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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended June 30, 2012

OR

 

¨ 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   26-1235962

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

360 West 4800 North Provo,

Utah

  84604
(Address of principal executive offices)   (Zip Code)

(801) 705-7000

(Registrant’s telephone number, including area code)

 

 

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

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  x     No  ¨

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   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    

Yes  ¨     No  x

As of July 26, 2012, there were 43,001,616 shares of the registrant’s common stock, par value $0.001, outstanding.

 

 

 


Table of Contents

Ancestry.com Inc.

Table of Contents

 

     Page  

Part I. Financial Information

  

Item 1. Financial Statements

     3   

Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

     3   

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June  30, 2012 and 2011

     4   

Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June  30, 2012 and 2011

     5   

Notes to Condensed Consolidated Financial Statements

     6   

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

     12   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     25   

Item 4. Controls and Procedures

     25   

Part II. Other Information

  

Item 1. Legal Proceedings

     26   

Item 1A. Risk Factors

     26   

Item 6. Exhibits

     42   

Signatures

     43   

Exhibit Index

     44   

Exhibit 10.1

  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINKBASE DOCUMENT

  

EX-101 LABELS LINKBASE DOCUMENT

  

EX-101 PRESENTATION LINKBASE DOCUMENT

  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ANCESTRY.COM INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     June 30,     December 31,  
     2012     2011  
     (unaudited)        
     (In thousands, except par values)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 69,615      $ 48,998   

Restricted cash

     3,689        1,702   

Accounts receivable, net of allowances of $695 and $527 at June 30, 2012 and December 31, 2011, respectively

     6,626        7,599   

Income tax receivable

     8,798        1,763   

Deferred income taxes

     4,823        4,823   

Prepaid expenses and other current assets

     7,965        7,945   
  

 

 

   

 

 

 

Total current assets

     101,516        72,830   

Property and equipment, net

     24,694        21,701   

Content databases, net

     84,199        76,646   

Intangible assets, net

     22,912        17,594   

Goodwill

     303,102        302,422   

Other assets

     4,638        2,656   
  

 

 

   

 

 

 

Total assets

   $ 541,061      $ 493,849   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 9,432      $ 9,817   

Accrued expenses

     32,442        34,725   

Deferred revenues

     133,498        108,654   

Debt

     —          10,000   
  

 

 

   

 

 

 

Total current liabilities

     175,372        163,196   

Deferred income taxes

     16,539        14,925   

Other long-term liabilities

     6,537        5,219   
  

 

 

   

 

 

 

Total liabilities

     198,448        183,340   

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; 48,579 shares issued and 42,933 shares outstanding at June 30, 2012 and 47,898 shares issued and 42,793 shares outstanding at December 31, 2011

     49        48   

Additional paid-in capital

     386,492        374,948   

Treasury stock, at cost; 5,646 and 5,105 shares at June 30, 2012 and December 31, 2011, respectively

     (175,000     (162,168 )

Accumulated other comprehensive income

     431        564   

Retained earnings

     130,641        97,117   
  

 

 

   

 

 

 

Total stockholders’ equity

     342,613        310,509   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 541,061      $ 493,849   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

3


Table of Contents

ANCESTRY.COM INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  
     (unaudited)  
     (In thousands, except per share data)  

Revenues:

        

Subscription revenues

   $ 113,037      $ 96,707      $ 215,633      $ 181,890   

Product and other revenues

     6,041        4,601        11,981        10,446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     119,078        101,308        227,614        192,336   

Costs of revenues:

        

Cost of subscription revenues

     16,403        14,111        32,697        27,998   

Cost of product and other revenues

     3,584        1,841        6,369        3,669   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     19,987        15,952        39,066        31,667   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     99,091        85,356        188,548        160,669   

Operating expenses:

        

Technology and development

     18,778        14,242        35,405        27,910   

Marketing and advertising

     34,944        30,250        74,493        64,058   

General and administrative

     12,733        10,111        23,375        19,468   

Amortization of acquired intangible assets

     3,224        4,297        5,785        8,567   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     69,679        58,900        139,058        120,003   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     29,412        26,456        49,490        40,666   

Other expense, net

     (54     (429     (15     (536
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     29,358        26,027        49,475        40,130   

Income tax expense

     (9,381     (9,470     (15,951     (14,602
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 19,977      $ 16,557      $ 33,524      $ 25,528   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 0.47      $ 0.36      $ 0.78      $ 0.56   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.44      $ 0.33      $ 0.74      $ 0.51   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     42,758        45,596        42,766        45,484   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     45,469        49,893        45,598        50,082   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 19,578      $ 16,454      $ 33,391      $ 25,910   
  

 

 

   

 

 

   

 

 

   

 

 

 

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
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (unaudited)  
     (In thousands)  

Operating activities:

        

Net income

   $ 19,977      $ 16,557      $ 33,524      $ 25,528   

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation

     3,606        3,188        7,153        6,452   

Amortization of content databases

     2,587        2,279        5,137        4,415   

Amortization of acquired intangible assets

     3,224        4,297        5,785        8,567   

Amortization of deferred financing costs

     69        69        138        138   

Deferred income taxes

     535        (2,021     1,625        (2,989

Stock-based compensation expense

     4,056        2,201        7,003        3,926   

Changes in operating assets and liabilities:

        

Accounts receivable

     6,219        999        973        1,308   

Restricted cash

     8        44        (2,987 )     536   

Other assets

     (846     (581     (1,297     (233 )

Income taxes, net

     (5,044     7,850        (6,180     13,493   

Accounts payable and other liabilities

     (5,910 )     8,041        (359 )     2,387   

Excess tax benefits from stock-based awards activity

     (1,367     (16,393     (2,347     (20,449

Deferred revenues

     5,169        5,054        24,844        24,906   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     32,283        31,584        73,012        67,985   

Investing activities:

        

Capitalization of content databases

     (7,538     (4,204     (12,678     (9,951

Purchases of property and equipment

     (5,024     (3,693     (10,117     (4,418

Acquisition of businesses

     —          —          (11,731     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (12,562     (7,897     (34,526     (14,369

Financing activities:

        

Proceeds from exercise of stock options

     1,354        7,290        3,806        10,022   

Taxes paid related to net share settlement of stock-based awards

     (842     (515     (1,168     (515 )

Principal payments on debt

     —          —          (10,000     —     

Excess tax benefits from stock-based awards activity

     1,367        16,393        2,347        20,449   

Repurchases of common stock

     —          (78,095 )     (12,832     (78,095 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     1,879        (54,927     (17,847     (48,139
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of changes in foreign currency exchange rates on cash and cash equivalents

     (33     (4 )     (22     23   

Net increase (decrease) in cash and cash equivalents

     21,567        (31,244     20,617        5,500   

Cash and cash equivalents at beginning of period

     48,048        102,263        48,998        65,519   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 69,615      $ 71,019      $ 69,615      $ 71,019   
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

        

Cash paid for interest

   $ 83      $ 111      $ 200      $ 226   

Cash paid for income taxes

     13,904        3,282        20,524        3,557   

Supplemental disclosures of noncash investing and financing activities:

        

Capitalization of stock-based compensation

     32        9        59        18   

See accompanying notes to condensed consolidated financial statements

 

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Table of Contents

ANCESTRY.COM INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Ancestry.com Inc. (“Ancestry” or the “company”) is an online family history resource that derives revenues primarily from providing online access to digitized historical records on a subscription basis. Ancestry is a holding company and all operations are conducted by its wholly-owned subsidiaries.

Basis of Presentation

The condensed consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 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.

Unaudited Interim Financial Statements

The accompanying condensed consolidated balance sheet at June 30, 2012 and the condensed consolidated statements of comprehensive income and cash flows for the three and six months ended June 30, 2012 and 2011 are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 company’s financial position, results of operations and cash flows for the three and six months ended June 30, 2012 and 2011. The majority of the company’s revenues are subscription revenues, which are recognized ratably over the subscription periods; the costs to acquire subscribers are generally incurred before the company recognizes the associated subscription revenues. Results of operations may vary between periods due to the timing of when revenues and expenses are recognized. As such, the results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”) filed with the Securities and Exchange Commission.

Use of Estimates

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.

The company evaluates its estimates continually to determine their appropriateness, including testing goodwill for impairment, recoverability of long-lived assets, income taxes, the estimated useful lives of the company’s intangible assets, including content databases, determination of fair value of stock options included in stock-based compensation expense and allowances for sales returns and uncollectible accounts receivable. The company bases its estimates on historical experience and on various assumptions that are believed to be reasonable, the results of which form the basis for the amounts recorded within the consolidated financial statements.

There have been no changes to the company’s significant accounting policies as described in the 2011 Annual Report for the three and six months ended June 30, 2012.

 

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Table of Contents

2. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consisted of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Cash

   $ 25,860       $ 25,811   

Cash equivalents:

     

Money market funds

     30,255         23,187   

Time deposits

     13,500         —     
  

 

 

    

 

 

 

Total cash and cash equivalents

   $ 69,615       $ 48,998   
  

 

 

    

 

 

 

3. FAIR VALUE MEASUREMENTS

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. 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.

