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

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Form 10-Q for VOCUS, INC.


7-Nov-2012

Quarterly Report


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2011.

This report includes forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of words such as "anticipate," "believe," "estimate," "may," "intend," "expect," "will," "should," "seeks" or other similar expressions. Forward-looking statements include, among others, statements regarding future events, future financial performance, our anticipated growth, anticipated trends regarding costs of revenues and operating expenses, the effect of general economic and market conditions, our business strategy and our plan to build our business, our operating results, new features and services, our ability to successfully integrate acquired businesses and technologies, the sufficiency of our capital resources, and potential litigation involving us, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Forward- looking statements reflect our plans, expectations and beliefs, and involve inherent risks and uncertainties, many of which are beyond our control. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in "Risk Factors" in Item 1A of Part II.

Overview

We are a leading provider of cloud marketing software that helps businesses attract, engage and retain customers. As consumers' buying behavior is increasingly influenced by online information and social networks, our software helps companies reach and influence buyers across social networks, online and through the media. Our cloud marketing solutions address key areas of modern online marketing, including social media marketing, search marketing, email marketing and publicity. Our sales organization is focused on adding new customers, renewing customer subscriptions and expanding relationships with existing customers. We deliver our solutions over the Internet using a secure, scalable application and system architecture that allows our customers to quickly deploy and adopt our software.

As of September 30, 2012, we had 15,131 active subscription customers who purchased our products and services. These customers represent a wide variety of industries, including financial and insurance, technology, healthcare and pharmaceutical and retail and consumer products, as well as government agencies, not-for-profit organizations and educational institutions. We define active subscription customers as unique customer accounts that have an annual active subscription and have not been suspended for non-payment.

We plan to expand our cloud marketing suite, expand our direct sales force, increase alternate channel distribution and selectively pursue strategic acquisitions. As a result, we plan to hire additional personnel, particularly in sales and marketing, expand our domestic selling and marketing activities and develop our operational and financial systems to manage a growing business.

Acquisition

On February 24, 2012, we acquired all of the outstanding shares of iContact Corporation (iContact), a privately-held provider of cloud-based email and social marketing software that enables organizations to create and publish professional-quality emails to engage, educate and retain customers. The acquisition provided an email capability component to our marketing suite. The purchase price consisted of approximately $89.8 million of cash, a promissory note in the amount of $0.7 million, 401,672 shares of our common stock with a deemed value at issuance of approximately $9.1 million and 1.0 million shares of our newly-created Series A convertible preferred stock, with a deemed value at issuance of $77.5 million, aggregating approximately $167.1 million of total consideration, net of $10.0 million cash acquired. The acquisition was accounted for under the purchase method of accounting. The


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consolidated financial statements include the operating results of iContact from the acquisition date. We incurred acquisition-related transaction costs of $2.9 million and paid severance costs of $2.1 million for the nine months ended September 30, 2012. We recorded $5.6 million of net tangible assets, $32.6 million of identifiable intangible assets and $138.9 million of goodwill which is not deductible for tax purposes.

Sources of Revenues

We derive our revenues from subscription agreements and related services and from news distribution services. Our subscription agreements contain multiple service elements and deliverables, which generally include use of our cloud-based software, news distribution services, hosting services, content and content updates and customer support and may also include implementation and training services. The typical term of our subscription agreements is one year; however, our customers may purchase subscriptions with varying terms. We separately invoice our customers in advance of their subscription, with payment terms that require our customers to pay us generally within 30 days of invoice. Our subscription agreements typically are non-cancelable, though customers have the right to terminate their agreements for cause if we materially breach our obligations under the agreement. Our subscription agreements may include amounts that are not yet contractually billable to customers, and any such unbilled amounts are not recorded in deferred revenue until invoiced.

Additionally, we derive revenue on a per-transaction basis from our news distribution services. We generally receive payment in advance of the online distribution of the news release.

Professional services revenue consists primarily of data migration, custom development and training. Our professional service engagements are billed on a fixed fee basis with payment terms requiring our customers to pay us generally within 30 days of invoice.

