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| IL > SEC Filings for IL > Form 10-Q on 9-Aug-2012 | All Recent SEC Filings |
9-Aug-2012
Quarterly Report
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as well as our subsequent reports on Form 8-K and Form 10-Q and other publicly available information. Amounts in tabular format are presented in thousands, except per share data, or otherwise indicated.
Overview
IntraLinks is a leading global provider of Software-as-a-Service ("SaaS") solutions for securely managing content, exchanging critical business information and collaborating within and among organizations. Our cloud-based solutions enable organizations to control, track, search and exchange time-sensitive information inside and outside the firewall, all within a secure and easy-to-use environment. Our customers rely on our cost-effective solutions to manage large amounts of electronic information, accelerate information intensive business processes, reduce time to market, optimize critical information workflow, meet regulatory and risk management requirements and collaborate with business counterparties in a secure, auditable and compliant manner. We help our customers eliminate many of the inherent risks and inefficiencies of using email, fax, courier services and other existing solutions to collaborate and exchange information.
At our founding in 1996, we introduced cloud-based collaboration for the debt capital markets industry and, shortly thereafter, extended our solutions to merger and acquisition transactions. Today, we service enterprise and governmental agencies in over 58 countries across a variety of industries, including financial services, pharmaceutical, biotechnology, consumer, energy, industrial, legal, insurance, real estate and technology, which use our solutions for the secure management and online exchange of information within and among organizations. Across all of our principal markets, we help transform a wide range of slow, expensive and information-intensive tasks into streamlined, efficient and real-time business processes.
We deliver our solutions entirely through a multi-tenant SaaS architecture in which a single instance of our software serves all of our customers. We sell our solutions directly through an enterprise sales team with industry-specific expertise, and indirectly through a customer referral network and channel partners. During the six months ended June 30, 2012, we generated $104.6 million in revenue, of which approximately 39% was derived from international sales across 58 countries.
During the second quarter of 2012, management initiated a business strategy review to explore long-term growth opportunities. The objective was to assess the competitive environment, identify the most attractive market opportunities, and further develop our execution strategy. We have made significant progress in validating our market opportunities and aligning the company to effectively address them. This strategic assessment reinforces our commitment to anticipate the changing needs of our customers, industry trends, and competitive forces.
Key Metrics
We evaluate our operating and financial performance using various performance indicators, as well as against the macroeconomic trends affecting the demand for our solutions in our principal markets. We also monitor relevant industry performance, including transactional activity in the Debt Capital Markets ("DCM") and the Mergers & Acquisitions ("M&A") market globally, to provide insight into the success of our sales activities as compared to our peers and to estimate our market share in each of our principal markets.
Our management relies on the key performance indicators set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We discuss revenue under "Results of Operations", and cash flow provided by operating activities, including deferred revenue, under "Liquidity and Capital Resources". Other measures of our performance, including adjusted gross margin, adjusted operating income, adjusted net income, adjusted EBITDA and adjusted EBITDA margin, and free cash flow are defined and discussed under "Non-GAAP Financial Measures" below.
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Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Consolidated
Statement of
Operations Data:
Total revenue $ 53,765 $ 53,336 $ 104,550 $ 105,743
Non-GAAP Gross 75.7% 79.8% 76.0% 80.1%
margin
Non-GAAP adjusted $ 3,961 $ 11,123 $ 6,747 $ 21,958
operating income
Non-GAAP adjusted $ 868 $ 5,721 $ 1,920 $ 11,814
net income
Non-GAAP adjusted $ 8,452 $ 16,379 $ 15,517 $ 32,163
EBITDA
Non-GAAP adjusted 15.7% 30.7% 14.8% 30.4%
EBITDA margin
Consolidated
Balance Sheet
Data:
Deferred revenue $ 42,705 $ 41,280 $ 42,705 $ 41,280
at June 30,
Consolidated
Statement of Cash
Flows Data:
Cash flows
provided by $ 17,197 $ 15,931 $ 18,725 $ 21,472
operations
Free cash flow $ 7,097 $ 9,609 $ 2,454 $ 9,466
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In addition to the metrics listed in the table above, our management regularly analyzes customer contract data, including aggregate contract values, contract durations and payment terms. Management also monitors sales and marketing activity, customer renewal rates, the mix of subscription and transaction business and international revenue growth to evaluate various aspects of our operating and financial performance. These items are discussed elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.