Cash equivalents consist of highly liquid investments with original maturities of three months or less and are classified within Level 1 or Level 2 of the fair value hierarchy. The company values its cash equivalents using quoted market prices or models utilizing market observable inputs. There were no movements between fair value measurement levels of the company’s cash equivalents during the six months ended June 30, 2012. The following table summarizes the financial instruments of the company at fair value based on the valuation approach applied at June 30, 2012 (in thousands):

 

            Fair Value Measurement at Reporting Date Using  
     Balance at
June  30,
2012
     Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Cash equivalents:

           

Money market funds

   $ 30,255       $ 30,255       $ —         $ —     

Time deposits

     13,500         —           13,500        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 43,755       $ 30,255       $ 13,500      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the financial instruments of the company at fair value based on the valuation approach applied at December 31, 2011 (in thousands):

 

            Fair Value Measurement at Reporting Date Using  
     Balance at
December  31,
2011
     Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
     Significant
Other

Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Cash equivalents:

           

Money market funds

   $ 23,187       $ 23,187       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 23,187       $ 23,187       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The carrying amounts reported in the financial statements for accounts receivable and accounts payable approximate their fair values because of the immediate or short-term maturities of these financial instruments. At December 31, 2011, the carrying value of debt outstanding approximated its fair value based on interest rates available to the company for debt with similar terms. At June 30, 2012, the company had no debt outstanding.

 

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4. DEBT

In September 2010, the company entered into a three-year $100.0 million principal amount senior secured revolving credit facility with Bank of America, N.A., as administrative agent, and certain other financial institutions (the “Credit Facility”). Borrowings under the Credit Facility may be used to finance the on-going working capital needs of the company and its subsidiaries and for general corporate purposes, including permitted business acquisitions, capital expenditures and authorized share repurchases. At December 31, 2011, the company had $10.0 million of debt outstanding under the Credit Facility. In January 2012, the company paid this amount in full. At June 30, 2012, there were no borrowings outstanding. The Credit Facility contains financial and other covenants, and the company was in compliance with all of these covenants at June 30, 2012.

5. 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 shares of common stock outstanding during the period. Potential shares of common stock consist primarily of incremental shares issuable upon the assumed vesting and exercise or settlement of stock-based awards using the treasury-stock method.

The following table sets forth the computations of basic and diluted net income per common share (in thousands, except per share data):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Basic net income per common share:

           

Net income

   $ 19,977       $ 16,557       $ 33,524       $ 25,528   

Shares used in computation:

           

Weighted average common shares outstanding

     42,758         45,596         42,766         45,484   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income per common share

   $ 0.47       $ 0.36       $ 0.78       $ 0.56   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per common share:

           

Net income

   $ 19,977       $ 16,557       $ 33,524       $ 25,528   

Shares used in computation:

           

Weighted average common shares outstanding

     42,758         45,596         42,766         45,484   

Dilutive stock-based awards

     2,711         4,297         2,832         4,598   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of diluted common shares

     45,469         49,893         45,598         50,082   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per common share

   $ 0.44       $ 0.33       $ 0.74       $ 0.51   
  

 

 

    

 

 

    

 

 

    

 

 

 

The computation of diluted net income per common share for the three and six months ended June 30, 2012 excluded 1.8 million shares and 1.7 million shares, respectively, as their impact was anti-dilutive. The computation of diluted net income per common share for the three and six months ended June 30, 2011 excluded 0.7 million shares as their impact was anti-dilutive.

6. STOCKHOLDERS’ EQUITY

During the six months ended June 30, 2012, the company repurchased approximately 0.5 million shares of common stock in the open market for $12.8 million. No shares were repurchased during the three months ended June 30, 2012. Shares repurchased during the six months ended June 30, 2012 were repurchased under an October 2011 share repurchase authorization of the company’s board of directors and were recorded as treasury stock at cost. In total, approximately 2.1 million shares of common stock were repurchased for $50.0 million under this completed authorization.

In April 2012, the company’s board of directors authorized the repurchase of up to $100.0 million in shares of the company’s outstanding common stock. Shares may be repurchased from time to time through March 31, 2013 in the open market or in privately negotiated transactions. The company expects to fund any repurchases using cash on hand or borrowings under a credit facility. The amount and timing of specific repurchases, if any, will depend on market conditions, stock price, available sources of liquidity and other factors. At June 30, 2012, no shares had been repurchased under this authorization.

 

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Table of Contents

7. STOCK-BASED AWARDS

The company grants stock options and other stock-based awards, including restricted stock units (“RSUs”), to employees, directors and consultants under the 2009 Stock Incentive Plan (the “2009 Plan”). The 2009 Plan is subject to an automatic annual increase provision on the first day of each fiscal year. On January 1, 2012, the number of shares available to be granted under the 2009 Plan increased by 1.7 million shares due to this provision. At June 30, 2012, 4.1 million shares were available to be granted under the 2009 Plan.

Stock Options

Stock options granted during the six months ended June 30, 2012 vest over four to five years. Stock option activity for the six months ended June 30, 2012 was as follows:

 

     Shares
(In  thousands)
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
(In years)
     Aggregate
Intrinsic
Value
(In thousands)
 

Outstanding at December 31, 2011

     5,234      $ 8.43         

Granted

     859        23.33         

Exercised

     (550 )     6.91         

Canceled

     (37 )     7.79         
  

 

 

         

Outstanding at June 30, 2012

     5,506        10.91         6.1       $ 95,080   
  

 

 

         

Exercisable at June 30, 2012

     3,785        5.74         4.9         82,493   

Vested and expected to vest at June 30, 2012

     5,410        10.75         6.0         94,412   

The company estimates the fair value of each stock option on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used in the calculations for the six months ended June 30, 2012 and 2011:

 

     Six Months Ended
June 30,
 
     2012     2011  

Expected volatility

     47.5 %     42.0 %

Expected term (in years)

     4.2        5.0   

Weighted average risk-free interest rate

     0.7 %     1.8 %

Weighted average fair value of the underlying common stock

   $ 23.33      $ 38.96   

Expected dividends

     —          —     

Additional information regarding stock options was as follows (in thousands, except per share data):

 

     Six Months Ended
June 30,
 
     2012      2011  

Weighted average grant date fair value of stock options granted, per share

   $ 8.86       $ 15.24   

Total intrinsic value of stock options exercised

     10,041         65,021   

 

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Restricted Stock Units

RSUs granted during the six months ended June 30, 2012 generally vest over three to five years. RSU activity for the six months ended June 30, 2012 was as follows:

 

     Number of
RSUs
(in thousands)
    Weighted
Average
Grant Date
Fair Value
 

RSUs outstanding at December 31, 2011

     1,280      $ 28.67   

Granted

     913        23.19   

Vested

     (184 )     27.43   

Forfeited

     (83 )     30.06   
  

 

 

   

RSUs outstanding at June 30, 2012

     1,926        26.13   
  

 

 

   

The total fair value of RSUs that vested during the three and six months ended June 30, 2012 were $3.0 million and $4.0 million, respectively. The total fair value of RSUs that vested during both the three and six months ended June 30, 2011 was $1.6 million.

Summary of Stock-Based Compensation Expense

Stock-based compensation expense was included in the following captions in the condensed consolidated statements of comprehensive income (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Cost of revenues

   $ 248       $ 85       $ 400       $ 147   

Technology and development

     2,054         911         3,408         1,687   

Marketing and advertising

     546         383         996         708   

General and administrative

     1,208         822         2,199         1,384   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 4,056       $ 2,201       $ 7,003       $ 3,926   
  

 

 

    

 

 

    

 

 

    

 

 

 

Unrecognized stock-based compensation, net of estimated forfeitures, for stock options and RSUs at June 30, 2012 was as follows (in thousands, except years):

 

     Unrecognized
Stock-Based
Compensation
     Weighted
Average
Remaining
Period

of Recognition
 

Stock options

   $ 13,718            3.3 years   

RSUs

     44,463            3.1 years   
  

 

 

       

Total unrecognized stock-based compensation at June 30, 2012

   $ 58,181         
  

 

 

       

8. INCOME TAXES

For the three and six months ended June 30, 2012, the company recorded income tax expense of $9.4 million and $16.0 million, respectively. For the three months ended June 30, 2012, the company’s effective income tax rate was 32.0%, a decrease of 4.4 percentage points compared to the three months ended June 30, 2011. For the six months ended June 30, 2012, the company’s effective income tax rate was 32.2%, a decrease of 4.2 percentage points compared to the six months ended June 30, 2011. The effective income tax rate for both periods decreased primarily due to increased earnings in jurisdictions with lower effective tax rates for the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011.

The company is subject to income taxes in U.S. and foreign jurisdictions and to examination by tax authorities. Significant judgment is required in evaluating the company’s uncertain tax positions and determining its provision for income taxes. The company’s total gross unrecognized tax benefits at June 30, 2012 and December 31, 2011 were $4.4 million and $4.2 million, respectively. The gross uncertain tax positions, if recognized, would result in a reduction of tax expense.

 

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9. BUSINESS ACQUISITIONS

In March 2012, the company completed two acquisitions for a total of approximately $11.7 million in cash consideration. The company acquired the DNA assets of Sorenson Molecular Genealogy Foundation, a non-profit organization with a diverse collection of DNA samples and corresponding genealogical information. The company also acquired We’re Related, LLC, which operates the We’re Related Facebook application. The assets acquired and liabilities assumed from the two transactions were recorded based on their estimated fair values at the date of acquisition. Cash consideration of $3.0 million is being held as restricted cash for potential indemnification obligations and certain other requirements related to the transactions. The final purchase price allocation for each acquisition is subject to change based on the final payments of restricted cash. These acquisitions were not material, either individually or in the aggregate, to the company’s financial position or results of operations.

10. COMMITMENTS AND CONTINGENCIES

In April 2012, the company entered into a definitive agreement to acquire Archives.com, a family history Web site, for $100.0 million in cash consideration plus assumed liabilities. The closing of the transaction is subject to various conditions, including expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing conditions. In certain circumstances, specifically related to antitrust matters and subject to certain conditions, the company would be required to pay a fee of $10.0 million if the agreement were terminated.

