalable nature of our solutions, we believe our solutions are particularly well-suited to large, dynamic enterprises with complex, global operations. We plan to expand our sales capability internationally by expanding our direct sales force and by collaborating with partners around the world.

Develop our partner ecosystem.    We have established relationships with other organizations to sell and deliver our solutions to customers. These relationships include platform partners, referral partners and consulting and implementation partners. We plan to expand our partner ecosystem in order to increase our market reach.

Pursue selective acquisitions.    From time to time, we may seek to acquire businesses and technologies that would increase our value proposition for our customers.

Our products

Our customers leverage our solutions to optimize incentive compensation by automating manual processes, streamlining workflows, providing visibility to users and delivering analyses and actionable insights. Our SaaS solutions are delivered through a scalable, secure cloud-based platform that allows for fast innovation benefiting all customers while keeping their information secure. Our solutions support finance, sales, compensation administrators, information technology and human resources personnel in designing, processing and managing incentive compensation to help achieve company goals.

 

LOGO

 

 

Xactly Incent Enterprise is our flagship solution and helps large enterprise and mid-market companies manage the critical elements of incentive compensation. Xactly Incent Enterprise helps finance teams take control of their incentive compensation process by automating calculations, streamlining workflows, such as plan documents and payment approvals, accurately forecasting compensation expenses and modeling compensation plans. Xactly Incent Enterprise delivers sales teams real-time visibility into performance against quotas as well as feedback on commissions. Quota dashboards, commission estimators and stacked rankings help focus sales representatives on achieving performance goals. Managers can also use these tools to run reports, analyze performance and identify any sales representatives who need coaching. Our users, including sales representatives, merchandizers, bank tellers, postal employees, wedding planners and retail

 

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clerks, can access Xactly Incent Enterprise through their desktop or mobile device anytime, anywhere. Key modules for Xactly Incent Enterprise include:

 

   

Xactly eDocs & Approvals is a module that works in conjunction with Xactly Incent Enterprise and is Xactly’s automated document routing and approval solution. With Xactly eDocs & Approvals customers dynamically generate plan documents, certification letters, and payment files based on details provided by Xactly Incent Enterprise. Document routing, review, and approval processes are managed with customizable workflows to automate document management. Customers can choose from a variety of pre-built workflows, or alternatively, they can create their own using a simple and intuitive interface. Xactly eDocs & Approvals sends automatic email notifications and reminders when action is required and allows users to track document status.

 

   

Xactly Analytics is a module that works in conjunction with Xactly Incent Enterprise and helps customers gain a deep understanding of their incentive compensation programs performance. With Xactly Analytics, customers see incentive data and reports in real-time and share these insights across the company without having to spend hours sifting through databases and spreadsheets. This increased visibility helps align employee behavior, which drives employee performance and helps reach company goals. With customized dashboards and reports customers have access to real-time intelligence and insights, therefore allowing them to make important business decisions or adjust business strategies to maximize sales performance and return on investments. From 2012 to 2014, the number of unique users of Xactly Analytics has grown at a compound annual growth rate of 40%.

 

 

Xactly Incent Express is designed to help companies with generally fewer than 350 employees drive behavior to achieve company goals by creating, processing and managing their incentive compensation. This solution is built on the force.com platform offered by Salesforce and, like Xactly Incent Enterprise, delivers features that companies need to incent right with automated calculations, streamlined workflows, real-time visibility through dashboards and commission estimators, and an easy-to-use plan engine to build and modify compensation plans. Xactly Incent Express also has built-in gamification features with leaderboards, badges and other options to keep sales representatives engaged and focused on achieving their goals. Administrators, sales representatives and managers can use mobile devices to access important compensation information on demand.

 

 

Xactly Objectives is built for both sales and non-sales personnel, allowing managers and employees to collaboratively track and achieve individual and shared goals. Xactly Objectives enables managers and employees to clearly define goals while also aligning them to a company’s business objectives. Xactly Objectives provides visibility into, and feedback relating to, incentives that drive employee behavior. Through an intuitive user interface, managers easily input goals and values that employees can then track throughout the week, month, quarter or year. Employees gain visibility into how their work helps the business reach its objectives, and managers gain visibility into employee performance.

 

 

Xactly Territories enables companies to manage sales team alignment by assigning individual sales representatives to specific territories of sales operations, using metrics such as geography, customer size, vertical market, or a set of product offerings. The mapping interface portion of Xactly Territories is provided by one of our partners.

 

 

Xactly Insights enables our customers to create industry-specific benchmarks using our empirical set of aggregated and anonymized data. We gather empirical data, including incentive compensation structures, performance results, demographic and other data, from the billions of transactions that we process. Our customers are able to compare their compensation plans and practices with those of a peer group or other benchmark that they select. The commercial insights derived from our data help customers make fact-based decisions to motivate employees and drive business performance.

 

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Xactly Quota automates and improves the quota-setting process based on corporate objectives and disseminates those quotas throughout an organization. With Xactly Quota, managers are able to assign quotas based on a range of inputs including past team performance, customer run-rates and territory potential. Managers are able to review and distribute their teams’ quotas. Once quotas are set, managers initiate a workflow approval process. Xactly Quota integrates with Xactly Incent Enterprise and Xactly Insights.

