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LEDR > SEC Filings for LEDR > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for MARKET LEADER, INC.

Form 10-Q for MARKET LEADER, INC.


9-Nov-2012

Quarterly Report


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

You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward looking statements relating to our anticipated plans, products, services, and financial performance. The words "believe," "expect," "anticipate," "intend" and similar expressions identify forward-looking statements, but their absence does not mean the statement is not forward looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could affect our actual results include, but are not limited to, those discussed under the heading Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 and in our other Securities and Exchange Commission filings. Given these risks and uncertainties, you should not place undue reliance on our forward-looking statements. The forward-looking statements are made as of the date of this report, and we assume no obligation to update any such statements to reflect events or circumstances after the date hereof.

Overview

Our Business

Market Leader, Inc., founded in 1999, provides innovative online technology and marketing solutions for real estate professionals across the United States and Canada. We serve more than 100,000 customers - real estate agents, brokerages and franchisors - offering complete end-to-end solutions that enable them to grow and manage their businesses. Our subscription-based real estate marketing software - including websites, contact management, a marketing center, and lead generation services - helps customers generate a steady stream of prospects, plus provides the systems and training they need to convert those prospects into clients. In addition, our national consumer real estate sites, including RealEstate.com, give our customers access to millions of future home buyers and sellers, while providing consumers with free access to the information they seek.

Review of Third Quarter 2012

We achieved our eleventh consecutive quarter of improved revenue in the third quarter, driven by demand for our software-as-a-service products as well as the continued ability to leverage our relationships with more than 100,000 customers to drive additional sales of premium services.

Our continued revenue growth and ongoing management of our cost structure resulted in a significant increase in Adjusted EBITDA profitability for the third quarter, and continued demonstration of leverage in our operating model. This financial progress was achieved despite higher operating expenses associated with revenue growth as well as costs associated with the businesses we acquired over the past year.

Our goal is to return to profitable growth over time, and we believe that to do so requires continued investment in cost-effective customer acquisition to drive and sustain revenue growth. We sell directly to individual real estate offices and their agents, which has long been a core competency for us. Starting in 2011, we have also implemented an effective strategy to build and maintain sales and marketing channel partnerships with major franchise networks and large brokerage companies to sell from the top down. These strategic relationships enable us to tap into the influence, credibility, and existing sales and marketing infrastructure of these franchise networks to let us cost-effectively acquire high-value customers.

Under these strategic agreements, we typically provide a base level version of our software-as-a-service products to agents and brokers enterprise-wide in exchange for specified contractual revenue over a number of years. These enterprise customers have a business incentive to partner with us and drive broad platform adoption of our software-as-a-service solutions, because it helps foster success and performance improvements within their agent base. Our strategy is to leverage the resulting broad access to sell recurring subscriptions to our premium services, including both software upgrades and marketing services. This strategy has contributed to our strong revenue growth.

We expect to extend our success in the enterprise space with the two additional major franchise agreements that were signed earlier this year with CENTURY 21 Real Estate and Better Homes and Gardens Real Estate LLC when those products are delivered.

In addition to the franchise-driven growth, our ActiveRain community, a real estate social networking platform, has continued to expand its membership. Combined with our software-as-a-service customers, ActiveRain membership gives us access to one out of every three real estate professionals in North America. This broad access offers a unique competitive advantage and one that will serve as a low cost distribution channel for our premium services both within and beyond our franchise partners.


Table of Contents

Results of Operations

Revenues

Three months ended Nine months ended
September 30, September 30,
2012 2011 2012 2011
Revenues (in thousands) $ 11,691 $ 8,979 $ 32,951 $ 24,541

Revenues increased 30% and 34% for the three and nine month periods ended September 30, 2012 compared to the same periods in 2011. We drove this revenue growth with the sales of premium products to our growing customer base, including our new RealEstate.com service and our newly integrated consumer marketing system. In addition, SharperAgent, which we acquired on August 1, 2011, contributed revenue of $0.9 million and $2.7 million for the three and nine month periods ended September 30, 2012 compared to $0.4 million for the three and nine month periods ended September 30, 2011.

We expect continued revenue growth in the coming quarters driven by continued growth from our Keller Williams customers, revenue from our new enterprise relationships, an increased investment in customer acquisition, and upsells of our premium services to our broad customer base. For the fourth quarter, we expect a sequential quarterly revenue increase similar to the increase in the third quarter, and the fourth quarter will include the initial revenue from our CENTURY 21 Real Estate agreement that was launched in late October.

Sales and Marketing



                                                  Three months ended             Nine months ended
                                                    September 30,                  September 30,
                                                 2012            2011           2012           2011
Total sales and marketing expense (in
thousands)                                     $   7,699        $ 6,976       $ 21,726       $ 21,119

Total sales and marketing expense as a % of
revenue                                               66 %           78 %           66 %           86 %

Sales and marketing expense increased for the three and nine month periods ended September 30, 2012 compared to the same periods in 2011. Sales and marketing expense has improved significantly as a percentage of revenue in 2012 as costs have remained relatively steady while revenue increased. We have continued to increase our customer acquisition costs due in part to the businesses we acquired last year and increased marketing targeted at franchise network relationships. The customer acquisition cost increase was offset by a decline in our customer support costs due to continued operational improvements. In the third quarter of 2012, sales and marketing expense increased due to an increase in variable stock compensation expense, as well as increased customer acquisition activities.

