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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

 

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

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015

 

OR

 

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

 

For the transition period from              to

 

Commission file number 001-35909

 

MARKETO, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

56-2558241

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

901 Mariners Island Boulevard, Suite 500

San Mateo, California 94404

(Address of Principal Executive Offices)

 

(650) 376-2300

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

 

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

 

Large accelerated filero

 

Accelerated filerx

 

 

 

Non-accelerated filero

 

Smaller reporting companyo

(Do not check if a smaller reporting company)

 

 

 

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

 

There were 42,705,841 shares of the registrant’s Common Stock issued and outstanding as of August 3, 2015.

 

 

 



Table of Contents

 

MARKETO, INC.

 

Table of Contents

 

Part I — Financial Information

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets

4

 

 

 

 

Condensed Consolidated Statements of Operations

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

30

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

Part II — Other Information

 

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

Item 1A.

Risk Factors

31

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

 

 

 

Item 3.

Default Upon Senior Securities

50

 

 

 

Item 4.

Mine Safety Disclosures

50

 

 

 

Item 5

Other Information

50

 

 

 

Item 6.

Exhibits

50

 

 

 

Signatures

 

52

 

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Table of Contents

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  our ability to sell our products and expand internationally;

 

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

 

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

 

·                  our reliance on our third-party service providers;

 

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

 

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

 

·                  the impact of seasonality on our business;

 

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

 

·                  future economic conditions;

 

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

 

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

 

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

 

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Table of Contents

 

·                  privacy concerns of our customers;

 

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

 

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

 

·                  our liquidity and working capital requirements;

 

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

 

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

 

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

 

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

 

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Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MARKETO, INC.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

110,445

 

$

112,644

 

Accounts receivable, net of allowances

 

45,744

 

37,867

 

Prepaid expenses and other current assets

 

7,801

 

5,756

 

Total current assets

 

163,990

 

156,267

 

Property and equipment, net

 

20,661

 

16,832

 

Goodwill

 

29,201

 

29,201

 

Intangible assets, net

 

6,933

 

7,076

 

Other assets

 

2,101

 

1,035

 

Total assets

 

$

222,886

 

$

210,411

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5,453

 

$

3,901

 

Accrued expenses and other current liabilities

 

23,680

 

20,691

 

Deferred revenue

 

80,620

 

62,945

 

Current portion of credit facility

 

2,643

 

2,719

 

Total current liabilities

 

112,396

 

90,256

 

Credit facility, net of current portion

 

1,382

 

2,653

 

Other liabilities

 

3,962

 

3,526

 

Total liabilities

 

117,740

 

96,435

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

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

 

2,246

 

800

 

Stockholder’s equity:

 

 

 

 

 

Common stock

 

4

 

4

 

Additional paid-in capital

 

322,372

 

297,420

 

Accumulated other comprehensive loss

 

(382

)

(350

)

Accumulated deficit

 

(219,094

)

(183,898

)

Total stockholders’ equity

 

102,900

 

113,176

 

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

 

$

222,886

 

$

210,411

 

 

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

 

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Table of Contents

 

MARKETO, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

43,757

 

$

31,236

 

$

83,857

 

$

59,847

 

Professional services and other

 

6,923

 

4,794

 

12,823

 

8,475

 

Total revenue

 

50,680

 

36,030

 

96,680

 

68,322

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

9,770

 

6,876

 

18,844

 

13,111

 

Professional services and other

 

8,177

 

5,540

 

15,514

 

10,381

 

Total cost of revenue

 

17,947

 

12,416

 

34,358

 

23,492

 

Gross profit:

 

 

 

 

 

 

 

 

 

Subscription and support

 

33,987

 

24,360

 

65,013

 

46,736

 

Professional services and other

 

(1,254

)

(746

)

(2,691

)

(1,906

)

Total gross profit

 

32,733

 

23,614

 

62,322

 

44,830

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

9,168

 

7,198

 

18,863

 

14,329

 

Sales and marketing

 

32,055

 

23,786

 

62,087

 

44,154

 

General and administrative

 

8,960

 

5,731

 

17,742

 

11,923

 

Total operating expenses

 

50,183

 

36,715

 

98,692

 

70,406

 

Loss from operations

 

(17,450

)

(13,101

)

(36,370

)

(25,576

)

Other income (expense), net

 

97

 

(186

)

617

 

(245

)

Loss before provision (benefit) for income taxes

 

(17,353

)

(13,287

)

(35,753

)

(25,821

)

Provision (benefit) for income taxes

 

100

 

(16

)

312

 

(30

)

Net loss

 

(17,453

)

(13,271

)

(36,065

)

(25,791

)

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

 

(497

)

159

 

(43

)

170

 

Net loss attributable to Marketo

 

$

(17,950

)

$

(13,112

)

$

(36,108

)

$

(25,621

)

 

 

 

 

 

 

 

 

 

 

Net loss per share of common stock, basic and diluted

 

$

(0.43

)

$

(0.33

)

$

(0.86

)

$

(0.64

)

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

 

42,163

 

40,271

 

41,889

 

39,898

 

 

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

 

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Table of Contents

 

MARKETO, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(17,453

)

$

(13,271

)

$

(36,065

)

$

(25,791

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(164

)

115

 

(74

)

