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XOOM > SEC Filings for XOOM > Form 10-Q on 29-Jul-2014All Recent SEC Filings

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Form 10-Q for XOOM CORP


29-Jul-2014

Quarterly Report


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

The following discussion and analysis is intended to provide greater details of our results of operations and financial condition and should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this document. Certain statements in this Quarterly Report constitute forward-looking statements and as such, involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectation of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements related to our ability to forecast demand for our services; statements related to competition; factors that may affect our operating results and business; statements related to security of our product offerings and customer information; statements related to enhancements of existing services and our growth; our anticipated cash needs and our estimates regarding our operating and capital requirements and our needs for additional financing; our disclosure controls and procedures; statements related to intellectual property; statements related to legal proceedings; statements related to recruiting and retaining employees; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends; statements related to our and our disbursement partners' ability to comply with current and future regulations; statements related to our stock; and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as "anticipate", "believe", "continue", "could", "estimate", "expect", "intend", "may", "plan" or "will" and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other 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 discussed in the section titled "Risk Factors" included in Item 1A of Part II of this Quarterly Report on Form 10-Q, and the risks discussed in our Annual Report and other filings with the SEC. We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. These statements are based on the beliefs and assumptions of our management based on information currently available to management. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

Overview

We are a leader in the digital consumer-to-consumer international money transfer industry. Our customers use Xoom to send money to family and friends in 30 countries. Since January 1, 2009, our customers have used Xoom to send $15.3 billion, including $3.4 billion for the six months ended June 30, 2014. We believe we are creating significant value for our customers by providing a convenient, fast and cost-effective solution for international money transfers.

Our solutions are built on our proprietary technology which, combined with our risk management capabilities and global disbursement partner network, constitute our operating platform. Our technology enables easy-to-use online and mobile sender interfaces, effective risk management and seamless integration with our disbursement partners' systems.

We believe our business model is characterized by predictable and recurring revenue from our large and growing base of new and repeat customers. Revenue from our repeat customers continued to be over 90% of our total revenue for the six months ended June 30, 2014. In the six months ended June 30, 2014, we experienced significant growth as compared to the same period in 2013 as our customer base expanded.


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Revenue increased from $57.8 million for the six months ended June 30, 2013 to $75.8 million for the six months ended June 30, 2014.

We launched our mobile strategy in November 2011 and continue to make product enhancements. We announced the release of the "Xoom App," our new mobile application, in English in June 2013 and in Spanish in July 2013. The Xoom App is simple to use and includes the ability for customers to send money to their family and friends in seconds with "one tap and one swipe" and track the status of their transactions. In January 2014, we launched sign-up functionality which allows new users to sign-up for a Xoom account on the Xoom App. In May 2014, we introduced a major upgrade to the Xoom App which now allows Xoom customers, including new users, to send money to both new recipients and existing recipients, from their mobile devices.

During the six months ended June 30, 2014, 47% of the total number of transactions was sent via mobile devices as compared to 29% in the same period in the prior year. During the six months ended June 30, 2014, more than $1.0 billion of our gross sending volume was sent from mobile devices which represented growth of approximately 119% compared to the same period in the prior year.

During the three months ended June 30, 2014, we expanded our partnership with Punjab National Bank to enhance our customer experience by offering instant bank deposit services to bank accounts in India using the Immediate Payment Service platform, which allows Xoom customers to send money instantly to many prominent banks in India.

Key Metrics

In addition to the line items in our 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 our 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 periods presented (unaudited):

                                              Three Months Ended June 30,        Six Months Ended June 30,
                                                 2014              2013            2014             2013
Gross Sending Volume (in thousands)         $    1,805,342     $ 1,606,584     $  3,382,033     $ 2,662,431
Transactions                                     3,192,199       2,582,000        6,088,838       4,621,000
Active Customers                                 1,195,425         919,610        1,195,425         919,610
New Customers                                      133,540         134,899          250,635         244,530
Cost Per Acquisition of a New Customer      $           50     $        44     $         53     $        42
Adjusted EBITDA (in thousands)              $        5,068     $     6,149     $      8,591     $     7,723

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, which does not include our fees. A percentage of GSV does not ultimately get paid out to recipients due to customer cancellations, our risk management decisions or customer error. In the periods presented, this percentage has ranged from 2.37% to 3.16%. Our GSV increased by 12% and 27% for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year. Some of our customers transact more depending on the value of the local currency relative to the U.S. dollar.

