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XOOM > SEC Filings for XOOM > Form 10-K on 21-Feb-2014All Recent SEC Filings

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Form 10-K for XOOM CORP


21-Feb-2014

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in "Risk Factors."

Xoom is a leader in the digital consumer-to-consumer international money transfer industry. Our customers use Xoom to send money to family and friends in 31 countries. Since January 1, 2009, our customers have used Xoom to send $11.9 billion, including $1.7 billion in 2011, $3.2 billion in 2012 and $5.5 billion in 2013. We believe we create significant value for our customers by providing a convenient, fast and cost-effective solution for international money transfers.

We believe our business model is characterized by sustainable revenue from a growing base of active customers, creating attractive per unit economics and operating leverage. We expect to continue to grow this customer base through increased marketing investment.

Although we are not a traditional subscription business, we operate our business and forecast our revenue similar to a subscription-based business model. This similarity is demonstrated by the predictable and recurring revenue from our active customers. The following graph identifies the quarterly gross sending volume by the year in which we originally acquired the customer and demonstrates a meaningful amount of stable recurring sending volume from active customers (unaudited):

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On February 21, 2013, we completed our initial public offering, or IPO, whereby 7,273,750 shares of our common stock were sold to the public (inclusive of 948,750 shares of common stock sold by us pursuant to the full exercise of an overallotment option granted to the underwriters and 1,104,107 shares of common stock sold by selling stockholders) at a price of $16.00 per share. The aggregate net proceeds received by us from the offering were $88.4 million, net of underwriting discounts and commissions and offering expenses payable by us. Immediately prior to the completion of the IPO, all shares of our then-outstanding convertible preferred stock automatically converted into 21,444,251 shares of common stock.

On September 16, 2013, we closed a follow-on public offering whereby 5,063,760 shares of our common stock were sold to the public (inclusive of 660,490 shares of common stock sold by us pursuant to the full exercise of an overallotment option granted to the underwriters and 1,432,622 shares of common stock sold by selling stockholders) at a price of $30.50 per share. The aggregate net proceeds received by us from the follow-on offering were $104.8 million, net of underwriting discounts and commissions and offering expenses payable by us.

We did not receive any proceeds from the sale of shares by the selling stockholders in either offering.

Key Metrics

In addition to the line items in our consolidated financial statements, we regularly review the following key metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections, make strategic business decisions, and assess marketing program efficacy, market share trends and working capital needs. We believe information on these metrics is useful for investors to understand the underlying trends in our business. The following table presents our key operating and financial metrics for the years presented (unaudited):

                                                     Year Ended December 31,
                                              2013            2012             2011
  Gross Sending Volume (in thousands)      $ 5,544,755     $ 3,248,457      $ 1,706,659
  Transactions                               9,988,000       6,617,000        4,068,000
  Active Customers                           1,059,689         776,426          516,597
  New Customers                                481,110         405,304          291,532
  Cost Per Acquisition of a New Customer   $        43     $        44      $        38
  Adjusted EBITDA (in thousands)           $    14,378     $      (493 )    $    (2,532 )

Gross Sending Volume. We define gross sending volume, or GSV, as the total principal amount of funds sent by our customers in a given period, excluding our fees. A percentage of GSV does not ultimately get paid out to recipients due to customer cancellations, our risk management decisions and customer error. In the periods presented, this percentage has ranged from 2.75% to 3.25%. Our GSV increased 71% for 2013 compared to the prior year, 90% for 2012 and 99% for 2011. Some of our customers transact more depending on the value of the local currency relative to the U.S. dollar. For example, amongst our Indian customers, we saw an increase in activity in the three months ended June 30, 2013 and September 30, 2013 due to a weakening Indian Rupee and a decrease in activity in the three months ended December 31, 2013 due to a strengthening Indian Rupee.

Transactions. This represents the total number of transactions sent by our customers in a given period. A small percentage of transactions do not ultimately get paid out to recipients due to customer cancellations, our risk management decisions and customer error. Our transactions increased 51% for 2013 compared to the prior year, 63% for 2012 and 43% for 2011. The increase in GSV was higher than the increase in number of transactions due to changes in the mix of countries we serve toward those with a higher average transaction amount.


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Active Customers. We define active customers as the number of customers who have sent at least one transaction during a trailing twelve month period. A new customer with one transaction during a trailing twelve month period would also be included as an active customer in the same period. The number of active customers increased 36% for 2013 compared to the prior year, 50% for 2012 and 32% for 2011.

New Customers. We define new customers as those customers who have sent their first transaction in a given period. Our new customer growth increased by 19% for 2013 compared to the prior year, 39% for 2012 and 29% for 2011.