Non-GAAP Financial Measures
This Form 10-Q includes information about certain financial measures that are not prepared in accordance with generally accepted accounting principles in the United States ("GAAP" or "U.S. GAAP"), including non-GAAP gross profit and gross margin, non-GAAP adjusted operating income and margin, non-GAAP adjusted net income, non-GAAP adjusted net income per share, non-GAAP adjusted EBITDA and free cash flow. These non-GAAP measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies.
Management defines its non-GAAP financial measures as follows:
• Non-GAAP gross margin represents the corresponding GAAP measure adjusted to exclude (1) stock-based compensation expense and (2) amortization of intangible assets
• Non-GAAP adjusted operating income represents the corresponding GAAP measure adjusted to exclude (1) stock-based compensation expense, (2) amortization of intangible assets, (3) impairment charges or asset write-offs, and (4) costs related to public stock offerings.
• Non-GAAP adjusted net income represents the corresponding GAAP measure adjusted to exclude (1) stock-based compensation expense, (2) amortization of intangible assets, (3) impairment charges or asset write-offs, (4) costs related to debt repayments and (5) costs related to public stock offerings. Non-GAAP adjusted net income is calculated using an estimated long-term effective tax rate.
• Non-GAAP net income per share represents non-GAAP adjusted net income defined above divided by dilutive shares outstanding
• Non-GAAP adjusted EBITDA represents net (loss) income adjusted to exclude
(1) interest expense, (2) income tax provision (benefit), (3) depreciation
and amortization, (4) amortization of intangible assets, (5) stock-based
compensation expense, (6) amortization of debt issuance costs, (7) other
expense (income), net, (8) impairment charges or asset write-offs, and (9)
costs related to public stock offerings.
• Free cash flow represents cash flow from operations less capital expenditures.
Management believes that these non-GAAP financial measures, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provide useful information about our period-over-period growth and provide additional information that is useful for evaluating our operating performance and manage the cash needs of our business. Additionally, management believes that these non-GAAP financial measures provide a more meaningful comparison of our operating results against those of other companies in our industry, as well as on a period to-period basis, because these measures exclude items that are not representative of our operating performance, such as amortization of intangible assets, interest expense and fair value adjustments to the interest rate swap. Management believes that including these costs in our results of operations results in a lack of comparability between our operating results and those of our peers in the industry, the majority of which are not highly leveraged and do not have comparable amortization costs related to intangible assets. However, non-GAAP gross margin, non-GAAP adjusted operating income, non-GAAP adjusted net income, non-GAAP adjusted net income per share, non-GAAP adjusted EBITDA and free cash flow are not measures of financial performance under U.S. GAAP and, accordingly, should not be considered as alternatives to gross margin, operating income, net income (loss), and cash flows provided by operations as indicators of operating performance.
A reconciliation of GAAP to Non-GAAP financial measures has been provided in the financial statement tables included in the press release
The table below provides reconciliations between the non-GAAP financial measures discussed above to the comparable U.S. GAAP measures:
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Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Gross profit $ 37,543 $ 39,199 $ 72,824 $ 77,990
Gross margin 69.8% 73.5% 69.7% 73.8%
Cost of
revenue - stock-based 92 37 200 108
compensation expense
Cost of
revenue - amortization 3,089 3,310 6,398 6,619
of intangible assets
Non-GAAP Gross profit $ 40,723 $ 42,546 $ 79,422 $ 84,717
Non-GAAP Gross margin 75.7% 79.8% 76.0% 80.1%
Income from operations $ (13,044 ) $ 2,062 $ (18,760 ) $ 3,715
Stock-based 1,691 1,899 3,036 3,871
compensation expense
Amortization of 6,937 7,159 14,094 14,315
intangible assets
Impairment on 8,377 - 8,377 -
capitalized software
Costs related to - 3 - 57
public stock offerings
Non-GAAP adjusted $ 3,961 $ 11,123 $ 6,747 $ 21,958
Operating income
Net (loss ) income $ (15,652 ) $ 20 $ (22,457 ) $ 242
before income tax
Stock-based 1,691 1,899 3,036 3,871
compensation expense
Amortization of 6,937 7,159 14,094 14,315
intangible assets
Impairment on 8,377 - 8,377 -
capitalized software
Costs related to - 3 - 57
public stock offerings
Costs related to debt 47 - 47 -
