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VOCS > SEC Filings for VOCS > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for VOCUS, INC.


3-May-2013

Quarterly Report


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2012.

This report includes forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of words such as "anticipate," "believe," "estimate," "may," "intend," "expect," "will," "should," "seeks" or other similar expressions. Forward-looking statements reflect our plans, expectations and beliefs, and involve inherent risks and uncertainties, many of which are beyond our control. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in "Risk Factors" in Item 1A of Part II.

Overview

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

As of March 31, 2013, we had 17,322 active subscription customers who purchased our products and services. These customers represent a wide variety of industries, including financial and insurance, technology, healthcare and pharmaceutical and retail and consumer products, as well as government agencies, not-for-profit organizations and educational institutions. We define active subscription customers as unique customer accounts that have an annual active subscription and have not been suspended for non-payment.

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

Sources of Revenues

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

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

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

Cost of Revenues and Operating Expenses

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


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We believe content is an integral part of our solution and provides our customers with access to broad, current and relevant information critical to their marketing efforts. We expect to continue to make investments in both our own content as well as content acquired from third-parties and to continue to enhance our proprietary information database and enhance our news monitoring and social media monitoring services. We expect that in the remainder of 2013, cost of revenues will increase in absolute dollars but will remain flat or increase slightly as a percentage of revenues.

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

We plan to continue to invest in sales and marketing to add new customers and increase sales to our existing customers. Such investments will include adding sales personnel and expanding our marketing activities to continue to build brand awareness and generate additional sales leads. We expect that in the remainder of 2013, sales and marketing expenses will increase in absolute dollars and as a percentage of revenues.

Research and Development. Research and development expenses consist primarily of compensation for our software application development personnel and allocated overhead. We have historically focused our research and development efforts on increasing the functionality and enhancing the ease of use of our cloud-based software. Because of our hosted solutions, we are able to provide our customers with a single, shared version of our most recent application, which enables us to have relatively low expenses as compared to traditional enterprise software business models. We expect that in the remainder of 2013, research and development expenses will decrease in absolute dollars and as a percentage of revenues.

General and Administrative. General and administrative expenses consist of compensation and related expenses for executive, finance, legal, human resources and administrative personnel, as well as fees for legal, accounting and other consulting services, including acquisition-related expenses, third-party payment processing and credit card fees, facilities rent, other corporate expenses, fair value adjustments to contingent consideration and allocated overhead. We expect that in 2013, general and administrative expenses will decrease in absolute dollars and as a percentage of revenues.

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

Critical Accounting Policies and Estimates

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

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

We believe that of our significant accounting policies, which are described in Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-Q and in our annual report on Form 10-K for the year ended December 31, 2012, the following accounting policies involve a greater degree of judgment or complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition. We recognize revenues when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. We allocate consideration to each deliverable in our multiple element arrangements based on the relative selling prices and recognize revenue as the respective services are delivered or performed.

Our separate units of accounting consist of subscription services, news distribution services and professional services. Our subscription agreements generally include the use of our cloud-based software, hosting services, content and content updates and customer support. Our subscription agreements do not provide customers the right to take possession of the software at any time.


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

Our professional services consist primarily of data migration, custom development and training. Our cloud-based software does not require significant modification and customization services.

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

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

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

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

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

Goodwill and Long-Lived Assets. Goodwill represents the excess of the cost of an acquired entity over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment at least annually. We perform our annual impairment assessment on November 1, or whenever events or circumstances indicate impairment may have occurred. We operate under one reporting unit, and as a result, evaluate goodwill impairment based on our fair value as a whole. Based on the results of our most recent annual assessment performed on November 1, 2012, we concluded that the fair value of our reporting unit exceeded its carrying amount. No events or circumstances occurred from the date of the assessment through March 31, 2013 that would impact this conclusion. Subsequent to March 31, 2013, we have experienced a decline in our market capitalization due to a recent decline in our stock price; however, the fair value of our reporting unit continues to exceed the carrying amount of our reporting unit.

