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ACTV > SEC Filings for ACTV > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for ACTIVE NETWORK INC

Form 10-Q for ACTIVE NETWORK INC


2-Aug-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 condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our other public filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "will," "plan," "project," "seek," "should," "target," "will," "would," and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important 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 in "Part II - Item 1A. Risk Factors" below, and those discussed in our other public filings with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are leaders in cloud-based Activity and Participant Management™ solutions serving a wide range of customer groups including business solutions, community activities, public sector and outdoors and sports. We provide applications that form an online network connecting a fragmented and diverse group of activity and event organizers with a large base of potential participants. Our proprietary technology platform transforms the way organizers manage their activities and events by automating online registrations and streamlining other critical management functions, while also driving consumer participation to their events.

We power a broad range of activities, such as reserving a campsite or tee time, signing up for a marathon or sports league, purchasing a fishing or hunting license, or participating in a community event or corporate conference. From the introduction of our platform in 1999, we have experienced significant growth and in 2012, we had over 55,000 customer organizations that drove approximately 89.9 million annual consumer registrations. Based on the results of a 2010 online survey we commissioned through Survey.com, we believe the organizations we target produce or organize activities and events for the majority of U.S. households. Our proprietary technology platform, ActiveWorks, provides cloud computing applications that reduce the cost and complexity of managing, organizing and promoting these activities and events.

Our business benefits from a powerful network effect. As more organizations use our platform, we increase the breadth and depth of activities and events offered through our platform. This more comprehensive offering of activities attracts more participants. As we attract more participants, we are able to drive increased demand for our customers' activities, thus increasing registrations and revenue for both organizers and us. This revenue growth enables us to develop enhanced functionality and services through ActiveWorks and our websites, further increasing participant engagement and attracting new organizers. In this way, we build increasing value for both organizations and participants.

We serve a wide range of customers including community and sports organizations, large corporations, small and medium-sized businesses, educational institutions, federal and state government agencies, non-profit organizations and other similar entities. We primarily generate revenue from technology fees paid by participants who register for our customers' activities through our cloud computing applications. During the six months ended June 30, 2013, we generated revenue of $238.4 million, as compared to $216.0 million in the six months ended June 30, 2012, an increase of 10%.

A large number of our customers are currently being served by our ActiveWorks architecture at varying levels of integration. We are in the process of transitioning to ActiveWorks certain customers who continue to use both our internally developed systems and acquired legacy systems. In addition, part of our growth strategy has included acquisitions, which resulted in the acquisition of additional legacy systems. In the future, we will evaluate acquired systems to determine, based on their sophistication and compatibility, whether to integrate them into ActiveWorks or to migrate the customers using these systems to ActiveWorks. This process is time consuming and requires the investment of significant technical and human resources. During this process, we expect to continue to incur costs associated with maintaining multiple legacy systems.


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In addition, our long-term strategic plan involves expanding our applications into new business areas within the activity and event registration and management market. A lack of market acceptance of such efforts or our inability to generate satisfactory revenue to offset the development costs could have a material adverse effect on our results of operations and future growth prospects. As we establish and expand our operational capabilities internationally, we will incur additional operating expenses and capital-related costs.

Technology Revenue. Our technology revenue was 90% of our total revenue for the six months ended June 30, 2013. Of our technology revenue recognized during the six months ended June 30, 2013, 76% related to registration revenue and 24% related to licensed software, maintenance, hosting, and implementation revenue. During the six months ended June 30, 2013, we processed 47.9 million consumer registrations.

Our technology fee is a percentage of the total registration amount that is paid by a participant at the time the participant registers. Participants typically use a credit card to register for an activity either online or offline, and in the case of some of our large contracts, by using a call center. Upon registration, the consumer is charged for the total event registration fee, including the technology fee, and the funds are remitted to bank accounts that we control. We record revenue for our technology fee and we remit the remaining funds to the organizer. The organizer has the option of absorbing our technology fee and presenting a total event registration fee to the participant, or adding the technology fee as a separate line item in the event registration fee. Pricing for our cloud offerings is based on a portion of the total dollars processed for a registration and typically has a fixed and variable component. A number of our offerings also include a fee for setup, support or hosting. Our technology platform serves the entire spectrum of organizations, from large to small. Our standard contract for our registration customers is three years. In some cases, we pre-purchase registrations and we retain the funds received upon registration. Approximately 2% of our total revenue represents pre-purchased registrations and the technology revenue associated with these registrations represents the sales price to the participant, in addition to the technology fee. The technology fee and the revenue from pre-purchased registrations represent net registration revenue, since they are the direct result of participant registrations.

Licensed software, maintenance, hosting and implementation revenue was 24% of our technology revenue for the six months ended June 30, 2013. In previous acquisitions, we acquired licensed software products which include licensed software, maintenance and services. As the market has become more receptive, we have begun transitioning these customers to our solutions. We anticipate that our licensed software, maintenance and services revenue will continue to decline as a percentage of our overall business. In the future, we anticipate sales in our technology segment will be primarily driven by technology fees from our cloud offerings.