65

 

Total comprehensive loss

 

(17,617

)

(13,156

)

(36,139

)

(25,726

)

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

 

415

 

159

 

869

 

170

 

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

 

45

 

(20

)

42

 

(18

)

Comprehensive loss attributable to Marketo

 

$

(17,157

)

$

(13,017

)

$

(35,228

)

$

(25,574

)

 

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

 

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MARKETO, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

Net loss:

 

 

 

 

 

Net loss attributable to Marketo

 

$

(36,108

)

$

(25,621

)

Net loss and adjustment attributable to redeemable non-controlling interests

 

43

 

(170

)

Net loss

 

(36,065

)

(25,791

)

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

 

 

 

 

 

Depreciation and amortization

 

6,285

 

4,344

 

Stock-based compensation expense

 

19,007

 

10,918

 

Deferred income taxes

 

247

 

(143

)

Reduction of allowance for doubtful accounts

 

236

 

92

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(8,478

)

(2,805

)

Prepaid expenses and other current assets

 

(2,019

)

(2,151

)

Other assets

 

(861

)

(579

)

Accounts payable

 

2,188

 

478

 

Accrued expenses and other current liabilities

 

2,532

 

(5,823

)

Deferred revenue

 

18,283

 

11,837

 

Other liabilities

 

77

 

(21

)

Net cash provided by (used in) operating activities

 

1,432

 

(9,644

)

Cash flows from investing activities:

 

 

 

 

 

Increase in restricted cash

 

(215

)

 

Purchase of property and equipment

 

(8,324

)

(4,263

)

Capitalized software development

 

(772

)

(404

)

Net cash used in investing activities

 

(9,311

)

(4,667

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock upon exercise of stock options

 

3,018

 

3,327

 

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

 

2,885

 

3,384

 

Investment from redeemable non-controlling interests

 

1,678

 

1,953

 

Repurchase of unvested common stock from terminated employees

 

(32

)

(46

)

Withholding taxes remitted for the net share settlement of equity awards

 

(74

)

(1,692

)

Repayment of debt

 

(1,346

)

(868

)

Payment of deferred follow-on offering costs

 

 

(104

)

Payment incurred for common stock registration related to acquisition

 

 

(319

)

Net cash provided by financing activities

 

6,129

 

5,635

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

(449

)

91

 

Net decrease in cash and cash equivalents

 

(2,199

)

(8,585

)

Cash and cash equivalents — beginning of period

 

112,644

 

128,299

 

Cash and cash equivalents — end of period

 

$

110,445

 

$

119,714

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

97

 

$

147

 

Cash paid for income taxes

 

116

 

44

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

Vesting of early exercise options

 

82

 

190

 

Unpaid and accrued fixed assets

 

1,252

 

1,063

 

Property and equipment acquired through tenant improvement allowance

 

211

 

 

 

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

 

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Table of Contents

 

MARKETO, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

Business

 

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

 

Marketo is a provider of the leading cloud-based Engagement Marketing software platform that is purpose-built to enable organizations to engage in modern engagement marketing. The Company’s platform is designed to enable the effective management, optimization and analytical measurement of marketing activities, enabling organizations to acquire new customers more efficiently, build stronger relationships with existing customers, improve sales effectiveness and drive faster revenue growth. On this platform, the Company delivers an easy to use, integrated suite of advanced applications. The Company generally offers its services on an annual subscription basis with quarterly or annual payment terms.

 

Basis of Presentation

 

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

 

The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year ending December 31, 2015. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (SEC). These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and related notes presented in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2015. There have been no material changes in the Company’s significant accounting policies from those that were disclosed in the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2014. Certain immaterial amounts in the prior period condensed consolidated statement of cash flows within the cash provided by (used in) operating activities have been reclassified to conform to the current period presentation.

 

Use of Estimates

 

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

 

Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standard Board (FASB) issued new accounting guidance, Simplifying the Presentation of Debt Issuance Costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The debt issuance costs guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company has elected not to early adopt. The adoption of the debt guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.

 

In April 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-05, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40). The pronouncement was issued to provide guidance concerning accounting for fees in a cloud computing arrangement. The pronouncement is effective for reporting periods beginning after December 15, 2015. The adoption of ASU 2015-05 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

 

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In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  ASU 2014-09 also specifies the accounting for some costs to obtain or fulfill a contract with a customer. The new standard is expected to become effective for the Company on January 1, 2018. Additionally, early application is permitted, but no earlier than the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method.  The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

2. Joint Venture

 

In February 2014, the Company entered into an agreement with SunBridge Corporation and Dentsu eMarketing One K.K. (collectively, the Investors) to engage in the investment, organization, management and operation of a Japanese subsidiary (Marketo KK) of the Company that is focused on the sale of the Company’s products and services in Japan. The Investors initially contributed approximately $2.0 million (200,000,000 Japanese Yen) in cash in exchange for 35.4% of the outstanding common stock of Marketo KK. Furthermore, under the agreement, the Company and the Investors agreed to subscribe to additional shares by contributing additional funding of approximately $2.0 million (237,480,955 Japanese Yen) and approximately $1.7 million (200,000,000 Japanese Yen), respectively, which occurred in March 2015. As of June 30, 2015, the Company and the Investors owned approximately 60.1% and 39.9% of the outstanding common stock in Marketo KK, respectively. See Note 6 for the activity in the redeemable non-controlling interests balance.

