Marketo
Marketo, Inc. (Form: 10-Q, Received: 05/06/2016 16:31:57)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016

 

OR

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to             

 

Commission file number 001-35909

 

MARKETO, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

56-2558241

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

901 Mariners Island Boulevard, Suite 500

San Mateo, California 94404

(Address of Principal Executive Offices)

 

(650) 376-2300

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x   NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x   NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o   NO x

 

There were 44,523,276 shares of the registrant’s Common Stock issued and outstanding as of April 29, 2016.

 

 

 



Table of Contents

 

MARKETO, INC.

 

Table of Content s

 

 

Part I — Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets

4

 

 

 

 

Condensed Consolidated Statements of Operations

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

33

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

 

Part II — Other Information

 

 

 

 

Item 1.

Legal Proceedings

34

 

 

 

Item 1A.

Risk Factors

34

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

Item 3.

Default Upon Senior Securities

53

 

 

 

Item 4.

Mine Safety Disclosures

53

 

 

 

Item 5

Other Information

53

 

 

 

Item 6.

Exhibits

53

 

 

 

Signatures

 

55

 

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Table of Contents

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in, but not limited to, the sections titled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements include, but are not limited to, statements about:

 

·                   our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses, ability to generate cash flow, and ability to achieve, and maintain, future profitability;

 

·                   our anticipated growth and growth strategies and our ability to effectively manage that growth and effect these strategies;

 

·                   anticipated trends, growth rates, relative growth rates, areas of investment and challenges in our business and in the markets in which we operate;

 

·                   future economic conditions;

 

·                   our ability to anticipate market needs and develop new and enhanced products and services to meet those needs, and our ability to successfully monetize them;

 

·                   maintaining and expanding our customer base and our relationships with other companies;

 

·                   the impact of competition in our industry and innovation by our competitors;

 

·                   the impact of any failure to anticipate and adapt to future changes in our industry;

 

·                   the evolution of technology affecting our products, services and markets;

 

·                   our ability to sell our products and expand internationally;

 

·                   our ability to hire and retain necessary qualified employees to expand and scale our operations;

 

·                   the impact of any failure of our solutions or solution innovations;

 

·                   our reliance on our third-party service providers;

 

·                   our ability to adequately protect our brand and other intellectual property;

 

·                   our ability to integrate businesses that we have acquired or may acquire;

 

·                   the impact of seasonality on our business;

 

·                   our ability to successfully execute our R&D program and to continue to develop and innovate product offerings at the same pace;

 

·                   the anticipated effect on our business of litigation to which we are or may become a party;

 

·                   our ability to stay abreast of new or modified laws, standards and regulations that currently apply or become applicable to our business both in the United States and internationally;

 

·                   the effects of security breaches, catastrophic events or failures in our or our customers’ products and services on our business;

 

·                   the effect of changing privacy laws and privacy-related expectations of customers on our business;

 

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·                   the expense and administrative workload associated with being a public company;

 

·                   our ability to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;

 

·                   our liquidity and working capital requirements;

 

·                   the estimates and estimate methodologies used in preparing our consolidated financial statements; and

 

·                   the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.

 

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

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Table of Contents

 

PART I — FINANCIAL INFORMAT ION

 

Item 1.   Financial Statem ents

 

MARKETO, INC.

Condensed Consolidated Balance Sh eets

(in thousands)

(unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

94,703

 

$

107,218

 

Accounts receivable, net

 

48,505

 

50,678

 

Prepaid expenses and other current assets

 

15,029

 

9,073

 

Total current assets

 

158,237

 

166,969

 

Property and equipment, net

 

24,273

 

21,323

 

Goodwill

 

29,201

 

29,201

 

Intangible assets, net

 

5,204

 

5,455

 

Other assets

 

3,052

 

2,130

 

Total assets

 

$

219,967

 

$

225,078

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5,058

 

$

4,265

 

Accrued expenses and other current liabilities

 

24,445

 

25,706

 

Deferred revenue

 

91,520

 

91,735

 

Current portion of credit facility

 

1,873

 

2,174

 

Total current liabilities

 

122,896

 

123,880

 

Credit facility, net of current portion

 

83

 

478

 

Deferred revenue, long-term

 

193

 

230

 

Other liabilities

 

3,818

 

2,722

 

Total liabilities

 

126,990

 

127,310

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interests (Note 2 and Note 6)

 

4,425

 

4,643

 

Stockholders’ equity:

 

 

 

 

 

Common stock

 

4

 

4

 

Additional paid-in capital

 

358,175

 

344,727

 

Accumulated other comprehensive loss

 

(46

)

(274

)

Accumulated deficit

 

(269,581

)

(251,332

)

Total stockholders’ equity

 

88,552

 

93,125

 

Total liabilities, redeemable non-controlling interests and stockholders’ equity

 

$

219,967

 

$

225,078

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MARKETO, INC.

Condensed Consolidated Statements of Operat ions

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

Subscription and support

 

$

55,348

 

$

40,100

 

Professional services and other

 

6,868

 

5,900

 

Total revenue

 

62,216

 

46,000

 

Cost of revenue:

 

 

 

 

 

Subscription and support

 

12,310

 

9,074

 

Professional services and other

 

9,068

 

7,337

 

Total cost of revenue

 

21,378

 

16,411

 

Gross profit:

 

 

 

 

 

Subscription and support

 

43,038

 

31,026

 

Professional services and other

 

(2,200

)

(1,437

)

Total gross profit

 

40,838

 

29,589

 

Operating expenses:

 

 

 

 

 

Research and development

 

11,001

 

9,695

 

Sales and marketing

 

37,113

 

30,032

 

General and administrative

 

10,872

 

8,782

 

Total operating expenses

 

58,986

 

48,509

 

Loss from operations

 

(18,148

)

(18,920

)

Other (expense) income, net

 

(137

)

520

 

Loss before provision for income taxes

 

(18,285

)

(18,400

)

Provision for income taxes

 

402

 

212

 

Net loss

 

(18,687

)

(18,612

)

Net loss and adjustment attributable to redeemable non-controlling interests (Note 2)

 

264

 

454

 

Net loss attributable to Marketo

 

$

(18,423

)

$

(18,158

)

 

 

 

 

 

 

Net loss per share of common stock, basic and diluted

 

$

(0.42

)

$

(0.44

)

Shares used in computing net loss per share of common stock, basic and diluted

 

43,992

 

41,613

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MARKETO, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Net loss

 

$

(18,687

)

$

(18,612

)

Other comprehensive loss:

 

 

 

 

 

Foreign currency translation adjustments

 

274

 

89

 

Total comprehensive loss

 

(18,413

)

(18,523

)

Net loss attributable to redeemable non-controlling interests (excluding adjustment to redeemable non-controlling interests)

 

438

 

454

 

Other comprehensive income attributable to redeemable non-controlling interests

 

(46

)

(3

)

Comprehensive loss attributable to Marketo

 

$

(18,021

)

$

(18,072

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MARKETO, INC.