 

 

Xactly Incent Views brings visibility and understanding to the incentive compensation information trapped inside a customer’s spreadsheet, homegrown or third-party compensation system. Xactly Incent Views gives customers the ability to benefit from Xactly Incent Enterprise’s reporting, analytics and mobile features without the need to replace their existing systems. Xactly Incent Views integrates with Xactly Analytics, Xactly eDocs & Approvals and Xactly Insights.

Customers

Our customer base is diverse, and as of January 31, 2015 we had approximately 725 customers with subscribers located internationally across numerous industries such as business & financial services, communications, high-tech manufacturing, life sciences, media & internet, and SaaS & traditional software. We define our enterprise customers as those customers with a minimum of 4,000 employees and our mid-market customers as those customers with at least 350 and less than 4,000 employees. We also sell to customers with fewer than 350 employees. No single customer accounted for more than 5% of our revenue in the fiscal year ended January 31, 2013, 2014 or 2015. The following is a list of representative customers by industry segment, as selected from our top ten largest customers within each industry segment based on the number of subscribers under contract, as of January 31, 2015:

 

Business Services

 

High Tech Manufacturing

 

SaaS & Cloud

Long View Systems Corporation

MultiView, Inc.

Regus plc

 

ARRIS Group, Inc.

Carl Zeiss AG

Lexmark International, Inc.

National Instruments Corporation

 

DocuSign, Inc.

QlikTech International AB

salesforce.com, inc.

ServiceNow, Inc.

Workday, Inc.

Communications

 

Life Sciences & Pharma

 

Media & Internet

Akamai Technologies, Inc.

Level 3 Communications, Inc.

Palo Alto Networks, Inc.

Riverbed Technology, Inc.

 

Carestream Health, Inc.

PerkinElmer, Inc.

Stryker Corporation

 

Angie’s List, Inc.

LinkedIn Corporation

Monster Worldwide, Inc.

Tribune Publishing Company

Twitter, Inc.

Case studies

The case studies below illustrate the results some of our customers have achieved by using our solution.

DocuSign

DocuSign, Inc. (DocuSign) is the leading Digital Transaction Management platform that helps companies keep business 100% digital from start to finish. Their platform includes electronic signature technology, authentication services, bank class security and carrier grade availability for executing business transactions around the world. In 2010, DocuSign wanted to implement a cloud-based solution for its internal compensation process. DocuSign wanted an internal system that would integrate with its CRM system, provide access to its sales people via mobile devices and improve the accuracy of its variable compensation forecasts.

 

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DocuSign selected Xactly Incent Express, which offered integration with Salesforce, rapid implementation and overall cost effectiveness. As of January 31, 2015, the number of Xactly subscribers within DocuSign had increased by over 1,000% since DocuSign became a customer in 2010, and in 2014, DocuSign migrated from Xactly Incent Express to Xactly Incent Enterprise to take advantage of Xactly’s enterprise solution, including Xactly Analytics and Xactly eDocs & Approvals.

Using Xactly has allowed DocuSign to improve its internal processes and make incentive compensation payments more quickly. In addition, DocuSign has stated that allowing its sales representatives to compare their performance to the incentive compensation plan and estimate their commissions on-demand has improved their performance. DocuSign has also been able to tailor its compensation plans to better optimize outcomes, reduce operational risk and improve internal controls. By using Xactly, DocuSign has been able to develop more accurate variable compensation forecasts, which provide its finance department with more predictability.

Frost Bank

Cullen/Frost Bankers, Inc. (Frost Bank) is a financial holding company, headquartered in San Antonio, Texas. With $28.3 billion in assets at December 31, 2014, Frost Bank is among the top 50 largest banks based in the U.S. For the past three years, Frost Bank had been using an Excel and Access Database system for incentive compensation. Seeking to improve the effectiveness of its commercial bankers, Frost Bank was looking for a more sophisticated incentive administration system to centralize all lines of its business incentives programs. In addition, Frost Bank needed a reporting and analysis capability that would improve management’s ability to both review banker performance and conduct internal audits of the incentive system.

In late 2011, Frost Bank selected Xactly to replace its existing Excel spreadsheets and internal access database systems. Through the use of Xactly Incent Enterprise, Xactly Analytics and Xactly eDocs & Approvals, Frost Bank has achieved enhanced data quality and integrity, along with better adherence to standard business rules and payment and performance results for new incentive programs that can be audited. Frost Bank now uses incentive compensation to pay its front-line branch sales personnel, commercial lending officers, treasury management officers and private bankers.

As a result, Frost Bank’s incentive plans drive the sales teams to improve sales and meet the bank’s corporate goals as staff can access performance information on demand. The program also allows management to monitor banker performance and other financial metrics, leading to overall improved internal controls for the bank’s incentive plans and processes.

LegalZoom

LegalZoom.com, Inc. (LegalZoom) is a nationally recognized online service that meets the legal needs of small business and consumers in the United States. By leveraging the power of technology and people, LegalZoom’s proprietary online legal platform allows its users to create their own legal documents, including corporate formation documents, real estate leases and sales agreements, wills and other estate planning documents and applications to register and protect intellectual property. In addition, LegalZoom offers subscription legal plans, compliance and registered agent services. In 2013, LegalZoom wanted an easily understood, cloud-based incentive compensation system that better aligned the behaviors of its employees with the company’s overall corporate strategy of ensuring long-term customer success.