 

Twenty percent of the common stock held by the Investors may be callable by the Company or puttable by the Investors beginning on the seventh anniversary of the initial capital contribution by the Investors. This percentage increases to forty percent and one hundred percent on the eighth and tenth anniversary, respectively.  Should the call or put option be exercised, the redemption value would be determined based on a prescribed formula derived from the relative revenues of Marketo KK and the Company and may be settled, at the Company’s discretion, with Company stock (with no limit on the shares that may be issued) or cash.  Additionally, the common stock held by the Investors may be callable or puttable following a change of control of the Company.  The redeemable non-controlling interests in Marketo KK are classified outside of permanent equity in the Company’s condensed consolidated balance sheet as of June 30, 2015, primarily due to the put right available to the redeemable non-controlling interest holders in the future which may be settled in cash or common stock of the Company. The balance of the redeemable non-controlling interests is reported at the greater of the initial carrying amount adjusted for the redeemable non-controlling interest’s share of earnings, or its estimated redemption value. Accordingly, at June 30, 2015 the Company adjusted the redeemable non-controlling interest to its expected redemption value, resulting in a $0.9 million reduction to additional paid-in-capital.

 

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

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

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

 

$

415

 

$

159

 

$

869

 

$

170

 

 

 

 

 

 

 

 

 

 

 

Adjustment to redeemable non-controlling interest

 

(912

)

 

(912

)

 

 

 

 

 

 

 

 

 

 

 

Net loss and adjustment attributable to redeemable non-controlling interest

 

$

(497

)

$

159

 

$

(43

)

$

170

 

 

3. Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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Table of Contents

 

As of June 30, 2015 and December 31, 2014, financial assets measured at fair value on a recurring basis were comprised of money market funds and certificates of deposit included within cash and cash equivalents.

 

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

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

93,055

 

$

 

$

 

$

104,021

 

$

 

$

 

Certificates of deposit

 

 

25

 

 

 

25

 

 

Total

 

$

93,055

 

$

25

 

$

 

$

104,021

 

$

25

 

$

 

 

4. Balance Sheet Components

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Cash

 

$

17,365

 

$

8,598

 

Cash equivalents:

 

 

 

 

 

Money market funds

 

93,055

 

104,021

 

Certificates of deposit

 

25

 

25

 

 

 

93,080

 

104,046

 

Cash and cash equivalents

 

$

110,445

 

$

112,644

 

 

Accounts Receivable

 

Accounts receivable consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Accounts receivable

 

$

46,083

 

$

38,260

 

Allowance for doubtful accounts

 

(339

)

(393

)

Accounts receivable, net

 

$

45,744

 

$

37,867

 

 

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Table of Contents

 

Property and Equipment, Net

 

Property and equipment, net consists of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Computer equipment

 

$

23,633

 

$

18,384

 

Software

 

2,900

 

2,417

 

Office furniture

 

2,449

 

2,071

 

Leasehold improvements

 

6,466

 

5,123

 

Construction in progress

 

2,745

 

1,745

 

Total property and equipment

 

38,193

 

29,740

 

Less accumulated depreciation

 

(17,532

)

(12,908

)

Property and equipment, net

 

$

20,661

 

$

16,832

 

 

Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities are as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Accrued bonuses, commissions and wages

 

$

11,318

 

$

10,553

 

Accrued ESPP

 

2,242

 

2,324

 

Accrued vacation

 

3,724

 

2,972

 

Accrued marketing expenses

 

1,072

 

1,313

 

Accrued other

 

5,324

 

3,529

 

Total

 

$

23,680

 

$

20,691

 

 

5. Goodwill and Intangible Assets

 

Goodwill and intangible assets consisted of the following as of June 30, 2015 and December 31, 2014:

 

 

 

June 30,
2015

 

Weighted
Average
Remaining
Useful Life

 

December 31,
2014

 

Weighted
Average
Remaining
Useful Life

 

 

 

(in thousands)

 

(in years)

 

(in thousands)

 

(in years)

 

Developed technology

 

$

6,050

 

2.4

 

$

6,050

 

2.9

 

Domain names

 

950

 

3.2

 

950

 

3.6

 

Customer relationships

 

1,600

 

1.2

 

1,600

 

1.6

 

Non-compete agreements

 

580

 

2.5

 

580

 

3.0

 

Capitalized software development costs

 

3,527

 

1.4

 

2,042

 

1.2

 

 

 

12,707

 

 

 

11,222

 

 

 

Less accumulated amortization

 

(5,774

)

 

 

(4,146

)

 

 

Intangible assets, net

 

6,933

 

 

 

7,076

 

 

 

Goodwill

 

29,201

 

 

 

29,201

 

 

 

Goodwill and intangible assets, net

 

$

36,134

 

 

 

$

36,277

 

 

 

 

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Table of Contents

 

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

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Amortization expense

 

$

892

 

$

503

 

$

1,628

 

$

1,020

 

 

Based on the carrying amount of intangible assets as of June 30, 2015, the estimated future amortization is as follows (in thousands):

 

 

 

Six Months

Ending
December 31,

 

Years Ending December 31,

 

