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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 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 No. 001-35367

 

 

JIVE SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		42-1515522
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

325 Lytton Avenue, Suite 200, Palo Alto, California		94301
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 650-319-1920

 

 

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x  (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

The number of shares of the registrant’s common stock outstanding as of November 7, 2012 was 64,312,147.

 

 

 

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JIVE SOFTWARE, INC.

INDEX TO FORM 10-Q

 

				Page
PART I - FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Consolidated Balance Sheets – September 30, 2012 and December 31, 2011			2
		Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2012 and 2011			3
		Consolidated Statements of Comprehensive Loss – Three and Nine Months Ended September 30, 2012 and 2011			4
		Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2012 and 2011			5
		Condensed Notes to Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.		Controls and Procedures			27
PART II - OTHER INFORMATION
Item 1A.		Risk Factors			28
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 6.		Exhibits			49
Signatures					50

 

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

JIVE SOFTWARE, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

		September 30,				December 31,
		2012				2011
Assets
Current Assets:
Cash and cash equivalents		$	57,472			$	180,649
Short-term marketable securities			83,995				—
Accounts receivable, net of allowances of $124 and $144			35,875				31,999
Prepaid expenses and other current assets			6,827				4,503
Total current assets			184,169				217,151
Marketable securities, noncurrent			35,404				—
Property and equipment, net of accumulated depreciation of $10,120 and $6,094			16,150				12,639
Goodwill			17,265				17,265
Intangible assets, net of accumulated amortization of $6,599 and $3,976			8,518				11,141
Other assets			234				146
Total assets		$	261,740			$	258,342
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	7,175			$	4,566
Accrued payroll and related liabilities			5,653				6,629
Other accrued liabilities			4,534				5,124
Deferred revenue, current			74,425				62,329
Term debt, current			2,400				2,946
Total current liabilities			94,187				81,594
Deferred revenue, less current portion			23,129				15,497
Term debt, less current portion			9,000				10,192
Other long-term liabilities			547				340
Total liabilities			126,863				107,623
Commitments and contingencies
Stockholders’ Equity:
Common stock, $0.0001 par value. Authorized 290,000,000 shares; issued —70,723,528 shares at September 30, 2012 and 68,568,778 at December 31, 2011; outstanding—63,793,145 at September 30, 2012 and 61,308,006 at December 31, 2011			7				7
Less treasury stock at cost			(3,352	)			(3,352	)
Additional paid-in capital			274,780				258,779
Accumulated deficit			(136,587	)			(104,725	)
Accumulated other comprehensive income			29				10
Total stockholders’ equity			134,877				150,719
Total liabilities and stockholders’ equity		$	261,740			$	258,342

See accompanying Condensed Notes to Consolidated Financial Statements.

 

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JIVE SOFTWARE, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

		For the Three Months Ended September 30,								For the Nine Months  Ended September 30,
		2012				2011				2012				2011
Revenues:
Product		$	25,861			$	17,493			$	71,436			$	46,092
Professional services			3,012				3,326				9,705				8,679
Total revenues			28,873				20,819				81,141				54,771
Cost of revenues:
Product			7,788				6,147				21,745				15,208
Professional services			3,474				3,095				11,055				9,146
Total cost of revenues			11,262				9,242				32,800				24,354
Gross profit			17,611				11,577				48,341				30,417
Operating expenses:
Research and development			9,845				7,537				27,327				23,320
Sales and marketing			14,800				12,297				40,737				31,757
General and administrative			4,127				3,901				11,680				9,120
Total operating expenses			28,772				23,735				79,744				64,197
Loss from operations			(11,161	)			(12,158	)			(31,403	)			(33,780	)
Other income (expense), net:
Interest income			56				10				116				37
Interest expense			(93	)			(569	)			(325	)			(924	)
Change in fair value of warrant liability			—				5,150				—				(7,185	)
Other, net			42				44				(4	)			4
Total other income (expense), net			5				4,635				(213	)			(8,068	)
Loss before provision (benefit) for income taxes			(11,156	)			(7,523	)			(31,616	)			(41,848	)
Provision (benefit) for income taxes			132				57				246				(3,710	)
Net loss		$	(11,288	)		$	(7,580	)		$	(31,862	)		$	(38,138	)
Basic and diluted net loss per share		$	(0.18	)		$	(0.31	)		$	(0.51	)		$	(1.61	)
Shares used in basic and diluted per share calculations			62,921				24,836				62,100				23,741

See accompanying Condensed Notes to Consolidated Financial Statements.

 

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JIVE SOFTWARE, INC.

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

		For the Three Months Ended September 30,								For the Nine Months  Ended September 30,
		2012				2011				2012				2011
Net loss		$	(11,288	)		$	(7,580	)		$	(31,862	)		$	(38,138	)
Other comprehensive income (loss):
Foreign currency translation, net of tax			(28	)			(18	)			(11	)			(24	)
Cumulative unrealized gain on marketable securities			39				—				30				—
Other comprehensive income (loss):			11				(18	)			19				(24	)
Comprehensive loss		$	(11,277	)		$	(7,598	)		$	(31,843	)		$	(38,162	)

See accompanying Condensed Notes to Consolidated Financial Statements.

 

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JIVE SOFTWARE, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2012				2011
Cash flows from operating activities:
Net loss		$	(31,862	)		$	(38,138	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			7,170				5,107
Stock-based compensation			12,277				7,524
Loss from change in fair value of warrant liability			—				7,185
Change in deferred taxes			—				(3,851	)
(Increase), net of acquisitions, in:
Accounts receivable, net			(3,876	)			(4,436	)
Prepaid expenses and other assets			(2,292	)			(573	)
Increase (decrease), net of acquisitions, in:
Accounts payable			4,122				3,270
Accrued payroll and related liabilities			(976	)			1,136
Other accrued liabilities			56				1,557
Deferred revenue			19,728				14,084
Other long-term liabilities			405				64
Net cash provided by (used in) operating activities			4,752				(7,071	)
Cash flows from investing activities:
Payments for purchase of property and equipment			(9,389	)			(5,837	)
Purchases of marketable securities			(119,399	)			—
Acquisitions, net of cash acquired			—				(22,892	)
Net cash used in investing activities			(128,788	)			(28,729	)
Cash flows from financing activities:
Proceeds from exercise of stock options, including tax withholding			3,724				2,007
Proceeds from issuance of preferred stock, net			—				40,000
Payments for stock issuance costs			(1,014	)			(564	)
Proceeds from revolving credit facility, net			—				515
Proceeds from term loans			—				24,203
Repayments of term loans			(1,850	)			(1,104	)
Net cash provided by financing activities			860				65,057
Net increase (decrease) in cash and cash equivalents			(123,176	)			29,257
Effect of exchange rate changes			(1	)			—
Cash and cash equivalents, beginning of period			180,649				43,348
Cash and cash equivalents, end of period		$	57,472			$	72,605

See accompanying Condensed Notes to Consolidated Financial Statements.

 

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JIVE SOFTWARE, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.

Nature of Business

Jive Software, Inc. and its subsidiaries provide a social business software platform that improves business results by enabling a more productive and effective workforce through enhanced communications and collaboration both inside and outside the enterprise. Organizations deploy our platform to improve employee productivity, enhance revenue opportunities, lower operational costs, increase customer retention and improve strategic decision making. Our platform is offered on a subscription basis, deployable in a private or public cloud and used for internal or external communities. We generate revenues from platform license fees as well as from professional service fees for configuration, implementation and training.

 

Note 2.

Basis of Presentation

The consolidated financial statements include the accounts of Jive Software, Inc. and our majority-controlled subsidiaries (collectively, “Jive Software”). All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements and condensed footnotes have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. The results of operations for the three and nine-month periods ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission (“SEC”) on March 12, 2012.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities in the financial statements and the accompanying notes. Significant estimates include:

 

•

stock-based compensation;

 

•

assumptions used in testing for impairment of goodwill and other long-lived assets; and

 

•

the recoverability of deferred income tax assets and liabilities.

Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.

 

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Note 3.

Stock-Based Compensation

Certain information regarding stock options outstanding as of September 30, 2012 was as follows:

 

		Shares Available for Grant				Outstanding Stock Options				Weighted average exercise price				Weighted average remaining life (in years)				Aggregate intrinsic value (in thousands)
Balances, December 31, 2011			4,377,973				15,981,155			$	3.56
Stock options granted			(1,176,800	)			1,176,800				17.13
Restricted stock units (“RSUs”) granted			(1,933,700	)			—				—
Performance stock units (“PSUs”) granted			(100,000	)			—				—
Forfeited – Stock options			776,495				(776,495	)			7.93
Forfeited – Restricted stock			26,500				—				—
Exercised			—				(2,154,750	)			1.73
Balances, September 30, 2012			1,970,468				14,226,710			$	4.72				7.26			$	157,865
Exercisable at September 30, 2012							6,906,130			$	2.24				6.67			$	93,040
Vested and expected to vest							13,563,016			$	4.53				7.22			$	152,968

Restricted stock results from the exercise of unvested restricted stock purchases, or RSPs, non-qualified stock options, or NSOs, with reverse vesting provisions, and the grant of restricted stock awards, or RSAs, and RSUs. The shares of restricted stock vest over the period specified in the related RSP, NSO, RSA and RSU agreements. During the third quarter of 2012, the Company granted performance based stock units, or PSUs, to a senior executive. The PSUs will vest up to 25% of the total granted, based on the achievement level of certain performance metrics, for each of 2013, 2014, 2015, and 2016. Restricted stock activity was as follows:

 

		Number of shares				Weighted average grant date fair value
Balances, December 31, 2011			835,367			$	5.56
Granted RSUs			1,933,700				19.88
Granted PSUs			100,000				15.75
Vested			(330,389	)			5.58
Forfeited			(26,500	)			23.98
Balances, September 30, 2012			2,512,178			$	16.85

Our stock-based compensation expense was included in our Consolidated Statements of Operations as follows (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
Cost of revenues		$	627			$	155			$	1,413			$	311
Research and development			1,705				806				4,185				1,764
Sales and marketing			1,436				1,988				2,890				3,234
General and administrative			1,260				1,180				3,789				2,215
		$	5,028			$	4,129			$	12,277			$	7,524

As of September 30, 2012, unrecognized stock-based compensation related to outstanding but unvested stock options and restricted stock was $55.7 million, which will be recognized over the weighted average remaining vesting period of 2.51 years.

 

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Note 4.

Earnings Per Share

Since we were in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods.

The following table sets forth the computation of historical basic and diluted net loss per share (in thousands, except per share data):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
Numerator:
Net loss		$	(11,288	)		$	(7,580	)		$	(31,862	)		$	(38,138	)
Denominator:
Weighted-average common shares outstanding			63,439				25,707				62,754				24,502
Less: Weighted-average unvested common shares subject to repurchase or forfeiture			(518	)			(871	)			(654	)			(761	)
Weighted-average shares used to compute net loss per share, basic and diluted			62,921				24,836				62,100				23,741
Net loss per share, basic and diluted		$	(0.18	)		$	(0.31	)		$	(0.51	)		$	(1.61	)

Potentially dilutive securities that are not included in the diluted per share calculations because they would be anti-dilutive were as follows:

 

		As of September 30,
		2012				2011
Stock options			14,226,710				16,274,820
Restricted stock			2,512,178				858,651
Shares subject to common stock warrants			—				127,000
Series A preferred stock			—				10,100,000
Series B preferred stock			—				3,335,817
Series C preferred stock			—				9,646,550
			16,738,888				40,342,838

 

Note 5.

Goodwill and Other Intangible Assets

Goodwill

The roll-forward of our activity related to goodwill was as follows (in thousands):

 

		Nine Months Ended September 30, 2012				Year Ended December 31, 2011
Balance, beginning of period		$	17,265			$	831
Acquisition of OffiSync Corporation			—				16,434
Balance, end of period		$	17,265			$	17,265

OffiSync Corporation’s results of operations have been included in our unaudited consolidated financial statements subsequent to the date of acquisition. Pro forma results for the three and nine months ended September 30, 2011 were not significantly different from our reported results of operations.

 

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Other Intangible Assets

The following table presents our intangible assets and their related useful lives (dollars in thousands):

 

		Useful Life		September 30, 2012				December 31, 2011
Acquired technology		5 years		$	11,564			$	11,564
Accumulated amortization					(4,076	)			(2,497	)
					7,488				9,067
Perpetual licenses		2 years			2,430				2,430
Accumulated amortization					(1,680	)			(916	)
					750				1,514
Covenant not to compete		1-2 years			807				807
Accumulated amortization					(602	)			(412	)
					205				395
Other		2 years			316				316
Accumulated amortization					(241	)			(151	)
					75				165
Total intangible assets, net				$	8,518			$	11,141

Amortization expense related to intangible assets was as follows (in thousands):

 

Three Months  Ended September 30,						Nine Months Ended September 30,
2012		2011				2012				2011
$ 864		$	966			$	2,623			$	2,544

Expected future amortization expense as of September 30, 2012 is as follows (in thousands):

 

Remainder of 2012		$	864
2013			2,782
2014			2,124
2015			1,999
2016			749
Thereafter			—
		$	8,518

 

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Note 6.

Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents and marketable securities consisted of the following as of September 30, 2012 (in thousands):

 

Description		Cost				Unrealized Gains				Unrealized Losses				Estimated Fair Value
Cash		$	57,259			$	—			$	—			$	57,259
Cash equivalents:
Money market mutual funds			213				—				—				213
Total cash equivalents			213				—				—				213
Total cash and cash equivalents			57,472				—				—				57,472
Short-term marketable securities:
Commercial paper			11,987				1				—				11,988
Corporate notes and bonds			29,845				12				—				29,857
Government obligations			10,153				1				—				10,154
U.S. agency obligations			31,982				14				—				31,996
Total short-term marketable securities			83,967				28				—				83,995
Marketable securities, noncurrent:
Corporate notes and bonds			15,338				1				—				15,339
Government obligations			2,731				—				4				2,727
U.S. agency obligations			17,333				5				—				17,338
Total marketable securities, noncurrent			35,402				6				4				35,404
Cash, cash equivalents, short-term marketable securities and marketable securities, noncurrent		$	176,841			$	34			$	4			$	176,871

As of September 30, 2012, we did not consider any of our investments to be other-than-temporarily impaired.

As of September 30, 2012, the following table summarizes the estimated fair value of our investments in marketable securities, all of which are considered available-for-sale, classified by the contractual maturity date (in thousands):

 

		September 30, 2012
Due within 1 year		$	83,995
Due within 1 year through 3 years			35,404
Total marketable securities		$	119,399

 

Note 7.

Fair Value Measurements

Factors used in determining the fair value of financial assets and liabilities are summarized into three broad categories:

 

•

Level 1 – quoted prices in active markets for identical securities as of the reporting date;

 

•

Level 2 – other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; and

 

•

Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.

The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

 

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The following table presents our financial assets that are measured at fair value on a recurring basis as of September 30, 2012 (in thousands):

 

		September 30, 2012
		Level 1				Level 2				Level 3				Total
Cash equivalents
Money market mutual funds		$	213			$	—			$	—			$	213
Marketable securities
Commercial paper			—				11,988				—				11,988
Corporate notes and bonds			—				45,196				—				45,196
Government obligations			—				12,881				—				12,881
U.S. government and agency			—				49,334				—				49,334
Total		$	213			$	119,399			$	—			$	119,612

We classify our marketable securities as available-for-sale and, accordingly, record them at fair value based on quoted market prices. Unrealized holding gains and losses are excluded from earnings and are reported as a separate component of Stockholders’ equity until realized. See the Consolidated Statements of Comprehensive Loss.

We did not have any financial liabilities that were measured at fair value on a recurring basis at September 30, 2012. We did not have any financial assets or liabilities that were measured at fair value on a recurring basis at December 31, 2011.

There were no changes to our valuation techniques during the first nine months of 2012.

During the nine months ended September 30, 2012 and 2011, we did not record any other-than-temporary impairments on those financial assets required to be measured at fair value on a nonrecurring basis.

We recognize or disclose the fair value of certain assets such as non-financial assets, primarily long-lived assets, goodwill, intangible assets and certain other assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.

The carrying value of our term loan approximates its fair value and falls under Level 2 of the fair value hierarchy.

 

Note 8.

Credit Facility with Silicon Valley Bank

In May 2012, we entered into a new loan agreement with Silicon Valley Bank (the “Loan Agreement”), which provides a secured revolving loan facility and term loan facility of up to $30.0 million and expires May 23, 2015. Under the Loan Agreement, revolving loans may be converted into term loans under the facility, subject to specified conditions, with all outstanding term loans reducing the availability under the revolving loan facility. The Loan Agreement also provides up to $3.0 million for the issuance of letters of credit, foreign exchange contracts, cash management services and secured swap obligations. On May 23, 2012, we converted the outstanding balance of the existing term loans with Silicon Valley Bank to a new term loan for $12.0 million under the Loan Agreement and terminated the previous credit facility agreement. Revolving loans drawn under the Loan Agreement will be used for working capital, potential acquisitions, and general corporate purposes. At September 30, 2012, no amounts remained outstanding under our previously existing term loans with Silicon Valley Bank.

 

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Revolving loans bear interest, at our option, at (i) an adjusted LIBOR rate, plus a margin of 1.75% or 2.0%, or (ii) the prime rate published in the Wall Street Journal, plus a margin of 0% or 0.25%, in each case with such margin determined based on our adjusted quick ratio. Term loans bear interest, at our option, at (i) an adjusted LIBOR rate, plus a margin of 2.0% or 2.25%, or (ii) the prime rate, plus a margin of 0.25% or 0.50%, in each case with such margin determined based on our adjusted quick ratio. The adjusted quick ratio is a ratio of our unrestricted cash and cash equivalents to our current liabilities minus the current portion of our deferred revenue. Interest on the revolving loans and the term loans is due and payable in arrears at the end of an interest period of 30, 60 or 90 days, as selected by us, for loans that bear interest based on the adjusted LIBOR rate, or quarterly for loans that bear interest based on the prime rate. Obligations under the loan facility are secured by a security interest on substantially all of our assets, excluding intellectual property.

The Loan Agreement contains customary affirmative and negative covenants subject to certain exceptions. We must also comply with financial covenants under the Loan Agreement, including (i) a minimum quick ratio, (ii) for the period from the closing through December 31, 2013, a minimum adjusted EBITDA, and (iii) beginning with the fiscal quarter ending March 31, 2014, a minimum fixed charge coverage ratio and a maximum leverage ratio.

The Loan Agreement also contains customary events of default including, among others, payment defaults, breaches of covenants, bankruptcy and insolvency events, cross defaults with certain material indebtedness, judgment defaults, and breaches of representations and warranties. Upon an event of default, all or a portion of the outstanding obligations may be declared to be immediately due and payable. During the existence of an event of default, interest on the obligations under the Loan Agreement could be increased by 5.0%.

At September 30, 2012, we had $0.3 million of outstanding letters of credit, no revolving loans outstanding under the Loan Agreement and $11.4 million of term loans outstanding at an interest rate of 2.39%. We were in compliance with all covenants as of September 30, 2012.

 

Note 9.

Commitments

In addition to $14.2 million in future payments under our operating leases, we have commitments under non-cancelable purchase orders, primarily relating to our annual user conference and capital expenditures for our data center, totaling $4.7 million at September 30, 2012. The non-cancelable purchase order commitments will be filled at various times through the third quarter of 2013; and our longest operating lease expires in September 2018.

 

Note 10.

Statements of Cash Flows

The summary of supplemental cash flows information is as follows (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
Supplemental Cash Flow Information
Cash paid for interest		$	89			$	476			$	397			$	811
Cash paid for income taxes			26				20				141				65
Supplemental Non-Cash Information
Common stock issued in connection with acquisition of Proximal Labs		$	—			$	—			$	—			$	551
Common stock issued in connection with acquisition of OffiSync			—				—				—				616

 

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Note 11.

Related-party transactions

Certain members of our board of directors are also investors in and/or serve on the board of directors of certain of our customers. We believe the transactions between these customers and us were carried out on an arm’s-length basis and that the pricing is consistent with similar transactions with our other similar customers. Current deferred revenue and non-current deferred revenue from these customers was $0.4 million and $0.7 million, respectively, as of September 30, 2012. Total revenues related to these customers was $0.2 million and $0.4 million, respectively, in the three and nine months ended September 30, 2012.

 

Note 12.

New Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles – Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment,” which permits an entity to make a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. Entities are required to test indefinite-lived intangible assets for impairment at least annually and more frequently if indicators of impairment exist. If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it is not required to perform the quantitative impairment test for that asset. Because the qualitative assessment is optional, an entity is permitted to bypass it for any indefinite-lived intangible asset in any period and apply the quantitative test. ASU 2012-02 also permits the entity to resume performing the qualitative assessment in any subsequent period. ASU 2012-02 is effective for impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted. We do not expect the adoption of ASU 2012-02 to have any effect on our financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 allows an entity to have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. ASU 2011-05 eliminated the option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. We adopted ASU 2011-05 in the first quarter of 2012 and, accordingly, comprehensive income is included as a separate financial statement that directly follows the Consolidated Statements of Operations.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” which amends the wording used to describe many of the requirements of U.S. GAAP for measuring fair value and disclosing information about fair value measurements as well as clarifies existing fair value measurement guidance and new disclosure requirements. Amendments in this ASU include: (1) allowing an entity to measure the fair value of financial assets and liabilities which have offsetting positions in market risks or counterparty credit risk and meet certain conditions on a net basis; (2) for Level 3 fair value measurements, entities must disclose quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, entities must disclose the fair value hierarchy level in which the fair value measurements were determined; (4) entities must disclose the highest-and-best use of a nonfinancial asset when this use differs from the asset’s current use, and the reason for the difference; and (5) disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 is effective prospectively for interim and annual periods beginning after December 15, 2011, with no early adoption permitted. All required disclosures are included in Note 7 and 8 of the Condensed Notes to the Consolidated Financial Statements.

 

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Note 13.

Subsequent Events

On October 3, 2012, Bascom Research, LLC filed a complaint in the United States District Court for the Eastern District of Virginia against us, among others, for patent infringement of U.S. Pat. Nos. 7,111,232; 7,139,974; and 7,158,971, captioned Bascom Research, LLC v. Jive Software, Inc., Civil Case No. 1:12CV1114. The complaint seeks damages and an injunction against certain features of our products. We intend to vigorously defend against these claims and are unable to estimate the amount or range of potential loss, if any, which might result if the outcome in this matter is unfavorable.

On November 5, 2012 we entered into a definitive agreement to acquire Producteev LLC (“Producteev”), a cloud-based project and task management company. This transaction is expected to close in the fourth quarter of 2012, subject to customary closing conditions. Additionally, on November 5, 2012, we entered into and closed a definitive agreement to acquire Bitplay Inc. (also known as “Meetings.io”), a cloud-based real-time video, chat and screen sharing collaboration company. These companies were purchased for approximately $7.6 million in aggregate cash and 211,935 shares of our common stock with an aggregate fair value of $2.4 million. We also issued 248,065 shares of restricted common stock to certain founding employees; the fair value of these shares on the grant date was $2.8 million, which will be recognized as stock-based compensation over a 3 year vesting period.

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

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements may be identified by the use of forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

 

•

our ability to timely and effectively scale and adapt our existing technology and network infrastructure;

 

•

our ability to increase adoption of our platform by our customers’ internal and external users;

 

•

our ability to protect our users’ information and adequately address security and privacy concerns;

 

•

our ability to maintain an adequate rate of growth;

 

•

our ability to successfully develop, market and sell new products;

 

•

our future expenses;

 

•

the effects of increased competition in our market;

 

•

our ability to effectively manage our growth;

 

•

our ability to successfully enter new markets and manage our international expansion;

 

•

our ability to maintain, protect and enhance our brand and intellectual property; and

 

•

the attraction and retention of qualified employees and key personnel.

These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Please refer to Item 1A. Risk Factors in this Quarterly Report on Form 10-Q, for a discussion of reasons why our actual results may differ materially from our forward-looking statements. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.

Overview

We provide a social business software platform that improves business results by enabling a more productive and effective workforce through enhanced communications and collaboration both inside and outside the enterprise. Organizations deploy our platform to improve employee productivity, enhance revenue opportunities, lower operational costs, increase customer retention and improve strategic decision making. Our platform is offered on a subscription basis, deployable in a private or public cloud and used for internal or external communities. We generate revenues from platform license fees as well as from professional service fees for configuration, implementation and training.

 

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We sell our comprehensive Jive Social Business Platform across two principal communities: internally for employees within the enterprise and externally for customers and partners outside the enterprise. Internally focused communities comprised 64.6% of our Jive Social Business Platform revenues in the first nine months of 2012. As the market for social business software within the enterprise continues to grow, we expect revenues from internally focused communities to continue to be higher than revenues generated from externally focused communities.

We offer our platform both as a public cloud service and as a private cloud solution. In March 2012, we released Jive Cloud, one of our public cloud services that is on a quarterly release cycle and is a non-customizable version of our platform. Additionally, in May 2012, we released Try Jive, a 30-day free trial version of the Jive Cloud offering. Try Jive is targeted at departments within larger organizations with the intent of driving viral adoption organically within the enterprise. In the first nine months of 2012, product revenues from all public cloud deployments, including Jive Cloud, represented 62.4% of total product revenues. With the release of Jive Cloud and Try Jive, we anticipate that, over the long-term, public cloud deployments of our platform will comprise an ever-increasing portion of our business.

Historically, we have generated the largest portion of our revenues from sales to customers within the United States. Revenues from customers in the United States accounted for 77.8% of total revenues in the first nine months of 2012. We are continuing to focus on expanding our sales headcount and channel partners internationally, and we anticipate the percentage of our revenues generated outside of the United States will increase in the future.

Our fourth quarter has historically been our strongest quarter for new billings and renewals This pattern may be amplified over time if the number of customers with renewal dates occurring in the fourth quarter continues to increase. Furthermore, our quarterly sales cycles are frequently weighted toward the end of the quarter, with an increased volume of sales in the last few weeks of each quarter. The year-over-year compounding effect of this seasonality in billing patterns and overall new business and renewal activity causes the value of invoices that we generate in the fourth quarter to continually increase in proportion to our billings in the other three quarters of our fiscal year. We expect this trend to continue in the fourth quarter of 2012 and in future years.

Critical Accounting Policies and the Use of Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, result primarily from the need to make estimates about the effects of matters that are inherently uncertain.