Marketing Services Revenue. Our marketing services revenue was 10% of our total revenue for the six months ended June 30, 2013. The marketing services segment works to provide the organizations within our technology segment and their participants with marketing solutions, online communities, membership programs and hosted websites. We group these sales as online services, field marketing and commerce. Online services include online advertising, email marketing and targeted newsletter promotions. We provide field marketing services including event promotions and sponsorships. Our commerce revenue consists of membership programs, training programs and websites. Contracts within our marketing services segment vary in length but are generally less than one year. We obtain customers through direct sales, inside sales and self-setup.

Seasonality. Our total revenue experiences seasonality with the three months ended June 30 and September 30 having the higher revenues. This seasonality is mainly due to trends in net registration revenue, as many of our largest customers experience peak business activity during the warmer months of the year.

Key Business Metrics

Net Registration Revenue. We calculate our net registration revenue by summing the technology fees generated by our registrations and revenue from the sale of pre-purchased registrations in a given period. Technology fees are generally recognized as revenue at the time a transaction is processed, and are typically a percentage of the total registration price paid by a participant. Revenue from the sale of pre-purchased registrations is comprised of the registration price paid by a participant and the technology fee and is recognized at the time the event is held.

Registrations. We define a registration as when a participant registers one or more people for an event being held by an organization who is using our technology to register that participant. We determine that a registration has taken place when a participant registers one or more people for an activity or an event being held by one of our customers.


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                                                Three Months Ended June 30,                       Six Months Ended June 30,
                                                                                       %                                              %
                                                 2013                 2012          Change          2013               2012        Change
                                                        (Unaudited)                                      (Unaudited)
                                                      (In thousands)                                    (In thousands)
Net registration revenue                    $       92,266       $       83,854          10 %   $     162,811       $  147,373          10 %
Registrations                                       29,738               28,036           6 %          47,876           46,259           3 %
Net registration revenue per registration   $         3.10       $         2.99           4 %   $        3.40       $     3.19           7 %

(1) Includes revenue of $2.8 million and $1.7 million related to pre-purchased registration with associated technology fees of $0.2 million and $0.2 million during the three months ended June 30, 2013 and 2012, respectively, and revenues of $5.4 million and $2.2 million related to pre-purchased registration with associated technology fees of $0.5 million and $0.3 million during the six months ended June 30, 2013 and 2012, respectively.

Registrations increased 1.7 million, or 6%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 and 1.6 million, or 3%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The increases were primarily due to higher registrations from new parks and recreation customers of the community activities primary group and higher registrations in certain large multi-event organizations in our sports customer group. In our outdoors customer group, we had higher registrations in the three months ended June 30, 2013, which partially offset the lower registrations we had during the three months ended March 31, 2013 which was primarily due to shifts in weather patterns impacting the seasonality of registrations. The average revenue per registration increased 4% for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 and 7% for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The increase was mainly due to an increase in our business solutions customer group which has higher revenue per registration than the rest of our customer groups, and an increase in net registration revenue related to pre-purchased registrations in our sports customer group.

Mobile Devices. During the three and six months ended June 30, 2013 and 2012, we do not believe a significant number of our registrations were made on a mobile or tablet device. We anticipate that revenue attributable to mobile usage will increase in future years due to users increasingly accessing the Internet through mobile devices.

Basis of Presentation

General

The condensed consolidated financial statements include the accounts of The Active Network, Inc. and its wholly-owned subsidiaries. All intercompany balances have been eliminated.

Revenue

We report our revenue in two segments:

• Technology

• Marketing services

The technology revenue segment is comprised of net registration revenue, which is primarily comprised of the technology fee we charge a participant when they register for one of our organization's events. The types of events we offer on our platform can be categorized into the following four primary groups: business solutions, community activities, public sector and outdoors, and sports. We generate technology revenue for our services based on the technology fee we charge a consumer when they register for one of the events. Consumers generally pay us the registration fee at the time of booking, and we pay the event organizer at a later date. The technology fee is recognized as revenue net of the organization registration fee which is collected directly from our consumer and then we make payment to the event organizer typically on a two week basis. Net registration revenue is recognized when services are provided, net of estimated refunds and other chargebacks. The timing difference between when the cash is collected from our consumers and when payments are made to the event organizers improves our operating cash flow and represents a source of liquidity for us. Technology revenue also includes software licensing, installation, training, maintenance, hosting subscriptions, and the sale of pre-purchased registrations. In certain circumstances we pre-purchase registrations from event organizers and bear the risk and rewards of ownership. Net registration revenue associated with these transactions is recognized when the event occurs and includes the total registration price paid by a customer and the technology fee.

The marketing services revenue segment includes online services, field marketing services and membership programs. Registrations lead participants to our network of websites and create opportunities for us to sell our online commerce and other marketing services to participants. Our network of websites enables like-minded consumers to engage in our online communities.

Costs and Expenses

Cost of Revenue. Our cost of revenue consists of credit card processing fees for registrations, payroll and related costs including allocated facilities costs, stock-based compensation for employees associated with registration, subscription or software


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implementation, customer support and onsite event support including travel costs. Costs also include expenses related to our call center operations, amortization of capitalized software development costs and certain acquired intangibles including acquired technology, customer supply costs, inventory costs and internet hosting costs.

