Marketo
Marketo, Inc. (Form: 10-Q, Received: 08/03/2016 16:35:22)

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 JUNE 30, 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 45,124,996 shares of the registrant’s Common Stock issued and outstanding as of July 27, 2016.

 

 

 


 


Table of Contents

 

MARKETO, INC.

 

Table of C ontents

 

 

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

34

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

 

Part II — Other Information

 

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

 

 

 

Item 3.

Defaults Upon Senior Securities

56

 

 

 

Item 4.

Mine Safety Disclosures

56

 

 

 

Item 5

Other Information

56

 

 

 

Item 6.

Exhibits

56

 

 

 

Signatures

 

58

 

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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; and

 

·                   our pending merger discussed below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Pending Merger.”

 

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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PART I — FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

MARKETO, INC.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

99,504

 

$

107,218

 

Accounts receivable, net

 

61,992

 

50,678

 

Prepaid expenses and other current assets

 

8,502

 

9,073

 

Total current assets

 

169,998

 

166,969

 

Property and equipment, net

 

24,795

 

21,323

 

Goodwill

 

29,201

 

29,201

 

Intangible assets, net

 

4,978

 

5,455

 

Other assets

 

2,960

 

2,130

 

Total assets

 

$

231,932

 

$

225,078

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

7,318

 

$

4,265

 

Accrued expenses and other current liabilities

 

25,177

 

25,706

 

Deferred revenue

 

102,604

 

91,735

 

Current portion of credit facility

 

1,383

 

2,174

 

Total current liabilities

 

136,482

 

123,880

 

Credit facility, net of current portion

 

 

478

 

Deferred revenue, long-term

 

156

 

230

 

Other liabilities

 

4,602

 

2,722

 

Total liabilities

 

141,240

 

127,310

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

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

 

9,888

 

4,643

 

Stockholders’ equity:

 

 

 

 

 

Common stock

 

5

 

4

 

Additional paid-in capital

 

365,158

 

344,727

 

Accumulated other comprehensive income (loss)

 

77

 

(274

)

Accumulated deficit

 

(284,436

)

(251,332

)

Total stockholders’ equity

 

80,804

 

93,125

 

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

 

$

231,932

 

$

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 Operations

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

57,682

 

$

43,757

 

$

113,030

 

$

83,857

 

Professional services and other

 

8,313

 

6,923

 

15,181

 

12,823

 

Total revenue

 

65,995

 

50,680

 

128,211

 

96,680

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

12,178

 

9,770

 

24,488

 

18,844

 

Professional services and other

 

9,058

 

8,177

 

18,126

 

15,514

 

Total cost of revenue

 

21,236

 

17,947

 

42,614

 

34,358

 

Gross profit:

 

 

 

 

 

 

 

 

 

Subscription and support

 

45,504

 

33,987

 

88,542

 

65,013

 

Professional services and other

 

(745

)

(1,254

)

(2,945

)

(2,691

)

Total gross profit

 

44,759

 

32,733

 

85,597

 

62,322

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

10,178

 

9,168

 

21,179

 

18,863

 

Sales and marketing

 

35,096

 

32,055

 

72,209

 

62,087

 

General and administrative

 

14,445

 

8,960

 

25,317

 

17,742

 

Total operating expenses

 

59,719

 

50,183

 

118,705

 

98,692

 

Loss from operations

 

(14,960

)

(17,450

)

(33,108

)

(36,370

)

Other income (expense), net

 

51

 

97

 

(86

)

617

 

Loss before provision for income taxes

 

(14,909

)

(17,353

)

(33,194

)

(35,753

)

Provision for income taxes

 

405

 

100

 

807

 

312

 

Net loss

 

(15,314

)

(17,453

)

(34,001

)

(36,065

)

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

 

(5,445

)

(497

)

(5,181

)

(43

)

Net loss attributable to Marketo

 

$

(20,759

)

$

(17,950

)

$

(39,182

)

$

(36,108

)

 

 

 

 

 

 

 

 

 

 

Net loss per share of common stock, basic and diluted

 

$

(0.46

)

$

(0.43

)

$

(0.88

)

$

(0.86

)

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

 

44,694

 

42,163

 