In June 2012, the company entered into a 10-year operating lease for office space in Dublin, Ireland. Total minimum lease payments under the terms of the agreement are approximately $2.9 million.

In addition, the company utilizes third party providers to perform certain services and to provide goods related to its Ancestry DNA service offering. At June 30, 2012, the company had outstanding commitments to purchase $9.8 million of DNA-related services or goods before September 30, 2013.

From time to time, the company is a party to or otherwise involved in legal proceedings and other claims that arise in the ordinary course of business or otherwise. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. The company records a liability when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. While the company cannot assure the ultimate outcome of any legal proceeding or contingency in which the company is or may become involved, the company does not believe any material loss is reasonably possible in connection with any pending matter.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q (the “Quarterly Report”) 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,” “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 and operating expenses, and our ability to sustain profitability and achieve long-term growth;

 

   

our rate of revenue and expense growth;

 

   

our success with respect to any recent or future acquisitions, and our ability to integrate acquired businesses;

 

   

the pool of our potential subscribers;

 

   

our ability to attract and retain subscribers and their choices of subscription package;

 

   

our ability to manage growth, including adding employees and facilities;

 

   

fluctuations in our business;

 

   

our investments in content, technology and products, and the success of our promotional programs and new products, including our new Ancestry DNA service;

 

   

our competitive position;

 

   

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 with added tools and features and to provide value;

 

   

our continued investment in our international operations;

 

   

our ability to adequately manage costs and control margins and trends;

 

   

our brand awareness;

 

   

our liquidity and working capital requirements and the availability of cash and credit;

 

   

our plans to repurchase shares of our common stock;

 

   

our ability to protect users’ data and privacy concerns and to comply with privacy and security standards and laws, including data related to our new Ancestry DNA service;

 

   

the seasonality of our business;

 

   

changes in our effective tax rate;

 

   

the impact of external market forces, including changes in the macroeconomic environment and foreign currency exchange rates;

 

   

the impact of claims or litigation; and

 

   

the impact of potential legislation and regulatory changes on privacy, subscription renewal, DNA or other aspects of our business.

 

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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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and elsewhere, including information contained in our Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”). 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 world’s largest online family history resource, with approximately 2.0 million paying subscribers around the world at June 30, 2012. We offer access on a subscription basis to an extensive collection of billions of historical records that we have digitized, indexed and made available online over the past 15 years. Our subscribers use our proprietary Web-based services and content collection to research their family histories, build their family trees, collaborate with other subscribers, upload their own records and publish and share their stories. These subscribers are our primary source of revenues. We believe we provide ongoing value to our subscribers by regularly adding new historical content, enhancing our Web-based services and platforms 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 worldwide subscriber base by offering a superior value proposition to anyone interested in learning more about their family history.

The following discussion and analysis is based on 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations and other information in the 2011 Annual Report. For additional information regarding share repurchases or business acquisitions completed, see Note 6 and Note 9, respectively, of the accompanying notes to our condensed consolidated financial statements.

Recent Developments

Business Acquisitions

In April 2012, we entered into a definitive agreement to acquire Archives.com, a family history Web site, for $100.0 million in cash consideration plus assumed liabilities. The closing of the transaction is subject to various conditions, including expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing conditions. In certain circumstances, specifically related to antitrust matters and subject to certain conditions, we would be required to pay a fee of $10.0 million if the agreement were terminated. This transaction will enable us to add a differentiated service targeted to a complementary segment of the growing family history market.

Key Business Metrics

Our management regularly reviews a number of financial and operating metrics, including the following key business metrics to evaluate our business, determine the allocation of resources, make decisions regarding corporate strategies and evaluate forward-looking projections. The following key business metrics reflect data with respect to our Ancestry.com Web sites and exclude our other subscription-based Web sites, such as Fold3.com and myfamily.com.

 

   

Total subscribers. A subscriber is an individual who pays for renewable access or redeems a gift subscription 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 or redeems a gift subscription to one of our Ancestry.com Web sites.

 

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Monthly churn. Monthly churn is a measure representing the number of subscribers that cancel in a quarter divided by the sum of beginning subscribers and gross subscriber additions during the quarter. To arrive at monthly churn, the result is divided 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 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.

Our key business metrics are presented for the three months ended June 30, 2012, March 31, 2012 and June 30, 2011:

 

     Three Months Ended  
     June 30,     March 31,     June 30,  
     2012     2012     2011  

Total subscribers at end of quarter

     2,005,409        1,869,571        1,672,319   

Gross subscriber additions

     360,685        389,928        321,687   

Monthly churn

     3.4 %     3.6 %     4.6 %

Subscriber acquisition cost

   $ 81.49      $ 88.11      $ 81.23   

Average monthly revenue per subscriber

   $ 18.84      $ 18.49      $ 18.88   

The following table presents the percentage of total subscribers by subscription duration type at June 30, 2012, March 31, 2012 and June 30, 2011:

 

     June 30,     March 31,     June 30,  
     2012     2012     2011  

Annual

     49.0 %     52.9 %     56.9 %

Semi-annual

     19.6        13.5        2.2   

Quarterly

     4.5        5.3        8.2   

Monthly

     26.9        28.3        32.7   
  

 

 

   

 

 

   

 

 

 

Total

     100.0 %     100.0 %     100.0 %
  

 

 

   

 

 

   

 

 

 

Components of Condensed Consolidated Statements of Comprehensive Income

Revenues

Subscription revenues. We derive subscription revenues primarily from providing access to our Ancestry.com Web sites, and we recognize the subscription revenues, net of estimated cancellations, ratably over the subscription period. We currently offer registered users a 14-day free trial, after which, unless they cancel, we charge the full period subscription amount at the beginning of each subscription period. No revenue is recognized or allocated to the 14-day free trial period. The amount of unrecognized revenues from subscriptions is recorded in deferred revenue. We have established a revenue reserve based on historical subscription cancellations. Actual customer subscription cancellations are charged against the allowance or deferred revenues to the extent that revenue has not yet been recognized. Subscription revenues also include revenues related to subscriptions to our non-Ancestry.com Web sites.

 

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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 table presents subscription revenues by geographic region:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  
     (In thousands)  

United States

   $ 85,547       $ 73,296       $ 161,587       $ 136,970   

United Kingdom

     13,237         11,722         26,190         22,918   

All other countries

     14,253         11,689         27,856         22,002   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total subscription revenues

   $ 113,037       $ 96,707       $ 215,633       $ 181,890   
  

 

 

    

 

 

    

 

 

    

 

 

 

Product and other revenues. Product and other revenues include sales of our Family Tree Maker desktop software, Ancestry DNA services, ProGenealogists’ genealogical research services, iArchives’ document digitization services, physical delivery of copies of historical vital records (birth, marriage and death certificates) and other products and services. Revenues related to these products or services are recognized upon shipment of the product or completion of the services, as applicable. For the remainder of 2012, we expect the growth rate of product and other revenues to increase compared to the first half of 2012 due to our new Ancestry DNA service, which we launched in the second quarter of 2012.

Expenses

Personnel-related costs for each category of cost of revenues and operating expenses include salaries, bonuses, stock-based compensation, and the employer portion of employee benefit costs and payroll taxes.

Costs of Revenues

Cost of subscription revenues. Cost of subscription revenues consists of Web server operating costs, personnel-related costs of Web support and subscriber services employees, credit card processing fees, amortization of our content databases, outside service costs for subscriber services and royalty costs on certain content licensed from others. Web server operating costs include depreciation and software licensing on Web servers and related equipment and Web hosting costs.

Cost of product and other revenues. Cost of product and other revenues consists of Ancestry DNA service costs, direct costs of products sold, personnel-related costs of iArchives’ digitization services and ProGenealogists’ genealogical research services, shipping costs and credit card processing fees. For the remainder of 2012, we expect cost of product and other revenues to increase slightly as a percentage of total revenues due to an expected increase in volume from our new Ancestry DNA service, which we launched in the second quarter of 2012.

Operating Expenses

Technology and development. Technology and development expenses consist primarily of personnel-related costs and outside service costs. Technology and development personnel-related costs include the costs of developing new products and tools and maintaining and testing our Web sites. Our development personnel are primarily based in the United States and are focused on creating accessibility to content and tools for individuals to do family history research. Outside service costs are primarily incurred for third-party product development and quality assurance services.

Marketing and advertising. Marketing and advertising expenses consist primarily of direct expenses related to television advertising, paid search, online display advertising, promotions and sponsorships, personnel-related costs and affiliate programs. Marketing and advertising costs are principally incurred in the United States, United Kingdom, Australia and Canada. In February 2012, NBC began airing the third season of “Who Do You Think You Are?,” in which we purchased advertising and product integration. The third season of the show consisted of 12 episodes, all of which aired during the first half of 2012. Due to the timing of the airing of the show, we expect our marketing and advertising expenses to be higher in the first half of 2012 compared to the second half of 2012, which may result in lower operating margins and net income in the first half of 2012 compared to the second half of 2012.

General and administrative. General and administrative expenses consist principally of personnel-related and outside service expenses related to our executive, finance, legal, human resources and other administrative functions. Outside services expenses are also incurred in the process of acquiring businesses.

 

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Amortization of acquired intangible assets. Amortization of acquired intangible assets is the amortization expense associated with subscriber relationships and contracts, technologies, trademarks and tradenames resulting from business acquisitions.