Management’s Discussion and Analysis and Note 2 to the Consolidated Financial Statements in our 2011 Annual Report on Form 10-K describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. During the first nine months of 2012, there were no significant changes in our critical accounting policies or estimates from those reported in our 2011 Annual Report on Form 10-K, which was filed with the SEC on March 12, 2012.

New Accounting Pronouncements

See Note 12 of the Condensed Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements.

 

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Non-GAAP Key Metrics

In addition to GAAP metrics such as total revenues and gross margin, we also regularly review billings, a non-GAAP measure, and the number of Jive Social Business Platform customers to evaluate our business, measure our performance, identify trends affecting our business, allocate capital and make strategic decisions.

Billings

The following tables set forth a reconciliation of total revenues to billings (dollars in thousands):

 

		Three Months Ended September 30,								Dollar Change				% Change
		2012				2011
Total revenues		$	28,873			$	20,819			$	8,054				38.7	%
Deferred revenue, end of period			97,554				64,304				33,250				51.7	%
Less: deferred revenue, beginning of period			(87,482	)			(58,644	)			(28,838	)			49.2	%
Billings		$	38,945			$	26,479			$	12,466				47.1	%

 

		Nine Months Ended September 30,								Dollar Change				% Change
		2012				2011
Total revenues		$	81,141			$	54,771			$	26,370				48.2	%
Deferred revenue, end of period			97,554				64,304				33,250				51.7	%
Less: deferred revenue, beginning of period			(77,826	)			(50,195	)			(27,631	)			55.1	%
Billings		$	100,869			$	68,880			$	31,989				46.4	%

We monitor billings, a non-GAAP measure, in addition to other financial measures presented in accordance with GAAP to manage our business, make planning decisions, evaluate our performance and allocate resources. We believe that this non-GAAP measure offers valuable supplemental information regarding the performance of our business, and it will help investors better understand the sales volumes and performance of our business.

Our use of billings has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for total revenues or an analysis of our results as reported under GAAP. Some of these limitations are:

 

•

billings is not a substitute for total revenues, as billings are recognized when invoiced, while revenue is recognized ratably over the contract term;

 

•

billings can include fees paid for license terms greater than 12 months and for subscription renewals prior to the expiration of the current subscription term and, therefore, does not always closely match with the timing of delivery of support, maintenance, and hosting services and the costs associated with delivering those services;

 

•

changes to the composition of current period billings may impact the correlation of current period billings to future period revenues;

 

•

billings would not exclude any agreements that contain customer acceptance provisions that would require deferral of revenue required under GAAP; and

 

•

other companies, including companies in our industry, may not use billings, may calculate non-GAAP measures differently or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP measures as comparative measures.

We consider billings a significant performance measure and a leading indicator of future recognized revenue based on our business model of billing for subscription licenses annually and recognizing revenue ratably over the subscription term. The billings we record in any particular period reflect sales to new customers plus subscription renewals and upsell to existing customers, and represent amounts invoiced for product subscription license fees and professional services. We typically invoice our customers for subscription fees in annual increments upon initiation of the initial contract or subsequent renewal. In addition, we also enter into arrangements with customers to purchase subscriptions for a term greater than 12 months, most typically 36 months. For subscriptions greater than 12 months, the customer has the option of being invoiced annually or paying for the full term of the subscription at the time the contract is signed. If the customer elects to pay the full multi-year amount at the time the contract is signed, the total amount billed for the entire term will be reflected in billings. If the customer elects to be invoiced annually, only the amount billed for the 12-month period will be included in billings.

 

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Billings for consulting services typically occur on a bi-weekly basis as the services are delivered.

The increases in billings in the periods presented were primarily driven by the addition of new customers, increased upsell of our products to existing customers, and an increase in customers renewing prior to the period in which their existing subscription term concludes.

Jive Social Business Platform Customers

We define the number of platform customers at the end of any given measurement period by counting every customer under active contract for the Jive Social Business Platform that carries a balance in our deferred revenue account at the end of that period. While a single customer may have multiple internal and external communities to support distinct departments, operating segments or geographies, we only include that customer once for purposes of this metric. We believe the number of Jive Social Business Platform customers is a leading indicator of our future revenues, billings and upsell opportunities.

Our Jive Social Business Platform customer count was as follows:

 

		As of September 30,								Change				% Change
		2012				2011
Jive Social Business Platform customer count			761				657				104				15.8	%

Our product revenues growth was 55.0% in the first nine months of 2012 compared to the first nine months of 2011. Our product revenues have grown at a faster rate than our customer count as we have realized greater upsell with our existing customers and larger average subscription values with new customers.

Components of Results of Operations

Revenues

We generate revenues primarily in the form of software subscription fees and professional services for configuration, implementation and other services related to our software. We offer our products with subscription terms typically ranging from 12 to 36 months. In addition to sales of our platform, our revenues include fees for sales of modules, additional users and page views. While subscription-based licenses make up the substantial majority of our product revenues, in limited instances we license our software to customers on a perpetual basis, with ongoing support and maintenance services. Revenues generated through the sale of subscription licenses also include fees for updates and maintenance. We recognize revenue from professional services ratably over the subscription term when they are bundled with a subscription license, because we do not have fair value of all the various services. These amounts, when recognized, are classified as professional services revenues on our consolidated statements of operations based on the hourly rates at which they are billed.

Cost of Revenues

Cost of product revenues includes all direct costs to produce and distribute our product offerings, including data center and support personnel, depreciation and maintenance related to equipment located at our hosting service provider, salaries, web hosting services expense for public cloud implementations, third-party royalty costs, benefits, amortization of acquired intangible assets and stock-based compensation.

 

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Cost of professional services revenues includes all direct costs to provide our professional services, which primarily include salaries, consulting and outside services, and benefits and stock-based compensation for our professional services personnel. We recognize expenses related to our professional services organization as they are incurred, while the majority of associated professional services revenues are recognized ratably over the subscription term.

Cost of revenues also includes allocated overhead costs for facilities and information technology. Allocated costs for facilities consist of rent and depreciation of equipment and leasehold improvements related to our facilities. Our allocated costs for information technology include costs for compensation of our information technology personnel and the cost associated with our information technology infrastructure. Our overhead costs are allocated to all departments based on headcount.

We expect that cost of revenues may increase in the future depending on the growth rate of our new customers and billings and our need to support the implementation, hosting and support of those new customers. We also expect that cost of revenues as a percentage of total revenues could fluctuate from period to period depending on growth of our services business and any associated costs relating to the delivery of services, the timing of sales of products that have royalties associated with them, the amount and timing of amortization of intangibles from acquisitions and the timing of significant expenditures.

Research and Development

Research and development expenses are expensed as incurred. These expenses include salaries, benefits and stock-based compensation for our engineers and developers, allocated facilities costs and payments to third parties for research and development of new software. We focus our research and development efforts on developing new versions of our platform with new and expanded features and enhancing the ease of use of our platform. We believe that continued investment in our technology is important for our future growth, and, as a result, we expect research and development expenses to increase in absolute dollars although they may fluctuate as a percentage of total revenues.

Sales and Marketing

Sales and marketing expenses primarily consist of salaries, incentive compensation and benefits, travel expense, marketing program fees, partner referral fees and stock-based compensation. Sales incentive compensation is recorded as a component of sales and marketing expense as earned. Sales incentive compensation is earned at the time a customer enters into a binding purchase agreement while associated revenue is recognized ratably over the subscription term. In addition, sales and marketing expenses include customer acquisition marketing, branding, advertising, customer events and public relations costs, as well as allocated facilities costs. We plan to continue investing heavily in sales and marketing to expand our global operations, increase revenues from current customers, build brand awareness and expand our indirect sales channel. We expect sales and marketing expenses to increase in absolute dollars and remain our largest expense in absolute dollars and as a percentage of total revenues, although they may fluctuate as a percentage of total revenues.

General and Administrative

General and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, legal, information technology, human resources and other administrative employees. In addition, general and administrative expenses include legal and accounting services, outside consulting, facilities and other supporting overhead costs not allocated to other departments. We expect that our general and administrative expenses will increase in absolute dollars as we continue to expand our business and incur additional expenses associated with being a publicly traded company.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest expense on our outstanding debt and foreign exchange gains and losses, as well as income related to our investments. In addition, the 2011 period includes changes in the fair value of our Series C preferred stock warrants. The Series C preferred stock warrants were exercised late in the third quarter of 2011 and, therefore, we will not incur charges related to these warrants in subsequent periods.

 

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Provision for Income Taxes

Provision for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign tax jurisdictions. Since we have generated net losses, we have fully reserved against any potential future benefits for loss carryforwards and research and development and other tax credits.

Results of Operations

The following tables set forth our statement of operations data, both in absolute dollars and as a percentage of total revenues (dollars in thousands):

 

		Three Months Ended September 30, 2012(1)(2)								Three Months Ended September 30, 2011(1)(2)
Revenues:
Products		$	25,861				89.6	%		$	17,493				84.0	%
Professional services			3,012				10.4	%			3,326				16.0	%
Total revenues			28,873				100.0	%			20,819				100.0	%
Cost of revenues:
Products			7,788				27.0	%			6,147				29.5	%
Professional services			3,474				12.0	%			3,095				14.9	%
Total cost of revenues			11,262				39.0	%			9,242				44.4	%
Gross profit (loss):
Products			18,073				62.6	%			11,346				54.5	%
Professional services			(462	)			(1.6	)%			231				1.1	%
Total gross profit			17,611				61.0	%			11,577				55.6	%
Operating expenses:
Research and development			9,845				34.1	%			7,537				36.2	%
Sales and marketing			14,800				51.3	%			12,297				59.1	%
General and administrative			4,127				14.3	%			3,901				18.7	%
Total operating expenses			28,772				99.7	%			23,735				114.0	%
Loss from operations			(11,161	)			(38.7	)%			(12,158	)			(58.4	)%
Other income (expense), net(3)			5				0.0	%			4,635				22.3	%
Loss before provision (benefit) for income taxes			(11,156	)			(38.6	)%			(7,523	)			(36.1	)%
Provision (benefit) for income taxes			132				0.5	%			57				0.3	%
Net loss		$	(11,288	)			(39.1	)%		$	(7,580	)			(36.4	)%
Basic and diluted net loss per common share		$	(0.18	)						$	(0.31	)
Shares used in per share calculations			62,921								24,836

 

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		Nine Months Ended September 30, 2012(1)(2)								Nine Months Ended September 30, 2011(1)(2)
Revenues:
Products		$	71,436				88.0	%		$	46,092				84.2	%
Professional services			9,705				12.0	%			8,679				15.8	%
Total revenues			81,141				100.0	%			54,771				100.0	%
Cost of revenues:
Products			21,745				26.8	%			15,208				27.8	%
Professional services			11,055				13.6	%			9,146				16.7	%
Total cost of revenues			32,800				40.4	%			24,354				44.5	%
Gross profit (loss):
Products			49,691				61.2	%			30,884				56.4	%
Professional services			(1,350	)			(1.7	)%			(467	)			(0.9	)%
Total gross profit			48,341				59.6	%			30,417				55.5	%
Operating expenses:
Research and development			27,327				33.7	%			23,320				42.6	%
Sales and marketing			40,737				50.2	%			31,757				58.0	%
General and administrative			11,680				14.4	%			9,120				16.7	%
Total operating expenses			79,744				98.3	%			64,197				117.2	%
Loss from operations			(31,403	)			(38.7	)%			(33,780	)			(61.7	)%
Other income (expense), net(3)			(213	)			(0.3	)%			(8,068	)			(14.7	)%
Loss before provision (benefit) for income taxes			(31,616	)			(39.0	)%			(41,848	)			(76.4	)%
Provision (benefit) for income taxes			246				0.3	%			(3,710	)			(6.8	)%
Net loss		$	(31,862	)			(39.3	)%		$	(38,138	)			(69.6	)%
Basic and diluted net loss per common share		$	(0.51	)						$	(1.61	)
Shares used in per share calculations			62,100								23,741

 

(1)	Stock-based compensation was included in our statements of operations data as follows (in thousands):

 

		Three Months Ended September 30, 2012(2)								Three Months Ended September 30, 2011(2)
Cost of revenues		$	627				2.2	%		$	155				0.7	%
Research and development			1,705				5.9	%			806				3.9	%
Sales and marketing			1,436				5.0	%			1,988				9.5	%
General and administrative			1,260				4.4	%			1,180				5.7	%
		$	5,028				17.4	%		$	4,129				19.8	%

 

		Nine Months Ended September 30, 2012(2)								Nine Months Ended September 30, 2011(2)
Cost of revenues		$	1,413				1.7	%		$	311				0.6	%
Research and development			4,185				5.2	%			1,764				3.2	%
Sales and marketing			2,890				3.6	%			3,234				5.9	%
General and administrative			3,789				4.7	%			2,215				4.0	%
		$	12,277				15.1	%		$	7,524				13.7	%

 

(2)	Percentages may not add due to rounding.

(3)

Non-cash income (expense) recorded in other income (expense), net in the three and nine months ended September 30, 2011 included $5.2 million and $(7.2) million, respectively, related to the change in fair value of our preferred stock warrant liability. The preferred stock warrants were exercised during the third quarter of 2011 and, accordingly, we will not incur charges related to this warrant in future periods.