44,343

 

41,889

 

 

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 June 30,

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(15,314

)

$

(17,453

)

$

(34,001

)

$

(36,065

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

141

 

(164

)

415

 

(74

)

Total comprehensive loss

 

(15,173

)

(17,617

)

(33,586

)

(36,139

)

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

 

459

 

415

 

897

 

869

 

Other comprehensive (income) loss attributable to redeemable non-controlling interests

 

(18

)

45

 

(64

)

42

 

Comprehensive loss attributable to Marketo

 

$

(14,732

)

$

(17,157

)

$

(32,753

)

$

(35,228

)

 

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

 

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MARKETO, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

Net loss:

 

 

 

 

 

Net loss attributable to Marketo

 

$

(39,182

)

$

(36,108

)

Net loss and adjustment attributable to redeemable non-controlling interests

 

5,181

 

43

 

Net loss

 

(34,001

)

(36,065

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

7,926

 

6,285

 

Stock-based compensation expense

 

20,138

 

19,007

 

Deferred income taxes

 

(136

)

247

 

Provision for allowance for doubtful accounts

 

613

 

236

 

Loss on disposal of fixed assets

 

9

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(11,577

)

(8,478

)

Prepaid expenses and other current assets

 

1,531

 

(2,019

)

Other assets

 

25

 

(861

)

Accounts payable

 

1,600

 

2,188

 

Accrued expenses and other current liabilities

 

(1,682

)

2,532

 

Deferred revenue

 

10,002

 

18,283

 

Other liabilities

 

787

 

77

 

Net cash (used in) provided by operating activities

 

(4,765

)

1,432

 

Cash flows from investing activities:

 

 

 

 

 

Increase in restricted cash

 

(735

)

(215

)

Purchase of property and equipment

 

(6,770

)

(8,324

)

Capitalized software development

 

(1,149

)

(772

)

Net cash used in investing activities

 

(8,654

)

(9,311

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock upon exercise of stock options

 

3,488

 

3,018

 

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

 

Repurchase of unvested common stock from terminated employees

 

 

(32

)

Withholding taxes remitted for the net share settlement of equity awards

 

(65

)

(74

)

Repayment of debt

 

(1,270

)

(1,346

)

Net cash provided by financing activities

 

4,869

 

6,129

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

836

 

(449

)

Net decrease in cash and cash equivalents

 

(7,714

)

(2,199

)

Cash and cash equivalents — beginning of period

 

107,218

 

112,644

 

Cash and cash equivalents — end of period

 

$

99,504

 

$

110,445

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

42

 

$

97

 

Cash paid for income taxes

 

590

 

116

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

Vesting of early exercise options

 

34

 

82

 

Unpaid and accrued fixed assets

 

2,573

 

1,252

 

Property and equipment acquired through tenant improvement allowance

 

1,146

 

211

 

 

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

 

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MARKETO, INC.

Notes to Condensed Consolidated Financial Statements

(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.

 

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.

 

Pending Merger

 

On May 27, 2016, Marketo entered into an Agreement and Plan of Merger (Merger Agreement) with Milestone Holdco, LLC, a Delaware limited liability company (Parent), and Milestone Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (Merger Sub), providing for the merger of Merger Sub with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub were formed by affiliates of Vista Equity Partners Fund VI, L.P., a Delaware limited partnership (Vista).  Parent will acquire all outstanding shares of Marketo common stock for a total value of approximately $1.79 billion.

 

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Consummation of the Merger is subject to customary closing conditions, including, but not limited to, the: (i) requisite approvals by the Company’s stockholders; (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act); and (iii) absence of any law or order restraining, enjoining or otherwise prohibiting the Merger. On June 22, 2016, the U.S. Federal Trade Commission notified Marketo that early termination of the waiting period under the HSR Act was granted, effective immediately. On July 28, 2016, Marketo held a special meeting of stockholders (the Special Meeting) at Marketo’s principal executive offices in San Mateo, CA to vote on the proposals described in the Company’s definitive proxy statement filed with the Securities and Exchange Commission on June 29, 2016 and first mailed to Marketo’s stockholders on June 29, 2016. At the Special Meeting, stockholders approved the proposal to adopt the Merger Agreement.

