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YUME > SEC Filings for YUME > Form 10-Q on 30-Aug-2013All Recent SEC Filings

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Form 10-Q for YUME INC


30-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, results of operations and cash flows should be read in conjunction with the (1) unaudited condensed consolidated financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and (2) 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 Prospectus filed on August 7, 2013 with the SEC pursuant to Rule 424(b) under the Securities Act.

Forward Looking Information

This Quarterly Report on Form 10-Q including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 part I of this report, contains forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The statements that are not purely historical fact are forward-looking statements and are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "plan," "project," "seek," "should," "target," "will," "would" and similar expressions or variations intended to identify forward-looking statements. 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 herein, and those discussed in the section titled "Risk Factors" included under Part II, Item 1A of this Form 10Q. Furthermore, such forward-looking statements speak only as of the date of this report. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Unless expressly indicated or the context requires otherwise, the terms "YuMe," "Company," "we," "us" and "our" in this document refer to YuMe, Inc., and, where appropriate, its wholly-owned subsidiaries.

Overview

We are a leading independent provider of digital video brand advertising solutions. Our proprietary technologies serve the specific needs of brand advertisers and enable them to find and target large, brand-receptive audiences across a wide range of Internet-connected devices and digital media properties. Our software is used by global digital media properties to monetize professionally-produced content and applications. We facilitate digital video advertising by dynamically matching relevant audiences available through our digital media property partners with appropriate advertising campaigns from our advertising customers. Our leadership, based on proprietary technologies, brand-specific advertising solutions, large software installed base and data assets is reflected in our wide audience reach, with over 261 million monthly unique viewers worldwide during June 2013, and our large advertising customer base that in the twelve months ended June 30, 2013 included 66 of the top 100 U.S. advertisers in 2012 as ranked by Advertising Age magazine, or the AdAge 100, such as American Express, AT&T, GlaxoSmithKline, Home Depot and McDonald's.

We help our advertising customers overcome the complexities of delivering digital video advertising campaigns in a highly fragmented environment where dispersed audiences of video consumers use a growing variety of Internet-connected devices to access thousands of online and mobile websites and applications. In 2012, we delivered over eight billion video advertising impressions across personal computers, smartphones, tablets, set-top boxes, game consoles, Internet-connected TVs and other devices. Our video ads run when users choose to view video content on their devices. On each video advertising impression, we collect dozens of data elements that we use for our advanced audience modeling algorithms that improve our brand-targeting efficacy.

Over our eight-year operating history we have amassed a vast amount of data derived from our large software installed base of YuMe Audience Aware Software Development Kits, or YuMe SDKs, that are embedded in online and mobile websites and entertainment applications residing on millions of personal computers, smartphones, tablets, Internet-connected TVs and other devices. This allows us to deliver television-like ads, enhanced and customized for each specific device type, and collect valuable advertisement viewership data. We estimate that we collected over 200 billion data points from ad impressions we delivered in 2012. As we grow our audience and advertiser footprint, we are able to collect even more data, which in turn enables us to improve the efficacy of our targeting models, further improving the utility of our solutions and driving additional adoption.

We generate revenue by delivering digital video advertisements on Internet-connected devices. Our customers primarily consist of large global brands and their advertising agencies. Advertising customers submit ad insertion orders to us, and we fulfill those orders by delivering their digital video advertisements to audiences available through digital media properties, a process that we refer to as an advertising campaign. From 2007 to 2012, we ran over 21,000 advertising campaigns. We typically bill our advertising customers on a cost per thousand impressions, or CPM, basis, of which we generally owe our digital media properties a negotiated revenue-share percentage.


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Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with 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, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition website and internal-use software development costs, business combinations, income taxes and stock-based compensation have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

Results of Operations

The following tables set forth our results of operations for the periods presented as a percentage of revenue for those periods (certain items may not foot due to rounding). 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
Condensed Consolidated Statements of
Operations Data:
Revenue                                      100.0 %      100.0 %     100.0 %      100.0 %
Cost of revenue                               54.4         54.2        54.5         55.5
Gross margin                                  45.6         45.8        45.5         44.5
Operating expenses
Sales and marketing                           31.7         31.6        34.6         33.3
Product development                            2.7          2.1         3.1          2.6
General and administrative                    13.8         10.9        14.2         11.3
Total operating expenses                      48.2         44.6        52.0         47.1
Income (loss) from operations                 (2.6 )        1.3        (6.5 )       (2.7 )
Income (loss) before income taxes             (3.0 )        1.1        (7.1 )       (2.8 )
Net income (loss)                             (3.2 )%       0.5 %      (7.3 )%      (3.0 )%

Revenue

We principally derive revenue from advertising solutions priced on a CPM basis and measured by the number of advertising impressions delivered to digital media properties. A substantial majority of our contracts with advertising customers take the form of ad insertion orders placed by advertising agencies on behalf of their brand advertiser clients, which are typically one to three months in duration. Occasionally, we enter into longer term contracts with advertising customers.