Cost of Revenues and Operating Expenses

Cost of Revenues. Cost of revenues consists primarily of compensation for training, editorial and support personnel, hosting infrastructure, press release distribution, acquisition, maintenance and amortization of our information database, amortization of purchased technology from business combinations, amortization of capitalized software development costs, depreciation associated with computer equipment and software and allocated overhead. We allocate overhead expenses such as employee benefits, computer and office supplies, management information systems and depreciation for computer equipment based on headcount. As a result, indirect overhead expenses are included in cost of revenues and each operating expense category.

We believe content is an integral part of our solution and provides our customers with access to broad, current and relevant information critical to their public relations efforts. We expect to continue to make investments in both our own content as well as content acquired from third-parties and to continue to enhance our proprietary information database and enhance our news monitoring and social media monitoring services. We expect that in the remainder of 2012, cost of revenues will increase in absolute dollars and increase slightly as a percentage of revenues.

Sales and Marketing. Sales and marketing expenses are our largest operating expense. Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, sales commissions and incentives, marketing programs, including lead generation, promotional events, webinars and other brand building expenses and allocated overhead. We expense our sales commissions at the time a subscription agreement is executed by the customer, and we recognize substantially all of our revenues ratably over the term of the corresponding subscription agreement. As a result, we incur sales expense before the recognition of the related revenues.

We plan to continue to invest in sales and marketing to add new customers, increase sales to our existing customers and increase sales of our online news release distribution services. Such investments will include adding sales personnel and expanding our marketing activities to seek to build brand awareness and generate additional sales leads. We expect that in the remainder of 2012, sales and marketing expenses will increase in absolute dollars and as a percentage of revenues.

Research and Development. Research and development expenses consist primarily of compensation for our software application development personnel and allocated overhead. We have historically focused our research and development efforts on increasing the functionality and enhancing the ease of use of our cloud-based software. Because of our hosted, on-demand model, we are able to provide our customers with a single, shared version of our most recent application. As a result, we do not have to maintain


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legacy versions of our software, which enables us to have relatively low expenses as compared to traditional enterprise software business models. We expect that in the remainder of 2012, research and development expenses will increase in absolute dollars and increase slightly as a percentage of revenues.

General and Administrative. General and administrative expenses consist of compensation and related expenses for executive, finance, legal, human resources and administrative personnel, as well as fees for legal, accounting and other consulting services, acquisition-related expenses, third-party payment processing and credit card fees, facilities rent, other corporate expenses, fair value adjustments to contingent consideration and allocated overhead. We expect that in the remainder of 2012, general and administrative expenses will increase in absolute dollars but will decrease as a percentage of revenues.

Amortization of Intangible Assets. Amortized intangible assets consist of customer relationships and trade names acquired in business combinations.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and include the accounts of Vocus, Inc. and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to the allowance for doubtful accounts, software development costs, useful lives of property, equipment and software, intangible assets and goodwill, contingent liabilities, revenue recognition, fair value of stock-based awards and income taxes, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates.

We believe that of our significant accounting policies, which are described in Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-Q and in our annual report on Form 10-K for the year ended December 31, 2011, the following accounting policies involve a greater degree of judgment or complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition. We recognize revenues when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. Our subscription agreements generally contain multiple service elements and deliverables. These elements include use of our cloud-based software, hosting services, content and content updates, customer support and may also include news distribution services and professional services. Our subscription agreements do not provide customers the right to take possession of the software at any time. Our separate units of accounting consist of subscription services, news distribution services and professional services. We allocate consideration to each deliverable in multiple element arrangements based on the relative selling prices and recognize revenue as the respective services are delivered or performed.

We established vendor-specific objective evidence of selling price for certain of our news distribution services as the selling price for a substantial majority of stand-alone sales falls within a narrow range around the median selling price. We determined third-party evidence of selling price is not available for any of our services due to differences in the features and functionality compared to competitor's products. We determined the estimated selling price for the remaining deliverables by analyzing factors such as historical pricing trends, discounting practices, gross margin objectives and other market conditions.

We also distribute individual news releases to the Internet which are indexed by major search engines and distributed directly to various news sites, journalists and other key constituents. We recognize revenue on a per-transaction basis when the press releases are made available to the public.

Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenues.

Sales Commissions. Sales commissions are expensed when we invoice a customer under its subscription agreement. As a result, we incur sales expense before the recognition of the related revenues.