 

The Company and Vista Funds currently anticipate the closing of the transaction to occur in the third calendar quarter of 2016.

 

The Company has recorded $4.0 milllion of transaction costs related to this transaction in the three and six months ended June 30, 2016.

 

Recent Accounting Pronouncements

 

In April 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This ASU addresses certain implementation issues that have surfaced since the issuance of ASU 2014-09 in May 2014. The ASU provides guidance in identifying performance obligations and determining the appropriate accounting for licensing arrangements. The amendments in this ASU will be effective for the Company beginning January 1, 2018, and for interim periods therein. The Company is in the process of assessing the impact that adoption of this new standard will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606) Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 further clarifies principal and agent relationships within ASU 2014-09. The amendment will be effective for the Company beginning January 1, 2018, including interim reporting periods within that reporting year. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

 

In March 2016, the FASB issued 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.

 

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 with early adoption permitted. 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 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.

 

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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 June 30, 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 June 30, 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 June 30, 2016 the Company adjusted the redeemable non-controlling interests to its expected redemption value, resulting in a $5.9 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 June 30,

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

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

 

$

459

 

$

415

 

$

897

 

$

869

 

Adjustment to redeemable non-controlling interests

 

(5,904

)

(912

)

(6,078

)

(912

)

Net loss and adjustment attributable to redeemable non-controlling interests

 

$

(5,445

)

$

(497

)

$

(5,181

)

$

(43

)

 

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 June 30, 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.

 

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

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

80,769

 

$

 

$

 

$

93,108

 

$

 

$

 

Certificates of deposit

 

 

25

 

 

 

25

 

 

Total

 

$

80,769

 

$

25

 

$

 

$

93,108

 

$

25

 

$

 

 

4. Balance Sheet Components

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Cash

 

$

18,710

 

$

14,085

 

Cash equivalents:

 

 

 

 

 

Money market funds

 

80,769

 

93,108

 

Certificates of deposit

 

25

 

25

 

Total cash equivalents

 

80,794

 

93,133

 

Cash and cash equivalents

 

$

99,504

 

$

107,218

 

 

Accounts Receivable, Net

 

Accounts receivable, net consists of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Accounts receivable

 

$

62,952

 

$

51,235

 

Allowance for doubtful accounts

 

(960

)

(557

)

Accounts receivable, net

 

$

61,992

 

$

50,678

 

 

Property and Equipment, Net

 

Property and equipment, net consists of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Computer equipment

 

$

33,526

 

$

28,159

 

Software

 

3,525

 

3,498

 

Office furniture

 

3,518

 

2,952

 

Leasehold improvements

 

8,754

 

7,120

 

Construction in progress

 

3,890

 

2,808

 

Total property and equipment

 

53,213

 

44,537

 

Less accumulated depreciation

 

(28,418

)

(23,214

)

Property and equipment, net

 

$

24,795

 

$

21,323

 

 

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Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities are as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Accrued bonuses, commissions and wages

 

$

9,631

 

$

12,343

 

Accrued ESPP

 

2,254

 

2,387

 

Accrued vacation

 

4,713

 

3,739

 

Accrued marketing expenses

 

1,203

 

1,289

 

Accrued other

 

7,376

 

5,948

 

Total

 

$

25,177

 

$

25,706

 

 

5. Goodwill and Intangible Assets

 

Goodwill and intangible assets consist of the following as of June 30, 2016 and December 31, 2015:

 

 

 

June 30,
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

 

1.4

 

$

6,050

 

1.9

 

Domain names

 

950

 

2.5

 

950

 

2.8

 

Customer relationships

 

1,600

 

0.5

 

1,600

 

0.8

 

Non-compete agreements

 

580

 

1.5

 

580

 

2.0

 

Capitalized software development costs

 

5,330

 

1.4

 

3,980

 

1.2

 

 

 

14,510

 

 

 

13,160

 

 

 

Less accumulated amortization

 

(9,532

)

 

 

(7,705

)

 

 

Intangible assets, net

 

4,978

 

 

 

5,455

 

 

 

Goodwill

 

29,201

 

 

 

29,201

 

 

 

Goodwill and intangible assets, net

 

