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IL > SEC Filings for IL > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for INTRALINKS HOLDINGS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for INTRALINKS HOLDINGS, INC.


8-Nov-2012

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 62 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 nine months ended September 30, 2012, we generated $159.3 million in revenue, of which approximately 39% was derived from international sales across 62 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 strategy assessment reinforces our commitment to anticipate the changing needs of our customers, industry trends, and competitive forces. We continued to make good progress against our business strategy during the third quarter of 2012, with particular emphasis on improving mid-market coverage and overall market share in our strategic transactions business. We are pursuing geographies where we are underrepresented and that will provide us with promising market opportunities. Additionally, we have continued to enhance our product offerings with new capabilities and improved functionality. 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             Nine Months Ended
                                                    September 30,                  September 30,
                                                 2012            2011           2012           2011
Consolidated Statement of Operations Data:
Total revenue                                $    54,753     $   54,826     $  159,303     $  160,569
Non-GAAP Gross margin                               76.1 %         79.9 %         76.0 %         80.0 %
Non-GAAP adjusted operating income           $     5,835     $   12,825     $   12,583     $   34,783
Non-GAAP adjusted net income                 $     3,209     $    5,984     $    5,129     $   17,798
Non-GAAP adjusted EBITDA                     $    10,567     $   18,022     $   26,085     $   50,184
Non-GAAP adjusted EBITDA margin                     19.3 %         32.9 %         16.4 %         31.3 %
Consolidated Balance Sheet Data:
Deferred revenue at September 30,            $    40,719     $   41,533     $   40,719     $   41,533
Consolidated Statement of Cash Flows Data:
Cash flows provided by operations            $     2,457     $   13,643     $   21,182     $   35,115
Free cash flow                               $    (2,830 )   $    6,716     $     (376 )   $   16,182

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.


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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:

                                             Three Months Ended             Nine Months Ended
                                               September 30,                  September 30,
                                            2012            2011           2012           2011
Gross profit                            $    39,544     $   40,387     $  112,368     $  118,377
Gross margin                                   72.2 %         73.7 %         70.5 %         73.7 %
Cost of revenue - stock-based
compensation expense                            121            110            321            218
Cost of revenue - amortization of
intangible assets                             1,986          3,309          8,383          9,927
Non-GAAP Gross profit                   $    41,651     $   43,806     $  121,072     $  128,522
Non-GAAP Gross margin                          76.1 %         79.9 %         76.0 %         80.0 %
Income from operations                  $    (1,794 )   $    2,774     $  (20,553 )   $    6,489
Stock-based compensation expense              1,795          2,894          4,831          6,765
Amortization of intangible assets             5,834          7,157         19,928         21,472
Impairment on capitalized software                -              -          8,377              -
Costs related to public stock
offerings                                         -              -              -             57
Non-GAAP adjusted Operating income      $     5,835     $   12,825     $   12,583     $   34,783
Net (loss ) income before income tax    $    (2,453 )   $     (507 )   $  (24,911 )   $     (265 )
Stock-based compensation expense              1,795          2,894          4,831          6,765
Amortization of intangible assets             5,834          7,157         19,928         21,472
Impairment on capitalized software                -              -          8,377              -
Costs related to public stock
offerings                                         -              -              -             57
Costs related to debt repayments                  -              -             47              -
Non-GAAP adjusted Net Income before
tax                                           5,176          9,544          8,272         28,029
Non-GAAP Income tax provision                 1,967          3,560          3,143         10,231
Non-GAAP adjusted Net income            $     3,209     $    5,984     $    5,129     $   17,798


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                                             Three Months Ended         Nine Months Ended
                                               September 30,              September 30,
                                             2012          2011         2012          2011
Net (loss ) income                        $  (1,259 )   $    764     $ (15,872 )   $  1,254
Interest expense                              1,171        2,552         5,245        8,146
Income tax benefit                           (1,194 )     (1,271 )      (9,039 )     (1,519 )
Depreciation and amortization                 4,732        5,197        13,502       15,401
Amortization of intangible assets             5,834        7,157        19,928       21,472
Stock-based compensation expense              1,795        2,894         4,831        6,765
Impairment on capitalized software                -            -         8,377            -
Amortization of debt issuance costs             177          214           591        1,155
Other expense (income), net(1)                 (689 )        515        (1,478 )     (2,547 )
Costs related to public stock offerings           -            -             -           57
Non-GAAP adjusted EBITDA                  $  10,567     $ 18,022     $  26,085     $ 50,184
Non-GAAP adjusted EBITDA margin                19.3 %       32.9 %        16.4 %       31.3 %
Cash flow provided by operations          $   2,457     $ 13,643     $  21,182     $ 35,115
Capital expenditures                         (5,287 )     (6,927 )     (21,558 )    (18,933 )
Free cash flow                            $  (2,830 )   $  6,716     $    (376 )   $ 16,182

(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 nine months ended September 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 September 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 then continued depressed stock price and our market capitalization relative to net book value.