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Stock-Based Compensation. We recognize compensation expense for equity awards based on the fair value of the award and on a straight-line basis over the requisite service period of the award based on the estimated portion of the award that is expected to vest. We apply estimated forfeiture rates based on analyses of historical data, including termination patterns and other factors. We use the quoted closing market price of our common stock on the grant date to measure the fair value of our restricted stock awards. We use the Black-Scholes option pricing model to measure the fair value of our option awards. We use the daily historical volatility of our stock price over the expected life of the options to calculate the expected volatility. The expected term of option awards is determined using a combination of historical exercise data with expected future exercise patterns using the average midpoint between vesting and the contractual term for outstanding awards. The risk-free interest rate is based on the rate on U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. We have not paid dividends and do not anticipate paying a cash dividend in the foreseeable future and, accordingly, use an expected dividend yield of zero.

Business Combinations. We have completed acquisitions of businesses that have resulted in the recording of goodwill and identifiable definite-lived intangible assets. Definite-lived intangible assets consist of acquired customer relationships, trade names and purchased technology. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives ranging from two to seven years. We recognize all of the assets acquired, liabilities assumed and contingent consideration at their fair values on the acquisition date. Acquisition-related costs are recognized separately from the acquisition and expensed as incurred in general and administrative expenses in the consolidated statements of operations. Accounting for these acquisitions requires us to make determinations about the fair value of assets acquired, useful lives for definite-lived tangible and intangible assets, and liabilities assumed that involve estimates and judgments.

Goodwill and Long-Lived Assets. Goodwill is not amortized, but rather is assessed for impairment at least annually. We perform our annual impairment assessment on November 1, or whenever events or circumstances indicate impairment may have occurred. We operate under one reporting unit, and as a result, evaluate goodwill impairment based on our fair value as a whole. We use an income approach based on discounted cash flows to determine the fair value of our reporting unit. Our cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors which are consistent with the plans used to manage our operations. The results of our most recent annual assessment performed on November 1, 2011 did not indicate any impairment of goodwill, and as such, the second step of the impairment test was not required. We also review the carrying amount of our reporting unit to its fair value based on quoted market prices of our common stock, or market capitalization. Our market capitalization exceeded our carrying amount on November 1, 2011.

We assess impairment of definite-lived intangible and other long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may no longer be fully recoverable. We determine the impairment, if any, by comparing the carrying value of the assets to future undiscounted net cash flows expected to be generated by the related assets. An impairment charge is recognized to the extent the carrying value exceeds the estimated fair value of the assets.

Income taxes. We use the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating losses and tax-credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amount of assets and liabilities and their tax bases. Net deferred tax assets are reduced by the valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Based on recent operating results and our current projections of future losses, we established a full valuation allowance on our U.S. federal and state net deferred tax assets because we were able to conclude that it is more likely than not that we will not realize the benefits of our deferred tax assets. We have historically maintained a full valuation allowance on net deferred tax assets of certain of our foreign subsidiaries because we determined that it is more likely than not that we will not realize the benefits of our foreign deferred tax assets.

Our estimates related to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If we determine it is more likely than not that a tax position will be sustained based on its technical merits, we record the impact of the position in our consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. Our estimates are updated at each reporting date based on the facts, circumstances and information available. We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits will occur during the next twelve months. We file income tax returns in the U.S. federal jurisdictions and various state and foreign jurisdictions and are subject to U.S. federal, state, and foreign tax examinations for years ranging from 2002 to 2011.


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Results of Operations

The following tables set forth selected unaudited consolidated statements of
operations data for each of the periods indicated as a percentage of total
revenues for the periods indicated.



                                                 Three Months Ended               Nine Months Ended
                                                   September 30,                    September 30,
                                                2011             2012            2011             2012
Revenues                                           100 %           100 %            100 %           100 %
Cost of revenues                                    19              20               19              20

Gross profit                                        81              80               81              80
Operating expenses:
Sales and marketing                                 49              57               50              57
Research and development                             6               7                7               8
General and administrative                          26              20               27              26
Amortization of intangible assets                    1               4                2               4

Total operating expenses                            82              88               86              95
Loss from operations                                (1 )            (8 )             (5 )           (15 )
Other income, net                                   -               -                -               -

Loss before provision (benefit) for
income taxes                                        (1 )            (8 )             (5 )           (15 )
Provision (benefit) for income taxes                -                1               (2 )             1

Net loss                                            (1 )%           (9 )%            (3 )%          (16 )%