Condensed Consolidated Statements of Cash F lows

(in thousands)

(unaudited)

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

Net loss:

 

 

 

 

 

Net loss attributable to Marketo

 

$

(18,423

)

$

(18,158

)

Net loss and adjustment attributable to redeemable non-controlling interests

 

(264

)

(454

)

Net loss

 

(18,687

)

(18,612

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

3,980

 

2,879

 

Stock-based compensation expense

 

10,000

 

9,281

 

Deferred income taxes

 

84

 

187

 

Provision for allowance for doubtful accounts

 

104

 

248

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

2,296

 

(3,027

)

Prepaid expenses and other current assets

 

(5,541

)

(4,170

)

Other assets

 

(117

)

(644

)

Accounts payable

 

(159

)

1,028

 

Accrued expenses and other current liabilities

 

(1,549

)

(515

)

Deferred revenue

 

(771

)

4,694

 

Other liabilities

 

380

 

116

 

Net cash used in operating activities

 

(9,980

)

(8,535

)

Cash flows from investing activities:

 

 

 

 

 

Increase in restricted cash

 

(735

)

(215

)

Purchase of property and equipment

 

(4,587

)

(4,092

)

Capitalized software development

 

(601

)

(521

)

Net cash used in investing activities

 

(5,923

)

(4,828

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock upon exercise of stock options

 

781

 

965

 

Proceeds from the issuance of common stock issued under the employee stock purchase plan

 

2,716

 

2,885

 

Investment from redeemable non-controlling interests

 

 

1,678

 

Withholding taxes remitted for the net share settlement of equity awards

 

(3

)

(3

)

Repayment of debt

 

(697

)

(670

)

Net cash provided by financing activities

 

2,797

 

4,855

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

591

 

(368

)

Net decrease in cash and cash equivalents

 

(12,515

)

(8,876

)

Cash and cash equivalents — beginning of period

 

107,218

 

112,644

 

Cash and cash equivalents — end of period

 

$

94,703

 

$

103,768

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

25

 

$

52

 

Cash paid for income taxes

 

90

 

29

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

Vesting of early exercise options

 

16

 

42

 

Unpaid and accrued fixed assets

 

1,218

 

262

 

Property and equipment acquired through tenant improvement allowance

 

594

 

65

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MARKETO, INC.

Notes to Condensed Consolidated Financial Statem ents

(Unaudited)

 

1. The Company and Summary of Significant Accounting Policies and Estimates

 

Business

 

Marketo, Inc. (Marketo or the Company) was incorporated in the state of California on January 20, 2006. The Company was reincorporated in the state of Delaware on December 17, 2009. The Company operates from its headquarters in San Mateo, California and has operating subsidiaries in Ireland, Australia, Israel, Japan and the United Kingdom.

 

Marketo is the provider of a leading cloud-based Engagement Marketing Platform that is purpose-built to enable organizations ranging from small and medium businesses (SMBs) to the world’s largest enterprises to engage in modern relationship marketing. The Company’s platform enables the effective execution, management and analytical measurement of online, social, mobile and offline marketing activities and customer interactions in today’s data-centric, multi-channel business environment. The Company has built a rich set of applications across ten categories that run on the Engagement Marketing Platform, as follows: Marketing Automation, Email Marketing, Mobile Engagement, Social Marketing, Digital Ads, Web Personalization, Marketing Analytics, Predictive Content, Marketing Calendar and Sales Insight. The Company generally offers its services on an annual subscription basis with quarterly or annual payment terms.

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements and accompanying notes of the Company reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The unaudited condensed consolidated financial statements include the accounts of Marketo and its wholly owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year ending December 31, 2016. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (SEC). These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and related notes presented in the Company’s Annual Report on Form 10-K filed with the SEC on March 4, 2016. There have been no material changes in the Company’s significant accounting policies from those that were disclosed in the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2015. Certain immaterial amounts in the prior period condensed consolidated statement of cash flows have been reclassified and disclosed to conform to the current period presentation.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Such management estimates and assumptions include the estimated selling price for the various elements in our customer contracts, the allowance for doubtful accounts, stock-based compensation expense, useful lives of intangible assets, redemption value of redeemable non-controlling interests and the valuation of deferred tax assets and acquired intangible assets. Actual results could differ materially from those estimates, and such differences could be material to the financial statements and affect the results of operations reported in future periods.

 

Recent Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. The ASU changes seven aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes; (6) practical expedient — expected term (nonpublic only); and (7) intrinsic value (nonpublic only). The ASU is effective for fiscal years beginning after December 15, 2016 and interim periods within those years, and early adoption is permitted. The Company has elected not to early adopt. The Company is evaluating the impact of the updated guidance on the Company’s consolidated financial statements and related disclosures and has not selected a transition method.

 

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In February 2016, the FASB issued ASU 2016-02, Leases, which, among other things, requires lessees to recognize most leases on-balance sheet. This will increase lessees’ reported assets and liabilities — in some cases very significantly. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 supersedes Topic 840, Leases. This ASU is effective for interim and annual periods beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is evaluating the impact of the updated guidance on the Company’s consolidated financial statements and related disclosures and has not determined if it will early adopt.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 also specifies the accounting for some costs to obtain or fulfill a contract with a customer. In July 2015, the FASB approved a one year deferral of the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP. In accordance with the deferral, this guidance will be effective for the Company, beginning January 1, 2018, and can be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. Early adoption is permitted beginning January 1, 2017. The Company has elected not to early adopt. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its consolidated financial statements.

 

2. Joint Venture

 

In February 2014, the Company entered into an agreement with SunBridge Corporation and Dentsu Digital Inc. (the successor entity to Dentsu eMarketing One K.K.) (collectively, the Investors) to engage in the investment, organization, management and operation of a Japanese subsidiary (Marketo KK) of the Company that is focused on the sale of the Company’s products and services in Japan. The Investors initially contributed approximately $2.0 million (200,000,000 Japanese Yen) in cash in exchange for 35.4% of the outstanding common stock of Marketo KK. Furthermore, under the agreement, the Company and the Investors agreed to subscribe to additional shares by contributing additional funding of approximately $2.0 million (237,480,955 Japanese Yen) and approximately $1.7 million (200,000,000 Japanese Yen), respectively, which occurred in March 2015. As of March 31, 2016, the Company and the Investors owned approximately 60.1% and 39.9% of the outstanding common stock in Marketo KK, respectively. See Note 6 for the activity in the redeemable non-controlling interests balance.

 

Twenty percent of the common stock held by the Investors may be callable by the Company or puttable by the Investors beginning on the seventh anniversary of the initial capital contribution by the Investors. This percentage increases to forty percent and one hundred percent on the eighth and tenth anniversary, respectively. Should the call or put option be exercised, the redemption value would be determined based on a prescribed formula derived from the relative revenues of Marketo KK and the Company and may be settled, at the Company’s discretion, with Company stock (with no limit on the shares that may be issued) or cash.  Additionally, the common stock held by the Investors may be callable or puttable following a change of control of the Company. The redeemable non-controlling interests in Marketo KK are classified outside of permanent equity in the Company’s unaudited condensed consolidated balance sheet as of March 31, 2016, primarily due to the put right available to the redeemable non-controlling interest holders in the future which may be settled in cash or common stock of the Company. The balance of the redeemable non-controlling interests is reported at the greater of the initial carrying amount adjusted for the redeemable non-controlling interest’s share of earnings, or its estimated redemption value. Accordingly, at March 31, 2016 the Company adjusted the redeemable non-controlling interests to its expected redemption value, resulting in a $0.2 million reduction to additional paid-in-capital.