LegalZoom selected Xactly Incent Enterprise and Xactly Analytics because it believed Xactly had the most comprehensive incentive solution in the market and the best understanding of LegalZoom’s business needs. With Xactly, LegalZoom has designed and implemented sales incentive plans that both align with the company

 

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objectives and provide management the important business intelligence they need to guide the company. Xactly provides sales representatives with optimal visibility into their incentive compensation in real time, which then helps redirect their efforts towards focusing on the needs of the customer and overall lifetime value.

Twitter

Twitter, Inc. (Twitter) is a global platform for public self-expression and conversation in real time. In 2012, Twitter needed a sales compensation solution that would meet the needs of its rapidly changing and evolving sales force, particularly increased incentive compensation visibility for its sales teams and improved internal controls.

Twitter selected Xactly Incent Enterprise, Xactly Analytics and Xactly eDocs & Approvals to automate its sales compensation processes. In addition to providing the increased visibility and improved internal controls that Twitter’s management needed, the sales teams gained more visibility with respect to their commissions. This increased on-demand transparency has enabled sales representatives to better understand their performance incentives and how their commissions are calculated.

Xactly Incent provided Twitter with the flexibility to easily change internal incentive compensation structures and add new regions and verticals as Twitter’s business grew. As of January 31, 2015, the number of Xactly subscribers at Twitter has more than doubled since Twitter became a customer in 2012.

According to Twitter, using Xactly reduced errors and disputes regarding incentive compensation and provided greater visibility for sales representatives. In addition, Twitter’s management reported reduced processing time, improved internal processes and more accurate commission payouts.

Professional services

We believe our professional services are a strategic part of our business. We strive to provide our customers with high-quality configuration and implementation services in order to better ensure a successful customer experience.

We offer a range of professional services, which include assisting customers in implementing our solutions and optimizing their use, such as application configuration, system integration, data transformation and automation services, education and training services and strategic services. These offerings are strategically designed to increase customer retention and ensure optimal use of our solutions. Our implementation and professional services engagements range in duration from a few weeks to several months, depending on the type and size of project. We use a mix of employees, consultants and partners to provide professional services.

We also offer training to both compensation administrators and other users. These training sessions are offered both over the internet and in-person at a central location in San Jose or on-site at our customers’ places of business. In addition, we regularly offer more advanced classes on how to use, administer and customize our service to customers.

Strategic services

As part of our professional services, we launched Xactly Strategic Services in early 2015, which include consulting and subscription offerings that advance our customers’ understanding of industry best practices. Our strategic services include compensation plan design, incentive compensation management program optimization and benchmarking through big data analytics and insights. Using Xactly Insights, research and onsite consulting, Xactly Strategic Services helps our customers achieve best practices throughout the incentive compensation lifecycle.

 

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Customer success and support

A cornerstone of our strategy is to focus on customer success, helping to ensure high customer retention rates. We believe that superior customer support is critical to generating growth in new customers, as well as new subscribers and sales of additional modules to existing customers. Our customer support functions are focused on ensuring that our customers use our solutions, and identifying, analyzing and solving problems related to our solutions and services.

Our technical support program provides customers with access to a broad knowledge base so they can better use our solutions. Our standard offering is included in the subscription fee and provides customers with case support and telephone support, along with access to a variety of resources, including a customer success portal and webinars. Our Premium and Premium Plus support offerings are provided at an additional cost and include services such as customer case management and telephone support 24 hours a day, seven days a week. Our customer support offerings are provided by technical support specialists located in San Jose, California, London, United Kingdom and Bangalore, India.

Sales and marketing

We target companies of various sizes, ranging from FORTUNE 50 enterprises to small, emerging companies. We sell our solutions primarily through our direct sales force located in San Jose, California, Denver, Colorado, Washington D.C. and London, United Kingdom. Our direct sales organization, consisting of field representatives, inside sales representatives and account development representatives, is organized by geography and account size and is also responsible for selling our solutions, services and support to new and existing customers. We also go to market with our partners, which include Apttus Corporation (Apttus), BigMachines, Inc. (a division of Oracle Corporation) (BigMachines), Ceridian, DocuSign, FPX, LLC (FPX), Intacct Corporation (Intacct), OpenSymmetry, Inc, (OpenSymmetry), Salesforce, SAP, SteelBrick, Inc. (SteelBrick) and ZS Associates, Inc. (ZS Associates).

Our marketing activities are designed to build awareness of our brand and solutions and to generate customer demand and leads. While our marketing programs have traditionally targeted finance executives and those in sales operations and senior sales roles, we are also increasingly targeting information technology and human resources professionals. We engage in a broad range of marketing activities and our principal marketing programs include:

 

 

engaging in online marketing activities, including through our website, direct email, online web advertising, blogs and webinars;

 

 

participating in field marketing events for customers and prospects, including user conferences, trade shows and industry events;

 

 

staffing business and account development representatives who help convert leads into new sales opportunities;

 

 

engaging in public relations, media relations and analyst relations;

 

 

engaging in cooperative marketing efforts with partners, including joint press announcements, joint trade shows, channel marketing campaigns and joint seminars; and

 

 

providing thought leadership by authoring and disseminating information about incentive compensation, sales and employee performance management.

