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MKTG > SEC Filings for MKTG > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for RESPONSYS INC

Form 10-Q for RESPONSYS INC


14-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 the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2011 included in our Form 10-K for the year ended December 31, 2011. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled "Risk Factors" set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a leading provider of on-demand software that enables companies to engage in relationship marketing across the interactive channels that consumers are embracing today-email, mobile, social, web and display. The Responsys Interact Suite, the core element of our solution, provides marketers with a set of integrated applications to create, execute, optimize and automate marketing campaigns. Our solution is comprised of our on-demand software and our professional services, all focused on enabling the marketing success of our customers.

The following are some of the more significant milestones in our corporate history during the past few years:

In April 2010, we added mobile and social functionality to Interact Campaign to coordinate the creation, scheduling, automation and tracking of short message service, or text message, marketing campaigns and promotions to consumers who engage with our customers' brands such as Facebook fans or Twitter followers.

In July 2010, we acquired a non-controlling, fifty-percent equity interest in Eservices Group Pty Ltd, or Eservices, a privately-held company headquartered in Melbourne, Australia, and in January 2011 we acquired the remaining equity interests in Eservices for $8.2 million. Following the acquisition, the company was renamed Responsys Pty Ltd. We began to consolidate our results with those of Eservices beginning in January 2011. We acquired Eservices to expand the scope of our business internationally, increase our customer base and grow our professional services and sales teams.

In October 2011, we introduced Responsys Interact for Display, which allows marketers to add display advertising to their cross-channel marketing programs. This offering enables marketers to leverage CRM and behavioral data to target the serving of relevant display ads to consumers at opportune times in the customer lifecycle.

In March 2012, we purchased 19.9% of the outstanding quotas of Pmweb from the quotaholders for a total purchase price of $1.7 million. We also made a direct investment in Pmweb of $70,000. Pmweb is a customer relationship management and digital marketing company in Brazil.

In July 2012, we purchased an additional 47.5% equity interest in Responsys Denmark for $2.3 million, bringing our total ownership to 95%. Responsys Denmark is a reseller of the Responsys' suite of product offerings and provides related professional services.

We derive revenue from subscriptions to our on-demand software including the associated messaging service and related professional services. As part of a subscription, a customer commits to a minimum monthly or quarterly fee that permits a customer to send up to a specified number of email messages. If a customer sends additional messages above the contracted level, the customer is required to pay additional per-message fees. No refunds or credits are given if a customer sends fewer messages than the contracted level. Customer agreements are non-cancelable for a minimum period, generally one year but ranging up to three years. Revenue from messages sent above contracted levels during the last three years has historically ranged from approximately 20% to 25% of our subscription revenue in any given 12-month period but varies from quarter to quarter due to seasonal, macroeconomic and other factors. Subscription revenue accounted for 70.2% and 70.3% of our total revenue for the three months ended September 30, 2012 and 2011, respectively, and 70.3% and 69.4% of our total revenue for the nine months ended September 30, 2012 and 2011, respectively. Subscription revenue is driven primarily by demand from existing customers, which includes their contractually committed messaging volumes and messages sent above these contracted levels. To date, our customers have primarily used email messages for their marketing campaigns, and email will continue to be the primary driver of our subscription revenue in the foreseeable future. However, if customers increase their use of other interactive channels in the future, we anticipate that revenue associated with email campaigns will decrease as a percentage of subscription revenue. Although revenue associated with our mobile, social, web and display channels has not been material to date, we believe that our cross-channel capabilities have been important factors in our new customers' purchasing decisions.


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Deferred revenue primarily consists of the unearned portion of billed professional services fees or fees associated with our on-demand software. As we bill nearly all our customers on a monthly or quarterly basis, our deferred revenue balance does not serve as a primary source of our future subscription revenue.

We sell subscriptions to our on-demand software and professional services primarily through a direct sales force. We target enterprise and larger mid-market companies that seek to implement more advanced marketing programs across interactive channels. Our customers are of varied size across a wide variety of industries, including retail and consumer, travel, financial services and technology. Our revenue from outside the United States as a percentage of total revenue was 24.1% and 21.3% for the three months ended September 30, 2012 and 2011, respectively, and 23.0% and 20.2% for the nine months ended September 30, 2012 and 2011, respectively.