 

The following table reconciles net loss and adjustment attributable to redeemable non-controlling interests for periods indicated below (in thousands):

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Net loss attributable to redeemable non-controlling interests (before adjustment to redeemable non-controlling interests)

 

$

438

 

$

454

 

Adjustment to redeemable non-controlling interests

 

(174

)

 

Net loss and adjustment attributable to redeemable non-controlling interests

 

$

264

 

$

454

 

 

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3. Fair Value of Financial Instruments

 

The Company measures certain financial assets at fair value on a recurring basis based on a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

 

·                   Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

·                   Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·                   Level 3 — Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

As of March 31, 2016 and December 31, 2015, financial assets measured at fair value on a recurring basis were comprised of money market funds and certificates of deposit included within cash and cash equivalents.

 

The fair value of these financial assets was determined using the following inputs for the periods presented:

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

84,186

 

$

 

$

 

$

93,108

 

$

 

$

 

Certificates of deposit

 

 

25

 

 

 

25

 

 

Total

 

$

84,186

 

$

25

 

$

 

$

93,108

 

$

25

 

$

 

 

4. Balance Sheet Components

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Cash

 

$

10,492

 

$

14,085

 

Cash equivalents:

 

 

 

 

 

Money market funds

 

84,186

 

93,108

 

Certificates of deposit

 

25

 

25

 

Total cash equivalents

 

84,211

 

93,133

 

Cash and cash equivalents

 

$

94,703

 

$

107,218

 

 

Accounts Receivable, Net

 

Accounts receivable, net consists of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Accounts receivable

 

$

49,030

 

$

51,235

 

Allowance for doubtful accounts

 

(525

)

(557

)

Accounts receivable, net

 

$

48,505

 

$

50,678

 

 

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Table of Contents

 

Property and Equipment, Net

 

Property and equipment, net consists of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Computer equipment

 

$

32,105

 

$

28,159

 

Software

 

3,525

 

3,498

 

Office furniture

 

3,331

 

2,952

 

Leasehold improvements

 

8,267

 

7,120

 

Construction in progress

 

3,339

 

2,808

 

Total property and equipment

 

50,567

 

44,537

 

Less accumulated depreciation

 

(26,294

)

(23,214

)

Property and equipment, net

 

$

24,273

 

$

21,323

 

 

Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities are as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Accrued bonuses, commissions and wages

 

$

8,847

 

$

12,343

 

Accrued ESPP

 

984

 

2,387

 

Accrued vacation

 

4,400

 

3,739

 

Accrued marketing expenses

 

5,787

 

1,289

 

Accrued other

 

4,427

 

5,948

 

Accrued expenses and other current liabilities

 

$

24,445

 

$

25,706

 

 

5. Goodwill and Intangible Assets

 

Goodwill and intangible assets consist of the following as of March 31, 2016 and December 31, 2015:

 

 

 

March 31,
2016

 

Weighted
Average
Remaining
Useful Life

 

December 31,
2015

 

Weighted
Average
Remaining
Useful Life

 

 

 

(in thousands)

 

(in years)

 

(in thousands)

 

(in years)

 

Developed technology

 

$

6,050

 

1.7

 

$

6,050

 

1.9

 

Domain names

 

950

 

2.6

 

950

 

2.8

 

Customer relationships

 

1,600

 

0.7

 

1,600

 

0.8

 

Non-compete agreements

 

580

 

1.7

 

580

 

2.0

 

Capitalized software development costs

 

4,685

 

1.3

 

3,980

 

1.2

 

 

 

13,865

 

 

 

13,160

 

 

 

Less accumulated amortization

 

(8,661

)

 

 

(7,705

)

 

 

Intangible assets, net

 

5,204

 

 

 

5,455

 

 

 

Goodwill

 

29,201

 

 

 

29,201

 

 

 

Goodwill and intangible assets, net

 

$

34,405

 

 

 

$

34,656

 

 

 

 

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Table of Contents

 

Amortization expense for the periods indicated below is as follows (in thousands):

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

Amortization expense

 

$

956

 

$

736

 

 

Based on the carrying amount of intangible assets as of March 31, 2016, the estimated future amortization is as follows (in thousands):

 

 

 

Nine Months
Ending
December 31,

 

Years Ending December 31,

 

 

 

 

 

2016

 

2017

 

2018

 

2019

 

2020

 

Total

 

Developed Technology

 

$

1,131

 

$

1,407

 

$

 

$

 

$

 

$

2,538

 

Domain Names

 

134

 

100

 

100

 

29

 

 

363

 

Customer Relationships

 

178

 

 

 

 

 

178

 

Non-Compete Agreements

 

113

 

144

 

 

 

 

257

 

Capitalized Software Development Costs

 

1,089

 

673

 

106

 

 

 

1,868

 

Total

 

$

2,645

 

$

2,324

 

$

206

 

$

29

 

$

 

$

5,204

 

 

6. Stockholders’ Equity and Redeemable Non-controlling Interests

 

The following table summarizes the activity in stockholders’ equity and redeemable non-controlling interests for the period indicated below (in thousands):

 

 

 

Total
Stockholders’
Equity

 

Redeemable
Non-controlling
Interests

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

$

93,125

 

$

4,643

 

Issuance of common stock upon exercise and early exercise of stock options

 

781

 

 

Issuance of common stock under employee stock purchase plan

 

2,716

 

 

Adjustment to redemption value

 

(174

)

174

 

Vesting of early exercised options

 

16

 

 

Stock-based compensation expense

 

10,109

 

 

Net loss

 

(18,249

)

(438

)

Foreign currency translation adjustments

 

228

 

46

 

Balance as of March 31, 2016

 

$

88,552

 

$

4,425

 

 

For the three months ended March 31, 2016, the Company incurred $10.0 million of stock-based compensation expense and capitalized stock-based compensation expense of $0.1 million associated with the development of the Company’s internal-use software projects.

 

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7. Credit Facility

 

In May 2012, the Company entered into a loan and security agreement with a bank related to an equipment facility providing the Company with an equipment line of up to $4.0 million. In June 2013, the Company entered into a first amendment to the loan and security agreement, which provided an additional line of credit for advances of up to $4.5 million. The interest rate associated with both lines of credit is the greater of 4% or three-quarters of a percentage point above the prime rate, as determined on the applicable funding date. For each equipment advance, the Company paid interest only for approximately nine months. Subsequently, the Company is obligated to make thirty-six equal monthly payments of principal and interest. The loan is secured by a security interest on substantially all of the Company’s assets, including the equipment purchased with the advances, and excludes the Company’s intellectual property. The loan and security agreement contains customary events of default and provides that during the existence of an event of default, interest on the obligations could be increased by 5%.

 

In May 2014, the Company entered into a second amendment to the loan and security agreement to amend various covenants. Under the second amendment the Company is required to maintain compliance with certain financial covenants, which include maintaining a minimum cash balance with the bank and various reporting covenants. As of March 31, 2016, the Company was in compliance with these covenants.  As of March 31, 2016 and December 31, 2015, the outstanding loan balance was $2.0 million and $2.7 million, respectively.

 

There were no material changes in the Company’s commitments under the outstanding loan balance, which was disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2015.