Cost Per Acquisition of a New Customer. We calculate cost per acquisition of a new customer, or CPA, in a reporting period as direct marketing cost, a portion of which is reflected in our cost of revenue, divided by new customers added in a given period. Our direct marketing cost does not include certain indirect marketing costs that are included in our marketing expense line item in our consolidated statements of operations. Examples of our indirect marketing costs include personnel-related costs, including stock-based compensation, and creative production costs.

Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss) adjusted for provision for income taxes, interest expense, interest income, depreciation and amortization and stock-based compensation. For a reconciliation of adjusted EBITDA to net income (loss) and an explanation of how management uses this metric, see "Selected Financial Data."

Basis of Presentation

Revenue. We generate revenue from transaction fees charged to customers, and foreign exchange spreads on transactions where the payout currency is other than U.S. dollars. Our revenue is derived from each transaction and may vary based on the size of the transaction, the funding method used, the currency to ultimately be disbursed and the country to which the funds are transferred. Revenue is recognized when we accept the transaction for processing, net of cancellations and refunds. Revenue growth will depend on our ability to retain active customers and attract new customers.

Cost of Revenue. Our cost of revenue includes fees to our disbursement partners for paying funds to the recipient, fees to our payment processors for funding our transactions, a provision for transaction losses and the promotional expenses to acquire new customers that are referees described below under "-Marketing Expense." We expect our cost of revenue to increase on an absolute basis for the foreseeable future as we continue to grow our business.

Marketing Expense. Our marketing expense consists of business development costs, television, out-of-home, print, online and promotional advertising costs to acquire new customers, employee compensation and related costs to support the marketing process and allocated facilities and other supporting overhead costs. During 2011, we introduced a Refer-A-Friend incentive program where the referrer receives either a cash-type or non-cash award and the referee receives a non-cash award. Cash-type awards are considered to be cash-type because the referrer could use them as cash. The amount related to the referee is classified as cost of revenue for non-cash awards. Awards provided to the referrer are recorded in marketing expense as these payments are a reward for bringing a new customer to Xoom. We anticipate our marketing expense will vary from period to period due to the timing of when such programs occur.

Technology and Development Expense. Our technology and development expense consists of employee compensation and related costs for our engineers and developers, professional services and consulting, costs related to the development of new technologies, costs associated with the enhancements of existing technologies, amortization of capitalized internally-developed software and allocated facilities and other supporting overhead costs.
Internally-developed software costs are a combination of internal compensation costs of engineering time and costs of outside consultants and primarily relate to the development of specific enhancements such as the


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development of our mobile application. We intend to continue to invest in technology and development efforts to further improve our customer experience and to continue expanding our operating platform. As a result, we expect technology and development expense to increase on an absolute basis for the foreseeable future.

Customer Service and Operations Expense. Our customer service and operations expense consists of outsourced customer call centers, employee compensation for our employees who support customer service calls, costs incurred for fraud detection, compliance operations, maintenance costs related to our outsourced customer call centers and allocated facilities and other supporting overhead costs. We expect customer service and operations expense to increase on an absolute basis for the foreseeable future to support the anticipated growth of our business.

General and Administrative Expense. Our general and administrative expense consists of employee compensation and related costs for our executives, finance, legal, compliance policy, human resources and other administrative employees, outside consulting, legal and accounting services and facilities and other supporting overhead costs not allocated to other departments. We expect to incur additional expenses associated with being a public company and to support our continuing growth, including increased legal and accounting costs and compliance costs in connection with the Sarbanes-Oxley Act.

Interest Expense. Interest expense represents interest incurred in connection with our line of credit and amortization of commitment and arrangement fees.

Interest Income. Interest income represents interest earned on our cash and cash equivalents and short-term investments.

Other Income (Expense). Other income (expense) consists of gains and/or losses on foreign currency balances due to fluctuations in exchange rates between the initiation of a transaction and the settlement of the transaction (usually a period of no longer than 24 hours).

Provision for Income Taxes. Provision for income taxes consists of state income taxes in the United States. We have not been required to pay U.S. federal income taxes to date because of our current and accumulated net operating losses which totaled $70.4 million as of December 31, 2013. Since inception, we have only been required to pay minimal state income taxes. For 2013, tax expense was $37,000, which consisted of U.S. state income taxes. As we expand our operations outside the United States, we will become subject to foreign taxes and our effective tax rate could change accordingly.

Results of Operations

The following tables set forth our results of operations in dollars and as a percentage of revenue for the years presented. The year-to-year comparison of financial results is not necessarily indicative of future results.

