Attached files
file | filename |
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EX-31.2 - EX-31.2 - Ancestry.com Inc. | c04706exv31w2.htm |
EX-32.1 - EX-32.1 - Ancestry.com Inc. | c04706exv32w1.htm |
EX-31.1 - EX-31.1 - Ancestry.com Inc. | c04706exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
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: 001-34518
Ancestry.com Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
26-1235962 (I.R.S. Employer Identification Number) |
|
360 West 4800 North Provo, Utah | 84604 | |
(Address of principal executive offices) | (Zip Code) |
(801) 705-7000
(Registrants telephone number, including area code)
(Registrants 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 þ 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 during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o 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 o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
As of July 30, 2010, there were 43,811,304 shares of the registrants common stock, par
value $0.001, outstanding.
Ancestry.com Inc.
Table of Contents
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Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ANCESTRY.COM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
(In thousands) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 103,417 | $ | 66,941 | ||||
Restricted cash |
2,351 | 2,181 | ||||||
Short-term investments |
30,535 | 33,331 | ||||||
Accounts receivable, net of allowances of $370 and $472 at June 30, 2010 and December 31, 2009, respectively |
4,925 | 5,860 | ||||||
Income tax receivable |
473 | 2,017 | ||||||
Deferred income taxes |
9,176 | 8,797 | ||||||
Prepaid expenses and other current assets |
3,510 | 5,380 | ||||||
Total current assets |
154,387 | 124,507 | ||||||
Property and equipment, net |
17,454 | 19,430 | ||||||
Content database costs, net |
51,130 | 49,650 | ||||||
Intangible assets, net |
34,126 | 41,484 | ||||||
Goodwill |
285,206 | 285,466 | ||||||
Other assets |
2,142 | 2,811 | ||||||
Total assets |
$ | 544,445 | $ | 523,348 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 9,339 | $ | 6,877 | ||||
Accrued expenses |
21,019 | 18,850 | ||||||
Escrow liability |
1,883 | 1,763 | ||||||
Deferred revenues |
88,799 | 69,711 | ||||||
Current portion of long-term debt |
10,395 | 28,416 | ||||||
Total current liabilities |
131,435 | 125,617 | ||||||
Long-term debt, less current portion |
65,835 | 71,609 | ||||||
Deferred income taxes |
27,859 | 30,117 | ||||||
Other long-term liabilities |
1,115 | 1,115 | ||||||
Total liabilities |
226,244 | 228,458 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding |
| | ||||||
Common stock, $0.001 par value; 175,000 shares authorized; 43,496 and 42,416 shares issued and outstanding
at June 30, 2010 and December 31, 2009, respectively |
43 | 42 | ||||||
Additional paid-in capital |
283,290 | 272,513 | ||||||
Accumulated other comprehensive income (loss) |
7 | (41 | ) | |||||
Retained earnings |
34,861 | 22,376 | ||||||
Total stockholders equity |
318,201 | 294,890 | ||||||
Total liabilities and stockholders equity |
$ | 544,445 | $ | 523,348 | ||||
See accompanying notes to condensed consolidated financial statements
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Table of Contents
ANCESTRY.COM INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Revenues: |
||||||||||||||||
Subscription revenues |
$ | 70,544 | $ | 50,719 | $ | 130,104 | $ | 99,903 | ||||||||
Product and other revenues |
3,916 | 3,854 | 8,777 | 7,903 | ||||||||||||
Total revenues |
74,460 | 54,573 | 138,881 | 107,806 | ||||||||||||
Costs of revenues: |
||||||||||||||||
Cost of subscription revenues |
11,228 | 9,966 | 22,729 | 19,722 | ||||||||||||
Cost of product and other revenues |
1,280 | 1,310 | 2,774 | 2,824 | ||||||||||||
Total cost of revenues |
12,508 | 11,276 | 25,503 | 22,546 | ||||||||||||
Gross profit |
61,952 | 43,297 | 113,378 | 85,260 | ||||||||||||
Operating expenses: |
||||||||||||||||
Technology and development |
9,992 | 8,692 | 19,919 | 17,548 | ||||||||||||
Marketing and advertising |
24,490 | 15,065 | 46,936 | 29,986 | ||||||||||||
General and administrative |
8,032 | 6,777 | 15,774 | 14,340 | ||||||||||||
Amortization of acquired intangible assets |
3,679 | 4,055 | 7,358 | 8,113 | ||||||||||||
Total operating expenses |
46,193 | 34,589 | 89,987 | 69,987 | ||||||||||||
Income from operations |
15,759 | 8,708 | 23,391 | 15,273 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(1,493 | ) | (1,515 | ) | (2,709 | ) | (3,356 | ) | ||||||||
Interest income |
76 | 567 | 139 | 698 | ||||||||||||
Other income (expense), net |
(12 | ) | 2 | (3 | ) | 10 | ||||||||||
Income before income taxes |
14,330 | 7,762 | 20,818 | 12,625 | ||||||||||||
Income tax expense |
(5,807 | ) | (3,082 | ) | (8,333 | ) | (4,442 | ) | ||||||||
Net income |
$ | 8,523 | $ | 4,680 | $ | 12,485 | $ | 8,183 | ||||||||
Net income per common share: |
||||||||||||||||
Basic |
$ | 0.20 | $ | 0.12 | $ | 0.29 | $ | 0.21 | ||||||||
Diluted |
$ | 0.18 | $ | 0.12 | $ | 0.26 | $ | 0.21 | ||||||||
Weighted average common shares outstanding |
||||||||||||||||
Basic |
42,764 | 38,287 | 42,612 | 38,257 | ||||||||||||
Diluted |
48,015 | 40,159 | 47,754 | 39,625 | ||||||||||||
See accompanying notes to condensed consolidated financial statements
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Table of Contents
ANCESTRY.COM INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | ||||||||||||||||
(In thousands) | ||||||||||||||||
Operating activities: |
||||||||||||||||
Net income |
$ | 8,523 | $ | 4,680 | $ | 12,485 | $ | 8,183 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||||||
Depreciation |
2,740 | 2,687 | 5,604 | 5,330 | ||||||||||||
Amortization of content |
1,830 | 1,716 | 3,664 | 3,429 | ||||||||||||
Amortization of intangible assets |
3,679 | 4,055 | 7,358 | 8,112 | ||||||||||||
Amortization of deferred financing costs |
614 | 181 | 829 | 393 | ||||||||||||
Deferred income taxes |
(1,487 | ) | (686 | ) | (2,637 | ) | (1,886 | ) | ||||||||
Stock-based compensation expense |
1,262 | 1,277 | 2,266 | 2,803 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Accounts receivable |
283 | 483 | 935 | (37 | ) | |||||||||||
Restricted cash |
(35 | ) | 422 | (50 | ) | 803 | ||||||||||
Other assets |
403 | (838 | ) | 1,970 | (964 | ) | ||||||||||
Income tax receivable |
| 2,896 | 1,544 | 2,884 | ||||||||||||
Accounts payable and accrued expenses |
4,136 | 512 | 8,068 | 65 | ||||||||||||
Excess tax benefits from stock-based compensation |
(3,570 | ) | (23 | ) | (3,570 | ) | (23 | ) | ||||||||
Deferred revenues |
4,654 | 1,041 | 19,088 | 8,646 | ||||||||||||
Other long-term liabilities |
| 26 | | 26 | ||||||||||||
Net cash provided by operating activities |
23,032 | 18,429 | 57,554 | 37,764 | ||||||||||||
Investing activities: |
||||||||||||||||
Capitalization of content database costs |
(2,349 | ) | (1,886 | ) | (5,141 | ) | (3,672 | ) | ||||||||
Purchases of property and equipment |
(2,221 | ) | (3,546 | ) | (3,628 | ) | (6,151 | ) | ||||||||
Purchases of short-term investments |
(5,193 | ) | | (7,193 | ) | | ||||||||||
Proceeds from sale and maturity of short-term investments |
4,991 | | 10,037 | | ||||||||||||
Net cash used in investing activities |
(4,772 | ) | (5,432 | ) | (5,925 | ) | (9,823 | ) | ||||||||
Financing activities: |
||||||||||||||||
Proceeds from exercise of stock options |
4,858 | 345 | 5,072 | 554 | ||||||||||||
Principal payments on debt |
(20,937 | ) | (13,301 | ) | (23,795 | ) | (15,926 | ) | ||||||||
Excess tax benefits from stock-based compensation |
3,570 | 23 | 3,570 | 23 | ||||||||||||
Repurchase of common stock |
| | | (100 | ) | |||||||||||
Net cash used in financing activities |
(12,509 | ) | (12,933 | ) | (15,153 | ) | (15,449 | ) | ||||||||
Net increase in cash and cash equivalents |
5,751 | 64 | 36,476 | 12,492 | ||||||||||||
Cash and cash equivalents at beginning of period |
97,666 | 52,549 | 66,941 | 40,121 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 103,417 | $ | 52,613 | $ | 103,417 | $ | 52,613 | ||||||||
Supplemental disclosures of cash flow information: |
||||||||||||||||
Cash paid for interest |
$ | 476 | $ | 1,388 | $ | 1,477 | $ | 5,416 | ||||||||
Cash paid for income taxes |
5,778 | 4,919 | 6,181 | 4,956 | ||||||||||||
Supplemental disclosures of noncash investing and financing activities: |
||||||||||||||||
Unrealized gain on short-term investments |
18 | | 48 | | ||||||||||||
Capitalization of stock-based compensation |
2 | | 3 | 2 |
See accompanying notes to condensed consolidated financial statements
5
Table of Contents
ANCESTRY.COM INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. NATURE OF OPERATIONS
Ancestry.com Inc. (the company or Ancestry) is an online family history resource that
derives revenues from providing access to digitized historical records on a subscription basis. The
company also offers other products including software and self-publishing products.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the company and its
wholly owned subsidiaries and a variable interest entity (VIE). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying condensed consolidated balance sheet as of June 30, 2010 and the condensed
consolidated statements of operations and condensed consolidated statements of cash flows for the
three and six months ended June 30, 2010 and 2009 are unaudited. These unaudited interim condensed
consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (GAAP) on the same basis as the audited consolidated financial statements
and in the opinion of management, reflect all adjustments (all of which are considered of normal
recurring nature) considered necessary to present fairly the companys financial position, results
of its operations and cash flows for the three and six months ended June 30, 2010 and 2009. The
results of operations for the three and six months ended June 30, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2010. These
unaudited interim condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes included in the companys 2009 Annual
Report on Form 10-K (the 2009 Annual Report) filed with the Securities and Exchange Commission on
February 26, 2010.
The preparation of interim condensed consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts reported and
disclosed in the financial statements and accompanying notes. Actual results could differ
materially from these estimates.
Certain prior period amounts have been reclassified to conform to current year presentation.
These reclassifications did not have a significant impact on the condensed consolidated financial
statements.
Recent accounting pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued amended standards for
determining whether to consolidate a VIE. These new standards amend the evaluation criteria to
identify the primary beneficiary of a VIE and require ongoing reassessment of whether an enterprise
is the primary beneficiary of the VIE. These standards were effective for the company beginning in
the first quarter of 2010. The company has concluded that it is the primary beneficiary of a VIE
and therefore has consolidated the financial statements of the VIE into the financial statements of
the company. The VIE is not significant to the financial position, results of operations, or cash
flows of the consolidated company. At June 30, 2010, the net assets of the VIE were not
significant. The adoption of the new standards did not have an impact on the companys consolidated
financial position, results of operations or cash flows.
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2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, cash equivalents and short-term investments consisted of the following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Cash |
$ | 10,377 | $ | 5,159 | ||||
Cash equivalents: |
||||||||
Money market funds |
93,040 | 61,782 | ||||||
Total cash and cash equivalents |
$ | 103,417 | $ | 66,941 | ||||
Short-term investments: |
||||||||
U.S. agency securities |
$ | 30,535 | $ | 33,331 | ||||
Gross unrealized gains and losses on short-term investments were not significant at June 30,
2010 and December 31, 2009. As of June 30, 2010, the company had U.S. agency securities totaling
$25.8 million in an unrealized gain position. The company also had U.S. agency securities totaling
$4.7 million in an unrealized loss position, which had been in a loss position for less than one
year, and are not considered to be other than temporary losses. As of December 31, 2009, all U.S.
agency securities were in an unrealized loss position and had been in a loss position for less than
one year. The company designates all short-term investments as available-for-sale. As of June 30,
2010 and December 31, 2009, the company did not hold any investments with original maturities
greater than one year from the date of purchase.
Cash equivalents and short-term investments are measured at fair value. Fair value is based on
the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In order to increase consistency
and comparability in fair value measurements, the accounting guidance establishes a fair value
hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three
broad levels. These levels, in order of highest priority to lowest priority, are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement
date for assets or liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available.
The companys cash equivalents and short-term investments at June 30, 2010 and December 31,
2009 were all classified within Level 1. There were no movements between fair value measurement
levels of the companys cash equivalents and short-term investments during the six months ended
June 30, 2010.
The carrying amounts reported in the financial statements for accounts receivable and accounts
payable approximate their fair values because of the short-term maturities of these financial
instruments. The carrying value of long-term debt approximated fair values based on interest rates
currently available to the company for debt with similar terms at June 30, 2010 and December 31,
2009.
In anticipation of an acquisition, the company entered into a forward contract to purchase 53
million Swedish kronor. The company did not qualify the contract for hedge accounting and therefore
the fair value gains and losses on the contract were recorded in net income. The fair value of the
contract was not significant at June 30, 2010 and was recorded in accrued expenses on the balance
sheet and in other expense on the statement of operations. In July 2010, the forward contract was
settled resulting in a gain of approximately $0.4 million.
3. NET INCOME PER COMMON SHARE
Basic net income per common share is computed using the weighted-average number of outstanding
shares of common stock during the period. Diluted net income per common share is computed using the
weighted-average number of outstanding shares of common stock and, when dilutive, potential common
shares outstanding during the period. Potential common shares consist primarily of incremental
shares issuable upon the assumed exercise of stock-based awards to purchase common stock using the
treasury stock method. The computation of diluted net income per share for the three months ended
June 30, 2010 and 2009 excludes stock-based awards to acquire 0.4 million and 1.8 million shares,
respectively, as their impact was anti-dilutive. The computation of diluted net income per common
share for the six months ended June 30, 2010 and 2009 excludes stock-based awards to acquire 0.4
million and 5.3 million shares, respectively, as their impact was anti-dilutive.