 

8. Commitments and Contingencies

 

Except as set forth below, there were no material changes in the Company’s commitments under contractual obligations, as disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2015.

 

In March 2016, the Company entered into a definitive lease agreement whereby the Company extended its current lease facilities in San Mateo through 2022 and expanded its office space by 33,779 square feet. The Company’s incremental future minimum lease payments under this extension are approximately $36.7 million, payable over seventy months. In conjunction with the amendment to the San Mateo lease agreement, the Company entered into a letter of credit of approximately $0.7 million with a bank as security for the amended lease agreement.

 

As of March 31, 2016, future minimum operating lease payments are as follows (in thousands):

 

 

 

Minimum Lease
Payment

 

2016

 

$

5,461

 

2017

 

8,642

 

2018

 

9,120

 

2019

 

8,861

 

2020

 

8,400

 

Thereafter

 

14,535

 

Total

 

$

55,019

 

 

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Table of Contents

 

9. Stockholders’ Equity and Stock-Based Compensation

 

Common Stock Authorized and Outstanding

 

As of March 31, 2016, the Company was authorized to issue 1,000,000,000 common shares with a par value of $0.0001 per share and 20,000,000 convertible preferred shares with a par value of $0.0001 per share. As of March 31, 2016, the Company had approximately 44.4 million shares of common stock issued and outstanding.

 

Summary of Stock Option Activity

 

A summary of the Company’s stock option activity under all stock option plans and related information for three months ended March 31, 2016 is as follows:

 

 

 

Number of
Stock
Options
Outstanding

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Life

 

Aggregate
Intrinsic
Value

 

 

 

(in thousands)

 

 

 

(Years)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

3,777

 

$

13.55

 

6.61

 

$

65,915

 

Granted

 

 

 

 

 

 

 

Exercised

 

(159

)

4.92

 

 

 

 

 

Repurchased

 

 

 

 

 

 

 

Cancelled/forfeited

 

(135

)

26.64

 

 

 

 

 

Balance as of March 31, 2016

 

3,483

 

$

13.43

 

6.23

 

$

37,107

 

Exercisable as of March 31, 2016

 

3,058

 

$

10.23

 

6.01

 

$

37,106

 

Vested and expected to vest as of March 31, 2016

 

3,406

 

$

13.15

 

6.20

 

$

36,764

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing price of $19.57 as of March 31, 2016 for options that were in-the-money as of that date.

 

Option awards generally vest over a four-year period, with 25% vesting one year from date of grant and monthly thereafter. Stock options granted under the Company’s 2006 Plan provided option holders with an early exercise provision, where in the event of termination any exercised and unvested shares are subject to repurchase by the Company at the original purchase price. This right of repurchase lapses as the option vests. Options exercisable as of March 31, 2016 include options that are exercisable prior to vesting.

 

The weighted average grant date fair value of options granted and the total intrinsic value of options exercised are as follows (in thousands, except weighted average grant date fair value):

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

Weighted average grant date fair value of options granted

 

N/A

 

N/A

 

Total intrinsic value of options exercised (in thousands)

 

$

2,180

 

$

7,583

 

 

The total estimated grant date fair value of options vested during the three months ended March 31, 2016 was approximately $2.1 million.

 

Determining Fair Value of Stock Options

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model. During each of the three months ending March 31, 2016 and 2015, the Company granted no stock options to employees.

 

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Table of Contents

 

Restricted Stock Units

 

A summary of the Company’s Restricted Stock Units (RSUs) activity and related information for the three months ended March 31, 2016 is as follows:

 

 

 

Number of
RSUs

 

Weighted Average
Grant Date
Fair Value

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

3,037

 

$

32.84

 

RSUs Granted

 

1,109

 

15.59

 

RSUs Vested

 

(411

)

37.21

 

RSUs Cancelled/Forfeited

 

(207

)

30.13

 

Balance as of March 31, 2016

 

3,528

 

$

27.07

 

 

RSUs are generally subject to a time-based vesting condition that ranges from 3 to 4 years.

 

The weighted average grant date fair value of RSUs granted and the total intrinsic value of RSUs that vested during the periods presented were as follows (in thousands, except weighted average grant date fair value):

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

Weighted average grant date fair value of RSUs granted

 

$

15.59

 

$

34.50

 

Total intrinsic value of vested RSUs (in thousands)

 

$

6,124

 

$

6,029

 

 

Market Stock Units

 

During the first quarter of 2015 and 2016 the Company granted market stock units (MSUs) to its executive officers under the Company’s 2013 Equity Incentive Plan. Each MSU award granted contains three separate tranches. The actual number of MSUs eligible to vest in each tranche is based on the performance of the Company’s stock price relative to the performance of the NASDAQ Composite Index over the vesting period of each tranche, which ranges from one to three years. MSU participants have the ability to receive up to 100% of the target number of shares in tranche 1 and 2 and up to 150% of the target number of shares in tranche 3.

 

A summary of the Company’s MSU activity and related information for the three months ended March 31, 2016 is as follows:

 

 

 

Number of Shares
Underlying MSUs

 

Weighted Average
Grant Date
Fair Value

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

193

 

$

37.53

 

MSUs Granted

 

220

 

9.67

 

MSUs Vested

 

(36

)

27.30

 

MSUs Cancelled/Forfeited

 

(28

)

27.30

 

Balance as of March 31, 2016

 

349

 

$

21.82

 

 

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Table of Contents

 

The fair value of each MSU award is determined by multiplying the fair value per share by the underlying number of shares. The fair value per share was determined on the grant date using the Monte Carlo valuation methodology. The fair value per share for each MSU award granted during the three months ended March 31, 2016 by tranche were as follows:

 

Grant Date

 

MSUs Granted

 

Tranche 1

 

Tranche 2

 

Tranche 3

 

MSU FV

 

February 17, 2016

 

136,350

 

$

1.36

 

$

1.98

 

$

6.30

 

$

9.64

 

February 18, 2016

 

65,000

 

1.15

 

1.76

 

5.77

 

8.68

 

March 7, 2016

 

18,835

 

2.19

 

2.80

 

8.29

 

13.28

 

 

The Company amortizes the fair value of each MSU award using the graded-vesting method, adjusted for estimated forfeitures. Stock-based compensation expense associated with participants who fulfill their requisite service period is not reversed even if the performance conditions are not met. However, stock-based compensation expense is reversed for participants who forfeit their MSU awards prior to fulfilling their requisite service period.

 

The fair value of the MSUs granted during the three months ended March 31, 2016 and 2015 were estimated using the following weighted-average assumptions:

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

Expected term (in years)

 

3

 

3

 

Risk-free interest rate

 

0.86% - 1.05%

 

0.99%

 

Expected volatility

 

45%

 

39%

 

Expected dividend rate

 

0%

 

0%

 

 

The weighted average grant date fair value of MSUs granted and the total intrinsic value of MSUs that vested during the periods presented were as follows (in thousands, except weighted average grant date fair value):

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

Weighted average grant date fair value of MSUs granted

 

$

9.67

 

$

37.53

 

Total intrinsic value of vested MSUs (in thousands)

 

$

540

 

$

 

 

Employee Stock Purchase Plan

 

The assumptions used to value employee stock purchase rights under the Black-Scholes model during the three months ended March 31, 2016 and 2015 were as follows:

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

Expected term (in months)

 

6

 

6

 

Risk-free interest rate

 

0.42%

 

0.07%

 

Expected volatility

 

41%

 

39%

 

Expected dividend rate

 

0%

 

0%

 

 

During the first three months ended March 31, 2016, the Company issued approximately 0.2 million shares of common stock under the Company’s Employee Stock Purchase Plan (ESPP) with an average purchase price of $12.65 per share.

