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JIVE > SEC Filings for JIVE > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for JIVE SOFTWARE, INC.


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

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 (the "Exchange Act"). Forward-looking statements may be identified by the use of forward-looking words such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan," "expect" or the negative or plural of these words or similar expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

our ability to timely and effectively scale and adapt our existing technology and network infrastructure;

our ability to increase adoption of our platform by our customers' internal and external users;

our ability to protect our users' information and adequately address security and privacy concerns;

our ability to maintain an adequate rate of growth;

our ability to successfully develop, market and sell new products;

our future expenses;

the effects of increased competition in our market;

our ability to effectively manage our growth;

our ability to successfully enter new markets and manage our international expansion;

our ability to maintain, protect and enhance our brand and intellectual property; and

the attraction and retention of qualified employees and key personnel.

These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Please refer to Item 1A. Risk Factors in this Quarterly Report on Form 10-Q, for a discussion of reasons why our actual results may differ materially from our forward-looking statements. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.

Overview

We provide a social business software platform that improves business results by enabling a more productive and effective workforce through enhanced communications and collaboration both inside and outside the enterprise. Organizations deploy our platform to improve employee productivity, enhance revenue opportunities, lower operational costs, increase customer retention and improve strategic decision making. Our platform is offered on a subscription basis, deployable in a private or public cloud and used for internal or external communities. We generate revenues from platform license fees as well as from professional service fees for configuration, implementation and training.


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We sell our comprehensive Jive Social Business Platform across two principal communities: internallyfor employees within the enterprise and externally for customers and partners outside the enterprise. Internally focused communities comprised 64.6% of our Jive Social Business Platform revenues in the first nine months of 2012. As the market for social business software within the enterprise continues to grow, we expect revenues from internally focused communities to continue to be higher than revenues generated from externally focused communities.

We offer our platform both as a public cloud service and as a private cloud solution. In March 2012, we released Jive Cloud, one of our public cloud services that is on a quarterly release cycle and is a non-customizable version of our platform. Additionally, in May 2012, we released Try Jive, a 30-day free trial version of the Jive Cloud offering. Try Jive is targeted at departments within larger organizations with the intent of driving viral adoption organically within the enterprise. In the first nine months of 2012, product revenues from all public cloud deployments, including Jive Cloud, represented 62.4% of total product revenues. With the release of Jive Cloud and Try Jive, we anticipate that, over the long-term, public cloud deployments of our platform will comprise an ever-increasing portion of our business.

Historically, we have generated the largest portion of our revenues from sales to customers within the United States. Revenues from customers in the United States accounted for 77.8% of total revenues in the first nine months of 2012. We are continuing to focus on expanding our sales headcount and channel partners internationally, and we anticipate the percentage of our revenues generated outside of the United States will increase in the future.

Our fourth quarter has historically been our strongest quarter for new billings and renewals This pattern may be amplified over time if the number of customers with renewal dates occurring in the fourth quarter continues to increase. Furthermore, our quarterly sales cycles are frequently weighted toward the end of the quarter, with an increased volume of sales in the last few weeks of each quarter. The year-over-year compounding effect of this seasonality in billing patterns and overall new business and renewal activity causes the value of invoices that we generate in the fourth quarter to continually increase in proportion to our billings in the other three quarters of our fiscal year. We expect this trend to continue in the fourth quarter of 2012 and in future years.

Critical Accounting Policies and the Use of Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, result primarily from the need to make estimates about the effects of matters that are inherently uncertain.

Management's Discussion and Analysis and Note 2 to the Consolidated Financial Statements in our 2011 Annual Report on Form 10-K describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. During the first nine months of 2012, there were no significant changes in our critical accounting policies or estimates from those reported in our 2011 Annual Report on Form 10-K, which was filed with the SEC on March 12, 2012.

New Accounting Pronouncements

See Note 12 of the Condensed Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements.


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Non-GAAP Key Metrics

In addition to GAAP metrics such as total revenues and gross margin, we also regularly review billings, a non-GAAP measure, and the number of Jive Social Business Platform customers to evaluate our business, measure our performance, identify trends affecting our business, allocate capital and make strategic decisions.

