Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
|
You should read the following discussion and analysis by our management of our financial condition and results of operations in
conjunction with our unaudited consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward looking
statements relating to our anticipated plans, products, services, and financial performance. The words will, estimate, believe, expect, anticipate, intend and similar
expressions identify forward-looking statements, but their absence does not mean the statement is not forward looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions
that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could affect our actual results include, but are not limited to, those discussed under the heading Item 1A,
Risk Factors below and in our Annual Report on Form 10-K for the year ended December 31, 2012 and in our other Securities and Exchange Commission filings. Given these risks and uncertainties, you should not place undue reliance
on our forward-looking statements. The forward-looking statements are made as of the date of this report, and we assume no obligation to update any such statements to reflect events or circumstances after the date hereof.
Unless the context requires otherwise, the terms Market Leader, the Company, we, us
and our refer to Market Leader, Inc. and its subsidiaries.
Overview
Our Business
Market Leader, founded in 1999, provides innovative online technology and marketing solutions for real estate professionals across the United States and Canada. The Company serves more than 135,000 real
estate agents, brokerages and franchisors, offering complete end-to-end solutions that enable them to grow and manage their businesses. Market Leaders subscription-based real estate marketing software and services helps customers generate a
steady stream of prospects, plus provides the systems and training they need to convert those prospects into clients. In addition, the Companys national consumer real estate sites, including www.realestate.com, give its customers access to
millions of future home buyers and sellers, while providing consumers with free access to the information they seek.
Review of First Quarter 2013
We achieved our thirteenth consecutive quarter of revenue growth, driven by demand for our software-as-a-service products as well as the continued ability to leverage our relationships with our more than
135,000 customers to drive additional sales of premium services.
Our primary goal is to continue to drive revenue growth,
which we believe requires continued investment in cost-effective customer acquisition. We sell directly to individual real estate brokerage offices and their agents, which has long been a core competency for us. We also have an effective strategy to
build and maintain sales and marketing channel relationships with major franchise networks and large brokerage companies to sell from the top down. These strategic relationships enable us to tap into the influence, credibility, and existing sales
and marketing infrastructure of these franchise networks to let us cost-effectively acquire high-value, premium customers.
We
have built our first enterprise relationship over the past two years, and we recently launched additional enterprise rollouts from agreements we signed in 2012 with two more of the nations leading franchises. These rollouts will further
enhance our access to real estate professionals and we believe will contribute to continued revenue growth in the future.
Under these strategic enterprise agreements, we typically provide a base level version of our software-as-a-service products to agents
and brokers enterprise-wide in exchange for specified contractual revenue over a number of years. These enterprise customers have a business incentive to partner with us and drive broad platform adoption of our software-as-a-service solutions,
because it helps foster success and performance improvements within their agent base. Our strategy is to leverage the resulting broad access to sell recurring subscriptions to our premium services, including both software upgrades and marketing
services. This strategy has contributed to our strong revenue growth.
We believe our success in the enterprise space and our
increasing access to real estate professionals is the result of providing an industry leading software solution that enhances our customers productivity. During 2013, we have continued to develop new features and enhance our software solution.
Most notably, we have extended and enhanced our mobile platform as well as added functionality that allows listing agents to automatically create unique websites for each of their home listings. We remain focused on continuing to make enhancements
to our software solution and delivering more value to our growing base of customers.
11
Results of Operations
Revenues
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Revenues (in thousands)
|
|
$
|
12,924
|
|
|
$
|
10,186
|
|
|
|
|
|
|
|
|
|
|
Revenue for the first quarter of 2013 was $12.9 million, a 27% increase over the same period last year,
driven by demand for our products at the professional and enterprise level, increased investment in customer acquisition, and upsells of our premium services to our broad customer base, supported by improved real estate market conditions.
Based upon our view of the business today, we expect annual revenue growth rate of over 30%, and that our strong
year-over-year revenue growth rate will accelerate in each of the remaining quarters of 2013.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Sales and marketing expense (in thousands)
|
|
$
|
8,845
|
|
|
$
|
7,028
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expense as a % of revenue
|
|
|
68
|
%
|
|
|
69
|
%
|
|
|
|
|
|
|
|
|
|
Sales and marketing expense increased for the three months ended March 31, 2013 when compared to the
same period in 2012 but decreased slightly as a percentage of revenue. Our customer acquisition costs increased due to investments in additional sales capacity and marketing programs to drive continued revenue growth. Our customer servicing costs
increased slightly as we continue to grow our customer base.