 

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Table of Contents

 

Stock Compensation Expense

 

The stock-based compensation expense included in operating results was allocated as follows (in thousands):

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Cost of subscription and support revenue

 

$

762

 

$

619

 

Cost of professional services and other revenue

 

1,212

 

937

 

Research and development

 

1,805

 

2,316

 

Sales and marketing

 

3,074

 

2,802

 

General and administrative

 

3,147

 

2,607

 

Total stock-based compensation expense

 

$

10,000

 

$

9,281

 

 

For the three months ended March 31, 2016, the Company incurred expenses of $1.7 million for options, $7.1 million for RSUs, $0.8 million for MSUs and $0.5 million for ESPP shares. Additionally, the Company capitalized stock-based compensation expense of $0.1 million associated with the Company’s internal-use software projects.

 

As of March 31, 2016, total unrecognized compensation cost related to unvested awards not yet recognized under all equity compensation plans, adjusted for estimated forfeitures, was as follows:

 

 

 

March 31, 2016

 

 

 

Unrecognized
Expense

 

Average Expected
Recognition Period

 

 

 

(in thousands)

 

(in years)

 

Stock options

 

$

7,988

 

1.21

 

Restricted stock units and market stock units

 

70,585

 

2.95

 

Employee stock purchase plan

 

619

 

0.50

 

Total unrecognized stock-based compensation expense

 

$

79,192

 

2.76

 

 

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Table of Contents

 

10. Net Loss per Share

 

Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture as they are not deemed to be issued for accounting purposes. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including stock options, RSUs, MSUs and ESPP shares, to the extent they are dilutive.

 

The following table sets forth the computation of the Company’s basic and diluted net loss per share of common stock under the two-class method attributable to common stockholders:

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

 

 

(in thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

Net loss attributable to Marketo

 

$

(18,423

)

$

(18,158

)

Denominator:

 

 

 

 

 

Weighted-average common shares outstanding

 

44,021

 

41,815

 

Less: Weighted-average unvested common shares subject to repurchase or forfeiture and shares held in escrow

 

(29

)

(202

)

Weighted-average shares used in computing net loss per share of common stock, basic and diluted

 

43,992

 

41,613

 

Net loss per share of common stock, basic and diluted

 

$

(0.42

)

$

(0.44

)

 

The Company applied the two-class method to calculate its basic and diluted net loss per share of common stock, as its common stock subject to repurchase and common stock held in escrow are participating securities. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common shareholders.

 

However, the two-class method does not impact the net loss per share of common stock as the Company was in a loss position for each of the periods presented and preferred shareholders, holders of common stock subject to repurchase and common stock held in escrow do not have to participate in losses.

 

Additionally, since the Company was in a loss position for each of the periods presented, diluted net loss per share is the same as basic net loss per share for each period, as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were excluded from the diluted per share calculation because they would have been anti-dilutive were as follows:

 

 

 

As of March 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Stock options to purchase common stock

 

3,483

 

4,969

 

Employee stock purchase plan

 

207

 

120

 

Common stock held in escrow

 

 

159

 

Common stock subject to repurchase

 

9

 

39

 

Restricted stock units and market stock units

 

3,877

 

3,359

 

 

 

7,576

 

8,646

 

 

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Table of Contents

 

11. Income Taxes

 

For the three months ended March 31, 2016 and 2015, the Company recorded an expense for income taxes of approximately $0.4 million and $0.2 million, respectively, consisting primarily of foreign and state income taxes.

 

For the three months ended March 31, 2016 and 2015,  the provision for income taxes differed from the statutory amount primarily due to unbenefited federal, state, and certain foreign losses with minor offsets for certain state and foreign taxes currently payable. The Company realized no benefit for current year losses due to maintaining a full valuation allowance against the U.S. and certain foreign net deferred tax assets.

 

The realization of tax benefits of deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available objective evidence, the Company does not believe it is more likely than not that the U.S. federal and state and certain foreign net deferred tax assets will be realizable. Accordingly, the Company has provided a full valuation allowance against the domestic net deferred tax assets and certain foreign jurisdictions with net deferred tax assets as of March 31, 2016 and December 31, 2015. The Company intends to maintain the remaining valuation allowance until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance. During the three months ended March 31, 2016, there have been no material changes to the total amount of unrecognized tax benefits.

 

12. Segment Information and Information about Geographic Areas

 

The accounting principles guiding disclosures about segments of an enterprise and related information establishes standards for the reporting by business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method of determining which information is reported is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company’s chief operating decision maker (CODM) is considered to be the Company’s Chief Executive Officer (CEO). The CODM reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. As such, the Company is determined to be operating in one business segment.

 

All of the Company’s principal operations and decision-making functions are located in the United States.

 

Revenue

 

Revenue by geography is based on the shipping address of the customer. The following table presents the Company’s revenue by geographic region for the periods presented:

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

United States

 

$

51,859

 

$

39,265

 

EMEA

 

4,586

 

3,152

 

Other

 

5,771

 

3,583

 

Total

 

$

62,216

 

$

46,000

 

 

No single customer accounted for more than 10% of the Company’s total revenue during the three months ended March 31, 2016 and 2015, respectively. No single customer accounted for more than 10% of accounts receivable as of March 31, 2016 and December 31, 2015.

 

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Table of Contents

 

Long-lived Assets

 

The following table sets forth the Company’s long-lived assets by geographic areas as of the periods presented:

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

United States

 

$

22,513

 

$

19,508

 

EMEA

 

409

 

327

 

Other

 

1,351

 

1,488

 

Total

 

$

24,273

 

$

21,323

 

 

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Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operati ons

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed on March 4, 2016. As discussed in the section above titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that 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. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below.

 

Overview

 

We are the provider of a leading cloud-based Engagement Marketing Platform that is purpose-built to enable organizations ranging from small and medium businesses (SMBs) to the world’s largest enterprises to engage in modern relationship marketing. Our platform enables the effective execution, management and analytical measurement of online, social, mobile and offline marketing activities and customer interactions in today’s data-centric, multi-channel business environment. We have built a rich set of applications across ten categories that run on our Engagement Marketing Platform, as follows: Marketing Automation, Email Marketing, Mobile Engagement, Social Marketing, Digital Ads, Web Personalization, Marketing Analytics, Predictive Content, Marketing Calendar and Sales Insight.

 

We deliver our solutions entirely through a multi-tenant cloud-based, or Software as a Service (SaaS), architecture which customers can configure to their specific needs. We initially focused our selling efforts on the SMB market, but beginning in late 2010, to address growing enterprise demand, we began to invest in an enterprise sales organization. We define the SMB market as companies with fewer than 1,500 employees and the enterprise market as companies with 1,500 or more employees.