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A reconciliation of the numerator and the denominator used in the calculation of basic and
diluted net income per common share is as follows (in thousands, except per share amounts):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic net income per common share: |
||||||||||||||||
Net income |
$ | 8,523 | $ | 4,680 | $ | 12,485 | $ | 8,183 | ||||||||
Shares used in computation: |
||||||||||||||||
Weighted-average common shares outstanding |
42,764 | 38,287 | 42,612 | 38,257 | ||||||||||||
Basic net income per common share |
$ | 0.20 | $ | 0.12 | $ | 0.29 | $ | 0.21 | ||||||||
Diluted net income per common share: |
||||||||||||||||
Net income |
$ | 8,523 | $ | 4,680 | $ | 12,485 | $ | 8,183 | ||||||||
Shares used in computation: |
||||||||||||||||
Weighted-average common shares outstanding |
42,764 | 38,287 | 42,612 | 38,257 | ||||||||||||
Dilutive stock-based awards |
5,251 | 1,872 | 5,142 | 1,368 | ||||||||||||
Weighted-average number of diluted common shares |
48,015 | 40,159 | 47,754 | 39,625 | ||||||||||||
Diluted net income per common share |
$ | 0.18 | $ | 0.12 | $ | 0.26 | $ | 0.21 | ||||||||
4. COMPREHENSIVE INCOME
Comprehensive Income
Other comprehensive income consists of unrealized gains and losses on available-for-sale
securities. The components of comprehensive income were as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 8,523 | $ | 4,680 | $ | 12,485 | $ | 8,183 | ||||||||
Other comprehensive income: |
||||||||||||||||
Change in unrealized
gain on available for
sale securities, net |
18 | | 48 | | ||||||||||||
Comprehensive income |
$ | 8,541 | $ | 4,680 | $ | 12,533 | $ | 8,183 | ||||||||
5. STOCK-BASED AWARD PLANS
In July 2009, the Board of Directors approved the 2009 Stock Incentive Plan (the 2009 Plan),
which provides for the grant of stock options and other stock-based awards, including restricted
stock units, to employees, directors and consultants. The 2009 Plan was effective upon the
consummation of the companys initial public offering on November 10, 2009. The 2009 Plan is
subject to various automatic annual increase provisions on the first day of each fiscal year. On
January 1, 2010, the number of stock-based awards available for grant under the 2009 Plan increased by 1,696,653 shares. As of June
30, 2010, 3,276,738 stock-based awards were available to be granted under the 2009 Plan. The
company has also granted stock options under previously approved plans: the 1998 Stock Option Plan
(the 1998 Plan), the Executive Stock Plan (ESP), the 2004 Stock Option Plan (the 2004 Plan)
and the Generations Holding, Inc. Stock Purchase and Option Plan (the 2008 Plan). The company
does not intend to grant additional stock awards under the 1998 Plan, ESP, 2004 Plan or 2008 Plan.
8
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Stock Options
Stock option awards granted generally vest over four years and have a term not greater than
ten years from the date of grant. A summary of stock option activity of all the plans for the six
months ended June 30, 2010 is as follows:
Weighted | ||||||||
Average | ||||||||
Number of | Exercise | |||||||
Shares | Price | |||||||
Outstanding at December 31, 2009 |
10,373,290 | $ | 5.29 | |||||
Granted |
252,250 | 16.07 | ||||||
Exercised |
(1,079,473 | ) | 4.70 | |||||
Canceled |
(42,751 | ) | 6.33 | |||||
Outstanding at June 30, 2010 |
9,503,316 | 5.64 | ||||||
Exercisable at June 30, 2010 |
6,196,643 | 4.87 | ||||||
Vested and expected to vest |
9,376,405 | 5.58 | ||||||
As of June 30, 2010, the company had $8.2 million of total unrecognized compensation expense,
net of estimated forfeitures, related to stock options. The unrecognized compensation expense is
expected to be recognized over a weighted average remaining period of 2.4 years. The weighted
average remaining contractual life of options outstanding at June 30, 2010 was 6.7 years. The total
intrinsic values of options outstanding and options exercisable as of June 30, 2010 were $113.9
million and $79.0 million, respectively. The total intrinsic value of options exercised during the
six months ended June 30, 2010 was $13.5 million.
The company estimates the fair value of each option on the date of grant using the
Black-Scholes option-pricing model. The weighted average grant date fair values of options granted
during the six months ended June 30, 2010 and 2009 were $5.43 and $2.86, respectively. The
following weighted average assumptions were used to value option grants.
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Expected volatility |
40 | % | 50 | % | ||||
Expected term (in years) |
4.0 | 4.3 | ||||||
Weighted average risk-free interest rate |
1.9 | % | 1.8 | % | ||||
Weighted average fair value of the underlying common stock |
$ | 16.07 | $ | 6.34 | ||||
Expected dividends |
| |
9
Table of Contents
Restricted Stock Units
During the six months ended June 30, 2010, the company also issued restricted stock units
under the 2009 Plan. Restricted stock unit awards generally vest over four years. The following
table summarizes restricted stock unit activity.
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Restricted stock units outstanding at December 31,
2009 |
| $ | | |||||
Granted |
294,098 | 16.44 | ||||||
Vested |
(200 | ) | 16.26 | |||||
Forfeited |
(3,667 | ) | 16.31 | |||||
Restricted stock units outstanding at June 30, 2010 |
290,231 | 16.44 | ||||||
As of June 30, 2010 the company had $3.8 million of total unrecognized compensation expense,
net of estimated forfeitures related to restricted stock units. The unrecognized compensation
expense is expected to be recognized over a weighted average period of 3.9 years.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense included in the statement of
operations (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of subscription revenues |
$ | 49 | $ | 32 | $ | 77 | $ | 61 | ||||||||
Technology and development |
490 | 360 | 887 | 835 | ||||||||||||
Marketing and advertising |
118 | 81 | 186 | 169 | ||||||||||||
General and administrative |
605 | 804 | 1,116 | 1,738 | ||||||||||||
Total stock-based compensation expense |
$ | 1,262 | $ | 1,277 | $ | 2,266 | $ | 2,803 | ||||||||
6. INCOME TAXES
The company is subject to income taxes in the U.S. and foreign jurisdictions. Significant
judgment is required in evaluating the companys uncertain tax positions and determining its
provision for income taxes. The companys total gross unrecognized tax benefits as of June 30, 2010
and December 31, 2009 were $0.6 million. The net uncertain tax positions, if recognized by the
company, would affect the companys effective income tax rate.
7. COMMITMENTS AND CONTINGENCIES
From time to time, the company is a party to or otherwise involved in legal proceedings or
other legal matters that arise in the ordinary course of business or otherwise. While the companys
management does not believe that any pending legal claim or proceeding will be resolved in a manner
that would have a material adverse effect on the companys business, the company cannot assure the
ultimate outcome of any legal proceeding or contingency in which the company is or may become
involved.
8. SUBSEQUENT EVENTS
On July 15, 2010, the company completed the acquisition of Genline AB, the owner and operator
of the Swedish family history website Genline.se, for $7.2 million.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements relating to future
events and future performance. All statements other than those that are purely historical may be
forward-looking statements. We may, in some cases, use words such as project, believe,
anticipate, continue, plan, expect, estimate, intend, should, would, could,
potentially, will or may, or other words that convey uncertainty of future events or outcomes
to identify these forward-looking statements. Forward-looking statements in this Quarterly Report
include statements about:
| our future financial performance, including our revenues, cost of revenues, operating expenses and ability to sustain profitability; | ||
| our rate of revenue and expense growth; | ||
| the pool of our potential subscribers; | ||
| our ability to attract and retain subscribers; | ||
| our ability to manage growth; | ||
| our ability to generate additional revenues on a cost-effective basis; | ||
| our ability to acquire content and make it available online; | ||
| our ability to enhance the subscribers experience and provide value; | ||
| our success with respect to any future acquisitions; | ||
| our international expansion plans; | ||
| our ability to adequately manage costs and control margins and trends; | ||
| our investments in technology and the success of our promotional programs and new products; | ||
| our development of brand awareness; | ||
| our ability to retain and hire necessary employees; | ||
| our competitive position; | ||
| our liquidity and working capital requirements and the availability of cash and credit; | ||
| the seasonality of our business; | ||
| the impact of external market forces; and | ||
| the impact of claims or litigation. |
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Although we believe that the assumptions underlying the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance or achievements.
There are a number of important factors that could cause actual results to differ materially from
the results anticipated by these forward-looking statements. These important factors include those
that we discuss in this Quarterly Report under the captions Managements Discussion and Analysis
of Financial Condition and Results of Operations, Risk Factors and elsewhere. You should read
these factors and the other cautionary
statements made in this Quarterly Report as being applicable to all related forward-looking
statements wherever they appear in this Quarterly Report. If one or more of these factors
materialize, or if any underlying assumptions prove incorrect, our actual results, performance or
achievements may vary materially from any future results, performance or achievements expressed or
implied by these forward-looking statements. All subsequent written or spoken forward-looking
statements attributable to our company or persons acting on our behalf are expressly qualified in
their entirety by these cautionary statements. The forward-looking statements included in this
Quarterly Report are made only as of the date of this Quarterly Report, and we undertake no
obligation to publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.
Overview
Ancestry.com is the worlds largest online family history resource, with more than 1.3 million
paying subscribers around the world as of June 30, 2010. We have been a leader in the family
history market for over 20 years and have helped pioneer the market for online family history
research. We believe that most people have a fundamental desire to understand who they are and from
where they came, and that anyone interested in discovering, preserving and sharing their family
history is a potential user of Ancestry.com. We strive to make our service valuable to individuals
ranging from the most committed family historians to those taking their first steps towards
satisfying their curiosity about their family stories.
The foundation of our service is an extensive and unique collection of billions of historical
records that we have digitized, indexed and put online over the past decade. Our subscribers use
our proprietary online platform, extensive digital historical record collection, and easy-to-use
technology to research their family histories, build their family trees, collaborate with other
subscribers, upload their own records and publish and share their stories with their families. We
offer our service on a subscription basis, typically annually or monthly. These subscribers are our
primary source of revenue. We charge each subscriber for their subscription at the commencement of
their subscription period and at each renewal date. Although monthly subscribers have become an
increasing proportion of our subscribers, the predominantly annual commitments of our subscribers
enhance managements near-term visibility on our revenues and provide working capital benefits,
which we believe enable us to more effectively manage the growth of our business. We provide
ongoing value to our subscribers by regularly adding new historical content, enhancing our Web
sites with new tools and features and enabling greater collaboration among our users through the
growth of our global community.
Our goal is to remain the leading online resource for family history and to grow our
subscriber base in the United States and around the world by offering a superior value proposition
to anyone interested in learning more about their family history. We have focused on, and will
continue to focus on, retaining our loyal base of existing subscribers, on acquiring new
subscribers and on expanding the market to new consumers. We believe our previous investments in
technology and content have provided us a foundation for a scalable business model that will help
us to increase our margins over the long term and effectively manage our costs as our business
grows. However, we expect to continue to devote substantial resources and funds to improving our
technologies and product offerings and acquiring new and relevant content, and also to expanding
the awareness of our brand and category through global marketing, which may dampen our margin
expansion in the near term.
The following discussion and analysis is based upon and should be read in conjunction with the
Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report as well as
the Consolidated Financial Statements and the related Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended
December 31, 2009 (the 2009 Annual Report).
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Key Business Metrics
Our management regularly reviews a number of financial and operating metrics, including the
following key operating metrics to evaluate our business, determine the allocation of resources,
make decisions regarding corporate strategies and evaluate forward-looking projections. The
following key operating metrics reflect data with respect to the Ancestry.com Web sites and exclude
our other
subscription-based Web sites, such as myfamily.com and Genealogy.com.
| Total subscribers. A subscriber is an individual who pays for renewable access to one of our Ancestry.com Web sites. Total subscribers is defined as the number of subscribers at the end of the quarter. | ||
| Gross subscriber additions. A gross subscriber addition is a new customer who purchases a subscription to one of our Ancestry Web sites, net of any refunds or returns. | ||
| Monthly churn. Monthly churn is a measure representing the number of subscribers that cancel in the quarter divided by the sum of beginning subscribers and gross subscriber additions during the quarter. To arrive at monthly churn, we divide the result by three. Management uses this measure to determine the health of our subscriber base. | ||
| Subscriber acquisition cost. Subscriber acquisition cost is external marketing and advertising expense, divided by gross subscriber additions in the quarter. Management uses this metric to determine the efficiency of our marketing and advertising programs in acquiring new subscribers. | ||
| Average monthly revenue per subscriber. Average monthly revenue per subscriber is total subscription revenues earned in the quarter from subscriptions to one of the Ancestry.com Web sites divided by the average number of subscribers in the quarter, divided by three. The average number of subscribers for the quarter is calculated by taking the average of the beginning and ending number of subscribers for the quarter. |
A significant number of our renewals historically occur in the first quarter of each year.
Because we recognize subscription revenues ratably over the subscription period, this trend
generally has not resulted in a material seasonal impact on our revenues, but may result in a
seasonal effect on one or more of the key business metrics described above.
Performance Highlights
The following represents our performance highlights for Q2 2010, Q1 2010 and Q2 2009:
Three Months Ended | ||||||||||||
June 30, | March 31, | June 30, | ||||||||||
2010 | 2010 | 2009 | ||||||||||
Total subscribers at end of quarter |
1,310,562 | 1,211,978 | 990,959 | |||||||||
Gross subscriber additions |
290,589 | 279,100 | 160,394 | |||||||||
Monthly churn |
4.3 | % | 3.3 | % | 3.8 | % | ||||||
Subscriber acquisition cost |
$ | 74.04 | $ | 69.57 | $ | 73.27 | ||||||
Average monthly revenue per subscriber |
$ | 18.02 | $ | 16.70 | $ | 16.42 |
For Q2 2010, our total subscribers and gross subscriber additions increased as compared to Q1
2010 and Q2 2009 primarily as a result of increased interest in Ancestry.com stemming from NBCs
release of the U.S. version of the television show Who Do You Think You Are? which first aired
on March 5, 2010 and continued through the season finale on April 30, 2010. Subscriber growth has
continued after the season finale, driven by our increased brand awareness, marketing efforts and
continued television advertising campaigns.
For Q2 2010, our monthly churn increased as compared to Q1 2010 and Q2 2009. New subscribers,
i.e., those who have been subscribers for less than 100 days, tend to churn at a higher rate than
the average subscriber. The number of new subscribers, as a percent of total subscribers, increased
due to the large growth in gross subscriber additions and an increase in the proportion of monthly
subscriptions to annual
subscriptions in the first half of 2010. These factors contributed to
an increase in churn for Q2
2010 as compared to Q1 2010 and Q2 2009.
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For Q2 2010, our subscriber acquisition cost increased as compared to Q1 2010, while remaining
comparable to Q2 2009. The increase was due to increased marketing expenses as compared to the
increase in gross subscriber additions.
For Q2 2010, our average monthly revenue per subscriber increased as compared Q2 2009 due to
both an increase in the proportion of monthly subscriptions to annual subscriptions and an increase
in the proportion of premium packages to basic packages. As compared to Q1 2010, our average
revenue per subscriber increased in Q2 2010 primarily due to the timing of revenue recognition
attributable to gross subscriber additions related to Who Do You Think You Are? Because the
majority of the Q1 2010 gross subscriber additions related to the television show were added in the
second half of March, we did not recognize a significant portion of revenue related to these
subscribers until Q2 2010; however, these subscriber additions were reflected in our average
monthly revenue per subscriber calculation in Q1 2010.
Components of Condensed Consolidated Statements of Operations
Revenues
Subscription revenues. We derive subscription revenues primarily from providing access to our
services via our various Ancestry.com Web sites. Subscription revenues are recognized ratably over
the subscription period, which consists primarily of annual and monthly subscriptions, net of
estimated cancellations. We typically charge each subscribers credit card for their subscription
at the commencement of their subscription period and at each renewal date (whether annual or
monthly), unless they cancel their subscription before the renewal date. The amount of unrecognized
revenues is recorded in deferred revenue.
A majority of our subscription revenues is derived from subscribers in the United States. We
attribute subscription revenues by country based on the billing address of the subscriber,
regardless of the Web site to which the person subscribes. The following presents subscription
revenue by geographic region (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
United States |
$ | 54,110 | $ | 38,402 | $ | 98,514 | $ | 75,478 | ||||||||
United Kingdom |
9,965 | 8,274 | 19,682 | 16,419 | ||||||||||||
All other countries |
6,469 | 4,043 | 11,908 | 8,006 | ||||||||||||
Total subscription revenues |
$ | 70,544 | $ | 50,719 | $ | 130,104 | $ | 99,903 | ||||||||
Product and other revenues. Product and other revenues include sales of desktop software
(Family Tree Maker), vital records certificates, DNA testing (Ancestry.com DNA), advertising and
other products and services. Revenues related to these products are recognized upon shipment of
product or fulfillment of services, as applicable.