Overall, we expect sales and marketing expenses to increase in
value, but decrease as a percentage of revenue. Customer servicing costs are expected to increase as we grow our customer base, but at a rate slower than our revenue growth as we continue to leverage operating efficiencies. We expect customer
acquisition costs to remain relatively consistent but to decline as a percentage of revenue.
Technology and Product
Development
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Technology and product development expense (in thousands)
|
|
$
|
2,942
|
|
|
$
|
2,339
|
|
|
|
|
|
|
|
|
|
|
Technology and product development expense as a % of revenue
|
|
|
23
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
Technology and product development expense increased 26% for the three month period ended March 31,
2013 compared to the same period in 2012. The increase reflects growth in the business and the pace of our product innovation. The increase is also due to an increase in stock compensation expense primarily resulting from our increased stock price.
We expect to continue to invest in technology and product development to support our existing customers, to deliver products
to new enterprise customers and to develop new products to sell into our customer base. We expect our investment in technology and product development to remain fairly consistent as a percentage of revenue for 2013.
Technology expenses will fluctuate depending on the level of effort required to support our growing customer base and to develop new
products, net of costs that are subject to capitalization.
12
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
General and administrative expense (in thousands)
|
|
$
|
2,303
|
|
|
$
|
1,855
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense as a % of revenue
|
|
|
18
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
General and administrative expense increased for the three month period ended March 31, 2013 when
compared to the same period in 2012, primarily due to increased stock compensation expense primarily resulting from our increased stock price as well as investment in additional office space capacity to support the growth in our business.
We expect quarterly general and administrative expenses to increase slightly during the year, but moderate as a percentage of
revenue.
Stock-based Compensation
Stock-based compensation expense increased for the three month period ended March 31, 2013 compared to the same period in 2012 primarily due to the impact of our stock price increase on our
liability-classified stock appreciation rights that are re-measured at the end of each reporting period. These awards were re-valued at the end of the first quarter when the share price used to re-measure the value of the liability awards was $8.90,
an increase from $6.52 at the beginning of the quarter. At March 31, 2013 a one dollar change in our stock price would change stock-based compensation expense by approximately $300,000.
Depreciation and Amortization of Property and Equipment
Depreciation and amortization of property and equipment increased for the three month period ended March 31, 2013 compared to the
same period in 2012 due to our ongoing additions to capitalized software development as we continue to deliver products to new enterprise customers and to develop new products.
Amortization of Acquired Intangible Assets
Amortization of intangible assets decreased slightly for the three month period ended March 31, 2013 compared to the same period in 2012, as intangible assets from prior year acquisitions became
fully amortized.
Interest Income and Expense, net
Interest income remains immaterial as liquidity and security of principal continue to be core to our investment strategy, which results in
low rates of return.
Income Tax Expense (Benefit)
Income tax expense (benefit) remains immaterial as we continue to record a full valuation allowance against our deferred tax assets.
13
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation
of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on other
assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We include a discussion of our critical accounting policies and estimates in our Annual Report on Form 10-K for the year ended
December 31, 2012.
Quarterly Consolidated Statements of Income and Operational Data
The following table presents unaudited operational data pertaining to our operations for the five quarters ended March 31, 2013. This
quarterly information has been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflects all adjustments necessary for a fair representation of the information for the periods
presented. This data should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012. Operating results for any quarter apply
to that quarter only and are not necessarily indicative of results for any future period.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar 31,
2013
|
|
|
Dec. 31,
2012
|
|
|
Sept. 30,
2012
|
|
|
June 30,
2012
|
|
|
Mar. 31,
2012
|
|
|
|
(in thousands)
|
|
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
12,924
|
|
|
$
|
12,037
|
|
|
$
|
11,691
|
|
|
$
|
11,074
|
|
|
$
|
