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LEDR > SEC Filings for LEDR > Form 10-Q on 5-Aug-2013All Recent SEC Filings

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

Form 10-Q for MARKET LEADER, INC.


5-Aug-2013

Quarterly Report


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

You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward looking statements relating to our anticipated plans, products, services, and financial performance. The words "will," "estimate," "believe," "expect," "anticipate," "intend" and similar expressions identify forward-looking statements, but their absence does not mean the statement is not forward looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could affect our actual results include, but are not limited to, those discussed under the heading Item 1A, "Risk Factors" below and in our Annual Report on Form 10-K for the year ended December 31, 2012 and in our other Securities and Exchange Commission filings. Given these risks and uncertainties, you should not place undue reliance on our forward-looking statements. The forward-looking statements are made as of the date of this report, and we assume no obligation to update any such statements to reflect events or circumstances after the date hereof.

Unless the context requires otherwise, the terms "Market Leader," the "Company," "we," "us" and "our" refer to Market Leader, Inc. and its subsidiaries.

Overview

Our Business

Market Leader, Inc., founded in 1999, provides innovative online technology and marketing solutions for real estate professionals across the United States and Canada. We serve more than 135,000 real estate agents, brokerages and franchisors, offering complete end-to-end solutions that enable them to grow and manage their businesses. Our subscription-based real estate marketing software and services helps customers generate a steady stream of prospects, plus provides the systems and training they need to convert those prospects into clients. In addition, our national consumer real estate sites give its customers access to millions of future home buyers and sellers, while providing consumers with free access to the information they seek.

Review of Second Quarter 2013

On May 7, 2013, we entered into an Agreement and Plan of Merger with Trulia, Inc. ("Trulia") and Mariner Acquisition Corp. (the "Merger Agreement") pursuant to which Trulia will acquire Market Leader in a merger transaction valued at approximately $355 million. The transaction requires the approval of our shareholders and is subject to other customary closing conditions. We anticipate that the merger will close during the third quarter of 2013.

The Merger Agreement contains certain termination rights for both Trulia and Market Leader, including if the Merger is not completed on or before October 31, 2013 or if our shareholders do not approve the Merger Agreement. The Merger Agreement also provides that, upon termination of the Merger Agreement under certain circumstances, we may be required to pay Trulia a termination fee of $15 million. In addition, under certain specified circumstances we may be required to reimburse Trulia's transaction expenses (subject to a cap of $1.0 million).

We achieved our fourteenth consecutive quarter of revenue growth, driven by demand for our software-as-a-service products as well as the continued ability to leverage our relationships with our more than 135,000 customers to drive additional sales of premium services.

Our primary goal is to continue to drive revenue growth, which we believe requires ongoing investment in customer acquisition. We sell directly to individual real estate brokerage offices and their agents, which has long been a core competency for us. We also have an effective strategy to build and maintain sales and marketing channel relationships with major franchise networks and large brokerage companies to sell from the top down. These strategic relationships enable us to tap into the influence, credibility, and existing sales and marketing infrastructure of these franchise networks to let us cost-effectively acquire high-value, premium customers.

We have built our first enterprise relationship over the past two years, and we launched additional enterprise rollouts in the first quarter with two more of the nation's leading franchises. These rollouts will further enhance our access to real estate professionals and we believe will contribute to continued revenue growth in the future.

Under these strategic enterprise agreements, we typically provide a base level version of our software-as-a-service products to agents and brokers enterprise-wide in exchange for specified contractual revenue over a number of years. These enterprise customers have a business incentive to partner with us and drive broad platform adoption of our software-as-a-service solutions because it helps foster success and performance improvements within their agent base. Our strategy is to leverage the resulting broad access to sell recurring subscriptions to our premium services, including both software upgrades and marketing services. This strategy has contributed to our strong revenue growth.


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We believe our success in the enterprise space and our increasing access to real estate professionals is the result of providing an industry leading software-as-a-service solution that enhances our customers' productivity. During the second quarter of 2013, we continued to develop new features and enhance our software solution. Most notably, we launched new technology that enables agents to automatically capture leads from major real estate sites and increased direct mail functionality via targeted mailing lists with easy-to-use customized filters. We remain focused on continuing to make enhancements to our software solution and delivering more value to our growing base of customers.

