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| LNUX > SEC Filings for LNUX > Form 10-Q/A on 10-Dec-2008 | All Recent SEC Filings |
10-Dec-2008
Quarterly Report
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Words such as "may," "could," "anticipate," "potential," "intend," "expect," "believe," "in our view," and variations of such words and similar expressions, are intended to identify such forward-looking statements, which include, but are not limited to, statements regarding our expectations and beliefs regarding future revenue growth; key metrics; gross margins; financial performance and results of operations; technological trends in, and demand for online advertising; management's strategy, plans and objectives for future operations; employee relations and our ability to attract highly qualified personnel; our intent to continue to invest significant resources in web site development; competition, competitors and our ability to compete; liquidity and capital resources; the outcome of any litigation to which we are a party; our accounting policies; and sufficiency of our cash resources, cash generated from operations and investments to meet our operating and working capital requirements and any share repurchases. Actual results may differ materially from those expressed or implied in such forward-looking statements due to various factors, including those set forth in the Risk Factors contained in the section of this Quarterly Report on Form 10-Q entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." We undertake no obligation to update the forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.
Critical Accounting Estimates
The following are the significant changes in our critical accounting estimates during the three months ended October 31, 2008 as compared to what was previously disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended July 31, 2008.
Effective August 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards (FAS) No. 157, "Fair Value Measurements" ("FAS 157") and FAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115" ("FAS 159"). As permitted by FAS 159, we have elected the fair value option for our Auction Rate Securities, also classified as Municipal Bonds, as of August 1, 2008. In conjunction with the adoption of FAS 159, we reduced our Accumulated Other Comprehensive Loss by $0.6 million and accounted for this as a cumulative effect of a change in accounting principle which was recorded as an increase in its Accumulated Deficit.
Overview
We own and operate a network of media web sites, serving the IT professional,
software development and open source communities. Through our ThinkGeek, Inc.
subsidiary, we also provide online sales of a variety of retail products of
interest to these communities. Our network of web sites include:
SourceForge.net, Slashdot.org, ThinkGeek.com, Linux.com and
freshmeat.net. Combining user-developed content, online marketplaces and
e-commerce, we are the global technology community's nexus for information
exchange, goods for geeks, and open source software distribution and services.
We were incorporated in California in January 1995 and reincorporated in Delaware in December 1999. From the date of our incorporation through October 2001, we sold Linux-based hardware systems and services under the name VA Linux Systems, Inc. In December 2001, we changed our name to VA Software Corporation to reflect our decision to pursue our Online Media, E-commerce, Software and Online Images businesses. In December 2005, we sold our Online Images business to Jupitermedia Corporation ("Jupitermedia") and in April 2007, we sold our Software business to CollabNet, Inc. ("CollabNet"). On May 24, 2007, reflecting our strategic decision to focus on our network of media and e-commerce web sites, we changed our name to SourceForge, Inc. and merged with our wholly-owned subsidiary, OSTG, Inc.
Our business consists of two operating segments: Online Media and E-commerce. Our Online Media segment provides web properties that serve as platforms for the creation, review, hosting and distribution of online peer produced content. Our audience of technology professionals and enthusiasts relies on our web properties SourceForge.net, Slashdot.org, Linux.com and freshmeat.net to create, improve, compare and distribute Open Source software and to debate and discuss current issues facing, and innovation in, the technology marketplace. Our E-commerce segment sells technology themed retail products to technology professionals and enthusiasts through our ThinkGeek.com web site.
Our strategy for our Online Media business is to attract more users and increase engagement. We currently use the following key metrics which are derived from data provided by Google Analytics:
Three Months Ended
October 31, October 31,
2008 2007
Pages per Unique (per Month) 4.3 4.7
Pages per Visit 2.4 2.5
Revenue per User (RPU) (1) $ 0.59 $ 0.52
Revenue per Page (RPM) $ 11.57 $ 9.26
Page Views (thousands) 468,375 476,215
Unique Visitors (thousands) (2) 36,471 33,744
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(2) - Unique Visitor is the aggregate average unique visitors for all Online Media sites during the period presented. This does not consider possible duplicate visitors who may visit more than one of our web sites during the month.
