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IL > SEC Filings for IL > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for INTRALINKS HOLDINGS, INC.

Form 10-Q for INTRALINKS HOLDINGS, INC.


9-Aug-2013

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as well as our reports on Form 8-K and other publicly available information. Amounts in tabular format are presented in thousands, except per share data, or as otherwise indicated.
Executive Overview
Intralinks is a leading global provider of Software-as-a-Service, or SaaS, solutions for secure content management and collaboration within and among organizations. Our cloud-based solutions enable organizations to control, track, search, exchange and collaborate on time-sensitive information inside and outside the firewall, all within a secure and easy-to-use environment. Our customers rely on our cost-effective solutions to manage large amounts of electronic information, accelerate information intensive business processes, reduce time to market, optimize critical information workflow, meet regulatory and risk management requirements and collaborate with business counterparties in a secure, auditable and compliant manner. We help our customers eliminate many of the inherent risks and inefficiencies of using email, fax, courier services and other existing solutions to collaborate and exchange information. At our founding in 1996, we introduced cloud-based collaboration for the debt capital markets industry and, shortly thereafter, extended our solutions to merger and acquisition transactions. Today, we service enterprise and governmental agencies in over 60 countries across a variety of industries, including financial services, pharmaceutical, manufacturing, biotechnology, consumer, energy, telecommunications, industrial, legal, agriculture, insurance, real estate and technology, which use our solutions for the secure management and online exchange of information within and among organizations. Across all of our principal markets, we help transform a wide range of slow, expensive and information-intensive tasks into streamlined, efficient and real-time business processes.
We deliver our solutions entirely through a multi-tenant SaaS architecture in which a single instance of our software serves all of our customers. We sell our solutions directly through a field team with industry-specific expertise and an inside sales team, and indirectly through a customer referral network and channel partners. During the six months ended June 30, 2013, we generated $112.8 million in revenue, of which approximately 40% was derived from sales across 63 countries outside of the United States.
During 2012, management initiated a business strategy review to explore long-term growth opportunities. The objective was to assess the competitive environment, identify the most attractive market opportunities, define a product roadmap and further develop our execution strategy. We have made significant progress in validating our market opportunities and aligning the Company to effectively address them. This strategy assessment reinforces our commitment to anticipate the changing needs of our customers, industry trends, and competitive forces.
Key Metrics
We evaluate our operating and financial performance using various performance indicators, as well as against the macroeconomic trends affecting the demand for our solutions in our principal markets. We also monitor relevant industry performance, including transactional activity in the debt capital markets, or DCM, and the mergers and acquisitions, or M&A, market globally, to provide insight into the success of our sales activities as compared to our peers and to estimate our market share in each of our principal markets.


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Our management relies on the key performance indicators set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We discuss revenue under "Results of Operations," and cash flow provided by operating activities, including deferred revenue, under "Liquidity and Capital Resources." Other measures of our performance, including adjusted gross margin, adjusted operating income, adjusted net income, adjusted EBITDA and adjusted EBITDA margin and free cash flow are defined and discussed under "Non-GAAP Financial Measures" below.

                                                 Three Months Ended June 30,          Six Months Ended June 30,
                                                   2013               2012               2013              2012
Consolidated Statement of Operations Data:
Total revenue                                $      57,742       $      53,765     $     112,763       $  104,550
Non-GAAP gross margin                                 75.8 %              75.7 %            75.7 %           76.0 %
Non-GAAP adjusted operating income           $       3,824       $       3,961     $       7,509       $    6,747
Non-GAAP adjusted net income                 $       1,475       $         868     $       2,512       $    1,920
Non-GAAP adjusted EBITDA                     $       8,845       $       8,452     $      17,361       $   15,517
Non-GAAP adjusted EBITDA margin                       15.3 %              15.7 %            15.4 %           14.8 %
Consolidated Balance Sheet Data:
Deferred revenue at June 30 (1)              $      44,766       $      42,705     $      44,766       $   42,705
Consolidated Statement of Cash Flows Data:
Cash flows provided by operations            $      11,826       $      17,197     $      19,757       $   18,725
Free cash flow                               $       4,871       $       7,097     $       5,632       $    2,454

(1) Short-term only

Non-GAAP Financial Measures
This Form 10-Q includes information about certain financial measures that are not prepared in accordance with generally accepted accounting principles in the United States, or GAAP or U.S. GAAP, including non-GAAP gross profit and gross margin, non-GAAP adjusted operating income and margin, non-GAAP adjusted net income, non-GAAP adjusted net income per share, non-GAAP adjusted EBITDA and free cash flow. These non-GAAP measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies.
Management defines its non-GAAP financial measures as follows:
Non-GAAP gross margin represents the corresponding GAAP measure adjusted to exclude (1) stock-based compensation expense and (2) amortization of intangible assets, if any.