repayments
Non-GAAP adjusted Net 1,400 9,081 3,097 18,485
Income before tax
Non-GAAP Income tax 532 3,360 1,177 6,671
provision
Non-GAAP adjusted Net $ 868 $ 5,721 $ 1,920 $ 11,814
income
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Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Net (loss ) $ (9,029 ) $ 7 $ (14,613 ) $ 490
income
Interest expense 1,938 2,603 4,074 5,597
Income tax (6,623 ) 13 (7,844 ) (248 )
benefit
Depreciation and 4,491 5,256 8,770 10,204
amortization
Amortization of 6,937 7,159 14,094 14,315
intangible assets
Stock-based
compensation 1,691 1,899 3,036 3,871
expense
Impairment on
capitalized 8,377 - 8,377 -
software
Amortization of
debt issuance 223 574 414 941
costs
Other expense 447 (1,135 ) (791 ) (3,065 )
(income), net(1)
Costs related to
public stock - 3 - 57
offerings
Non-GAAP adjusted $ 8,452 $ 16,379 $ 15,517 $ 32,163
EBITDA
Non-GAAP adjusted 15.7% 30.7% 14.8% 30.4%
EBITDA margin
Cash flow
provided by $ 17,197 $ 15,931 $ 18,725 $ 21,472
operations
Capital (10,100 ) (6,322 ) (16,271 ) (12,006 )
expenditures
Free cash flow $ 7,097 $ 9,609 $ 2,454 $ 9,466
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(1) "Other expense (income), net" primarily includes foreign currency transaction gains and losses and fair value adjustments to our interest rate swap which matured as of June 30, 2012.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities on an ongoing basis. We evaluate these estimates including those related to the determination of the fair value of stock options and estimated forfeitures of equity-based awards, the fair value of our reporting unit, valuation of intangible assets (and their related useful lives), fair value of financial instruments, certain components of the income tax provisions, including valuation allowances on the Company's deferred tax assets, accruals for certain compensation expenses, allowances for doubtful accounts and reserves for customer credits. We base estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from those estimates under different assumptions or conditions.
During the six months ended June 30, 2012, there were no material changes to our significant accounting policies from those contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Goodwill Impairment Analysis
At June 30, 2012, we had $215.5 million of goodwill recorded as a result of the Merger that occurred on June 15, 2007. Goodwill is evaluated for impairment on an annual basis (October 1), or more frequently if events or changes in circumstances indicate that an impairment loss may have occurred. Our operations consist of one reporting unit, which is evaluated during each goodwill impairment test.
In the second quarter of 2012, we performed a goodwill impairment test as a result of the continued depressed stock price and our market capitalization relative to net book value.
In accordance with ASC 350, Goodwill and Other, goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its goodwill carrying amount to measure the amount of impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
Step 1 of the goodwill impairment test was performed using a combination of a discounted cash flow ("DCF") analysis and a market-based approach. The forecasted cash flows employed in the DCF analysis were based on our most recent forecast and business plans and represent our best estimate of future results as of June 30, 2012 within a range of possible outcomes. In addition, we made the following assumptions in the DCF analysis: (i) a 5% growth factor to calculate the terminal value of our reporting unit and (ii) a 15% discount rate to calculate the terminal value of our reporting unit, both of which are consistent with rates used in the 2011 annual impairment test. The Step 1 valuation also considered our market capitalization as of the second quarter of 2012, adjusted for an estimated equity control premium of 28%.
Based on the results of our most recent Step 1 goodwill impairment test, we concluded that goodwill was not impaired as of June 30, 2012. However, our most recent goodwill impairment test showed that we could be at risk of recording a goodwill impairment in the future if, for example, our stock price remains at a depressed level or there is a negative change in our future cash flow projections.
If we performed the goodwill impairment test solely based on the outstanding stock price as of June 30, 2012 adjusted for an estimated 28% equity control premium, or if we had used a 1% higher discount rate or projections on the lower end of the range of possible outcomes in our DCF analysis, step 1 of the goodwill impairment test would have failed. We will continue to monitor the judgments and estimates used in the impairment analysis and consider future triggering events to continue to assess the recoverability of our goodwill balance.