We assess impairment of definite-lived intangible and other long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may no longer be fully recoverable. We determine the impairment, if any, by comparing the carrying value of the assets to future undiscounted net cash flows expected to be generated by the related assets. An impairment charge is recognized to the extent the carrying value exceeds the estimated fair value of the assets. There were no impairment charges for long-lived assets for the three months ended March 31, 2012 and 2013.

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


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Our federal and state NOL carryforwards and tax credits are subject to annual limitations under Sections 382 and 383 of Internal Revenue Code. The limitations imposed under Sections 382 and 383 will not preclude us from realizing these NOLs and tax credits but may operate to limit their utilization of the NOLs and tax credits in any given tax year in the event that our federal and state taxable income exceeds the limitation imposed by Sections 382 and 383.

Our estimates related to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If we determine it is more likely than not that a tax position will be sustained based on its technical merits, we record the impact of the position in our consolidated financial statements at the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement. Our estimates are updated at each reporting date based on the facts, circumstances and information available. We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits will occur during the next twelve months. We file income tax returns in U.S. federal jurisdictions and various state and foreign jurisdictions and are subject to U.S. federal, state, and foreign tax examinations for years ranging from 2003 to 2012.

Results of Operations

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



                                                     Three Months Ended
                                                          March 31,
                                                     2012            2013
          Revenues                                      100 %          100 %
          Cost of revenues                               21             21


          Gross profit                                   79             79
          Operating expenses:
          Sales and marketing                            60             58
          Research and development                       10              7
          General and administrative                     36             27
          Amortization of intangible assets               3              4


          Total operating expenses                      109             96

          Loss from operations                          (30 )          (17 )
          Other income (expense), net                    -              -


          Loss before provision for income taxes        (30 )          (17 )
          Provision for income taxes                      1              1


          Net loss                                      (31 )%         (18 )%

Three Months Ended March 31, 2013 and 2012

Revenues. Revenues for the three months ended March 31, 2013 were $46.2 million, an increase of $11.3 million, or 33%, over revenues of $34.9 million for the comparable period in 2012. The increase in revenues was primarily due to the increase in the number of total active subscription customers to 17,322 as of March 31, 2013 from 13,103 as of March 31, 2012. The increase in active subscription customers was the result of additional sales and marketing personnel focused on acquiring new customers and renewing existing customers. Total deferred revenue as of March 31, 2013 was $78.1 million, representing an increase of $11.7 million, or 18%, over total deferred revenue of $66.4 million as of March 31, 2012.

Cost of Revenues. Cost of revenues for the three months ended March 31, 2013 was $9.8 million, an increase of $2.5 million, or 33%, over cost of revenues of $7.3 million for the comparable period in 2012. The increase in cost of revenues was primarily due to an increase of $1.2 million in employee related costs from additional personnel including increases in headcount from our acquisition of iContact, $236,000 in contracted labor costs and $542,000 in amortization of technology primarily from our acquisition of iContact. We had 342 full-time employee equivalents in our professional and other support services group at March 31, 2013 compared to 292 full-time employee equivalents at March 31, 2012.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended March 31, 2013 were $26.8 million, an increase of $6.0 million, or 29%, over sales and marketing expenses of $20.8 million for the comparable period in 2012. The increase in sales and marketing was primarily due to an increase of $3.3 million in employee-related costs from additional sales personnel including increases in


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headcount from our acquisition of iContact, $317,000 in sales commissions and incentive compensation and $2.3 million in marketing program costs, offset by $691,000 of severance for iContact personnel incurred in the three months ended March 31, 2012. We had 856 full-time employee equivalents in sales and marketing at March 31, 2013 compared to 552 full-time employee equivalents at March 31, 2012.

Research and Development Expenses. Research and development expenses for the three months ended March 31, 2013 were $3.0 million, a decrease of $658,000, or 18%, over research and development expenses of $3.7 million for the comparable period in 2012. The decrease in research and development was primarily due to $637,000 of severance for iContact personnel incurred in the three months ended March 31, 2012. We had 66 full-time employee equivalents in research and development at March 31, 2013 compared to 79 full-time employee equivalents at March 31, 2012.