In addition, we host our annual CompCloud global user conference where current and potential customers participate in programs designed to help drive business results through the use of our solutions. This conference features a variety of prominent keynote and customer speakers, panelists and presentations focused on businesses of all sizes, across a wide range of industries. Attendees also gain insight into our recent

 

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solution releases and enhancements and participate in interactive sessions that give them the opportunity to express opinions on new features and functionality.

Partnerships

An important element of our strategy is to establish and maintain relationships with key industry leaders to help us evangelize, enable and ensure the adoption and continued use of our solutions. We have established a network of relationships that broaden and complement our solution offerings and increase our value to our customers. These key partnerships break down into three categories:

 

 

Platform partners allow us to interoperate with their APIs, which is an important part of our solutions strategy and includes providers such as Oracle Corporation, Salesforce and SAP AG.

 

 

Referral partners work closely with us on joint go-to-market strategies and refer new opportunities to us. Our key referral partners include Apttus, BigMachines, Ceridian, DocuSign, FPX, Intacct, Salesforce, SAP, SteelBrick and ZS Associates.

 

 

Consulting and implementation partners engage with us on consulting and implementation services at both the strategic and tactical levels. Our key consulting and implementation partners include Deloitte LLP, OpenSymmetry and ZS Associates.

Technology infrastructure and operations

We believe that our cloud-based, SaaS solutions enable us to develop and deliver functionality to customers more efficiently than traditional on-premise enterprise software vendors can. We have designed true multi-tenant cloud solutions and we have built our solutions on a modular, secure, highly available and scalable platform.

We build our solutions using service-oriented architecture principles and employ proprietary and third-party technologies. Our applications are written in industry-standard software programming languages including a standardized Java-based development environment, Hadoop and SQL relational database query language. We use commercially available hardware and a combination of proprietary, open source and commercially available software to provide our service. We have a purpose-built, modular, service-oriented platform that allows us to balance customer workloads tuned to our specific environment, allowing us to continue to scale in a fault-tolerant fashion. The platform architecture is designed to allow us to provide the high levels of uptime required by our customers, and to meet or exceed our 99.7% uptime commitment in our service-level agreements, excluding planned downtime. Our customers can access our solutions through mobile devices or through any certified web browser without installing or downloading applets.

Our solutions treat all customers as logically separate tenants utilizing shared application services and databases. We are able to spread the cost of delivering our service across our user base. In addition, because we do not have to manage thousands of distinct applications or application versions with their own business logic and database schemas, we can rapidly scale our business. As a result, we are able to simultaneously and seamlessly update our solutions on a monthly basis for all our customers.

Our solution is flexible. Every page is dynamically rendered for each user, adhering to role-based security settings, including dynamic currency conversion support. As a result, our solution can display different views of data based on a number of factors, including user, department and area of responsibility in the company. We have also developed extensive reporting and analytics functionality that provides near real-time analysis of a customer’s data.

Our solutions can be integrated into other applications using secure internet network protocols. Through our platform, we allow customers and partners to insert, update, delete and query information in our solutions. We

 

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also have mechanisms to protect and govern the use of our solutions to ensure that all customers, regardless of size, have access to our solutions.

Security is central to our solutions and includes physical security, network security, application security and security at our third-party data centers. Our security measures are audited as part of our Statements on Standards for Attestation Engagements No. 16 (SSAE-16) attestations by a third-party auditor. In addition, our customers only interact with our solutions over secure internet protocols.

We serve all our customers and subscribers from primary data centers located in Virginia and Northern California. Both data centers are SSAE-16 Type 2 audited and are secured by around-the-clock guards, biometric access screening and escort-controlled access, and are supported by on-site backup generators in the event of a power failure, with fully redundant heating, ventilation and air conditioning systems.

Research and development

Our ability to compete depends in large part on our continuous commitment to research and development and our ability to rapidly introduce new applications, technologies, features and functionality into our solutions. Our research and development efforts are focused on improving and enhancing our existing service offerings by working closely with our customers, conducting quality assurance testing and improving our core technology as well as developing new proprietary services and solutions. Performance, security, functional depth and breadth, and usability of our solutions drive our technology decisions and product development.

We devote a significant portion of our resources to research and development. Research and development expenses were $6.6 million, $9.1 million and $11.9 million for the fiscal years ended January 31, 2013, 2014 and 2015, respectively.

Competition

The market for incentive compensation solutions for employee and sales performance management is evolving, highly competitive and significantly fragmented. With the introduction of new technologies and the potential entry of new competitors into the market, we expect competition to increase and intensify in the future, which could harm our ability to increase sales, maintain or increase renewals and maintain our prices.

We compete primarily with companies offering incentive compensation and employee and sales performance management applications via hybrid cloud-based and on-premise solutions. We also compete with spreadsheets, homegrown systems, and toolsets and products developed by software providers that allow customers to build new applications that run on the customers’ current infrastructure or as hosted services. Our competitors include Callidus, Cognos and Oracle.