 

 

 

 

2015

 

2016

 

2017

 

2018

 

2019

 

Total

 

Developed Technology

 

$

754

 

$

1,508

 

$

1,406

 

$

 

$

 

$

3,668

 

Domain Names

 

92

 

180

 

100

 

100

 

29

 

501

 

Customer Relationships

 

274

 

315

 

 

 

 

589

 

Non-Compete Agreements

 

75

 

150

 

144

 

 

 

369

 

Capitalized Software Development Costs

 

714

 

928

 

164

 

 

 

1,806

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,909

 

$

3,081

 

$

1,814

 

$

100

 

$

29

 

$

6,933

 

 

6. Stockholders’ Equity and Redeemable Non-controlling Interests

 

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

 

 

 

Total
Stockholders’
Equity

 

Redeemable
Non-controlling
Interests

 

 

 

 

 

 

 

Balance as of December 31, 2014

 

$

113,176

 

$

800

 

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

 

3,018

 

 

Issuance of common stock under employee stock purchase plan

 

2,885

 

 

Investment by redeemable non-controlling interests

 

233

 

1,445

 

Adjustment to redemption value

 

(912

)

912

 

Withholding taxes for the net share settlement of equity awards

 

(77

)

 

Vesting of early exercised options

 

82

 

 

Stock-based compensation expense

 

19,723

 

 

Net loss

 

(35,196

)

(869

)

Foreign currency translation adjustments

 

(32

)

(42

)

Balance as of June 30, 2015

 

$

102,900

 

$

2,246

 

 

For the six months ended June 30, 2015, the Company incurred $19.0 million of stock-based compensation expense and capitalized stock-based compensation expense of $0.7 million associated with the Company’s internal-use software projects.

 

7. Credit Facility

 

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

 

In May 2014, the Company entered into a second amendment to the loan and security agreement to amend various covenants. Under the second amendment the Company is required to maintain compliance with certain financial covenants, which include maintaining a minimum cash balance with the bank and various reporting covenants. As of June 30, 2015, the Company was in compliance with these covenants.  As of June 30, 2015 and December 31, 2014, the outstanding loan balance was $4.0 million and $5.4 million, respectively.

 

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Table of Contents

 

There were no material changes in the Company’s commitments under the outstanding loan balance, which was disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2014.

 

8. Commitments and Contingencies

 

Except as set forth below, there were no material changes in the Company’s commitments under contractual obligations, as disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2014.

 

In February 2015, the Company entered into a definitive lease agreement whereby the Company will lease approximately 6,448 square feet of office space in Sydney, Australia. The Company’s future minimum lease payments under this agreement are approximately $1.0 million, payable over the thirty-six month term of the lease.

 

In March 2015, the Company entered into a definitive lease agreement whereby the Company will lease approximately 4,147 square feet of office space in Tokyo, Japan. The Company’s future minimum lease payments under this agreement are approximately $1.4 million, payable over the forty-two month term of the lease.

 

As of June 30, 2015, future minimum operating lease payments are as follows (in thousands):

 

2015 (6 months)

 

$

2,998

 

2016

 

6,395

 

2017

 

6,632

 

2018

 

4,644

 

2019

 

582

 

Thereafter

 

 

Total

 

$

21,251

 

 

Additionally, in January 2015, the Company entered into a renewal agreement with a customer relationship management vendor. The Company’s contractual obligation under this agreement is approximately $4.0 million, payable over the thirty-six month term of the agreement.

 

In January 2015, the Company also entered into a renewal agreement with a data center vendor. The Company’s contractual obligation under this agreement is approximately $1.4 million, payable over the thirty-six month term of the agreement.

 

9. Stockholder’s Equity and Stock Based Compensation

 

Common Stock Authorized and Outstanding

 

As of June 30, 2015, the Company was authorized to issue 1,000,000,000 common shares with a par value of $0.0001 per share and 20,000,000 convertible preferred shares with a par value of $0.0001 per share. As of June 30, 2015, the Company had approximately 42.6 million shares of common stock issued and outstanding.

 

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Table of Contents

 

Summary of Stock Option Activity

 

A summary of the Company’s stock option activity under all stock option plans and related information for six months ended June 30, 2015 is as follows:

 

 

 

Number of
Stock
Options
Outstanding

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Life

 

Aggregate
Intrinsic
Value

 

 

 

(in thousands)

 

 

 

(Years)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2014

 

5,404

 

$

11.55

 

7.56

 

$

120,595

 

Granted

 

51

 

29.28

 

 

 

 

 

Exercised

 

(665

)

4.53

 

 

 

 

 

Repurchased

 

 

 

 

 

 

 

Cancelled/forfeited

 

(292

)

15.79

 

 

 

 

 

Balance as of June 30, 2015

 

4,498

 

12.51

 

7.05

 

79,630

 

 

 

 

 

 

 

 

 

 

 

Exercisable as of June 30, 2015

 

3,794

 

8.12

 

6.74

 

79,156

 

Vested and expected to vest as of June 30, 2015

 

4,274

 

12.08

 

6.99

 

$

77,076

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing price of $28.06 as of June 30, 2015 for options that were in-the-money as of that date.