 

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Revenues

Certain revenue information was as follows (dollars in thousands):

 

		Three Months Ended Sept. 30,								Dollar Change				% Change
		2012				2011
Products		$	25,861			$	17,493			$	8,368				47.8	%
Professional services			3,012				3,326				(314	)			(9.4	)%
Total revenues		$	28,873			$	20,819			$	8,054				38.7	%

 

		Nine Months Ended Sept. 30,								Dollar Change				% Change
		2012				2011
Products		$	71,436			$	46,092			$	25,344				55.0	%
Professional services			9,705				8,679				1,026				11.8	%
Total revenues		$	81,141			$	54,771			$	26,370				48.1	%

Products Revenues

The increases in products revenues in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily the result of the increase in the average subscription value of a customer on an annual basis, as a result of the realization of greater upsell on our existing customers, and increases in the aggregate number of customers on the Jive Social Business Platform, which grew from 657 as of September 30, 2011 to 761 as of September 30, 2012.

Certain revenue information was as follows:

 

		Three Months  Ended September 30,								Nine Months  Ended September 30,
		2012				2011				2012				2011
Revenues from customers in the United States as percentage of total product revenues			78.0	%			79.0	%			77.8	%			78.9	%
Revenues from customers outside the United States as percentage of total product revenues			22.0	%			21.0	%			22.2	%			21.1	%

 

		Three Months  Ended September 30,								Nine Months  Ended September 30,
		2012				2011				2012				2011
Revenues from public cloud deployments as percentage of total product revenues			62.2	%			63.4	%			62.4	%			60.6	%
Revenues from private cloud deployments as percentage of total product revenues			37.8	%			36.6	%			37.6	%			39.4	%

 

		Three Months  Ended September 30,								Nine Months  Ended September 30,
		2012				2011				2012				2011
Percentage of Jive Social Business Platform revenues that represented internally focused communities			66.1	%			57.5	%			64.6	%			56.5	%
Percentage of Jive Social Business Platform revenues that represented externally focused communities			33.9	%			42.5	%			35.4	%			43.5	%

Professional Services Revenues

In the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 professional services revenues as a percent of product revenues decreased by 7 percentage points and 5 percentage points, respectively, as continued enhancements of the core product have decreased the amount of customization requested by customers. This was also driven by our most recent release, Jive Cloud, a public cloud, non-customizable version of our Jive Social Business Platform.

 

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Cost of Revenues and Gross Margins

Cost of revenues information was as follows (dollars in thousands):

 

		Three Months Ended Sept. 30,								Dollar Change				% Change
(Dollars in thousands)		2012				2011
Cost of revenues: products		$	7,788			$	6,147			$	1,641				26.7	%
Products gross margin			69.9	%			64.9	%
Cost of revenues: professional services		$	3,474			$	3,095			$	379				12.2	%
Professional services gross margin			(15.3	)%			6.9	%

 

		Nine Months Ended Sept. 30,								Dollar Change				% Change
(Dollars in thousands)		2012				2011
Cost of revenues: products		$	21,745			$	15,208			$	6,537				43.0	%
Products gross margin			69.6	%			67.0	%
Cost of revenues: professional services		$	11,055			$	9,146			$	1,909				20.9	%
Professional services gross margin			(13.9	)%			(5.4	)%

Cost of Revenues: Products

The increases in cost of revenues for products in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to the increases in products revenues and included a $0.9 million and a $2.9 million increase, respectively, in salaries and benefits related to increased headcount in our operations and support personnel, increases in depreciation expense of $0.5 million and $1.6 million, respectively, and increases in allocations for IT and facilities costs of $0.2 million and $0.5 million, respectively. The three-month period includes increases in miscellaneous expenses of $0.2 million. The nine-month period includes a $0.5 million increase in subscription and third-party hosting services, a $0.6 million increase in third-party royalties, and a $1.2 million increase in intangible asset amortization. These factors were partially offset by decreases in third-party consulting fees of $0.2 million and $0.7 million, respectively.

The increases in expenses in products cost of revenue in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were attributable to depreciation related to the build-out of our Phoenix, Arizona data center and increased headcount in our hosting department, which grew from 26 employees as of September 30, 2011 to 29 employees as of September 30, 2012, due to the increases in mix of revenue towards our public cloud deployment models, our programs to scale our public cloud capabilities for future growth, and increases in amortization of acquired intangibles as a result of acquisitions made in the first half of 2011. Additionally, headcount in our support organization grew from 30 as of September 30, 2011 to 43 as of September 30, 2012. The increase in products gross margin was driven by efficiencies gained through utilization of our internally managed data centers as we continue to transition our existing public cloud customers from a third-party hosting service, as well as deploying our new public cloud customers directly to our managed data centers.

Cost of Revenues: Professional Services

In the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011, cost of revenues for professional services related to salaries and benefits increased $0.4 million and $1.8 million, respectively. The nine-month period also includes a $0.1 million increase within travel and consulting costs.

The decreases in the professional services gross margin in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to lower professional service revenues as a percentage of total revenues, as a result of our most recent release, Jive Cloud, which is a non-customizable version of our Jive Social Business Platform.

 

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Additionally, we offer professional services on both fixed fee and time and materials hourly billing arrangements. For time and materials-based professional services that are part of a multiple-element arrangement where the fees for the professional services are not fixed or determinable upon delivery of the software, revenue is recognized ratably over the contract term as the related fees become fixed. We also sell professional services separately, outside of multiple-element arrangements, and recognize revenues resulting from those as professional services are delivered. Professional services revenues recognized from non-multiple-element arrangements, as a percentage of total professional services revenues, in the three-month and nine-month periods ended September 30, 2012 were 22.8 and 10.9 percentage points less, respectively, than the three-month and nine-month periods ended September 30, 2011, resulting in a greater percentage of the professional services revenues related to professional services performed in the current three-month period being recognized ratably over the contract term, which typically extends beyond the current period.

Furthermore, professional services are typically delivered in the period subsequent to the period in which the agreement for services was entered into. We experienced decreased utilization of our existing full-time professional services employees in the three-month period ended September 30, 2012, compared to the three month period ended September 30, 2011 as the dollar value of agreements for professional services entered into in the three month period ended June 30, 2012 was less than the three month period ended June 30, 2011, as a percent of the total dollar value of all products and professional services sales agreements.

Research and Development Costs

 

		Three Months Ended Sept. 30,								Dollar Change				% Change
(Dollars in thousands)		2012				2011
Research and development		$	9,845			$	7,537			$	2,308				30.6	%
Percentage of total revenues			34.1	%			36.2	%

 

		Nine Months Ended Sept. 30,								Dollar Change				% Change
(Dollars in thousands)		2012				2011
Research and development		$	27,327			$	23,320			$	4,007				17.2	%
Percentage of total revenues			33.7	%			42.6	%

The increases in research and development expenses in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to increases in salaries and benefits of $2.3 million and $6.1 million, respectively and increases in allocations for IT and facilities, subscription services, and depreciation of $0.2 million and $0.5 million, respectively. The increases in salaries and benefits were a result of increasing our research and development headcount from 126 as of September 30, 2011 to 164 as of September 30, 2012, and include a $0.9 million and a $2.4 million increase in stock-based compensation, respectively. The increase in the three-month period ended September 30, 2012 was partially offset by a decrease in professional fees of $0.2 million. The increase in the nine-month period ended September 30, 2012 was partially offset by acquisition related expenses incurred in the first quarter of 2011 associated with the acquisition of Proximal Labs, Inc., which included $1.6 million in bonuses, as well as $1.0 million in amortization expense related to in process research and development that was fully expensed at the time of acquisition.

Sales and Marketing

 

		Three Months Ended Sept. 30,								Dollar Change				% Change
(Dollars in thousands)		2012				2011
Sales and marketing		$	14,800			$	12,297			$	2,503				20.4	%
Percentage of total revenues			51.3	%			59.1	%

 

		Nine Months Ended Sept. 30,								Dollar Change				% Change
(Dollars in thousands)		2012				2011
Sales and marketing		$	40,737			$	31,757			$	8,980				28.3	%
Percentage of total revenues			50.2	%			58.0	%

 

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The increases in sales and marketing expenses in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to increases in salaries and benefits of $1.2 million and $5.8 million, respectively, an increase in travel costs of $0.2 million and $0.9 million, respectively, and an increase in allocations for IT and facilities as well as subscription services of $0.2 million and $0.7 million, respectively, all primarily as a result of increasing our sales and marketing headcount from 115 as of September 30, 2011 to 140 as of September 30, 2012. The increases in the three and nine month-periods ended September 30, 2012 were also attributable to increases in general marketing spending of $0.7 million and $1.2 million, respectively, related to our Try Jive and Jive Live Tour marketing campaigns, as well as an increase of $0.2 million and $0.4 million in consulting fees, respectively.

General and Administrative

 

		Three Months Ended Sept. 30,								Dollar Change				% Change
(Dollars in thousands)		2012				2011
General and administrative		$	4,127			$	3,901			$	226				5.8	%
Percentage of total revenues			14.3	%			18.7	%

 

		Nine Months Ended Sept. 30,								Dollar Change				% Change
(Dollars in thousands)		2012				2011
General and administrative		$	11,680			$	9,120			$	2,560				28.1	%
Percentage of total revenues			14.4	%			16.7	%

The increases in general and administrative expenses in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to increases in salaries and benefits of $0.6 million and $3.2 million, respectively, which were primarily as a result of increased headcount. The increases were also driven by stock-based compensation expense, which generated $0.1 million and $1.6 million, respectively, of the total increases in salaries and benefits. General and administrative headcount grew from 39 as of September 30, 2011 to 54 as of September 30, 2012.

The increases in general and administrative expenses in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were, to a lesser extent, also driven by increases in depreciation from both facilities and IT capital additions of $0.1 million and $0.3 million, respectively, as well as an increase in office fees of $0.3 million for the nine-month period ended September 30, 2012 compared to the same period in 2011. These increases were partially offset by decreases in overhead allocations out of general and administrative to the other functions based on relative headcount of $0.5 million and $1.3 million, respectively.

Other Income (Expense), net

 

		Three Months Ended Sept. 30,								Dollar Change				% Change
(Dollars in thousands)		2012				2011
Other income, net		$	5			$	4,635			$	(4,630	)			(99.9	)%
Percentage of total revenues			0.0	%			22.3	%

 

		Nine Months Ended Sept. 30,								Dollar Change				% Change
(Dollars in thousands)		2012				2011
Other expense, net		$	(213	)		$	(8,068	)		$	7,855				(97.4	)%
Percentage of total revenues			(0.3	)%			(14.7	)%

The changes in other income (expense), net in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to the exercise of the Series C preferred stock warrants in the third quarter of 2011. Accordingly, we did not have income or expense related to these warrants in the first nine months of 2012. The income (expense) in the three and nine months ended September 30, 2011 related to the Series C preferred stock warrant was $5.2 million and $(7.2) million, respectively.

 

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Provision (Benefit) For Income Taxes

 

		Three Months Ended Sept. 30,
(Dollars in thousands)		2012				2011
Provision for income taxes		$	132			$	57
Percentage of loss before income taxes			1.2	%			0.8	%

 

		Nine Months Ended Sept. 30,
(Dollars in thousands)		2012				2011
Provision (benefit) for income taxes		$	246			$	(3,710	)
Percentage of loss before income taxes			0.8	%			(8.9	)%

In both the 2012 and 2011 periods, we recorded income taxes that were principally attributable to state and foreign taxes. We currently believe that the recognition of the deferred tax assets arising from future tax benefits as a result of our losses before provision for income taxes is not more likely than not to be realized. We therefore continued to record valuation allowances against our deferred tax assets and, accordingly, benefits generated related to losses were offset by increases in the valuation allowance.

Additionally, in the nine months ended September 30, 2011, in connection with the acquisition of OffiSync Corporation (“OffiSync”), a deferred tax liability, of $3.9 million was established for the book tax basis differences related to specifically identified non-goodwill intangibles. The net liability from the acquisition created an additional source of income to utilize a portion of our deferred tax assets and therefore, a corresponding amount of the valuation allowance was released.

Liquidity and Capital Resources

 

		Nine Months Ended Sept. 30,
(Dollars in thousands)		2012				2011
Cash flows provided by (used in) operating activities		$	4,752			$	(7,071	)
Cash used in investing activities			(128,788	)			(28,729	)
Cash provided by financing activities			860				65,057
Increase (decrease) in cash and cash equivalents		$	(123,176	)		$	29,257

We have financed our operations primarily through issuances of preferred stock, borrowings under our credit facility, cash generated from customer sales and our initial public offering (“IPO”), which closed on December 16, 2011.

Our principal source of liquidity at September 30, 2012 consisted of $57.5 million of cash and cash equivalents and $84.0 million of short-term marketable securities. Our principal needs for liquidity include funding our operating losses, working capital requirements, capital expenditures, debt service and acquisitions. We believe that our available resources are sufficient to fund our liquidity requirements for at least the next 12 months from September 30, 2012.

Cash Flows from Operating Activities

Cash flows provided by operating activities were $4.8 million during the first nine months of 2012 compared to cash used by operating activities of $7.1 million in the first nine months of 2011. The improvement in cash flows generated from operating activities primarily resulted from changes in our operating assets and liabilities. Changes to our operating cash flows are historically impacted by the growth in our quarterly calculated billings and our ability to maintain or improve the timeframe to collect the cash from outstanding accounts receivable, or days billings outstanding, offset by funding our growth and working capital needs.

The $4.8 million of cash provided by operating activities in the first nine months of 2012 resulted from our net loss of $31.9 million, offset by net non-cash charges of $19.4 million and changes in our operating assets and liabilities as discussed below.