Cost of Revenues
Cost of subscription revenues. Cost of subscription revenues consists of
amortization of our database content costs, depreciation expense on web servers
and equipment, credit card processing fees, web hosting costs, royalty costs on certain content licensed from others and
personnel-related costs for database content support and subscriber services personnel.
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Cost of product and other revenues. Cost of product and other revenues consists of our direct
costs to purchase the products, shipping costs, credit card processing fees, personnel-related
costs of warehouse
personnel, warehouse storage costs and royalties on products licensed from others.
Personnel-related costs for each category of cost of revenues and operating expenses include
salaries, bonuses, stock-based compensation, employer payroll taxes and employee benefit costs.
Operating Expenses
Technology and development. Technology and development expenses consist of personnel-related
costs incurred in product development, maintenance and testing of our Web sites, enhancing our
record search and linking technologies, developing solutions for new product lines, internal
information systems and infrastructure, third-party development, and other internal-use software
systems. Our development costs are primarily based in the United States and are primarily devoted
to providing accessibility to content and tools for individuals to do family history research. We
expect that in the remainder of 2010, as we continue to invest in personnel and other resources to
further improve our service, technology and development costs will continue to increase in absolute
dollars as compared to the six months ended June 30, 2010.
Marketing and advertising. Marketing and advertising expenses consist primarily of direct
expenses related to television and online advertising and personnel-related expenses. We expect
that in the remainder of 2010, marketing costs will continue to increase in absolute dollars as
compared to the six months ended June 30, 2010.
General and administrative. General and administrative expenses consist principally of
personnel-related expenses for our executive, finance, legal, human resources and other
administrative personnel, as well as accounting and legal professional fees and other general
corporate expenses. We expect that in the remainder of 2010, general and administrative costs will
continue to increase in absolute dollars as compared to the six months ended June 30, 2010.
Amortization of acquired intangible assets. Amortization of acquired intangible assets is the
amortization expense associated with subscriber relationships and contracts, core technologies, and
intangible assets, including trademarks and tradenames.
Other Income (Expense) and Income Tax Expense
Interest expense. Interest expense includes the interest expense associated with our
long-term debt and amortization of deferred financing costs. Our interest expense varies based on
the level of debt outstanding and changes in interest rates.
Interest income. Interest income includes interest earned on cash and cash equivalents and
short-term investments.
Income tax expense. Income tax expense consists of federal and state income taxes in the
United States and income taxes in certain foreign jurisdictions.
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Results of Operations
The following table sets forth our condensed consolidated statements of operations as a
percentage of revenues for the three and six months ended June 30, 2010 and 2009. The information
contained in the table below should be read in conjunction with our condensed consolidated
financial statements and the related notes.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Subscription revenues |
94.7 | % | 92.9 | % | 93.7 | % | 92.7 | % | ||||||||
Product and other revenues |
5.3 | 7.1 | 6.3 | 7.3 | ||||||||||||
Total revenues |
100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
Costs of revenues: |
||||||||||||||||
Cost of subscription revenues |
15.1 | 18.3 | 16.4 | 18.3 | ||||||||||||
Cost of product and other revenues |
1.7 | 2.4 | 2.0 | 2.6 | ||||||||||||
Total cost of revenues |
16.8 | 20.7 | 18.4 | 20.9 | ||||||||||||
Gross profit |
83.2 | 79.3 | 81.6 | 79.1 | ||||||||||||
Operating expenses: |
||||||||||||||||
Technology and development |
13.4 | 15.9 | 14.3 | 16.3 | ||||||||||||
Marketing and advertising |
32.9 | 27.6 | 33.8 | 27.8 | ||||||||||||
General and administrative |
10.8 | 12.4 | 11.4 | 13.3 | ||||||||||||
Amortization of acquired
intangible assets |
4.9 | 7.4 | 5.3 | 7.5 | ||||||||||||
Total operating expenses |
62.0 | 63.3 | 64.8 | 64.9 | ||||||||||||
Income from operations |
21.2 | 16.0 | 16.8 | 14.2 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(2.1 | ) | (2.8 | ) | (2.0 | ) | (3.1 | ) | ||||||||
Interest income |
0.1 | 1.0 | 0.1 | 0.6 | ||||||||||||
Other income, net |
| | 0.1 | | ||||||||||||
Income before income taxes |
19.2 | 14.2 | 15.0 | 11.7 | ||||||||||||
Income tax expense |
(7.8 | ) | (5.6 | ) | (6.0 | ) | (4.1 | ) | ||||||||
Net income |
11.4 | 8.6 | 9.0 | 7.6 | ||||||||||||
Revenues, Cost of Revenues and Gross Profit
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2010 | 2009 | % Change | 2010 | 2009 | % Change | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Subscription revenues |
$ | 70,544 | $ | 50,719 | 39.1 | % | $ | 130,104 | $ | 99,903 | 30.2 | % | ||||||||||||
Product and other revenues |
3,916 | 3,854 | 1.6 | 8,777 | 7,903 | 11.1 | ||||||||||||||||||
Total revenues |
74,460 | 54,573 | 36.4 | 138,881 | 107,806 | 28.8 | ||||||||||||||||||
Cost of revenues: |
||||||||||||||||||||||||
Cost of subscription revenues |
11,228 | 9,966 | 12.7 | 22,729 | 19,722 | 15.2 | ||||||||||||||||||
Cost of product and other
revenues |
1,280 | 1,310 | (2.3 | ) | 2,774 | 2,824 | (1.8 | ) | ||||||||||||||||
Total cost of revenues |
12,508 | 11,276 | 10.9 | 25,503 | 22,546 | 13.1 | ||||||||||||||||||
Gross profit |
$ | 61,952 | $ | 43,297 | 43.1 | $ | 113,378 | $ | 85,260 | 33.0 | ||||||||||||||
Gross profit percentage |
83.2 | % | 79.3 | % | 81.6 | % | 79.1 | % |
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Subscription revenues
For Q2 2010, our subscription revenues increased $19.8 million as compared to Q2 2009. The
increase was primarily the result of an increase in the number of total subscribers, as well as an
increase in average monthly revenue per subscriber on our Ancestry.com Web sites. Average monthly
revenue per subscriber increased due to both an increase in the proportion of monthly subscriptions
to annual subscriptions, and an increase in the proportion of premium packages to basic packages. During Q2 2010, changes in foreign currency exchange rates had an
insignificant impact on subscription revenues.
For the six months ended June 30, 2010, our subscription revenues increased $30.2 million as
compared to the six months ended June 30, 2009. The increase was driven by the same factors that
influenced the three month results.
Product and other revenues
Product and other revenues remained relatively flat between Q2 2010 and Q2 2009.
For the six months ended June 30, 2010, product and other revenues increased $0.9 million as
compared to the six months ended June 30, 2009. The increase was primarily due to the recognition
of deferred revenues upon a change in our software distribution partners and increased revenues
related to our vital records products.
Cost of subscription revenues
For Q2 2010, our cost of subscription revenues increased $1.3 million as compared to Q2 2009.
The increase was primarily due to a $0.5 million increase in personnel-related costs attributable
to increased web hosting support personnel, a $0.5 million increase in credit card processing fees
due to increased transaction volumes as a result of increased total subscribers and a $0.2 million
increase in web hosting costs attributable to greater user traffic volumes due to increased total
subscribers.
For the six months ended June 30, 2010, our cost of subscription revenues increased $3.0
million as compared to the six months ended June 30, 2009. The increase was primarily due to a $1.2
million increase in personnel-related costs attributable to increased web hosting support
personnel, a $0.9 million increase in credit card processing fees attributable to increased
transaction volumes as a result of increased total subscribers, a $0.5 million increase in web
hosting costs attributable to greater user traffic volumes due to increased total subscribers and a
$0.3 million increase in content amortization.
Cost of product and other revenues
Cost of product and other revenues remained relatively flat between Q2 2010 and Q2 2009 as
well as between the six months ended June 30, 2010 and the six months ended June 30, 2009.
Operating Expenses
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2010 | 2009 | % Change | 2010 | 2009 | % Change | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Technology and development |
$ | 9,992 | $ | 8,692 | 15.0 | % | $ | 19,919 | $ | 17,548 | 13.5 | % | ||||||||||||
Marketing and advertising |
24,490 | 15,065 | 62.6 | 46,936 | 29,986 | 56.5 | ||||||||||||||||||
General and administrative |
8,032 | 6,777 | 18.5 | 15,774 | 14,340 | 10.0 | ||||||||||||||||||
Amortization of acquired
intangible assets |
3,679 | 4,055 | (9.3 | ) | 7,358 | 8,113 | (9.3 | ) | ||||||||||||||||
Total operating expenses |
$ | 46,193 | $ | 34,589 | 33.5 | $ | 89,987 | $ | 69,987 | 28.6 | ||||||||||||||
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Technology and development
For Q2 2010, our technology and development expenses increased $1.3 million as compared to Q2
2009. For the six months ended June 30, 2010, our technology and development expenses increased
$2.4 million as compared to six months ended June 30, 2009. The increases were primarily the result
of increases in personnel-related expenses reflecting increases in the number of technology and
development personnel.
Marketing and advertising
For Q2 2010, our marketing and advertising expenses increased $9.4 million as compared to Q2
2009. For the six months ended June 30, 2010, our marketing and advertising expenses increased
$17.0 million as compared to the six months ended June 30, 2009. The increases were due to
increased television and online advertising in both the domestic and international markets, which
included marketing and advertising expenses around the U.S. version of the television show Who Do
You Think You Are?
General and administrative
For Q2 2010, our general and administrative expenses increased $1.3 million as compared to Q2
2009. The increase was primarily due to a $0.5 million increase in outside service costs,
consisting primarily of consultants, legal services, and accounting fees, and due to a $0.5 million
change in position from foreign currency gains in Q2 2009 to losses Q2 2010.
For the six months ended June 30, 2010, our general and administrative expenses increased $1.4
million as compared to the six months ended June 30, 2009. The increase was primarily due to a $0.6
million increase in outside service costs, consisting primarily of consultants, legal services, and
accounting fees, and due to a $0.7 million change in position from foreign currency gains in the
six months ended June 30, 2009 to losses in the six months ended June 30, 2010.
Amortization of acquired intangible assets
For Q2 2010, amortization of acquired intangible assets decreased $0.4 million as compared to
Q2 2009. For the six months ended June 30, 2010, amortization of acquired intangible assets
decreased $0.8 million as compared to the six months ended June 30, 2009. The decreases were due to
decreased amortization of our subscriber relationship intangible asset, which is amortized on an
accelerated basis.
Other Income (Expense), Net and Income Tax Expense
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2010 | 2009 | % Change | 2010 | 2009 | % Change | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest expense |
$ | (1,493 | ) | $ | (1,515 | ) | (1.5) | % | $ | (2,709 | ) | $ | (3,356 | ) | (19.3) | % | ||||||||
Interest income |
76 | 567 | (86.6 | ) | 139 | 698 | (80.1 | ) | ||||||||||||||||
Other income (expense), net |
(12 | ) | 2 | (700.0 | ) | (3 | ) | 10 | (130.0 | ) | ||||||||||||||
Income tax expense |
(5,807 | ) | (3,082 | ) | 88.4 | (8,333 | ) | (4,442 | ) | 87.6 | ||||||||||||||
Other data: |
||||||||||||||||||||||||
Effective tax rate |
40.5 | % | 39.7 | % | 40.0 | % | 35.2 | % |
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Interest expense
For Q2 2010, interest expense remained relatively flat as compared to Q2 2009. However,
decreased cash interest expense was offset by increased non-cash deferred financing costs. This was
primarily due to
the acceleration of $0.4 million of deferred financing costs related to the excess cash
payment of $18.6 million made on our credit facility during Q2 2010. This excess cash payment is
determined based working capital available at the end of the previous fiscal year. Cash interest
expense decreased due to $43.3 million of principal payments, including the excess cash payment,
made on our credit facility during the previous 12 months, which reduced our debt balance. The
effective interest rate on our credit facility was approximately the same as of June 30, 2010 as
compared to June 30, 2009.
For the six months ended June 30, 2010, interest expense decreased $0.6 million as compared to
the six months ended June 30, 2009. Cash interest expense decreased due to $43.3 million of
principal payments, including the excess cash payment, made on our credit facility during the previous 12 months. The decrease was
partially offset by the acceleration of $0.4 million of non-cash deferred financing costs related
to the excess cash payment made on our credit facility during Q2 2010. The effective interest rate
on our credit facility was approximately the same as of June 30, 2010 as compared to June 30, 2009.
Interest income
For Q2 and the six months ended June 30, 2010, our interest income decreased $0.5 million and
$0.6 million as compared to Q2 and the six months ended June 30, 2009, respectively. The decreases
were primarily due to $0.5 million in interest earned on an income tax refund received in Q2 2009.
Other income (expense), net
Other income (expense), net was not significant in either Q2 or the six months ended June 30,
2010 or 2009.
Income tax expense
For Q2 2010, our effective income tax rate of 40.5% differed from the federal statutory rate
of 35% principally due to state income taxes of 2.3%, foreign income taxes of 1.6% as a result of
net operating losses in foreign jurisdictions for which no income tax benefit has been recognized,
non-deductible stock-based compensation expenses of 1.3% and other items of 0.3%.
For Q2 2009 our effective income tax rate of 39.7% differed from the federal statutory rate of
35% primarily due to state income taxes of 1.4%, non-deductible stock-based compensation expenses
of 2.0% and other items of 1.3%.
For the six months ended June 30, 2010, our effective income tax rate of 40.0% differed from
the federal statutory rate of 35% principally due to state income taxes of 2.3%, foreign income
taxes of 1.1% as a result of net operating losses in foreign jurisdictions for which no income tax
benefit has been recognized, non-deductible stock-based compensation expenses of 1.3% and other
items of 0.3%.
For the six months ended June 30, 2009 our effective income tax rate of 35.2% differed from
the federal statutory rate of 35% primarily due to changes in the state tax apportionment factors
resulting from enacted legislation, which resulted in a benefit of 9.4%, net operating loss adjustments of 4.3%,
non-deductible stock-based compensation expenses of 3.3%, foreign income taxes of 1.1% as a result
of net operating losses in foreign jurisdictions for which no income tax benefit has been
recognized and other items of 0.9%.
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Other Financial Data
In addition to our results determined under U.S. generally accepted accounting principles
(GAAP) discussed above, we believe adjusted EBITDA and free cash flow are useful to investors in
evaluating our operating performance because securities analysts use adjusted EBITDA and free cash
flow as supplemental measures to evaluate the overall operating performance of companies. For the
three months and six months ended June 30, 2010 and 2009, our net income, adjusted EBITDA and free
cash flow were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2010 | 2009 | % Change | 2010 | 2009 | % Change | |||||||||||||||||||
Net Income |
$ | 8,523 | $ | 4,680 | 82.1 | % | $ | 12,485 | $ | 8,183 | 52.6 | % | ||||||||||||
Adjusted EBITDA(1) |
25,270 | 18,443 | 37.0 | 42,283 | 34,947 | 21.0 | ||||||||||||||||||
Free cash flow(2) |
14,446 | 6,704 | 115.5 | 25,856 | 14,752 | 75.3 |
(1) | Adjusted EBITDA. We define adjusted EBITDA as net income (loss) plus net interest expense; income tax expense; non-cash charges including depreciation, amortization, impairment of intangible assets and stock-based compensation expense; and other (income) expense. | |
(2) | Free cash flow. We define free cash flow as net income plus net interest expense; income tax expense; non-cash charges including depreciation, amortization, impairment of intangible assets and stock-based compensation expense; and other (income) expense; minus capitalization of content database costs, capital expenditures and cash paid for income taxes and interest. |
Adjusted EBITDA and free cash flow are financial data that are not calculated in accordance
with GAAP. The table below in this Managements Discussion and Analysis of Financial Condition and
Results of Operations provides a reconciliation of these non-GAAP financial measures to net
income, the most directly comparable financial measure calculated and presented in accordance with
GAAP. We prepare adjusted EBITDA and free cash flow to eliminate the impact of items that we do not
consider indicative of our core operating performance. We encourage you to evaluate these
adjustments and the reasons we consider them appropriate, as well as the material limitations of
non-GAAP measures.
