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MKTG > SEC Filings for MKTG > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for RESPONSYS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for RESPONSYS INC


9-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 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, 2012 included in our Form 10-K for the year ended December 31, 2012. 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, the 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 69.2% and 71.5% of our total revenue for the three months ended March 31, 2013 and 2012, 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, the 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 21.7% and 21.2% for the three months ended March 31, 2013 and 2012, 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 March 31, 2013.

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 415 and 346 customers as of March 31, 2013 and 2012, 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 March 31, 2013 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, 2012.

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 March 31,
                                                             2013                      2012
                                                                     (in thousands)
Revenue:
Subscription                                             $      33,552             $      27,205
Professional services                                           14,949                    10,849

Total revenue                                                   48,501                    38,054

Cost of revenue: (1)
Subscription                                                     9,088                     7,445
Professional services                                           12,492                     9,920

Total cost of revenue                                           21,580                    17,365

Gross profit                                                    26,921                    20,689

Operating expenses:
Research and development (1)                                     4,140                     3,802
Sales and marketing (1)                                         13,833                     9,061
General and administrative (1)                                   5,725                     4,171

Total operating expenses                                        23,698                    17,034

Operating income                                                 3,223                     3,655
Other expense, net                                                (333 )                     (48 )

Income before income taxes                                       2,890                     3,607
Provision for income taxes                                      (1,374 )                  (1,535 )
Equity in net income of unconsolidated affiliates                   -                         25

Net income                                               $       1,516             $       2,097

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

                                           Three Months Ended March 31,
                                             2013                2012
                                                  (in thousands)
            Cost of revenue              $         677       $         354
            Research and development               214                 238
            Sales and marketing                    848                 362
            General and administrative             854                 444

            Total costs and expenses     $       2,593       $       1,398


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

                                                             Three Months Ended March 31,
                                                            2013                     2012
Revenue:
Subscription                                                     69.2 %                   71.5 %
Professional services                                            30.8                     28.5

Total revenue                                                   100.0                    100.0

Cost of revenue:
Subscription                                                     18.7                     19.6
Professional services                                            25.8                     26.1

Total cost of revenue                                            44.5                     45.7

Gross profit                                                     55.5                     54.3

Operating expenses:
Research and development                                          8.5                     10.0
Sales and marketing                                              28.5                     23.8
General and administrative                                       11.8                     11.0

Total operating expenses                                         48.8                     44.8

Operating income                                                  6.7                      9.5
Other expense, net                                               (0.7 )                   (0.1 )

Income before income taxes                                        6.0                      9.4
Provision for income taxes                                       (2.8 )                   (4.0 )
Equity in net income of unconsolidated affiliates                  -                       0.1

Net income                                                        3.2 %                    5.5 %

Comparison of Three Months Ended March 31, 2013 and 2012

Revenue.



                                                Three Months Ended March 31,
                                                                       Change in
                                         2013          2012           $          %
                                                   (dollars in thousands)
       Subscription revenue            $ 33,552      $ 27,205      $ 6,347       23.3 %
       Percentage of total revenue         69.2 %        71.5 %
       Professional services revenue   $ 14,949      $ 10,849      $ 4,100       37.8 %
       Percentage of total revenue         30.8 %        28.5 %

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 the contracted minimum per-message fee. If customers send less than the specified number of messages, no rollover credit or refunds are given.


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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.

Subscription revenue for the three months ended March 31, 2013 increased by $6.3 million, or 23.3%, over the three months ended March 31, 2012. The increase was primarily due to an increase in contractually committed messaging of $5.0 million from new customers partially offset by a decrease of $0.8 million from existing customers. In addition, revenue from messages sent above contracted levels increased from $6.9 million for the three months ended March 31, 2012, to $9.0 million for the three months ended March 31, 2013. Messages sent above contracted levels accounted for 27.0% and 25.2% of subscription revenue for the three months ended March 31, 2013 and 2012, respectively.

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 March 31, 2013 increased by $4.1 million, or 37.8% over the three months ended March 31, 2012. The increase was primarily due to an increase of $0.6 million from existing customers and $3.5 million from new customers.

Cost of Revenue.