We expect to increase our investment in customer acquisition activities to drive accelerated revenue growth. We began adding additional sales professionals late in the third quarter, and expect to invest in additional sales capacity and marketing programs in the fourth quarter and into 2013. Customer support costs are expected to increase as we grow our customer base, but at a rate slower than our revenue growth as we continue to leverage operating efficiencies. As we continue to invest in additional sales capacity and marketing programs to increase our customer base, we expect our sales and marketing expenses to increase but to remain fairly consistent as a percentage of revenue for the remainder of 2012.

Technology and Product Development



                                                  Three months ended             Nine months ended
                                                    September 30,                  September 30,
                                                 2012            2011           2012           2011
Total technology and product development
expense (in thousands)                         $   2,265        $ 2,207       $   7,366       $ 5,937

Total technology and product development
expense as a % of revenue                             19 %           25 %            22 %          24 %

Technology and product development expense increased for the three and nine month periods ended September 30, 2012 compared to the same periods in 2011. The increase reflects growth in the business and the pace of our product innovation as well as the inclusion of costs for the businesses we acquired last year.

We expect to continue to invest in technology and product development to support our existing customers, to deliver products to new enterprise customers and to develop new products to sell into our customer base. For the remainder of 2012, we expect our technology and product development expenses to remain fairly consistent as we continue to enhance our product offerings, and to decrease as a percentage of revenue.


Table of Contents

General and Administrative



                                                  Three months ended             Nine months ended
                                                    September 30,                  September 30,
                                                 2012            2011           2012           2011
Total general and administrative expense
(in thousands)                                 $   2,064        $ 1,657       $   5,774       $ 5,083

Total general and administrative expense as
a % of revenue                                        18 %           18 %            18 %          21 %

General and administrative expense for the three and nine month periods ended September 30, 2012 increased when compared to the same periods in 2011 due primarily to the inclusion of costs for the businesses we acquired last year.

We expect quarterly general and administrative expenses to remain fairly consistent for the remainder of 2012, and to decrease as a percentage of revenue.

Stock-based Compensation

Stock-based compensation expense increased for the three and nine month periods ended September 30, 2012 compared to the same periods in 2011 primarily due to the impact of our stock price increase on our non-employee share-based payment and our liability-classified stock appreciation rights that are both re-measured at the end of each reporting period. These awards were re-valued at the end of the third quarter when the share price used to re-measure the value of the liability awards was $6.57, an increase from $4.95 at the beginning of the quarter. As of September 30, 2012 a one dollar difference in our stock price would have affected the stock-based compensation expense by approximately $400,000.

Depreciation and Amortization of Property and Equipment

Depreciation and amortization of property and equipment increased for the three and nine month periods ended September 30, 2012 compared to the same periods in 2011 due to our ongoing additions to capitalized software development and the inclusion of depreciation from property and equipment acquired through business combinations in the prior year.

Amortization of Acquired Intangible Assets

Amortization of intangible assets increased for the three and nine month periods ended September 30, 2012 compared to the same periods in 2011 due to the intangible assets acquired through business combinations in 2011.

Loss on Disposition of Asset

We had a loss on an asset disposition in the third quarter of 2011 of $174,000 as we elected to abandon previously capitalized software.

Interest Income and Expense, Net

Interest income remains immaterial as liquidity and security of principal continue to be core to our investment strategy, which results in low rates of return.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We include a discussion of our critical accounting policies and estimates in our Annual Report on Form 10-K for the year ended December 31, 2011.


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Quarterly Consolidated Statements of Income and Operational Data

The following table presents unaudited operational data pertaining to our operations for the seven quarters ended September 30, 2012. This quarterly information has been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflects all adjustments necessary for a fair representation of the information for the periods presented. This data should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011. Operating results for any quarter apply to that quarter only and are not necessarily indicative of results for any future period.

                                         Sept. 30,       June 30,       Mar. 31,       Dec. 31,        Sept. 30,       June 30,       Mar. 31,
                                           2012            2012           2012           2011            2011            2011           2011
                                                                                    (in thousands)
Operations Data:
Revenues                                $    11,691      $  11,074      $  10,186      $   9,484      $     8,979      $   8,320      $   7,242
Expenses:
Sales and marketing                           7,699          6,999          7,028          6,638            6,976          6,710          7,433
Technology and product development            2,265          2,762          2,339          2,272            2,207          1,890          1,840
General and administrative                    2,064          1,855          1,855          1,757            1,657          1,823          1,603
Depreciation and amortization of
property and equipment                          754            768            644            625              655            646            611
Amortization of acquired intangible
assets                                          849            836            823            890              374            262            262
Loss on asset disposition                        -              -              -              -               174             -              -
Contract termination charge                      -              -              -           1,450               -              -              -

Total expenses                               13,631         13,220         12,689         13,632           12,043         11,331         11,749

