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IL > SEC Filings for IL > Form 10-K on 11-Mar-2013All Recent SEC Filings

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

Form 10-K for INTRALINKS HOLDINGS, INC.


11-Mar-2013

Annual Report


ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations, or 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. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Amounts in tabular format are presented in thousands, except per share data, or as otherwise indicated.
Executive Overview
Intralinks is a leading global provider of Software-as-a-Service, or SaaS, solutions for secure content management and collaboration within and among organizations. Our cloud-based solutions enable organizations to control, track, search, exchange and collaborate on 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 60 countries across a variety of industries, including financial services, pharmaceutical, manufacturing, biotechnology, consumer, energy, telecommunications, industrial, legal, agriculture, 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.


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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 a field team with industry-specific expertise and an inside sales team, and indirectly through a customer referral network and channel partners. In 2012, we generated $216.7 million in revenue, of which approximately 39% was derived from sales across 60 countries outside of the United States.

2012 Key Accomplishments

Business Strategy Review

During 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, define a product roadmap 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 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.

Operational Changes

During 2012, management initiated a review of our systems and business processes and began making changes toward operational improvement.

We began a redesign of the sales model focused on improving marketing and demand generation, establishing a high-velocity inside sales model, and moving toward sales specialization in our enterprise sales force. We believe this sales model will better address opportunities in the market and better match sales with the way customers buy SaaS offerings.

In product development, we instituted a change in methodology, embracing Agile and Waterfall development methodologies. We also put a program of intellectual property protection in place.

We also entered into a strategic partnership to help us with distribution and technology. We are committed to seeking out and building crucial relationships that promote, sell and support our services.

Key Personnel

Our executive leadership team went through a significant amount of change in 2012. New additions to the team during the year included the General Counsel, EVP of Business Operations and CIO, EVP of Sales and Marketing and Chief Financial Officer. The executive leadership team is confident that we are well positioned to take full advantage of the opportunities that lie ahead and that the right people are on board to execute against them.

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, or DCM, and the mergers and acquisitions, or 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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                                                     Year Ended December 31,
                                                2012          2011          2010
Consolidated Statement of Operations Data:
Total revenue                                $ 216,667     $ 213,504     $ 184,332
Non-GAAP Gross margin                             76.2 %        79.9 %        81.5 %
Non-GAAP adjusted operating income           $  18,750     $  46,255     $  45,569
Non-GAAP adjusted net income                 $   8,365     $  23,539     $  13,737
Non-GAAP adjusted EBITDA                     $  37,317     $  66,254     $  62,551
Non-GAAP adjusted EBITDA margin                   17.2 %        31.0 %        33.9 %
Consolidated Balance Sheet Data:
Deferred revenue at December 31 (1)          $  40,719     $  40,309     $  38,043
Consolidated Statement of Cash Flows Data:
Cash flows provided by operations            $  35,186     $  54,726     $  35,564
Free cash flow                               $   9,159     $  30,893     $  12,573

(1) Short-term only

Non-GAAP Financial Measures
This Form 10-K includes information about certain financial measures that are not prepared in accordance with generally accepted accounting principles in the United States, or 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, internally, for managing 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.


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The table below provides reconciliations between the non-GAAP financial measures discussed above to the comparable U.S. GAAP measures:

                                                               Year Ended December 31,
                                                          2012           2011           2010
Gross profit                                          $  154,313     $  157,119     $  136,836
Gross margin                                                71.2 %         73.6 %         74.2 %
Cost of revenue - stock-based compensation expense           445            310            105
Cost of revenue - amortization of intangible assets       10,369         13,237         13,237
Non-GAAP Gross profit                                 $  165,127     $  170,666     $  150,178
Non-GAAP Gross margin                                       76.2 %         79.9 %         81.5 %
(Loss) Income from operations                         $  (22,300 )   $    8,860     $   11,197
Stock-based compensation expense                           6,561          8,708          4,215
Amortization of intangible assets                         25,774         28,630         28,741
Impairment on capitalized software                         8,715              -              -
Costs related to public stock offerings                        -             57          1,416
Non-GAAP adjusted Operating income                    $   18,750     $   46,255     $   45,569
Net (loss) before income tax                          $  (27,605 )   $      (31 )   $  (18,863 )
Stock-based compensation expense                           6,561          8,708          4,215
Amortization of intangible assets                         25,774         28,630         28,741
Impairment on capitalized software                         8,715              -              -
Costs related to public stock offerings                        -             57          1,416
Costs related to debt repayments                              47              -          7,011
Non-GAAP adjusted Net Income before tax                   13,492         37,364         22,520
Non-GAAP income tax provision                              5,127         13,825          8,783
Non-GAAP adjusted Net income                          $    8,365     $   23,539     $   13,737
Net (loss)                                            $  (17,380 )   $   (1,243 )   $  (12,436 )
Interest expense                                           6,435         10,645         24,724
Income tax (benefit) expense                             (10,225 )        1,212         (6,427 )
Depreciation and amortization                             18,567         19,999         16,982
Amortization of intangible assets                         25,774         28,630         28,741
Stock-based compensation expense                           6,561          8,708          4,215
Impairment on capitalized software                         8,715              -              -
Amortization of debt issuance costs                          740          1,369          3,084
Loss on extinguishment of debt                                 -              -          4,974
Other (income), net(1)                                    (1,870 )       (3,123 )       (2,722 )
Costs related to public stock offerings                        -             57          1,416
Non-GAAP adjusted EBITDA                              $   37,317     $   66,254     $   62,551
Non-GAAP adjusted EBITDA margin                             17.2 %         31.0 %         33.9 %
Cash flow provided by operations                      $   35,186     $   54,726     $   35,564
Capital expenditures                                     (26,027 )      (23,833 )      (22,991 )
Free cash flow                                        $    9,159     $   30,893     $   12,573

(1) "Other expense (income), net" primarily includes fair value adjustments to our interest rate swap which matured as of June 30, 2012 and foreign currency transaction gains and losses.


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Components of Operating Results

Sources of Revenue

We derive revenue principally through fixed commitment contracts under which we provide customers with various services, including access to our cloud-based Intralinks Platform, access to one or more of our Intralinks Exchanges, the related customer support and other services. Our management operates the business in one reportable segment, assessing performance and making operating decisions based on one single operating unit. However, to date we have monitored certain revenue metrics and trends by principal markets, as defined below. We also monitor the mix of "subscription" and "transaction" customers within these markets, as well as revenue growth in international locations.

The following represent our principal markets:
Enterprise comprises customers spanning a variety of industries, including financial services, pharmaceutical, biotechnology, consumer, energy, industrial, legal, insurance, real estate and technology, who use our services for a wide range of corporate purposes, primarily under subscription arrangements.

Mergers & Acquisitions (M&A) comprises customers, across the same variety of industries described above, who use Intralinks Exchanges for project-based transactions, such as mergers, acquisitions and dispositions. These customers are typically referred to us by financial or legal advisors involved in the respective transactions. This principal market is generally characterized by the use of the Intralinks Platform under transaction arrangements.

Debt Capital Markets (DCM) primarily comprises customers within the financial services industry who use Intralinks exchanges for loan syndication and administration, and is generally characterized by the use of the Intralinks Platform under subscription arrangements.

We believe our revenue growth will be driven by our ongoing investments in our platform and in enhanced service offerings, by improving our mid-market coverage, by expanding our focus on underrepresented geographies and by increasing our overall market share in our strategic transactions business. We believe that making continued investments in our platform, services and operational infrastructure will allow us to service more clients, including those with larger-scale requirements.

Additionally, during the year ended December 31, 2011, we received insurance proceeds totaling $0.6 million, as a result of one of our primary facilities sustaining water damage from a fire on a floor above, which resulted in an interruption in our operations. We filed a claim under our business interruption insurance policy for lost revenue caused by the down-time experienced subsequent to the loss event. The business interruption insurance proceeds are classified as "Other Revenue" in the Consolidated Statement of Operations.

Cost of Revenue

Cost of revenue primarily consists of (i) personnel-related costs, including non-cash stock-based compensation, (ii) expenses for third-party contractors providing customer support and project management services, (iii) expenses related to hosting our service, including Internet connectivity, co-location management and data storage fees, (iv) depreciation expenses for hardware, (v) amortization expenses associated with capitalized software and definite-lived intangible assets and (vi) allocated overhead. Our hosting provider charges us a monthly fee based on the number of servers, the amount of storage and the levels of network connectivity required. We allocate overhead, such as facilities and telecommunication charges, to all departments based on headcount, which we consider to be a fair and representative means of allocation. As such, general overhead expenses are reflected in our cost of revenue and operating expenses categories.

We will continue to make investments in our platform and services, which may include direct investments in our technology, client services group and our hosting infrastructure. The level and timing of investments in these areas could affect our cost of revenue, both in terms of absolute dollars and as a percentage of revenue.