Other Expense, Net and Income Tax Expense

Other expense, net. Other expense, net includes foreign currency transaction and remeasurement gains and losses, which vary based on changes in foreign currency exchange rates. Also included are interest expense associated with borrowings, the amortization of the deferred financing costs related to the issuance of our credit facility and interest income earned on cash and cash equivalents. Our interest expense varies based on the level of debt outstanding and changes in interest rates.

Income tax expense. Income tax expense consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions.

Results of Operations

The following table sets forth our statements of income, as included in the condensed consolidated statements of comprehensive income, as a percentage of total revenues for the three and six months ended June 30, 2012 and 2011. 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,  
     2012     2011     2012     2011  

Revenues:

        

Subscription revenues

     94.9     95.5     94.7     94.6

Product and other revenues

     5.1        4.5        5.3        5.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100.0        100.0        100.0        100.0   

Costs of revenues:

        

Cost of subscription revenues

     13.8        13.9        14.4        14.6   

Cost of product and other revenues

     3.0        1.8        2.8        1.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     16.8        15.7        17.2        16.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     83.2        84.3        82.8        83.5   

Operating expenses:

        

Technology and development

     15.8        14.1        15.6        14.5   

Marketing and advertising

     29.3        29.9        32.7        33.3   

General and administrative

     10.7        10.0        10.3        10.1   

Amortization of acquired intangible assets

     2.7        4.2        2.5        4.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     58.5        58.2        61.1        62.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     24.7        26.1        21.7        21.1   

Other expense, net

     —          (0.4     —          (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     24.7        25.7        21.7        20.9   

Income tax expense

     (7.9     (9.4     (7.0     (7.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     16.8        16.3        14.7        13.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Revenues, Costs of Revenues and Gross Profit

 

     Three Months Ended           Six Months Ended        
     June 30,           June 30,        
     2012     2011     % Change     2012     2011     % Change  
     (In thousands)           (In thousands)        

Revenues:

            

Subscription revenues

   $ 113,037      $ 96,707        16.9   $ 215,633      $ 181,890        18.6

Product and other revenues

     6,041        4,601        31.3        11,981        10,446        14.7   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total revenues

     119,078        101,308        17.5        227,614        192,336        18.3   

Costs of revenues:

            

Cost of subscription revenues

     16,403        14,111        16.2        32,697        27,998        16.8   

Cost of product and other revenues

     3,584        1,841        94.7        6,369        3,669        73.6   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total cost of revenues

     19,987        15,952        25.3        39,066        31,667        23.4   
  

 

 

   

 

 

     

 

 

   

 

 

   

Gross profit

   $ 99,091      $ 85,356        16.1      $ 188,548      $ 160,669        17.4   
  

 

 

   

 

 

     

 

 

   

 

 

   

Gross profit percentage

     83.2     84.3       82.8     83.5  

Subscription revenues

For the three months ended June 30, 2012, our subscription revenues increased $16.3 million compared to the three months ended June 30, 2011. The increase was primarily the result of an increase in the number of total subscribers. Net subscriber additions increased primarily due to continued marketing efforts in connection with the third season of “Who Do You Think You Are?” and other targeted marketing promotions. In addition, eight episodes, including five original episodes and three reruns, of “Who Do You Think You Are?” aired in the second quarter of 2012 in comparison to two original episodes in the second quarter of 2011. Net subscriber additions also increased for the three months ended June 30, 2012 due to a decrease in monthly churn. In late 2011, we made changes to our subscription pricing and duration offerings, including offering new subscribers semi-annual subscriptions in place of annual subscriptions. Since the majority of our new semi-annual subscriptions did not come up for renewal during the three months ended June 30, 2012, monthly churn decreased for the three months ended June 30, 2012 compared to the three month ended June 30, 2011. As such, we also expect monthly churn to increase in the second half of 2012 as these new semi-annual subscriptions come up for renewal. For the three months ended June 30, 2012, changes in average foreign currency exchange rates did not have a significant effect on subscription revenues.

For the six months ended June 30, 2012, our subscription revenues increased $33.7 million compared to the six months ended June 30, 2011. The increase was driven by the same factors that influenced the three-month results.

Product and other revenues

For the three months ended June 30, 2012, our product and other revenues increased $1.4 million compared to the three months ended June 30, 2011. The increase was primarily due to a $0.9 million increase in ProGenealogists genealogical research services revenue and Family Tree Maker revenue.

For the six months ended June 30, 2012, our product and other revenues increased $1.5 million compared to the six months ended June 30, 2011. The increase was primarily due to a $1.0 million increase in ProGenealogists genealogical research services revenue.

Cost of subscription revenues

For the three months ended June 30, 2012, our cost of subscription revenues increased $2.3 million compared to the three months ended June 30, 2011. The increase was primarily due to a $0.9 million increase in outside service costs for subscriber services, a $0.7 million increase in Web server operating costs partly attributable to greater user traffic volume, and a $0.4 million increase in personnel-related costs primarily due to additional stock-based compensation expense. In addition, personnel-related expenses increased due to a higher average pay rate per subscriber services employee, although this was partially offset by the employment of fewer subscriber services employees, as we outsource components of subscriber services.

 

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For the six months ended June 30, 2012, our cost of subscription revenues increased $4.7 million compared to the six months ended June 30, 2011. The increase was primarily due to a $2.2 million increase in outside service costs for subscriber services, a $0.9 million increase in personnel-related costs primarily due to a higher average pay rate per subscriber services employee, a $0.7 million increase in content database amortization due to our continued investment in content databases and a $0.6 million increase in Web server operating costs partly attributable to greater user traffic volumes.

Cost of product and other revenues

For the three months ended June 30, 2012, our cost of product and other revenues increased $1.7 million compared to the three months ended June 30, 2011. This increase was primarily due to a $1.5 million increase in costs related to a new Ancestry DNA service.

For the six months ended June 30, 2012, our cost of product and other revenues increased $2.7 million compared to the six months ended June 30, 2011. This increase was primarily due to a $2.3 million increase in costs related to a new Ancestry DNA service.

Operating Expenses

 

     Three Months Ended            Six Months Ended         
     June 30,            June 30,         
     2012      2011      % Change     2012      2011      % Change  
     (In thousands)            (In thousands)         

Operating expenses:

                

Technology and development

   $ 18,778       $ 14,242         31.8   $ 35,405       $ 27,910         26.9

Marketing and advertising

     34,944         30,250         15.5        74,493         64,058         16.3   

General and administrative

     12,733         10,111         25.9        23,375         19,468         20.1   

Amortization of acquired intangible assets

     3,224         4,297         (25.0     5,785         8,567         (32.5 )
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 69,679       $ 58,900         18.3      $ 139,058       $ 120,003         15.9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Technology and development

For the three months ended June 30, 2012, our technology and development expenses increased $4.5 million compared to the three months ended June 30, 2011. The increase was primarily due to an increase in personnel-related expenses. The average number of technology and development personnel increased 30% during the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

For the six months ended June 30, 2012, our technology and development expenses increased $7.5 million compared to the six months ended June 30, 2011. The increase was primarily due to an increase in personnel-related expenses. The average number of technology and development personnel increased 25% during the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Marketing and advertising

For the three months ended June 30, 2012, our marketing and advertising expenses increased $4.7 million compared to the three months ended June 30, 2011. The increase was primarily due to a $2.2 million increase in television advertising and sponsorship expenses, a $0.7 million increase in display advertising and a $0.5 million increase in paid search. These increases primarily related to increases in product integration costs incurred in connection with the third season of “Who Do You Think You Are?” and increases in advertising volume and media rates. The third season of the show consisted of 12 original episodes, of which five original episodes aired in second quarter of 2012. In contrast, the second season of the show consisted of eight original episodes, of which two original episodes aired in the second quarter of 2011. Personnel-related costs also increased $1.1 million due to a 23% increase in the average number of marketing and advertising personnel during the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

For the six months ended June 30, 2012, our marketing and advertising expenses increased $10.4 million compared to the six months ended June 30, 2011. The increase was primarily due to an increase of $6.5 million in television advertising and sponsorship expenses, a $1.7 million increase in display advertising, and a $1.1 million increase in paid search. These increases primarily resulted from increases in advertising volume and media rates as well as an increase in product integration costs incurred in connection with the third season of “Who Do You Think You Are?”. Personnel-related costs also increased $2.0 million due to a 21% increase in the average number of marketing and advertising personnel during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. These increases were partially offset by a reduction of $0.9 million in affiliate expenses.

 

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General and administrative

For the three months ended June 30, 2012, our general and administrative expenses increased $2.6 million compared to the three months ended June 30, 2011. The increase was primarily the result of a $2.0 million increase in outside services costs, including costs related to business acquisitions. In addition, personnel-related costs increased $0.5 million primarily as a result of additional stock-based compensation expense.

For the six months ended June 30, 2012, our general and administrative expenses increased $3.9 million compared to the six months ended June 30, 2011. The increase was primarily the result of a $2.7 million increase in outside services costs, including costs related to business acquisitions. In addition, personnel-related costs increased $1.2 million primarily as a result of additional stock-based compensation expense.

Amortization of acquired intangible assets

For the three months ended June 30, 2012, our amortization of acquired intangible assets decreased $1.1 million compared to the three months ended June 30, 2011. For the six months ended June 30, 2012, our amortization of acquired intangible assets decreased $2.8 million compared to the six months ended June 30, 2011. These decreases were primarily due to certain acquired intangible assets now being fully amortized, offset in part by amortization expense from intangible assets acquired from businesses purchased in March 2012.