Our management uses adjusted EBITDA and free cash flow as measures of operating performance;
for planning purposes, including the preparation of our annual operating budget; to allocate
resources to enhance the financial performance of our business; to evaluate the effectiveness of
our business strategies; to provide consistency and comparability with past financial performance;
to facilitate a comparison of our results with those of other companies; and in communications with
our board of directors concerning our financial performance. We also use adjusted EBITDA and have
used free cash flow as factors when determining managements incentive compensation.
Management believes that the use of adjusted EBITDA and free cash flow provides consistency
and comparability with our past financial performance, facilitates period to period comparisons of
operations, and also facilitates comparisons with other peer companies, many of which use similar
non-GAAP financial measures to supplement their GAAP results. Management believes that it is useful
to exclude non-cash charges such as depreciation, amortization and stock-based compensation from
adjusted EBITDA and free cash flow because (i) the amount of such non-cash expenses in any specific
period may not directly correlate to the underlying performance of our business operations and (ii)
such expenses can vary significantly between periods as a result of new acquisitions, full
amortization of previously acquired tangible and intangible assets or the timing of new stock-based
awards, as the case may be.
Although adjusted EBITDA and free cash flow are frequently used by investors and securities
analysts in their evaluations of companies, adjusted EBITDA and free cash flow each have
limitations as an analytical tool, and you should not consider them in isolation or as a substitute
for analysis of our results of operations as reported under GAAP. Some of these limitations are:
| adjusted EBITDA and free cash flow do not reflect our future requirements for contractual commitments and adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures; | ||
| adjusted EBITDA and free cash flow do not reflect changes in, or cash requirements for, our working capital; |
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| adjusted EBITDA does not reflect interest income or interest expense; | ||
| adjusted EBITDA does not reflect cash requirements for income taxes; | ||
| adjusted EBITDA and free cash flow do not reflect the non-cash component of employee compensation; | ||
| although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and adjusted EBITDA and free cash flow do not reflect any cash requirements for these replacements; | ||
| other companies in our industry may calculate adjusted EBITDA or free cash flow or similarly titled measures differently than we do, limiting their usefulness as comparative measures. |
The following table presents a reconciliation of our adjusted EBITDA and free cash flow to net
income, the most comparable GAAP financial measure, for each of the periods identified.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Reconciliation of adjusted EBITDA and free
cash flow to net income: |
||||||||||||||||
Net income |
$ | 8,523 | $ | 4,680 | $ | 12,485 | $ | 8,183 | ||||||||
Interest expense, net |
1,417 | 948 | 2,570 | 2,658 | ||||||||||||
Income tax expense |
5,807 | 3,082 | 8,333 | 4,442 | ||||||||||||
Depreciation expense |
2,740 | 2,687 | 5,604 | 5,330 | ||||||||||||
Amortization expense |
5,509 | 5,771 | 11,022 | 11,541 | ||||||||||||
Stock-based compensation |
1,262 | 1,277 | 2,266 | 2,803 | ||||||||||||
Other income, net |
12 | (2 | ) | 3 | (10 | ) | ||||||||||
Adjusted EBITDA |
$ | 25,270 | $ | 18,443 | $ | 42,283 | $ | 34,947 | ||||||||
Capitalization of content database costs |
(2,349 | ) | (1,886 | ) | (5,141 | ) | (3,672 | ) | ||||||||
Capital expenditures |
(2,221 | ) | (3,546 | ) | (3,628 | ) | (6,151 | ) | ||||||||
Cash paid for interest |
(476 | ) | (1,388 | ) | (1,477 | ) | (5,416 | ) | ||||||||
Cash paid for income taxes |
(5,778 | ) | (4,919 | ) | (6,181 | ) | (4,956 | ) | ||||||||
Free cash flow |
$ | 14,446 | $ | 6,704 | $ | 25,856 | $ | 14,752 | ||||||||
Liquidity and Capital Resources
In December 2007, Spectrum Equity Investors contributed cash and equity with an aggregate
value of $138.6 million and we entered into a credit facility that included a $140 million term
loan as part of a larger transaction, which we refer to as the Spectrum investment. On November 10,
2009, we received net proceeds of $47.8 million from our initial public offering. With the
exception of our initial public offering, we have funded our operations primarily from cash flows
from operations, which in Q2 2010 and the six months ended June 30, 2010 satisfied all of our cash
requirements.
Our primary uses of cash include operating costs such as personnel-related expenses,
marketing and advertising, payments related to our long-term debt, capital and content database
costs and expansion of new markets and businesses. Our future capital requirements may vary
materially from those now planned and will depend on many factors, including:
| the development of new services; | ||
| market acceptance of our services; | ||
| the levels of advertising and promotion required to retain and acquire subscribers; | ||
| the launch of additional services and improvement of our competitive position in the marketplace; | ||
| the level of new content acquisition required to retain and acquire subscribers; | ||
| the expansion of our development and marketing organizations; | ||
| the building of infrastructure necessary to support our growth; and | ||
| our relationships with suppliers and customers. |
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We have experienced increases in our expenditures in connection with the growth in our
operations and personnel, and we anticipate that our expenditures will continue to increase in the
future. We expect cash on hand, internally generated cash flow and available credit from our credit
facility will provide adequate funds for operating and recurring cash needs (e.g., working capital,
capital expenditures, and debt repayments) for at least the next 12 months.
As of June 30, 2010, we had $143.9 million of total liquidity, comprised of $103.4 million in
cash and cash equivalents, $30.5 million in short-term investments and the ability to borrow
$10.0 million under the revolving portion of our credit facility. Cash and cash equivalents are
comprised of high quality investments including money market funds. Short-term investments are
classified as available-for-sale and are held in high quality investments including U.S. government
agency securities with maturities less than a year. Note 2 to our condensed consolidated financial
statements included in this Quarterly Report describes further the composition of our cash and cash
equivalents and short-term investments.
Summary cash flow information for cash and cash equivalents and short-term investments for Q2
2010 and Q2 2009 and six months ended June 30, 2010 and 2009 is set forth below. For the purposes
of this cash flow analysis, we have included our highly liquid short-term investments.
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2010 | 2009 | % Change | 2010 | 2009 | % Change | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Net cash and cash equivalents and short-term investments
provided by (used in): |
||||||||||||||||||||||||
Operating activities |
$ | 23,032 | $ | 18,429 | 25 | % | $ | 57,554 | $ | 37,764 | 52 | % | ||||||||||||
Investing activities |
(4,552 | ) | (5,432 | ) | (16 | ) | (8,721 | ) | (9,823 | ) | (11 | ) | ||||||||||||
Financing activities |
(12,509 | ) | (12,933 | ) | (3 | ) | (15,153 | ) | (15,449 | ) | (2 | ) | ||||||||||||
Increase in cash and cash equivalents and short-term investments |
$ | 5,971 | $ | 64 | NM | $ | 33,680 | $ | 12,492 | 170 | ||||||||||||||
Cash Flow Analysis
Sources and uses of cash
For Q2 2010, our cash and cash equivalents and short-term investments increased $6.0 million
to $134.0 million, as compared to an increase of $0.1 million in Q2 2009. Net cash provided by
operating activities was used primarily for debt repayments and investments in capital expenditures
and content database costs.
For the six months ended June 30, 2010, our cash and cash equivalents and short-term
investments increased $33.7 million to $134.0 million, as compared to an increase of $12.5 million
in the six months ended June 30, 2009. Net cash provided by operating activities was used primarily
for debt repayments and investments in capital expenditures and content database costs.
Net cash provided by operating activities
For Q2 2010, net cash provided by operating activities was $23.0 million, reflecting an
increase of $4.6 million as compared to Q2 2009, which was primarily the result of increased net
income. Net cash provided by operating activities consists of net income as adjusted for non-cash
expenses and changes in operating assets and liabilities. For Q2 2010, our net income totaled
$8.5 million, reflecting an increase of $3.8 million as compared to Q2 2009. Our non-cash expenses,
including depreciation, amortization of content database costs, amortization of acquired intangible
assets, amortization of deferred financing costs, stock-based compensation and deferred income
taxes, totaled $8.6 million, reflecting a decrease of $0.6 million. Our net cash provided by
changes in operating assets and liabilities excluding deferred revenue totaled $1.2 million,
reflecting a decrease of $2.3 million. The change in our deferred revenue, which represents cash
received from subscribers but not yet recognized in revenue, totaled $4.7 million, reflecting an
increase of $3.6 million. Deferred revenue increased primarily due to the net increase in
subscribers and the increase in the proportion of premium packages over basic packages.
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For the six months ended June 30, 2010, net cash provided by operating activities was $57.6
million, reflecting an increase of $19.8 million as compared to the six months ended June 30, 2009.
Net cash provided by operating activities consists of net income as adjusted for non-cash expenses
and changes in operating assets and liabilities. For the six months ended June 30, 2010, our net
income totaled $12.5 million, reflecting an increase of $4.3 million as compared to the six months
ended June 30, 2009. Our non-cash expenses, including depreciation, amortization of content
database costs, amortization of acquired intangible assets, amortization of deferred financing
costs, stock-based compensation and deferred income taxes, totaled $17.1 million, reflecting a
decrease of $1.1 million. Our net cash provided by changes in operating assets and liabilities
excluding deferred revenue totaled $8.9 million, reflecting an increase of $6.1 million. The change
in our deferred revenue, which represents cash received from subscribers but not yet recognized in
revenue, totaled $19.1 million, reflecting an increase of $10.4 million. Deferred revenue increased
primarily due to the net increase in subscribers and the increase in the proportion of premium
packages over basic packages.
Net cash used in investing activities
For Q2 2010, net cash used in investing activities totaled $4.6 million, reflecting a decrease
of $0.9 million as compared to Q2 2009. Net cash used in investing activities consisted of
investments in capital equipment and content database costs. The decrease in net cash used in
investing activities was due to decreased purchases of capital equipment partially offset by
increased content database costs.
For the six months ended June 30, 2010, net cash used in investing activities totaled $8.7
million, reflecting a decrease of $1.1 million as compared to the six months ended June 30, 2009.
Net cash used in investing activities consisted of investments in capital equipment and content
database costs. The decrease in net cash used in investing activities was due to decreased
purchases of capital equipment partially offset by increased content database costs.
Net cash used in financing activities
For Q2 2010, net cash used in financing activities totaled $12.5 million, reflecting a
decrease of $0.4 million as compared to Q2 2009. Net cash used in financing activities consisted primarily of principal
payments on long-term debt of $20.9 million partially offset by proceeds from stock option exercises of $4.9 million and excess tax benefits from stock-based compensation of $3.6 million.
For the six months ended June 30, 2010, net cash used in financing activities totaled $15.2
million, reflecting a decrease of $0.3 million as compared to the six months ended June 30, 2009. Net cash used in
financing activities consisted primarily of principal payments on long-term debt of $23.8 million partially offset
by proceeds from stock option exercises of $5.1 million and excess tax benefits from stock-based compensation of $3.6 million.
Contractual Obligations
Long-term Debt
At June 30, 2010, long-term debt outstanding under our credit facility totaled $76.2 million.
Of the amount outstanding at June 30, 2010, $10.4 million is due in the next 12 months. We expect
to repay the credit facility with cash on hand, including the proceeds from our initial public
offering and cash flow generated from operations. We were in compliance with all debt covenants
under the credit facility at June 30, 2010. The credit facility includes a revolving commitment of
up to $10.0 million, of which $10.0 million was available for borrowing at June 30, 2010. There
were no changes to the credit facility during the six months ended June 30, 2010. Note 6 to our
consolidated financial statements in the 2009 Annual Report describes further our credit facility
and related long-term debt.
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Operating Leases
We have entered into various non-cancelable operating lease agreements for our offices and
distribution centers globally with original lease periods expiring through 2016. We recognize
rent expense on our operating leases on a straight-line basis beginning at the commencement of the
lease.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not engage in transactions that generate relationships
with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities. Accordingly, we are not subject to financing,
liquidity, market risk, or credit risk arising due to off-balance sheet arrangements.
Recent Developments
On July 15, 2010, we acquired Genline AB, owner and operator of the Swedish website
Genline.se, for $7.2 million. At acquisition, Genline.se had more than 17,000 paying members with
access to 26 million pages of digitized Swedish church records spanning more than 400 years from
the 17th to the 20th century.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in conformity with GAAP. The
preparation of these condensed consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses
and related disclosures. These estimates and assumptions are often based on judgments that we
believe to be reasonable under the circumstances at the time made, but all such estimates and
assumptions are inherently uncertain and unpredictable. Actual results may differ from those
estimates and assumptions, and it is possible that other professionals, applying their own judgment
to the same facts and circumstances, could develop and support alternative estimates and
assumptions that would result in material changes to our operating results and financial condition.
We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on
historical experience and various other assumptions that we believe to be reasonable under the
circumstances.
We consider the assumptions and estimates associated with recoverability of intangible assets,
the period of amortization of our database content costs, stock-based compensation and income taxes
to be our critical accounting estimates. For further information on our significant accounting
policies, see Note 1 to our consolidated financial statements included in our 2009 Annual Report.
There have been no changes to our significant accounting policies since December 31, 2009 except as
discussed below in Recent Accounting Pronouncements.
Recent Accounting Pronouncements
There have been no new accounting pronouncements or changes in accounting pronouncements
during the six months ended June 30, 2010, as compared to the recent accounting pronouncements
described in the 2009 Annual Report, that are of significance, or potential significance, to the
company that we expect to adopt in the future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. These risks include
primarily interest rate and foreign currency exchange risks. For financial market risks related to
changes in interest rates and foreign currency exchange, reference is made to Item 7A Quantitative
and Qualitative Disclosures About Market Risk contained in Part II of our 2009 Annual Report.
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In anticipation of the acquisition of Genline AB, we entered into a forward contract to
purchase 53 million Swedish kronor. We entered into the forward contract to lock in the amount of
U.S. dollars required to settle the transaction and acquire Genline. We did not qualify the
contract for hedge accounting and
therefore the fair value gains and losses on the contract are recorded in net income. As of
June 30, 2010, the fair value of the contract was not significant and is recorded in accrued
expenses on the balance sheet and in other expense on the statement of position. In July 2010, the
forward contract was settled resulting in a gain of approximately $0.4 million.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end
of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that as of the end of the period covered by this
Quarterly Report our disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed by us in reports that we file or submit under
the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and include controls and procedures
designed to ensure that the information required to be disclosed by us in such reports is
accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures will prevent or detect all error and all fraud.
While our disclosure controls and procedures are designed to provide reasonable assurance of their
effectiveness, because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any,
within Ancestry.com have been detected.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the three months ended June 30, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings
In August 2009, we received a letter from counsel to Shutterfly, Inc., alleging infringement
of certain of its patents by our operation of our MyCanvas.com Web site. If litigation were to
commence, we believe that we have substantive and meritorious defenses to these claims and would
contest any claim vigorously.
In addition, from time to time, we are a party to or otherwise involved in legal proceedings
or other legal matters that arise in the ordinary course of business or otherwise. While management
does not believe that any pending legal claim or proceeding will be resolved in a manner that would
have a material adverse effect on our business, we cannot assure you of the ultimate outcome of any
legal proceeding or contingency in which we are or may become involved.