Billings

The following tables set forth a reconciliation of total revenues to billings
(dollars in thousands):



                                                  Three Months Ended
                                                     September 30,              Dollar
                                                 2012            2011           Change          % Change
Total revenues                                 $  28,873       $  20,819       $   8,054             38.7 %
Deferred revenue, end of period                   97,554          64,304          33,250             51.7 %
Less: deferred revenue, beginning of period      (87,482 )       (58,644 )       (28,838 )           49.2 %

Billings                                       $  38,945       $  26,479       $  12,466             47.1 %

                                                   Nine Months Ended
                                                     September 30,              Dollar
                                                 2012            2011           Change          % Change
Total revenues                                 $  81,141       $  54,771       $  26,370             48.2 %
Deferred revenue, end of period                   97,554          64,304          33,250             51.7 %
Less: deferred revenue, beginning of period      (77,826 )       (50,195 )       (27,631 )           55.1 %

Billings                                       $ 100,869       $  68,880       $  31,989             46.4 %

We monitor billings, a non-GAAP measure, in addition to other financial measures presented in accordance with GAAP to manage our business, make planning decisions, evaluate our performance and allocate resources. We believe that this non-GAAP measure offers valuable supplemental information regarding the performance of our business, and it will help investors better understand the sales volumes and performance of our business.

Our use of billings has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for total revenues or an analysis of our results as reported under GAAP. Some of these limitations are:

billings is not a substitute for total revenues, as billings are recognized when invoiced, while revenue is recognized ratably over the contract term;

billings can include fees paid for license terms greater than 12 months and for subscription renewals prior to the expiration of the current subscription term and, therefore, does not always closely match with the timing of delivery of support, maintenance, and hosting services and the costs associated with delivering those services;

changes to the composition of current period billings may impact the correlation of current period billings to future period revenues;

billings would not exclude any agreements that contain customer acceptance provisions that would require deferral of revenue required under GAAP; and

other companies, including companies in our industry, may not use billings, may calculate non-GAAP measures differently or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP measures as comparative measures.

We consider billings a significant performance measure and a leading indicator of future recognized revenue based on our business model of billing for subscription licenses annually and recognizing revenue ratably over the subscription term. The billings we record in any particular period reflect sales to new customers plus subscription renewals and upsell to existing customers, and represent amounts invoiced for product subscription license fees and professional services. We typically invoice our customers for subscription fees in annual increments upon initiation of the initial contract or subsequent renewal. In addition, we also enter into arrangements with customers to purchase subscriptions for a term greater than 12 months, most typically 36 months. For subscriptions greater than 12 months, the customer has the option of being invoiced annually or paying for the full term of the subscription at the time the contract is signed. If the customer elects to pay the full multi-year amount at the time the contract is signed, the total amount billed for the entire term will be reflected in billings. If the customer elects to be invoiced annually, only the amount billed for the 12-month period will be included in billings.


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Billings for consulting services typically occur on a bi-weekly basis as the services are delivered.

The increases in billings in the periods presented were primarily driven by the addition of new customers, increased upsell of our products to existing customers, and an increase in customers renewing prior to the period in which their existing subscription term concludes.

Jive Social Business Platform Customers

We define the number of platform customers at the end of any given measurement period by counting every customer under active contract for the Jive Social Business Platform that carries a balance in our deferred revenue account at the end of that period. While a single customer may have multiple internal and external communities to support distinct departments, operating segments or geographies, we only include that customer once for purposes of this metric. We believe the number of Jive Social Business Platform customers is a leading indicator of our future revenues, billings and upsell opportunities.

Our Jive Social Business Platform customer count was as follows:

As of September 30, 2012 2011 Change % Change Jive Social Business Platform customer count 761 657 104 15.8 %

Our product revenues growth was 55.0% in the first nine months of 2012 compared to the first nine months of 2011. Our product revenues have grown at a faster rate than our customer count as we have realized greater upsell with our existing customers and larger average subscription values with new customers.

Components of Results of Operations

Revenues

We generate revenues primarily in the form of software subscription fees and professional services for configuration, implementation and other services related to our software. We offer our products with subscription terms typically ranging from 12 to 36 months. In addition to sales of our platform, our revenues include fees for sales of modules, additional users and page views. While subscription-based licenses make up the substantial majority of our product revenues, in limited instances we license our software to customers on a perpetual basis, with ongoing support and maintenance services. Revenues generated through the sale of subscription licenses also include fees for updates and maintenance. We recognize revenue from professional services ratably over the subscription term when they are bundled with a subscription license, because we do not have fair value of all the various services. These amounts, when recognized, are classified as professional services revenues on our consolidated statements of operations based on the hourly rates at which they are billed.