Results of Operations

Revenues

Three months ended Six months ended
June 30, June 30,
2013 2012 2013 2012
Revenues (in thousands) $ 13,686 $ 11,074 $ 26,610 $ 21,260

Revenues increased 24% and 25% for the three and six month periods ended June 30, 2013 compared to the same periods in 2012, driven by demand for our products at the professional and enterprise level, increased investment in customer acquisition, and upsells of our premium services to our broad customer base, supported by improved real estate market conditions.

Sales and Marketing



                                                  Three months ended             Six months ended
                                                       June 30,                      June 30,
                                                 2013            2012           2013           2012
Total sales and marketing expense (in
thousands)                                     $   8,238        $ 6,999       $ 17,083       $ 14,027

Total sales and marketing expense as a % of
revenue                                               60 %           63 %           64 %           66 %

Sales and marketing expense increased for the three and six months ended June 30, 2013 when compared to the same periods in 2012 but decreased slightly as a percentage of revenue. Our customer acquisition costs increased due to investments in additional sales capacity and marketing programs to drive continued revenue growth. Our customer servicing costs increased slightly, driven by growth in our customer base, but decreased as a percentage of revenue.

Technology and Product Development



                                                     Three months ended             Six months ended
                                                          June 30,                      June 30,
                                                    2013            2012           2013          2012
Total technology and product development
expense (in thousands)                            $   3,020        $ 2,762       $  5,962       $ 5,101

Total technology and product development
expense as a % of revenue                                22 %           25 %           22 %          24 %

Technology and product development expense increased for the three and six month periods ended June 30, 2013 compared to the same periods in 2012. The increase reflects growth in the business and the pace of our product innovation. The increase is also due to an increase in stock-based compensation expense primarily resulting from our increased stock price.


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General and Administrative



                                                  Three months ended             Six months ended
                                                       June 30,                      June 30,
                                                 2013            2012           2013          2012
Total general and administrative expense
(in thousands)                                 $   3,593        $ 1,855       $  5,896       $ 3,710

Total general and administrative expense as
a % of revenue                                        26 %           17 %           22 %          17 %

General and administrative expense increased for the three and six month period ended June 30, 2013 when compared to the same periods in 2012, primarily due to costs of $1.1 million incurred in the second quarter in connection with the pending merger transaction with Trulia. In addition, general and administrative expense increased due to increased stock-based compensation expense primarily resulting from our increased stock price.

Stock-based Compensation

Stock-based compensation expense increased for the three and six month periods ended June 30, 2013 compared to the same periods in 2012 primarily due to the impact of our stock price increase on our liability-classified stock appreciation rights that are re-measured at the end of each reporting period. These awards were re-valued at the end of the second quarter when the share price used to re-measure the value of the liability awards was $10.65, an increase from $8.90 at the beginning of the quarter.

Depreciation and Amortization of Property and Equipment

Depreciation and amortization of property and equipment increased for the three and six month periods ended June 30, 2013 compared to the same periods in 2012 due to our ongoing additions to capitalized software development as we continue to deliver products to new enterprise customers and to develop new products.

Amortization of Acquired Intangible Assets

Amortization of intangible assets decreased slightly for the three and six month periods ended June 30, 2013 compared to the same periods in 2012, as intangible assets from prior acquisitions became fully amortized.

Interest Income and Expense, Net

Interest income remains immaterial as liquidity and security of principal continue to be core to our investment strategy, which results in low rates of return.

Income Tax Expense (Benefit)

Income tax expense (benefit) remains immaterial as we continue to record a full valuation allowance against our deferred tax assets.

Net Loss

Net loss has increased for the three and six month periods ended June 30, 2013 compared to the same periods in 2012. While our revenues and Adjusted EBITDA have improved for those comparative periods, we have experienced an increase in stock-based compensation expense, discussed above. Additionally, our operating results for the second quarter were impacted by expenses we incurred in connection with the pending merger transaction with Trulia.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We include a discussion of our critical accounting policies and estimates in our Annual Report on Form 10-K for the year ended December 31, 2012.


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Quarterly Consolidated Statements of Income and Operational Data

The following table presents unaudited operational data pertaining to our operations for the six quarters ended June 30, 2013. This quarterly information has been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflects all adjustments necessary for a fair representation of the information for the periods presented. This data should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012. Operating results for any quarter apply to that quarter only and are not necessarily indicative of results for any future period.