                                                       Year Ended December 31,
                                                   2013          2012          2011
                                                            (in thousands)
   Consolidated Statements of Operations Data:
   Revenue                                       $ 122,206     $ 80,016      $ 50,020
   Cost of revenue                                  38,082       26,779        18,075

   Gross profit                                     84,124       53,237        31,945

   Marketing                                        25,926       21,496        14,314
   Technology and development                       22,451       15,950         9,431
   Customer service and operations                  13,552       10,964         7,321
   General and administrative                       13,145        9,135         4,957

   Total operating expense                          75,074       57,545        36,023

   Income (loss) from operations                     9,050       (4,308 )      (4,078 )


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                                                         Year Ended December 31,
                                                     2013          2012          2011
                                                              (in thousands)
 Other income (expense):
 Interest expense                                    (1,837 )      (1,504 )        (370 )
 Interest income                                        203            85            29
 Other income (expense)                              (1,051 )        (125 )          49

 Income (loss) before provision for income taxes      6,365        (5,852 )      (4,370 )
 Provision for income taxes                              37             2             2

 Net income (loss)                                 $  6,328      $ (5,854 )    $ (4,372 )

                                                         Year Ended December 31,
                                                      2013          2012        2011
   Consolidated Statements of Operations Data:(1)
   Revenue                                               100 %        100 %       100 %
   Cost of revenue                                        31           33          36

   Gross profit                                           69           67          64

   Marketing                                              21           27          29
   Technology and development                             18           20          19
   Customer service and operations                        11           14          15
   General and administrative                             11           11          10

   Total operating expense                                61           72          72

   Income (loss) from operations                           7           (5 )        (8 )
   Other income (expense):
   Interest expense                                       (2 )         (2 )        (1 )
   Interest income                                         -            -           -
   Other income (expense)                                 (1 )          -           -

   Income (loss) before provision for income taxes         5           (7 )        (9 )
   Provision for income taxes                              -            -           -

   Net income (loss)                                       5 %         (7 )%       (9 )%

(1) Certain items may not foot due to rounding.

Revenue



                       Year Ended December 31,           2013 to 2012       2012 to 2011
                   2013          2012         2011         % Change           % Change
                           (in thousands)


Revenue $ 122,206 $ 80,016 $ 50,020 53 % 60 %

2013 Compared to 2012. Revenue increased $42.2 million, or 53%, in 2013 as compared to 2012. The increase was primarily due to a 36% increase in active customers, which included 481,110 new customers added during 2013. Revenue grew at a faster rate than the increase in our active customers because the annual revenue per average active customer increased from $124 in 2012 to $133 in 2013, or 8%. This increase was due to changes in the mix of countries we serve toward those with a higher average transaction amount.

2012 Compared to 2011. Revenue increased $30.0 million, or 60%, in 2012 as compared to 2011. The increase was primarily due to a 50% increase in active customers, which included 405,304 new customers added during 2012. Revenue grew at a faster rate than the increase in our active customers because the annual revenue


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per average active customer increased from $110 in 2011 to $124 in 2012, or 13%. This increase was due to changes in the mix of countries we serve toward those with a higher average transaction amount.

Cost of Revenue



                                           Year Ended December 31,                 2013 to 2012         2012 to 2011
                                     2013            2012            2011            % Change             % Change
                                            (dollars in thousands)
Cost of revenue                    $ 38,082        $ 26,779        $ 18,075                   42 %                 48 %

Percentage of revenue 31 % 33 % 36 %

2013 Compared to 2012. Cost of revenue increased $11.3 million, or 42%, in 2013 as compared to 2012. The increase in cost of revenue was driven by a $6.4 million increase to $22.7 million in processing and disbursement costs to support the 51% increase in transactions and a $5.9 million increase to $13.6 million in transaction losses due to the increase in our GSV. This was partially offset by a decrease of $0.9 million in costs related to Refer-A-Friend and other incentive programs. The decrease in cost of revenue as a percentage of revenue and corresponding increase in gross profit for 2013 was primarily a result of a reduction in Refer-A-Friend costs due to a reduction in the reward amount per new user and a result of a reduction in disbursement costs per transaction due to changes in the mix of countries we serve toward those with lower disbursement costs per transaction.

2012 Compared to 2011. Cost of revenue increased $8.7 million, or 48%, in 2012 as compared to 2011. The increase in cost of revenue was driven by a $4.4 million increase to $16.3 million in processing and disbursement costs to support the 63% increase in transactions, a $2.3 million increase to $7.7 million in transaction losses due to the increase in our GSV and an additional $1.8 million in costs related to the Refer-A-Friend and other incentive programs. The decrease in cost of revenue as a percentage of revenue and corresponding increase in gross profit for 2012 was primarily a result of a reduction in processing costs due to more active customers funding their money transfers via bank account, which is less costly to us than if they fund via credit or debit card. Further, we experienced a reduction in our processing costs per transaction as a result of the Durbin Amendment to the Dodd-Frank Act, which resulted in lower debit card fees beginning in the fourth quarter of 2011.