Other Expense, Net and Income Tax Expense

 

     Three Months Ended           Six Months Ended        
     June 30,           June 30,        
     2012     2011     % Change     2012     2011     % Change  
     (In thousands)           (In thousands)        

Other expense, net

   $ (54   $ (429     (87.4 )%    $ (15   $ (536     (97.2 )% 

Income tax expense

     (9,381     (9,470     (0.9 )     (15,951     (14,602     9.2   

Other data:

            

Effective tax rate

     32.0     36.4       32.2     36.4  

Other expense, net

For the three and six months ended June 30, 2012, our other expense, net changed slightly compared to the three and six months ended June 30, 2011.

Income tax expense

Our effective income tax rate decreased by 4.4 percentage points for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. Our effective income tax rate decreased by 4.2 percentage points for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The effective income tax rate for both periods decreased primarily due to increased earnings in jurisdictions with lower effective tax rates for the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011.

 

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Other Financial Data

In addition to our results discussed above determined under accounting principles generally accepted in the United States of America (“GAAP”), 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 and six months ended June 30, 2012 and 2011, our net income, adjusted EBITDA and free cash flow were as follows:

 

     Three Months Ended            Six Months Ended         
     June 30,            June 30,         
     2012      2011      % Change     2012      2011      % Change  
     (In thousands)            (In thousands)         

Net income

   $ 19,977       $ 16,557         20.7   $ 33,524       $ 25,528         31.3

Adjusted EBITDA(1)

     42,885         38,421         11.6        74,568         64,026         16.5   

Free cash flow(2)

     16,336         27,131         (39.8 )     31,049         45,874         (32.3

 

(1) Adjusted EBITDA. We define adjusted EBITDA as net income plus other expense, net; income tax expense; non-cash charges, including depreciation, amortization, impairment of intangible assets and stock-based compensation expense; and certain non-recurring (income) expenses.
(2) Free cash flow. We define free cash flow as net income plus other expense, net; income tax expense; non-cash charges, including depreciation, amortization, impairment of intangible assets and stock-based compensation expense; and certain non-recurring (income) expenses; and minus capitalization of content databases, purchases of property and equipment 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 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. Adjusted EBITDA together with revenues has also been used as a financial performance objective in determining the bonus pool under our recent performance incentive programs. 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, impairment of intangible assets and stock-based compensation expense 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.

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 content databases, property and equipment;

 

   

adjusted EBITDA and free cash flow do not reflect changes in, or cash requirements for, our working capital;

 

   

adjusted EBITDA does not reflect other income and expenses, including interest income and expense;

 

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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, amortization and impairment of intangible assets and acquired in-process research and development are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for these replacements; and

 

   

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 measure, for the periods presented.

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  
     (In thousands)  

Reconciliation of adjusted EBITDA and free cash flow to net income:

        

Net income

   $ 19,977      $ 16,557      $ 33,524      $ 25,528   

Other expense, net

     54        429        15        536   

Income tax expense

     9,381        9,470        15,951        14,602   

Depreciation

     3,606        3,188        7,153        6,452   

Amortization

     5,811        6,576        10,922        12,982   

Stock-based compensation expense

     4,056        2,201        7,003        3,926   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 42,885      $ 38,421      $ 74,568      $ 64,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capitalization of content databases

     (7,538     (4,204     (12,678     (9,951

Purchases of property and equipment

     (5,024     (3,693     (10,117     (4,418

Cash paid for interest

     (83     (111     (200     (226

Cash paid for income taxes

     (13,904     (3,282     (20,524     (3,557
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 16,336      $ 27,131      $ 31,049      $ 45,874   

 

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Liquidity and Capital Resources

Our primary sources of liquidity are our cash and cash equivalents, our cash flows from operations and our revolving credit facility. At June 30, 2012, we had $169.6 million of total liquidity, comprised of $69.6 million in cash and cash equivalents and the ability to borrow $100.0 million under a three-year $100 million principal amount senior secured revolving credit facility with Bank of America, N.A., as administrative agent, and certain other financial institutions. Note 2 of the accompanying notes to our condensed consolidated financial statements describes further the composition of our cash and cash equivalents. Note 7 to the Consolidated Financial Statements included in our 2011 Annual Report describes further the terms of our revolving credit facility.

At June 30, 2012, approximately $33.0 million of our cash and cash equivalents was held by our foreign subsidiaries. If these funds were needed for our U.S. operations and were repatriated, we could be required to accrue and pay U.S. federal income taxes. However, we currently intend to reinvest these funds in growing our international operations and do not expect to repatriate the funds for our U.S. operations.

Our primary uses of cash include costs such as marketing and advertising, personnel-related expenses, capital expenditures related to content databases, property and equipment, investments in new service offerings and technologies and Web-hosting costs. We also use cash for other purposes including repurchases of shares of our common stock, business acquisitions and repayment of borrowings under our credit facility. Our future capital requirements may vary significantly from those now planned and will depend on many factors, including:

 

   

the levels of advertising and promotion required to retain and acquire subscribers;

 

   

the development of new services and enhancement of functionality in our technology and tools;

 

   

market acceptance of our services;

 

   

the launch of additional services and improvement of our competitive position in the marketplace;

 

   

future stock repurchases by us;

 

   

our engaging in additional business acquisitions;

 

   

the level of new content acquisition required to retain and acquire subscribers;

 

   

the expansion of our development, marketing and administrative organizations;

 

   

amounts we must spend to integrate and operate acquired businesses;

 

   

the building of infrastructure necessary to support our growth; and

 

   

our relationships with subscribers and vendors.

Our expenditures have increased as our operations and personnel have grown, and we anticipate that our expenditures will continue to increase in the future. We expect to continue to invest in content databases in 2012 as we digitize and index the 1940 U.S. Federal Census, U.K. parish records and other content collections. We expect cash and cash equivalents on hand, cash flow from operations and our revolving credit facility will provide adequate funds for our currently anticipated operating and recurring cash needs (e.g., working capital and capital expenditures) for at least the next twelve months. In April 2012, we announced that we had entered into a definitive agreement to acquire Archives.com for $100.0 million in cash consideration plus assumed liabilities and that our board of directors had authorized the repurchase of up to $100.0 million in shares of our outstanding common stock. See Notes 6 and 9 of the accompanying notes to our condensed consolidated financial statements. Our current sources of liquidity do not accommodate us funding both initiatives simultaneously. As such, we may enter into a new credit facility. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, we may not be able to complete our share repurchase authorization, should we otherwise wish to do so.

 

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Cash Flow Analysis

Summary cash flow information for cash and cash equivalents for the three months ended June 30, 2012 and 2011 is set forth below. We consider cash and cash equivalents in evaluating our overall cash position.

 

     Three Months Ended
June 30,
          Six Months Ended
June 30,
       
     2012     2011     % Change     2012     2011     % Change  
     (In thousands)           (In thousands)        

Net cash and cash equivalents provided by (used in):

            

Operating activities

   $ 32,283      $ 31,584        2   $ 73,012      $ 67,985        7

Investing activities

     (12,562     (7,897     59        (34,526     (14,369     140   

Financing activities

     1,879        (54,927     (103     (17,847     (48,139     (63 )

Effect of changes in foreign currency exchange rates on cash and cash equivalents and short-term investments

     (33     (4 )     725        (22     23        (196
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

   $ 21,567      $ (31,244     (169   $ 20,617      $ 5,500        275   

Net cash provided by operating activities

For the three months ended June 30, 2012, net cash provided by operating activities was $32.3 million, an increase of $0.7 million compared to the three months ended June 30, 2011. Net cash provided by operating activities consisted of net income of $20.0 million, adjustments for non-cash items of $14.1 million and the changes in operating assets and liabilities of $(1.8) million. For the three months ended June 30, 2012, this represented a $3.4 million increase in net income, a $4.1 million increase in non-cash adjustments and a $6.8 million decrease in the changes in operating assets and liabilities over the three months ended June 30, 2011. The increase in adjustments for non-cash items primarily consisted of a $2.5 million increase in deferred income taxes and a $1.9 million increase in stock-based compensation expense due to additional employee equity awards. These increases were partially offset by a $0.3 million decrease in depreciation and amortization primarily due to a decrease in the amount of amortization expense from acquired intangible assets. The decrease in the changes in operating assets and liabilities was primarily driven by a $12.9 million decrease in the change in our net income tax payable/receivable including a $15.0 million decrease in the change in the excess tax benefits of stock-based awards activity. In addition, the change in other operating assets and liabilities decreased $8.9 million primarily due to the timing of cash receipts and payments.

For the six months ended June 30, 2012, net cash provided by operating activities was $73.0 million, an increase of $5.0 million compared to the six months ended June 30, 2011. Net cash provided by operating activities consisted of net income of $33.5 million, adjustments for non-cash items of $26.8 million and the changes in operating assets and liabilities of $12.7 million. For the six months ended June 30, 2012, this represented a $8.0 million increase in net income, a $6.3 million increase in non-cash adjustments and a $9.3 million decrease in the changes in operating assets and liabilities over the six months ended June 30, 2011. The increase in adjustments for non-cash items primarily consisted of a $4.6 million increase in deferred income taxes and a $3.1 million increase in stock-based compensation expense due to additional employee equity awards. These increases were partially offset by a $1.4 million decrease in depreciation and amortization primarily due to decrease in the amount of amortization expense from acquired intangible assets. The decrease in the changes in operating assets and liabilities was primarily driven by a $19.7 million decrease in the change in our net income tax payable/receivable, including an $18.1 million decrease in the change in the excess tax benefits of stock-based awards activity. The change in restricted cash decreased $3.5 million primarily due to acquisitions. In addition, the change in other operating assets and liabilities decreased $4.2 million primarily due to the timing of cash receipts and payments.

