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VOCS > SEC Filings for VOCS > Form 10-K on 7-Mar-2014All Recent SEC Filings

Show all filings for VOCUS, INC.

Form 10-K for VOCUS, INC.


7-Mar-2014

Annual Report


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report. In addition to historical consolidated financial information, 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 report, particularly in "Risk Factors" in Item 1A.


Overview

We are a leading provider of cloud marketing and public relations software that enables businesses to acquire and retain customers. We offer products and services to help customers attract and engage prospects, capture and keep customers and measure and improve marketing effectiveness. Our cloud marketing solutions addresses key areas of digital marketing, including social media marketing, search marketing and news distribution, email marketing and publicity. Our sales organization is focused on adding new customers, renewing customer subscriptions and expanding relationships with existing customers. We deliver our solutions over the Internet using a secure, scalable application and system architecture that allows our customers to quickly deploy and adopt our software.

As of December 31, 2013, we had 16,854 active subscription customers who purchased our products and services. These customers represent a wide variety of industries, including financial and insurance, technology, healthcare and pharmaceutical and retail and consumer products, as well as government agencies, not-for-profit organizations and educational institutions. We define active subscription customers as unique customer accounts that have an annual active subscription and have not been suspended for non-payment.

We plan to continue to expand our cloud marketing suite, provide additional consulting services as part of our subscriptions, expand our marketing activities to continue to increase brand awareness and increase the presence of our cloud marketing solutions with mid-sized organizations.

Acquisitions

iContact

On February 24, 2012, we acquired all of the outstanding shares of iContact Corporation (iContact), a provider of cloud-based email and social marketing software that enables organizations to create and publish professional-quality emails to engage, educate and retain customers. The acquisition provided an email capability component to our cloud marketing suite. The purchase price consisted of approximately $89.8 million of cash, a promissory note in the amount of $669,000, 406,554 shares of our common stock with a deemed value at issuance of approximately $9.1 million and 1.0 million shares of our newly-created Series A convertible preferred stock, with a deemed value at issuance of $77.5 million, aggregating approximately $167.1 million of total consideration, net of $10.0 million cash acquired. The acquisition was accounted for under the purchase method of accounting. Our consolidated financial statements include the operating results of iContact from the acquisition date. We incurred acquisition-related transaction costs of $2.9 million and paid severance costs of $2.1 million for the year ended December 31, 2012. We recorded $5.6 million of net tangible assets, $32.6 million of identifiable intangible assets and $138.9 million of goodwill which is not deductible for tax purposes.

North Social

On February 24, 2011, we acquired substantially all of the assets and assumed certain liabilities of North Venture Partners, LLC (North Social), a provider of Facebook applications that enable users to create, manage and promote their business on Facebook. The acquisition broadened our social media solution. The purchase price at the acquisition date consisted of approximately $7.0 million of cash paid at closing and $5.1 million of contingent consideration for the achievement of certain financial milestones within the following 24 months. The contingent consideration could have resulted in additional payments of up to $15.0 million. We recorded $101,000 of identifiable intangible assets, $11.9 million of goodwill which is deductible for tax purposes and $78,000 of other net tangible assets. Acquisition-related costs incurred for the acquisition were not material.

The fair value of the contingent consideration liability was estimated based on a discounted probability-weighted income approach derived from revenue and earnings estimates and a probability assessment with respect to the likelihood of achieving the milestone criteria. Increases or decreases in the probability of achievement of these certain financial and performance milestones resulted in changes to the estimated fair value. The additional expense of $1.9 million, $1.2 million and $3.5 million was included in general and administrative expenses in the consolidated statements of operations for the years ended December 31, 2011, 2012 and 2013, respectively. During 2013, the fair value of the contingent consideration was adjusted based on the final earn-out calculations which were impacted by higher revenues in the first quarter of 2013 resulting from the increase in the number of North Social subscription customers due to additional marketing efforts near the conclusion of the earn-out period. The remaining liability for contingent consideration was paid in the second quarter of 2013.

On February 4, 2014, we announced the discontinuance of the North Social platform as it does not align with our current strategic direction. We are in the process of evaluating the impact to our consolidated financial statements.

For more information, please refer to Note 3, Business Combinations of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.