 

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Accounts receivable, net increased $3.9 million to $35.9 million at September 30, 2012 compared to $32.0 million at December 31, 2011, primarily as a result of a $2.9 million increase in billings in the third quarter of 2012 compared to the fourth quarter of 2011. Additionally, we had a decrease of $0.4 million in invoices that were billed and collected in the same period at September 30, 2012 compared to December 31, 2011 and an increase in days billings outstanding to 84 days in the quarter ended September 30, 2012 compared to 82 days in the quarter ended December 31, 2011. Refer to “Overview” for additional discussion around the seasonality of our business.

Accounts payable and other accrued liabilities increased $2.0 million to $11.7 million at September 30, 2012 compared to $9.7 million at December 31, 2011, primarily due to timing of payments and the seasonality of our business.

Accrued payroll and related liabilities decreased $1.1 million to $5.7 million at September 30, 2012 compared to $6.6 million at December 31, 2011, primarily due to a decrease in accrued commissions as a result of average commission rates in the third quarter of 2012 compared to the fourth quarter of 2011, as well as a decrease in accrued bonuses as a result of our second half 2011 management bonus being paid in the first quarter of 2012.

Deferred revenue increased $19.8 million to $97.6 million at September 30, 2012 compared to $77.8 million at December 31, 2011, primarily due to new business and renewal-related billings, as well as billings for multi-year commitments, in the first nine months of 2012.

Operating activities used $7.1 million of cash in the first nine months of 2011, which primarily resulted from our net loss of $38.1 million, due primarily to the significant investments we made to grow our business, adjusted for net non-cash charges of $16.0 million and changes in our operating assets and liabilities, primarily accounts receivable, accounts payable and deferred revenue.

Cash Flows from Investing Activities

Our primary investing activities have consisted of purchases of investments, purchases of property and equipment primarily related to the build out of our data centers, as well as payments for intangible assets and acquisitions. We continue to invest the proceeds from our IPO, and we made net investments of $128.8 million in the first nine months of 2012, which included $119.4 million in purchases of marketable securities and $9.4 million used for purchases of property and equipment. We anticipate spending approximately $1 million to $3 million for the purchase of property and equipment in the last quarter of 2012, primarily for the continued build-out of our data centers in order to scale our capacity with our revenue growth.

Cash Flows from Financing Activities

Our financing activities have consisted primarily of borrowings and repayments under out revolving credit facilities and the net proceeds from the issuance of common stock from employee option exercises. Cash provided by financing activities of $0.9 million in the first nine months of 2012 resulted from $3.7 million in cash receipts related to stock option exercises being offset by $1.9 million in principal payments on our term debt, as well as $1.0 million in payments for offering expenses associated with our initial public offering in December 2011, which were accrued at December 31, 2011.

Debt Arrangements

Term Loan

In May 2012, we entered into a secured revolving loan facility and term loan facility of up to $30.0 million and terminated the previously outstanding credit facility agreement. Revolving loans may be converted into term loans under the facility, with all outstanding term loans reducing the availability under the revolving loan facility. As of September 2012, we have outstanding a $11.4 million term loan under the secured revolving loan facility and term loan facility as a result of refinancing $12 million of previously existing term loans in May 2012. Interest is accrued, at our option, at (i) an adjusted LIBOR rate, plus a margin of 2.0% or 2.25%, or (ii) the prime rate, plus a margin of 0.25% or 0.50%, in each case with such margin determined based on our adjusted quick ratio. The interest rate on this loan at September 30, 2012 was 2.39%. Repayment began July 1, 2012, and is payable in 16 quarterly installment payments. Each of the installment payments is $0.75 million, plus accrued interest.

 

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, other than operating leases and commitments under non-cancelable purchase orders discussed in Note 9 of the Notes to the Consolidated Financial Statements in this Quarterly Report Form 10-Q, that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations or commitments since December 31, 2011.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, primarily changes in interest rates and currency exchange rates.

Interest Rate Risk

Our exposure to market risk for changes in interest rates primarily relates to our investments, our revolving credit facility and our variable-rate, long-term debt.

The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This objective is accomplished by making diversified investments, consisting only of investment grade securities.

As of September 30, 2012, we held cash and cash equivalents and marketable securities of $176.9 million. Based on the nature of our marketable securities, a decline in interest rates over time would reduce our interest income, but would not have a material impact on our results of operations, financial position or cash flows, as we have classified our securities as available-for-sale and, therefore, may choose to sell or hold them as changes in the market occur. In addition, due to the nature of our highly liquid cash equivalents, a change in interest rates would not materially affect the fair value of our cash equivalents.

Our credit facility and term loan bear interest at a variable rate tied to the prime rate or LIBOR. Based on amounts outstanding at September  30, 2012, a 10% increase in the prime or LIBOR rate would not materially increase our interest expense.

Item  4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Management, with the participation of our chief executive officer and our chief financial officer and review of our Audit Committee, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2012, our chief executive officer and chief financial officer and our Audit Committee concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

Risks Related to our Business and Industry

We have a history of cumulative losses and we do not expect to be profitable for the foreseeable future.

We have incurred losses in each of the last five years, including a net loss of $50.8 million in 2011 and a net loss of $31.9 million in the first nine months of 2012. At September 30, 2012, we had an accumulated deficit of $136.6 million. As we continue to invest in infrastructure, development of our solutions, international expansion and sales and marketing, our operating expenses will continue to increase. Additionally, to accommodate future growth, we are in the process of transitioning our customer data centers from third-party service providers to co-located facilities managed by our internal hosting operations team. This transition has required and will continue to require significant up front capital expenditures and these costs and expenses may exceed the rate which realize any associated incremental billings or revenues. As a result, our losses in future periods may be significantly greater than the losses we would incur if we developed our business more slowly. In addition, we may find that these efforts are more expensive than we currently anticipate or that they may not result in increases in our revenues or billings or provide the gross margin improvements we anticipated. Although we have experienced revenue growth in recent periods, you should not consider our recent revenue growth or growth rates as indicative of our future performance. We do not expect to be profitable on a GAAP basis in the foreseeable future and we cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability.

We have a limited operating history, which makes it difficult to predict our future operating results.

Although we were incorporated in 2001, our current platform, the Jive Social Business Platform, was not introduced until 2007 and, at that time, we began offering our platform on a subscription basis for internal and external communities. As a result of our limited operating history, our ability to forecast our future operating results is limited and subject to a number of uncertainties, including our ability to plan for and model future growth.

 

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We have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described in this report. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.

Our future growth is, in large part, dependent upon the widespread adoption of social business software by enterprises and it is difficult to forecast the rate at which this will happen.

Social business software for enterprises is still at an early stage of technological and market development and the extent to which social business software will become widely adopted remains uncertain. It is difficult to predict customer adoption rates, customer demand for our platform, the future growth rate and size of this market or the entry of competitive solutions. Any expansion of the social business software market depends on a number of factors, including the cost, performance and perceived value and benefits associated with social business software. If social business software does not achieve widespread adoption, or there is a reduction in demand for social business software caused by a lack of customer acceptance, technological challenges, weakening economic conditions, competing technologies and products, decreases in corporate spending or otherwise, it could result in lower billings, reduced renewal rates and decreased revenues and our business could be adversely affected. Additionally, mergers or consolidations among our customers could reduce the number of our customers and could adversely affect our revenues and billings. In particular, if our customers are acquired by entities that are not our customers, are customers of our competitors, or that use fewer of our solutions, or that have more favorable contract terms and choose to discontinue, reduce or change the terms of their use of our platform, our business and operating results could be materially and adversely affected.

Additionally, in May 2012 we launched “Try Jive”, a free 30 day trial to our cloud-based offering platform. The goal of this trial is to make it easier for customers to start using our platform with the strategy of increasing viral adoption within each of our customers. If this new offering is not successful, we may not achieve the revenue growth we anticipated, thereby potentially not recovering the investments we made in engineering, marketing and the expansion of our sales force, and our operating results could be adversely affected.

The market for social business software is in its early stages of development and intensely competitive, and if we do not compete effectively, our business would be harmed.

The market for social business software is relatively new, highly competitive and rapidly evolving with new competitors entering the market. We expect the competitive landscape to continue to intensify in the future as a result of regularly evolving customer needs and frequent introductions of new products and services. We currently compete with large well-established multi-solution enterprise software vendors, stand-alone enterprise software application providers, and smaller software application vendors. Our primary competition currently comes from large well-established enterprise software vendors such as Microsoft Corporation and IBM Corporation, both of which are significantly larger than we are, have greater name recognition, larger customer bases, much longer operating histories, significantly greater financial, technical, sales, marketing and other resources, and are able to provide comprehensive business solutions that are broader in scope than the solutions we offer. These well-established vendors may have preexisting relationships with our existing and potential customers and to the extent our solutions are not viewed as being superior in features, function and integration or priced competitively to existing solutions, we might have difficulty displacing them. We also compete with stand-alone enterprise software applications that have begun adding social features to their existing offerings, including salesforce.com, inc. Some of these companies have large installed bases of active customers that may prefer to implement social business software solutions that are provided by an existing provider of customer management software, and these companies may be able to offer discounts and other pricing incentives that make their solutions more attractive. In addition, large social and professional networking providers with greater name recognition, financial resources and other resources may add social business applications to their existing applications, resulting in increased competition. For example, in June 2012, Microsoft Corporation acquired Yammer, Inc., an early stage private company that provides social networking capabilities to the enterprise. To the extent that Microsoft is successful in combining these acquired social networking capabilities with their existing products, we could experience increased competition and could adversely affect our billings, revenues, and margins.

 

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Several early stage private social business software companies have obtained significant financing, which could enable these competitors to offer products at lower prices or at no cost, execute deeper and broader marketing programs, expand their product offerings and functionality in a rapid manner and significantly increase the size of their sales force; all of which could adversely affect our billings, revenues, and margins.

Some potential customers, particularly large enterprises, may elect to develop their own internal solutions. In addition, some of our competitors offer their solutions at a lower price or at no cost, which has resulted in pricing pressures and increased competition. If we are unable to price our solutions appropriately, our operating results could be negatively impacted. In addition, lower margins, pricing pressures and increased competition generally could result in reduced sales and billings, losses or the failure of our platform to achieve or maintain more widespread market acceptance, any of which could harm our business. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their product offerings or resources. Certain current competitors have been, and current or potential competitors may be, acquired by third parties with greater available resources and as a result of such acquisitions, might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their solutions, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their offerings more quickly than we do. If we are unable to compete effectively for a share of our market, our business, operating results and financial condition could be materially and adversely affected.

We cannot accurately predict new subscription, subscription renewal or upsell rates and the impact these rates may have on our future revenues and operating results.

In order for us to improve our operating results and continue to grow our business, it is important that we continually attract new customers and that existing customers renew their subscriptions with us when their existing contract term expires. Our existing customers have no contractual obligation to renew their subscriptions after the initial subscription period and we cannot accurately predict renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including, but not limited to, their satisfaction with our platform and our customer support, the level of usage of our platform within their enterprise, the frequency and severity of outages, our product uptime or latency, the pricing of our, or competing, software or professional services, the effects of global economic conditions, and reductions in spending levels or changes in our customers’ strategies regarding social collaboration tools. If our customers renew their subscriptions, they may renew for fewer users or page views, for shorter contract lengths, or on other terms that are less economically beneficial to us. If customers enter into shorter initial subscription periods, the risk of customers not renewing their subscriptions with us would increase and our billings may be adversely impacted. We have limited historical data with respect to rates of customer renewals, so we may not accurately predict future renewal trends. We cannot assure you that our customers will renew their subscriptions, and if our customers do not renew their agreements or renew on less favorable terms, our revenues may grow more slowly than expected or decline and our billings may be adversely impacted.

To the extent we are successful in increasing our customer base, we could incur increased losses because costs associated with generating customer agreements and performing services are generally incurred up front, while revenue is recognized ratably over the term of the agreement. This risk is particularly applicable for those customers who choose to deploy our platform in the public cloud. If new customers sign agreements with short initial subscription periods and do not renew their subscriptions, our operating results could be negatively impacted due to the upfront expenses associated with our sales and implementation efforts. Alternatively, to the extent we are unsuccessful in increasing our customer base, we could also incur increased losses because costs associated with marketing programs and new products intended to attract new customers would not be offset by future incremental revenues and cash flow.

 

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In order for us to improve our operating results, it is important that our customers make additional significant purchases of our functionality and offerings, including additional communities, modules, users or page views or professional services. If our customers do not purchase additional functionality or offerings, our revenues may grow more slowly than expected. Additionally, increasing incremental sales to our current customer base requires increasingly sophisticated and costly sales efforts that are targeted at senior management. We also invest various resources targeted at expanding the utilization rates of our platform. There can be no assurance that our efforts would result in increased sales to existing customers, or upsells, and additional revenues. If our efforts to upsell to our customers are not successful, our business would suffer.

Additionally, our quarterly sales cycles are frequently more heavily weighted toward the end of the quarter, with an increased volume of sales in the last few weeks of the quarter. If this trend continues or becomes more weighted towards the end of the quarter, it could negatively impact the timing of recognized revenues, the timing of cash collections and delivery of professional services in subsequent periods. Furthermore, the concentration of contract negations in the last few weeks of the quarter could require us to hire additional sales, legal and finance employees.

Our quarterly results are likely to fluctuate due to a number of factors, and the value of our stock could decline substantially.

