This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are any statements that look to future events and consist of, among other things, statements regarding our business strategies; anticipated future operating results and operating expenses; our ability to attract new customers to enter into subscriptions for our solution; our ability to service those customers effectively and induce them to renew and upgrade their deployments of our solution; our ability to expand our sales organization to address effectively the new industries, geographies and types of organizations we intend to target; our ability to accurately forecast revenue and appropriately plan our expenses; market acceptance of enhanced solutions; alternate ways of addressing e-commerce needs or new technologies generally by us and our competitors; continued acceptance of software-as-a-service, or SaaS, as an effective method for delivering e-commerce solutions and other applications; the attraction and retention of qualified employees and key personnel; our ability to protect and defend our intellectual property; costs associated with defending intellectual property infringement and other claims; events in the markets for our solution and alternatives to our solution, as well as in the United States and global markets generally; future regulatory, judicial and legislative changes in our industry; and changes in the competitive environment in our industry and the markets in which we operate. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as "may," "believe," "could," "anticipate," "would," "might," "plan," "expect," and similar expressions or the negative of such terms or other comparable terminology, although not all forward-looking statements contain these words. These forward-looking statements speak only as of the date of this Form 10-Q and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth in this Item 2, in Part II, Item 1A, "Risk Factors," elsewhere in this Form 10-Q and in our other reports filed with the Securities and Exchange Commission, or SEC. We expressly disclaim any obligation to update the forward-looking statements to reflect events or circumstances that arise after the date hereof.

Overview

We are a leading provider of SaaS e-commerce solutions that enable companies to easily design, implement and manage their own customized e-commerce sites, including websites, mobile applications and other digital storefronts. Our customers use our highly scalable and integrated Demandware Commerce platform to create a seamless brand experience for consumers across all digital touch points worldwide.

We sell subscriptions to our on-demand software and related services through both a direct sales force and indirect channels. Our current customers consist of retailers and branded consumer product manufacturers that operate principally in the following vertical markets: apparel, general merchandise, health & beauty, home & garden, sporting goods and other vertical categories.

We derive most of our revenue from subscriptions to our on-demand platform and related services. Subscription fees are based on a variable revenue share pricing model, whereby our customers pay us a percentage of their total gross revenue that is processed on our platform. As part of their subscription fee, our customers commit to a minimum level of gross revenue to be processed on our platform, from which a minimum monthly, quarterly or annual, non-refundable subscription fee is derived. If a customer processes more gross revenue than their committed minimum level, then the customer is required to pay us additional fees, called overage fees, which are calculated as a percentage of the incremental revenue generated above the committed revenue. While we typically record overage fees each quarter, a significant portion is recorded in the fourth quarter. No refunds or credits are given if a customer processes less gross revenue than the contracted level. Customer contracts are generally non-cancellable for a minimum period that is typically three years and ranges from one year to seven years.

Subscription revenue is driven primarily by the number of customers we have, the number of e-commerce sites they operate on our platform, the contracted minimum value of our subscription agreements and the gross revenue generated from our customers in excess of their committed minimum levels. To date, revenue generated by our customers' traditional web e-commerce sites has been the primary driver of our subscription revenue. However, we believe that our multi-channel capabilities, including mobile, social and other web channels, have been and will continue to be important factors in our new customers' purchasing decisions.

We derive our services revenue from the implementation of our customers' e-commerce sites, which includes the integration of complementary technologies and adaptation to back-end systems and/or business processes and the configuration and deployment of the site. We also provide training services for individuals who are part of the implementation, maintenance and optimization teams of our customers. In general, it takes from four to six months to implement a new customer e-commerce site on our platform. Incremental e-commerce sites for a customer, including for additional brands or geographies, can be implemented in less than one month either by us, our partners, or the customers themselves.

Deferred revenue primarily consists of the unearned portion of billed services fees and fees for our on-demand software. As we invoice nearly all our customers on a monthly or quarterly basis, our deferred revenue balance does not serve as a reliable indicator of our future subscription revenue.

We believe the large and growing market for SaaS e-commerce solutions will provide us with significant growth opportunities. As e-commerce transactions continue to account for a greater proportion of all retail sales, we believe that retailers and branded consumer product manufacturers will continue to enhance the performance and functionality of their e-commerce sites, increase their number of e-commerce sites and expand their online presence to encompass multiple digital channels. Just as companies have increasingly chosen SaaS solutions as an attractive alternative to costly and inflexible on-premise solutions for their enterprise-wide applications, we believe that retailers and branded consumer product manufacturers will increasingly adopt SaaS solutions for their e-commerce needs.