 

Our Engagement Marketing Platform offers a unique blend of power and speed that is appealing to business to business (B2B) and business to consumer (B2C) customers across both large enterprises and SMBs. We market and sell our products directly and through select distribution partners. Our client base is diverse, with 4,615 customers as of March 31, 2016 across a wide range of industries including business services, consumer, financial services, healthcare, manufacturing, media, technology and telecommunications. During each of the three months ended March 31, 2016 and 2015, our 20 largest customers accounted for approximately 11% of our total revenue. The percentage of our subscription and support revenue from enterprise customers was 31% and 29% during the three months ended March 31, 2016 and 2015, respectively.

 

Many of the strategies and business processes that our solution supports are new and rapidly evolving, and there is relatively little accumulated experience in many of our prospective customers about how best to take advantage of modern relationship marketing. We therefore complement our products with an extensive network of resources to assist our customers with the strategic and practical use of our solutions. Among these resources are expert consulting services, peer-to-peer discussion communities, a library of pre-built marketing programs and templates, rich content on marketing best practices and an integrated ecosystem of partner products. We collectively refer to this extended set of resources as the Marketo Marketing Nation.

 

Our direct sales force has separate sales teams for the enterprise market and for the SMB market. Within our direct sales force, we also have a team that is responsible for selling to existing customers who may renew their subscriptions, increase their usage of our platform and applications, acquire additional applications from our product family, or broaden the deployment of our solutions across their organizations. In addition, we utilize distributors, agencies, resellers and OEMs, who resell or use our platform to provide managed marketing services to their end customers. To date, substantially all of our revenue has been derived from direct sales.

 

We provide our solutions on a subscription basis, and we generated total revenue of $62.2 million and $46.0 million for the three months ended March 31, 2016 and 2015, respectively. We derive most of our revenue from subscriptions to our cloud-based software and related customer support services. Subscription and support revenue accounted for 89% and 87% of our total revenue during each of the three months ended March 31, 2016 and 2015, respectively. We price our products based on various customer usage measures, including the number of records in each customer’s database and the number of user seats authorized to access our service. Our subscription contracts are typically one year in length, but can range from one year to three years in length.

 

Professional services and other revenue accounted for 11% and 13% of our total revenue during the three months ended March 31, 2016 and 2015, respectively.  Our solution is designed to be ready to use immediately upon provisioning of a new customer subscription. However, we believe that our customers’ success is enhanced by the effective use of marketing strategies performed with our software, which we foster primarily through the sale and delivery of expert services that educate our customers on the best use of our solutions as well as assist in the implementation of our solutions. In addition, some of our customers require services to support

 

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integrating their existing systems with our solutions. Enterprise customers typically exhibit a higher demand for all of these services. We also partner with third-party consulting organizations that provide similar services to our customers in connection with their use of our solutions. One of our strategies is to increase the amount of services delivered by such third-party consulting organizations, and we have had success growing the capabilities of our third-party partners. We expect to see our professional services revenue grow at a slightly slower rate than our subscription revenue and to not increase significantly as a percentage of total revenue.

 

We generate the majority of our revenue in the United States; however, we are focused on growing our international business. Revenue generated from our international customers was approximately 17% and 15% of our total revenue during the three months ended March 31, 2016 and 2015, respectively.

 

We have focused on rapidly growing our business and plan to continue to invest in growth. We expect our cost of revenue and operating expenses to continue to increase in absolute dollars in future periods. Marketing and sales expenses are expected to increase as we continue to expand our sales teams, increase our marketing activities and grow our international operations. Research and development expenses are expected to increase in absolute dollars to support the enhancement of our existing products and the development of new products. We also intend to invest in maintaining a high level of customer service and support which we consider critical for our continued success. We plan to continue investing in our data center infrastructure and services capabilities in order to support continued future customer growth. We also expect to incur additional general and administrative expenses as a result of both our growth and the infrastructure required to be a public company. Considering our plans for investment, we do not expect to be profitable in the near term and, in order to achieve profitability, we will need to grow revenue at a rate faster than our investments in cost of revenue and operating expenses.

 

We had net losses attributable to Marketo of $18.4 million and $18.2 million for the three months ended March 31, 2016 and 2015, respectively, primarily due to increased investments in our current and projected future growth.

 

Since our inception, we financed our operations through cash collected from customers as well as preferred equity financings, our initial public offering (IPO) and concurrent private placement completed in May 2013, and our follow-on public offering completed in September 2013.  We also maintain a credit facility. As of March 31, 2016, we had outstanding borrowings of $2.0 million under this facility.

 

Seasonality, Cyclicality and Quarterly Trends

 

We have historically experienced seasonality in terms of when we enter into new customer agreements for our services. We sign a significantly higher percentage of agreements with new customers as well as renewal agreements with existing customers in the fourth quarter of each year as compared to any of the prior quarters. The first quarter and third quarter are typically the slowest in this regard. Furthermore, we usually sign a significant portion of these agreements during the last month, and often the last two weeks, of each quarter. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in our revenue, because we recognize subscription revenue over the term of the license agreement, which is typically one year, but ranges from one to three years. Historical patterns should not be considered a reliable indicator of our future sales activity or performance.

 

Our revenue has increased over the periods presented due to increased sales to new customers, as well as increased usage of existing and new products by existing customers. Our operating expenses generally have increased sequentially in every quarter primarily due to increases in headcount and other related expenses to support our growth. We anticipate our operating expenses will continue to increase in absolute dollars in future periods as we invest in the long-term growth of our business.

 

In addition, each year we typically participate in several key industry trade shows, including our own annual user conference, which typically occurs in the second quarter of the fiscal year. The timing of these events can vary from year to year, and the costs associated with these events typically have a significant effect on our sales and marketing expenses for the applicable quarter and cause our quarterly results and cash flows to fluctuate.

 

Results of Operations for the Three Months Ended March 31, 2016 and 2015

 

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

 

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Three Months
Ended March 31,

 

 

 

2016

 

2015

 

Revenue:

 

 

 

 

 

Subscription and support

 

89.0

%

87.2

%

Professional services and other

 

11.0

 

12.8

 

Total revenue

 

100.0

 

100.0

 

Cost of revenue:

 

 

 

 

 

Subscription and support

 

19.8

 

19.7

 

Professional services and other

 

14.6

 

16.0

 

Total cost of revenue

 

34.4

 

35.7

 

Gross margin:

 

 

 

 

 

Subscription and support

 

69.2

 

67.4

 

Professional services and other

 

-3.5

 

-3.1

 

Total gross margin

 

65.6

 

64.3

 

Operating expenses:

 

 

 

 

 

Research and development

 

17.7

 

21.1

 

Sales and marketing

 

59.7

 

65.3

 

General and administrative

 

17.5

 

19.1

 

Total operating expenses

 

94.8

 

105.5

 

Loss from operations

 

-29.2

 

-41.1

 

Other income (expense), net

 

-0.2

 

1.1

 

Loss before provision for income taxes

 

-29.4

 

-40.0

 

Provision for income taxes

 

0.6

 

0.5

 

Net loss

 

-30.0

 

-40.5

 

Net loss attributable to redeemable non-controlling interests

 

0.4

 

1.0

 

Net loss attributable to Marketo

 

-29.6

%

-39.5

%

 

Percentages are based on actual values. Totals may not sum due to rounding.