$

34,179

 

 

 

$

34,656

 

 

 

 

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

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Amortization expense

 

$

870

 

$

892

 

$

1,826

 

$

1,628

 

 

Based on the carrying amount of intangible assets as of June 30, 2016, the estimated future amortization is as follows (in thousands):

 

 

 

Six Months
Ending
December 31,

 

Years Ending December 31,

 

 

 

 

 

2016

 

2017

 

2018

 

2019

 

2020

 

Total

 

Developed Technology

 

$

754

 

$

1,407

 

$

 

$

 

$

 

$

2,161

 

Domain Names

 

88

 

100

 

100

 

29

 

 

317

 

Customer Relationships

 

107

 

 

 

 

 

107

 

Non-Compete Agreements

 

75

 

144

 

 

 

 

219

 

Capitalized Software Development Costs

 

894

 

1,025

 

255

 

 

 

2,174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,918

 

$

2,676

 

$

355

 

$

29

 

$

 

$

4,978

 

 

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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

 

3,456

 

 

Issuance of common stock under employee stock purchase plan

 

2,716

 

 

Adjustment to redemption value

 

(6,078

)

6,078

 

Withholding taxes for the net share settlement of equity awards

 

(62

)

 

Vesting of early exercised options

 

34

 

 

Stock-based compensation expense

 

20,366

 

 

Net loss

 

(33,104

)

(897

)

Foreign currency translation adjustments

 

351

 

64

 

Balance as of June 30, 2016

 

$

80,804

 

$

9,888

 

 

For the six months ended June 30, 2016, the Company incurred $20.1 million of stock-based compensation expense and capitalized stock-based compensation expense of $0.3 million associated with the development of the Company’s internal-use software projects.

 

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 June 30, 2016, the Company was in compliance with these covenants.  As of June 30, 2016 and December 31, 2015, the outstanding loan balance was $1.4 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

 

Commitments

 

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.

 

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In May 2016, the Company entered into a definitive lease agreement whereby the Company leases approximately 17,227 square feet of office space in Dublin, Ireland. The Company’s future minimum lease payments under this agreement are approximately $2.8 million, payable over the sixty month lease term.

 

As of June 30, 2016, future minimum operating lease payments are as follows (in thousands):

 

 

 

Minimum Lease
Payment

 

2016

 

$

3,990

 

2017

 

9,226

 

2018

 

9,678

 

2019

 

9,389

 

2020

 

8,929

 

Thereafter

 

14,800

 

Total

 

$

56,012

 

 

Contingencies

 

On July 5, 2016, a purported stockholder class action lawsuit captioned Porwal v. Marketo, Inc. et al., Case No. 16CIV00265, was filed in Superior Court of the State of California, County of San Mateo against Marketo, its directors, Vista, Parent, and Merger Sub.  The lawsuit alleges, generally, that Marketo’s directors breached their fiduciary duties to Marketo stockholders by seeking to sell Marketo through an allegedly defective process, for an unfair price, and on unfair terms, and that the other defendants aided and abetted those purported breaches. The lawsuit also alleges that defendants have failed to disclose all material facts concerning the proposed Merger to stockholders. The lawsuit seeks, among other things, equitable relief that would enjoin the consummation of the proposed Merger, damages, rescission of the proposed Merger to the extent it is consummated, and attorneys’ fees and costs.

 

On July 12, 2016, a purported stockholder class action lawsuit captioned Rosati v. Marketo, Inc. et al., Case No. 3:16-cv-3907, was filed in the United States District for the Court Northern District of California against Marketo and its directors. The lawsuit alleges, generally, that Marketo and its directors violated Section 14(a) and Rule 14a-9 promulgated thereunder by the SEC pursuant to Section 14 under the Securities Exchange Act of 1934, as amended. The lawsuit also alleges that defendants have failed to disclose all material facts concerning the proposed Merger to stockholders. The lawsuit also alleges that Marketo’s directors breached their fiduciary duties to Marketo stockholders by conducting an inadequate sales process and agreeing to a transaction that provides Marketo’s stockholders with inadequate consideration. On July 21, 2016, the plaintiff filed a request for a Temporary Restraining Order seeking to enjoin the shareholder vote. On July 26, 2016, the Court denied plaintiff’s request. The lawsuit seeks, among other things, equitable relief that would enjoin the consummation of the proposed Merger, damages, rescission of the proposed Merger to the extent it is consummated, and attorneys’ fees and costs.