Our revenue growth over these periods has been driven by an increased number of customers with higher subscription fees. Over the past three years, we have added larger enterprise customers with higher subscription commitments, higher messaging volumes and greater professional services demands. Our subscription revenue fluctuates as a result of seasonal variations in our business, principally due to timing of our customers' sales and marketing cycles. We have historically had higher subscription revenue in our fourth quarter than in other quarters during a given calendar year, primarily due to revenue from messages sent above contracted levels by our retail and consumer customers. Our cost of revenue and operating expenses have increased in absolute dollars over this period due to our need to increase headcount, bandwidth and capacity to support larger messaging volumes and the overall increased size of our business. We expect that our cost of revenue and operating expenses will continue to increase in absolute dollars as we continue to invest in our growth and incur additional costs as a public company.

Key Metrics

We regularly review a number of metrics to evaluate trends, measure our performance, establish budgets and make strategic decisions. We discuss revenue, gross margin, and the components of operating income and margin below under "Results of Operations" and we discuss other key metrics below.

Subscription Dollar Retention Rate.

We believe that our ability to retain our customers and expand their use of our software over time is an indicator of the stability of our revenue base and the long-term value of our customer relationships. We assess our performance in this area using a metric we refer to as our Subscription Dollar Retention Rate. Our Subscription Dollar Retention Rate metric is calculated by dividing (a) Retained Subscription Revenue by (b) Retention Base Revenue. We define Retention Base Revenue as subscription revenue from all customers in the prior period, and we define Retained Subscription Revenue as subscription revenue from that same group of customers in the current period. Our Subscription Dollar Retention Rate has averaged above 100% over the four quarters in each of the last three years and through the three months ended September 30, 2012.

Number of Customers.

We believe that our ability to expand our customer base is an indicator of our market penetration and growth of our business as we continue to invest in our direct sales force and marketing initiatives. We define our number of customers as of the end of a particular quarter as the number of direct-billed subscription customers with $3,000 or more in subscription revenue from contractually committed messaging for that quarter. We had 399 and 338 customers as of September 30, 2012 and 2011, respectively.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an on-going basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

There have been no changes in the accounting policies for which we make critical accounting estimates in the preparation of our condensed consolidated financial statements during the three months ended September 30, 2012 as compared to those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K for the year ended December 31, 2011.

New Accounting Pronouncements

Accounting Standards Adopted During 2012.

See Note 2, "Summary of Significant Accounting Policies-Accounting Standards Adopted During 2012," of Notes to Condensed Consolidated Financial Statements for a discussion of the effect of new accounting pronouncements.


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Results of Operations

The following tables set forth selected consolidated statements of income data
for each of the periods indicated.



                                           Three Months Ended September 30,               Nine Months Ended September 30,
                                             2012                    2011                   2012                    2011
                                                    (in thousands)                                (in thousands)
Revenue:
Subscription                            $        28,450         $        23,834       $         83,113         $       67,767
Professional services                            12,098                  10,056                 35,038                 29,928

Total revenue                                    40,548                  33,890                118,151                 97,695

Cost of revenue: (1)
Subscription                                      8,225                   7,239                 23,701                 20,285
Professional services                            11,141                   9,196                 31,684                 26,846

Total cost of revenue                            19,366                  16,435                 55,385                 47,131

Gross profit                                     21,182                  17,455                 62,766                 50,564

Operating expenses:
Research and development (1)                      3,981                   3,540                 11,720                  9,987
Sales and marketing (1)                          11,089                   7,786                 32,721                 23,663
General and administrative (1)                    4,254                   3,226                 12,853                  8,282
Gain on acquisition                              (2,233 )                    -                  (2,233 )               (2,220 )

Total operating expenses                         17,091                  14,552                 55,061                 39,712

Operating income                                  4,091                   2,903                  7,705                 10,852
Other income (expense), net                         106                    (252 )                 (159 )                 (198 )

Income before provision for income
taxes                                             4,197                   2,651                  7,546                 10,654
Provision for income taxes                         (729 )                (1,192 )               (2,002 )               (4,555 )
Equity in net income (loss) of
unconsolidated affiliates                            -                      (52 )                   36                    (90 )

Net income                              $         3,468         $         1,407       $          5,580         $        6,009

(1) Total cost of revenue and operating expenses include the following amounts related to stock-based compensation:

                                           Three Months Ended September 30,                 Nine Months Ended September 30,
                                             2012                     2011                   2012                     2011
                                                    (in thousands)                                  (in thousands)
Cost of revenue                        $            442         $            294       $          1,173         $            664
Research and development                            282                      195                    716                      402
Sales and marketing                                 527                      257                  1,277                      544
General and administrative                          589                      373                  1,503                      811

Total costs and expenses               $          1,840         $          1,119       $          4,669         $          2,421

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


Table of Contents
                                          Three Months Ended September 30,                   Nine Months Ended September 30,
                                          2012                       2011                    2012                       2011
Revenue:
Subscription                                    70.2 %                     70.3 %                  70.3 %                     69.4 %
Professional services                           29.8                       29.7                    29.7                       30.6

Total revenue                                  100.0                      100.0                   100.0                      100.0

Cost of revenue:
Subscription                                    20.3                       21.4                    20.1                       20.8
Professional services                           27.5                       27.1                    26.8                       27.5

Total cost of revenue                           47.8                       48.5                    46.9                       48.3

Gross profit                                    52.2                       51.5                    53.1                       51.7

Operating expenses:
Research and development                         9.8                       10.4                     9.9                       10.2
Sales and marketing                             27.3                       23.0                    27.7                       24.2
General and administrative                      10.5                        9.5                    10.9                        8.5
Gain on acquisition                             (5.5 )                       -                     (1.9 )                     (2.3 )

Total operating expenses                        42.1                       42.9                    46.6                       40.6

Operating income                                10.1                        8.6                     6.5                       11.1
Other income (expense), net                      0.3                       (0.7 )                  (0.1 )                     (0.2 )

Income before provision for
income taxes                                    10.4                        7.9                     6.4                       10.9
Provision for income taxes                      (1.8 )                     (3.5 )                  (1.7 )                     (4.7 )
Equity in net loss of
unconsolidated affiliates                         -                        (0.2 )                    -                        (0.1 )

Net income                                       8.6 %                      4.2 %                   4.7 %                      6.1 %

Comparison of Three and Nine Months Ended September 30, 2012 and 2011

Revenue.



                                                 Three Months Ended September 30,                          Nine Months Ended September 30,
                                                                             Change in                                                 Change in
                                         2012            2011               $          %           2012           2011               $           %
                                                       (dollars in thousands)                                    (dollars in thousands)
Subscription revenue                   $ 28,450      $     23,834        $ 4,616       19.4 %    $ 83,113      $    67,767        $ 15,346       22.6 %
Percentage of total revenue                70.2 %            70.3 %                                  70.3 %           69.4 %

Professional services revenue          $ 12,098      $     10,056        $ 2,042       20.3 %    $ 35,038      $    29,928        $  5,110       17.1 %
Percentage of total revenue                29.8 %            29.7 %                                  29.7 %           30.6 %

Subscription Revenue.

We derive our subscription revenue from subscriptions to our on-demand software. Subscription revenue primarily consists of revenue from contractually committed messaging and revenue from messages sent above contracted levels. Customer agreements are non-cancelable for a minimum period, generally one year but ranging up to three years. Our contracts provide our customers with access to our on-demand software which allows them to send up to a committed number of messages during each month or quarter over the contract term. If customers exceed the specified messaging volume, per-message fees are billed for the excess volume, generally at rates equal to or greater than the contracted minimum per-message fee. If customers send less than the specified number of messages, no rollover credit or refunds are given.

We recognize subscription revenue equal to the lesser of (1) the cumulative amount of the aggregate contractually committed subscription fee on a straight-line basis over the subscription term less amounts previously recognized or (2) the cumulative amount we have the right to invoice our customer less amounts previously recognized, provided that an enforceable contract has been signed by both parties, access to our software has been granted to the customer, the fee for the subscription is fixed or determinable and collection is reasonably assured. Revenue for messages sent above contractually committed messaging levels is recognized in the period in which the messages are sent. We also derive revenue from setup fees to activate the service. The setup fees are initially recorded as deferred revenue and recognized as revenue ratably over the estimated life of the customer relationship.


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Subscription revenue for the three months ended September 30, 2012 increased by $4.6 million, or 19.4%, over the three months ended September 30, 2011. The increase was primarily due to an increase in contractually committed messaging of $3.8 million from new customers partially offset by a decrease of $0.1 million from existing customers. In addition, revenue from messages sent above contracted levels increased from $4.2 million to $5.1 million and as a percentage of total subscription revenue, from 17.7% of total subscription revenue in the third quarter 2011 to 18.1% of revenue in the quarter ended September 30, 2012.