Media companies have historically reported page views as a metric seeking to measure users' level of engagement. Since the introduction of a new web technology, known as asynchronous JavaScript and XML ("AJAX") which allows users to browse web sites without loading a new page, page views have generally declined for the same, or even higher, level of activity. We have begun to implement this technology and as we increase our adoption we may experience associated fluctuations in page views. As media companies measures of engagement evolve to include elements such as time or number of visits in addition to or in lieu or page views, we expect that our reported metrics may also evolve.
Since July 31, 2008, SourceForge.net released a framework for hosted application services and provided projects with access to a wiki, a forum and a survey application. We have also released new ad products to engage our users with interactive content and rich media and a new sponsorship product.
Our E-commerce business strategy is to increase revenue and gross margins by expanding the range of new and innovative products we sell, including product developed by us, and by attracting increased traffic to our site.
Our sales continue to be primarily attributable to customers located in the United States of America.
Results of Operations
The application of accounting standards is central to a company's reported financial position, results of operations and cash flows. We review our annual and quarterly results, along with key accounting policies, with our audit committee prior to the release of financial results. We do not use off-balance-sheet arrangements with unconsolidated related parties, nor do we use other forms of off-balance-sheet arrangements such as research and development arrangements.
The following table sets forth our operating results from continuing operations for the periods indicated as a percentage of revenue, represented by selected items from the unaudited condensed consolidated statements of operations. The results of our discontinued Software business are excluded from the operating results from continuing operations. This table should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q.
Three Months Ended October 31,
2008 2007
Consolidated Statements of Operations Data
from Continuing Operations:
Online Media revenue 44.8 % 42.8 %
E-commerce revenue 55.2 57.2
Revenue 100.0 % 100.0 %
Online Media cost of revenue 18.1 13.8
E-commerce cost of revenue 43.1 42.0
Cost of revenue 61.2 55.8
Gross margin 38.8 44.2
Operating expenses:
Sales and marketing 17.8 17.4
Research and development 12.2 8.3
General and administrative 19.1 21.9
Restructuring costs - 13.7
Total operating expenses 49.1 61.3
Loss from operations (10.3 ) (17.1 )
Interest and other income, net 6.5 6.8
Loss from continuing operations before
income taxes (3.8 ) (10.3 )
Benefit for income taxes (0.3 ) -
Loss from continuing operations (3.5 )% (10.3 )%
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Revenue
The following table summarizes our revenue by business segment:
Three Months Ended
October 31, October 31, % Change
2008 2007 Three Months
($ in thousands)
Online Media revenue $ 5,417 $ 4,409 23 %
E-commerce revenue 6,668 5,893 13 %
Revenue $ 12,085 $ 10,302 17 %
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Sales for the three months ended October 31, 2008 were primarily to customers located in the United States of America.
For the three months ended October 31, 2008, revenue from Google Inc. ("Google") was 13% of total revenue. Google may also continue to represent more than 10% of revenue in the future.
Revenue by Segment
Online Media Revenue
Three Months Ended
October 31, October 31, % Change
2008 2007 Three Months
($ in thousands)
Direct sales $ 3,497 $ 3,491 0 %
Ad Networks 1,575 731 115 %
Other 345 187 84 %
Online Media revenue $ 5,417 $ 4,409 23 %
Percentage of total revenue 45 % 43 %
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Our Online Media revenue is derived primarily from advertising products delivered on our web sites. Direct sales revenue is generated from orders received by our United States based sales team, which may also include advertisements to be delivered globally. Ad Networks revenue represents revenue from our Ad Network partners who sell our inventory globally to customers through automated systems and includes revenue from international resellers who use automated systems. Other represents orders received from our international resellers as well as referral fees and revenue earned from subscriptions to our web sites.
Direct sales revenue for the three months ended October 31, 2008 increased slightly as compared with the three months ended October 31, 2007. The increase in Ad Networks revenue for the three months ended October 31, 2008 as compared to the three months ended October 31, 2007 is due to increased revenue from Google as we continue to optimize our web sites to increase yields from Google and other Ad Networks. The increase in Other for the three months ended October 31, 2008 as compared to the three months ended October 31, 2007 is primarily due to an increase in our United Kingdom's reseller revenue and to a lesser extent to revenue from other resellers.