 

The Company does not currently believe a loss from the above lawsuits are probable or estimable.

 

9. Stockholders’ Equity and Stock-Based Compensation

 

Common Stock Authorized and Outstanding

 

As of June 30, 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 June 30, 2016, the Company had approximately 45.0 million shares of common stock issued and outstanding.

 

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Summary of Stock Option Activity

 

A summary of the Company’s stock option activity under all stock option plans and related information for six months ended June 30, 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

 

91

 

30.56

 

 

 

 

 

Exercised

 

(692

)

5.04

 

 

 

 

 

Cancelled/forfeited

 

(206

)

28.80

 

 

 

 

 

Balance as of June 30, 2016

 

2,970

 

14.99

 

6.30

 

62,379

 

 

 

 

 

 

 

 

 

 

 

Exercisable as of June 30, 2016

 

2,558

 

11.60

 

5.99

 

61,502

 

Vested and expected to vest as of June 30, 2016

 

2,903

 

$

14.67

 

6.26

 

$

61,835

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing price of $34.82 as of June 30, 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 June 30, 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):

 

 

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

Weighted average grant date fair value of options granted

 

$

14.74

 

$

12.55

 

Total intrinsic value of options exercised (in thousands)

 

$

15,127

 

$

16,706

 

 

The total estimated grant date fair value of options vested during the six months ended June 30, 2016 was approximately $4.7 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. The following assumptions were used to estimate the fair value of options granted to employees:

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Expected term (in years)

 

6

 

6

 

6

 

6

 

Risk-free interest rate

 

1.52% - 1.55%

 

1.70%

 

1.52% - 1.55%

 

1.70%

 

Expected volatility

 

47.99%- 53.83%

 

44.80%

 

47.99%- 53.83%

 

44.80%

 

Expected dividend rate

 

0%

 

0%

 

0%

 

0%

 

 

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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 six months ended June 30, 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

 

1,397

 

18.01

 

RSUs Vested

 

(484

)

35.61

 

RSUs Cancelled/Forfeited

 

(366

)

28.67

 

Balance as of June 30, 2016

 

3,584

 

$

27.12

 

 

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):

 

 

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

Weighted average grant date fair value of RSUs granted

 

$

18.01

 

$

33.65

 

Total intrinsic value of vested RSUs (in thousands)

 

$

8,348

 

$

8,472

 

 

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 six months ended June 30, 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 June 30, 2016

 

349

 

$

21.82

 

 

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 six months ended June 30, 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

 

 

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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 and six months ended June 30, 2016 and 2015 were estimated using the following weighted-average assumptions:

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Expected term (in years)

 

N/A

 

N/A

 

3

 

3

 

Risk-free interest rate

 

N/A

 

N/A

 

0.86% - 1.05%

 

0.99%

 

Expected volatility

 

N/A

 

N/A

 

45%

 

39%

 

Expected dividend rate

 

N/A

 

N/A

 

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):

 

 

 

Six Months
Ended June 30,

 

 

 

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 six months ended June 30, 2016 and 2015 were as follows:

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Expected term (in months)

 

6

 

6

 

6

 

6

 

Risk-free interest rate

 

0.42%

 

0.07%

 

0.42%

 

0.07%

 

Expected volatility

 

41%

 

39%

 

41%

 

39%

 

Expected dividend rate

 

0%

 

0%

 

0%

 

0%

 

 

During the first six months ended June 30, 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 June 30,

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Cost of subscription and support revenue

 

$

789

 

$

626

 

$

1,551

 

$

1,245

 

Cost of professional services and other revenue

 

1,174

 

1,100

 

2,386

 

2,037

 

Research and development

 

1,859

 

1,639

 

3,664

 

3,955

 

Sales and marketing

 

3,217

 

3,404

 

6,291

 

6,206

 

General and administrative

 

3,099

 

2,957

 

6,246

 

5,564

 

Total stock-based compensation expense

 

$

10,138

 

$

9,726

 

$

20,138

 

$

19,007

 

 

For the six months ended June 30, 2016, the Company incurred expenses of $3.4 million for options, $14.6 million for RSUs, $1.5 million for MSUs and $0.9 million for ESPP shares. Additionally, the Company capitalized stock-based compensation expense of $0.3 million associated with the Company’s internal-use software projects.