 

Option awards generally vest over a four year period, with 25% vesting one year from date of grant and monthly thereafter. Stock options granted under the Company’s 2006 Plan provided option holders with an early exercise provision, where in the event of termination any exercised and unvested shares are subject to repurchase by the Company at the original purchase price. This right of repurchase lapses as the option vests. Options exercisable as of June 30, 2015 include options that are exercisable prior to vesting.

 

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

 

 

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

Weighted average grant date fair value of options granted

 

$

12.55

 

$

20.79

 

Total intrinsic value of options exercised

 

$

16,706

 

$

33,190

 

 

The total estimated grant date fair value of options vested during the six months ended June 30, 2015 was approximately $8.7 million.

 

Determining Fair Value of Stock Options

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model. The following assumptions were used to estimate the fair value of options granted to employees:

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Expected term (in years)

 

6

 

6

 

6

 

6

 

Risk-free interest rate

 

1.70%

 

1.90% - 1.97%

 

1.70%

 

1.84% - 1.97%

 

Expected volatility

 

44.80%

 

49% - 55%

 

44.80%

 

49% - 56%

 

Expected dividend rate

 

0%

 

0%

 

0%

 

0%

 

 

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Table of Contents

 

Restricted Stock Units

 

A summary of the Company’s Restricted Stock Units (RSUs) activity and related information for the six months ended June 30, 2015 is as follows:

 

 

 

Number of
RSUs

 

Weighted Average
Grant Date
Fair Value

 

Aggregate
Intrinsic
Value

 

 

 

(in thousands)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2014

 

2,360

 

$

33.30

 

$

77,207

 

RSUs Granted

 

1,256

 

33.65

 

 

 

RSUs Vested

 

(299

)

36.94

 

 

 

RSUs Cancelled/Forfeited

 

(367

)

32.39

 

 

 

Balance as of June 30, 2015

 

2,950

 

$

33.19

 

$

82,763

 

 

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

 

The aggregate intrinsic value of RSUs outstanding at June 30, 2015 was determined using the Company’s closing stock price of $28.06 per share as of June 30, 2015.

 

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

 

 

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

Weighted average grant date fair value of RSUs granted

 

$

33.65

 

$

38.29

 

Total intrinsic value of vested RSUs

 

$

8,472

 

$

4,237

 

 

Market Stock Units

 

In February 2015, the Compensation and Leadership Development Committee of the Company’s Board of Directors granted market-performance based restricted stock units (MSUs) to its executive officers. The MSU awards were granted under the Company’s 2013 Equity Incentive Plan.

 

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

 

A summary of the Company’s MSU activity and related information for the six months ended June 30, 2015 is as follows:

 

 

 

Number of Shares
Underlying MSUs

 

Weighted Average
Grant Date
Fair Value

 

Weighted Average
Remaining
Vesting Period

 

Aggregate
Intrinsic
Value

 

 

 

(in thousands)

 

 

 

(in years)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2014

 

 

$

 

 

$

 

MSUs Granted

 

240

 

37.53

 

 

 

 

 

MSUs Vested

 

 

 

 

 

 

 

MSUs Cancelled/Forfeited

 

(15

)

37.53

 

 

 

 

 

Balance as of June 30, 2015

 

225

 

$

37.53

 

1.63

 

$

6,308

 

 

The aggregate intrinsic value of MSUs outstanding was determined using the Company’s closing stock price of $28.06 as of June 30, 2015.

 

The fair value of each MSU award is determined by multiplying the fair value per share by the underlying number of shares. The fair value per share was determined on the grant date using the Monte Carlo valuation methodology and the assumptions described in the table below. The fair value per share for tranche 1, tranche 2, and tranche 3 is $9.10, $8.68 and $19.75, respectively. The Company amortizes the fair value of each MSU award using the graded-vesting method, adjusted for estimated forfeitures. Stock-based compensation expense associated with participants who fulfill their requisite service period is not reversed even if the performance conditions are not met. However, stock-based compensation expense is reversed for participants who forfeit their MSU awards prior to fulfilling their requisite service period.

 

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Table of Contents

 

The fair value of the MSUs granted during the first six months of fiscal 2015 was estimated using the following weighted-average assumptions:

 

 

 

Six Months Ended

 

 

 

June 30, 2015

 

 

 

 

 

Expected term (in years)

 

3

 

Risk-free interest rate

 

0.99%

 

Expected volatility

 

39%

 

Expected dividend rate

 

0%

 

 

Employee Stock Purchase Plan

 

The assumptions used to value employee stock purchase rights under the Black-Scholes model during the six months ended June 30, 2015 and 2014 were as follows:

 

 

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

Expected term (in months)

 

6

 

6 - 9

 

Risk-free interest rate

 

0.05% - 0.07%

 

0.08% - 0.11%

 

Expected volatility

 

39% - 43%

 

41% - 42%

 

Expected dividend rate

 

0%

 

0%

 

 

During the first six months of fiscal 2015, the Company issued approximately 0.1 million shares of common stock under the Company’s Employee Stock Purchase Plan (ESPP) with an average purchase price of $23.87 per share.