We are focused on growing our business by pursuing the significant market opportunity for SaaS e-commerce solutions. We plan to grow our revenue by adding new customers and helping our existing customers increase their revenue processed on our platform by taking full advantage of the functionality of Demandware Commerce, by increasing the number of e-commerce sites deployed by them and by extending their online presence across multiple channels, including mobile phones, social networks, call centers and in-store kiosks. We also plan to expand our customer base to include industry sectors, customer segments and geographic regions beyond those which we currently serve, including small- and medium-size businesses.

Initial Public Offering

In March 2012, we closed our initial public offering, or IPO, of 6,325,000 shares of common stock, including 825,000 shares sold pursuant to the underwriters' option to purchase additional shares, at an offering price of $16.00 per share. All outstanding shares of our redeemable convertible preferred stock converted to 18,028,763 shares of common stock at the closing of the IPO. Our shares are traded on the New York Stock Exchange. We received proceeds from the IPO of $94.1 million, net of underwriting discounts and commissions but before offering expenses of $3.1 million. Offering expenses at December 31, 2011 of $1.7 million were recorded in other non-current assets. These offering expenses, and additional expenses incurred from January 2012 through the closing of the IPO of approximately $1.4 million, have been recorded as additional paid-in capital.

Key Metrics

We regularly review a number of metrics to evaluate growth trends, measure our performance, formulate financial projections and make strategic decisions. We discuss revenue, gross margin, and the components of operating income and margin below under "Basis of Presentation," and we discuss other key metrics below.

Number of Customers

We believe that our ability to expand our customer base is an indicator of our market penetration and growth of our business as we continue to invest in our direct sales force, our indirect sales channels and marketing initiatives. We define our number of customers at the end of a particular quarter as the number of customers generating subscription revenue during the period, and who have a committed minimum level of gross revenue to be processed on our platform, from which a minimum monthly, quarterly or annual, non-refundable subscription fee is derived. As of March 31, 2012, we had 110 customers.

Number of Customer E-commerce Sites

Since our customers generally operate more than one e-commerce site across various geographies and brands and pay us fees based on the total gross revenue they process on our platform, we believe the total number of customer e-commerce sites using our solutions in a given quarter is an indicator of the growth of our business. As of March 31, 2012, our customers were operating 402 e-commerce sites on our platform.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses and related disclosures. We believe that the estimates, assumptions and judgments involved in the accounting policies described in the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and in our prospectus filed with the SEC on March 15, 2012 have the greatest potential impact on our financial statements and, therefore, we consider these to be our critical accounting policies.

As of March 31, 2012, there have been no material changes to our critical accounting policies since December 31, 2011.

Recent Accounting Pronouncements

Under the Jumpstart Our Business Startups Act, or JOBS Act, which was signed into law in April 2012, we meet the definition of an emerging growth company. We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. See "Risk Factors - We are an "emerging growth company" and may elect to comply with reduced public company reporting requirements applicable to emerging growth companies, which could make our common stock less attractive to investors."

Adopted Accounting Pronouncements

For information regarding recently adopted accounting pronouncements, refer to Note 1 of Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Results of Operations

The following table sets forth our results of operations for each of the periods
indicated as dollars (in thousands). The period-to-period comparison of
financial results is not necessarily indicative of future results.





                                           Three Months Ended March 31,
                                            2012                  2011
          Results of Operations:
          Revenue:
          Subscription                  $      13,613         $       9,324
          Services                              2,477                 2,280

          Total revenue                        16,090                11,604
          Cost of revenue:
          Subscription                          2,866                 2,061
          Services                              2,553                 2,305

          Total cost of revenue                 5,419                 4,366

          Gross profit                         10,671                 7,238
          Operating expenses:
          Sales and marketing                   6,338                 4,532
          Research and development              3,471                 2,477
          General and administrative            2,705                 1,270

          Total operating expenses             12,514                 8,279

          Loss from operations                 (1,843 )              (1,041 )
          Other (expense) income, net            (274 )                 353

          Loss before income taxes             (2,117 )                (688 )
          Income tax expense                      126                    29

          Net loss                      $      (2,243 )       $        (717 )

Revenue and Metrics

Revenue



                                        Three Months Ended
                                             March 31,                   Change
                                         2012          2011           $          %
                                             (dollars in thousands)
        Subscription revenue          $   13,613      $ 9,324      $ 4,289       46.0 %
        Percentage of total revenue         84.6 %       80.4 %
        Services revenue              $    2,477      $ 2,280      $   197        8.6 %
        Percentage of total revenue         15.4 %       19.6 %