Subscription revenue for the nine months ended September 30, 2012 increased by $15.3 million, or 22.6% over the nine months ended September 30, 2011. The increase was driven by an increase in subscription messaging of $4.6 million from existing customers and $6.2 million in new customers. In addition, overage revenue rose by $4.5 million. Overage also rose as a percentage of total subscription revenue from 19.4% to 21.3% from the nine months 2011 to the nine months 2012.

Professional Services Revenue.

Professional services revenue consists primarily of fees associated with campaign services, creative and strategic marketing services, technical services and education services. Our professional services are not required for customers to begin using our on-demand software. Our professional services engagements are typically billed on a fixed fee, time and materials or unit basis.

Professional services revenue for the three months ended September 30, 2012 increased by $2.0 million, or 20.3% over the three months ended September 30, 2011. The increase was primarily due to an increase of $2.7 million from new customers, partially offset by $0.7 million decrease from existing customers.

Professional services revenue for the nine months ended September 30, 2012 increased by $5.1 million, or 17.1% over the nine months ended September 30, 2011. The increase was primarily due to an increase of $5.7 million from new customers, partially offset by $0.6 million decrease from existing customers.

Cost of Revenue.



                                                        Three Months Ended September 30,                          Nine Months Ended September 30,
                                                                                    Change in                                                 Change in
                                                2012           2011               $           %           2012            2011               $          %
                                                              (dollars in thousands)                                    (dollars in thousands)
Cost of subscription revenue                  $  8,225      $     7,239        $    986       13.6 %    $ 23,701      $     20,285        $ 3,416       16.8 %
Percentage of subscription revenue                28.9 %           30.4 %                                   28.5 %            29.9 %
Gross margin                                      71.1 %           69.6 %                                   71.5 %            70.1 %

Cost of professional services revenue         $ 11,141      $     9,196        $  1,945       21.2 %    $ 31,684      $     26,846        $ 4,838       18.0 %
Percentage of professional services revenue       92.1 %           91.4 %                                   90.4 %            89.7 %
Gross margin                                       7.9 %            8.6 %                                    9.6 %            10.3 %

Cost of Subscription Revenue.

Cost of subscription revenue primarily consists of hosting costs, data communications expenses, personnel and related costs, including salaries and employee benefits, allocated overhead, software license fees, costs associated with website development activities, amortization expenses associated with capitalized software and depreciation and amortization expenses associated with computer equipment. To date, the amortization expense associated with capitalized software has not been material to our cost of subscription revenue. Expenses related to hosting and data communications are affected by the number of customers using our on-demand software, the complexity and frequency of their use, the volume of messages sent and the amount of data processed and stored. We plan to continue to significantly expand our capacity to support our growth, which will result in higher cost of subscription revenue in absolute dollars.

Cost of subscription revenue for the three months ended September 30, 2012 increased by $1.0 million over the three months ended September 30, 2011. The increase in costs was consistent with higher levels of revenue and consisted primarily due to the addition of new employees of $0.5 million, data center costs of $0.2 million, and depreciation expense of $0.2 million.

Cost of subscription revenue for the nine months ended September 30, 2012 increased by $3.4 million over the nine months ended September 30, 2011. The increase in costs was consistent with higher levels of revenue and consisted primarily of increases in personnel costs of $1.3 million, depreciation expense of $0.6 million, increase data center equipment costs of $0.6 million, and stock-based compensation of $0.2 million. Subscription gross margin for the nine months ended September 30, 2012 increased by 1.4% over the nine months ended September 30, 2011 primarily due to the increase in revenue from messages sent above contracted levels, which has minimal incremental costs associated with it.


Table of Contents

Cost of Professional Services Revenue.

Cost of professional services revenue primarily consists of personnel and related costs and allocated overhead. Our cost associated with providing professional services is significantly higher as a percentage of revenue than our cost of subscription revenue due to the labor costs associated with providing professional services. As it takes several months to ramp up a productive professional services consultant, we generally increase our professional services capacity ahead of associated professional services revenue, which can result in lower margins in the given investment period. We expect the number of professional services personnel to increase in the future, which will result in higher cost of professional services revenue in absolute dollars.

Cost of professional services revenue for the three months ended September 30, 2012 increased by $1.9 million over the three months ended September 30, 2011. . . .

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