Loss from operations                         (1,940 )       (2,146 )       (2,503 )       (4,148 )         (3,064 )       (3,011 )       (4,507 )
Interest income and expense, net                  7              8              9              1               15             18             26

Loss before income tax                       (1,933 )       (2,138 )       (2,494 )       (4,147 )         (3,049 )       (2,993 )       (4,481 )
Income tax expense                               10              8             28            (36 )              3              3              3

Net loss                                     (1,943 )       (2,146 )       (2,522 )       (4,111 )         (3,052 )       (2,996 )       (4,484 )
Net loss attributable to
noncontrolling interest                          -              -              -             (17 )            (91 )         (150 )         (140 )

Net loss attributable to Market
Leader                                  $    (1,943 )    $  (2,146 )    $  (2,522 )    $  (4,094 )    $    (2,961 )    $  (2,846 )    $  (4,344 )

Adjusted EBITDA                         $       937      $     260      $    (403 )    $    (771 )    $    (1,524 )    $  (1,716 )    $  (3,271 )


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Adjusted EBITDA is a non-GAAP financial measure provided as a complement to results in accordance with accounting principles generally accepted in the United States. Adjusted EBITDA is not a substitute for measures determined in accordance with GAAP, and may not be comparable to Adjusted EBITDA as reported by other companies. Our use of the term "Adjusted EBITDA" refers to a financial measure defined as earnings or loss before net interest, income taxes, depreciation, amortization, net loss attributable to noncontrolling interest, loss on asset disposition, contract termination charge, and stock-based compensation. We believe Adjusted EBITDA to be relevant and useful information to our investors as this measure is an integral part of our internal management reporting and planning process and is the primary measure used by our management to evaluate operating performance. See the table below for a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP measure.

                                          Sept. 30,       June 30,       Mar. 31,       Dec. 31,        Sept. 30,       June 30,       Mar. 31,
                                            2012            2012           2012           2011            2011            2011           2011
                                                                                     (in thousands)
Reconciliation of GAAP Measurement to
Adjusted EBITDA:
Net loss attributable to Market Leader   $    (1,943 )    $  (2,146 )    $  (2,522 )    $  (4,094 )    $    (2,961 )    $  (2,846 )    $  (4,344 )
Less: Interest income, net                        (7 )           (8 )           (9 )           (1 )            (15 )          (18 )          (26 )
Add:
Net loss attributable to
noncontrolling interest                           -              -              -             (17 )            (91 )         (150 )         (140 )
Depreciation and amortization of
property and equipment                           754            768            644            625              655            646            611
Amortization of intangible assets                849            836            823            890              374            262            262
Loss on asset disposition                         -              -              -              -               174             -              -
Contract termination charge                       -              -              -           1,450               -              -              -
Stock-based compensation                       1,274            802            633            412              337            387            363
Income tax expense                                10              8             28            (36 )              3              3              3

Adjusted EBITDA                          $       937      $     260      $    (403 )    $    (771 )    $    (1,524 )    $  (1,716 )    $  (3,271 )

Liquidity and Capital Resources

Currently, our principal source of liquidity is our cash, cash equivalents and short-term investments as well as the cash flow that we may generate from our operations. At September 30, 2012, our cash, cash equivalents and short-term investments totaled $22.1 million compared to $21.2 million at June 30, 2012.

Liquidity and security of principal continue to be core to our investment strategy, which results in low rates of return. As of September 30, 2012, we have invested in cash equivalents consisting of money market funds that hold U.S. Treasury securities with short-term weighted average duration. Short-term investments are comprised of U.S. Treasury bills and notes and FDIC-insured certificates of deposit with terms of one year or less.

The following table presents summary cash flow data:

                                                              Nine months
                                                          Ended September 30,
                                                          2012             2011
                                                        (dollars in thousands)
    Cash provided by(used in) operating activities    $         854      $ (6,826 )
    Cash used in investing activities                        (2,990 )      (6,456 )
    Cash provided by (used in) financing activities           1,259          (221 )

Operating Activities

Net cash from operating activities consists of our net loss adjusted for certain non-cash items, including depreciation, amortization, stock-based compensation and the effects of changes in working capital. We generated $0.9 million in cash from operations during the first nine months of 2012, an increase of $7.7 million compared to the same period in 2011. The increase was primarily due to improved operating results.


Table of Contents

Investing Activities

Cash used in investing activities for the first nine months of 2012 was $3.0 million compared to $6.5 million for the same period in 2011. During the first nine months of 2011, as we spent $10.7 million for acquisitions and we used cash as well as proceeds from our net short-term investment maturities of $6.1 million to fund those acquisitions. In addition, during 2012, we increased our investments in fixed assets by $1 million, primarily due to increased software development activity.

Financing Activities

Cash from financing activities during the first nine months of 2012 increased when compared to the same period last year primarily due to increased proceeds from the exercise of employee stock options.

Purchase and Retirement of Common Stock

In October 2006, our Board of Directors authorized a share repurchase program to purchase and retire up to two million shares of our common stock. We did not make any purchases pursuant to the share repurchase program during the third quarter of 2012. At September 30, 2012, 928,043 shares remain available for purchase under the share repurchase program.

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