Sales and Marketing. Our sales and marketing costs are primarily salaries, benefits, incentive compensation, stock-based compensation and allocated facilities costs for our sales and marketing employees. Costs also include expenses for travel, trade shows and other promotional and marketing activities including direct and online marketing.

Research and Development. Our research and development costs are primarily salaries, benefits, incentive compensation, stock-based compensation and allocated facilities costs for employees and contractors engaged in the development and ongoing maintenance of our products and services.

General and Administrative. Our general and administrative costs are primarily salaries, benefits, incentive compensation, stock-based compensation and allocated facilities costs for employees engaged in support activities including executive, finance, accounting, human resources, legal and internal information technology support. Also included are professional fees and contractor costs for legal and accounting services. Software expenses and travel costs for support employees, taxes, fees and licenses are also included.

Amortization of Intangibles. Intangible assets with finite lives are amortized using a combination of straight-line and accelerated methods based on the expected cash flows from the asset over their estimated useful lives. This includes assets recorded in conjunction with certain acquisitions.

Other Income (Expense), Net. Other income (expense), net consists primarily of the interest income earned on our cash and cash equivalents, interest paid on our debt, foreign exchange gains and losses and other one-time gains and losses.

Provision for Income Taxes. Provision for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions.

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed within this Quarterly Report on Form 10-Q Adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short-and long-term operational plans. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, Adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the payment of bonuses to our executive officers. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are:

• Adjusted EBITDA does not reflect our cash expenditures for capital equipment, internally developed software costs or certain other contractual commitments;

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may need to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements;

• Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

• Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation to our management team or employees;

• Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

• other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP financial results.


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The following table presents a reconciliation of Adjusted EBITDA for each of the three and six month periods ended June 30, 2013 and June 30, 2012:

                                            Three Months Ended June 30,           Six Months Ended June 30,
                                             2013                 2012              2013               2012
Reconciliation of Adjusted EBITDA to
Net Loss:
Net loss                                        (4,472 )             (2,325 )         (19,700 )        (22,663 )
Interest expense, net                              137                   65               304              191
Provision for income taxes                       1,127                2,469             2,445            3,080
Depreciation and amortization                   15,460               15,118            30,859           30,094
Stock-based compensation                         9,526                4,302            13,452            7,331
Other (income) expense, net                        470                  524             1,023             (877 )

Adjusted EBITDA                                 22,248               20,153            28,383           17,156

Critical Accounting Policies

In presenting our condensed consolidated financial statements in conformity with U.S. generally accepting accounting principles, or GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures.

Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. Our future estimates may change if the underlying assumptions change. Actual results may differ significantly from these estimates.

We believe that the critical accounting policies listed below involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our condensed consolidated financial statements.

• Revenue recognition

• Software development costs

• Business combinations

• Impairment of goodwill, indefinite-lived intangible assets and long-lived assets

• Income taxes

• Stock-based compensation

As of June 30, 2013, there have been no material changes to the items disclosed as critical accounting policies and estimates in "Management Discussion and Analysis of Financial Condition and Results of Operations" in Part II-Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.


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Results of Operations

The following tables set forth our results of operations for the periods
presented and those results as a percentage of our revenue. The period-to-period
comparison of financial results is not necessarily indicative of future results.




                                                       Three Months Ended           Six Months Ended
                                                            June 30,                    June 30,
                                                       2013          2012          2013          2012
                                                                       (in thousands)
Net revenue:
Technology revenue                                   $ 119,473     $ 108,155     $ 214,463     $ 192,275
Marketing services revenue                              12,887        13,409        23,908        23,727

Total net revenue                                      132,360       121,564       238,371       216,002
Cost of net revenue:
Cost of technology revenue                              56,413        50,812       105,459        96,467
Cost of marketing services revenue                       1,024         2,115         2,215         3,431

Cost of net revenue                                     57,437        52,927       107,674        99,898

Gross profit                                            74,923        68,637       130,697       116,104
Operating expenses:
Sales and marketing                                     27,148        24,284        53,974        49,308
Research and development                                21,496        21,121        42,672        42,330
General and administrative                              25,031        16,903        41,539        33,447
Amortization of intangibles                              3,986         5,596         8,440        11,288

Total operating expenses                                77,661        67,904       146,625       136,373

(Loss) income from operations                           (2,738 )         733       (15,928 )     (20,269 )
Interest income                                             16            25            31            50
Interest expense                                          (153 )         (90 )        (335 )        (241 )
Other income (expense), net                               (470 )        (524 )      (1,023 )         877

(Loss) income before provision for income taxes         (3,345 )         144       (17,255 )     (19,583 )
Income tax provision                                     1,127         2,469         2,445         3,080

Net loss attributable to common stockholders         $  (4,472 )   $  (2,325 )   $ (19,700 )   $ (22,663 )

                                                        Three Months Ended           Six Months Ended
                                                             June 30,                    June 30,
. . .
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