 

Stock Compensation Expense

 

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

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Cost of subscription and support revenue

 

$

626

 

$

419

 

$

1,245

 

$

803

 

Cost of professional services and other revenue

 

1,100

 

610

 

2,037

 

1,057

 

Research and development

 

1,639

 

1,173

 

3,955

 

2,252

 

Sales and marketing

 

3,404

 

2,095

 

6,206

 

3,874

 

General and administrative

 

2,957

 

1,614

 

5,564

 

2,932

 

Total stock-based compensation expense

 

$

9,726

 

$

5,911

 

$

19,007

 

$

10,918

 

 

For the six months ended June 30, 2015, the Company incurred expenses of $4.3 million for options, $12.6 million for RSUs, $2.0 million for MSUs and $0.8 million for ESPP shares. Additionally, the Company capitalized stock-based compensation expense of $0.7 million associated with the Company’s internal-use software projects. Amounts for the six months ended June 30, 2015 include stock compensation expense of $1.0 million related to performance-based RSUs that are tied to product milestones issued in connection with an acquisition that occurred in December 2014.

 

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Table of Contents

 

As of June 30, 2015, total unrecognized compensation cost related to unvested awards not yet recognized under all equity compensation plans, adjusted for estimated forfeitures, was as follows:

 

 

 

June 30, 2015

 

 

 

Unrecognized
Expense

 

Average Expected
Recognition Period

 

 

 

(in thousands)

 

(in years)

 

Stock options

 

$

14,547

 

1.77

 

Restricted stock units and market stock units

 

70,650

 

2.93

 

Employee stock purchase plan

 

202

 

0.13

 

Total unrecognized stock-based compensation expense

 

$

85,399

 

2.73

 

 

10. Net Loss per Share

 

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

 

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

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in thousands, except per share amount)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss attributable to Marketo

 

$

(17,950

)

$

(13,112

)

$

(36,108

)

$

(25,621

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

42,333

 

40,494

 

42,075

 

40,134

 

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

 

(170

)

(223

)

(186

)

(236

)

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

 

42,163

 

40,271

 

41,889

 

39,898

 

Net loss per share of common stock, basic and diluted

 

$

(0.43

)

$

(0.33

)

$

(0.86

)

$

(0.64

)

 

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

 

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

 

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

 

 

 

As of June 30,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Stock options to purchase common stock

 

4,498

 

5,974

 

Employee stock purchase plan

 

110

 

123

 

Common stock held in escrow

 

22

 

137

 

Common stock subject to repurchase

 

23

 

76

 

Restricted stock units and market stock units

 

3,175

 

1,513

 

 

 

7,828

 

7,823

 

 

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11. Income Taxes

 

The provision for income taxes for the three and six months ended June 30, 2015 was approximately $0.1 million and $0.3 million, respectively. The provision for income taxes for the three and six months ended June 30, 2015 consisted primarily of foreign and state income taxes. The benefit for income taxes for the three and six months ended June 30, 2014 was approximately $16,000 and $30,000, respectively, consisting primarily of foreign and state income taxes offset by a deferred tax benefit resulting primarily from the reduction in the foreign deferred tax liability as a result of the amortization of the acquired intangibles relating to the acquisition of Insightera, which occurred in December 2013.

 

For the three and six months ended June 30, 2015 and 2014, the provision for income taxes differed from the statutory amount primarily due to the Company realizing no benefit for current year losses and maintaining a full valuation allowance against the U.S. and certain foreign net deferred tax assets, while recognizing state and foreign taxes currently payable.

 

The realization of tax benefits of deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available objective evidence, the Company does not believe it is more likely than not that the U.S. Federal and state and certain foreign jurisdictions net deferred tax assets will be realizable. Accordingly, the Company has provided a full valuation allowance against the domestic net deferred tax assets and certain foreign jurisdictions with net deferred tax assets as of June 30, 2015 and December 31, 2014. The Company intends to maintain the remaining valuation allowance until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance. During the three and six months ended June 30, 2015, there have been no material changes to the total amount of unrecognized tax benefits.

 

12. Segment Information and Information about Geographic Areas

 

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

 

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

 

Revenue

 

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

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in thousands)

 

(in thousands)

 

United States

 

$

43,144

 

$

30,424

 

$

82,409

 

$

57,774

 

EMEA

 

3,380

 

2,849

 

6,532

 

5,504

 

Other

 

4,156

 

2,757

 

7,739

 

5,044

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

50,680

 

$

36,030

 

$

96,680

 

$

68,322

 

 

No single customer accounted for more than 10% of the Company’s total revenue during the three and six months ended June 30, 2015 and 2014, respectively. One customer accounted for 12% of accounts receivable as of June 30, 2015.  No single customer accounted for more than 10% of accounts receivable as of December 31, 2014.

 

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Long-lived Assets

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

United States

 

$

18,885

 

$

16,265

 

EMEA

 

298

 

209

 

Other

 

1,478

 

358

 

 

 

 

 

 

 

Total

 

$

20,661

 

$

16,832

 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed on March 12, 2015. As discussed in the section above titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below.