We believe the principal competitive factors in our market include the following:

 

 

technology architecture (multi-tenant SaaS versus on-premise or hosted);

 

level of customer satisfaction;

 

ease of deployment;

 

ease of use;

 

breadth and depth of application functionality;

 

total costs of ownership;

 

pricing of solutions;

 

brand awareness and reputation;

 

sophistication of technology platform;

 

actionable insights through big data analytics;

 

capability for customization, configurability, integration, security, scalability and reliability of applications;

 

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ability to innovate and respond to customer needs rapidly;

 

domain expertise;

 

size of customer base and level of user adoption; and

 

ability to integrate with legacy enterprise infrastructures and third-party applications.

Some of our current competitors have, and future competitors may have, greater financial, technical, marketing and other resources, greater resources to devote to the development, promotion, sale and support of their products and services, more extensive customer bases and broader customer relationships, and longer operating histories and greater name recognition. As a result, these competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. In a few cases, some competitors may also be able to offer competing solutions at little or no additional cost by bundling them with their existing suite of solutions.

Intellectual property

We rely on a combination of copyrights, trademarks, service marks, trade secrets, confidentiality procedures and contractual restrictions to establish and protect our proprietary rights in our solutions and services. As of May 19, 2015, we had three pending U.S. patent applications. We intend to pursue additional patent protection. We have registered trademarks for “Xactly,” the Xactly logo, “Inspire Performance,” and certain other marks in the U.S. and several other jurisdictions. We are also the registered holder of a variety of domestic and international domain names that include “xactlycorp.com” and similar variations. We license software from third parties for integration into our solutions, including open source software and other software available on commercially reasonable terms. All our employees and independent contractors are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property and assigning to us any ownership that they may claim in those works. In addition, we generally enter into confidentiality agreements with our employees, consultants, vendors and customers, and generally limit access to and distribution of our proprietary information.

Despite our precautions, it may be possible for unauthorized third parties to copy our solutions or otherwise circumvent our intellectual property protection and use information that we regard as proprietary to create competing products and services. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our solutions may be unenforceable under the laws of certain jurisdictions and foreign countries. In addition, the laws of some countries do not protect proprietary rights to the same extent as the laws of the U.S., and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the U.S. To the extent we expand our international activities, our exposure to unauthorized copying and use of our solutions and misappropriation of our proprietary information may increase.

We expect that software and other solutions in our industry increasingly may be subject to third-party infringement claims as the number of competitors grows and the functionality of solutions in different industry segments overlaps. Moreover, many of our competitors and other industry participants have been issued patents and/or have filed patent applications, and have asserted claims and related litigation regarding patent and other intellectual property rights. From time to time, third parties, including certain of these companies, have asserted patent, copyright, trademark, trade secret and other intellectual property rights within the industry. Any of these third parties might in the future make a claim of infringement against us.

Government regulation

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particular, we comply with the U.S.-E.U. and U.S.-Swiss Safe Harbor Frameworks as set forth by the U.S. Department of Commerce, under which we commit to treat the personal data of E.U. residents in accordance with identified privacy principles.

In addition, many of our customers and potential customers, including those in the healthcare, financial services and other industries are subject to substantial regulation in the U.S. and in foreign jurisdictions regarding their collection, use and protection of data and may be the subject of further regulation in the future. These various laws and regulations are often evolving and sometimes conflict. Many international and domestic laws require notification to users when there is a security breach of their sensitive personal data, such as the 2002 amendment to California’s Information Practices Act. Other domestic and foreign laws and regulations require the adoption and maintenance of information security standards to protect certain types of data. We expect the costs of compliance with these laws and regulations to increase in the future as a result of additional laws and regulations and changes in legal interpretation. Furthermore, any failure on our part to comply with these laws and regulations, or any laws or regulations that may be promulgated in the future, may subject us to significant liabilities and fines.

Employees

As of January 31, 2015, we had 333 employees, with 93 in research and development, 125 in sales and marketing, 86 in operations, customer support and professional services, and 29 in general and administrative. Of these employees, 261 were located in the U.S. and 72 were located internationally. Our employees are not covered by collective bargaining agreements. We believe our employee relations are good.

XactlyOne Foundation

In May 2015, we established the XactlyOne Foundation as a non-profit organization, and we plan to issue 200,000 shares of our common stock to it. The proposed programs of the XactlyOne Foundation include grants, volunteerism and other projects. We believe the XactlyOne Foundation will foster employee morale, strengthen our community presence and provide increased brand visibility. We will incur a non-cash expense in the quarter ending July 31, 2015 equal to the fair value of the shares of our common stock issued to the XactlyOne Foundation.

Facilities

Our corporate headquarters and executive offices are located in San Jose, California, where we currently occupy approximately 40,000 square feet of office space under a lease that expires January 31, 2021, with an option to extend the lease until January 31, 2026. We maintain additional offices in Denver, Colorado, Washington, D.C., London, United Kingdom and Bangalore, India. We lease all our facilities, and we do not own any real property. We believe that our existing facilities are adequate for our current needs and that we will be able to lease suitable additional or alternative space on commercially reasonable terms if and when we need it.