E-commerce Revenue
Three Months Ended
October 31, October 31, % Change
2008 2007 Three Months
E-commerce revenue (in thousands) $ 6,668 $ 5,893 13 %
Percentage of total revenue 55 % 57 %
Number of Orders (per quarter) 96,506 81,396 19 %
Avg. order size (in whole dollars) $ 69.09 $ 72.40 (5 )%
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E-commerce revenue is derived from the online sale of consumer goods, including shipping, net of any returns and allowances. The growth during the three months ended October 31, 2008, as compared to the three months ended October 31, 2007, was primarily due to a 19% increase in the number of orders year-over-year. The increase in the number of orders was primarily due to the introduction of innovative products.
Cost of Revenue/Gross Margin
Three Months Ended
October 31, October 31, % Change
2008 2007 Three Months
($ in thousands)
Cost of revenue $ 7,402 $ 5,753 29 %
Gross margin 4,683 4,549 3 %
Gross margin % 39 % 44 %
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Cost of revenue consists of personnel costs and related overhead associated with developing and delivering external content for our media sites, cost of equipment and co-location costs to deliver external media content and product costs associated with our E-commerce business.
Gross margins increased for the three months ended October 31, 2008 as compared with the three months ended October 31, 2007, due primarily to increases in our Online Media revenue and our E-commerce revenue.
Gross margin percentage for the three months ended October 31, 2008 decreased as compared with the three months ended October 31, 2007, due primarily to increases in our Online Media cost of revenue and our E-commerce cost of revenue.
Cost of Revenue/Gross Margin by Segment
Online Media Cost of Revenue/Gross Margin
Three Months Ended
October 31, October 31, % Change
2008 2007 Three Months
($ in thousands)
Online Media cost of revenue $ 2,190 $ 1,424 54 %
Online Media gross margin 3,227 2,985 8 %
Online Media gross margin % 60 % 68 %
Headcount 21 20
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Online Media cost of revenue consists of personnel costs and related overhead associated with developing the editorial content of the sites, co-location and depreciation costs for delivering site content, and the costs of serving and running advertising campaigns. The decrease in Online Media gross margin percentages for the three months ended October 31, 2008, as compared to the three months ended October 31, 2007, was primarily driven by increases in data center co-location costs of $0.4 million, amortization of internally developed software costs of $0.2 million, and ad serving costs. Our data center costs increased due to increased infrastructure requirements and depreciation as we purchased equipment for our new data center. Our ad serving costs increased as we added headcount to develop and serve our premium products, which require more effort to produce and are also more expensive to serve.
We expect Online Media cost of revenue to increase in absolute dollars resulting from increased headcount in our ad operations group, depreciation expense and ongoing operating costs. To the extent that Online Media revenue does not increase proportionately or even declines, our Online Media gross margins may decline.
E-commerce Cost of Revenue/Gross Margin
Three Months Ended
October 31, October 31, % Change
2008 2007 Three Months
($ in thousands)
E-commerce cost of revenue $ 5,212 $ 4,329 20 %
E-commerce gross margin 1,456 1,564 (7 )%
E-commerce gross margin % 22 % 27 %
Headcount 21 14
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E-commerce cost of revenue consists of product costs, shipping and fulfillment costs and operating costs, and includes personnel costs associated with the E-commerce operations and merchandising functions. The increase in E-commerce cost of revenue during the three months ended October 31, 2008, as compared to the three months ended October 31, 2007 was primarily due to increased shipping and product costs as well as increased operating costs. The increase in shipping costs was primarily the result of increased E-commerce number of orders and increased carrier costs, while the increase in product costs was primarily due to the increased number of orders. The increase in operating costs was primarily due to increased headcount and related expenses to support the increased revenue as well as increased fulfillment costs resulting from the increased number of orders. The changes in gross margin percentage were primarily due to increases in shipping costs as they increased at a higher rate than product costs, fulfillment costs and operating expenses, primarily due to additional headcount and related costs as we expand to source and identify new products. We expect E-commerce cost of revenue in absolute dollars to grow as E-commerce revenue increases in the future, while E-commerce gross margin percentages may fluctuate depending on the mix of products sold and our ability to adjust for shipping cost surcharges on a timely basis.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing ("S&M") expenses consist primarily of personnel and related
overhead expenses, including sales commission, for personnel engaged in sales,
marketing and sales support functions, and includes costs associated with market
research, promotional activities and trade shows.