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Item 1A. Risk Factors
A wide range of factors could materially affect our performance. The following factors and
other information included in this Quarterly Report should be carefully considered. Although the
risk factors described below are the ones management deems significant, additional risks and
uncertainties not presently known to us or that we presently deem less significant may also impair
our business operations. If any of the following events actually occur, our business, financial
condition and results of operations could be adversely affected.
Risks Related to Our Business
If our efforts to retain and attract subscribers are not successful, our revenues will be adversely
affected.
We generate substantially all of our revenue from subscriptions to our services. We must
continue to retain existing and attract new subscribers. If our efforts to satisfy our existing
subscribers are not successful, we may not be able to retain them, and as a result, our revenues
would be adversely affected. For example, if consumers do not perceive our services to be reliable,
valuable and of high quality, if we fail to regularly introduce new and improved services, or if we
introduce new services that are not favorably received by the market, we may not be able to retain
existing or attract new subscribers. We rely on our marketing and advertising efforts, including
television and online and offline performance-based and fixed-cost programs, to attract new
subscribers and retain existing subscribers. If we are unable to effectively retain existing
subscribers and attract new subscribers, our business, financial condition and results of
operations would be adversely affected.
The relative service levels, pricing and related features of competitors to our products and
services are some of the factors that may adversely impact our ability to retain existing
subscribers and attract new subscribers. Some of our current competitors provide genealogical
records free of charge. Some governments or private organizations may make historical records
available online at no cost to consumers and some commercial entities could choose to make such
records available on an advertising-supported basis rather than a subscription basis. If consumers
are able to satisfy their family history research needs at no or lower cost, they may not perceive
value in our products and services. If our efforts to satisfy and retain our existing subscribers
are not successful, we may not be able to continue to attract new subscribers through word-of-mouth
referrals. Further, subscriber growth may decrease as a result of a decline in interest in family
history research. Any of these factors could cause our subscriber growth rate to fall, which would
adversely impact our business, financial condition and results of operations.
Our recent performance may not be sustainable, which could negatively affect our stock price or
financial condition and results of operations.
Our revenues have grown rapidly, increasing from $140.3 million in 2005 to $224.9 million in
2009, representing a compound annual growth rate of 12.5%. In Q2 2010 and the six months ended June
30, 2010, our revenue growth was 36% and 29%, respectively, over the prior year periods. We may not
be able to sustain our recent growth rate in future periods and you should not rely on the revenue
growth of these periods or any prior period or year as an indication of our future performance.
Additionally, we expect to continue to devote substantial resources and funds to improving our
technologies and product offerings and acquiring new and relevant content, and also to expanding
awareness of our brand and category through marketing, such as the increased advertising we
undertook in connection with the television program Who Do You Think You Are? which may reduce
our margins in the near term. If our margins or our future growth resulting from our implementation
of these strategies fail to meet investor or analyst expectations, it could have a negative effect
on our stock price. If our growth rate were to decline significantly or become negative, it could
adversely affect our financial condition and results of operations.
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If
we experience excessive rates of subscriber cancellation, or churn, our revenues and business will be harmed.
We must
continually
add new subscribers both to replace subscribers who choose to cancel their subscriptions and
to grow our business beyond our current subscriber base. Subscribers choose to cancel their
subscriptions for many reasons, including a desire to reduce discretionary spending or a perception
that they do not use the service sufficiently, the service is a poor value, competitive services
provide a better value or experience, or subscriber service issues are not satisfactorily resolved.
Subscribers may choose to cancel their subscription at any time prior to the renewal date. When we
add subscribers as rapidly as we have in the first half of 2010, the
rate of subscriber cancellation, or churn, may also
increase as it did in Q2 2010. If we are unable to attract new subscribers in numbers greater than
our subscriber churn, our subscriber base will decrease and our business, financial condition and
results of operations will be adversely affected.
If our subscriber churn increases, we may be required to increase the rate at which we add new
subscribers in order to maintain and grow our revenues. If excessive numbers of subscribers cancel
our service, we may be required to incur significantly higher marketing and advertising expenses
than we currently anticipate to replace these subscribers with new subscribers. A significant
increase in our subscriber churn would have an adverse effect on our business, financial condition
and results of operations.
A change in our mix of subscription durations could have a significant impact on our revenue, churn
and revenue visibility.
A majority of our subscribers have annual subscriptions. At any point in time, however, the
majority of new subscribers generally signs up for monthly subscriptions and may or may not choose
to renew. We generally experience higher rates of churn for monthly subscribers than for annual
subscribers. As of June 30, 2010, the percentage of overall subscribers that are monthly
subscribers had increased as compared to June 30, 2009. If this trend continues,
more of our revenue would become dependent on monthly renewals, and we would likely have higher
churn. We continually evaluate the types of subscriptions that are most appropriate for us and our
subscribers. As we make these evaluations, we may more aggressively market subscriptions that are
shorter than our annual subscriptions. Any material change in our mix of subscription duration
could have a significant impact on our revenue and churn.
Additionally, the largely annual commitments of our subscribers enhance our near-term
visibility on our revenues, which we believe enable us to more effectively manage the growth of our
business and provide working capital benefits. A shift in subscriber mix towards more monthly
subscriptions may result in diminished visibility with respect to forecasting revenue, which could
make it more difficult to manage our growth and effectively budget future working capital
requirements.
Because we recognize revenues from subscriptions to our service over the term of the subscription,
downturns or upturns in subscriptions may not be immediately reflected in our operating results and
therefore could affect our operating results in later periods.
We recognize revenues from subscribers ratably over the term of their subscriptions. Given
that annual subscriptions still represent a substantial majority of our subscriptions, a large
portion of our revenues for each quarter reflects deferred revenue from subscriptions entered into
during previous quarters. Consequently, a decline in new or renewed subscriptions in any one
quarter will not necessarily be fully reflected in the revenues in that quarter but will negatively
affect our revenues in future quarters. Accordingly, the effect of significant downturns or upturns
in subscriptions or market acceptance of our service, or changes in subscriber churn, may not fully
impact our results of operations until future periods.
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If our marketing and advertising efforts fail to generate additional revenues on a cost-effective
basis, or if we are unable to manage our marketing and advertising expenses, it could harm our
results of operations and growth.
Our future growth and profitability, as well as the maintenance and enhancement of our brands,
will depend in large part on the effectiveness and efficiency of our marketing and advertising
expenditures and the continued success of television programming related to family history. We use
a diverse mix of online and offline performance-based and fixed-cost marketing and advertising
programs to promote our products and services and programming, and we periodically adjust our mix
of marketing and advertising programs
to reflect our television audience. We have recently experienced price increases in some of
our marketing and advertising channels. Significant increases in the pricing of one or more of our
marketing and advertising channels would increase our marketing and advertising expense or cause us
to choose less expensive but potentially less effective marketing and advertising channels. As we
implement new marketing and advertising strategies, we have expanded into television advertising,
which may have significantly higher costs than other channels and which could adversely affect our
profitability. Further, we may over time become disproportionately reliant on one channel or
partner, such as NBC in future seasons of Who Do You Think You Are? which could increase our
operating expenses. We have incurred and may in the future incur marketing and advertising expenses
significantly in advance of the time we anticipate recognizing revenue associated with such
expenses, as in the case of television programming, and our marketing and advertising expenditures
may not continue to result in increased revenue or generate sufficient levels of brand awareness.
If we are unable to maintain our marketing and advertising channels on cost-effective terms or
replace existing marketing and advertising channels with similarly effective channels, our
marketing and advertising expenses could increase substantially, our subscriber levels could be
affected adversely, and our business, financial condition and results of operations may suffer.
In addition, our expanded marketing efforts may increase our subscriber acquisition cost. For
example, our decision to expand our international marketing and advertising efforts will lead to a
significant increase in our marketing and advertising expenses. Any of these additional expenses
may not result in sufficient customer growth to offset cost, which would have an adverse effect on
our business, financial condition and results of operations.
We cannot predict whether the television show Who Do You Think You Are? will continue to have an
impact on our business in the future.
We purchased product integration in the television show Who Do You Think You Are? in the
United States, which aired in the first half of 2010. In addition, during the first quarter of
2010, PBS also aired a television series related to family history and genealogy. Both these
series, or their combined effects, together with our increased television advertising, caused
increased interest in our core business that resulted in a greater number of subscribers, which
while increasing revenue for some duration, has increased, and may continue to increase, our churn.
While NBC has announced a second season of Who Do You Think You Are? we cannot guarantee that
another season of the show will in fact air. If we do not receive lasting benefits from these and
future shows, it could have a negative effect on our stock price.
Because we generate substantially all of our revenue from online family history resources,
particularly in the United States and United Kingdom, a decline in demand for our services or for
online family history resources in general, and particularly of the United States and United
Kingdom, could cause our revenue to decline.
We generate substantially all of our revenue from our online family history services, and we
expect that we will continue to depend upon our online family history services for substantially
all of our revenue in the foreseeable future. Because we depend on our online family history
services, factors such as changes in consumer preferences for these products may have a
disproportionately greater impact on us than if we offered multiple services. The market for online
family history resources, and for consumer services in general, is subject to rapidly changing
consumer demand and trends in preferences. If consumer interest in our online family history
services declines, or if consumer interest in family history in general declines, we would likely
experience a significant loss of revenue and net income. Some of the potential factors that could
affect interest in and demand for online family history services include:
| individuals interest in, and their willingness to spend time and money, conducting family history research; | ||
| availability of discretionary funds; | ||
| awareness of our brand and the family history category; |
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| the appeal and reliability of our services; | ||
| the price, performance and availability of competing family history products and services; | ||
| public concern regarding privacy and data security; | ||
| our ability to maintain high levels of customer satisfaction; and | ||
| the rate of growth in online commerce generally. |
In addition, substantially all of our revenues are from subscribers in the United States, the
United Kingdom, and to a lesser extent, Australia and Canada. Consequently, a decrease of interest
in and demand for online family history services in these countries could have a disproportionately
greater impact on us than if our geographical mix of revenue was less concentrated.
Challenges in acquiring historical content and making it available online could adversely affect
our ability to retain and expand our subscriber base, and therefore adversely affect our business,
financial condition and results of operations.
In order to retain and expand our subscriber base, both domestically and internationally, we
must continue to expend significant resources to acquire significant amounts of additional
historical content, digitize it and make it available to our subscribers online. We face legal,
logistical and cultural challenges in acquiring new content. Relevant governmental records may be
widely dispersed and held at a national, state or local level.
Religious and private records are even more widely dispersed. These problems often pose
particular challenges in acquiring content internationally. For example, content in Germany is
highly dispersed, and legislation in France is particularly stringent. Desirable content may not be
available to us on favorable terms, or at all, due to competition for a particular collection,
privacy concerns relative to information contained in a given collection or our lack of negotiating
leverage with a certain content provider. For example, some of our most popular databases include
so-called vital records content namely, birth, marriage and death records made available by
certain governmental agencies. To help prevent identity theft, or even terrorist activities,
governments may attempt to restrict the release of all or substantial portions of their vital
records content, and particularly birth records, to third parties. If these efforts are successful,
it may limit or altogether prevent us from acquiring these types of vital record content or
continuing to make them available online. In many cases, we will be the first commercial entity
that may have approached the keeper of the records, often a governmental body. In some cases, we
have to lobby for legislation to be changed to enable government or other bodies to grant us access
to records.
While we own or license most of the images in our database, we generally do not own the
underlying historical documents. If owners of content have sold or licensed it for digitization
purposes on an exclusive basis to a third party, we would not be able to acquire this content. The
owners of such historical records generally can allow one or more parties to digitize those
records. If owners of content have sold or licensed the rights to digitize that content, even on a
non-exclusive basis, they often elect not to sell or license it for digitization purposes to any
other person. Therefore, if one of our competitors acquires rights to digitize a set of content,
even on a non-exclusive basis, we may be unable to acquire rights to digitize that content. In some
cases, acquisition of content involves competitive bidding, and we have in the past and may in the
future choose not to bid or may not successfully bid to acquire content rights. In addition, a
number of governmental bodies and other organizations are interested in making historical content
available for free and owners of historical records may license or sell their records to such
governmental bodies and organizations in addition to or instead of licensing or selling their
content to us. Our inability to offer vital records or other valuable content as part of our family
history research databases or the widespread availability of such content elsewhere at lower cost
or for free could result in our subscription services becoming less valuable to consumers, which
could have an adverse impact on our number of subscribers or subscriber churn, and therefore on our
business, financial condition and results of operations.
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We depend in part upon third party licenses for some of our historical content, and a loss of those
licenses, or disputes regarding royalties under these licenses, could adversely affect our ability
to retain and expand our subscriber base, and therefore adversely affect our revenues, financial
condition and results of operations.
Though we own or license most of the images in our databases, in some cases on a non-exclusive
basis, we acquire a portion of our content pursuant to ongoing license agreements. Some of these
agreements have finite terms and we may not be able to renew the agreements on terms that are
advantageous to us or at all. For example, we license a significant amount of our United Kingdom
content from the United Kingdom National Archives under several license agreements that generally
have ten year terms, with varying automatic extension periods. These agreements with the United
Kingdom National Archive generally expire from 2012 to 2020. The agreements are generally
terminable by either party for breach by the other party and by the United Kingdom National
Archives upon our insolvency or bankruptcy. Some of these agreements permit the United Kingdom
National Archives to terminate these licenses if we undergo a change of control.
If a current or future license for a significant content collection were to be terminated, we
may not be able to obtain a new license on terms advantageous to us or at all and we could be
required to remove the relevant content from our Web sites, either immediately or after some period
of time. If a content provider were to license or sell us content in violation of that content
providers agreements with other parties, we could be required to remove that content from our Web
sites. If we were required to remove a material amount of content from our Web sites, as a result
of the termination of one or more licenses or otherwise, it could adversely affect our business and
results of operations. Some of these license agreements restrict the manner in which we use the
applicable content, which could limit our ability to leverage that content for new uses as we
expand our business. We pay royalties under some of these license agreements, and the other party
to those royalty-bearing agreements may have a right to audit the calculation of our royalty
payments. If there were to be a disagreement regarding the calculation of royalty payments, we
could be required to make additional payments under those agreements. We also have indemnification
obligations under many of these agreements. We could experience claims in the future which, if
material, could have a negative impact on our results of operations and financial condition.
Digitizing and indexing new content can take a significant amount of time and expense, and can
expose us to risks associated with the loss or damage of historical documents. Our inability to
maintain or acquire content or make new content available online in a timely and cost-effective
manner, or liability for loss of historical documents, could have an adverse effect on our
business, financial condition and results of operations.
Digitizing and indexing new historical content can take a significant amount of time and
expense and we generally incur the expenses related to such content significantly in advance of the
time we can make it available to our subscribers. We have invested approximately $90 million in
content to date and expect to continue to spend significant resources on content. Increases in the
cost or time required to digitize and index new content could harm our financial results.
Currently, two transcription vendors perform substantially all of our data transcription as
measured by cost. We do not have long-term contracts with any of our transcription vendors. If we
were to replace one of these transcription vendors for any reason, we would be required to provide
extensive training to the new vendor, which could delay our ability to make our new content
available to our subscribers, and our relationships with the new transcription vendors may be on
financial or other terms less favorable to us than our existing arrangements. Our inability to
maintain or acquire content or to make new content available online in a timely and cost-effective
manner would have an adverse effect on our business, financial condition and results of operations.
In addition, if we acquire content that ultimately generates only minimal subscriber interest,
the cost of acquiring and processing that content may exceed the incremental revenues produced by
the content, which would adversely affect our profitability.
While we are digitizing content, we may be in possession of valuable and irreplaceable
original historical documents. While we maintain insurance with respect to such documents, any loss
or damage to such documents, while in our possession, could cause us significant expense and could
have a material adverse effect on our reputation and the potential willingness of content owners to
sell, license or lend their content to us.