 

As of June 30, 2016, total unrecognized compensation cost related to unvested awards not yet recognized under all equity compensation plans, adjusted for estimated forfeitures, was as follows:

 

 

 

June 30, 2016

 

 

 

Unrecognized
Expense

 

Average Expected
Recognition Period

 

 

 

(in thousands)

 

(in years)

 

Stock options

 

$

7,565

 

1.32

 

Restricted stock units and market stock units

 

67,308

 

2.77

 

Employee stock purchase plan

 

208

 

0.13

 

Total unrecognized stock-based compensation expense

 

$

75,081

 

2.62

 

 

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.

 

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Table of Contents

 

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 June 30,

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss attributable to Marketo

 

$

(20,759

)

$

(17,950

)

$

(39,182

)

$

(36,108

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

44,701

 

42,333

 

44,361

 

42,075

 

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

 

(7

)

(170

)

(18

)

(186

)

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

 

44,694

 

42,163

 

44,343

 

41,889

 

Net loss per share of common stock, basic and diluted

 

$

(0.46

)

$

(0.43

)

$

(0.88

)

$

(0.86

)

 

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 June 30,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Stock options to purchase common stock

 

2,970

 

4,498

 

Employee stock purchase plan

 

207

 

110

 

Common stock held in escrow

 

 

22

 

Common stock subject to repurchase

 

10

 

23

 

Restricted stock units and market stock units

 

3,933

 

3,175

 

 

 

7,120

 

7,828

 

 

11. Income Taxes

 

The provision for income taxes was $0.4 million and $0.1 million for the three months ended June 30, 2016 and 2015, respectively and $0.8 million and $0.3 million for the six months ended June 30, 2016 and 2015, respectively. The provision for income taxes consisted primarily of foreign and state income taxes.

 

For the three and six months ended June 30, 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 June 30, 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 six months ended June 30, 2016, there have been no material changes to the total amount of unrecognized tax benefits.

 

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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 June 30,

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

(in thousands)

 

United States

 

$

54,330

 

$

43,144

 

$

106,190

 

$

82,409

 

EMEA

 

5,084

 

3,380

 

9,669

 

6,532

 

Other

 

6,581

 

4,156

 

12,352

 

7,739

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

65,995

 

$

50,680

 

$

128,211

 

$

96,680

 

 

No single customer accounted for more than 10% of the Company’s total revenue during the three and six months ended June 30, 2016 and 2015, respectively. No single customer accounted for more than 10% of accounts receivable as of June 30, 2016 and December 31, 2015.

 

Long-lived Assets

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

United States

 

$

22,106

 

$

19,508

 

EMEA

 

1,469

 

327

 

Other

 

1,220

 

1,488

 

 

 

 

 

 

 

Total

 

$

24,795

 

$

21,323

 

 

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Table of Contents

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our 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 4,761 customers as of June 30, 2016 across a wide range of industries including business services, consumer, financial services, healthcare, manufacturing, media, technology and telecommunications. During the three months ended June 30, 2016 and 2015, our 20 largest customers accounted for approximately 11% and 13% of our total revenue, respectively. During the six months ended June 30, 2016 and 2015, our 20 largest customers accounted for approximately 11% and 12% of our total revenue, respectively.

 

The percentage of our subscription and support revenue from enterprise customers was 31% and 30% during the three months ended June 30, 2016 and 2015, respectively, and 31% and 30% during the six months ended June 30, 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 $66.0 million and $50.7 million for the three months ended June 30, 2016 and 2015, respectively, and $128.2 million and $96.7 million for the six months ended June 30, 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 87% and 86% of our total revenue during each of the three months ended June 30, 2016 and 2015, respectively, and 88% and 87% of our total revenue during the six months ended June 30, 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.