Recently Adopted Accounting Pronouncements
On May 12, 2011, the Financial Accounting Standards Board ("FASB") issued revised authoritative guidance covering fair value measurements and disclosures. The amended guidance include provisions for (1) the application of concepts of "highest and best use" and "valuation premises", (2) an option to measure groups of offsetting assets and liabilities on a net basis, (3) incorporation of certain premiums and discounts in fair value measurements, and (4) measurement of the fair value of certain instruments classified in shareholders' equity. The revised guidance is effective for interim and annual periods beginning after December 15, 2011. We adopted this authoritative guidance effective January 1, 2012. The adoption of this authoritative guidance had no material impact on our consolidated financial statements.
On June 16, 2011 the FASB issued revised authoritative guidance covering
Presentation of Comprehensive Income, which revises the manner in which entities
present comprehensive income in their financial statements. The revised guidance
removes the presentation options in the former guidance and requires entities to
report components of comprehensive income in either a continuous statement of
comprehensive income, or two separate but consecutive statements. The revised
authoritative guidance does not change the items that must be reported in other
comprehensive income. The revised guidance is effective for interim and fiscal
years beginning after December 15, 2011. We adopted this authoritative guidance
effective January 1, 2012, and have included the presentation of comprehensive
(loss) income in a separate statement that immediately follows the Consolidated
Statements of Operations in this Quarterly Report on Form 10-Q.
Results of Operations
The following table sets forth consolidated statements of operations data for
each of the periods indicated as a percentage of total revenues.
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Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue 30.2 % 26.5 % 30.3 % 26.2 %
Gross profit 69.8 % 73.5 % 69.7 % 73.8 %
Operating
expenses:
Product 9.8 % 9.4 % 9.3 % 10.5 %
development
Sales and 42.3 % 42.2 % 45.1 % 41.4 %
marketing
General and 26.4 % 18.0 % 25.2 % 18.4 %
administrative
Impairment of
capitalized 15.6 % 0.0 % 8.0 % 0.0 %
software
Total operating 94.1 % 69.6 % 87.6 % 70.2 %
expenses
- (24.3 %) 3.9 % (17.9 %) 3.5 %
Interest expense 3.6 % 4.9 % 3.9 % 5.3 %
Amortization of
debt issuance 0.4 % 1.1 % 0.4 % 0.9 %
costs
Other expense 0.8 % (2.1 %) (0.8 %) (2.9 %)
(income), net
Net (loss) income (29.1 %) 0.0 % (21.5 %) 0.2 %
before income tax
Income tax
(benefit) (12.3 %) 0.0 % (7.5 %) (0.2 %)
provision
Net (loss) income (16.8 %) 0.0 % (14.0 %) 0.5 %
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Comparison of the Three Months Ended June 30, 2012 and 2011
Revenue
Revenue increased to $53.8 million for the three months ended June 30, 2012,
from $53.3 million for the three months ended June 30, 2011. The following table
sets forth revenues by our principal markets, Enterprise, Mergers and
Acquisitions ("M&A") and Debt Capital Markets ("DCM"), for the three months
ended June 30, 2012 compared to the three months ended June 30, 2011, the
percentage increase or decrease between those periods, and the percentage of
total revenue that each principal market represented for those periods:
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% Revenue
Three Months Ended Three Months Ended
June 30, Increase (Decrease) % Increase (Decrease) June 30,
2012 2011 2012 2011
Enterprise $ 23,364 $ 22,583 $ 781 3.5 % 43.4 % 42.3 %
M&A 21,483 20,990 493 2.3 % 40.0 % 39.4 %
DCM 8,918 9,763 (845 ) (8.7 %) 16.6 % 18.3 %
Total Revenues $ 53,765 $ 53,336 $ 429 0.8 % 100.0 % 100.0 %
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Enterprise - The results for the three months ended June 30, 2012 reflect an increase in Enterprise revenue of $0.8 million or 3.5%, as compared to the three months ended June 30, 2011. The increase in Enterprise revenue for the three month period, as compared to the prior year period, was attributable to a net increase in our customer base.
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