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We face competition from a number of different sources, and our failure to compete effectively with
current and future competitors could adversely affect our ability to retain and expand our
subscriber base, and therefore adversely impact our revenues, results of operations and financial
condition.
We face competition in our business from a variety of online and offline organizations, some
of which provide genealogical records free of charge. We expect competition to increase in the
future. We generally compete on the basis of content, technology, ease of use, brand recognition,
quality and breadth of products, service and support, price and the number of network users with
whom other users can collaborate.
Ancestry.com and our similar international Web sites face competition from:
| FamilySearch, and its Web site FamilySearch.org, a genealogy organization that is part of The Church of Jesus Christ of Latter-day Saints. FamilySearch has an extensive collection of paper and microfilm records. FamilySearch has digitized a large quantity of these records and has published them online at FamilySearch.org, where it makes them available to the public for free and through thousands of family history centers located throughout the world. FamilySearch is a well funded organization and has stated its intention to undertake a massive digitization project to bring most of its collection online. | ||
| Commercial entities, including online genealogical research services, library content distributors, search engines and portals, retailers of books and software related to genealogical research and family tree creation and family history oriented social networking Web sites. | ||
| Non-profit entities and organizations, genealogical societies, governments and agencies that may make vital statistics or other records available to the public for free. |
We expect our competition to grow, and our competitors may include other Internet-based and
offline businesses, governments and other entities. Our current and future competitors may have
greater resources, more well-established brand recognition or more sophisticated technologies, such
as search algorithms, than we do or may more easily obtain relevant records in international
markets. Additionally, our current and future competitors may offer new categories of content,
products or services before us, or at lower prices, which may give them a competitive advantage in
attracting subscribers. Our current and future competitors may make historical records available
online at no cost or on an advertising-supported basis rather than a subscription basis. Our future
competitors and their products and services may be superior to any of our current competition.
There has recently been some consolidation in our industry, and such consolidation could also
increase competition in the future, including competition with respect to acquisition of content,
exclusivity of content or pricing. To compete effectively, we may need to expend significant
resources on content acquisition, technology or marketing and advertising, which could reduce our
margins and have a material adverse effect on our business, financial condition and results of
operations.
Competitive pricing pressures could cause us to fail to retain existing or attract new subscribers
and harm our revenues and results of operations.
Demand for our products and services is sensitive to price. Many external factors, including
our marketing, content acquisition and technology costs and our current and future competitors
pricing and marketing strategies, can significantly affect our pricing strategies, particularly in
markets outside the United States. Some of our competitors provide genealogical records free of
charge. If we fail to meet our subscribers pricing expectations, we could fail to retain existing
or attract new subscribers, either of which would harm our business and results of operations.
Changes in our pricing strategies could have a significant impact on our revenues, financial
condition and results of operations.
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Our growth could strain our personnel, technology and infrastructure resources, and if we are
unable to implement appropriate controls and procedures to manage our growth, and hire and
integrate
appropriate personnel, we may not be able to successfully implement our business plan.
Our growth in operations has placed a significant strain on our management, administrative,
technological, operational and financial infrastructure. Anticipated future growth, including
growth related to the broadening of our product and service offerings and our expansion into new
geographical areas, will continue to place similar strains on our personnel, technology and
infrastructure. We have hired a significant number of new employees in 2010, and we plan to hire additional personnel
in the near future. Particularly when adding staff quickly, we may not make optimal hiring
decisions or may not integrate personnel effectively. A sudden increase in our number of registered
users could strain our capacity and result in Web site performance issues. Our success will depend
in part upon the management ability of our officers with respect to growth opportunities. To manage
the expected growth of our operations, we will need to continue to improve our operational,
financial, technological and management controls and our reporting systems and procedures.
Additional personnel and capital investments will increase our cost base, which will make it more
difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the
short term. If we fail to successfully manage our growth, it could adversely affect our business,
financial condition and results of operations.
Any significant disruption in service on our Web sites or in our computer systems, which are
currently hosted primarily by a single third-party, could damage our reputation and result in a
loss of subscribers, which would harm our business and operating results.
Registered users and subscribers access our service through our Web sites, where our family
history research databases are located, and our internal billing software and operations are
integrated with our product and service offerings. Our brand, reputation and ability to attract,
retain and serve our subscribers depend upon the reliable performance of our Web sites, network
infrastructure, content delivery processes and payment systems. We have experienced interruptions
in these systems in the past, including server failures that temporarily slowed down our Web sites
performance and users access to content, or made our Web sites inaccessible, and we may experience
interruptions in the future. Interruptions in these systems, whether due to system failures,
computer viruses or physical or electronic break-ins, could affect the security or availability of
our Web sites and prevent our registered users from accessing our data and using our products and
services. Problems with the reliability or security of our systems may require disclosure to our
lenders and could harm our reputation, and damage to our reputation and the cost of remedying these
problems could negatively affect our business, financial condition and results of operations.
Substantially all of our communications, network and computer hardware used to operate our Web
sites are co-located in a facility in Utah. We do not own or control the operation of this
facility. We have established a disaster recovery facility located at a third-party facility in
Denver, Colorado. Our systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, terrorist attacks, acts of war, electronic and
physical break-ins, computer viruses, earthquakes and similar events. The occurrence of any of the
foregoing events could result in damage to our systems and hardware or could cause them to fail
completely, and our insurance may not cover such events or may be insufficient to compensate us for
losses that may occur. Our systems are not completely redundant, so a failure of our system at our
primary site could result in reduced functionality for our registered users, and a total failure of
our systems at both sites could cause our Web sites to be inaccessible by our registered users.
Problems faced by our third-party web hosting provider, with the telecommunications network
providers with whom it contracts or with the systems by which it allocates capacity among its
customers, including us, could adversely affect the experience of our subscribers. Our third-party
web hosting provider could decide to close its facilities without adequate notice. In addition, any
financial difficulties, such as bankruptcy reorganization, faced by our third-party web hosting
provider or any of the service providers with whom it contracts may have negative effects on our
business, the nature and extent of which are difficult to predict. Additionally, if our third-party
web hosting provider is unable to keep up with our growing needs for capacity, this could have an
adverse effect on our business. Any errors, defects, disruptions or other performance problems with
our services could harm our reputation and have an adverse effect on our business, financial
condition and results of operations.
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Our operating results depend on numerous factors and may fluctuate from quarter to quarter, which
could make them difficult to predict.
Our quarterly operating results are tied to certain financial and operational metrics that
have fluctuated in the past and may fluctuate significantly in the future. As a result, you should
not rely upon our past quarterly operating results as indicators of future performance. Our
operating results depend on numerous factors, many of which are outside of our control. In addition
to the other risks described in this Risk Factors section, the following risks could cause our
operating results to fluctuate:
| our ability to retain existing subscribers and attract new subscribers; | ||
| the mix of annual and monthly subscribers at any given time and the mix of packages to which they subscribe to; | ||
| the success and timing of television programming relating to family history and its impact on our market and our marketing expenditures; | ||
| timing and amount of costs of new and existing marketing and advertising efforts; | ||
| timing and amount of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure, including content acquisition and international expansion costs; | ||
| the cost and timing of the development and introduction of new product and service offerings by us or our competitors; | ||
| downward pressure on the pricing of our subscriptions; | ||
| system failures, security breaches or Web site downtime; | ||
| fluctuations in the usage of our Web sites; and | ||
| fluctuations in foreign currency exchange rates. |
For these or other reasons, the results of any prior quarterly or annual periods should not be
relied upon as indications of our future performance and our revenue and operating results in
future quarters may differ materially from the expectations of management or investors.
We require a significant amount of cash to service our indebtedness, which reduces the cash
available to finance our organic growth and strategic acquisitions, alliances and collaborations.
If we fail to grow as a result of limitations on available cash, it could harm our financial
condition and stock price.
We had $76 million of long-term debt as of June 30, 2010. Our indebtedness could:
| make us more vulnerable to unfavorable economic conditions; | ||
| make it more difficult to obtain additional financing in the future for working capital, capital expenditures or other general corporate purposes; | ||
| limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate; | ||
| require us to dedicate or reserve a large portion of our cash flow from operations for making payments on our indebtedness, which would prevent us from using it for other purposes; | ||
| make us susceptible to fluctuations in market interest rates that affect the cost of our borrowings to the extent that our variable rate debt is not covered by interest rate derivative agreements; and | ||
| make it more difficult to pursue strategic acquisitions, alliances and collaborations. |
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Our existing credit facility contains a number of financial and operating covenants which
could limit our flexibility in operating our business. For example, our credit facility limits our
capital expenditures, which limits the amount we can spend on content acquisition, and it limits
the amount we can pay when acquiring companies. These restrictions and covenants, among other
things, limit our ability to: incur additional indebtedness; make investments; pay dividends or
make distributions to our stockholders; grant liens on our assets; sell assets; enter into a new or
different line of business; enter into transactions with our affiliates; acquire, merge or
consolidate with other entities or transfer all or substantially all of our assets; and enter into
sale and leaseback transactions. Our failure to comply with any covenant could result in a default
under the credit facility. Our ability to service our indebtedness and comply with the covenants
will depend on our future performance, which will be affected by prevailing economic conditions and
financial, business, regulatory and other factors. Some of these factors are beyond our control. We
believe that, based upon current levels of operations, we will be able to comply with the covenants
in our credit facility and meet our debt service obligations when due. Significant assumptions
underlie this belief including, among other things, that we will continue to be successful in
implementing our business strategy and that there will be no material adverse developments in our
business, liquidity or capital requirements. If we cannot generate sufficient cash flow from
operations to service our indebtedness and to meet our other obligations and commitments, we might
be required to refinance our debt or to dispose of assets to obtain funds for such purpose. We
cannot assure you that refinancing or asset dispositions could be effected on a timely basis or on
satisfactory terms, if at all, or would be permitted by the terms of our credit facility. See
Note 6 to our consolidated financial statements found in our 2009 Annual Report for more
information about our credit facility.
Our obligations under the existing credit facility are secured by collateral, which includes
substantially all of our assets, including our intellectual property. If we are not able to satisfy
our obligations under the credit facility, the creditors could exercise their rights under the
credit facility, which include taking control of the collateral, including our intellectual
property, which would have a material adverse effect on our business.
We may need additional capital, and we cannot be certain that additional financing will be
available. If we fail to obtain additional financing if needed, it could harm our growth and our
ability to respond to business challenges.
Prior to our initial public offering, we had funded our operations primarily from cash flows
from operations. However, in connection with the Spectrum investment, we incurred $140 million of
debt. Although we currently anticipate that our available funds and cash flow from operations will
be sufficient to meet our cash needs for at least the next 12 months, we may require additional
financing in the future. Our ability to obtain financing will depend, among other things, on our
development efforts, business plans, operating performance and condition of the capital markets at
the time we seek financing. Additional financing may not be available to us on favorable terms, or
at all, when required. The financial stress that affected the banking system and financial markets
over the past several years could make it more difficult for us to obtain additional financing if
we should require it. CIT Group Inc., the parent company of CIT Lending Services Corporation, or
CIT, one of the lenders in the lending syndicate for the revolving portion of our credit facility,
has reorganized under Chapter 11 of United States Bankruptcy Code. If CIT or any other of the
financial institutions that are in the syndicate for the revolving portion of our credit facility
were to suffer further financial difficulties or enter bankruptcy, it could affect our ability to
draw down on that facility. If sufficient funds are not available from our credit facility, we may
seek to raise additional funds through the issuance of equity, equity-linked or debt securities,
although we cannot be certain that we would be able to issue sufficient amounts at adequate prices
to satisfy our needs. If we are unable to obtain adequate financing or financing on terms
satisfactory to us when we require it, our ability to service our outstanding indebtedness, to
continue to support our business growth and to respond to business challenges could be
significantly limited.
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If we acquire any businesses or technologies in the future, they could prove difficult to
integrate, disrupt our ongoing business, dilute stockholder value or have an adverse effect on our
results of operations.
As part of our business strategy, we may engage in acquisitions of businesses or technologies
to augment our organic or internal growth, as we did in July 2010
when we acquired the owner and operator of the Swedish family history
website, Genline.se. While we have engaged in some acquisitions in the past,
we do not have extensive experience with integrating and managing acquired businesses or assets.
Acquisitions involve challenges and risks in negotiation, execution, valuation and integration.
Moreover, we may not be able to find suitable acquisition opportunities on terms that are
acceptable to us. Even if successfully negotiated, closed and integrated, certain acquisitions may
not advance our business strategy, may fall short of expected return-on-investment targets or may
fail. Any future acquisition could involve numerous risks including:
| potential disruption of our ongoing business and distraction of management; | ||
| difficulty integrating the operations and products of the acquired business; | ||
| use of cash to fund the acquisition or for unanticipated expenses; | ||
| limited market experience in new businesses; | ||
| exposure to unknown liabilities, including litigation, against the companies we acquire; | ||
| additional costs due to differences in culture, geographical locations and duplication of key talent; | ||
| acquisition-related accounting charges affecting our balance sheet and operations; | ||
| dilution to our current stockholders from the issuance of equity securities; and | ||
| potential loss of key employees or customers of the acquired company. |
In the event we enter into any acquisition agreements, closing of the transactions could be
delayed or prevented by regulatory approval requirements, including antitrust review, or other
conditions. We may not be successful in addressing these risks or any other problems encountered in
connection with any attempted acquisitions, and we could assume the economic risks of such failed
or unsuccessful acquisitions.
We face many risks associated with our plans to continue to expand our international offerings and
marketing and advertising efforts, which could harm our business, financial condition and results
of operations.
In addition to our United States and United Kingdom Web sites, since 2006, we have launched
Web sites directed at Australia, Canada, Germany, France, Italy, Sweden and China and launched an
initial version of our global Mundia.com Web site in the third quarter of 2009. In 2009,
approximately 35% of subscribers to our Ancestry.com Web sites, and approximately 25% of our
revenues from subscribers, were from locations outside the United States. In addition, in July
2010, we acquired the owner and operator of the Swedish family history website, Genline.se. We
anticipate that our continuing international expansion will continue to entail increased marketing
and advertising of our products, services and brands, and the development of localized Web sites
throughout our geographical markets. We may not succeed in these efforts and achieve our subscriber
acquisition or other goals. For some international markets, customer preferences and buying
behaviors may be different, and we may use business models that are different from our traditional
subscription model that provides company-acquired content to subscribers. Our revenues from new
foreign markets may not exceed the costs of acquiring, establishing, marketing and maintaining
international offerings, and therefore may not be profitable on a sustained basis, if at all. We
will be subject to risks of doing business internationally, including the following:
| difficulties in developing and marketing our offerings and brands as a result of distance, language and cultural differences; | ||
| foreign currency exchange rate fluctuations; |
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| more stringent consumer and data protection laws; | ||
| local socio-economic and political conditions; | ||
| technical difficulties and costs associated with the localization of our service offerings; | ||
| strong local competitors; | ||
| lack of experience in certain geographical markets; | ||
| different and conflicting legal and regulatory regimes; | ||
| changes in governmental regulations; | ||
| different and conflicting intellectual property laws; | ||
| difficulties in staffing and managing international operations; and | ||
| risk of business or user fraud. |
One or more of these factors could harm our business, financial condition and results of
operations.
If we are unable to improve market recognition of and loyalty to our brands, or if our reputation
were to be harmed, we could lose subscribers or fail to increase the number of subscribers, which
could harm
our revenues, results of operations and financial condition.