Sources of Revenues

We derive our revenues from subscription agreements and related services and from news distribution services. Our subscription agreements are primarily for our marketing and public relations suites and iContact products. The subscription agreements contain multiple service elements and deliverables, which generally include use of our cloud-based software, news distribution services, hosting services, content and content updates and customer support and may also include implementation and training services. The typical term of our subscription agreements of our marketing and public relations suites are one year; however, our customers may purchase subscriptions with multi-year terms. The typical term of our subscription agreements of our iContact products are monthly; however, our customers may purchase


subscriptions with varying terms. We separately invoice our customers in advance of their subscription, with payment terms that generally require our customers to pay us within 30 days of invoice. Our subscription agreements typically are non-cancelable, though customers have the right to terminate their agreements for cause if we materially breach our obligations under the agreement. Our subscription agreements may include amounts that are not yet contractually billable to customers, and any such unbilled amounts are not recorded in deferred revenue until invoiced.

Additionally, we derive revenue on a per-transaction basis from our PRWeb news distribution services. We generally receive payment in advance of the online distribution of the news release.

Professional services revenue consists primarily of data migration, custom development and training. Our professional service engagements are billed on a fixed fee basis with payment terms requiring our customers to pay us generally within 30 days of invoice.

Cost of Revenues and Operating Expenses

Cost of Revenues. Cost of revenues consists primarily of compensation for training, editorial and support personnel, hosting infrastructure, press release distribution costs, acquisition, maintenance and amortization of the information database, amortization of purchased technology from business combinations, amortization of capitalized software development costs, depreciation associated with computer equipment and software and allocated overhead. We allocate overhead expenses such as employee benefits, computer and office supplies, management information systems and depreciation for computer equipment based on headcount. As a result, indirect overhead expenses are included in cost of revenues and each operating expense category.

We believe content is an integral part of our solution and provides our customers with access to broad, current and relevant information critical to their marketing efforts. We expect to continue to make investments in both our own content as well as content acquired from third-parties and to continue to enhance our proprietary information database and enhance our news monitoring and social media monitoring services. We expect in 2014, cost of revenues will increase in absolute dollars and as a percentage of revenues.

Sales and Marketing. Sales and marketing expenses are our largest operating expense. Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, sales commissions and incentives, marketing programs, including lead generation, promotional events, webinars and other brand building expenses and allocated overhead. We expense our sales commissions at the time a subscription agreement is executed by the customer, and we recognize substantially all of our revenues ratably over the term of the corresponding subscription agreement. As a result, we incur sales expense before the recognition of the related revenues. We expect in 2014, sales and marketing expenses will decrease in absolute dollars and as a percentage of revenues.

Research and Development. Research and development expenses consist primarily of compensation for our software application development personnel and allocated overhead. We have historically focused our research and development efforts on increasing the functionality and enhancing the ease of use of our cloud-based software. Because of our hosted solutions, we are able to provide our customers with a single, shared version of our most recent application, which enables us to have relatively low expenses as compared to traditional enterprise software business models. We expect that in 2014, research and development expenses will remain flat in absolute dollars and as a percentage of revenues.

General and Administrative. General and administrative expenses consist of compensation and related expenses for executive, finance, legal, human resources and administrative personnel, as well as fees for legal, accounting and other consulting services, including acquisition-related expenses, third-party payment processing and credit card fees, facilities rent, other corporate expenses, fair value adjustments to contingent consideration and allocated overhead. We expect that in 2014, general and administrative expenses will decrease in absolute dollars and as a percentage of revenues.

Amortization of Intangible Assets. Amortized intangible assets consist of customer relationships and trade names acquired in business combinations.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and include the accounts of Vocus, Inc. and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to the allowance for doubtful accounts, software development costs, useful lives of property, equipment and software, intangible assets and goodwill, contingent liabilities, self-insurance, revenue recognition, fair value of stock-based awards and income taxes, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates.


We believe that of our significant accounting policies, which are described in Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K, the following accounting policies involve a greater degree of judgment or complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition. We recognize revenues when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. We allocate consideration to each deliverable in our multiple element arrangements based on the relative selling prices and recognize revenue as the respective services are delivered or performed.

Our separate units of accounting consist of subscription services, news distribution services and professional services. Our subscription agreements generally include the use of our cloud-based software, hosting services, content and content updates and customer support. Our subscription agreements typically are non-cancelable, though customers have the right to terminate their agreements for cause if we materially breach our obligations under the agreement. Our subscription agreements do not provide customers the right to take possession of the software at any time.

We also distribute individual news releases to the Internet which are indexed by major search engines and distributed directly to various news sites, journalists and other key constituents. We recognize revenue on a per-transaction basis when the press releases are made available to the public.

Our professional services consist primarily of data migration, custom development and training. Our cloud-based software does not require significant modification and customization services.