Gross Profit and Gross Margin

Our gross profit and margin are driven by our ability to manage the costs of providing our service as revenue increases or decreases. As noted under "Cost of Revenue" above, we intend to continue making investments in personnel, including our client service group, and other initiatives directly related to the development of our technology.


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Operating Expenses

Product Development - Product development expenses consist primarily of personnel-related costs, including non-cash stock-based compensation, and consulting expenses associated with the design, development and testing of our systems. We capitalize direct costs of services used in developing internal-use software, including both internal and external direct labor costs. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred.

We expect that product development expenses will increase in absolute dollars as we extend our service offerings and develop new technologies to ensure our service integrates and performs well with existing and future leading databases, applications, operating systems and other platforms, and keeps pace with technological change in our industry. Depending on the nature and levels of work undertaken, the amount of product development costs that are capitalized may fluctuate from period to period, which may affect operating expenses, both in terms of absolute dollars and as a percentage of revenue.

Sales and Marketing - Sales and marketing expenses consist primarily of personnel-related costs, including commissions paid to our sales representatives and non-cash stock-based compensation for equity granted to our sales and marketing staff. Sales and marketing expenses also include payments to channel partners, costs of marketing programs and amortization expense for certain definite-lived intangible assets. Our marketing programs include advertising, events and conferences, corporate communications, public relations and other brand building and product marketing expenses.

We expect that sales and marketing expenses will increase in absolute dollars as we invest in additional direct sales personnel in order to add new customers in our existing markets and geographical locations, as well as in emerging global markets. Additionally, we intend to focus on expanding our partnering efforts and allocating more resources to marketing activities, including building greater brand awareness and sponsoring additional marketing events.

General and Administrative - General and administrative expenses consist primarily of personnel-related costs, including non-cash stock-based compensation, for our finance and accounting, legal, human resources, administrative, and internal business systems personnel, amortization expense for certain definite-lived intangible assets, as well as non-personnel costs such as professional fees and other corporate and public company expenses.

We expect that general and administrative expenses will increase in absolute dollars in connection with our continued efforts to make infrastructure enhancements and improvements.

Non-Operating Expenses

Non-operating expenses consist of: (i) fair value adjustments to our interest rate swap which matured on June 30, 2012, (ii) interest expense related to our long-term debt, net of interest income generated from our short-term investments, (iii) amortization of debt issuance costs, which are being amortized over the expected remaining life of loan, and (iv) foreign currency transactions gains and losses, primarily driven by fluctuations between the U.S. Dollar, Pound Sterling and Euro.

In addition, during the year ended December 31, 2010, non-operating expenses included a loss on extinguishment of debt related to the repayment of our Holdings Senior PIK Credit Agreement, or the PIK Loan, and the accelerated recognition of deferred debt issuance costs due to the repayment of outstanding amounts under our PIK Loan and our Second Lien Credit Facility entered into on June 15, 2007, as amended, or the Second Lien Credit Facility, in 2010, using the net proceeds from our August 2010 initial and our December 2010 and April 2011 follow-on public offerings. See Note 9 to our Consolidated Financial Statements contained elsewhere in this Form 10-K for additional details regarding the extinguishment of the PIK Loan and accelerated recognition of deferred debt issuance costs.

Income Tax Expense (Benefit)

We are subject to income tax in the United States as well as other countries in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may also be subject to current U.S. income tax based on our corporate structure and operations. Our effective tax rate differs from the statutory rate primarily as a result of stock-based compensation, other non-deductible expenses, research and development credits, state taxes, and taxation of our foreign operations.


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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. The following accounting estimates are viewed by management to be critical because they require significant judgment on the part of management. Management has discussed and reviewed the development, selection, and disclosure of critical accounting estimates with our Audit Committee.

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. Financial results could be materially different if other methodologies were used or if management modified its assumptions.

We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our financial statements. For further information on our critical and other significant accounting policies, see Note 2, Summary of Significant Accounting Policies, of our consolidated financial statements included elsewhere in this Form 10-K.

Revenue Recognition - We derive revenue principally through fixed commitment contracts under which we provide customers various services, including access to our cloud-based Intralinks Platform, including our Intralinks Exchanges, as well as the related customer support and other services.

We currently sell our services under service contracts that we consider either "subscription" or "transaction" arrangements, as follows:
Subscription arrangements include those customer contracts with an initial term of 12 months or more that automatically renew for successive terms of at least 12 months. Because some long-term customers will not accept automatic renewal terms, we also consider among our subscription customers . . .

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