                                                       Three Months Ended March 31,
                                                                              Change in
                                                 2013         2012           $          %
                                                          (dollars in thousands)
 Cost of subscription revenue                  $  9,088      $ 7,445      $ 1,643       22.1 %
 Percentage of subscription revenue                27.1 %       27.4 %
 Gross margin                                      72.9 %       72.6 %
 Cost of professional services revenue         $ 12,492      $ 9,920      $ 2,572       25.9 %
 Percentage of professional services revenue       83.6 %       91.4 %
 Gross margin                                      16.4 %        8.6 %

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 March 31, 2013 increased by $1.6 million over the three months ended March 31, 2012. The increase in costs was primarily due to an increase of $0.6 million of hardware and software costs, $0.3 million of increased service costs to support higher levels of revenue, $0.2 million for data center equipment and network infrastructure to support the operation of our on-demand software, and $0.1 million of stock-based compensation expense.


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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 March 31, 2013 increased by $2.6 million over the three months ended March 31, 2012. The increase in costs was primarily due to the addition of new employees of $1.2 million, $0.4 million of increased consulting expense, $0.2 million increase in facilities expenses and $0.2 million increase in stock-based compensation expense.

Operating Expenses.

Research and Development.

Three Months Ended March 31,
Change in
2013 2012 $ %
(dollars in thousands)

Research and development $ 4,140 $ 3,802 $ 338 8.9 % Percentage of total revenue 8.5 % 10.0 %

Research and development expenses primarily consist of personnel and related costs for our product development and product management employees and allocated overhead. Our research and development efforts have been devoted primarily to increasing the functionality and enhancing the ease of use of our on-demand software and to improving scalability and performance. We expect that in the future, research and development expenses will increase in absolute dollars as we extend our on-demand software offerings and develop new technologies and capabilities.

Research and development expenses for the three months ended March 31, 2013 increased by $0.3 million over the three months ended March 31, 2012. The increase was primarily due to $0.7 million in personnel expenses related to the addition of new employees and $0.2 million for increased equipment and facilities expense, offset by $0.5 million related to research and development expense capitalized for internal use software and a decrease of $0.2 million in consulting expense.


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Sales and Marketing.

Three Months Ended March 31,
Change in
2013 2012 $ %
(dollars in thousands)

Sales and marketing $ 13,833 $ 9,061 $ 4,772 52.7 % Percentage of total revenue 28.5 % 23.8 %

Sales and marketing expenses primarily consist of personnel and related costs for our sales and marketing employees, the cost of marketing programs, promotional events and webinars (net of amounts received from sponsors and participants), amortization of our intangible assets, and allocated overhead. We expense sales commissions when the customer contract is signed because our obligation to pay a sales commission arises at that time. We plan to continue to invest in sales and marketing by increasing the number of direct sales personnel in order to add new customers and increase penetration within our existing customer base, expanding our domestic and international sales and marketing activities, building brand awareness and sponsoring additional marketing events. We expect that in the future, sales and marketing expenses will increase in absolute dollars and will continue to be our largest cost.

Sales and marketing expenses for the three months ended March 31, 2013 increased by $4.8 million over the three months ended March 31, 2012. The increase was primarily due to $2.3 million in personnel expenses related to the addition of new employees, $1.0 million in commission expense, $0.5 million in stock-based compensation expense, $0.2 million training expense and $0.2 million in advertising expense.

General and Administrative.

Three Months Ended March 31,
Change in
2013 2012 $ %
(dollars in thousands)

General and administrative $ 5,725 $ 4,171 $ 1,554 37.3 % Percentage of total revenue 11.8 % 11.0 %

General and administrative expenses consist primarily of personnel and related costs for administrative employees and allocated overhead. In addition, general and administrative expenses include professional fees, bad debt expenses and other corporate expenses. We anticipate that we will incur additional costs for personnel, systems and professional services as we grow and operate as a public company, including higher legal, accounting and insurance expenses, and the additional costs to achieve and maintain compliance with Section 404 of the Sarbanes-Oxley Act. Accordingly, we expect that in the future, general and administrative expenses will increase in absolute dollars.

General and administrative expenses for the three months ended March 31, 2013 . . .

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