Legal proceedings

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We have been, and may in the future be, put on notice and/or sued by third parties for alleged infringement of their proprietary rights. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

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Management

Executive officers, key employees and directors

The following table sets forth the names, ages and positions of our executive officers, key employees and directors as of May 19, 2015:

 

Name    Age    Position

 

Executive officers

     

Christopher W. Cabrera

   48    Chief Executive Officer and Director

Joseph C. Consul

   55    Chief Financial Officer, Treasurer and Assistant Secretary

L. Evan Ellis, Jr.

   60    President and Chief Operating Officer

Key employees

     

Scott R. Broomfield

   58    Chief Marketing Officer

Steven J. De Marco

   49    Vice President of Worldwide Sales and Alliances

Bernard G. Kassar

   44    Senior Vice President Customer Success and Support

Colleen M. Pouliot

   57    General Counsel and Secretary

Ron W. Rasmussen

   53    Chief Technology Officer and Senior Vice President of Engineering

Non-employee directors

     

Gerald S. Casilli(1)

   75    Director

Neal Dempsey(2)(3)

   74    Director

Earl E. Fry(1)

   56    Director

Carol G. Mills(2)(3)

   61    Chair of the Board

Cynthia B. Padnos(1)

   58    Director

David W. Pidwell

   67    Director

John P. Ward, Jr.(2)

   49    Director

 

 

(1)   Member of the audit committee.

 

(2)   Member of the compensation committee.

 

(3)   Member of the nominating and corporate governance committee.

Executive officers

Christopher W. Cabrera is our founder and has served as our Chief Executive Officer and a director since March 2005. Mr. Cabrera also served as our President from March 2005 to April 2015. Prior to joining us, Mr. Cabrera served in various executive positions and most recently as Senior Vice President, Operations at Callidus, a publicly listed enterprise software company, from December 1998 until February 2005. Mr. Cabrera was named the 2011 “Alumni Entrepreneur of the Year” by the Lloyd Greif Center for Entrepreneurial Studies at the USC Marshall School of Business. We believe that Mr. Cabrera possesses specific attributes that qualify him to serve as a member of our board of directors, including the perspective and experience he brings as our Chief Executive Officer and his substantial expertise in sales performance management, sales compensation and SaaS delivery models. As our founder and the longest serving member of our board of directors, Mr. Cabrera also has a deep understanding of our customer base and our business as it has evolved over time. Mr. Cabrera holds a B.S. in Business Administration from University of Southern California and an M.B.A from Santa Clara University.

 

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Joseph C. Consul has served as our Chief Financial Officer since June 2012 and our Treasurer and Assistant Secretary since February 2014. Prior to joining us, Mr. Consul served as Executive Vice President and Chief Financial Officer at LogLogic, Inc., a security management platform company acquired by TIBCO Software Inc. in April 2012, from May 2008 to April 2012. Prior to that, Mr. Consul served as Chief Financial Officer at several companies, including Everdream Corporation, Arcot Systems, Inc. and Tumbleweed Communications Corp., a then-publicly listed company. Mr. Consul holds a B.S. in Business Administration from San Jose State University and an M.B.A from University of Southern California.

L. Evan Ellis, Jr. has served as our President and Chief Operating Officer since April 2015 and served as our Chief Operating Officer from January 2009 to April 2015. Prior to that Mr. Ellis served as our Senior Vice President of Worldwide Operations from November 2007 to April 2009. Earlier in his career, Mr. Ellis held management positions at various companies, including Chief Operating Officer at Serena Software, Inc., a then-publicly listed company, President & Chief Operating Officer at CyberSource Corporation, a then-publicly listed company, Senior Vice President of Marketing and Americas Field Operations at Silicon Graphics, Inc., a then-publicly listed company, and senior management positions at International Business Machines Corporation. Mr. Ellis holds a B.A. in Economics from the University of California, Los Angeles.

Key employees

Scott R. Broomfield has served as our Chief Marketing Officer since May 2013. He previously served as our Senior Vice President and General Manager SMB from June 2012 to May 2013 and as our Chief Financial Officer from September 2010 to June 2012. From January 2007 to September 2010, Mr. Broomfield served as Chairman and Chief Executive Officer at Veeple, Inc., an interactive on-line video business he co-founded. Earlier in his career Mr. Broomfield held senior management positions at various companies, including Chief Executive Officer at Xtegra Corporation, Visuale, Inc. and Centura Software Corporation, a then-publicly listed company. Mr. Broomfield holds a B.A. in Psychology from Azusa Pacific University and an M.B.A from Santa Clara University.

Steven J. De Marco has served as our Vice President of Worldwide Sales since May 2013 and as our Vice President of Worldwide Sales and Alliances since April 2015. He previously served as our Vice President, Corporate Sales from June 2011 to May 2013 and as Vice President of Worldwide Sales from September 2008 to June 2011. Prior to that he served as our Vice President, Business Development from August 2005 to September 2008. Earlier in his career, Mr. De Marco held a variety of sales and sales management positions at various companies, including Callidus, Informatica Corporation (Informatica), a publicly listed company, and Influence Software. Mr. DeMarco holds a B.S. in Industrial Engineering from Cal Polytechnic State University.