We count advertising customers in accordance with the following principles: we count (i) each advertiser, not the advertising agencies through which its ad insertion orders may be placed, as the advertising customer; (ii) entities that are part of the same corporate structure as a single advertising customer; and
(iii) intermediaries, including entities that are part of their same corporate structure, that have relationships with advertising agencies and advertisers are each counted as one advertising customer, even if they place ads for multiple advertising agencies and advertisers. We also generate other revenue from digital media property owners, including platform fees, professional service fees and ad serving fees. In calculating revenue per advertising customer, we exclude this other revenue.

Our revenue may fluctuate based on seasonal factors that affect the advertising industry. For example, many advertisers devote the largest portion of their budgets to the fourth quarter of the calendar year, to coincide with increased holiday and year-end purchasing activities. Historically, the fourth quarter of the year reflects the highest advertising activity and the first quarter reflects the lowest level of such activity.


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Three Months Six Months Ended Ended June 30, % June 30, % 2013 2012 Change 2013 2012 Change

($ in thousands) ($ in thousands)

Revenue $ 34,320 $ 25,196 36.2% $ 60,932 $ 45,265 34.6%

In the three months ended June 30, 2013, revenue increased $9.1 million, or 36.2%, compared to the three months ended June 30, 2012. The increase was primarily due to an increase in the number of advertising customers, and an increase in the average revenue per advertising customer. We had 301 advertising customers with average revenue of $112 thousand per advertising customer in the three months ended June 30, 2013 as compared to 239 advertising customers with average revenue of $105 thousand per advertising customer in the three months ended June 30, 2012. The increase in average revenue per advertising customer was primarily the result of advertisers directing an increasing amount of their budgets to digital video advertising. Other revenue increased to $0.7 million in the three months ended June 30, 2013 from $0.2 million in the three months ended June 30, 2012, primarily as a result of higher platform fees. Our top 20 advertising customers in the three months ended June 30, 2013 accounted for $17.0 million, or 49.5%, of our revenue, compared to $14.2 million, or 56.3% of our revenue in the three months ended June 30, 2012.

In the six months ended June 30, 2013, revenue increased $15.7 million, or 34.6%, compared to the six months ended June 30, 2012. The increase was primarily due to an increase in the number of advertising customers, and an increase in the average revenue per advertising customer. We had 383 advertising customers with average revenue of $156 thousand per advertising customer in the six months ended June 30, 2013 compared to 302 advertising customers with average revenue of $149 thousand per advertising customer in the six months ended June 30, 2012. The increase in average revenue per advertising customer was primarily the result of advertisers directing an increasing amount of their budgets to digital video advertising. Other revenue increased to $1.3 million in the six months ended June 30, 2013 from $0.4 million in the six months ended June 30, 2012, primarily as a result of higher platform fees. Our top 20 advertising customers in the six months ended June 30, 2013 accounted for $29.4 million, or 48.2%, of our revenue, compared to $24.4 million, or 53.8% of our revenue in the six months ended June 30, 2012.

Cost of Revenue

Cost of revenue primarily consists of traffic acquisition costs incurred with digital media property owners, typically under revenue-sharing arrangements. Generally, we incur traffic acquisition costs in the period the advertising impressions are delivered. In limited circumstances, traffic acquisition costs are based on minimum guaranteed impressions. Cost of revenue also includes ad delivery costs, such as labor and related costs, depreciation and amortization related to acquired and internally developed software, data center assets and Internet access costs. These expenses are classified as cost of revenue in the corresponding period in which the revenue is recognized. We expect cost of revenues, including our traffic acquisition costs, to increase, but to remain relatively constant as a percentage of revenue in the near term.

                            Three Months                  Six Months Ended
                           Ended June 30,        %            June 30,           %
                          2013        2012     Change     2013        2012     Change
                          ($ in thousands)                 ($ in thousands)
Cost of revenue         $  18,658   $ 13,652   36.7%    $  33,211   $ 25,141   32.1%
Percentage of revenue        54.4 %     54.2 %               54.5 %     55.5 %

In the three months ended June 30, 2013, cost of revenue increased $5.0 million, or 36.7%, compared to the three months ended June 30, 2012. The increase was primarily attributable to an increase of $4.2 million of costs associated with increased ad impressions delivered, as well as a $0.4 million increase in ad delivery costs. As a result of the growth in our business, we hired additional employees to support our ad operations department (including hires in Chennai, India) and experienced an increase in salaries and related costs and infrastructure costs of $0.1 million and an increase in depreciation and amortization of $0.3 million.