                                     June 30,       Mar 31,       Dec. 31,        Sept. 30,       June 30,       Mar. 31,
                                       2013           2013          2012            2012            2012           2012
                                                                        (in thousands)
Operations Data:
Revenues                             $  13,686      $ 12,924      $  12,037      $    11,691      $  11,074      $  10,186
Expenses:
Sales and marketing                      8,238         8,845          7,263            7,699          6,999          7,028
Technology and product development       3,020         2,942          2,347            2,265          2,762          2,339
General and administrative               3,593         2,303          2,054            2,064          1,855          1,855
Depreciation and amortization of
property and equipment                     816           827            735              754            768            644
Amortization of acquired
intangible assets                          793           787            811              849            836            823

Total expenses                          16,460        15,704         13,210           13,631         13,220         12,689

Loss from operations                    (2,774 )      (2,780 )       (1,173 )         (1,940 )       (2,146 )       (2,503 )
Interest income and expense, net             4             6              8                7              8              9

Loss before income tax                  (2,770 )      (2,774 )       (1,165 )         (1,933 )       (2,138 )       (2,494 )
Income tax expense                           7             7              8               10              8             28

Net loss                                (2,777 )      (2,781 )       (1,173 )         (1,943 )       (2,146 )       (2,522 )

Adjusted EBITDA                      $   1,337      $    203      $     913      $       937      $     260      $    (403 )


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Adjusted EBITDA is a non-GAAP financial measure provided as a complement to results in accordance with accounting principles generally accepted in the US. Adjusted EBITDA is not a substitute for measures determined in accordance with GAAP, and may not be comparable to Adjusted EBITDA as reported by other companies. Our use of the term "Adjusted EBITDA" refers to a financial measure defined as earnings or loss before net interest, income taxes, depreciation, amortization, and stock-based compensation, and excludes expenses incurred in connection with the pending merger transaction with Trulia as these are non-recurring expenses that are unrelated to our ongoing operations. We believe Adjusted EBITDA to be relevant and useful information to our investors as this measure is an integral part of our internal management reporting and planning process and is the primary measure used by our management to evaluate operating performance. See the table below for a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP measure.

                                       June 30,       Mar. 31,       Dec. 31,        Sept. 30,       June 30,       Mar. 31,
                                         2013           2013           2012            2012            2012           2012
                                                                           (in thousands)
Reconciliation of GAAP Measurement
to Adjusted EBITDA:
Net loss                               $  (2,777 )    $  (2,781 )    $  (1,173 )    $    (1,943 )    $  (2,146 )    $  (2,522 )
Adjustments:
Stock-based compensation                   1,380          1,369            540            1,274            802            633
Depreciation and amortization of
property and equipment                       816            827            735              754            768            644
Amortization of intangible assets            793            787            811              849            836            823
Merger-related expenses                    1,122             -              -                -              -              -
Other expense                                  3              1             -                 3             -              19

Adjusted EBITDA                        $   1,337      $     203      $     913      $       937      $     260      $    (403 )

Liquidity and Capital Resources

Currently, our principal source of liquidity is our cash, cash equivalents and short-term investments as well as the cash flow that we may generate from our operations. At June 30, 2013, our cash, cash equivalents and short-term investments totaled $21.2 million.

Liquidity and security of principal continue to be core to our investment strategy, which results in low rates of return. As of June 30, 2013, we have invested in cash equivalents consisting of money market funds that hold U.S. Treasury securities with short-term weighted average duration. Short-term investments are comprised of U.S. Treasury bills with terms of one year or less.

The following table presents summary cash flow data:

                                                              Six months
                                                            Ended June 30,
                                                        2013              2012
                                                        (dollars in thousands)
   Cash provided by (used in) operating activities   $       431       $      (315 )
   Cash provided by investing activities                   1,904             6,018
   Cash provided by financing activities                     739               573

Operating Activities

Cash flows from operating activities consist of our net loss adjusted for certain non-cash items, primarily depreciation, amortization, stock-based compensation, and the effects of changes in working capital. We generated $0.4 million in cash from operations during the first six months of 2013, an increase of $0.7 million compared to the same period in 2012. The increase was primarily due to an improvement in Adjusted EBITDA.

Investing Activities

Cash provided by investing activities for the first six months of 2013 was $1.9 million compared to $6.0 million for the same period in 2012, primarily due to timing of purchases and maturities of short term investments.

Financing Activities

Cash provided by financing activities during the first six months of 2013 increased compared to the same period last year primarily due to increased proceeds from the exercise of employee stock options.


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Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of June 30, 2013.

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