 

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Table of Contents

 

Professional services and other revenue accounted for 13% and 14% of our total revenue during the three months ended June 30, 2016 and 2015, respectively, and 12% and 13% of our total revenue during the six months ended June 30, 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 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 18% and 15% of our total revenue during the three months ended June 30, 2016 and 2015, respectively, and 17% and 15% of our total revenue during each of the six months ended June 30, 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. 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 $20.8 million and $18.0 million for the three months ended June 30, 2016 and 2015, respectively, and $39.2 million and $36.1 million for the six months ended June 30, 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 June 30, 2016, we had outstanding borrowings of $1.4 million under this facility.

 

Pending Merger

 

On May 27, 2016, Marketo entered into a Merger Agreement with Milestone Holdco, LLC, a Delaware limited liability company (Parent), and Milestone Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (Merger Sub), providing for the merger of Merger Sub with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub were formed by affiliates of Vista Equity Partners Fund VI, L.P., a Delaware limited partnership (Vista). Capitalized terms used herein but not otherwise defined have the meaning set forth in the Merger Agreement, which was filed as Exhibit 2.1 to the Current Report on 8-K filed by the Company with the SEC on May 31, 2016.

 

At the Effective Time, each:

 

(i)                                      share of common stock, par value $0.0001 per share, of the Company (Company Common Stock) issued and outstanding as of immediately prior to the Effective Time (other than Owned Company Shares and Dissenting Company Shares) will be cancelled and extinguished, and automatically converted into the right to receive cash in an amount equal to $35.25, without interest thereon (Per Share Price);

 

(ii)                                   Company Stock-Based Award, whether vested or unvested, will be cancelled and converted into the right to receive an amount equal to (x) the Per Share Price (less the exercise price per share, if any, attributable to such Company Stock-Based Award), multiplied by, (y) (A) in the case of a Company Stock-Based Award that is only subject to time-vesting requirements, the total number of shares of Company Common Stock that are subject to such Company Stock-Based Award, and (B) in the case of a Company Stock-Based Award that is subject to time- and performance-vesting requirements, the total number of shares of Company Common Stock determined pursuant to the “change in control” provisions of the award agreement underlying such Company Stock Based Award, and with the remaining time-vesting requirements deemed satisfied; and

 

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Table of Contents

 

(iii)                                Company Option, whether vested or unvested, will be cancelled and converted into the right to receive an amount equal to (a) the Per Share Price (less the exercise price per share, if any, attributable to such Company Option), multiplied by (b) the total number of shares of Company Common Stock that are issuable upon the full exercise of such Company Option.

 

The parties have made customary representations, warranties and covenants in the Merger Agreement, including covenants regarding the conduct of their respective businesses and the use of reasonable best efforts to cause the conditions of the Merger to be satisfied.  Marketo has agreed, subject to the restrictions and exceptions in the Merger Agreement, to conduct its business and operations in the ordinary course of business. Marketo has also agreed to not initiate, propose or induce or knowingly encourage, facilitate or assist any inquiries regarding any proposal or offer that constitutes or would reasonably be expected to lead to an Acquisition Proposal, subject to certain exceptions set forth in the Merger Agreement. The Merger Agreement also includes termination provisions for both the Company and Parent and provides that, in connection with the termination of the Merger Agreement under specified circumstances, the Company may be required to pay to Parent a termination fee of $49.2 million.

 

Consummation of the Merger is subject to customary closing conditions, including, but not limited to, the: (i) requisite approvals by the Company’s stockholders; (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act); and (iii) absence of any law or order restraining, enjoining or otherwise prohibiting the Merger. On June 22, 2016, the U.S. Federal Trade Commission notified Marketo that early termination of the waiting period under the HSR Act was granted, effective immediately. On July 28, 2016, Marketo held a special meeting of stockholders (the Special Meeting) at Marketo’s principal executive offices in San Mateo, CA to vote on the proposals described in the Company’s definitive proxy statement filed with the Securities and Exchange Commission on June 29, 2016 and first mailed to Marketo’s stockholders on June 29, 2016. At the Special Meeting, stockholders approved the proposal to adopt the Merger Agreement.