Our quarterly operating results are likely to fluctuate as a result of a variety of factors, many of which are outside our control. If our quarterly financial results fall below the expectations of investors or any securities analysts who follow our stock, the price of our common stock could decline substantially. Fluctuations in our quarterly financial results may be caused by a number of factors, including, but not limited to, the following:

 

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the renewal rates for our platform;

 

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upsell rates for our solutions and services;

 

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changes in deferred revenues balances due to changes in the average duration of subscriptions, rate of renewals, timing of renewal billings and the rate of new business growth;

 

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changes in the composition of current period billings;

 

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changes in the mix of the average term length and payment terms;

 

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order sizes in any given quarter;

 

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the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;

 

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changes in our pricing policies, whether initiated by us or as a response to competitive or other factors;

 

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the cost and timing associated with, and management effort for, the introduction of new features to our platform;

 

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the rate of expansion and productivity of our sales force;

 

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the length of the sales cycle for our platform;

 

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changes in our go-to-market strategy;

 

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the success of our international expansion strategy;

 

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new solution introductions by our competitors;

 

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our success in selling our platform to large enterprises;

 

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general economic conditions that may adversely affect either our customers’ ability or willingness to purchase additional subscriptions or a larger deployment, or hinder or delay a prospective customer’s purchasing decision, or reduce the value of new subscriptions, or affect renewal rates or the timing of renewals;

 

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timing of additional investments in the development of our platform or deployment of our services;

 

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disruptions in our hosting services or our inability to meet service level agreements and any resulting refunds to customers;

 

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security breaches and potential financial penalties to customers and government entities;

 

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purchases of new equipment and bandwidth in connection with planned data center expansion;

 

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regulatory compliance costs;

 

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the timing of customer payments and payment defaults by customers;

 

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the impact on services margins as a result of the use of third-party contractors to fulfill demand;

 

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costs associated with acquisitions of companies and technologies;

 

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potential goodwill impairment charges related to prior acquisitions;

 

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extraordinary expenses such as litigation or other dispute-related settlement payments;

 

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the impact of new accounting pronouncements; and

 

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the timing of stock awards to employees.

Additionally, our fourth quarter has historically been our strongest quarter for new billings and renewals. This pattern may be amplified over time if the number of customers with renewal dates occurring in the fourth quarter continues to increase. Furthermore, our quarterly sales cycles are frequently weighted toward the end of the quarter, with an increased volume of sales in the last few weeks of each quarter, which may impact our revenues and billings significantly.

We may fail to meet or exceed the expectations of securities analysts and investors, and the market price for our common stock could decline. If one or more of the securities analysts who cover us change their recommendation regarding our stock adversely, the market price for our common stock could decline. Additionally, our stock price may be based on expectations, estimates or forecasts of our future performance that may be unrealistic or may not be achieved. Further, our stock price may be affected by financial media, including press reports and blogs.

Due to our evolving business model, the rapid pace of technological change, the unpredictability of the emerging market in which we participate, and potential fluctuations in future general economic and financial market conditions, we may not be able to accurately forecast our rate of growth. We plan our expense levels and investments on estimates of future revenues and future anticipated rate of growth. We may not be able to adjust our spending quickly enough if the addition of new customers, the upsell rate for existing customers, or the price for which we are able to sell our platform is below our expectations. As a result, we expect that our billings, revenues, operating results and cash flows may fluctuate significantly and comparisons of our billings, revenues, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance.

We believe that our quarterly operating results, including the levels of our revenues and billings, may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of any one quarter as an indication of future performance.

Our sales cycle can be long and unpredictable, particularly with respect to large enterprises, and we may have to delay revenue recognition for some of the more complex transactions, which could harm our business and operating results.

The timing of our sales is difficult to predict. Our sales efforts involve educating our customers, frequently at an executive level, about the use, technical capabilities, security and benefits of our platform. Customers often undertake a prolonged product-evaluation process which frequently involves not only our solutions but also those of our competitors. As we continue to target our sales efforts at large enterprise customers, we will face greater costs, long sales cycles and less predictability in completing some of our sales. In this market segment, the customer’s decision to subscribe to our platform may be an enterprise-wide decision and, if so, may require us to provide even greater levels of education regarding the use and benefits of our platform and may require us to obtain support from multiple departments within the larger enterprise. In addition, prospective enterprise customers may require customized features and functions unique to their business process and may require acceptance testing related to those unique features. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, increasing costs and time required to complete sales and diverting our own sales and professional services resources to a smaller number of larger transactions, while potentially requiring us to delay revenue recognition on some of these transactions until the acceptance requirements have been met.

 

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We rely on a third-party service provider to host some of our solutions and any interruptions or delays in services from this third party could impair the delivery of our products and harm our business.

We currently outsource some of our hosting services to SunGard Availability Services LP, or SunGard. These services are provided by three of SunGard’s data centers worldwide. We do not control the operation of SunGard’s facilities and therefore must rely on SunGard to ensure that our technology and customer data is adequately protected. SunGard’s facilities are vulnerable to damage or interruption from natural disasters, fires, power loss, telecommunications failures and similar events. They are also subject to employee negligence, break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The occurrence of any of these disasters, a decision by SunGard to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our service which would materially impact our customers’ use of our offerings and may result in financial penalties.

Additionally, we are still in the process of transitioning our hosting services to internally managed hosting facilities. These facilities are subject to the same risks as those existing in our SunGard facilities as well as other risks inherent in the fact that we are now managing the infrastructure that hosts our customer communities. These risks include our failure to properly plan for our infrastructure capacity requirements and our inability obtain and maintain the technologies and personnel necessary to cause the hosting services to operate efficiently and in accordance with our contractual commitments including those pertaining to uptime and security.

Furthermore, the availability of our platform could be interrupted by a number of additional factors outside of our hosting facilities, including our customers’ inability to access the Internet, the failure of our network or software systems due to human or other error, security breaches or ability of the infrastructure to handle spikes in customer usage. We may be required to issue credits or refunds or indemnify or otherwise be liable to customers or third parties for damages that may occur resulting from certain of these events. For example, in January 2011, we experienced a hosting outage which impacted some of our customers for up to 14 hours. As a result of this outage, we provided service credits to certain customers. If we experience similar outages in the future, we may experience customer dissatisfaction and potential loss of confidence, which could harm our reputation and impact future revenues from these customers.

A rapid expansion of our business could cause our network or systems to fail.

In the future, we may need to expand our hosting operations at a more rapid pace than we have in the past, spend substantial amounts to purchase or lease data centers and equipment, upgrade our technology and infrastructure to handle increased customer demand and introduce new solutions. For example, if we secure a large customer or a group of customers which require significant amounts of bandwidth, storage, or computing power to enable their community, we may need to increase bandwidth, storage, server deployments, electrical power or other elements of our hosting operations and our existing systems may not be able to scale in a manner satisfactory to our existing or prospective customers. In addition, our sales expansion strategies in Asia and Latin America may require us to set up or partner with hosting providers in those regions, and we may have to spend substantial amounts to purchase or lease new data centers and equipment. Any such expansion could be expensive and complex and result in inefficiencies or operational failures and could reduce our margins.

 

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Our transition from third-party hosted data centers for our public cloud customers to our own managed facilities is expensive and complex, and could result in inefficiencies or operational failure and increased risk.

Our transition from data centers managed by a third-party service provider to co-located facilities managed by our internal hosting operations team is complex, could result in operational inefficiencies or operational failures, and will require significant up front capital expenditures for equipment and infrastructure as well as increased personnel expense. In this regard, we anticipate making capital expenditures of approximately $10 million to $12 million in all of 2012 for purchases of hosting equipment, as well as for additional hosting services. If it takes longer than we expect to complete this transition, there may be a negative impact on our operating results, particularly if the scope of the project grows and we deploy additional resources and hire additional personnel to complete the project. Additionally, to the extent that we are required to add data center capacity to accommodate customer demands for additional bandwidth or storage to enable their communities, we may need to significantly increase the bandwidth, storage, power or other elements of our hosting operations, and the costs associated with adjustments to our data center architecture could also negatively affect our margins and operating results.

There is an increased risk that service interruptions may occur as a result of our data center transition or other unforeseen issues. Even after we transition our data centers, we will remain subject to the continued risks associated with data center operations, including security and privacy compliance, the maintenance of appropriate data security certifications, risks of disruptions or delays in services and other factors. Our failure to effectively manage these risks could damage our reputation and result in a financial liability or a loss of customers, which would harm our business and operating results.

If our security measures are breached or unauthorized access to customer data is otherwise obtained, our solutions may be perceived as not being secure, customers may reduce the use of or stop using our solutions and we may incur significant liabilities.

Our hosting operations involve the storage and transmission of customer data. We use certain third party vendors to assist in these operations, including back-up storage for customer data. Security breaches or unauthorized access of this data could result in the misuse or loss of this information, litigation, indemnity obligations and other liability. Many of our customers require us to assume full responsibility for security breaches or unauthorized access of their data and therefore we may incur significant financial liability in such circumstances.

While we and our vendors have security measures in place, these systems and networks are subject to ongoing threats and therefore, these security measures may be breached as a result of third-party action, including cyber attacks or other intentional misconduct by computer hackers, employee error, failure to implement appropriate processes and procedures, malfeasance or otherwise. This could result in one or more third parties obtaining unauthorized access to our customers’ data or our data, including intellectual property and other confidential business information. Third parties may also attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers’ data or our data, including intellectual property and other confidential business information.

Our hosting, support and professional services personnel sometimes must access customer communities to fulfill our contractual obligations to provide these services to our customers. This access may result in exposure to confidential customer data that is stored within our platform. If our personnel or our software systems were to permit unauthorized loss or access to this customer data, our reputation could be damaged and we could incur significant liability.

Additionally, while our platform is not intended for the transmission or storage of sensitive health, personal or financial information and we contractually prohibit our customers from doing so, neither we nor our suppliers monitors or review the content that our customers upload and store within their communities. Therefore, we have no direct control over the substance of the content within our hosted communities. If customers use our platform for the transmission or storage of sensitive health, personal or financial information and our security measures are breached our reputation could be damaged, our business may suffer and we could incur significant liability as many domestic and international laws place a higher burden of care on organizations that transmit and process this type of information.

 

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Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative or mitigation measures. Any or all of these issues could negatively impact our ability to attract new customers and increase engagement by existing customers, cause existing customers to elect to not renew their subscriptions, subject us to third-party lawsuits, regulatory fines or other action or liability, thereby harming our reputation and our operating results.

In addition, through the Jive Apps Market our customers may obtain third-party applications which access the data stored within their community. Because we do not control the transmissions between our customers and these third-party technology providers, or the processing of such data by third-party technology providers, we cannot ensure the complete integrity or security of such transmissions or processing. Any security breach could result in a loss of confidence in the security of our service, damage our reputation, disrupt our business, lead to legal liability and negatively impact our future sales.

Because our platform could be used to collect and store personal information of our customers’ employees or customers, privacy concerns could result in additional cost and liability to us or inhibit sales of our platform.

Personal privacy has become a significant issue in the United States and in many other countries where we offer our solutions. The regulatory framework for privacy issues worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act (HIPAA) of 1996 and state breach notification laws. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply, including the Data Protection Directive established in the European Union, the Federal Data Protection Act recently passed in Germany and the European Directive 2002/58/EC (commonly known as the “EU Cookie Law”).

In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the technological features of our solutions. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and harm our business.

Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our platform. Privacy concerns, whether valid or not valid, may inhibit market adoption of our platform particularly in certain industries and foreign countries.

We have experienced rapid growth in recent periods. If we fail to manage such growth and our future growth effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.

We have experienced significant growth in recent periods. For example, we grew from 159 employees at December 31, 2009 to 485 at September 30, 2012. This growth has placed, and any future growth may place, a significant strain on our management and operational infrastructure, including our hosting operations. Our success will depend, in part, on our ability to manage these changes effectively. We will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Failure to effectively manage growth could result in declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties. Any failure to effectively manage growth could adversely impact our business and reputation.

 

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Changes in laws and/or regulations related to the Internet or related to privacy and data security concerns or changes in the Internet infrastructure itself may cause our business to suffer.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy and the transmission of certain types of content using the Internet. For example, the State of California has adopted legislation requiring operators of commercial websites that collect personal information from California residents to conspicuously post and comply with privacy policies that satisfy certain requirements. Several other U.S. states have adopted legislation requiring companies to protect the security of personal information that they collect from consumers over the Internet, and more states may adopt similar legislation in the future. Additionally, the Federal Trade Commission has used its authority under Section 5 of the Federal Trade Commission Act to bring actions against companies for failing to maintain adequate security for personal information collected from consumers over the Internet and for failing to comply with privacy-related representations made to Internet users. The U.S. Congress has at various times proposed federal legislation intended to protect the privacy of Internet users and the security of personal information collected from Internet users that would impose additional compliance burdens upon companies collecting personal information from Internet users, and the U.S. Congress may adopt such legislation in the future, such as the Cyber Intelligence Sharing and Protection Act (“CISPA”) recently passed by the U.S. House of Representatives. The European Union also has adopted various directives regulating data privacy and security and the transmission of content using the Internet involving residents of the European Union, including those directives known as the Data Protection Directive, the E-Privacy Directive, and the Privacy and Electronic Communications Directive, and may adopt similar directives in the future. Several other countries, including Canada and several Latin American countries, have constitutional protections for, or have adopted legislation protecting, individuals’ personal information. Additionally, some federal, state, or foreign governmental bodies have established laws which seek to censor the transmission of certain types of content over the Internet, such as the German Multimedia Law of 1997.