In the six months ended June 30, 2013, cost of revenue increased $8.1 million, or 32.1%, compared to the six months ended June 30, 2012. The increase was primarily attributable to an increase of $6.3 million of costs associated with increased ad impressions delivered, as well as a $0.5 million increase in ad delivery costs. As a result of the growth in our business, we hired additional employees to support our ad operations department (including hires in Chennai, India) and experienced an increase in salaries and related costs and infrastructure costs of $0.7 million and an increase in depreciation and amortization of $0.5 million.


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Sales and Marketing

We sell to our advertising customers primarily through our direct sales force personnel, who have established relationships with major ad agencies and direct relationships with advertisers. Our sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, travel and entertainment expenses, and incentive compensation for our sales and marketing employees. Sales and marketing expenses also include promotional, advertising and public relations costs, as well as allocated depreciation, facilities and other supporting overhead costs. We expect sales and marketing expenses to increase as we hire additional employees to expand our sales force and to support our marketing initiatives, and to decline as a percentage of revenue over time.

                            Three Months                  Six Months Ended
                           Ended June 30,        %            June 30,           %
                           2013       2012     Change     2013        2012     Change
                          ($ in thousands)                ($ in thousands)
Sales and marketing     $   10,893   $ 7,958   36.9%    $  21,110   $ 15,060   40.2%
Percentage of revenue         31.7 %    31.6 %               34.6 %     33.3 %

In the three months ended June 30, 2013, sales and marketing expenses increased $2.9 million, or 36.9%, compared to the three months ended June 30, 2012. The increase was primarily attributable to an increase in headcount-related expenses of $1.8 million as we expanded our sales organization. As a result of our efforts to increase market awareness of our solutions, our general marketing expenses increased $0.6 million. Allocated facilities expenses, including depreciation expense, increased $0.4 million, reflecting our increased investment in infrastructure.

In the six months ended June 30, 2013, sales and marketing expenses increased $6.1 million, or 40.2%, compared to the six months ended June 30, 2012. The increase was primarily attributable to an increase in headcount-related expenses of $3.0 million as we expanded our sales organization. As a result of our efforts to increase market awareness of our solutions, our general marketing expenses increased $1.5 million and travel and entertainment increased $0.3 million. Additionally, as a result of our increase in revenue and increase in sales and marketing headcount, our commission expenses increased $0.2 million and recruiting expense increased $0.2 million. Allocated facilities expenses, including depreciation expense, increased $0.8 million, reflecting our increased investment in infrastructure.

Research and Development

We engage in research and development efforts to create new, and enhance our existing, data-science capabilities and proprietary technologies. Our research and development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product management and information technology personnel. Research and development expenses also include outside services and consulting, allocated depreciation, facilities and other overhead costs. We capitalize a portion of our research and development costs attributable to internally developed software. We expect our research and development expenses to increase in the near term as we continue to enhance our existing, data-science capabilities and proprietary technologies.

                               Three Months                  Six Months Ended
                              Ended June 30,        %            June 30,           %
                              2013        2012    Change      2013       2012     Change
                             ($ in thousands)                ($ in thousands)
Research and development   $      917    $  523   75.3%    $    1,917   $ 1,175   63.1%
Percentage of revenue             2.7 %     2.1 %                 3.1 %     2.6 %

In the three months ended June 30, 2013, research and development expenses increased $0.4 million, or 75.3%, compared to the three months ended June 30, 2012. The increase was attributable to an increase in headcount-related expenses of $0.2 million, including an increase in stock-based compensation expense of $0.1 million, as we further invested in our research and development capabilities in the United States and Chennai, India. In addition, allocated facilities expenses, including depreciation expense, increased $0.2 million, reflecting our increased investment in infrastructure.


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In the six months ended June 30, 2013, research and development expenses increased $0.7 million, or 63.1%, compared to the six months ended June 30, 2012. The increase was attributable to an increase in headcount-related expenses of $0.4 million, including an increase in stock-based compensation expense of $0.1 million, as we further invested in our research and development capabilities in the United States and Chennai, India. In addition, allocated facilities expenses, including depreciation expense, increased $0.3 million, reflecting our increased investment in infrastructure.