Subscription revenue. Subscription revenue for the three months ended March 31, 2012 increased by $4.3 million, or 46.0%, compared to the three months ended March 31, 2011. The increase was driven primarily by an increase of $3.0 million in revenue from new customers and an increase of $1.3 million in revenue from existing customers through both organic site growth and the launch of additional e-commerce sites in the 2012 period. We had 110 customers and 402 e-commerce sites operating on our platform at March 31, 2012, an increase from 75 customers and 237 e-commerce sites operating on our platform at March 31, 2011. Revenue realized from overage fees increased from $2.5 million to $3.6 million, and represented 26.4% and 26.4% of subscription revenue, for the three months ended March 31, 2011 and 2012, respectively.

Services revenue. Services revenue for the three months ended March 31, 2012 increased by $0.2 million, or 8.6%, compared to the three months ended March 31, 2011. The increase was primarily driven by $0.6 million more in service revenue performed after our customers have launched on our platform compared to the 2011 period. We recognize billings received for our implementation and training service engagements that are sold with the subscription prior to the customers use of our e-commerce platform ratably over the estimated life of our customer base, which ranges between three and six years for revenue recognized in the 2012 period. Revenue from service engagements sold with the subscription declined $0.2 million in 2012 as the revenue recognition period of our earlier and higher priced projects were fully realized in 2011. Additionally, $0.3 million in revenues associated with fees received from participants attending our global customer conference were realized in the prior period. No similar revenue was recognized in the period ended March 31, 2012 because our 2012 global customer conference is scheduled to be held during the quarter ending June 30, 2012.

Cost of Revenue



                                            Three Months Ended
                                                 March 31,                   Change
                                            2012           2011           $         %
                                                (dollars in thousands)
     Cost of subscription revenue         $   2,866       $ 2,061       $ 805       39.1 %
     Percentage of subscription revenue        21.1 %        22.1 %
     Gross margin                              78.9 %        77.9 %
     Cost of services revenue             $   2,553       $ 2,305       $ 248       10.8 %
     Percentage of services revenue           103.1 %       101.1 %
     Gross margin                              (3.1 )%       (1.1 %)

Cost of subscription revenue. Cost of subscription revenue for the three months ended March 31, 2012 increased by $0.8 million, or 39.1%, compared to the three months ended March 31, 2011. The increase was primarily attributable to $0.3 million of increased depreciation and maintenance expenses associated with equipment for our data centers and $0.2 million of increased hosting and bandwidth expenses due to an expansion of our capacity to accommodate the growth during the 2012 period. In addition, we increased our headcount in our support and technical operations team by 42.1% in the 2012 period, growing from 19 employees at March 31, 2011 to 27 employees at March 31, 2012. As a result, our personnel and related expenses, such as salaries, bonuses, payroll taxes, recruiting fees and stock compensation, increased $0.3 million in the 2012 period.

Cost of services revenue. Cost of services revenue for the three months ended March 31, 2012 increased by $0.2 million, or 10.8%, compared to the three months ended March 31, 2011. The increase was primarily attributable to $0.4 million of increased personnel and related expenses due to increased client services headcount, offset by $0.2 million of decreased outside consulting expenses resulting from a decreased use of third-party contractors to assist our direct services implementation teams. The increases in headcount from 33 in the 2011 period to 39 in the 2012 period resulted from our expansion into new regions as well as an increase in the number of customer implementations conducted in the 2012 period versus the 2011 period. While we had more customers in the implementation phase during the three months ended March 31, 2012, we also had an approximate 5% decrease in total project hours compared to the three months ended March 31, 2011. This is due to a higher percentage of customers utilizing our partners for their implementations of e-commerce sites. Approximately 19% of current period implementations were performed directly by our client service team as opposed to through a partner, compared to 30% during the three months ended March 31, 2011. In addition to a higher percentage of customers utilizing partners for their implementations, we have experienced efficiencies within our direct implementations as more projects are completed. These efficiencies have resulted in fewer hours per project and, as a result, less support is required from third-party contractors on our direct services implementations.