Non-GAAP adjusted operating income represents the corresponding GAAP measure adjusted to exclude (1) stock-based compensation expense, (2) amortization of intangible assets, (3) impairment charges or asset write-offs and (4) costs related to public stock offerings, if any.

Non-GAAP adjusted net income represents the corresponding GAAP measure adjusted to exclude (1) stock-based compensation expense, (2) amortization of intangible assets, (3) impairment charges or asset write-offs, (4) costs related to debt repayments and (5) costs related to public stock offerings, if any. Non-GAAP adjusted net income is calculated using an estimated long-term effective tax rate.

Non-GAAP net income per share represents non-GAAP adjusted net income (defined above) divided by dilutive shares outstanding.

Non-GAAP adjusted EBITDA represents net (loss) income adjusted to exclude
(1) interest expense, (2) income tax provision (benefit), (3) depreciation and amortization, (4) amortization of intangible assets, (5) stock-based compensation expense, (6) amortization of debt issuance costs, (7) other expense (income), net, (8) impairment charges or asset write-offs and (9) costs related to public stock offerings, if any.

Free cash flow represents cash flow from operations less capital expenditures and capitalized software development costs.

Management believes that these non-GAAP financial measures, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provide useful information about our period-over-period growth and provide additional information that is useful for evaluating our operating performance. In addition, free cash flow provides management with useful information


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for managing the cash needs of our business. Management also believes that these non-GAAP financial measures provide a more meaningful comparison of our operating results against those of other companies in our industry, as well as on a period-to-period basis, because these measures exclude items that are not representative of our operating performance, such as amortization of intangible assets, interest expense and fair value adjustments to the interest rate swap that matured as of June 30, 2012. Management believes that including these costs in our results of operations results in a lack of comparability between our operating results and those of our peers in the industry, the majority of which are not highly leveraged and do not have comparable amortization costs related to intangible assets. However, non-GAAP gross margin, non-GAAP adjusted operating income, non-GAAP adjusted net income, non-GAAP adjusted net income per share, non-GAAP adjusted EBITDA and free cash flow are not measures of financial performance under U.S. GAAP and, accordingly, should not be considered as alternatives to gross margin, operating income, net income (loss), and cash flows provided by operations as indicators of operating performance.


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

                                            Three Months Ended June 30,          Six Months Ended June 30,
                                             2013                2012               2013              2012
Gross profit                            $     41,519       $       37,543     $      80,973       $   72,824
Gross margin                                    71.9 %               69.8 %            71.8 %           69.7 %
Cost of revenue - stock-based
compensation expense                             149                   92               317              200
Cost of revenue - amortization of
intangible assets                              2,081                3,089             4,069            6,398
Non-GAAP gross profit                   $     43,749       $       40,724     $      85,359       $   79,422
Non-GAAP gross margin                           75.8 %               75.7 %            75.7 %           76.0 %
Loss from operations                    $     (4,155 )     $      (13,044 )   $      (8,430 )     $  (18,760 )
Stock-based compensation expense               2,012                1,691             4,128            3,036
Amortization of intangible assets              5,967                6,937            11,811           14,094
Impairment on capitalized software                 -                8,377                 -            8,377
Non-GAAP adjusted operating income      $      3,824       $        3,961     $       7,509       $    6,747
Net loss before income tax              $     (5,600 )     $      (15,652 )   $     (11,888 )     $  (22,457 )
Stock-based compensation expense               2,012                1,691             4,128            3,036
Amortization of intangible assets              5,967                6,937            11,811           14,094
Impairment on capitalized software                 -                8,377                 -            8,377
Costs related to debt repayments                   -                   47                 -               47
Non-GAAP adjusted net income before
tax                                            2,379                1,400             4,051            3,097
Non-GAAP income tax provision                    904                  532             1,539            1,177
Non-GAAP adjusted net income            $      1,475       $          868     $       2,512       $    1,920
Net loss                                $     (4,358 )     $       (9,029 )   $      (8,913 )     $  (14,613 )
Interest expense                               1,152                1,938             2,274            4,074
Income tax benefit                            (1,242 )             (6,623 )          (2,975 )         (7,844 )
Depreciation and amortization                  5,021                4,491             9,852            8,770
Amortization of intangible assets              5,967                6,937            11,811           14,094
Stock-based compensation expense               2,012                1,691             4,128            3,036
Impairment on capitalized software                 -                8,377                 -            8,377
Amortization of debt issuance costs              104                  223               216              414
Other expense (income), net(1)                   189                  447               968             (791 )
Non-GAAP adjusted EBITDA                $      8,845       $        8,452     $      17,361       $   15,517
Non-GAAP adjusted EBITDA margin                 15.3 %               15.7 %            15.4 %           14.8 %
Cash flow provided by operations        $     11,826       $       17,197     $      19,757       $   18,725
Capital expenditures                          (1,475 )             (5,517 )          (3,289 )         (5,919 )
Capitalized software development
costs                                         (5,480 )             (4,583 )         (10,836 )        (10,352 )
Free cash flow                          $      4,871       $        7,097     $       5,632       $    2,454