General and Administrative

Our general and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, user operations, legal, human resources and other administrative employees. In addition, general and administrative expenses include outside consulting, legal and accounting services, and facilities and other supporting overhead costs not allocated to other departments. We expect that our general and administrative expenses will increase on an absolute basis but not necessarily increase as a percentage of revenue in the near term, as we continue to expand our business and incur additional expenses associated with being a publicly traded company.

                                 Three Months                  Six Months Ended
                                Ended June 30,        %            June 30,           %
                                2013       2012     Change      2013       2012     Change
                               ($ in thousands)                ($ in thousands)
General and administrative   $    4,730   $ 2,747   72.2%    $    8,668   $ 5,096   70.1%
Percentage of net revenue          13.8 %    10.9 %                14.2 %    11.3 %

In the three months ended June 30, 2013, general and administrative expenses increased $2.0 million, or 72.2%, compared to the three months ended June 30, 2012. The increase was attributable to an increase in outside services expense of $1.8 million as we invested in infrastructure to prepare for the growth of the business. In addition, there was an increase in headcount-related expenses of $0.6 million, including an increase in stock-based compensation expense of $0.1 million, as we continued to invest in key accounting, finance, legal and management positions within the organization. Furthermore, bad debt expense increased $0.2 million to provide for potential issues with collectability as we expand our customer base, particularly internationally. Additionally, in the three months ended June 30, 2013, we expensed $0.2 million of IPO related costs that had been capitalized incorrectly during the three months ended March 31, 2013. These increases were partially offset by higher allocated facilities costs to other departments of $0.4 million as well as $0.3 million decrease in acquisition earn out expenses relating to the Appealing Media acquisition in 2011.

In the six months ended June 30, 2013, general and administrative expenses increased $3.6 million, or 70.1%, compared to the six months ended June 30, 2012. This increase was attributable to an increase in outside services expense of $3.2 million as we invested in infrastructure to prepare for the growth of the business. In addition, there was an increase in headcount-related expenses of $1.3 million, including an increase in stock-based compensation expense of $0.2 million, as we continued to invest in key accounting, finance, legal and management positions within the organization. Furthermore, bad debt expense increased $0.3 million to provide for potential issues with collectability as we expand our customer base, particularly internationally. The increases were partially offset by higher allocated facilities costs to other departments of $0.9 million as well as $0.6 million decrease in acquisition earn out expenses relating to the Appealing Media acquisition in 2011.

Interest and Other Expenses

Interest and other expenses consist primarily of the interest expense on our capital lease obligations and notes payable, interest income earned on our cash and cash equivalents, foreign exchange gains and losses, and the revaluation of our outstanding convertible preferred stock warrants (in thousands).

                                          Three Months Ended             Six Months Ended
                                               June 30,                      June 30,
                                         2013            2012           2013          2012
Interest expense                      $        13     $        31    $       32    $       65
Transaction gain (loss) on foreign
exchange                                      (10 )            10           162            11
Other non-operating income (loss),
net                                           144              (2 )         164            (3 )
Interest and other expenses           $       147     $        39    $      358    $       73


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In the three months ended June 30, 2013, interest and other expenses increased $0.1 million compared to the three months ended June 30, 2012. The increase reflects the revaluation of outstanding convertible preferred stock warrants offset in part by a decrease in interest expense as a result of principal payments on capital leases and notes payable.

In the six months ended June 30, 2013, interest and other expenses increased $0.3 million compared to the six months ended June 30, 2012. The increase reflects the higher losses on foreign currency transactions related to the India and European operations as well as the revaluation of outstanding convertible preferred stock warrants, offset in part by a decrease in interest expense as a result of principal payments on capital leases and notes payable.

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, deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and the realization of net operating loss carryforwards (in thousands).

Three Months Ended Six Months Ended June 30, June 30, 2013 2012 2013 2012 Income tax expense $ (68 ) $ (150 ) $ (99 ) $ (85 )

In the three months ended June 30, 2013, income tax expense primarily related to taxes due in foreign jurisdictions. In the three months ended June 30, 2012 we recorded deferred tax assets for the United Kingdom in the amount of $0.1 million, resulting in a tax benefit.

In the six months ended June 30, 2013, income tax expense primarily related to taxes due in foreign jurisdictions. In the six months ended June 30, 2012 we recorded deferred tax assets for the United Kingdom in the amount of $0.1 million, resulting in a tax expense.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income
(loss), adjusted to exclude expenses for: interest, income taxes, depreciation and amortization, and stock-based compensation. We believe that adjusted EBITDA provides useful information to investors in understanding and evaluating our . . .

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