 

Revenue

 

 

 

Three Months
Ended March 31,

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

2015

 

$ Change

 

% Change

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

55,348

 

$

40,100

 

$

15,248

 

38.0

%

Professional services and other

 

6,868

 

5,900

 

968

 

16.4

 

Total revenue

 

$

62,216

 

$

46,000

 

$

16,216

 

35.3

%

 

 

 

 

 

 

 

 

 

 

Percentage of revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

89.0

%

87.2

%

 

 

 

 

Professional services and other

 

11.0

%

12.8

%

 

 

 

 

Total

 

100.0

%

100.0

%

 

 

 

 

 

Total revenue increased $16.2 million or 35%, during the three months ended March 31, 2016 compared to the same period in 2015, due to the increase in subscription and support revenue of $15.2 million and an increase in professional services revenue of $1.0 million.

 

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Impact (in thousands)

 

 

Category

 

Three Months

 

Key Drivers

Subscription and support

 

h

$

15,248

 

Increase in subscription and support revenue was primarily attributable to (1) growth in our total customer count and (2) growth in both usage rights (driven by higher use, consumption and/or database size of our products used by existing customers) and cross selling of additional products either during the term of their subscription or at the point of renewal of their subscription. Of the total increase in subscription and support revenue during the three months ended March 31, 2016, 67% was attributable to revenue from new customers acquired after March 31, 2015 and 33% was attributable to revenue from customers existing on or before March 31, 2015.

Professional services and other

 

h

$

968

 

Increase in professional services revenue resulted from increased demand for services across our customer base, particularly enterprise customers who typically have a higher demand for our services.

 

Cost of Revenue and Gross Margin

 

 

 

Three Months
Ended March 31,

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

2015

 

$ Change

 

% Change

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

12,310

 

$

9,074

 

$

3,236

 

35.7

%

Professional services and other

 

9,068

 

7,337

 

1,731

 

23.6

 

Total cost of revenue

 

$

21,378

 

$

16,411

 

$

4,967

 

30.3

%

 

 

 

 

 

 

 

 

 

 

Gross margin:

 

 

 

 

 

 

 

 

 

Subscription and support

 

77.8

%

77.4

%

 

 

 

 

Professional services and other

 

-32.0

%

-24.4

%

 

 

 

 

Total gross margin

 

65.6

%

64.3

%

 

 

 

 

 

Cost of subscription and support increased due to the following:

 

 

 

Impact (in thousands)

 

 

Category

 

Three Months

 

Key Drivers

Personnel-related costs

 

h

$

1,312

 

Increase in salary and benefits costs resulted from an increase in headcount directly associated with our cloud infrastructure, customer support and customer success organizations to support our existing and new customers and an increase in stock-based compensation, which reflects grants of additional equity awards to existing employees and of equity awards to new employees.

Depreciation and amortization

 

h

 

649

 

Increase in depreciation and amortization expense primarily reflected the expansion of network capacity at our U.S. based co-location data center facilities and amortization of capitalized software costs.

Equipment maintenance

 

h

 

577

 

Increase in equipment maintenance costs primarily related to the increase in asset additions in our co-location data center facilities

Hosting costs

 

h

 

216

 

Increase in hosting costs resulted from our increased use of our international managed hosting service provider due to increased customer count at our international locations.

Facilities and IT allocations

 

h

 

166

 

Increase in the allocation of facility and IT expenses was due principally to headcount growth in the subscription and support department and overall higher IT and facilities expenses.

Various other items

 

h

 

316

 

Increase was due to various other individually insignificant items.

 

Our subscription and support gross margin were 77.8% and 77.4% for the three months ended March 31, 2016 and 2015, respectively. Subscription and support gross margin remained relatively flat for each of these periods primarily due to increased subscription and support revenue being offset by increased cost of subscription and support. We expect subscription and support gross margins to remain relatively flat in the future.

 

Cost of professional services and other increased due to the following:

 

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Impact (in thousands)

 

 

Category

 

Three Months

 

Key Drivers

Personnel-related costs

 

h

$

1,339

 

Increase in salary and benefit cost resulted from an increase in headcount as we continue to grow our professional services organization to support the increasing demand from our enterprise customers and an increase in stock-based compensation expenses from additional equity awards to new and existing employees.

Facilities and IT allocations

 

h

 

218

 

Increase in the allocation of facility and IT expenses was due principally to headcount growth in the professional services and other department and overall higher IT and facilities expenses.

Various other items

 

h

 

174

 

Increase was due to various other insignificant items.

 

Our professional services and other gross margin were (32.0)% and (24.4)% for the three months ended March 31, 2016 and 2015, respectively. The decrease in gross margin for the three months ended March 31, 2016, compared to the same period in 2015, primarily reflects an increase in personnel-related costs, as we hired additional non-billable administrative staff to support our growing professional services organization.

 

We expect gross margin for professional services to improve for the remainder of 2016 as we align capacity to support projected growth of our professional services business.  Our gross margin for professional services can also be impacted by any associated costs relating to the delivery of professional services, and the timing of significant expenditures.

 

Research and Development

 

 

 

Three Months
Ended March 31,

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

2015

 

$ Change

 

% Change

 

Research and development

 

$

11,001

 

$

9,695

 

$

1,306

 

13.5

%

Percentage of total revenue

 

17.7

%

21.1

%

 

 

 

 

 

Research and development expenses increased due to the following:

 

 

 

Impact (in thousands)

 

 

Category

 

Three Months

 

Key Drivers

Personnel-related costs

 

h

$

529

 

Increase in salary and benefits costs was primarily driven by the increase in headcount to support the enhancement of our existing products and the development of new products, partially offset by a decrease in stock-based compensation due to the vesting of performance-based RSUs tied to product milestones during the prior year.

Capitalized software

 

h

 

449

 

Decrease in capitalized personnel-related costs for software development was primarily due to larger capitalizable projects in Q1 2015 to Q1 2016.

Facilities and IT allocations

 

h

 

370

 

Increase in the allocation of facility and IT expenses was due principally to headcount growth in the research and development department and overall higher IT and facilities expenses.

Various other items

 

i

 

(42

)

Decrease was due to various other insignificant items.

 

We believe that continued investment in our technology is important for our future growth, and, as a result, we expect research and development expenses to continue to increase in absolute dollars but may fluctuate as a percentage of revenue.

 

Sales and Marketing

 

 

 

Three Months
Ended March 31,

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

2015

 

$ Change

 

% Change

 

Sales and marketing

 

$

37,113

 

$

30,032

 

$

7,081

 

23.6

%

Percentage of total revenue

 

59.7

%

65.3

%

 

 

 

 

 

Sales and marketing expenses increased due to the following:

 

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Impact (in thousands)

 

 

Category

 

Three Months

 

Key Drivers

Personnel-related costs

 

h

$

5,046

 

Increase in salary and benefit costs was primarily driven by an increase in headcount for our sales, marketing and business development employees and executives and an increase in stock-based compensation expenses from additional equity awards to new and existing employees.

Travel and entertainment

 

h

 

1,034

 

Increase in travel costs reflected the expansion of our enterprise sales efforts and increased international sales and marketing efforts.

Facilities and IT allocations

 

h

 

891

 

Increase in the allocation of facility and IT expenses was due principally to headcount growth in the sales and marketing department and overall higher IT and facilities expenses.