Net cash used in investing activities

For the three months ended June 30, 2012, net cash used in investing activities totaled $12.6 million, an increase of $4.7 million compared to the three months ended June 30, 2011. For the three months ended June 30, 2012 compared to the three months ended June 30, 2011, investments in content databases and property and equipment increased $3.4 million and $1.3 million, respectively.

For the six months ended June 30, 2012, net cash used in investing activities totaled $34.5 million, an increase of $20.1 million compared to the six months ended June 30, 2011. For the six months ended June 30, 2012, we used $11.7 million to acquire businesses. In addition, for the six months ended June 30, 2012 compared to the six months ended June 30, 2011, investments in content databases and property and equipment increased $2.7 million and $5.7 million, respectively.

 

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Net cash provided by (used in) financing activities

For the three months ended June 30, 2012, net cash provided by financing activities totaled $1.9 million, a $56.8 million change compared to $54.9 million of cash used in financing activities during the three months ended June 30, 2011. The change was primarily due to our not having repurchased any shares of our common stock during the three months ended June 30, 2012 compared to share repurchases of $78.1 million during the three months ended June 30, 2011. This was partially offset by a $15.0 million decrease in the change in excess tax benefits of stock-based awards activity, a $5.9 million decrease in the proceeds from the exercise of stock-based awards and a $0.4 million increase in taxes paid related to the net share settlement of equity awards.

For the six months ended June 30, 2012, net cash used in financing activities totaled $17.8 million, a decrease of $30.3 million compared to in the six months ended June 30, 2011. The change was primarily due to a decrease of $65.3 million in repurchases of common stock. This was partially offset by a decrease of $18.1 million in the excess tax benefit from stock-based awards activity, the repayment of $10.0 million of debt in the first half of 2012, a decrease of $6.2 million in the proceeds from the exercise of stock-based awards and a $0.7 million increase in taxes paid related to the net share settlement of equity awards.

Contractual Obligations

In April 2012, we entered into a definitive agreement to acquire Archives.com, a family history Web site, for $100.0 million in cash consideration plus assumed liabilities. The closing of the transaction is subject to various conditions, including expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing conditions. In certain circumstances, specifically related to antitrust matters and subject to certain conditions, we would be required to pay a fee of $10.0 million if the agreement were terminated.

In June 2012, we entered into a 10-year operating lease for office space in Dublin, Ireland. Total minimum lease payments under the terms of the agreement are approximately $2.9 million.

We utilize third party providers to perform certain services and to provide goods related to our Ancestry DNA service offering. At June 30, 2012, we had outstanding commitments to purchase $9.8 million of DNA-related services or goods before September 30, 2013.

There have been no other significant changes to our contractual obligations since December 31, 2011.

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, our operating results, financial condition and cash flows are not subject to off-balance sheet risks.

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, expenses and related disclosures. These estimates and assumptions are often based on historical experience and judgments that we believe to be reasonable under the circumstances at the time made. However, all such estimates and assumptions are inherently uncertain and unpredictable and actual results may differ. 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 could result in material changes to our operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis.

We consider the assumptions and estimates associated with the testing of goodwill for impairment, recoverability of long-lived assets, income taxes, the period of amortization of our content databases and stock-based compensation expense 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 2011 Annual Report. There have been no changes to our significant accounting policies since December 31, 2011.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business which currently are comprised primarily of foreign currency exchange rate risk. We are also exposed to interest rate risk when we have borrowings outstanding under our credit facility. For financial market risks related to foreign currency exchange and interest rates, refer to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our 2011 Annual Report. Our exposure to market risk has not changed significantly since December 31, 2011 other than the repayment of our debt that was outstanding at December 31, 2011.

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 SEC’s 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 the company 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 quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

 

Item 1. Legal Proceedings

We are party to legal proceedings arising in the ordinary course of business and may become involved in legal proceedings and other claims that arise in the ordinary course of business or otherwise in the future. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. While we cannot assure the ultimate outcome of any legal proceeding or contingency in which we are or may become involved, we do 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.

 

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 revenues from subscriptions to our services. We must continue to retain existing and attract new subscribers, which we seek to do in part by investing in our product platform and new services and technologies, such as our mobile and our Ancestry DNA services. 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 and more content, 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 to attract new 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 $166.4 million in 2007 to $399.7 million in 2011, representing a compound annual growth rate of 24.5%. In the first half of 2012, our revenues increased 18.3% over the first half of 2011. While we expect that our business will continue to grow, we anticipate that our revenue growth rate will generally decrease over time as it did in the first half of 2012. Since we do not expect to sustain our historical growth rate in future periods, you should not rely on the revenue growth of any prior year or other period 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, including new product offerings, and to continue acquiring new and relevant content and also to expanding awareness of our brand and category through marketing, 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 monthly churn, our revenues and business may 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, a perception that they do not have sufficient time to use the service or otherwise 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 subscriptions at any time prior to the renewal date. In late 2011, we made changes to our subscription pricing and duration offerings, including offering new subscribers on the U.S. Ancestry.com Web site semi-annual subscriptions in place of annual subscriptions. As a result of these changes, the percentage of subscribers in monthly and annual subscription durations decreased, while the percentage of subscribers in semi-annual durations increased. Our monthly churn for all durations decreased to 3.4% in the second quarter of 2012 from 4.6% in the second quarter of 2011, in part, due to a majority of semi-annual subscriptions purchased after the offering began not coming up for renewal until the second half of 2012. As such, we expect monthly churn to increase in the second half of 2012 as these new semi-annual subscriptions come up for renewal. If we are unsuccessful at retaining these subscribers, churn may increase more than expected. We may also experience similar fluctuations in monthly churn as we pursue new subscribers through other offerings or new marketing channels, or if we have a large number of subscriptions come up for renewal in the same period as we did in the second quarters of 2011 and 2010. In these periods, monthly churn rose to 4.6% and 4.3%, respectively, from 3.7% and 3.3% in the first quarters of 2011 and 2010, respectively.

If our monthly 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. If we are unable to attract new subscribers in numbers greater than the impact of our monthly churn, our subscriber base will decrease and our business, financial condition and results of operations may be adversely affected.

A change in our mix of subscription durations could have a significant impact on our revenues, monthly churn and revenue visibility.

We continually evaluate and test the types of subscriptions that we offer. Based on the results of any product or price testing conducted, we may change the types of subscriptions we offer or we may price and market different types of subscriptions as we did in late 2011 when we began offering new subscribers on Ancestry.com semi-annual subscriptions in place of annual subscriptions. Although annual subscribers have historically represented the largest percentage of our subscriber base and did at June 30, 2012, new subscribers on the U.S. Ancestry.com Web site are currently being offered the choice of monthly and semi-annual subscriptions. If a higher percentage of our subscribers choose a shorter subscription duration, we would likely experience higher monthly churn. While offering semi-annual subscription durations may lead some monthly subscribers to choose a longer subscription duration, any improvement to monthly churn may be more than offset by the shift from annual to semi-annual subscriptions. In the future, we may continue to perform product and price tests involving our prospective users, the results of which could affect our number or mix of subscribers and may have an adverse impact on our results of operations, stock price and key operating metrics.

Additionally, the largely long-term commitments of our subscribers have enhanced our near-term visibility on our revenues, which we believe has enabled us to more effectively manage the growth of our business and provide working capital benefits. Our shift to offering new subscribers only monthly and semi-annual subscription durations could cause a reduction in this near-term visibility, which could make it more difficult to manage our growth and effectively budget future working capital requirements.

We cannot predict how the cancellation of the television show “Who Do You Think You Are?” will impact our business in the future.

We purchased product integration in all three seasons of the television show, “Who Do You Think You Are?” in the United States, including season three, which aired during the first half of 2012. The airing of the three seasons of this series in 2010-2012, together with our increased television advertising, caused increased interest in our core business that resulted in a greater number of subscribers. In the second quarter of 2012, NBC announced its decision to not renew the show for a fourth season. As a result of NBC’s decision to not air future seasons of “Who Do You Think You Are?”, the visibility of our core business and our brand may be reduced and our results of operations, financial condition, and key metrics, such as gross subscriber additions, subscriber acquisition cost, and monthly churn, may be adversely affected. We cannot predict what impact the cancellation of the show will have on our business.

 

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Acquisitions may not be completed within the expected timeframe or at all, and businesses or technologies we acquire 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 engage in acquisitions of businesses or technologies from time to time to augment our organic or internal growth. In March 2012, we made two such acquisitions for approximately $11.7 million in cash. In addition, in April 2012 we entered into a definitive agreement to acquire Archives.com for $100.0 million in cash consideration plus assumed liabilities. While we have engaged in acquisitions in the past, our experience with integrating and managing acquired businesses or assets is still limited. 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 recent or 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;

 

   

inability to effectively operate the new business;

 

   

exposure to unknown liabilities, including litigation, against the companies we acquire;

 

   

use of cash or borrowings under our credit facility or otherwise to fund the acquisition or for unanticipated expenses;

 

   

additional outside service costs, including legal, accounting and consulting fees;

 

   

additional costs due to differences in culture, geographical locations and duplication of key talent;

 

   

difficulty integrating the financial reports of the acquired business in our consolidated financial statements and implementing our internal controls in the acquired business;

 

   

potential impairment of goodwill and acquired intangible assets;

 

   

dilution to our current stockholders from the issuance of equity securities; and

 

   

potential loss of key employees or customers of the acquired company.

