Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - XO GROUP INC. | ex32293015.htm |
| EX-32.1 - EXHIBIT 32.1 - XO GROUP INC. | ex32193015.htm |
| EX-31.1 - EXHIBIT 31.1 - XO GROUP INC. | ex31193015.htm |
| EX-21.1 - EXHIBIT 21.1 - XO GROUP INC. | ex211093015.htm |
| EX-31.2 - EXHIBIT 31.2 - XO GROUP INC. | ex31293015.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
______________________
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2015
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-35217
____________________________
XO GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 13-3895178 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
195 Broadway, 25th Floor
New York, New York 10007
(Address of Principal Executive Offices and Zip Code)
(212) 219-8555
(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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes ý 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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o | Accelerated Filer x |
Non-Accelerated Filer o (Do not check if a smaller reporting company) | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No ý
As of October 30, 2015, there were 26,258,300 shares of the registrant’s common stock outstanding.
XO GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015
TABLE OF CONTENTS
Page | |
PART I FINANCIAL INFORMATION | |
Item 1. Financial Statements (Unaudited): | |
Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 | |
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014 | |
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014 | |
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 | |
Notes to Condensed Consolidated Financial Statements | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. Controls and Procedures | |
PART II OTHER INFORMATION | |
Item 1. Legal Proceedings | |
Item 1A. Risk Factors | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. Defaults Upon Senior Securities | |
Item 4. Mine Safety Disclosures | |
Item 5. Other Information | |
Item 6. Exhibits | |
SIGNATURES | |
i
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements relating to future events and the future performance of XO Group Inc. based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “should,” “expect,” “intend,” “estimate,” “are positioned to,” “continue,” “project,” “guidance,” “target,” “forecast,” “anticipated” or comparable terms.
These forward-looking statements involve risks and uncertainties. Our actual results or events could differ materially from those anticipated in such forward-looking statements as a result of certain factors, as more fully described in Item 1A (Risk Factors) in our most recent Annual Report on Form 10-K, filed with the Securities Exchange Commission on March 16, 2015, and Part II of this report. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
WHERE YOU CAN FIND MORE INFORMATION
XO Group’s corporate website is located at www.xogroupinc.com. XO Group makes available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing to, the Securities and Exchange Commission (“SEC”). Information contained on XO Group’s corporate website is not part of this report or any other report filed with the SEC.
Unless the context otherwise indicates, references in this report to the terms “XO Group,” “we,” “our” and “us” refer to XO Group Inc., its divisions and its subsidiaries.
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PART I - FINANCIAL INFORMATION
XO GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share and Per Share Data)
(Unaudited)
September 30, 2015 | December 31, 2014 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 86,318 | $ | 89,955 | ||||
Accounts receivable, net of allowances of $2,926 and $2,756 at September 30, 2015 and December 31, 2014, respectively | 20,084 | 15,785 | ||||||
Deferred tax assets, net | 3,052 | 3,052 | ||||||
Prepaid expenses and other current assets | 3,807 | 4,696 | ||||||
Total current assets | 113,261 | 113,488 | ||||||
Long-term restricted cash | 2,599 | 2,600 | ||||||
Property and equipment, net | 13,791 | 15,125 | ||||||
Goodwill and intangibles, net | 43,435 | 43,558 | ||||||
Deferred tax assets, net | 12,123 | 13,110 | ||||||
Investments | 7,792 | 5,501 | ||||||
Other assets | 73 | 200 | ||||||
Total assets | $ | 193,074 | $ | 193,582 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 11,618 | $ | 12,463 | ||||
Deferred revenue | 15,319 | 16,236 | ||||||
Total current liabilities | 26,937 | 28,699 | ||||||
Deferred rent | 4,674 | 5,167 | ||||||
Other liabilities | 1,218 | 1,790 | ||||||
Total liabilities | 32,829 | 35,656 | ||||||
Commitments and contingencies (Note 5) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized and 0 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively | — | — | ||||||