10,186
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
8,845
|
|
|
|
7,263
|
|
|
|
7,699
|
|
|
|
6,999
|
|
|
|
7,028
|
|
Technology and product development
|
|
|
2,942
|
|
|
|
2,347
|
|
|
|
2,265
|
|
|
|
2,762
|
|
|
|
2,339
|
|
General and administrative
|
|
|
2,303
|
|
|
|
2,054
|
|
|
|
2,064
|
|
|
|
1,855
|
|
|
|
1,855
|
|
Depreciation and amortization of property and equipment
|
|
|
827
|
|
|
|
735
|
|
|
|
754
|
|
|
|
768
|
|
|
|
644
|
|
Amortization of acquired intangible assets
|
|
|
787
|
|
|
|
811
|
|
|
|
849
|
|
|
|
836
|
|
|
|
823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
15,704
|
|
|
|
13,210
|
|
|
|
13,631
|
|
|
|
13,220
|
|
|
|
12,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,780
|
)
|
|
|
(1,173
|
)
|
|
|
(1,940
|
)
|
|
|
(2,146
|
)
|
|
|
(2,503
|
)
|
Interest income and expense, net
|
|
|
6
|
|
|
|
8
|
|
|
|
7
|
|
|
|
8
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
(2,774
|
)
|
|
|
(1,165
|
)
|
|
|
(1,933
|
)
|
|
|
(2,138
|
)
|
|
|
(2,494
|
)
|
Income tax expense (benefit)
|
|
|
7
|
|
|
|
8
|
|
|
|
10
|
|
|
|
8
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,781
|
)
|
|
|
(1,173
|
)
|
|
|
(1,943
|
)
|
|
|
(2,146
|
)
|
|
|
(2,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
203
|
|
|
$
|
913
|
|
|
$
|
937
|
|
|
$
|
260
|
|
|
$
|
(403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Adjusted EBITDA is a non-GAAP financial measure provided as a complement to results in
accordance with accounting principles generally accepted in the US. Adjusted EBITDA is not a substitute for measures determined in accordance with GAAP, and may not be comparable to Adjusted EBITDA as reported by other companies. Our use
of the term Adjusted EBITDA refers to a financial measure defined as earnings or loss before net interest, income taxes, depreciation, amortization, and stock-based compensation. We believe Adjusted EBITDA to be relevant and useful
information to our investors as this measure is an integral part of our internal management reporting and planning process and is the primary measure used by our management to evaluate operating performance. See the table below for a reconciliation
of Adjusted EBITDA to net loss, the most comparable GAAP measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31,
2013
|
|
|
Dec. 31,
2012
|
|
|
Sept. 30,
2012
|
|
|
June 30,
2012
|
|
|
Mar. 31,
2012
|
|
|
|
(in thousands)
|
|
Reconciliation of GAAP Measurement to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,781
|
)
|
|
$
|
(1,173
|
)
|
|
$
|
(1,943
|
)
|
|
$
|
(2,146
|
)
|
|
$
|
(2,522
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
1,369
|
|
|
|
540
|
|
|
|
1,274
|
|
|
|
802
|
|
|
|
633
|
|
Depreciation and amortization of property and equipment
|
|
|
827
|
|
|
|
735
|
|
|
|
754
|
|
|
|
768
|
|
|
|
644
|
|
Amortization of intangible assets
|
|
|
787
|
|
|
|
811
|
|
|
|
849
|
|
|
|
836
|
|
|
|
823
|
|
Other expense (income)
|
|
|
1
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
203
|
|
|
$
|
913
|
|
|
$
|
937
|
|
|
$
|
260
|
|
|
$
|
(403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Currently, our principal source of liquidity is our cash, cash equivalents and short-term investments as well as the cash flow that we may generate from our operations. At March 31, 2013, our cash,
cash equivalents and short-term investments totaled $22 million.
Liquidity and security of principal continue to be core to
our investment strategy, which results in low rates of return. As of March 31, 2013, we have invested in cash equivalents consisting of money market funds that hold U.S. Treasury securities with short-term weighted average duration. Short-term
investments are comprised of U.S. Treasury bills with terms of one year or less.
The following table presents summary cash
flow data:
|
|
|
|
|
|
|
|
|
|
|
Three months
Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(dollars in thousands)
|
|
Cash provided by (used in) operating activities
|
|
$
|
196
|
|
|
$
|
(1,309
|
)
|
Cash (used in) provided by investing activities
|
|
|
(1,041
|
)
|
|
|
731
|
|
Cash provided by financing activities
|
|
|
662
|
|
|
|
169
|
|
Operating Activities
Net cash provided by (used in) operating activities consists of our net loss adjusted for certain non-cash items, primarily depreciation,
amortization, stock-based compensation, and the effects of changes in working capital. We generated $0.2 million in cash from operations during the first three months of 2013, an increase of $1.5 million compared to the same period in 2012. The
increase was primarily due to changes in working capital and stock-based compensation.
Investing Activities
Cash used in investing activities for the first three months of 2013 was $1.0 million compared to cash provided by
investing activities of $0.7 million for the same period in 2012, primarily due to timing of maturities of short term investments.
Financing Activities
Cash provided by financing activities during
the first three months of 2013 increased compared to the same period last year primarily due to increased proceeds from the exercise of employee stock options.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
March 31, 2013.
15