Given the variety of global privacy and data protection regimes it is possible we may find ourselves subject to inconsistent obligations. For instance, the USA Patriot Act is considered by some to be in conflict with certain directives of the European Union. Situations such as these require that we make prospective determinations regarding compliance with conflicting regulations. Increased enforcement of existing laws and regulations, as well as any laws, regulations, or changes that may be adopted or implemented in the future, could limit the growth of the use of public cloud applications or communications generally, result in a decline in the use of the Internet and the viability of Internet-based applications such as our public cloud solutions and reduce the demand for our social business software platform. Additionally, due to the complexity and diversity of these laws, our customers often include contractual obligations which can impose significant risk of termination and financial penalties if we fail to comply.

If we are not able to develop and introduce enhancements and new features that achieve market acceptance or that keep pace with technological developments, our business could be harmed.

We operate in a dynamic environment characterized by rapidly changing technologies and industry and legal standards. The introduction of new social business software solutions by our competitors, the market acceptance of solutions based on new or alternative technologies, or the emergence of new industry standards could render our platform obsolete. Our ability to compete successfully, attract new customers and increase revenues from existing customers depends in large part on our ability to enhance and improve our existing social business software platform and to continually introduce or acquire new features that are in demand by the market we serve. The success of any enhancement or new solution depends on several factors, including timely completion, adequate quality testing, introduction and market acceptance. Any new platform or feature that we develop or acquire may not be introduced in a timely or cost-effective manner, may contain defects or may not achieve the broad market acceptance necessary to generate significant revenues. If we are unable to anticipate or timely and successfully develop or acquire new offerings or features or enhance our existing platform to meet customer requirements, our business and operating results will be adversely affected.

 

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In the second quarter of 2011, we launched our Jive Apps Market. We have devoted significant resources to the development of this new offering and we plan to continue to invest in its growth and adoption. The success of the Jive Apps Market depends, in part, on the willingness of third-party developers to build applications that are complementary to our platform. The Jive Apps Market, as well as other future initiatives, may present new and difficult technology challenges and end-users may choose not to adopt our new solutions, which would harm our operating results. Additionally, the Jive Apps Market includes applications that are built by third-party application developers. This may subject us to additional risks, including the risk that such applications, in particular those developed by smaller, independent developers, cause harm to our reputation and subject us to liability due to, for example, quality issues, the lack of sufficient security within the application, infringement of third-party intellectual property and the introduction of viruses, any of which could harm our business.

Additionally, in May 2012 we launched “Try Jive”, a free 30-day trial of our cloud-based offering targeted at making it easier for departments within a larger organization to try our platform. The goal of this cloud-based offering is to make it easy for customers to get started using our platform with the strategy of making it more likely to drive viral adoption within each customer. If this new offering is not successful we may not achieve the revenue growth we anticipated, thereby potentially not recovering the investments we made in engineering, marketing and the expansion of our sales force, and our operating results could be adversely affected.

Our platform must integrate with a variety of operating systems, software applications and hardware that are developed by others and, if we are unable to devote the necessary resources to ensure that our solutions interoperate with such software and hardware, we may fail to increase, or we may lose, market share and we may experience a weakening demand for our platform.

Our social business software platform must integrate with a variety of network, hardware and software platforms, including Microsoft Office, and we will need to continuously modify and enhance our platform to adapt to changes in Internet-related hardware, software, communication, browser and database technologies. Any failure of our solutions to operate effectively with future network platforms and technologies could reduce the demand for our platform, result in customer dissatisfaction and harm our business. If we are unable to respond in a timely manner to these changes in a cost-effective manner, our solutions may become less marketable and less competitive or obsolete and our operating results may be negatively impacted. In addition, an increasing number of individuals within the enterprise are utilizing devices other than personal computers, such as mobile phones and other handheld devices, to access the Internet and corporate resources and conduct business. If we cannot effectively make our platform available on these mobile devices, we may experience difficulty attracting and retaining customers.

We derive a substantial portion of our revenues from a single software platform.

We derive a substantial portion of our total revenues from sales of a single software platform, the Jive Social Business Platform, and related modules. As such, any factor adversely affecting sales of this platform, including product release cycles, market acceptance, product competition, performance and reliability, reputation, price competition, and economic and market conditions, could harm our business and operating results.

Our business could be adversely affected if our customers are not satisfied with our implementation, customization or other professional services we provide.

Our business depends on our ability to satisfy our customers and meet our customers’ business needs. If a customer is not satisfied with the type of solutions and professional services we deliver, we could incur additional costs to remedy the situation, the profitability of that work might be impaired, and the customer’s dissatisfaction with our services could damage our ability to obtain additional services from that customer. If we are not able to accurately estimate the cost of services requested by the customer, it might result in providing services on a discounted basis or free of charge until customer satisfaction is achieved. In addition, negative publicity related to our customer relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new business with current and prospective customers. Further, we have customer payment obligations not yet due that are attributable to software we have already delivered. These customer obligations are typically not cancelable, but will not yield the expected revenues and cash flow if the customer defaults and fails to pay amounts owed, which could have a negative impact on our financial condition and operating results.

 

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Additionally, large enterprises may request or require customized features and functions unique to their particular business processes. If prospective large customers require customized features or functions that we do not offer, then the market for our platform will be more limited and our business could suffer. In addition, supporting large enterprise customers could require us to devote significant development services and support personnel and strain our personnel resources and infrastructure. If we are unable to address the needs of these customers in a timely fashion or further develop and enhance our platform, these customers may not renew their subscriptions, seek to terminate their relationship, renew on less favorable terms, or fail to purchase additional features. If any of these were to occur, our revenues and billings may decline and we may not realize significantly improved operating results.

We might experience significant errors or security flaws in our platform.

Despite testing prior to their release, software products frequently contain undetected errors, defects or security vulnerabilities, especially when initially introduced or when new versions are released. Errors in our platform could affect the ability of our platform to work with other hardware or software products, impact functionality and delay the development or release of new solutions or new versions of solutions and adversely affect market acceptance of our platform. The detection and correction of any bugs or security flaws can be time consuming and costly. Some errors in our platform and related solutions may only be discovered after installation and use by customers. Any errors, defects or security vulnerabilities discovered after commercial release or contained in custom implementations could result in loss of revenues or delay in revenue recognition, loss of customers or increased service and warranty cost, any of which could adversely affect our business, financial condition and results of operations. Our platform has contained and may contain undetected errors, defects or security vulnerabilities that could result in data unavailability, data security breaches, data loss or corruption or other harm to our customers. Undiscovered vulnerabilities in our platform could expose them to hackers or other unscrupulous third parties who develop and deploy viruses, worms, and other malicious software programs that could attack our solutions, result in unauthorized access to customer data, or fraudulently induce individuals to provide their log-in credentials. Actual or perceived security vulnerabilities in our platform could result in contractual liability, harm our reputation and lead some customers to cancel subscriptions, reduce or delay future purchases or use competitive solutions.

Failure to adequately expand and retain our direct sales force will impede our growth.

We will need to continue to expand and optimize our sales and marketing infrastructure in order to grow our customer base and our business. We plan to continue to expand our direct sales force, both domestically and internationally. Identifying and recruiting qualified personnel and training them in the use of our platform require significant time, expense and attention. It can take 9 to 12 months or longer before our sales representatives are fully trained and productive. Our business may be harmed if our efforts to expand and train our direct sales force do not generate a corresponding significant increase in billings and revenues. In particular, if we are unable to hire, develop and retain talented sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our billings and revenues or grow our business.

 

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Our growth depends in part on the success of our strategic relationships with third parties.

Our future growth will depend on our ability to enter into successful strategic relationships with third parties. For example, we are investing resources in building our indirect sales channel by establishing relationships with third parties to facilitate incremental sales and to implement and customize our platform. In addition, we are also establishing relationships with other third parties to develop integrations with compatible technology and content. These relationships may not result in additional customers or enable us to generate significant billings or revenues. Identifying partners as well as negotiating and documenting relationships with them requires significant time and resources. Our agreements for these relationships are typically non-exclusive and do not prohibit the other party from working with our competitors or from offering competing services. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenues and billings could be impaired and our operating results would suffer. In particular, leveraging third party reseller and referral partner relationships is important to our strategy to expand our presence in the Latin America and Asia Pacific regions. If these relationships are not successful it could impede our growth in revenues and billings.

Our use of open source technology could impose limitations on our ability to commercialize our platform.

Our products contain software modules licensed to us by third-party authors under “open source” licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that require attribution or that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public at no cost. This would allow our competitors to create similar products with lower development effort and time and ultimately could result in an adverse impact upon our intellectual property rights and ability to commercialize our products.

Although we monitor our use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been interpreted by United States courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. Moreover, we cannot assure you that our processes for controlling our use of open source software in our products will be effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our products on terms that are not economically feasible, to re-engineer our products, to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, operating results, and financial condition.

We may be sued by third parties for alleged infringement of their proprietary rights.

The software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual property and proprietary rights. Recently, a number of large software, technology and social networking companies have become active in initiating litigation against competitors and other third parties. Companies in this industry are often required to defend against litigation claims that are based on allegations of infringement or other violations of intellectual property rights. Our technologies may not be able to withstand any third-party claims or rights against their use. As a result, our success depends upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties have claimed and may claim that we infringe upon their intellectual property rights, and we may be found to be infringing upon such rights. In the future, we may be the subject of claims that our platform and underlying technology infringe or violate the intellectual property rights of others. As a result of disclosure of information in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our solutions, or require that we comply with other unfavorable terms. Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results. As most of our customer and partner agreements obligate us to provide indemnification in connection with any such litigation and to obtain licenses, modify our platform, or refund fees, we have in the past been, and may in the future be, requested to indemnify our customers and business partners. We expect that the occurrence of infringement claims is likely to grow as the market for social business software grows. Accordingly, our exposure to damages resulting from infringement claims could be increased and this could further exhaust our financial and management resources.

 

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For example, on October 3, 2012, Bascom Research, LLC (“Bascom”) filed a complaint for patent infringement of U.S. Patent Numbers 7,111,232; 7,139,974; and 7,158,971 against us, among others, in the United States District Court for the Eastern District of Virginia. The complaint seeks damages and an injunction against certain features of our products. The court has not yet ruled on this action. Any litigation, whether or not resolved in our favor, could result in significant expense to us and divert the efforts of our management and technical personnel, which might adversely affect our business, operating results and financial condition.

The outcome of any litigation, regardless of its merits, is inherently uncertain. Any intellectual property claim or lawsuit could be time-consuming and expensive to resolve, divert management attention from executing our business plan and require us to change our technology, change our business practices and/or pay monetary damages or enter into short- or long-term royalty or licensing agreements. In addition, in certain circumstances, such as those in which the opposing parties are large and well-funded companies, we may face a more expensive and protracted path to resolution of such claims or lawsuits.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success and ability to compete depend in part upon our intellectual property. We primarily rely on a combination of copyright, trade secret and trademark laws, as well as confidentiality procedures and contractual restrictions with our employees, customers, partners and others to establish and protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate or we may be unable to secure intellectual property protection for all of our solutions. In particular, we have only recently begun to implement a strategy to seek patent protection for our technology.

Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. The enforcement of our intellectual property rights also depends on our legal actions against these infringers being successful, but we cannot be sure these actions will be successful, even when our rights have been infringed. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business and operating results might be harmed. In addition, defending our intellectual property rights might entail significant expense and the diversion of management resources. Any of our intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Any patents issued in the future may not provide us with competitive advantages, or may be successfully challenged by third parties.

Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective protection of our intellectual property may not be available to us in every country in which our solutions are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.

We might be required to spend significant resources to monitor and protect our intellectual property rights, and our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Litigation to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management, whether or not it is resolved in our favor, and could ultimately result in the impairment or loss of portions of our intellectual property.

 

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Because we generally recognize revenues from subscriptions for our platform ratably over the term of the agreement, near term changes in sales may not be reflected immediately in our operating results.

We generally recognize revenues from customers ratably over the term of their agreements, which range from 12 to 36 months. As a result, most of the revenues we report in each quarter are derived from the recognition of deferred revenues relating to subscription agreements entered into during previous quarters or years. Consequently, a decline in new or renewed subscriptions in any one quarter is not likely to be reflected immediately in our revenues results for that quarter. Such declines, however, would negatively affect our revenues in future periods and the effect of significant downturns in sales and market acceptance of our solutions, and potential changes in our rate of renewals, may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our total revenues through additional sales in any period, as revenues from new customers must be recognized over the applicable subscription term. In some instances, our customers choose to pre-pay the entire term of their multi-year subscriptions up front. As a result, billings can fluctuate significantly from quarter to quarter.

Because our long-term success depends, in part, on our ability to expand our sales to customers outside the United States, our business will be susceptible to risks associated with international operations.