Common stock, $0.01 par value; 100,000,000 shares authorized and 26,248,900 and 26,630,507 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively | 264 | 267 | ||||||
Additional paid-in-capital | 172,184 | 171,951 | ||||||
Accumulated other comprehensive income | — | 35 | ||||||
Accumulated deficit | (12,203 | ) | (14,327 | ) | ||||
Total stockholders’ equity | 160,245 | 157,926 | ||||||
Total liabilities and stockholders’ equity | $ | 193,074 | $ | 193,582 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
1
XO GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except for Per Share Data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net revenue: | ||||||||||||||||
Online advertising | $ | 25,038 | $ | 22,122 | $ | 73,679 | $ | 65,522 | ||||||||
Registry and commerce | 4,809 | 3,430 | 11,266 | 8,387 | ||||||||||||
Merchandise | — | 4,473 | 878 | 12,902 | ||||||||||||
Publishing and other | 4,859 | 5,833 | 17,675 | 19,797 | ||||||||||||
Total net revenue | 34,706 | 35,858 | 103,498 | 106,608 | ||||||||||||
Cost of revenue: | ||||||||||||||||
Online advertising | 683 | 365 | 1,588 | 1,337 | ||||||||||||
Merchandise | — | 2,833 | 881 | 8,106 | ||||||||||||
Publishing and other | 1,367 | 1,663 | 5,082 | 5,920 | ||||||||||||
Total cost of revenue | 2,050 | 4,861 | 7,551 | 15,363 | ||||||||||||
Gross profit | 32,656 | 30,997 | 95,947 | 91,245 | ||||||||||||
Operating expenses: | ||||||||||||||||
Product and content development | 9,901 | 8,569 | 29,300 | 26,274 | ||||||||||||
Sales and marketing | 10,679 | 10,842 | 31,683 | 32,606 | ||||||||||||
General and administrative | 5,955 | 5,389 | 18,116 | 18,778 | ||||||||||||
Depreciation and amortization | 1,361 | 1,868 | 4,027 | 5,393 | ||||||||||||
Total operating expenses | 27,896 | 26,668 | 83,126 | 83,051 | ||||||||||||
Income from operations | 4,760 | 4,329 | 12,821 | 8,194 | ||||||||||||
Loss in equity interests | (173 | ) | (68 | ) | (209 | ) | (243 | ) | ||||||||
Interest and other (expense) income, net | (3 | ) | 57 | (51 | ) | 55 | ||||||||||
Income before income taxes | 4,584 | 4,318 | 12,561 | 8,006 | ||||||||||||
Income tax expense | 1,718 | 2,234 | 4,939 | 3,551 | ||||||||||||
Net income | $ | 2,866 | $ | 2,084 | $ | 7,622 | $ | 4,455 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.11 | $ | 0.08 | $ | 0.30 | $ | 0.18 | ||||||||
Diluted | $ | 0.11 | $ | 0.08 | $ | 0.30 | $ | 0.17 | ||||||||
Weighted average number of shares used in calculating net earnings per share: | ||||||||||||||||
Basic | 25,136 | 25,351 | 25,161 | 25,159 | ||||||||||||
Dilutive effect of: | ||||||||||||||||
Restricted stock | 304 | 319 | 360 | 359 | ||||||||||||
Options | 9 | — | 16 | 29 | ||||||||||||
Diluted | 25,449 | 25,670 | 25,537 | 25,547 | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
2
XO GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net income | $ | 2,866 | $ | 2,084 | $ | 7,622 | $ | 4,455 | ||||||||
Other comprehensive income: | ||||||||||||||||
Foreign currency translation adjustments | — | (89 | ) | — | (44 | ) | ||||||||||
Total comprehensive income | $ | 2,866 | $ | 1,995 | $ | 7,622 | $ | 4,411 | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
3
XO GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2015 | 2014 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 7,622 | $ | 4,455 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 4,027 | 5,393 | ||||||
Stock-based compensation expense | 4,252 | 4,447 | ||||||
Deferred income taxes | 987 | 587 | ||||||
Excess tax benefits from stock-based awards | (979 | ) | (1,263 | ) | ||||
Allowance for doubtful accounts | 1,527 | 755 | ||||||
Other non-cash charges | 420 | 384 | ||||||
Changes in operating assets and liabilities: | ||||||||
Increase in accounts receivable | (5,826 | ) | (4,695 | ) | ||||
Decrease in prepaid expenses and other assets, net | 1,740 | 1,871 | ||||||
Decrease in accounts payable and accrued expenses | (766 | ) | (1,284 | ) | ||||
(Decrease) increase in deferred revenue | (917 | ) | 1,440 | |||||
Decrease in deferred rent | (493 | ) | (576 | ) | ||||
(Decrease) increase in other liabilities, net | (35 | ) | 39 | |||||
Net cash provided by operating activities | 11,559 | 11,553 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment | (391 | ) | (652 | ) | ||||
Additions to capitalized software | (2,386 | ) | (3,321 | ) | ||||
Maturity of U.S. Treasury Bills | 2,600 | 2,599 | ||||||
Purchases of U.S. Treasury Bills | (2,595 | ) | (2,599 | ) | ||||
Proceeds from the sale of property and equipment | 185 | — | ||||||
Payments to acquire investments | (2,500 | ) | (4,000 | ) | ||||
Other investing activities | (53 | ) | (46 | ) | ||||