We believe that maintaining and enhancing our Ancestry.com and other brands is critical to our
success. We believe that the importance of brand recognition and loyalty will only increase in
light of increasing competition in our markets. We plan to continue to promote our brands, both
domestically and internationally, but there is no guarantee that our selected strategies will
increase the favorable recognition of our brands. Some of our existing and potential competitors,
including search engines, media companies and government and religious institutions have
well-established brands with greater brand recognition than we have. Additionally, from time to
time, our subscribers express dissatisfaction with our service, including, among other things,
dissatisfaction with our auto-renewal and other billing policies, our handling of personal data and
the way our services operate. To the extent that dissatisfaction with our service is widespread or
not adequately addressed, our brand may be adversely impacted. If our efforts to promote and
maintain our brand are not successful, our operating results and our ability to attract and retain
subscribers may be adversely affected. In addition, even if our brand recognition and loyalty
increases, this may not result in increased use of our products and services or higher revenues.
Many of our subscribers are passionate about family history research, and many of these subscribers
participate in blogs on this topic both on our Web sites and elsewhere. If actions we take or
changes we make to our products upset these subscribers, their blogging could negatively affect our
brand and reputation.
Our future growth may differ materially from our historic growth rates and our projections, which
could harm our revenues, results of operations and financial condition.
Online family history research is a relatively new industry and our operational history in the
online family history research industry is also relatively limited. Consequently, it is difficult
to predict the ultimate size of the industry and the acceptance by the market of our products and
services. Our business strategy and projections rely on a number of assumptions, some or all of
which may be incorrect. For example, we believe that consumers will be willing to pay for
subscriptions to our online family history resources, notwithstanding the fact that some of our
current and future competitors may provide such resources free of charge. We cannot accurately
predict whether our products and services will achieve significant acceptance by potential users in
significantly larger numbers than at present. You should therefore not rely on our historic growth
rates as an indication of future growth.
Our business could be adversely affected if our subscribers are not satisfied with our products and
services. If we lose subscribers or fail to increase the number of subscribers due to
dissatisfaction with our products and services, it could harm our revenues, results of operations
and financial condition.
Our business depends on our ability to satisfy our subscribers. Our subscribers satisfaction
may be negatively impacted by factors that are actual or perceived by them, such as limitations in
our technologies, changes in our products and services, interruptions or slowness in online
capacity of our Web sites, privacy and data security concerns, speed of search of our online
content and relevance of search results, as well as perceived ease of search, and our automatic
subscription renewal by credit card policy, including any perceptions of credit card fraud. If we
do not handle subscriber complaints effectively, our brand and reputation may suffer, we may lose
our subscribers confidence, and they may choose not to renew their subscriptions. Complaints or
negative publicity about our products, services or billing practices could adversely impact our
business, financial condition and results of operations.
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If we are unable to continually enhance our products and services and adapt them to technological
changes and subscriber needs, we may not remain competitive and our business may fail to grow or
decline.
Our business is rapidly changing. To remain competitive, we must continue to provide relevant
content and enhance and improve the functionality and features of our products and services. If we
fail to do so, or if competitors introduce new solutions embodying new technologies, our existing
products and services may become obsolete. Our future success will depend, among other things, on
our ability to:
| anticipate demand for new products and services; | ||
| enhance our existing solutions; and | ||
| respond to technological advances on a cost-effective and timely basis. |
Developing the technologies in our products entails significant technical and business risks.
We may use new technologies ineffectively, or we may fail to adapt our products and services to the
demands of our subscribers. If we face material delays in introducing new or enhanced solutions,
our subscribers may forego the use of our solutions in favor of those of our competitors.
Undetected product or service errors or defects could result in the loss of revenues, delayed
market acceptance of our products or services or claims against us.
We offer a variety of Internet-based services and a software product, Family Tree Maker, all
of which are complex and frequently upgraded. Our Internet-based services and software product may
contain undetected errors, defects, failures or viruses, especially when first introduced or when
new versions or enhancements are released. Despite product testing, our products, or third party
products that we incorporate into ours, may contain undetected errors, defects or viruses that
could, among other things:
| require us to make extensive changes to our subscription services or software product, which would increase our expenses; | ||
| expose us to claims for damages; | ||
| require us to incur additional technical support costs; | ||
| cause a negative registered user reaction that could reduce future sales; | ||
| generate negative publicity regarding us and our subscription services and software product; or | ||
| result in subscribers delaying their subscription or software purchase or electing not to renew their subscriptions. |
Any of these occurrences could have a material adverse effect upon our business, financial
condition and results of operations.
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Privacy concerns could require us to incur significant expense and modify our operations in a
manner that could result in restrictions and prohibitions on our use of certain information, and
therefore harm our business.
As part of our business, we make biographical and historical data available through our Web
sites, we use registered users personal data for internal purposes and we host Web sites and
message boards, among other things, that contain content supplied by third parties. In addition, in
connection with our Ancestry.com DNA product, we obtain biological DNA samples used for genetic
testing. For privacy or security reasons, privacy groups, governmental agencies and individuals may
seek to restrict or prevent our use or publication of certain biological or historical information
pertaining to individuals, particularly living persons. We will also face additional privacy issues
as we expand into other international markets, as many nations have privacy protections more
stringent than those in the United States. We have incurred, and will continue to incur, expenses
to comply with privacy and security standards and protocols imposed by law, regulation, industry
standards or contractual obligations. Increased domestic or international regulation of data
utilization and distribution practices, including self-regulation, could require us to modify our
operations and incur significant expense, which could have an adverse effect on our business,
financial condition and results of operations.
Our possession and use of personal information presents risks and expenses that could harm our
business. Unauthorized disclosure or manipulation of such data, whether through breach of our
network security or otherwise, could expose us to costly litigation and damage our reputation.
Maintaining our network security is of critical importance because our online systems store
confidential registered user, employee and other sensitive data, such as names, addresses, credit
card numbers and other personal information. In particular, a substantial majority of our
subscribers use credit and debit cards to purchase our products and services. If we or our
processing vendors were to have problems with our billing software, it could have an adverse effect
on our subscriber satisfaction and could cause one or more of the major credit card companies to
disallow our continued use of their payment services. In addition, if our billing software fails to
work properly and, as a result, we do not automatically charge our subscribers credit cards on a
timely basis or at all, our business, financial condition and results of operations could be
adversely affected.
In addition, our online systems store the content that our registered users upload onto our
Web sites, such as family records and photos. This content is often personally meaningful, and our
registered users may rely on our online system to store digital copies of such content. If we were
to lose such content, if our users private content were to be publicly available or if third
parties were able to access and manipulate such content, we may face liability and harm to our
brand and reputation.
We and our vendors use commercially available encryption technology to transmit personal
information when taking orders. We use security and business controls to limit access and use of
personal information, including registered users uploaded content. However, third parties may be
able to circumvent these security and business measures by developing and deploying viruses, worms
and other malicious software programs that are designed to attack or attempt to infiltrate our
systems and networks. In addition, employee error, malfeasance or other errors in the storage, use
or transmission of personal information could result in a breach of registered user or employee
privacy.
If third parties improperly obtain and use the personal information of our registered users or
employees, we may be required to expend significant resources to resolve these problems. A major
breach of our network security and systems could have serious negative consequences for our
businesses, including possible fines, penalties and damages, reduced demand for our products and
services, an unwillingness of subscribers to provide us with their credit card or payment
information, an unwillingness of registered users to upload family records or photos onto our Web
sites, harm to our reputation and brand and loss of our ability to accept and process subscriber
credit card orders. Similarly, if a well-publicized breach of data security at any other major
consumer Web site were to occur, there could be a general public loss of confidence in the use of
the Internet for commercial transactions. Any of these events could have material adverse effects
on our business, financial condition and results of operations.
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Any claims related to activities of registered users and the content they upload could result in
expenses
that could harm our results of operations and financial condition.
Our registered users often upload their own content onto our Web sites. The terms of use of
such content are set forth in the terms and conditions of our Web sites and a submission agreement
to which registered users must agree when they upload their content. Disputes or negative publicity
about the use of such content could make members more reluctant to upload personal content or harm
our reputation. We do not review or monitor content uploaded by our registered users, and could
face claims arising from or liability for making any such content available on our Web sites. In
addition, our collaboration tools and other features of our site allow registered users to contact
each other. While registered users can choose to remain anonymous in such communications,
registered users may choose to engage with one another without anonymity. If any such contact were
to lead to fraud or other harm, we may face claims against us and negative publicity. Litigation to
defend these claims or efforts to counter any negative publicity could be costly and any other
liabilities we incur in connection with any such claims may harm our business, financial condition
and results of operations.
Increases in credit card processing fees would increase our operating expenses and adversely affect
our results of operations, and the termination of our relationship with any major credit card
company would have a severe, negative impact on our ability to collect revenues from subscribers.
The substantial majority of our subscribers pay for our products and services using credit
cards. From time to time, the major credit card companies or the issuing banks may increase the
fees that they charge for each transaction using their cards. An increase in those fees would
require us to either increase the prices we charge for our products and services, or suffer a
negative impact on our profitability, either of which could adversely affect our business,
financial condition and results of operations.
In addition, our credit card fees may be increased by credit card companies if our chargeback
rate or the refund rate exceeds certain minimum thresholds. If we are unable to maintain our
chargeback rate at acceptable levels, our credit card fees for chargeback transactions, or for all
credit card transactions, may be increased, and, if the problem significantly worsens, credit card
companies may further increase our fees or terminate their relationships with us. Any increases in
our credit card fees could adversely affect our results of operations, particularly if we elect not
to raise our subscription rates to offset the increase. The termination of our ability to process
payments on any major credit or debit card would significantly impair our ability to operate our
business.
If government regulation of the Internet or other areas of our business changes or if consumer
attitudes toward use of the Internet change, we may need to change the manner in which we conduct
our business in a manner that is less profitable or incur greater operating expenses, which could
harm our results of operations.
The adoption, modification or interpretation of laws or regulations relating to the Internet
or other areas of our business could adversely affect the manner in which we conduct our business
or the overall popularity or growth in use of the Internet. Such laws and regulations may cover
automatic subscription renewal, credit card processing procedures, sales and other procedures,
tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic
contracts, consumer protection, broadband residential Internet access and the characteristics and
quality of services. In foreign countries, such as countries in Europe, such laws may be more
restrictive than in the United States. It is not clear how existing laws governing issues such as
property ownership, sales and other taxes, libel and personal privacy apply to the Internet. If we
are required to comply with new regulations or legislation or new interpretations of existing
regulations or legislation, this compliance could cause us to incur additional expenses, make it
more difficult to renew subscriptions automatically, make it more difficult to attract new
subscribers or otherwise alter our business model. Any of these outcomes could have a material
adverse effect on our business, financial condition or results of operations.
Our revenues may be adversely affected if we are required to charge sales taxes in additional
jurisdictions and/or other taxes for our products and services.
We collect or have imposed upon us sales or other taxes related to the products and services
we sell in certain states and other jurisdictions. Additional states or one or more countries or
other jurisdictions may
seek to impose sales or other tax collection obligations on us in the future. A successful
assertion by any country, state or other jurisdiction in which we do business that we should be
collecting sales or other taxes on the sale of our products and services could, among other things,
create significant administrative burdens for us, result in substantial tax liabilities for past
sales, discourage registered users from purchasing from us or otherwise substantially harm our
business and results of operations.
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We face risk associated with currency exchange rate fluctuations, which could adversely affect our
operating results.
In 2009, approximately 21% of our total revenues were received, and approximately 12% of our
total expenses were paid, in currencies other than the United States dollar, such as the British
pound sterling, the Canadian dollar and the Australian dollar. As a result, we are at risk for
exchange rate fluctuations between such foreign currencies and the United States dollar, which
could affect our results of operations. We attempt to limit our exposure by paying our operating
expenses incurred in foreign jurisdictions with revenues received in the applicable currency, but
if we do not have enough local currency to pay all our expenses in that currency, we are exposed to
currency exchange rate risk with respect to those expenses. We are also exposed to exchange rate
risk with respect to our profits earned in foreign currency. Even if we were to implement hedging
strategies to mitigate foreign currency risk, these strategies might not eliminate our exposure to
foreign exchange rate fluctuations and would involve costs and risks of their own, such as ongoing
management time and expertise, external costs to implement the strategies and potential accounting
implications.
Our business may be significantly impacted by a change in the economy, including any resulting
effect on consumer spending.
Our business may be affected by changes in the economy generally, including any resulting
effect on consumer spending specifically. Our products and services are discretionary purchases,
and consumers may reduce their discretionary spending on our products and services during an
economic downturn such as the recent economic downturn. Although we have not experienced a material
increase in subscription cancellations or a material reduction in subscription renewals, we may yet
experience such an increase or reduction in the future, especially if employment and personal
income do not improve. Conversely, consumers may spend more time using the Internet during an
economic downturn and may have less time for our products and services in a period of economic
growth. In addition, media prices may increase in a period of economic growth, which could
significantly increase our marketing and advertising expenses. As a result, our business, financial
condition and results of operations may be significantly affected by changes in the economy
generally.
The loss of one or more of our key personnel, or our failure to attract, assimilate and retain
other highly qualified personnel in the future, could harm our business.
We depend on the continued service and performance of our key personnel, including Timothy
Sullivan, our President and Chief Executive Officer. We do not maintain key man insurance on any of
our officers or key employees. We also do not have long-term employment agreements with any of our
officers or key employees. In addition, much of our key technology and systems are custom-made for
our business by our personnel. The loss of key personnel, including key members of our management
team, as well as certain of our key marketing, sales, product development or technology personnel
could disrupt our operations and have an adverse effect on our ability to grow our business.
In addition, to execute our growth plan, we must attract and retain a relatively large number
of highly qualified personnel. Competition for these employees is intense, and we may not be
successful in attracting and retaining qualified personnel. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications. Many of the companies with
which we compete for experienced personnel have greater resources than we have. In addition, in
making employment decisions, particularly in the Internet and high-technology industries, job
candidates often consider the value of the stock options or other equity awards they may receive in
connection with their employment. Accounting principles generally accepted in
the United States relating to the expensing of stock options may discourage us from granting
the size or type of stock option awards that job candidates may require to join our company. If we
fail to attract new personnel, or fail to retain and motivate our current personnel, our business
and future growth prospects could be severely harmed.
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We are subject to additional regulatory compliance matters as a result of becoming a public
company, which compliance includes Section 404 of the Sarbanes-Oxley Act of 2002, and our
management has limited experience managing a public company. Failure to comply with these
regulatory matters could harm our business.
In November 2009, we became a public company and have incurred and will continue to incur
significant legal, accounting and other expenses that we did not incur as a private company. Our
management team and other personnel are devoting a substantial amount of time to new compliance
initiatives and to meeting the obligations that are associated with being a public company, and we
may not successfully or efficiently manage this transition. Rules and regulations such as the
Sarbanes-Oxley Act of 2002 may continue to increase our legal and finance compliance costs and make
some activities more time-consuming than in the past. We may need to hire a number of additional
employees with public accounting and disclosure experience in order to meet our ongoing obligations
as a public company. Furthermore, Section 404 of the Sarbanes-Oxley Act of 2002 requires that our
management report on, and our independent auditors to attest to, the effectiveness of our internal
control structure and procedures for financial reporting in our Annual Report on Form 10-K for the
fiscal year ending December 31, 2010. Section 404 compliance efforts may divert internal resources
and will take a significant amount of time, effort and funds to complete. We may not be able to
successfully complete the procedures and certification and attestation requirements of Section 404
by the time we will be required to do so. If we fail to do so, or if in the future our chief
executive officer, chief financial officer or independent registered public accounting firm
determines that our internal control over financial reporting is not effective, we could be subject
to sanctions or investigations by the Nasdaq Stock Market, SEC or other regulatory authorities.
Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the
market price of our stock. Furthermore, whether or not we comply with Section 404, any failure of
our internal controls could have a material adverse effect on our stated results of operations and
harm our reputation. If we are unable to implement necessary procedures or changes effectively or
efficiently, it could harm our operations, financial reporting or financial results and could
result in an adverse opinion on internal control over financial reporting from our independent
registered public accounting firm. While we currently have a sufficient number of independent board
members to assign to committees to meet the listing standards of the Nasdaq Stock Market by the
deadlines set by the exchange, we would require these directors to serve on multiple committees to
achieve compliance. Although we plan to seek additional independent board members, our failure to
attract such individuals could impose undue strain on our current independent directors.