 

Overview

 

We are a provider of the leading cloud-based Engagement Marketing software platform that is purpose-built to enable organizations ranging from Small and Medium Businesses (SMBs) to the world’s largest enterprises to engage in modern engagement marketing. Our platform enables the effective execution, management and analytical measurement of online, social, mobile and offline marketing activities and customer interactions in today’s data-centric, multi-channel business environment. On our platform, we deliver an easy-to-use, integrated suite of advanced applications, which today include Marketing Automation, Sales Insight, Revenue Analytics, Marketing Calendar, Real-time Personalization, Social Marketing, Mobile Engagement and Ad Bridge. To enable our customers to obtain maximum value from our platform, we complement our solutions with an extensive network of resources to assist our customers with the strategic and practical use of our products. Among these resources are expert consulting services, peer-to-peer discussion communities, a library of pre-built marketing programs and templates, rich content on marketing best practices and an integrated ecosystem of partner products.

 

We designed our platform to be valuable across large enterprises and SMBs that sell to both businesses and consumers in virtually any industry. We market and sell our products directly and through a network of distribution partners. Our client base is diverse, with 4,126 customers as of June 30, 2015 across a wide range of industries including business services, consumer, financial services, healthcare, manufacturing, media, technology and telecommunications. During the three months ended June 30, 2015 and 2014, our 20 largest customers accounted for approximately 13% and 11% of our total revenue, respectively. During the six months ended June 30, 2015 and 2014, our 20 largest customers accounted for approximately 12% and 10% of our total revenue, respectively. The percentage of our subscription and support revenue from enterprise customers was 30% and 27% during the three months ended June 30, 2015 and 2014, respectively, and 30% and 28% during the six months ended June 30, 2015 and 2014, respectively.

 

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

 

Our direct sales force has separate sales teams for the enterprise market and for the SMB market. Within our direct sales force, we also have a team that is responsible for selling to existing customers, who may renew their subscriptions, increase their usage of our platform and applications, acquire additional applications from our product family, or broaden the deployment of our solutions across their organizations. In addition, we have indirect sales teams that sell to distributors, agencies, resellers and OEMs, who in turn resell or use our platform to provide managed marketing services to their end customers. To date, substantially all of our revenue has been derived from direct sales, but we intend to invest in our indirect sales teams to increase indirect revenue as a percentage of our total revenue over time. We provide our solutions on a subscription basis, and we generated total revenue of $50.7 million and $36.0 million for the three months ended June 30, 2015 and 2014, respectively, and $96.7 million and $68.3 million for the six months ended June 30, 2015 and 2014, respectively. We derive most of our revenue from subscriptions to our cloud-based software and related customer support services. Subscription and support revenue accounted for 86% and 87% of our total revenue during the three months ended June 30, 2015 and 2014, respectively, and 87% and 88% of our total revenue during the six months ended June 30, 2015 and 2014, respectively. We price our products based on customer usage measures, which can include the number of records in each customer’s database and the number of user seats authorized to access our service. Our subscription contracts are typically one year in length, but can range from one year to three years in length.

 

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Professional services revenue accounted for 14% and 13% of our total revenue during the three months ended June 30, 2015 and 2014, respectively, and 13% and 12% of our total revenue during the six months ended June 30, 2015 and 2014, respectively.  Our solution is designed to be ready to use immediately upon provisioning of a new customer subscription. However, we believe that our customers’ success is enhanced by the effective use of marketing strategies performed with our software, which we foster primarily through the sale and delivery of expert services that educate our customers on the best use of our solutions as well as assist in the implementation of our solutions. In addition, some of our customers require services to support integrating their existing systems with our solutions. Enterprise customers typically exhibit a higher demand for all of these services. Over the near term, due to market demand for expertise in engagement marketing, we expect our professional services revenue to grow at a faster rate than our subscription and support revenue, and therefore, to increase as a percentage of our total revenue. In addition, we also partner with third-party consulting organizations that provide similar services to our customers in connection with their use of our solutions.

 

We generate the majority of our revenue in the United States; however, we are focused on growing our international business. Revenue generated from our international customers was approximately 15% and 16% of our total revenue during the three months ended June 30, 2015 and 2014, respectively, and 15% of our total revenue during each of the six months ended June 30, 2015 and 2014, respectively.

 

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

 

We had net losses attributable to Marketo of $18.0 million and $13.1 million for the three months ended June 30, 2015 and 2014, respectively, and $36.1 million and $25.6 million for the six months ended June 30, 2015 and 2014, respectively, primarily due to increased investments in our current and projected future growth.

 

Since our inception, we financed our operations through cash collected from customers as well as preferred equity financings, our initial public offering and concurrent private placement completed in May 2013, and our follow-on public offering completed in September 2013.  We also maintain a credit facility. As of June 30, 2015, we had outstanding borrowings of $4.0 million under this facility.

 

Seasonality, Cyclicality and Quarterly Trends

 

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

 

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

 

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

 

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Table of Contents

 

Results of Operations for the Three and Six Months Ended June 30, 2015 and 2014

 

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

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

86.3

%

86.7

%

86.7

%

87.6

%

Professional services and other

 

13.7

 

13.3

 

13.3

 

12.4

 

Total revenue

 

100.0

 

100.0

 

100.0

 

100.0

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

19.3

 

19.1

 

19.5

 

19.2

 

Professional services and other

 

16.1

 

15.4

 

16.0

 

15.2

 

Total cost of revenue

 

35.4

 

34.5

 

35.5

 

34.4

 

Gross margin:

 

 

 

 

 

 

 

 

 

Subscription and support

 

67.1

 

67.6

 

67.2

 