Operating Expenses

Sales and Marketing



                                        Three Months Ended
                                             March 31,                   Change
                                        2012           2011           $          %
                                             (dollars in thousands)

Sales and Marketing. Sales and marketing expenses for the three months ended March 31, 2012 increased by $1.8 million, or 39.9%, compared to the three months ended March 31, 2011. The increase was attributable to the expansion of our sales force to address increased opportunities in new and existing markets. Total headcount within sales and marketing increased from 62 at March 31, 2011 to 97 at March 31, 2012, an increase of 56.5%. We added employees within our direct sales, business development and marketing organizations in both North America and Europe which contributed to $1.6 million of increased personnel and related expenses. In addition, commissions and sales bonuses increased by $0.4 million, or 61.8%, in the 2012 period as a result of an increase in new customers acquired during the 2012 period. These increases were partially offset by a reduction in marketing program expenses in the 2012 period. We hosted our global customer conference in the first quarter of 2011, and will host a similar global customer conference in the second quarter of 2012. As a result, our marketing program expenses were $0.4 million lower in the 2012 period. Finally, we incurred $0.1 million of increased travel and entertainment expenses and $0.1 million of increased allocated overhead costs such as rent, IT costs, and depreciation and amortization expenses incurred as a result of our growth.

Research and Development



                                         Three Months Ended
                                              March 31,                  Change
                                         2012           2011          $         %
                                             (dollars in thousands)

Research and Development. Research and development expenses for the three months ended March 31, 2012 increased by $1.0 million, or 40.1%, compared to the three months ended March 31, 2011. The increase was attributable to investments made to enhance and improve the functionality of our e-commerce platform. We increased our engineering headcount by 16 employees, or 38.1%, in the 2012 period, which contributed to increased personnel and related expenses of $0.5 million. In addition, in the 2012 period, we supplemented our internal development efforts with third-party contractors in order to accelerate our development efforts. As a result, we incurred increased contractor costs of $0.4 million in the 2012 period. Finally, we incurred increased expenses of allocated overhead costs such as rent, IT costs, and depreciation and amortization, of $0.1 million, relating to overall increased expenses to support our continued growth.

General and Administrative



                                       Three Months Ended
                                            March 31,                   Change
                                       2012           2011           $           %
                                            (dollars in thousands)

General and Administrative. General and administrative expenses for the three months ended March 31, 2012 increased by $1.4 million, or 113.0%, compared to the three months ended March 31, 2011. The increase was driven by increased employee-related costs and professional fees to support our growing business. We incurred increased personnel, consulting and related costs of $0.7 million and increased professional fees of $0.5 million for accounting, audit, legal and tax services incurred as a result of our transition from a private company to a public company and to support the expansion and growth of our business. Finally, we incurred $0.1 million of increased travel and entertainment expenses incurred as a result of our growth.

Other (Expense) Income



                                          Three Months Ended
                                               March 31,                 Change
                                          2012            2011         $          %
                                              (dollars in thousands)

* Because the change was from positive to negative, the percentage change is not calculable.

Other (Expense) Income. Other (expense) income for the three months ended March 31, 2012 decreased $0.6 million, from other income of $0.3 million in the 2011 period to other expense of $0.3 million in the 2012 period. The decrease was attributable to $0.2 million in foreign exchange gains related to fluctuations in the British pound sterling and Euro in relation to the U.S. Dollar in the 2012 period compared to foreign exchange gains of $0.4 million in the 2011 period. In addition, during the 2012 period we incurred $0.4 million in other expense due to the increase in the fair value of our warrant. This increased expense was partially offset by other income related to a number of individually insignificant items.

Liquidity and Capital Resources



                                                             Three Months Ended March 31,
                                                               2012                  2011
Net cash provided by operating activities                 $        1,369         $      1,593
Net cash used in investing activities                             (1,538 )               (243 )
Net cash provided by financing activities                         94,435                  125
Effect of foreign exchange rate changes on cash and
equivalents                                                           47                   81
Net increase in cash and equivalents                              94,313                1,556

To date, we have financed our operations primarily through the sale of equity securities, including net cash proceeds from our IPO. In March 2012, we closed our initial public offering of 6,325,000 shares of common stock, including 825,000 shares sold pursuant to the underwriters' option to purchase additional shares, at a public offering price of $16.00 per share. We raised approximately $94.1 million from our IPO, net of our underwriting discounts and commissions but before offering expenses of $3.1 million. At March 31, 2012, $0.6 million of expenses incurred in connection with the IPO have not been paid.

At March 31, 2012, our principal sources of liquidity were $109.3 million of cash and cash equivalents and amounts available under our loan and security agreement, or the 2008 Loan Agreement, with Silicon Valley Bank, as described below.

In June 2011, we amended the 2008 Loan Agreement and increased the available borrowings to an additional $4.0 million for equipment purchases made through March 31, 2012. Each advance is payable over 36 months at a fixed rate of 6.00%. As of March 31, 2012, we made borrowings under this line of $3.9 million.

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