Three Months Ended September 30, 2012 and 2011

Revenues. Revenues for the three months ended September 30, 2012 were $45.2 million, an increase of $16.3 million, or 57%, over revenues of $28.9 million for the comparable period in 2011. The increase in revenues was primarily due to incremental revenue from the acquisition of iContact of $12.9 million in the three months ended September 30, 2012, net of the fair value adjustment to deferred revenue due to purchase accounting of $513,000 and to the increase in the number of total active subscription customers to 15,131 as of September 30, 2012 from 10,855 as of September 30, 2011. Revenue growth from the increase in active subscription customers, excluding revenue from the acquisition, was $3.5 million. Total deferred revenue as of September 30, 2012 was $68.1 million, representing an increase of $12.9 million, or 23%, over total deferred revenue of $55.2 million as of September 30, 2011.

Cost of Revenues. Cost of revenues for the three months ended September 30, 2012 was $8.9 million, an increase of $3.5 million, or 66%, over cost of revenues of $5.4 million for the comparable period in 2011. The increase in cost of revenues was primarily due to an increase of $1.3 million in employee related costs from additional personnel, including increases in headcount from our acquisition of iContact, $1.0 million in amortization of technology primarily from our acquisition of iContact, $448,000 of contracted labor costs and $210,000 in hosting facility fees. We had 266 full-time employee equivalents in our professional and other support services group at September 30, 2012 compared to 205 full-time employee equivalents at September 30, 2011.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended September 30, 2012 were $25.6 million, an increase of $11.4 million, or 81%, over sales and marketing expenses of $14.2 million for the comparable period in 2011. The increase in sales and marketing was primarily due to an increase of $3.5 million in employee-related costs from additional sales personnel, including increases in headcount from our acquisition of iContact, $841,000 in sales commissions and incentive compensation and $5.6 million in marketing program costs. We had 734 full-time employee equivalents in sales and marketing at September 30, 2012 compared to 431 full-time employee equivalents at September 30, 2011.

Research and Development Expenses. Research and development expenses for the three months ended September 30, 2012 were $3.3 million, an increase of $1.5 million, or 85%, over research and development expenses of $1.8 million for the comparable period in 2011. The increase in research and development was primarily due to an increase of $739,000 in employee-related costs from additional personnel, including increases in headcount from our acquisition of iContact, and $217,000 in stock-based compensation. For the three months ended September 30, 2012, we did not capitalize any employee-related costs for internally developed software. For the three months ended September 30, 2011, we capitalized $179,000 of employee-related costs for internally developed software. We had 69 full-time employee equivalents in research and development at September 30, 2012 compared to 45 full-time employee equivalents at September 30, 2011.


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General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2012 were $8.8 million, an increase of $1.4 million, or 18%, over general and administrative expenses of $7.4 million for the comparable period in 2011. The increase in general and administrative expenses was primarily due to an increase of $335,000 in employee-related costs, including increases in headcount from our acquisition of iContact, and $1.0 million of rent and depreciation expense primarily related to the expansion and relocation of our headquarters and additional rent from our acquisition of iContact. We had 92 full-time employee equivalents in our general and administrative group at September 30, 2012 compared to 71 full-time employee equivalents at September 30, 2011.

Amortization of Intangible Assets. Amortization of intangible assets for the three months ended September 30, 2012 was $2.0 million, an increase of $1.6 million, or 356%, compared to $442,000 for the comparable period in 2011. The increase in amortization expense is primarily attributable to the intangible assets related to the acquisition of iContact.

Other Income (Expense). Other expense for the three months ended September 30, 2012 was $105,000, a decrease of $110,000, or 2,200%, compared to other income of $5,000 for the comparable period in 2011, primarily due to changes in foreign currency exchange gains and losses and interest expense from fees for our revolving credit facility.

Provision (Benefit) for Income Taxes. The provision for income taxes for the three months ended September 30, 2012 was $301,000, which reflects our estimated annual effective tax rate for the year. Our effective tax rate differs from the U.S. federal statutory rate primarily due to operating losses in U.S. and foreign jurisdictions for which no tax benefit is currently available, an increase in a U.S. deferred tax liability that cannot serve as a source of taxable income for the recognition of a deferred tax asset, non-deductible stock-based compensation, non-deductible acquisition-related transaction costs . . .

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