We sell our platform primarily through our direct sales organization, which is comprised of inside sales and field sales personnel located in a variety of geographic regions, including the U.S., South America and Europe. In addition to our existing presence in the U.S., South America and Europe we are focusing on expanding our sales presence in the Asia Pacific region. Sales outside of the U.S. represented approximately 21% and 20% of our total revenues for 2011 and 2010, respectively, and 22% for the first nine months of 2012. As we continue to expand sales of our social business software platform to customers located outside the U.S., our business will be increasingly susceptible to risks associated with international operations. However, we have a limited operating history outside the U.S., and our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to particular challenges of supporting a rapidly growing business in an environment of diverse cultures, languages, customs, tax laws, legal systems, alternate dispute systems and regulatory systems. The risks and challenges associated with international expansion include:

 

•

continued localization of our platform, including translation into foreign languages and associated expenses;

 

•

laws and business practices favoring local competitors;

 

•

compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;

 

•

compliance with anti-bribery laws, including compliance with the Foreign Corrupt Practices Act;

 

•

regional data privacy laws that apply to the transmission of our customers’ data across international borders;

 

•

ability to provide local hosting services;

 

•

different pricing environments, including invoicing and collecting in foreign currencies and associated foreign currency exposure;

 

•

difficulties in staffing and managing foreign operations and the increased travel, infrastructure, accounting, tax and legal compliance costs associated with international operations;

 

•

different or lesser protection of our intellectual property rights;

 

•

difficulties in enforcing contracts and collecting accounts receivable, longer payment cycles and other collection difficulties; and

 

•

regional economic and political conditions.

Additionally, a substantial majority of our international customers currently pay us in U.S. dollars and, as a result, fluctuations in the value of the U.S. dollar and foreign currencies may make our platform more expensive for international customers, which could harm our business. In the future, an increasing number of our customers may pay us in foreign currencies. Any fluctuation in the exchange rate of these foreign currencies or pressure on the creditworthiness of sovereign nations, particularly in Europe, may negatively impact our business. If we are unable to successfully manage the challenges of international operations and expansion, our growth could be limited, and our business and operating results could be adversely affected.

 

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We may continue to acquire or invest in other companies or technologies in the future, which could divert management’s attention, result in additional dilution to our stockholders, increase expenses, disrupt our operations and harm our operating results.

We have in the past acquired, and we may in the future acquire or invest in, businesses, products or technologies that we believe could complement or expand our platform, enhance our technical capabilities or otherwise offer growth opportunities. We cannot assure you that we will realize the anticipated benefits of these or any future acquisition. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses related to identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

There are inherent risks in integrating and managing acquisitions. If we acquire additional businesses, we may not be able to assimilate or integrate the acquired personnel, operations and technologies successfully or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

 

•

unanticipated costs or liabilities associated with the acquisition;

 

•

incurrence of acquisition-related costs, which would be recognized as a current period expense;

 

•

inability to generate sufficient revenues to offset acquisition or investment costs;

 

•

the inability to maintain relationships with customers and partners of the acquired business;

 

•

the difficulty of incorporating acquired technology and rights into our platform and of maintaining quality standards consistent with our brand;

 

•

delays in customer purchases due to uncertainty related to any acquisition;

 

•

the need to implement additional controls, procedures and policies;

 

•

challenges caused by distance, language and cultural differences;

 

•

harm to our existing business relationships with business partners and customers as a result of the acquisition;

 

•

the potential loss of key employees;

 

•

use of resources that are needed in other parts of our business;

 

•

the inability to recognize acquired revenues in accordance with our revenue recognition policies, and the loss of acquired deferred revenue; and

•

use of substantial portions of our available cash or the incurrence of debt to consummate the acquisition.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to goodwill and other intangible assets, which must be assessed for impairment at least annually. Also, contingent considerations related to acquisitions will be remeasured to fair value at each reporting period, with any changes in the value recorded as income or expense. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on the impairment assessment process, which could harm our results of operations.

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer.

For example, on November 5, 2012 we entered into a definitive agreement to acquire Producteev LLC (“Producteev”), a cloud-based project and task management company. This transaction is expected to close in the fourth quarter of 2012, subject to customary closing conditions. Additionally, on November 5, 2012, we entered into and closed a definitive agreement to acquire Bitplay Inc. (also known as “Meetings.io”), a cloud-based real-time video, chat and screen sharing collaboration company.

 

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Weakened global economic conditions may adversely affect our industry, business and results of operations in ways that may be hard to predict or defend against.

Our overall performance depends in part on domestic and worldwide economic conditions, which may remain challenging for the foreseeable future. Financial developments seemingly unrelated to us or to our industry may adversely affect us over the course of time. The U.S. and other key international economies, particularly Europe, have been impacted by threatened sovereign defaults and ratings downgrades, falling demand for a variety of goods and services, restricted credit, going concern threats to major multinational companies, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty. These conditions and their continued deterioration, particularly in Europe, affect the rate of information technology spending and have adversely affected, and could continue to adversely affect, our customers’ ability or willingness to purchase our social business software platform, and could delay prospective customers’ purchasing decisions, reduce the value or duration of their subscriptions, or affect renewal rates, all of which could adversely affect our operating results. We cannot predict the timing, strength or duration of the economic recovery or any subsequent economic slowdown, worldwide, in the United States, or in our industry.

Catastrophic events may disrupt our business.

Our corporate headquarters are located in Palo Alto, California, a high portion of our technology and services personnel are located in our Portland, Oregon office, and we are in the process of transitioning our data centers to a co-located facility located along the West Coast of the United States. The West Coast, and California in particular, are active earthquake zones. Additionally, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems and our website for our development, marketing, operational, support, hosted services and sales activities. In the event of a major earthquake or catastrophic event such as fire, power loss, telecommunications failure, cyber attack, war or terrorist attack, we may be unable to continue our corporate operations and may endure system interruptions, reputational harm, loss of intellectual property, contractual and financial liabilities, delays in our product development, lengthy interruptions in our services, breaches of data security and loss of critical data, all of which could harm our future operating results.

Although we back up customer data stored on our systems at least daily to a geographically distinct location, the data is not mirrored in real-time to this site. Thus, in the event of a physical disaster, or certain other failures of our computing infrastructure, customer data from very recent transactions may be permanently lost. Further, our full production infrastructure is not mirrored to a geographically distinct location and thus in the event of a disaster, production capacity may be impacted for an extended amount of time while the infrastructure is procured and rebuilt and data is restored.

We might require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.

 

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The forecasts of market growth included in this document may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you our business will grow at similar rates, if at all.

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. Forecasts relating to the expected growth in the social business software market and other markets may prove to be inaccurate. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties.

There are limitations on the effectiveness of controls and the failure of our control systems may materially and adversely impact us.

We do not expect that disclosure controls or internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. 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, have been detected. Failure of our control systems to prevent error or fraud could materially and adversely impact us.

The intended operational and tax benefits of our corporate structure and intercompany arrangements depend on the application of the tax laws of various jurisdictions and how we operate our business, and may be challenged by tax authorities.

Our corporate structure and intercompany agreements with our foreign subsidiaries are intended to optimize our operating structure and our worldwide effective tax rate, including the manner in which we develop and use our intellectual property, manage our cash flow, and the pricing of our intercompany transactions. Our foreign subsidiaries operate under cost plus transfer pricing agreements with us. These agreements provide for sales, support and development activities for our benefit. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing technology or our transfer pricing arrangements, or determine that the manner in which we operate our business does not achieve the intended tax objectives, which could increase our international tax exposure and harm our operating results.

We depend on our senior management team, and the loss of one or more key employees or groups could harm our business and prevent us from implementing our business plan in a timely manner.

Our success depends largely upon the continued services of our executive officers, which includes key leadership in the areas of research and development, marketing, sales, services and the general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our platform and other solutions.

Our personnel do not have employment arrangements that require these personnel to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. We do not maintain key person life insurance policies on any of our employees. The loss of one or more of our key employees or groups could seriously harm our business.

Additionally, in August 2012, we added the position of President of Worldwide Field Operations, which will be responsible for all customer-facing functions, including sales, professional services and support. The consolidation, transition and onboarding process may be disruptive to our internal processes, our sales cycles, expansion into markets outside the United States and implementation of new professional services strategies.

 

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Because competition for our target employees is intense, we may not be able to attract and retain the highly skilled employees we need to support our operations and growing customer base.

Our future success will depend on our continued ability to identify, hire, develop, motivate and retain talent. In the software industry, there is substantial and continuous competition for software engineers with high levels of experience in designing, developing and managing software, as well as competition for sales executives and operations personnel. We may not be successful in attracting and retaining qualified personnel. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In addition, job candidates and existing employees often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock declines, it may adversely affect our ability to retain highly skilled employees. In addition, since we expense all stock-based compensation, we may periodically change our stock compensation practices, which may include reducing the number of employees eligible for options or reducing the size of equity awards granted per employee. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contribute to our success, and our business may be harmed.

We believe that a critical component to our success has been our corporate culture. We have invested substantial time and resources in building our team. As we continue to grow and develop the infrastructure associated with being a public company, we may find it difficult to maintain these important aspects of our corporate culture. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members particularly after we are no longer an “emerging growth company.”

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the listing requirements of the Nasdaq Global Market on which our common stock trades and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results and maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future, which will increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

 

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We also expect that the combination of being a public company and the existence of these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers as well as qualified members of our board of directors, particularly to serve on our Audit Committee and Compensation Committee.

However, for as long as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”. These exemptions include but are not limited to not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”

Under the Jumpstart Our Business Startups Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

We will cease to be an “emerging growth company” upon the earliest of (i) the first fiscal year following the fifth anniversary of our initial public offering, (ii) the first fiscal year after our annual gross revenues are $1 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities, or (iv) the date on which we are deemed to be a “large accelerated filer” as defined in the Exchange Act.

We are obligated to develop and maintain proper and effective internal controls over financial reporting. We may not complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock. 

When we cease to be an “emerging growth company,” we will be required, pursuant to the Exchange Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting as of December 31 of the earlier of the year we crease to be an “emerging growth company” or 2016. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our auditors have issued an attestation report on our management’s assessment of our internal controls.

The effort required to compile the system and processing documentation necessary to perform the evaluation needed to provide these reports is a costly and challenging process. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to attest to management’s report on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.

 

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Risk Related to our Ownership of our Common Stock

The market price of our common stock is likely to be volatile and could subject us to litigation.

The trading prices of the securities of technology companies have been highly volatile. Accordingly, the market price of our common stock has been, and is likely to continue to be, subject to wide fluctuations. Factors affecting the market price of our common stock include:

 

•

variations in our billings, renewal rates, operating results, cash flow, loss per share and how these results compare to analyst expectations;

 

•

the net increase in the number of customers acquired, either independently or as compared with published expectations of analysts that cover us;

 

•

forward looking guidance on revenues and loss per share;

 

•

announcements of technological innovations, new products or services, strategic alliances or significant agreements by us or by our competitors;

 

•

disruptions in our public cloud service;

 

•

the economy as a whole, market conditions in our industry, and the industries of our customers; and

 

•

any other factors discussed herein.

In addition, if the market for technology stocks, especially social media related stocks, or the stock market in general experiences uneven investor confidence, the market price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The market price for our stock might also decline in reaction to events that affect other companies within, or outside, our industry, even if these events do not directly affect us. Some companies that have experienced volatility in the trading price of their stock have been subject of securities litigation. If we are the subject of such litigation, it could result in substantial costs and a diversion of management’s attention and resources.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors that are not nominated by the current members of our board of directors or take other corporate actions, including effecting changes in our management. These provisions include:

 

•

a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

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•

the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;

 

•

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

•

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

•

the requirement that a special meeting of stockholders may be called only by the chairman of our board of directors, our president, our secretary, or a majority vote of our board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

•

the requirement for the affirmative vote of holders of at least 66 2/3 percent of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws, which may inhibit the ability of an acquiror to effect such amendments to facilitate an unsolicited takeover attempt;

 

•

the ability of our board of directors, by majority vote, to amend the bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquiror to amend the bylaws to facilitate an unsolicited takeover attempt; and

 

•

advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.

In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Use of Proceeds

We filed a registration statement on Form S-1, File No. 333-176483 for an initial public offering of common stock, which was declared effective by the Securities and Exchange Commission on December 12, 2011. In that offering, we sold an aggregate of 12.1 million shares of our common stock with net offering proceeds of $131.4 million. No payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or to any affiliates.

As of September 30, 2012, we had used approximately $20.1 million of those proceeds for the repayment of indebtedness and $9.4 million for purchase of property and equipment, primarily to build out our co-located data center. We currently intend to use the remaining proceeds for general corporate purposes as described in the prospectus for the offering.

 

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Item 6. Exhibits

The following exhibits are filed herewith or incorporated by reference hereto and this list is intended to constitute the exhibit index:

 

3.1		Amended and Restated Certificate of Incorporation.(1)
3.2		Amended and Restated Bylaws.(1)
10.1		Change of Control and Retention Agreement between Jive Software, Inc. and Jay Larson dated August 13, 2012.
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted 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.

 

*	Furnished herewith.

**

Pursuant to Rule 406T of Regulation S-T, the Interactive data Files on Exhibit 101, submitted electronically herewith, are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 or the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

(1)	Incorporated by reference to Form S-1 file number 333-176483 as declared effective by the Securities and Exchange Commission on December 12, 2011.

 

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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.

 

						JIVE SOFTWARE, INC.
Dated: November 7, 2012						/s/ ANTHONY ZINGALE
						Anthony Zingale
						Chief Executive Officer
						(Principal Executive Officer)
						/s/ BRYAN LEBLANC
						Bryan LeBlanc
						Chief Financial Officer
						(Principal Financial and Accounting Officer)

 

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