 

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 and Six Months Ended June 30, 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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Table of Contents

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

87.4

%

86.3

%

88.2

%

86.7

%

Professional services and other

 

12.6

 

13.7

 

11.8

 

13.3

 

Total revenue

 

100.0

 

100.0

 

100.0

 

100.0

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

18.5

 

19.3

 

19.1

 

19.5

 

Professional services and other

 

13.7

 

16.1

 

14.1

 

16.0

 

Total cost of revenue

 

32.2

 

35.4

 

33.2

 

35.5

 

Gross margin:

 

 

 

 

 

 

 

 

 

Subscription and support

 

69.0

 

67.1

 

69.1

 

67.2

 

Professional services and other

 

-1.1

 

-2.5

 

-2.3

 

-2.8

 

Total gross margin

 

67.8

 

64.6

 

66.8

 

64.5

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

15.4

 

18.1

 

16.5

 

19.5

 

Sales and marketing

 

53.2

 

63.2

 

56.3

 

64.2

 

General and administrative

 

21.9

 

17.7

 

19.7

 

18.4

 

Total operating expenses

 

90.5

 

99.0

 

92.6

 

102.1

 

Loss from operations

 

-22.7

 

-34.4

 

-25.8

 

-37.6

 

Other income (expense), net

 

0.1

 

0.2

 

-0.1

 

0.6

 

Loss before provision for income taxes

 

-22.6

 

-34.2

 

-25.9

 

-37.0

 

Provision for income taxes

 

0.6

 

0.2

 

0.6

 

0.3

 

Net loss

 

-23.2

 

-34.4

 

-26.5

 

-37.3

 

Net loss attributable to redeemable non-controlling interests

 

-8.3

 

-1.0

 

-4.0

 

0.0

 

Net loss attributable to Marketo

 

-31.5

%

-35.4

%

-30.6

%

-37.3

%

 

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

 

24



Table of Contents

 

Revenue

 

 

 

Three Months
Ended June 30,

 

 

 

 

 

Six Months
Ended June 30,

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

2015

 

$ Change

 

% Change

 

2016

 

2015

 

$ Change

 

% Change

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

57,682

 

$

43,757

 

$

13,925

 

31.8

%

$

113,030

 

$

83,857

 

$

29,173

 

34.8

%

Professional services and other

 

8,313

 

6,923

 

1,390

 

20.1

 

15,181

 

12,823

 

2,358

 

18.4

 

Total revenue

 

$

65,995

 

$

50,680

 

$

15,315

 

30.2

%

$

128,211

 

$

96,680

 

$

31,531

 

32.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

87.4

%

86.3

%

 

 

 

 

88.2

%

86.7

%

 

 

 

 

Professional services and other

 

12.6

%

13.7

%

 

 

 

 

11.8

%

13.3

%

 

 

 

 

Total

 

100.0

%

100.0

%

 

 

 

 

100.0

%

100.0

%

 

 

 

 

 

Total revenue increased $15.3 million or 30%, during the three months ended June 30, 2016 compared to the same period in 2015, due to the increase in subscription and support revenue of $13.9 million and an increase in professional services and other revenue of $1.4 million. During the six month period ended June 30, 2016, total revenue increased $31.5 million, or 33%, compared to the comparable period in 2015, due to the increase in subscription and support revenue of $29.2 million and an increase in professional services and other revenue of $2.4 million.

 

 

 

Impact (in thousands)

 

 

Category

 

Three Months

 

Six Months

 

Key Drivers

Subscription and support

 

h

 

$

13,925

 

   h

 

$

29,173

 

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 June 30, 2016, 65% was attributable to revenue from new customers acquired after June 30, 2015 and 35% was attributable to revenue from customers existing on or before June 30, 2015.

Professional services and other

 

h

 

$

1,390

 

   h

 

2,358

 

Increase in professional services and other 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 June 30,

 

 

 

 

 

Six Months
Ended June 30,

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

2015

 

$ Change

 

% Change

 

2016

 

2015

 

$ Change

 

% Change

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

12,178

 

$

9,770

 

$

2,408

 

24.6

%

$

24,488

 

$

18,844

 

$

5,644

 

30.0

%

Professional services and other

 

9,058

 

8,177

 

881

 

10.8

 

18,126

 

15,514

 

2,612