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


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Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities on an ongoing basis. The following accounting estimates are viewed by management to be critical because they require significant judgment on the part of management. Management has discussed and reviewed the development, selection, and disclosure of critical accounting estimates with our Audit Committee.
Among the estimates we review, we evaluate those related to the determination of the fair value of stock options and estimated forfeitures of equity-based awards, the fair value of our reporting unit, valuation of intangible assets (and their related useful lives), fair value of financial instruments, certain components of the income tax provisions, including valuation allowances on the Company's deferred tax assets, accruals for certain compensation expenses, allowances for doubtful accounts and reserves for customer credits. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from those estimates under different assumptions or conditions. Financial results could be materially different if other methodologies were used or if management modified its assumptions.
During the six months ended June 30, 2013, there were no material changes to our significant accounting policies from those contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
The following is a discussion of our revenue recognition accounting policy and our goodwill impairment analysis.
Revenue Recognition
We derive revenue principally through fixed commitment contracts under which we provide customers various services, including access to our cloud-based Intralinks platform, which includes our Intralinks exchanges, as well as related customer support and other services.
We currently sell our services under service contracts that we consider either "subscription" or "transaction" arrangements, as follows:
Subscription arrangements include those customer contracts with an initial term of 12 months or more that automatically renew for successive terms of at least 12 months. Because some long-term customers will not accept automatic renewal terms, we also consider among our subscription customers those whose contracts have been extended upon mutual agreement for at least one renewal term of at least 12 months. We believe subscription arrangements appeal mainly to customers that have integrated our service into their business processes and plan to use our service offerings for a series of expected projects or on an ongoing basis. Subscription arrangements afford customers of our exchange products several benefits, including the ability to manage the creation, opening and closing of any number of exchanges at their convenience during the commitment period, and potentially lower pricing than they would generally be charged under a single-event contract.

Transaction arrangements include those customer contracts having an initial term of less than 12 months. We also consider transaction customers to be those first-time customers whose contracts do not have an automatic renewal clause and who have not yet renewed their contracts by mutual agreement. We believe these types of arrangements appeal mainly to customers who have a single discrete project. Unlike subscription contracts, which generally renew for at least one year at a time, transaction contracts continue in effect after their initial term on a month-to-month basis, until the customer terminates, often by closing the relevant exchange.

Revenue from both subscription and transaction contracts is recognized ratably over the contracted service period, provided that there is persuasive evidence of an arrangement, the service has been provided to the customer, collection is reasonably assured, the amount of fees to be paid by the customer is fixed or determinable and we have no significant remaining obligation at the completion of the contracted term. In circumstances where we have a significant remaining obligation after completion of the initial contract term, revenue is recognized ratably over the extended service period. Our contracts do not contain general rights of return. Certain of our contracts contain customer acceptance clauses, in which case revenue is deferred until acceptance occurs.
Under most subscription arrangements for our exchange offering, an annual fixed commitment fee is determined based on the aggregate value of the expected number of exchanges required over the term, the type of exchanges expected to be opened, the number of users that are expected to access each exchange and the volume of data expected to be managed in the exchanges. We bill customers with annual commitment fees in advance, generally in four equal quarterly installments. Similarly, a transaction contract for a single project will have a fee covering services for the expected duration of the project, for which we generally bill customers in full, in advance, upon the commencement of the contract. Subscription and transaction fees payable in advance are recorded initially in accounts receivable, or cash upon their collection, and deferred revenue, until such time that the relevant revenue recognition criteria have been met for such amounts to be included in revenue.