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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 represented 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 remained 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.
During the third quarter of 2012, the Company did not observe any further events or circumstances subsequent to the analysis that would reduce the fair value of the reporting units below the carrying amounts as of September 30, 2012. On the contrary, the stock price has steadily risen from $4.38 at June 30, 2012 to $6.54 at September 30, 2012 based on the closing price on the NYSE on such dates.
Other Revenues

On November 25, 2008, one of the Company's primary facilities sustained water damage from a fire on a floor above, resulting in an interruption to the Company's operations. The Company filed a claim under its business interruption insurance policy for lost revenue caused by the down-time experienced subsequent to the loss event. The Company received insurance proceeds totaling $614 during the nine months ended September 30, 2011, in response to its business interruption claim. Business interruption insurance proceeds are classified as "Other revenue" in the Consolidated Statement of Operations for the three and nine months ended September 30, 2011.
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


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The following table sets forth consolidated statements of operations data for each of the periods indicated as a percentage of total revenues.

                                        Three Months Ended       Nine Months Ended
                                          September 30,            September 30,
                                         2012         2011        2012        2011
Revenue                                100.0  %      99.1  %    100.0  %     99.6  %
Other Revenue                              -  %       0.9  %        -  %      0.4  %
Total Revenue                          100.0  %     100.0  %    100.0  %    100.0  %
Cost of revenue                         27.8  %      26.3  %     29.5  %     26.3  %
Gross profit                            72.2  %      73.7  %     70.5  %     73.7  %
Operating expenses:
Product development                      9.8  %       6.5  %      9.5  %      9.1  %
Sales and marketing                     43.0  %      43.3  %     44.4  %     42.0  %
General and administrative              22.7  %      18.8  %     24.4  %     18.5  %
Impairment of capitalized software         -  %         -  %      5.3  %        -  %
Total operating expenses                75.5  %      68.6  %     83.4  %     69.7  %
(Loss) income from operations           (3.3 )%       5.1  %    (12.9 )%      4.0  %
Interest expense                         2.1  %       4.7  %      3.3  %      5.1  %
Amortization of debt issuance costs      0.3  %       0.4  %      0.4  %      0.7  %
Other expense (income), net             (1.3 )%       0.9  %     (0.9 )%     (1.6 )%
Net (loss) income before income tax     (4.5 )%      (0.9 )%    (15.6 )%     (0.2 )%
Income tax (benefit) provision          (2.2 )%      (2.3 )%     (5.7 )%     (0.9 )%
Net (loss) income                       (2.3 )%       1.4  %    (10.0 )%      0.8  %

Comparison of the Three Months Ended September 30, 2012 and 2011
Revenue
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 September 30, 2012 compared to the three months ended September 30,
2011, the percentage increase or decrease between those periods, and the
percentage of total revenue that each principal market represented for those
periods:
                                              Increase       % Increase           % Revenue
                    Three Months Ended        (Decrease)     (Decrease)      Three Months Ended
                      September 30,                                             September 30,
                     2012         2011          2012            2011          2012         2011
Enterprise       $    23,822    $ 24,502    $      (680 )        (2.8 )%      43.5 %        44.7 %
M&A                   23,905      21,548          2,357          10.9  %      43.7 %        39.3 %
DCM                    7,026       8,269         (1,243 )       (15.0 )%      12.8 %        15.1 %
Other Revenue              -         507           (507 )      (100.0 )%         - %         0.9 %
Total Revenues   $    54,753    $ 54,826    $       (73 )        (0.1 )%     100.0 %       100.0 %

Enterprise - The results for the three months ended September 30, 2012 reflect an decrease in Enterprise revenue of $0.7 million or 2.8%, as compared to the three months ended September 30, 2011. The decrease in Enterprise revenue for the three month period, as compared to the prior year period, was attributable to a net decrease in our customer base.
M&A - The results for the three months ended September 30, 2012 reflect an increase in M&A revenue of $2.4 million, or 10.9%, as compared to the three months ended September 30, 2011. The increase in M&A revenue for the three month period, as compared to the prior year period, was primarily driven by a higher volume of strategic business transactions and market share gains. Although we continue to achieve modest growth in this market, we believe that M&A revenue is being adversely impacted by current macroeconomic conditions in the Europe, Middle East and Africa ("EMEA") region.


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DCM - The results for the three months ended September 30, 2012 reflect a decrease in DCM revenue of $1.2 million, or 15.0%, as compared to the three . . .

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