68.4

 

Professional services and other

 

-2.5

 

-2.1

 

-2.8

 

-2.8

 

Total gross margin

 

64.6

 

65.5

 

64.5

 

65.6

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

18.1

 

20.0

 

19.5

 

21.0

 

Sales and marketing

 

63.2

 

66.0

 

64.2

 

64.6

 

General and administrative

 

17.7

 

15.9

 

18.4

 

17.5

 

Total operating expenses

 

99.0

 

101.9

 

102.1

 

103.1

 

Loss from operations

 

-34.4

 

-36.4

 

-37.6

 

-37.4

 

Other income (expense), net

 

0.2

 

-0.5

 

0.6

 

-0.4

 

Loss before provision for income taxes

 

-34.2

 

-36.9

 

-37.0

 

-37.8

 

Provision (benefit) for income taxes

 

0.2

 

0.0

 

0.3

 

0.0

 

Net loss

 

-34.4

 

-36.8

 

-37.3

 

-37.7

 

Net loss attributable to redeemable non-controlling interests

 

-1.0

 

0.4

 

0.0

 

0.2

 

Net loss attributable to Marketo

 

-35.4

%

-36.4

%

-37.3

%

-37.5

%

 

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

 

Revenue

 

 

 

Three Months
Ended June 30,

 

 

 

 

 

Six Months
Ended June 30,

 

 

 

 

 

(in thousands, except percentages)

 

2015

 

2014

 

$ Change

 

% Change

 

2015

 

2014

 

$ Change

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

43,757

 

$

31,236

 

$

12,521

 

40.1

%

$

83,857

 

$

59,847

 

$

24,010

 

40.1

%

Professional services and other

 

6,923

 

4,794

 

2,129

 

44.4

 

12,823

 

8,475

 

4,348

 

51.3

 

Total revenue

 

$

50,680

 

$

36,030

 

$

14,650

 

40.7

%

$

96,680

 

$

68,322

 

$

28,358

 

41.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

86.3

%

86.7

%

 

 

 

 

86.7

%

87.6

%

 

 

 

 

Professional services and other

 

13.7

%

13.3

%

 

 

 

 

13.3

%

12.4

%

 

 

 

 

Total

 

100.0

%

100.0

%

 

 

 

 

100.0

%

100.0

%

 

 

 

 

 

Total revenue increased $14.7 million or 41%, during second quarter of 2015 compared to the comparable period in 2014, due to the increase in subscription and support revenue of $12.5 million and an increase in professional services revenue of $2.1 million. During the six month period ended June 30, 2015, total revenue increased $28.4 million, or 42%, compared to the comparable period in 2014, due to the increase in subscription and support revenue of $24.0 million and an increase in professional services revenue of $4.3 million.

 

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Table of Contents

 

 

 

Impact (in thousands)

 

 

Category

 

Three Months

 

 

Six Months

 

Key Drivers

Subscription and support

 

h

$

12,521

 

 

h

$

24,010

 

Increase in subscription and support revenue was primarily attributable to (1) growth in our total customer count and (2) growth in both usage rights (driven by higher use, consumption and/or database size of our products used by existing customers) and cross selling of additional products either during the term of their subscription or at the point of renewal of their subscription. Of the total increase in subscription and support revenue over 2014, 64% was attributable to revenue from new customers acquired after June 30, 2014, and 36% was attributable to revenue from customers existing on or before June 30, 2014.

Professional services and other

 

h

 

2,129

 

 

h

 

4,348

 

Increase in professional services revenue resulted from increased demand for services across our customer base.

 

Cost of Revenue and Gross Margin

 

 

 

Three Months
Ended June 30,

 

 

 

 

 

Six Months
Ended June 30,

 

 

 

 

 

(in thousands, except percentages)

 

2015

 

2014

 

$

 Change

 

% Change

 

2015

 

2014

 

$ Change

 

% Change

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

9,770

 

$

6,876

 

$

2,894

 

42.1

%

$

18,844

 

$

13,111

 

$

5,733

 

43.7

%

Professional services and other

 

8,177

 

5,540

 

2,637

 

47.6

 

15,514

 

10,381

 

5,133

 

49.4

 

Total cost of revenue

 

$

17,947

 

$

12,416

 

$

5,531

 

44.5

%

$

34,358

 

$

23,492

 

$

10,866

 

46.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

77.7

%

78.0

%

 

 

 

 

77.5

%

78.1

%

 

 

 

 

Professional services and other

 

-18.1

%

-15.6

%

 

 

 

 

-21.0

%

-22.5

%

 

 

 

 

Total gross margin

 

64.6

%

65.5

%

 

 

 

 

64.5

%

65.6

%

 

 

 

 

 

Cost of subscription and support increased due to the following:

 

 

 

Impact (in thousands)

 

 

Category

 

Three Months

 

 

Six Months

 

Key Drivers

Personnel-related costs

 

h

$

1,019

 

 

h

$

2,253

 

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

Depreciation and amortization

 

h

 

811

 

 

h

 

1,361

 

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

Hosting costs

 

h

 

250

 

 

h

 

555

 

Increase in hosting costs as a result of our increased use of our international managed hosting service provider.

Facilities and IT allocations

 

h

 

255

 

 

h

 

518

 

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

Various other items