Bernard G. Kassar has served as our Senior Vice President Customer Success and Support since November 2013 and as our Vice President of Customer Success and Support since July 2008. Prior to joining us, Mr. Kassar served as Director, Strategic Business Development at Endeca Technologies, a data management and web commerce software company acquired by Oracle, from 2006 to 2007. From July 1999 to November 2006, he held a variety of positions, including Senior Director of Business Development and Global Alliances and Director of Customer Advocacy and Field Marketing, at Callidus. Earlier in his career, he held various roles in sales and business development at Compuware Corporation, a publicly listed company, Great Lakes InfoTronics, Inc. and Deluxe Corporation. Mr. Kassar holds a B.S. in Speech Communications from University of Minnesota.

Colleen M. Pouliot has served as our General Counsel since October 2013 and Secretary since February 2014. Prior to joining us, Ms. Pouliot was engaged in the private practice of law from April 2002 to September 2013. She served as a member of the board of directors of Adobe Systems Incorporated from November 2001 to March 2009. Earlier in her career, Ms. Pouliot was Senior Vice President, General Counsel and Secretary at

 

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Adobe Systems Incorporated and practiced law at Gray Cary Ware & Freidenrich LLP, now DLA Piper (US) LLP. Ms. Pouliot holds a B.S. in Economics, summa cum laude, from Santa Clara University and a J.D. from University of California, Davis.

Ron W. Rasmussen has served as our Chief Technical Officer and Senior Vice President, Engineering since November 2013 and as our Vice President, Engineering since November 2011. Prior to joining us, Mr. Rasmussen served as Vice President of Engineering at Quova Inc., an IP intelligence and geolocation data company acquired by NeuStar, Inc., from March 2010 to November 2011. From August 2008 to October 2009, he served as Vice President of Engineering at Lithium Technologies, Inc., a provider of social customer experience management software. Earlier in his career, Mr. Rasmussen held a variety of engineering roles at various companies, including KnowNow, Inc. and Digital Impact, Inc. Mr. Rasmussen holds a B.A. in Computer and Information Sciences and in Economics from University of California, Santa Cruz.

Board of directors

Gerald S. Casilli has served as a member of our board of directors since August 2005. Mr. Casilli has been a general partner of Rembrandt Venture Partners, a venture capital firm he co-founded, since March 2004. Prior to that, Mr. Casilli served as Chairman of the board of directors of IKOS Systems, Inc. and previously served as its Chief Executive Officer from 1989 to 1995. Mr. Casilli previously was a founding member of Trinity Ventures and Genesis Capital. Earlier in his career, Mr. Casilli also founded Millennium Systems. Mr. Casilli serves on the board of directors of several privately-held companies and has previously served on the board of directors of several public companies. We believe that Mr. Casilli possesses specific attributes that qualify him to serve as a member of our board of directors, including his experience as a director of several technology companies and his substantial experience as a venture capital investment professional.

Neal Dempsey has served as a member of our board of directors since April 2008. Mr. Dempsey joined Bay Partners, a venture capital firm, as a general partner in May 1989 and has served as the managing general partner since July 2001. Since April 2010, he has been a member of the board of directors of Enphase Energy, Inc., a solar energy management device maker, and previously served as a member of the board of directors of Eloqua, Inc. from August 2006 to February 2013 and Guidewire Software, Inc. from 2006 to December 2013. We believe that Mr. Dempsey possesses specific attributes that qualify him to serve as a member of our board of directors, including his experience as a director of several technology software companies.

Earl E. Fry has served as a member of our board of directors since September 2005. Since November 2014, Mr. Fry has been Chief Customer Officer and Executive Vice President, Operations Strategy at Informatica, an enterprise data integration software company he joined in December 1999, having previously held the positions of Chief Financial Officer, Chief Administrative Officer and Executive Vice President, Global Customer Support and Services. Since April 2005, Mr. Fry has been a member of the board of directors of Central Pacific Financial Corp., a bank holding company. We believe that Mr. Fry possesses specific attributes that qualify him to serve as a member of our board of directors, including his professional experience in the areas of finance, accounting and audit oversight.

Carol G. Mills has served as the chair of our board of directors since February 2010. Ms. Mills has been an independent consultant since February 2006. Since September 2013, Ms. Mills has been a member of the board of directors of Alaska Communications Systems Group, Inc., a provider of broadband solutions, since September 2013 and Ingram Micro Inc., an electronics company and information technology distributor, since June 2014, and previously served as a member of the board of directors of Adobe Systems Incorporated from 1998 to April 2011, Blue Coat Systems, Inc. from January 2009 to February 2012 and Tekelec from June 2007 to January 2012. We believe that Ms. Mills possesses specific attributes that qualify her to serve as the chair of our board of directors, including her substantial corporate governance, operational and financial experience gained from serving on the boards of directors of several public companies.

 

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Cynthia B. Padnos has served as a member of our board of directors since March 2006. Ms. Padnos has been a managing partner at Illuminate Ventures, a venture capital firm she founded, since January 2009. From March 2004 to December 2008, she served as a director at Outlook Ventures, a venture capital firm. Ms. Padnos serves on the board of directors of a number of privately-held companies. We believe that Ms. Padnos possesses specific attributes that qualify her to serve as a member of our board of directors, including her experience as a venture capital investment professional and her substantial expertise in SaaS and technology services companies.