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 or customer error. Our transactions increased by 24% and 32% for the three and six months ended June 30, 2014, respectively, as compared to the same periods in the prior year. Increased activity in the three months ended June 30, 2013 due to a weakening Indian Rupee resulted in a higher average transaction amount in that period compared to the current period. Consequently, the 12% increase in GSV


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during the current period as compared to the same period in the prior year is less than the 24% increase in the number of transactions.

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. Our active customers increased by 30% for the six months ended June 30, 2014 compared to the same period in the prior year.

New Customers. We define new customers as those customers who have sent their first transaction in a given period. Our new customer growth decreased by 1% and increased by 2% for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year. The decrease for the three months ended June 30, 2014 compared to the same period in the prior year may have been attributable to a weakening India Rupee in the second quarter of 2013 and our reduced marketing spend in the current quarter during the 2014 World Cup.

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 divided by new customers added in a given period. Direct marketing cost can include spend to, among other things, attract new customers, retain active customers, increase the number of transactions sent by active customers and re-activate inactive customers. For example, during the six months ended June 30, 2014, our direct marketing cost included our spend to market the Xoom App, which primarily benefits active customers, thereby driving retention and increased activity among such customers. A portion of the direct marketing cost is reflected in our cost of revenue. Our direct marketing cost does not include certain indirect marketing costs that are included in our marketing expense line item in our condensed consolidated statements of income. Examples of our indirect marketing costs are 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 adjusted for provision for income taxes, interest expense, interest income, amortization of acquired intangible, depreciation and other amortization and stock-based compensation. We believe that adjusted EBITDA provides useful information to investors in understanding and evaluating our business in the same manner as our management and board of directors. Non-GAAP financial measures should be considered supplemental in nature and are not meant as a substitute for the related financial information prepared in accordance with GAAP. The following table presents a reconciliation of adjusted EBITDA for each of the periods presented (unaudited):

                                                  Three Months Ended June 30,           Six Months Ended June 30,
                                                    2014                2013             2014               2013
                                                                           (in thousands)
Reconciliation of Adjusted EBITDA:
Net income                                     $       1,398       $       4,090     $      1,750       $      4,011
Provision for income taxes                                19                 132               31                134
Interest expense                                         344                 499              672                946
Interest income                                          (69)                (41)            (145)               (77)
Amortization of acquired intangible                      203                    -             407                   -
Depreciation and other amortization expense              840                 510            1,619                972
Stock-based compensation                               2,333                 959            4,257              1,737
Adjusted EBITDA                                $       5,068       $       6,149     $      8,591       $      7,723


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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 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, including referees as 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 is comprised of business development, offline, online and promotional advertising costs to acquire new customers and improve customer retention, employee compensation and related costs to support the marketing process and allocated facilities and other supporting overhead costs. We have increased spending on advertising to market the Xoom App for the six months ended June 30, 2014. We have 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 based in the United States and Guatemala, costs associated with professional services and consulting, development of new technologies, and enhancements of existing technologies, amortization of capitalized internally-developed software and the intangible asset (developed technology) acquired in the Acquisition, and allocated facilities and other supporting overhead costs. Internally-developed software costs, which primarily relate to the development of specific enhancements such as the development of the Xoom App, are a combination of internal compensation costs of engineering time and costs of outside consultants. 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 costs incurred for outsourced support centers, employee compensation for our employees who support customer service calls, costs incurred for fraud detection, compliance operations, maintenance costs related to our outsourced support 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 to support our continuing growth.

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


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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 movements 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 and foreign taxes. 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. As of June 30, 2014, we have a full valuation allowance against our deferred tax asset. We will continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist. Significant judgment is required in making this assessment, and it is very difficult to predict when our assessment may conclude that the remaining portion of the deferred tax asset is realizable. Based on historical and projected operating performance, and to the extent we expect that our operations will generate sufficient taxable income in future periods, we may partially or fully release the deferred tax valuation allowance in a future period. Any adjustment to the deferred tax asset valuation allowance will be recorded in the income statement of the period in which the adjustment is determined to be required.

For the three months ended June 30, 2014, tax expense was $19,000, which consisted of $12,000 of U.S. state income taxes and $7,000 of foreign income taxes. For the six months ended June 30, 2014, tax expense was $31,000 which consisted of $19,000 of U.S. state income taxes and $12,000 of foreign income taxes.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. 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 our reserve for transactions losses, 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.