Cost of Revenues

Cost of product revenues includes all direct costs to produce and distribute our product offerings, including data center and support personnel, depreciation and maintenance related to equipment located at our hosting service provider, salaries, web hosting services expense for public cloud implementations, third-party royalty costs, benefits, amortization of acquired intangible assets and stock-based compensation.


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Cost of professional services revenues includes all direct costs to provide our professional services, which primarily include salaries, consulting and outside services, and benefits and stock-based compensation for our professional services personnel. We recognize expenses related to our professional services organization as they are incurred, while the majority of associated professional services revenues are recognized ratably over the subscription term.

Cost of revenues also includes allocated overhead costs for facilities and information technology. Allocated costs for facilities consist of rent and depreciation of equipment and leasehold improvements related to our facilities. Our allocated costs for information technology include costs for compensation of our information technology personnel and the cost associated with our information technology infrastructure. Our overhead costs are allocated to all departments based on headcount.

We expect that cost of revenues may increase in the future depending on the growth rate of our new customers and billings and our need to support the implementation, hosting and support of those new customers. We also expect that cost of revenues as a percentage of total revenues could fluctuate from period to period depending on growth of our services business and any associated costs relating to the delivery of services, the timing of sales of products that have royalties associated with them, the amount and timing of amortization of intangibles from acquisitions and the timing of significant expenditures.

Research and Development

Research and development expenses are expensed as incurred. These expenses include salaries, benefits and stock-based compensation for our engineers and developers, allocated facilities costs and payments to third parties for research and development of new software. We focus our research and development efforts on developing new versions of our platform with new and expanded features and enhancing the ease of use of our platform. We believe that continued investment in our technology is important for our future growth, and, as a result, we expect research and development expenses to increase in absolute dollars although they may fluctuate as a percentage of total revenues.

Sales and Marketing

Sales and marketing expenses primarily consist of salaries, incentive compensation and benefits, travel expense, marketing program fees, partner referral fees and stock-based compensation. Sales incentive compensation is recorded as a component of sales and marketing expense as earned. Sales incentive compensation is earned at the time a customer enters into a binding purchase agreement while associated revenue is recognized ratably over the subscription term. In addition, sales and marketing expenses include customer acquisition marketing, branding, advertising, customer events and public relations costs, as well as allocated facilities costs. We plan to continue investing heavily in sales and marketing to expand our global operations, increase revenues from current customers, build brand awareness and expand our indirect sales channel. We expect sales and marketing expenses to increase in absolute dollars and remain our largest expense in absolute dollars and as a percentage of total revenues, although they may fluctuate as a percentage of total revenues.

General and Administrative

General and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, legal, information technology, human resources and other administrative employees. In addition, general and administrative expenses include legal and accounting services, outside consulting, facilities and other supporting overhead costs not allocated to other departments. We expect that our general and administrative expenses will increase in absolute dollars as we continue to expand our business and incur additional expenses associated with being a publicly traded company.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest expense on our outstanding debt and foreign exchange gains and losses, as well as income related to our investments. In addition, the 2011 period includes changes in the fair value of our Series C preferred stock warrants. The Series C preferred stock warrants were exercised late in the third quarter of 2011 and, therefore, we will not incur charges related to these warrants in subsequent periods.


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Provision for Income Taxes

Provision for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign tax jurisdictions. Since we have generated net losses, we have fully reserved against any potential future benefits for loss carryforwards and research and development and other tax credits.

Results of Operations

The following tables set forth our statement of operations data, both in
absolute dollars and as a percentage of total revenues (dollars in thousands):



                                                         Three Months Ended                   Three Months Ended
                                                     September 30, 2012 (1)(2)            September 30, 2011 (1)(2)
Revenues:
Products                                           $       25,861            89.6 %     $       17,493            84.0 %
Professional services                                       3,012            10.4 %              3,326            16.0 %

Total revenues                                             28,873           100.0 %             20,819           100.0 %
Cost of revenues:
Products                                                    7,788            27.0 %              6,147            29.5 %
Professional services                                       3,474            12.0 %              3,095            14.9 %

Total cost of revenues                                     11,262            39.0 %              9,242            44.4 %