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Annual subscription fees, as well as the fixed fees payable upfront under transaction contracts, are payable in full and are non-refundable regardless of actual usage of services. Similarly, while customers may close exchanges and cease using services, our contracts generally do not allow for cancellation or termination for convenience during the contract term. We reserve the right under subscription and transaction contracts to charge customers for loading data or adding users to exchanges in excess of their original usage estimates. Incremental fees for overages are billed monthly or quarterly in arrears and the related revenue is recognized ratably from the point that the overage is measured through the remaining contract term, or the remaining contract quarter, depending on the usage terms within the customer contract. Our customers do not have a contractual right, or the ability, to take possession of the Intralinks software at any time during the hosting period, or to contract with an unrelated third party to host the Intralinks software. Therefore, revenue recognition for our services is not accounted for under the FASB's specific guidance on software revenue recognition. We recognize revenue for our services ratably over the related service period, as described above. We offer our services to customers through single-element and multiple-element arrangements, some of which contain offerings for optional services, including document scanning, data archiving and other professional services. In accordance with the FASB's guidance on multiple-deliverable arrangements, we have evaluated the deliverables in our arrangements to determine whether they represent separate units of accounting and, specifically, whether the deliverables have value to our customers on a standalone basis. We have determined that the services delivered to customers under our existing arrangements generally represent a single unit of accounting. Revenue for optional services is recognized as delivered, or as completed, provided that the general revenue recognition criteria described above are met. We will continue to evaluate the nature of the services offered to customers under our fixed commitment contracts, as well as our pricing practices, to determine if a change in policy regarding multiple-element arrangements and related disclosures is warranted in future periods.
Additionally, certain contracts contain provisions for set-up and implementation services relating to the customer's use of our platform. We believe that these set-up and implementation services provide value to the customer over the entire period that the exchange is active, including renewal periods, and therefore the revenue related to these services is recognized over the longer of the contract term or the estimated relationship life. We continue to evaluate from time to time the length of the amortization period of the revenue related to set up and implementation fees, as we gain more experience with customer contract renewals. From time to time, we agree to sales concessions with our customers, a reserve for which is estimated based on historical patterns of actual credits issued. Expenses associated with maintaining this reserve are recorded as a reduction to revenue.

Deferred revenue represents the billed but unearned portion of existing contracts for services to be provided. Deferred revenue does not include the unbilled portion of existing contractual commitments of our customers. Accordingly, the deferred revenue balance does not represent the total contract value of outstanding arrangements. Amounts that have been invoiced but not yet collected are recorded as revenue or deferred revenue, as appropriate, and are included in our accounts receivable balances. Deferred revenue that will be recognized during the subsequent 12-month period is classified as "Deferred revenue," with the remaining portion as non-current deferred revenue as a component of "Other long term liabilities" on the Consolidated Balance Sheets. Goodwill Impairment Analysis
At June 30, 2013, we had $215.9 million of goodwill. Goodwill is evaluated for impairment on an annual basis, or more frequently if events or circumstances indicate that an impairment loss may have been incurred. We have one reporting unit that is evaluated in the annual impairment test, which is performed as of each October 1.
We completed our most recent impairment analysis as of October 1, 2012. Among the factors included in our qualitative assessment were: (i) our market capitalization, (ii) general economic conditions and the competitive environment, (iii) actual and expected financial performance, (iv) forward-looking business measurements, (v) external market conditions, (vi) our stock-price performance compared to overall market and industry peers and (vii) other relevant entity-specific events. Based on the results of the qualitative assessment, we concluded that it is more likely than not that the fair value of our reporting unit is more than its carrying amount and, therefore, performance of the two-step quantitative impairment test was not necessary. However, the Company could be at risk of recording a goodwill impairment in the future if, for example, the Company's stock price remained at a depressed level or the Company has a negative change in its future cash flow projections. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. When performing the quantitative analysis, we utilize valuation techniques consistent with the income approach and market approach to measure fair value for purposes of impairment testing. An estimate of fair value can be affected by many assumptions, requiring that management make significant judgments in arriving at these estimates, including the expected operational performance of our business in the future, market conditions and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use to estimate future cash flows - including sales growth, pricing of our services, market penetration, competition, technological obsolescence, fair value of net operating loss carryforwards and discount rates - are consistent with our internal planning. Significant changes in these estimates and the related assumptions, or changes in qualitative


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factors affecting us in the future, could result in an impairment charge related to our goodwill.
During the six months ended June 30, 2013, we did not observe any events or circumstances arising since the date of our most recent impairment analysis that would cause us to believe that the fair value of the reporting unit is below its carrying amount as of June 30, 2013.
Recently Adopted Accounting Pronouncements In February 2013, new accounting guidance was issued by the FASB that requires disclosures of amounts reclassified from accumulated other comprehensive income to net income. The adoption of this accounting guidance, which became effective and was adopted by the Company on January 1, 2013, had no material impact on our consolidated financial statements.
In June 2013, the FASB ratified accounting guidance proposed by the Emerging Issues Task Force that requires entities to present an unrecognized tax benefit net with certain deferred tax assets when specific requirements are met. The amendments in this updated guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company is currently evaluating the effect this guidance will have on its consolidated . . .

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