The acquisition of Archives.com could be delayed or prevented by regulatory approval requirements, including antitrust review, or other conditions. In the event that the acquisition of Archives.com is terminated due to certain circumstances specifically related to antitrust matters, and subject to certain other conditions, the purchase agreement provides for us to pay a fee of $10 million upon termination. The same delays could apply to any future acquisitions we announce. 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.

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 have historically represented the largest percentage of our subscriptions, a large portion of our revenues for each quarter has reflected deferred revenues from subscriptions entered into during previous quarters, as will continue to be the case if we are successful in selling our semi-annual subscriptions. Consequently, a decline in new or renewed subscriptions in any one quarter will not be fully reflected in 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 monthly churn, may not fully impact our results of operations until future periods.

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. We use a diverse mix of marketing and advertising programs to promote our products and services, and we periodically adjust our mix of these programs. We have 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 could increase our marketing and advertising expense or cause us to choose less effective marketing and advertising channels. Television advertising comprises a large percentage of our marketing and advertising expense, which may have

 

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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, which could increase our operating expenses. Because we recognize revenues ratably over the subscription period, we have incurred and may in the future incur marketing and advertising expenses significantly in advance of the time we anticipate recognizing revenues associated with such expenses, and our marketing and advertising expenditures may not continue to result in increased revenues 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, as 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 face competition from a number of different sources, and our failure to compete effectively could adversely impact our revenues, results of operations and financial condition.

We face competition in our business from a variety of organizations, some of which provide genealogical records free of charge. For example, in response to the recent release of the 1940 U.S. Federal Census, we have seen increased competition from both new domestic entities and established foreign competitors that have entered the U.S. market. We expect competition to increase in the future. Many external factors, including the cost of marketing, content acquisition and technology and our current and future competitors’ pricing and marketing strategies can significantly affect our competitive strategies, including pricing. In 2011, we announced that we were making the 1940 U.S. Federal Census available to all Ancestry.com registered users free-of-charge from the date it was released in April 2012 through December 31, 2013. However, if in doing so or through some other measure we fail to meet our subscribers’ expectations, we could fail to retain existing or attract new subscribers, either of which could harm our business and results of operations.

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 is undertaking a large-scale digitization project to make its collection available online. FamilySearch has partnered and may in the future partner with other commercial entities to broaden the distribution of its records.

 

   

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 or that partner with commercial entities to make their records widely-available.

In addition, we face competition related to DNA services from companies such as 23andMe and others. We expect our competition to grow, both through industry consolidation and the emergence of new participants in our existing markets. We will also face competitors in new markets that we enter. Our future competitors may include other Internet-based businesses, governments and other entities. The market for Internet-based services evolves at a very rapid pace and our competitors may offer products and services that are superior to any of our products and services. In addition, Internet business models are constantly changing. The online family history market could move to an advertising-supported model to the detriment of our subscription-based model. Our competitors may have greater resources, more well-established brand recognition or more sophisticated technologies, such as search algorithms, than we do. Additionally, our competitors may more easily obtain relevant records in domestic and international markets or offer new categories of content, products or services before we do, or at lower prices, which may give them a competitive advantage in attracting subscribers. 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. If we do not compete effectively, our ability to retain and expand our subscriber base, and our revenues, results of operations and financial condition, could be adversely affected.

 

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Because we generate substantially all of our revenues 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 revenues to decline.

We generate substantially all of our revenues 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 revenues 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 revenues 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,

 

   

the appeal, reliability and performance 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 and the United Kingdom, and, to a lesser extent, Australia and Canada. Consequently, a decrease of interest in and demand for online family history services or increased competition in these countries could have a disproportionately greater impact on us than if our geographical mix of revenues were 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, cultural and commercial 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. 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 “vital records” content — namely, historical 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 some cases, we have had to lobby for legislation to be changed or otherwise work to surmount administrative or other bureaucratic hurdles 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 the rights to digitize that content, even on a non-exclusive basis, they may 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. Conversely, the owners of historical records may allow more than one party to digitize those records and our competitors may digitize and make available the same content that we offer. In some cases, acquisition of content involves competitive bidding, and we may 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 certain 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 monthly 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 these 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.

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. 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 provider’s 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 to 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 more than $140 million to acquire, digitize and index content, including content acquired through business acquisitions, and we 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 a substantial portion 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.

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 license or lend their content to us.

Our failure to attract, integrate and retain highly qualified personnel in the future could harm our business.

To execute our growth plan, we must attract and retain 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-based awards they may receive in connection with their employment. GAAP requirements relating to the expensing of stock-based awards may discourage us from granting the size or type of awards that job candidates may require to join our company. If our stock price declines, we may face increased difficulty attracting and retaining personnel through the use of stock-based awards. If we fail to attract new personnel, or fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected.

 

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We currently outsource some of our customer service and product development activities to third parties, which exposes us to risks if these parties fail to perform under our agreements with them.

Because we currently outsource some of our customer service and product development activities to third parties, we have less control over the work produced by these providers than over our own employees. If customer service personnel fail to perform in accordance with the terms of our agreements, we may fail to meet customer expectations. If third-party developers fail to adequately protect or transfer our intellectual property rights in our products, our intellectual property portfolio could be damaged. These outcomes could result in negative publicity, damage our reputation and brands and harm our business and results of operations.

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 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, will continue to place similar strains on our personnel, technology and infrastructure. Our full-time core employee headcount, which excludes subscriber service employees, increased 19% in 2011, and we plan to continue to hire additional personnel in 2012. Particularly when adding staff quickly, we may not make optimal hiring decisions or may not integrate personnel effectively. Increased activity on our Web sites, particularly sudden increases, could strain our capacity and result in Web site performance issues or cause us to hit limitations in our present infrastructure or other technology. 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, if we fall short of anticipated revenue growth, will make it more difficult to decrease expenses 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.

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 subscribers from accessing our data and using our products and services. Problems with the reliability or security of our systems may harm our reputation and require disclosure to our lenders, 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 Salt Lake City, 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 customers, and a total failure of our systems at both sites could cause our Web sites to be inaccessible by our customers. 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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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.

At June 30, 2012 and for the six months ended June 30, 2012, approximately 28% of subscribers to our Ancestry.com Web sites and approximately 25% of our subscription revenues were from locations outside the United States. We are subject to many of the risks of doing business internationally, including the following:

 

   

exposure to foreign currency exchange rate fluctuations;

 

   

compliance with foreign laws and the interpretation of those laws, including tax and employment law;

 

   

compliance with changing and conflicting legal and regulatory regimes;

 

   

compliance with U.S. laws affecting operations outside of the U.S., including the Foreign Corrupt Practices Act;

 

   

compliance with varying and conflicting intellectual property laws;

 

   

effects of repatriating cash earned in foreign jurisdictions;

 

   

difficulties in staffing and managing international operations;

 

   

prevention of business or user fraud; and

 

   

effective implementation of internal controls and processes across diverse operations and a dispersed employee base.

We anticipate that our continuing international expansion will 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 or achieve our subscriber acquisition or other goals. For some international markets, customer preferences and buying behaviors may be different than those in our current markets, and we may use business models that are different from our traditional subscription models. 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. The risks of international expansion include:

 

   

difficulties in developing and marketing our offerings and brands as a result of distance, language and cultural differences;

 

   

more stringent consumer and data protection laws;

 

   

inability to effectively deal with local socio-economic and political conditions;

 

   

technical difficulties and costs associated with the localization of our service offerings;

 

   

strong local competitors; and

 

   

lack of experience in certain geographical markets.

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 brand 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 increase, 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 and other messaging on this topic on our Web sites, social media and elsewhere. If actions we take or changes we make to our products upset these subscribers, their blogging and messaging could negatively affect our brand and reputation, which could harm our revenues, results of operations and financial condition.

 

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Our future growth may differ materially from our historic growth rates and our projections, which could harm our results of operations and financial condition.

Online family history research is a relatively young industry. 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.

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, cross-platform compatibility, systems capacity and processing speed; 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.

We distribute free mobile apps as part of our product and service enhancement efforts. Our mobile apps are becoming an increasingly important way for new users to register. Most users of our free mobile apps download them from various service providers that do not currently charge us fees or commissions. If one or more of these service providers were to begin to impose fees or commissions upon us in connection with their distribution of our mobile apps, or to prohibit us from distributing our mobile apps on their platforms, we may be unable to attract on a cost-effective basis a similar number of new registered users that we can convert to subscribers, which could adversely affect our financial condition and results of operations.

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, 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 an 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 DNA testing services, 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 present risks and expenses that could harm our business. Unauthorized disclosure or use of such data, whether through breach of our network security or otherwise, could expose us to significant liability and damage our reputation.

Maintaining the security of our information technology and network systems infrastructure is of critical importance because we handle confidential subscriber, registered user, employee and other sensitive data, such as names, addresses, credit card numbers and other personal information. In addition, our online systems include 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 become publicly available or if third parties were able to gain unauthorized access to such content, we may face liability and harm to our brand and reputation.

Almost all 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, cash flows and results of operations could be adversely affected.

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 including 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.