We established vendor-specific objective evidence (VSOE) of selling price for certain of our news distribution services as the selling price for a substantial majority of stand-alone sales falls within a narrow range around the median selling price. We determined third-party evidence (TPE) of selling price is not available for any of our services due to differences in the features and functionality compared to competitor's products. Therefore, we use the estimated selling prices (ESP) for the remaining deliverables by analyzing multiple factors such as historical pricing trends, discounting practices, gross margin objectives and other market conditions.

Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenues.

Sales Commissions. Sales commissions are expensed when a subscription agreement is executed by the customer. As a result, we incur sales expense before the recognition of the related revenues.

Stock-Based Compensation. We recognize compensation expense for equity awards based on the fair value of the award and on a straight-line basis over the requisite service period of the award based on the estimated portion of the award that is expected to vest. We apply estimated forfeiture rates based on analyses of historical data, including termination patterns and other factors. We use the quoted closing market price of our common stock on the grant date to measure the fair value of our restricted stock awards. We use the Black-Scholes option pricing model to measure the fair value of our option awards. We use the daily historical volatility of our stock price over the expected life of the options to calculate the expected volatility. The expected term of option awards is determined using a combination of historical exercise data with expected future exercise patterns using the average midpoint between vesting and the contractual term for outstanding awards. The risk-free interest rate is based on the rate on U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. We have not paid dividends and do not anticipate paying a cash dividend in the foreseeable future and, accordingly, use an expected dividend yield of zero.

Self-Insurance. In 2011, we enrolled in a self-insured plan for a majority of our U.S. employee health insurance costs, including claims filed and claims incurred but not reported (IBNR) subject to certain stop loss provisions. We estimate the liability based upon management's judgment, historical data and the assistance of third-party actuaries in determining an adequate liability for self-insurance claims. Our IBNR accrual and expenses may fluctuate due to the number of plan participants, claims activity and deductible limits.

Business Combinations. We have completed acquisitions of businesses that have resulted in the recording of goodwill and identifiable definite-lived intangible assets. Definite-lived intangible assets consist of acquired customer relationships, trade names and purchased technology. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives ranging from two to seven years. We recognize all of the assets acquired, liabilities assumed and contingent consideration at their fair values on the acquisition date. Acquisition-related costs are recognized separately from the acquisition and expensed as incurred in general and administrative expenses in the consolidated statements of operations. Accounting for these acquisitions requires us to make determinations about the fair value of assets acquired, useful lives for definite-lived tangible and intangible assets, and liabilities assumed that involve estimates and judgments.

Goodwill and Long-Lived Assets. Goodwill represents the excess of the cost of an acquired entity over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment at least annually. We perform our annual impairment assessment on November 1, or whenever events or circumstances indicate impairment may have occurred. We operate under one reporting unit, and as a result, evaluate goodwill impairment based on our fair value as a whole. When assessing goodwill for impairment, we use an income approach based on discounted cash flows to determine the fair value of our reporting unit. Our cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors which are consistent with the plans used to manage our operations. Based on the results of our most recent annual assessment performed on November 1, 2013, we concluded that the fair value of our reporting unit exceeded its carrying amount.


We also review the carrying amount of our reporting unit to its fair value based on quoted market prices of our common stock, or market capitalization. Our market capitalization exceeded our carrying amount on November 1, 2013. No events or circumstances occurred from the date of the assessments through December 31, 2013 that would impact our conclusions.

We assess impairment of definite-lived intangible and other long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may no longer be fully recoverable. We determine the impairment, if any, by comparing the carrying value of the assets to future undiscounted net cash flows expected to be generated by the related assets. An impairment charge is recognized to the extent the carrying value exceeds the estimated fair value of the assets. Impairment charges for long-lived assets for the year ended December 31, 2011, 2012 and 2013 were $100,000, $709,000 and $301,000, respectively.

Income taxes. We use the asset and liability method whereby deferred tax assets and liabilities are recognized for deductible temporary differences between the respective reported amounts and tax bases of assets and liabilities, as well as for operating losses and tax-credit carryforwards. Net deferred tax assets are reduced by the valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

In 2011, based on operating results and our projections of future losses, we established a full valuation allowance on our U.S. federal and state net deferred tax assets as we concluded that it is more likely than not that we will not realize the benefits of our deferred tax assets. We have historically maintained a full valuation allowance on net deferred tax assets of certain of our foreign subsidiaries because we determined that it is more likely than not that we will not realize the benefits of our foreign deferred tax assets.