David W. Pidwell has served as a member of our board of directors since September 2005. Mr. Pidwell has been a venture partner at Alloy Ventures since January 1996. Mr. Pidwell serves on the board of directors of a privately-held company and previously served on the board of directors of Informatica from February 1996 to May 2012. We believe that Mr. Pidwell possesses specific attributes that qualify him to serve as a director, including his substantial experience as a venture capital investment professional and his expertise in technology companies.

John P. Ward, Jr. has served as a member of our board of directors since January 2009. Mr. Ward has been a managing director at Key Venture Partners since January 2007 and a managing partner at Unit Economic Investors, LLC, since April 2011. Mr. Ward serves on the board of directors of several privately-held companies. We believe that Mr. Ward possesses specific attributes that qualify him to serve as a director, including his experience as a venture capital investment professional, his substantial expertise in on-demand delivery models and technology services companies.

There are no family relationships among any of our directors or executive officers.

Code of business conduct and ethics

Effective upon the closing of this offering, our board of directors will adopt a code of business conduct and ethics that applies to all of our employees, officers and directors, including our Chief Executive Officer and Chief Financial Officer. The full text of our code of business conduct and ethics will be posted on the investor relations page on our website at www.xactlycorp.com. We intend to disclose any amendments to or waivers of our code of business conduct and ethics on our website or in filings under the Exchange Act. The inclusion of our website address in this prospectus does not incorporate by reference the information on or accessible through our website into this prospectus.

Board of directors

Our business and affairs are managed under the direction of our board of directors. The number of directors will be fixed by our board of directors, subject to the terms of our amended and restated certificate of incorporation and amended and restated bylaws that will become effective immediately prior to the completion of this offering. Upon the completion of this offering, our board of directors will consist of eight directors, seven of whom will qualify as “independent” under the New York Stock Exchange listing standards.

In accordance with our amended and restated certificate of incorporation and our amended and restated bylaws, immediately after the completion of this offering our board of directors will be divided into three classes with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Our directors will be divided among the three classes as follows:

 

 

the Class I directors will be Messrs. Cabrera and Fry, and their terms will expire at the annual meeting of stockholders to be held in 2016;

 

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the Class II directors will be Ms. Mills and Messrs. Pidwell and Ward, and their terms will expire at the annual meeting of stockholders to be held in 2017; and

 

 

the Class III directors will be Messrs. Casilli and Dempsey and Ms. Padnos, and their terms will expire at the annual meeting of stockholders to be held in 2018.

The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change of control. Under Delaware law, our directors may be removed for cause by the affirmative vote of the holders of a majority of our outstanding voting stock. Directors may not be removed by our stockholders without cause.

Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.

Director independence

Our board of directors has undertaken a review of the independence of each director. Based on information provided by each director concerning his or her background, employment and affiliations, our board of directors has determined that Messrs. Casilli, Dempsey, Fry, Pidwell, and Ward and Mses. Mills and Padnos do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the listing standards of the New York Stock Exchange. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining each non-employee director’s independence, including the beneficial ownership of our capital stock by each non-employee director, and the transactions involving any non-employee director described in the section titled “Certain relationships, related party and other transactions.”

Committees of the board of directors

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each of the committees of our board of directors is described below. Members will serve on these committees until their resignation or until as otherwise determined by our board of directors.

Audit committee

Our audit committee consists of Messrs. Casilli and Fry and Ms. Padnos, with Mr. Fry serving as Chair, each of whom meets the requirements for independence under the applicable rules and regulations of the Securities and Exchange Commission (SEC) and the listing standards of the New York Stock Exchange. Each member of our audit committee also meets the financial literacy and sophistication requirements of the listing standards of the New York Stock Exchange. In addition, our board of directors has determined that Mr. Fry is an audit committee financial expert within the meaning of Item 407(d) of Regulation S-K under the Securities Act. Our audit committee, among other things:

 

 

selects a qualified firm to serve as the independent registered public accounting firm to audit our financial statements;

 

 

helps to ensure the independence and performance of the independent registered public accounting firm;

 

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discusses the scope and results of the audit with the independent registered public accounting firm, and reviews, with management and the independent registered public accounting firm, our interim and year-end operating results;

 

 

develops procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

 

 

reviews our policies on and oversees risk assessment and risk management, including enterprise risk management;

 

 

reviews related party transactions; and

 

 

approves or, as required, pre-approves, all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm.

Our audit committee operates under a written charter that satisfies the applicable rules and regulations of the SEC and the listing standards of the New York Stock Exchange.

Compensation committee

Our compensation committee consists of Ms. Mills and Messrs. Dempsey and Ward, with Ms. Mills serving as Chair, each of whom meets the requirements for independence under the applicable rules and regulations of the SEC and the listing standards of the New York Stock Exchange. Each member of our compensation committee is also a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Exchange Act (Rule 16b-3), and an outside director, as defined pursuant to Section 162(m) of the Code. Our compensation committee, among other things:

 

 

reviews, approves and determines the compensation of our executive officers and key employees;

 

 

reviews, approves and determines compensation and benefits, including equity awards, to directors for service on the board of directors or any committee thereof;

 

 

administers our equity compensation plans;

 

 

reviews, approves and makes recommendations to our board of directors regarding incentive compensation and equity compensation plans; and

 

 

establishes and reviews general policies relating to compensation and benefits of our employees.

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