General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2013 were $12.3 million, a decrease of $60,000, or 1%, over general and administrative expenses of $12.4 million for the comparable period in 2012. The slight decrease in general and administrative expenses was primarily due to $486,000 of severance for iContact personnel and $2.9 million in non-recurring professional fees and transaction costs for the acquisition of iContact incurred in the three months ended March 31, 2012. These decreases were offset by an increase of $3.3 million in expense in the three months ended March 31, 2013 related to the fair value of the contingent consideration for the acquisition of North Social in 2011. For the three months ended March 31, 2012 and 2013, the additional expense was $232,000 and $3.5 million, respectively. During the three months ended March 31, 2013, the fair value of the contingent consideration was adjusted based on the final earn-out calculations. The final earn-out calculations were impacted by higher revenues in the first quarter of 2013 resulting from the increase in the number of total North Social subscription customers due to additional marketing efforts near the conclusion of the earn-out period. The remaining liability for contingent consideration is included in accrued expenses and will be paid in the second quarter of 2013. We had 106 full-time employee equivalents in our general and administrative group at March 31, 2013 compared to 91 full-time employee equivalents at March 31, 2012.

Amortization of Intangible Assets. Amortization of intangible assets for the three months ended March 31, 2013 was $2.0 million, an increase of $920,000, or 84%, compared to $1.1 million for the comparable period in 2012. The increase in amortization expense is primarily attributable to the intangible assets related to the acquisition of iContact.

Other Income (Expense). Other income for the three months ended March 31, 2013 was $5,000, an increase of $63,000, or 109%, compared to expense of $58,000 for the comparable period in 2012. The increase is primarily due to changes in foreign currency exchange gains and losses and interest expense from fees for our revolving credit facility.

Provision (Benefit) for Income Taxes. The provision for income taxes for the three months ended March 31, 2013 was $439,000 compared to $326,000 for the comparable period in 2012. Our effective tax rate differs from the U.S. federal statutory rate primarily due to operating losses in U.S. and foreign jurisdictions for which no tax benefit is currently available, an increase in a U.S. deferred tax liability that cannot serve as a source of taxable income for the recognition of a deferred tax asset, non-deductible stock-based compensation, non-deductible acquisition-related transaction costs and to a lesser extent, state income taxes and certain other non-deductible expenses.

Liquidity and Capital Resources

As of March 31, 2013, our principal sources of liquidity were cash and cash equivalents totaling $40.3 million, investments totaling $643,000 and net accounts receivable totaling $21.6 million. Our cash equivalents and investments primarily consisted of money market funds and certificates of deposit. Cash, cash equivalents and investments held by our international operations totaled $10.4 million at March 31, 2013. Based on our business plan, we expect that cash held overseas will continue to be used for our international operations and therefore do not anticipate repatriating these funds. If we were to repatriate these amounts, we do not believe that the resulting withholding taxes payable would have a material impact on our liquidity.

Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2013 was $10.8 million, reflecting a net loss of $8.1 million, non-cash charges for depreciation and amortization of $4.3 million, stock-based compensation of $3.7 million, a net change of $7.2 million in accounts receivable and deferred revenue due to our acquisitions and growth in our subscription agreements invoiced in 2013. Net cash provided by operating activities is also impacted by changes in other working capital accounts in the ordinary course of business.

Investing Activities. Net cash used in investing activities for the three months ended March 31, 2013 was $1.0 million, which primarily resulted from investments in property, equipment and software of $2.3 million, offset by sales of investments of $1.3 million.

Financing Activities. Net cash used in financing activities for the three months ended March 31, 2013 was $1.1 million which primarily resulted from our purchase of 29,678 shares of our common stock at an aggregate cost of $413,000 and the payment of a promissory note previously held in escrow included in the iContact purchase of $669,000.

We have various non-cancelable operating leases, primarily related to office real estate, that expire through 2023 and generally contain renewal options for up to five years. As of March 31, 2013, minimum required payments in future years under these leases are $3.3 million, $4.4 million, $3.9 million, $3.7 million, $2.8 million and $10.6 million in the remainder of 2013 and in the years 2014, 2015, 2016, 2017, 2018 and thereafter, respectively. We have irrevocable letters of credit in favor of our landlords for various of our . . .

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