There can be no assurances that we will be able to continue to operate our facilities and customer service and sales operations in accordance with industry practices such as Payment Card Industry Data Security 23 Standards. Even if we remain compliant with those standards, we may not be able to prevent security breaches involving customer transaction data. If we experience a security breach or other lapse in the handling of confidential information of this kind, the incident could give rise to risks including data loss, litigation and liability, and could harm our reputation or disrupt our operations, any of which could adversely affect our business. We have experienced “denial-of-service” and other attacks in the past that have slowed our systems. In addition, various states and countries have differing laws regarding protection of customer privacy and confidential information, including notification requirements in the event of certain breaches or losses of information. Efforts to comply with these laws and regulations increase our costs of doing business and failure to achieve compliance could result in substantial liability to our business and harm our reputation. In the event of a security breach or loss of confidential information, we could be subject to fines, penalties, damages and other remedies under applicable laws, any of which could have an adverse impact on our reputation, business, operating results and financial condition.

If third parties improperly obtain and use the personal information of our registered users or employees, we may be required to expend significant resources in efforts to address 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 adverse effects on our business, financial condition and results of operations. In addition, we may have inadequate insurance coverage to compensate for any related losses.

 

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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 users 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 subscribers to contact each other. While subscribers can choose to remain anonymous in such communications, subscribers 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 could have a severe, negative impact on our ability to collect revenues from subscribers.

The 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 increase the prices we charge for our products and services or negatively impact 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 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 collect revenues from subscribers.

Our operating results depend on numerous factors and may fluctuate from period to period, which could make them difficult to predict.

Our quarterly and annual 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 operating results as indicators of future performance. Our operating results depend on numerous factors, many of which are outside of our control. For the reasons set forth in this Risk Factors section 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 revenues and operating results in the future may differ materially from the expectations of management or investors.

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 or states or jurisdictions in which we already collect tax may increase the amount of taxes we are required to collect. 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, result in substantial tax liabilities for past sales, create significant administrative burdens for us, discourage registered users from purchasing from us or otherwise substantially harm our business and results of operations.

 

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Our current credit facility may not be sufficient for current needs and we may require additional capital for business opportunities, acquisitions or unforeseen circumstances. If such sources are not available to us, or are not available on acceptable terms, we may not be able to expand and our business and/or our operating results and financial condition may be harmed.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business opportunities, including developing new features and products or enhancing our existing solutions, improving our operating infrastructure, making stock repurchases, or acquiring complementary businesses and technologies. In April 2012, we announced that we had entered into a definitive agreement to acquire Archives.com for $100.0 million in cash consideration plus assumed liabilities and that our board of directors had authorized the repurchase of up to $100.0 million in shares of our outstanding common stock. Our current liquidity does not accommodate us funding both initiatives simultaneously. Accordingly, we may engage in debt financings to secure additional funds; however, we may not be able to obtain additional financing on terms favorable to us, if at all. For example, our current credit facility contains restrictive covenants relating to our capital raising activities and other financial and operational matters, and any debt financing secured by us in the future could involve further restrictive covenants, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to grow our business and to respond to business challenges could be significantly impaired, and our business may be harmed.

Our current credit facility could limit our flexibility in operating our business.

Our current credit facility contains a number of financial and operating covenants that could limit our flexibility in operating our business, including a covenant to maintain a specified ratio of a measure of certain funded indebtedness (excluding subordinated indebtedness) to a measure of EBITDA (as EBITDA is defined in our credit facility) and a covenant to maintain a specified ratio of a measure of EBITDA to a measure of fixed charges.

Any indebtedness we undertake could:

 

   

make us more vulnerable to unfavorable economic conditions;

 

   

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, if any; and

 

   

make it more difficult to pursue strategic acquisitions, alliances and collaborations.

Any obligations under our 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 lenders could exercise their rights under the credit facility, including taking control of the collateral, including our intellectual property, which would have a material adverse effect on our business. In addition, we cannot assure you that our lenders will have sufficient liquidity to provide funds to us if and when we seek to borrow additional amounts under the credit facility.

We face risks associated with currency exchange rate fluctuations, which could adversely affect our revenues and operating results.

For the six months ended June 30, 2012, approximately 22% of our total revenues were received and approximately 11% of our total expenses were paid, in currencies other than the United States dollar, such as the British pound sterling, the Australian dollar and the Canadian 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 revenues and results of operations. If the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions will result in decreased revenues, operating expenses and net income. We may not be able to offset adverse foreign currency impact with increased subscription pricing or volume. 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. 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.

 

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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. Although we did not experience a material increase in subscription cancellations or a material reduction in subscription renewals during the recent economic downturn, we may yet be impacted if employment and personal income do not improve or if economic conditions in the United States and Europe continue to deteriorate. 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, we have already seen a rise in media prices, including television advertising, and prices may further increase if the economy begins to experience substantial 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 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 our officers or key employees, other than Timothy Sullivan. 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, product development or technology personnel could disrupt our operations and have an adverse effect on our ability to operate our business.

We have made significant estimates in calculating our income tax provision and other tax assets and liabilities. If these estimates are incorrect, our operating results and financial condition may be adversely affected.

We are subject to regular review and audit by both domestic and foreign tax authorities. Any adverse outcome of such a review or audit could have a negative effect on our operating results and financial condition. In addition, the determination of our provision for income taxes and other tax assets and liabilities requires significant judgment, and there are many transactions and calculations where the ultimate tax determination is uncertain at the present time. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may have an adverse effect on our operating results and financial condition.

We earn a significant amount of our operating income from outside the U.S., and there have been proposals to change U.S. tax laws that would significantly impact how we are taxed on foreign earnings, including a February 2012 proposal by the Obama administration that would establish a minimum tax on multinational corporations’ foreign earnings. Although we cannot predict whether or in what form any proposed legislation may be enacted, such tax law changes could have a material adverse impact on our future tax expense and cash flow.

Expenses or liabilities 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. We cannot assure you of the ultimate outcome of any legal proceeding or contingency in which we are or may become involved.

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. Many of our trademarks contain words or terms having a somewhat common usage and, as a result, we may have difficulty registering them in certain jurisdictions. Although we possess intellectual property rights in some aspects of our digital content, search technology, software products and digitization and indexing processes, 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. However, 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.

 

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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 in all instances, 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, revenues, reputation and competitive position could be harmed.

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 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, revenues, 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, content indexes, 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 valid 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 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.

 

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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 arise with respect to both institutional 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.

If we are unable to protect our domain names, our reputation and brand could be affected adversely, which may negatively impact our ability to compete.

We have registered domain names for Web site destinations that we use in our business, such as Ancestry.com, Ancestry.co.uk and Fold3.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. Although 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 Common Stock and Corporate Structure

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 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 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.

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.

The market price of shares of our common stock could be subject to wide fluctuations in response to many risks listed herein and others beyond our control, including:

 

   

actual or anticipated fluctuations in our key operating metrics, financial condition and operating results;

 

   

a greater than expected gain or loss of existing subscribers;

 

   

actual or anticipated changes in our growth rate;

 

   

issuance of new or updated research or reports by securities analysts;

 

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our announcement of actual results for a fiscal period that are higher or lower than projected or expected results or our announcement of revenues 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 common stock by us or others; or market reaction to announced repurchases of common stock by us;

 

   

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 management’s attention from other business concerns, which could seriously harm our business.

Our stock price may be affected by 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.

Financial forecasting by us and financial analysts who may publish estimates of our performance may differ materially from actual results.

Given the dynamic nature of our business, the current uncertain economic climate and the inherent limitations in predicting the future, forecasts of our revenues, gross margin, operating expenses, number of paying subscribers and other financial and operating data may differ materially from actual results. Such discrepancies could cause a decline in the trading price of our common stock.

Spectrum Equity Investors and its affiliates own a substantial portion of our outstanding common stock, and their interests may not always coincide with the interests of the other holders of our common stock.

At June 30, 2012, Spectrum Equity Investors V, L.P. and certain of its affiliates beneficially owned in the aggregate shares representing approximately 31% 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 could have influence over 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.

 

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Item 6. Exhibits

 

Exhibit

Number

 

Exhibit Description

2.1*   Asset Purchase Agreement dated April 25, 2012 by and between Ancestry.com Operations Inc. and Inflection LLC. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on April 30, 2012 (File No. 001-34518))
10.1   Ancestry.com Inc. Description of 2012 Performance Incentive Program.
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
101.INS ***   XBRL Instance Document
101.SCH ***   XBRL Taxonomy Extension Schema Document
101.CAL ***   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF ***   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB ***   XBRL Taxonomy Extension Label Linkbase Document
101.PRE ***   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Certain schedules and exhibits have been omitted. The Registrant hereby undertakes to furnish, supplementally, copies of any of the omitted schedules and exhibits upon request of the Securities and Exchange Commission.
** These certifications are not deemed filed with the Securities and Exchange Commission 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.
*** In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

 

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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 2, 2012

    By:   /s/ Timothy Sullivan
      Timothy Sullivan
      President and Chief Executive Officer

Dated: August 2, 2012

    By:   /s/ Howard Hochhauser
      Howard Hochhauser
      Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit

Number

 

Exhibit Description

2.1*   Asset Purchase Agreement dated April 25, 2012 by and between Ancestry.com Operations Inc. and Inflection LLC. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on April 30, 2012 (File No. 001-34518))
10.1   Ancestry.com Inc. Description of 2012 Performance Incentive Program.
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
101.INS ***   XBRL Instance Document
101.SCH ***   XBRL Taxonomy Extension Schema Document
101.CAL ***   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF ***   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB ***   XBRL Taxonomy Extension Label Linkbase Document
101.PRE ***   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Certain schedules and exhibits have been omitted. The Registrant hereby undertakes to furnish, supplementally. copies of any of the omitted schedules and exhibits upon request of the Securities and Exchange Commission.
** These certifications are not deemed filed with the Securities and Exchange Commission 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.
*** In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

 

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