Three Months Ended
October 31, October 31, % Change
2008 2007 Three Months
($ in thousands)
Sales and Marketing $ 2,152 $ 1,791 20 %
Percentage of total revenue 18 % 17 %
Headcount 30 22
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The increase in S&M expenses in the three months ended October 31, 2008, as compared to the three months ended October 31, 2007, was primarily due to increases in headcount and related expenses of $0.2 million and marketing expenses of $0.2 million. The increase in headcount is due to additional sales personnel as we ramp our sales organization and our Online Media personnel to support our media platform. The increase in marketing expenses was due to printing and mailing of our E-commerce catalog.
We expect S&M expenses to increase in absolute dollars as we grow our sales force and may also increase as a percentage of revenue.
Research and Development Expenses
Research and development ("R&D") expenses consist primarily of personnel and
related overhead expenses for software engineers involved in our Online Media
segment. We expense all of our R&D costs as they are incurred; however, certain
costs, including personnel related expenses incurred in the development of
internal-use software, were capitalized.
Three Months Ended
October 31, October 31, % Change
2008 2007 Three Months
($ in thousands)
Online Media $ 1,341 $ 760 76 %
E-commerce 139 93 49 %
Research and Development $ 1,480 $ 853 74 %
Percentage of total revenue 12 % 8 %
Headcount 35 25
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R&D expense increased by $0.6 million in absolute dollars in the three months ended October 31, 2008, as compared to the three months ended October 31, 2007. Online Media R&D expenses increased by $0.6 million, primarily due to $0.5 million capitalized as internally-developed software during the three months ended October 31, 2007 and headcount related costs of $0.1 million. We expect R&D expenses to increase in absolute dollars and may also increase as a percentage of revenue in the future.
In accordance with SOP 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use," costs related to the planning and post-implementation phases of internal use software products are recorded as an operating expense. Direct costs incurred in the development phase are capitalized and amortized over the product's estimated useful life as charges to cost of revenue. We did not capitalize any internal use software costs for the three months ended October 31, 2008. We capitalized $0.5 million of internal use software costs for the three months ended October 31, 2007.
General and Administrative Expenses
General and administrative expenses consist of salaries and related expenses for
finance and accounting, human resources and legal personnel, professional fees
for accounting and legal services as well as insurance and other public company
related costs.
Three Months Ended
October 31, October 31, % Change
2008 2007 Three Months
($ in thousands)
General and Administrative $ 2,314 $ 2,256 3 %
Percentage of total revenue 19 % 22 %
Headcount 23 19
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General and administrative expenses increased by $0.1 million in absolute dollars in the three months ended October 31, 2008, as compared to the three months ended October 31, 2007, primarily due to recruiting fees for our CEO search. General and administrative expense decreased as a percentage of revenue due to the increase in revenue. We expect general and administrative expenses to remain steady in the future.
Restructuring Costs
In October 2007, we relocated our corporate headquarters to Mountain View, California. During fiscal 2008, we recorded a restructuring charge of $2.2 million for the remaining facility space and leasehold improvements at our former corporate headquarters located in Fremont, California. In conjunction with the sale of our Software business in April 2007, we accrued a restructuring charge of $0.6 million for the excess facility space used in the operation of our Software business, which was included in the gain on disposal of discontinued operations. In fiscal 2001 and 2002, we adopted plans to exit our hardware systems and hardware-related software engineering and professional services businesses, as well as exit a sublease agreement and to reduce our general and administrative overhead costs. The restructuring liability of $4.6 million as of October 31, 2008 represents the remaining accrual from non-cancelable lease payments, which continue through 2010, less estimated sublease rent. This accrual is subject to change should actual circumstances change. We will continue to evaluate and update, if applicable, these accruals on an annual basis.
All charges as a result of restructuring activities have been recorded in accordance with FAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" and Emerging Issues Task Force ("EITF") 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring)."
Below is a summary of the changes to the restructuring liability (in thousands):
Balance at
Beginning Restructuring Cash Balance at
of Period Charges Payments Other End of Period
For the three months
ended October 31, 2008 $ 5,232 $ - $ (685 ) $ 29 $ 4,576
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Interest and other income, net
Below is a summary of Interest and other income, net (in thousands):
Three Months Ended
October 31, October 31, % Change
2008 2007 Three Months
Interest Income $ 183 $ 750 (76 )%
Interest Expense (29 ) (56 ) (48 )%
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