Our reported financial results may be adversely affected by changes in accounting principles
applicable to us.
Generally accepted accounting principles in the United States are subject to interpretation by
the FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed
to promulgate and interpret appropriate accounting principles. A change in these principles or
interpretations could have a significant effect on our reported financial results, and could affect
the reporting of transactions completed before the announcement of a change. In addition, the SEC
has announced a multi-year plan that could ultimately lead to the use of International Financial
Reporting Standards by United States issuers in their SEC filings. Any such change could have a
significant effect on our reported financial results.
Any expenses or liability resulting from litigation could adversely affect our results of
operations and financial condition.
From time to time, we may be subject to claims or litigation. Any such claims or litigation
may be time-consuming and costly, divert management resources, require us to change our products
and services, require us to accept returns of software products, or have other adverse effects on
our business. Any of the
foregoing could have a material adverse effect on our results of operations and could require
us to pay significant monetary damages. For example, in August 2009, we received a letter from
Shutterfly, Inc., alleging infringement of certain of their patents by our operation of the
MyCanvas.com Web site. While MyCanvas.com revenues have represented a small percentage of our total
revenue and we do not believe that this claim will be resolved in a manner that would have a
material adverse effect on our business, intellectual property litigation is subject to inherent
uncertainties, and there can be no assurance that the expenses associated with defending any
litigation or the resolution of this dispute would not have a material adverse impact on our
results of operations or cash flows. Nor can we assure you of the ultimate outcome of any legal
proceeding or contingency in which we are or may become involved.
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Risks Related to Intellectual Property
If our intellectual property and technologies are not adequately protected to prevent use or
appropriation by our competitors, the value of our brand and other intangible assets may be
diminished, and our business may be adversely affected.
Our future success and competitive position depend in part on our ability to protect our
proprietary technologies and intellectual property. We rely and expect to continue to rely on a
combination of confidentiality and license agreements with our employees, consultants and third
parties with whom we have relationships, as well as trademark, copyright, patent and trade secret
protection laws, to protect our proprietary technologies and intellectual property. In the United
States, we currently have six patents issued, and we have a number of patents pending relating to
digitization, indexing, storage, correlation, search and display of content. Ancestry.com,
myfamily.com and Family Tree Maker are among our registered trademarks. In addition, in the United
States, we have filed various trademark applications for certain aspects of our technologies, and
we have also filed trademark applications in certain foreign countries for the Ancestry and other
Web site names. Many of our trademarks contain words or terms having a common usage and, as a
result, may not be protectable under applicable law. Because of this concern, we have elected not
to file applications with respect to certain of our trademarks, and some of our trademarks for
which we have filed applications may not be protectable. We also possess intellectual property
rights in aspects of our digital content, search technology, software products and digitization and
indexing processes. However, our digital content is not protected by any registered copyrights or
other registered intellectual property or statutory rights. Rather, our digital content is
protected by user agreements that limit access to and use of our data, and by our proprietary
indexing and search technology that we apply to make our digital content searchable. Compliance
with use restrictions is difficult to monitor, and our proprietary rights in our digital content
databases may be more difficult to enforce than other forms of intellectual property rights.
There can be no assurance that the steps we take will be adequate to protect our technologies
and intellectual property, that our patent and trademark applications will lead to issued patents
and registered trademarks, that others will not develop or patent similar or superior technologies,
products or services, or that our patents, trademarks and other intellectual property will not be
challenged, invalidated or circumvented by others. Furthermore, the intellectual property laws of
other countries at which our Web sites are or may be in the future be directed may not protect our
products and intellectual property rights to the same extent as the laws of the United States. The
legal standards relating to the validity, enforceability and scope of protection of intellectual
property rights in Internet-related industries are uncertain and still evolving, both in the United
States and in other countries. In addition, third parties may knowingly or unknowingly infringe our
patents, trademarks and other intellectual property rights, and litigation may be necessary to
protect and enforce our intellectual property rights. Any such litigation could be very costly and
could divert management attention and resources. If the protection of our technologies and
intellectual property is inadequate to prevent use or appropriation by third parties, the value of
our brand and other intangible assets may be diminished and competitors may be able to more
effectively mimic our subscription services and methods of operations. Any of these events would
have a material adverse effect on our business, financial condition and results of operations.
We also expect that the more successful we are, the more likely it will become that
competitors will try to develop products that are similar to ours, which may infringe on our
proprietary rights. It may also be more likely that competitors will claim that our products and
services infringe on their proprietary rights. If we are unable to protect our proprietary rights
or if third parties independently develop or gain access to
our or similar technologies, our business, revenue, reputation and competitive position could
be harmed.
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Confidentiality agreements with employees and others may not adequately prevent disclosure of trade
secrets and other proprietary information. Failure to protect our proprietary information could
make it easier for third parties to compete with our products and harm our business.
A substantial amount of our tools and technologies are protected by trade secret laws. In
order to protect our proprietary technologies and processes, we rely in part on security measures,
as well as confidentiality agreements with our employees, licensees, independent contractors and
other advisors. These measures and agreements may not effectively prevent disclosure of
confidential information, including trade secrets, and may not provide an adequate remedy in the
event of unauthorized disclosure of confidential information. We could potentially lose future
trade secret protection if any unauthorized disclosure of such information occurs. In addition,
others may independently discover our trade secrets and proprietary information, and in such cases
we could not assert any trade secret rights against such parties. Laws regarding trade secret
rights in certain markets in which we operate may afford little or no protection to our trade
secrets. The loss of trade secret protection could make it easier for third parties to compete with
our products by copying functionality. In addition, any changes in, or unexpected interpretations
of, the trade secret and other intellectual property laws in any country in which we operate may
compromise our ability to enforce our trade secret and intellectual property rights. Costly and
time-consuming litigation could be necessary to enforce and determine the scope of our proprietary
rights, and failure to obtain or maintain trade secret protection could adversely affect our
business, revenue, reputation and competitive position.
Intellectual property claims against us could be costly and result in the loss of significant
rights related to, among other things, our Web sites and marketing and advertising activities.
Trademark, copyright, patent and other intellectual property rights are important to us and
other companies. Our intellectual property rights extend to our technologies, business processes
and the content on our Web sites. We use intellectual property licensed from third parties in
merchandising our products and marketing and advertising our services. From time to time, third
parties may allege that we have violated their intellectual property rights. If there is a claim
against us for infringement, misappropriation, misuse or other violation of third party
intellectual property rights, and we are unable to obtain sufficient rights or develop
non-infringing intellectual property or otherwise alter our business practices on a timely basis,
our business and competitive position may be adversely affected. Many companies are devoting
significant resources to obtaining patents that could potentially affect many aspects of our
business. There are numerous patents that broadly claim means and methods of conducting business on
the Internet. We have not exhaustively searched patents relevant to our technologies and business.
If we are forced to defend ourselves against intellectual property infringement claims, whether
they are with or without merit or are determined in our favor, we may face costly litigation,
diversion of technical and management personnel, limitations on our ability to use our current Web
sites or inability to market or provide our products or services. As a result of any such dispute,
we may have to develop non-infringing technology, pay damages, enter into royalty or licensing
agreements, cease providing certain products or services, adjust our merchandizing or marketing and
advertising activities or take other actions to resolve the claims. These actions, if required, may
be costly or unavailable on terms acceptable to us. In addition, many of our co-branding,
distribution and other partnering agreements require us to indemnify our partners for third-party
intellectual property infringement claims, which could increase the cost to us of an adverse ruling
in such an action.
In addition, as a publisher of online content, we face potential liability for negligence,
copyright, patent or trademark infringement or other claims based on the nature and content of data
and materials that we publish or distribute. These claims could potentially arise with respect to
both company-acquired content and user-generated content. Litigation to defend these claims could
be costly and any other liabilities we incur in connection with the claims may harm our business,
financial condition and results of operations.
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If we are unable to protect our domain names, our reputation and brand could be affected adversely,
which would adversely affect our subscriber base, and therefore adversely affect our revenues.
We have registered domain names for Web site destinations that we use in our business, such as
Ancestry.com, Genealogy.com and myfamily.com. However, if we are unable to maintain our rights in
these domain names, our competitors could capitalize on our brand recognition by using these domain
names for their own benefit. In addition, our competitors could capitalize on our brand recognition
by using domain names similar to ours. Domain names similar to ours have been registered in the
United States and elsewhere, and in many countries the top-level domain names ancestry or
genealogy are owned by other parties. Though we own the ancestry.co.uk domain name in the
United Kingdom, we might not be able to, or may choose not to, acquire or maintain other
country-specific versions of the ancestry and genealogy domain names. Further, the relationship
between regulations governing domain names and laws protecting trademarks and similar proprietary
rights varies from jurisdiction to jurisdiction and is unclear in some jurisdictions. We may be
unable to prevent third parties from acquiring and using domain names that infringe on, are similar
to, or otherwise decrease the value of, our brand or our trademarks or service marks. Protecting
and enforcing our rights in our domain names and determining the rights of others may require
litigation, which could result in substantial costs and divert management attention. We may not
prevail if any such litigation is initiated.
Risks Related to our Corporate Structure
Our share price may be volatile due to fluctuations in our operating results and other factors,
each of which could cause our stock price to decline.
Our revenues, expenses and results of operations have fluctuated in the past and are likely to
do so in the future from quarter to quarter and year to year due to the risk factors described in
this section and the factors described below and elsewhere in this Quarterly Report:
| actual or anticipated fluctuations in our key operating metrics, financial condition and operating results; |
| a greater than expected gain or loss of existing subscribers; |
| a change in one or more of our key metrics; |
| actual or anticipated changes in our growth rate; |
| issuance of new or updated research or reports by securities analysts; |
| our announcement of actual results for a fiscal period that are higher or lower than projected or expected results or our announcement of revenue or earnings guidance that is higher or lower than expected; |
| fluctuations in the valuation of companies perceived by investors to be comparable to us; |
| share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; |
| sales or expected sales of additional common stock; |
| announcements from, or operating results of, our competitors; or |
| general economic and market conditions. |
Furthermore, during the last few years, the stock markets have experienced extreme price and
volume fluctuations and the market prices of some equity securities continue to be volatile. These
fluctuations often have been unrelated or disproportionate to the operating performance of these
companies. These broad market and industry fluctuations, as well as general economic, political and
market conditions such as recessions, interest rate changes or international currency fluctuations,
may cause the market price of shares of our common stock to decline. In the past, companies that
have experienced volatility in the market price of their stock have been subject to securities
class action litigation. We may be the target of this type of
litigation in the future. Securities litigation against us could result in substantial costs
and divert our managements attention from other business concerns, which could seriously harm our
business.
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Our stock price is susceptible to coverage by securities analysts.
The trading of our common stock is influenced by the reports and research that industry or
securities analysts publish about us or our business. If analysts stop covering us, or if too few
analysts cover us, the trading price of our stock would likely decrease. If one or more of the
analysts who cover us downgrade our stock, our stock price will likely decline. If one or more of
these analysts cease coverage of our company or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could cause our stock price or trading
volume to decline.
Our principal stockholder and its affiliates own a majority of our outstanding common stock, and
their interests may not always coincide with the interests of the other holders of our common
stock.
As of June 30, 2010, Spectrum Equity Investors V, L.P. and certain of its affiliates
beneficially owned in the aggregate shares representing approximately 53% of our outstanding voting
power. Two persons associated with Spectrum Equity Investors V, L.P. currently serve on our board
of directors. As a result, Spectrum Equity Investors V, L.P. and certain of its affiliates
effectively control all matters presented to our stockholders for approval, including election and
removal of our directors and change of control transactions. The interests of Spectrum Equity
Investors V, L.P. and certain of its affiliates may not always coincide with the interests of the
other holders of our common stock.
Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay
or discourage takeover attempts that stockholders may consider favorable.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or
preventing a change of control or changes in our management. For example, our board of directors
has the authority to issue up to five million shares of preferred stock in one or more series and
to fix the powers, preferences and rights of each series without stockholder approval. The ability
to issue preferred stock could discourage unsolicited acquisition proposals or make it more
difficult for a third party to gain control of our company, or otherwise could adversely affect the
market price of our common stock. Our amended and restated certificate of incorporation requires
that any action to be taken by stockholders must be taken at a duly called meeting of stockholders,
which may only be called by our board of directors, the chairperson of our board of directors or
the chief executive officer, with the concurrence of a majority of our board of directors, and may
not be taken by written consent. Our amended and restated bylaws also require that any stockholder
proposals or nominations for election to our board of directors meet specific advance notice
requirements and procedures, which make it more difficult for our stockholders to make proposals or
director nominations. In addition, we have a classified board of directors with three-year
staggered terms, which could delay the ability of stockholders to change membership of a majority
of our board of directors.
Furthermore, because we are incorporated in Delaware, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law. These provisions may prohibit or restrict
large stockholders, in particular those owning 15% or more of our outstanding voting stock, from
merging or combining with us. These provisions in our certificate of incorporation and bylaws and
under Delaware law could discourage potential takeover attempts and could reduce the price that
investors might be willing to pay for shares of our common stock in the future and result in our
market price being lower than it would without these provisions.
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Substantial sales of our common stock by our stockholders, including sales pursuant to 10b5-1
plans, could depress our stock price regardless of our operating results.
Sales of substantial amounts of our common stock in the public market could reduce the
prevailing market prices for our common stock. On November 10, 2009 we completed our initial public
offering of approximately 7.4 million shares of common stock on the Nasdaq Global Select Market. As
of June 30, 2010, we had approximately 43.5 million shares of common stock outstanding along with
vested and exercisable options to purchase approximately 6.2 million shares of common stock.
Substantially all of our
outstanding common stock is eligible for sale, subject to Rule 144 volume limitations for
holders affected by such limitations, as is common stock issuable under vested and exercisable
stock options. If our existing stockholders sell a large number of shares of our common stock or
the public market perceives that existing stockholders might sell shares of common stock, including
sales pursuant to Rule 10b5-1 plans, the market price of our common stock could decline
significantly. These sales might also make it more difficult for us to sell equity securities at a
time and price that we deem appropriate.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On November 4, 2009, the SEC declared effective our Registration Statement on Form S-1 (File
No. 333-160986) for our initial public offering. During the second quarter of 2010, we made
payments totaling $20.9 million on our credit facility with CIT Lending Services Corporation, as
Administrative Agent, and certain other financial institutions. Since our initial public offering,
we have made aggregate payments of $38.4 million on our credit facility. These payments were made
with cash on hand, including the net proceeds from our initial public offering.
We expect to use the remainder of the net proceeds from our initial public offering for
working capital and general corporate purposes. We may also use a portion of the proceeds to expand
our current business through acquisitions or investments in other strategic businesses, products or
technologies. We have invested the net proceeds in short-term interest-bearing, U.S. Government
agency securities and money market funds pending their use as described above.
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Item 6. Exhibits
Exhibit | ||
Number | Exhibit Description | |
31.1* | Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|
31.2* | Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|
32.1* | Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | These certifications are not deemed filed with the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Ancestry.com Inc. |
||||
Dated: August 11, 2010 | By: | /s/ Timothy Sullivan | ||
Timothy Sullivan | ||||
President and Chief Executive Officer | ||||
Dated: August 11, 2010 | By: | /s/ Howard Hochhauser | ||
Howard Hochhauser | ||||
Chief Financial Officer |
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EXHIBIT INDEX
Exhibit | ||
Number | Exhibit Description | |
31.1* | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2* | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1* | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
* | These certifications are not deemed filed with the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. |
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