Commissions

 

h

 

740

 

Increase in commission expense primarily reflected an increase in new customer acquisitions and increased subscription services to existing customers.

Marketing programs

 

i

 

(821

)

Decrease in marketing costs was due primarily to a planned effort to improve efficency in marketing spend through a shift in the mix of programs in the current period and greater leverage of sales and partner teams to help drive demand.

Various other items

 

h

 

191

 

Increase was due to various other insignificant items.

 

We expect sales and marketing expenses to increase in absolute dollars and remain our largest expense in absolute dollars, but may fluctuate as a percentage of revenue.

 

General and Administrative

 

 

 

Three Months
Ended March 31,

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

2015

 

$ Change

 

% Change

 

General and administrative

 

$

10,872

 

$

8,782

 

$

2,090

 

23.8

%

Percentage of total revenue

 

17.5

%

19.1

%

 

 

 

 

 

General and administrative expenses increased due to the following:

 

 

 

Impact (in thousands)

 

 

Category

 

Three Months

 

Key Drivers

Personnel-related costs

 

h

$

2,013

 

Increase in salary, recruiting, and benefit costs was primarily driven by an increase in headcount for our administrative, legal, human resources, finance and accounting departments and an increase in stock-based compensation expenses from additional equity awards to new and existing employees.

Various other items

 

h

 

77

 

Increase was due to various other insignificant items.

 

We expect that our general and administrative expenses will increase in absolute dollars as we continue to expand our business and infrastructure to support being a public company, but may fluctuate as a percentage of revenue in the future.

 

Other (Expense) Income, net

 

 

 

Three Months
Ended March 31,

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

2015

 

$ Change

 

% Change

 

Other (expense) income, net

 

$

(137

)

$

520

 

$

(657

)

126.3

%

Percentage of total revenue

 

-0.2

%

1.1

%

 

 

 

 

 

Other (expense) income, net increased due to the following:

 

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Impact (in thousands)

 

 

Category

 

Three Months

 

Key Drivers

Foreign exchange gain (loss)

 

i

$

(746

)

The change in foreign exchange gain (loss) was primarily due to the strengthening of the U.S. dollar against the Euro during the quarter ended March 31, 2015 resulting in gains, versus the U.S. dollar weakening against other foreign currencies during the quarter ended March 31, 2016, resulting in losses.

Various other items

 

h

 

89

 

Increase was due to various other insignificant items.

 

Provision for Income Taxes

 

 

 

Three Months
Ended March 31,

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

2015

 

$ Change

 

% Change

 

Provision for income taxes

 

$

402

 

$

212

 

$

190

 

89.6

%

Percentage of total revenue

 

0.6

%

0.5

%

 

 

 

 

 

For the three months ended March 31, 2016 and 2015, the Company recorded an expense for income taxes of approximately $0.4 million and $0.2 million, respectively, consisting primarily of foreign and state income taxes. We expect our income tax expense in our foreign jurisdictions to increase for the remainder of 2016.

 

Net Loss and Adjustment Attributable to Redeemable Non-Controlling Interests

 

 

 

Three Months
Ended March 31,

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

2015

 

$ Change

 

% Change

 

Net loss attributable to non-controlling interests

 

$

264

 

$

454

 

$

(190

)

41.9

%

Percentage of total revenue

 

0.4

%

1.0

%

 

 

 

 

 

Net loss and adjustment attributable to redeemable non-controlling interests fluctuated due to the following:

 

 

 

Impact (in thousands)

 

 

Category

 

Three Months

 

Key Drivers

Net loss attributable to non-controlling interests

 

i

$

(16

)

Decrease in net loss attributable to redeemable non-controlling interests related to the overall decrease in net losses in Marketo KK.

Adjustment to non-controlling interests

 

i

 

(174

)

Increase in adjustment to non-controlling interests was primarily due to the excess of the estimated redemption value over the carrying value of the non- controlling interest balance.

 

Liquidity and Capital Resources

 

To date, we have financed our operations through cash collected from customers as well as preferred equity financings, our IPO and concurrent private placement completed in May 2013, and our follow-on public offering completed in September 2013.  We also maintain a credit facility. As of March 31, 2016 and December 31, 2015, we had cash and cash equivalents of $94.7 million and $107.2 million, respectively, most of which was held in money market accounts.

 

In May 2012, we entered into a loan and security agreement with a bank related to a credit facility providing us with an equipment line of up to $4.0 million. In June 2013, we entered into a first amendment to the loan and security agreement, which provided an additional line of credit for advances of up to $4.5 million. The interest rate associated with both lines of credit is the greater of 4% or three-quarters of a percentage point above the bank’s prime rate, as determined on the applicable funding date. For each equipment loan advance, we paid interest only for approximately nine months. Subsequently, we make thirty-six equal monthly payments of principal and interest. In May 2014 we entered into a second amendment to revise the existing covenants associated with this facility.  As of March 31, 2016, we were in compliance with these revised covenants. As of March 31, 2016 and December 31, 2015, the outstanding loan balance was $2.0 million and $2.7 million, respectively. See Note 7 - Credit Facility to our Condensed Consolidated Financial Statements for a discussion of our credit facility.

 

A substantial source of our cash flow from operating activities results from changes in our deferred revenue balance, which is included on our unaudited condensed consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of

 

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billed fees for our software subscriptions and professional services and is amortized into revenue in accordance with our revenue recognition policy. As of March 31, 2016 and December 31, 2015, we had working capital of $35.3 million and $43.1 million, respectively, which included $91.5 million and $91.7 million of deferred revenue recorded as a current liability, respectively. The decrease in our working capital at March 31, 2016 was primarily due to our net cash used in operating activities and our total capital expenditures, partially offset by proceeds received for common stock issued upon exercise of stock options and under our employee stock purchase plan.

 

We assess our liquidity primarily through our cash on hand as well as the projected timing of billings under contract with our customers and related collection cycles. We believe our current cash and cash equivalents, and cash to be received from existing and new customers will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

 

As of March 31, 2016, we held an aggregate of $84.6 million and $10.1 million in cash and cash equivalents in the United States and our foreign subsidiaries, respectively. At present, such foreign funds are considered to be indefinitely reinvested in foreign countries. In the event funds from foreign operations are needed to fund cash needs in the United States and if U.S. taxes have not already been previously accrued, we would be required to accrue and pay additional U.S. taxes in order to repatriate these funds.

 

Our future capital requirements will depend on many factors, including equipment required in connection with expanding capacity in our co-location data center facilities, revenue growth and costs incurred to support customer growth, international expansion, research and development and increased general and administrative expenses to support the anticipated growth in our operations. Our capital expenditures in future periods are expected to grow in line with our business. To the extent that existing cash and cash from operations are not sufficient to fund our future operations, we may need to raise additional funds through public or private equity or additional debt financing. Although we currently are not a party to any agreement and do not have any understanding with any third parties with respect to potential investments in, or acquisitions of, businesses or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

 

The table below provides selected cash flow information for the periods indicated (in thousands):

 

 

 

Three Months
Ended March 31,

 

 

 

2016

 

2015

 

Net cash used in operating activities

 

$

(9,980

)

$

(8,535

)

Net cash used in investing activities

 

(5,923

)

(4,828

)

Net cash provided by financing activities

 

2,797