Apart from the addition to the stock-based compensation accounting policy disclosed in the notes to condensed consolidated financial statements, there have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report.

Recently Issued Accounting Pronouncement

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers." The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and International Financial Reporting Standards. The pronouncement is effective for reporting periods beginning after December 15, 2016. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.


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Results of Operations

The following table sets forth our results of operations in dollars for the
periods presented. The period-to-period comparison of financial results is not
necessarily indicative of future results.




                                                    Three Months Ended June 30,          Six Months Ended June 30,
                                                      2014               2013             2014              2013
                                                                            (in thousands)
                                                                             (unaudited)
Consolidated Statements of Income Data:
Revenue                                          $      39,844      $      33,493     $     75,782      $     57,808
Cost of revenue                                         12,977             10,119           22,555            17,638
Gross profit                                            26,867             23,374           53,227            40,170
Marketing                                                7,356              6,907           16,138            12,599
Technology and development                               8,801              5,476           16,651            10,310
Customer service and operations                          4,371              3,325            8,345             6,342
General and administrative                               4,817              3,039            9,975             5,962
Total operating expense                                 25,345             18,747           51,109            35,213
Income from operations                                   1,522              4,627            2,118             4,957
Other income (expense):
Interest expense                                          (344)              (499)            (672)             (946)
Interest income                                             69                 41              145                77
Other income                                               170                 53              190                57
Income before provision for income taxes                 1,417              4,222            1,781             4,145
Provision for income taxes                                  19                132               31               134
Net income                                       $       1,398      $       4,090     $      1,750      $      4,011

Revenue

Three Months Ended June 30, Six Months Ended June 30, 2014 2013 % Change 2014 2013 % Change

(dollars in thousands)

(unaudited)

Revenue $ 39,844 $ 33,493 19 % $ 75,782 $ 57,808 31 %

In the three months ended June 30, 2014, revenue increased $6.4 million, or 19%, compared to the three months ended June 30, 2013. The increase was primarily due to a 30% increase in active customers, which included 133,540 new customers added during the three months ended June 30, 2014. Increased activity in the three months ended June 30, 2013 due to a weakening Indian Rupee resulted in a higher average transaction amount. This drove revenue per average active customer to $38 for that period as compared to $34 in the current period, resulting in revenue growing at a slower rate than the increase in our active customers. In addition, the average number of transactions per active customer was marginally lower in the current period as compared to the prior period.


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In the six months ended June 30, 2014, revenue increased $18.0 million, or 31%, compared to the six months ended June 30, 2013. The increase was primarily due to a 30% increase in active customers, which included 250,635 new customers added during the six months ended June 30, 2014.

Cost of Revenue




                                         Three Months Ended June 30,                       Six Months Ended June 30,
                                           2014               2013         % Change         2014              2013         % Change
                                                                          (dollars in thousands)
                                                                               (unaudited)
Cost of revenue                       $      12,977      $      10,119        28  %     $     22,555      $     17,638        28  %
Percentage of revenue                            33  %              30  %                         30  %             31  %

In the three months ended June 30, 2014, cost of revenue increased $2.9 million, or 28%, compared to the three months ended June 30, 2013. The increase in cost of revenue was primarily driven by a $1.4 million increase in processing and disbursement costs to support the 24% increase in transactions, a $1.3 million increase in promotional advertising, which was classified as cost of revenue in the condensed consolidated statements of income, and a $0.2 million increase in transaction losses due to the increase in our GSV. The increase in cost of revenue as a percentage of revenue and corresponding decrease in gross profit for the three months ended June 30, 2014 was mostly due to higher spending in promotional advertising. As a percentage of revenue, promotional advertising expense classified as cost of revenue fluctuates from period to period due to the nature and timing of marketing programs.

In the six months ended June 30, 2014, cost of revenue increased $4.9 million, or 28%, compared to the six months ended June 30, 2013. The increase in cost of revenue was driven by a $3.2 million increase in processing and disbursement costs to support the 32% increase in transactions, a $1.2 million increase in promotional advertising, which was classified as cost of revenue in the condensed consolidated statements of income and a $0.5 million increase in the provision for transaction losses due to the increase in our GSV. The decrease in . . .

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