Our estimates related to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If we determine it is more likely than not that a tax position will be sustained based on its technical merits, we record the impact of the position in our consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. Our estimates are updated at each reporting date based on the facts, circumstances and information available. We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits will occur during the next twelve months. We file income tax returns in U.S. federal jurisdictions and various state and foreign jurisdictions and are subject to U.S. federal, state, and foreign tax examinations for years ranging from 2003 to 2013.

Results of Operations

The following tables set forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenues.

                                                      Year Ended December 31,
                                                   2011           2012       2013
       Revenues                                       100 %         100 %      100 %
       Cost of revenues                                19            20         20

       Gross profit                                    81            80         80
       Operating expenses:
       Sales and marketing                             50            57         59
       Research and development                         7             8          6
       General and administrative                      26            24         22
       Amortization of intangible assets                2             4          4

       Total operating expenses                        85            93         91
       Loss from operations                            (4 )         (13 )      (11 )
       Interest and other income (expense), net        -             -          -

       Loss before provision for income taxes          (4 )         (13 )      (11 )
       Provision for income taxes                       9             1          1

       Net loss                                       (13 )%        (14 )%     (12 )%

Years Ended December 31, 2013 and 2012

Revenues. Revenues for 2013 were $186.9 million, an increase of $16.1 million, or 9%, over revenues of $170.8 million for 2012. Revenue for our marketing suite product increased $12.7 million from $4.5 million for the year ended December 31, 2012 to $17.2 million for the year ended December 31, 2013. In 2014, we anticipate revenues related to our marketing suite product will grow as a percentage of total revenues due to our continued emphasis on the product. Total active subscription customers increased to 16,854 as of December 31, 2013 from 16,494 as of December 31, 2012. The increase in active subscription customers was the result of additional sales and marketing personnel focused on acquiring new customers and renewing existing customers. Additionally, revenue for iContact increased $5.1 million from $41.4 million for the year ended December 31, 2012 to $46.5 million for the year ended December 31, 2013. iContact revenues for the year ended December 31, 2012 included operations from iContact subsequent to the acquisition in February 2012 as compared to revenues for the year ended December 31, 2013 which included a full year of operations. Total deferred revenue at December 31, 2013 was $84.5 million, representing an increase of $5.2 million, or 7%, over total deferred revenue of $79.3 million at December 31, 2012.


Cost of Revenues. Cost of revenues for 2013 was $38.2 million, an increase of $4.5 million, or 13%, over cost of revenues of $33.7 million for 2012. The increase in cost of revenues was primarily due to increases of $3.7 million in employee-related costs from additional personnel, $926,000 in third-party license and royalty fees for content, $352,000 in amortization of technology primarily from our acquisition of iContact and $363,000 in equipment maintenance and software support costs, offset by a decrease of $851,000 in contracted labor costs. Cost of revenues for the year ended December 31, 2012 included costs from iContact subsequent to the acquisition in February 2012 as compared to a full year of costs for the year ended December 31, 2013. We had 396 full-time employee equivalents in our professional and other support services group at December 31, 2013, compared to 298 full-time employee equivalents at December 31, 2012.

Sales and Marketing Expenses. Sales and marketing expenses for 2013 were $109.8 million, an increase of $11.9 million, or 12%, over sales and marketing expenses of $97.9 million for 2012. The increase was primarily due to an increase of $9.1 million in employee related costs from additional sales personnel hired throughout the year, $2.1 million in sales commissions and incentive compensation and $1.5 million in professional fees, offset by a decrease in stock-based compensation of $1.1 million and $691,000 of severance for iContact personnel incurred in 2012. Sales and marketing expenses for the year ended December 31, 2012 included costs from iContact subsequent to the acquisition in February 2012 as compared to a full year of costs for the year ended December 31, 2013. We had 784 full-time sales and marketing employee equivalents at December 31, 2013, compared to 789 full-time employee equivalents at December 31, 2012.

Research and Development Expenses. Research and development expenses for 2013 were $10.6 million, a decrease of $2.7 million, or 20%, compared to research and development expenses of $13.3 million for 2012. The decrease in research and development was primarily due to a decrease of $619,000 in employee-related costs primarily due to turnover in personnel as a result of the acquisition of iContact, $637,000 of severance for iContact personnel incurred in 2012 and $713,000 in stock-based compensation. For the years ended 2013 and 2012, we capitalized $802,000 and $175,000, respectively, of research and development employee-related costs for internally developed software. Research and development expenses for the year ended December 31, 2012 included costs from iContact subsequent to the acquisition in February 2012 as compared to a full year of costs for the year ended December 31, 2013. We had 66 full-time employee equivalents in research and development at December 31, 2013, compared to 63 full-time employee equivalents at December 31, 2012.

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