Gross profit (loss):
Products                                                   18,073            62.6 %             11,346            54.5 %
Professional services                                        (462 )          (1.6 )%               231             1.1 %

Total gross profit                                         17,611            61.0 %             11,577            55.6 %
Operating expenses:
Research and development                                    9,845            34.1 %              7,537            36.2 %
Sales and marketing                                        14,800            51.3 %             12,297            59.1 %
General and administrative                                  4,127            14.3 %              3,901            18.7 %

Total operating expenses                                   28,772            99.7 %             23,735           114.0 %

Loss from operations                                      (11,161 )         (38.7 )%           (12,158 )         (58.4 )%
Other income (expense), net(3)                                  5             0.0 %              4,635            22.3 %

Loss before provision (benefit) for income taxes          (11,156 )         (38.6 )%            (7,523 )         (36.1 )%
Provision (benefit) for income taxes                          132             0.5 %                 57             0.3 %

Net loss                                           $      (11,288 )         (39.1 )%    $       (7,580 )         (36.4 )%

Basic and diluted net loss per common share        $        (0.18 )                     $        (0.31 )

Shares used in per share calculations                      62,921                               24,836


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                                                         Nine Months Ended                    Nine Months Ended
                                                     September 30, 2012 (1)(2)            September 30, 2011 (1)(2)
Revenues:
Products                                           $       71,436            88.0 %     $       46,092            84.2 %
Professional services                                       9,705            12.0 %              8,679            15.8 %

Total revenues                                             81,141           100.0 %             54,771           100.0 %
Cost of revenues:
Products                                                   21,745            26.8 %             15,208            27.8 %
Professional services                                      11,055            13.6 %              9,146            16.7 %

Total cost of revenues                                     32,800            40.4 %             24,354            44.5 %

Gross profit (loss):
Products                                                   49,691            61.2 %             30,884            56.4 %
Professional services                                      (1,350 )          (1.7 )%              (467 )          (0.9 )%

Total gross profit                                         48,341            59.6 %             30,417            55.5 %
Operating expenses:
Research and development                                   27,327            33.7 %             23,320            42.6 %
Sales and marketing                                        40,737            50.2 %             31,757            58.0 %
General and administrative                                 11,680            14.4 %              9,120            16.7 %

Total operating expenses                                   79,744            98.3 %             64,197           117.2 %

Loss from operations                                      (31,403 )         (38.7 )%           (33,780 )         (61.7 )%
Other income (expense), net(3)                               (213 )          (0.3 )%            (8,068 )         (14.7 )%

Loss before provision (benefit) for income taxes          (31,616 )         (39.0 )%           (41,848 )         (76.4 )%
Provision (benefit) for income taxes                          246             0.3 %             (3,710 )          (6.8 )%

Net loss                                           $      (31,862 )         (39.3 )%    $      (38,138 )         (69.6 )%

Basic and diluted net loss per common share        $        (0.51 )                     $        (1.61 )

Shares used in per share calculations                      62,100                               23,741

(1) Stock-based compensation was included in our statements of operations data as follows (in thousands):

                                                         Three Months Ended                 Three Months Ended
                                                       September 30, 2012 (2)             September 30, 2011 (2)
Cost of revenues                                    $        627              2.2 %    $        155              0.7 %
Research and development                                   1,705              5.9 %             806              3.9 %
Sales and marketing                                        1,436              5.0 %           1,988              9.5 %
General and administrative                                 1,260              4.4 %           1,180              5.7 %

                                                    $      5,028             17.4 %    $      4,129             19.8 %

                                   Nine Months Ended                 Nine Months Ended
                                September 30, 2012 (2)            September 30, 2011 (2)
 Cost of revenues             $       1,413           1.7 %    $        311              0.6 %
 Research and development             4,185           5.2 %           1,764              3.2 %
 Sales and marketing                  2,890           3.6 %           3,234              5.9 %
 General and administrative           3,789           4.7 %           2,215              4.0 %

$ 12,277 15.1 % $ 7,524 13.7 %

(2) Percentages may not add due to rounding.

(3) Non-cash income (expense) recorded in other income (expense), net in the three and nine months ended September 30, 2011 included $5.2 million and $(7.2) million, respectively, related to the change in fair value of our preferred stock warrant liability. The preferred stock warrants were exercised during the third quarter of 2011 and, accordingly, we will not incur charges related to this warrant in future periods. . . .

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