Marketing Expense



                                           Year Ended December 31,                 2013 to 2012         2012 to 2011
                                     2013            2012            2011            % Change             % Change
                                            (dollars in thousands)
Marketing                          $ 25,926        $ 21,496        $ 14,314                   21 %                 50 %

Percentage of revenue 21 % 27 % 29 %

2013 Compared to 2012. Marketing expense increased $4.4 million, or 21%, in 2013 as compared to 2012. The increase was primarily due to an expansion of our marketing programs to drive increased customer acquisition, including increasing television, out-of-home, online and incentive promotions by $3.5 million to $21.4 million during 2013. In addition, there was an increase of $0.6 million in personnel-related costs (including stock-based compensation). As a percentage of revenue, marketing expense fluctuates from period to period due to the timing of marketing programs and incentive programs to acquire new customers.

2012 Compared to 2011. Marketing expense increased $7.2 million, or 50%, in 2012 as compared to 2011. The increase was primarily due to an increase in our marketing programs to drive increased customer acquisition, including television, online and incentive promotions of $6.3 million to $17.9 million in 2012. Our


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Refer-A-Friend incentive program contributed $2.0 million of this $6.3 million increase. As stated in "-Cost of Revenue" above, marketing expenses in this line item do not reflect certain marketing expenses related to our Refer-A-Friend incentive program that we recognize under cost of revenue. The remaining increase was due to personnel-related costs (including stock-based compensation).

Technology and Development Expense



                                           Year Ended December 31,                2013 to 2012         2012 to 2011
                                     2013            2012           2011            % Change             % Change
                                           (dollars in thousands)
Technology and development         $ 22,451        $ 15,950        $ 9,431                   41 %                 69 %

Percentage of revenue 18 % 20 % 19 %

2013 Compared to 2012. Technology and development expense increased $6.5 million, or 41%, in 2013 as compared to 2012. The increase was primarily the result of an increase in personnel-related costs of $4.3 million to $17.2 million (including stock-based compensation) due to an increase in headcount to expand and improve our service. The remaining increase was due to an increase in facilities, information technology and other infrastructure costs of $0.9 million, an increase in depreciation and amortization expense of $0.7 million due to various software projects that were put into service in 2013, including mobile app and text messaging, and an increase in allocated insurance costs of $0.3 million.

2012 Compared to 2011. Technology and development expense increased $6.5 million, or 69%, in 2012 as compared to 2011. The increase was primarily the result of an increase in personnel-related costs of $5.0 million to $12.9 million (including stock-based compensation) due to an increase in headcount to expand and improve our service. The remaining increase was due to an increase in depreciation and amortization expense of $0.5 million, an increase in the investment of additional technology infrastructure of $0.5 million and an increase in allocated overhead costs.

Customer Service and Operations Expense



                                            Year Ended December 31,                2013 to 2012         2012 to 2011
                                      2013            2012           2011            % Change             % Change
                                            (dollars in thousands)
Customer service and operations     $ 13,552        $ 10,964        $ 7,321                   24 %                 50 %

Percentage of revenue 11 % 14 % 15 %

2013 Compared to 2012. Customer service and operations expense increased $2.6 million, or 24%, in 2013 as compared to 2012. The increase was primarily due to an increase in the volume of transactions we processed, resulting in an increase in costs of $1.8 million to $8.7 million associated with our outsourced customer call centers (including communication and software costs), $0.4 million in personnel-related costs (including stock-based compensation) and $0.3 million in customer verification costs.

2012 Compared to 2011. Customer service and operations expense increased $3.6 million, or 50%, in 2012 as compared to 2011. The increase was primarily due to an increase in the volume of transactions we processed, resulting in higher costs of $2.5 million to $6.1 million associated with our outsourced customer call centers and personnel-related costs of $0.8 million to $3.0 million (including stock-based compensation) due to an increase in headcount.


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General and Administrative Expense



                                           Year Ended December 31,                2013 to 2012         2012 to 2011
                                      2013           2012           2011            % Change             % Change
                                            (dollars in thousands)
General and administrative          $ 13,145        $ 9,135        $ 4,957                   44 %                 84 %
Percentage of revenue                     11 %           11 %           10 %

2013 Compared to 2012. General and administrative expense increased $4.0 million, or 44%, in 2013 as compared to 2012. The increase was primarily the result of an increase in personnel-related costs of $2.8 million to $8.3 million (including stock-based compensation) due to an increase in headcount to support our overall growth, and an increase in consulting, professional services and public company costs of $0.6 million. The remaining $0.6 million increase was due to an increase in facilities, allocated insurance costs, information technology and other infrastructure costs.

2012 Compared to 2011. General and administrative expense increased $4.2 million, or 84%, in 2012 as compared to 2011. The increase was primarily the result of an increase in personnel-related costs of $2.4 million to $5.5 million . . .

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