Acquisitions, net of cash acquired | — | (5,724 | ) | |||||
Net cash used in investing activities | (5,140 | ) | (13,743 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Repurchase of common stock | (8,807 | ) | (615 | ) | ||||
Proceeds pursuant to employee stock-based compensation plans | 497 | 898 | ||||||
Excess tax benefits from stock-based awards | 979 | 1,263 | ||||||
Surrender of restricted common stock for income tax purposes | (2,725 | ) | (4,370 | ) | ||||
Net cash used in financing activities | (10,056 | ) | (2,824 | ) | ||||
Decrease in cash and cash equivalents | (3,637 | ) | (5,014 | ) | ||||
Cash and cash equivalents at beginning of period | 89,955 | 90,697 | ||||||
Cash and cash equivalents at end of period | $ | 86,318 | $ | 85,683 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
1. Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of XO Group Inc. (“XO Group” or the “Company”) and its wholly-owned subsidiaries. The condensed consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations. Certain prior year financial statement line items have been reclassified to conform to the current year’s presentation. The Company believes that the disclosures are adequate to make the information presented not misleading. The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2014.
In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial condition, results of operations and changes in cash flows of the Company for the interim periods presented. The results of operations for the nine months ended September 30, 2015 are not necessarily indicative of results to be expected for the entire calendar year.
On July 2, 2015, the Company contributed $1.5 million in cash in exchange for a minority equity interest in Jetaport, Inc., a hotel room block marketplace technology company. On July 17, 2015, the Company made an investment of $1.0 million in cash in exchange for a minority equity interest in a vendor services company. The Company plans to account for both investments under the equity method of accounting since it exercises significant influence over both investments.
Earnings per Share
For the three months ended September 30, 2015, the calculation of diluted earnings per share excludes a weighted average number stock options, restricted stock and ESPP shares of 236,195, 16,543, and 377, respectively, because to include them would be antidilutive. For the nine months ended September 30, 2015, the calculation of diluted earnings per share excludes a weighted average number of stock options, restricted stock and ESPP shares of 208,670, 24,644, and 475, respectively, because to include them would be antidilutive. The calculation of diluted earnings per share excludes a weighted average number of stock options, restricted stock and ESPP shares of 250,000, 64,051 and 659, respectively, for the three months ended September 30, 2014 and 214,835, 451,326, and 715, respectively, for the nine months ended September 30, 2014 because to include them would be antidilutive.
Recently Issued Accounting Pronouncements
In May 2014, the accounting standard relating to revenue from contracts with customers was updated to clarify the principles for recognizing revenue and develop a common standard for all industries. The new guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted only for interim and annual reporting periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or cumulative effect approach to adopt the new standard. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements or the method of adoption.
In September 2015, an accounting standard update was issued related to business combinations simplifying the accounting for measurement period adjustments. The new guidance requires that adjustments made to provisional amounts recognized in a business combination be recorded in the period such adjustments are determined, rather than retrospectively adjusting previously reported amounts. The new guidance is effective for interim and fiscal reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the new guidance and has not determined the impact, if any, this standard may have on its consolidated financial statements.
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2. Fair Value Measurements
Cash and cash equivalents and investments consist of the following:
September 30, 2015 | December 31, 2014 | |||||||
(In Thousands) | ||||||||
Cash and cash equivalents | ||||||||
Cash | $ | 31,582 | $ | 27,186 | ||||
Restricted cash | — | 525 | ||||||
Money market funds | 54,736 | 62,244 | ||||||
Total cash and cash equivalents | 86,318 | 89,955 | ||||||
Long-term investments | ||||||||
Long-term restricted cash | 2,599 | 2,600 | ||||||
Total cash and cash equivalents and investments | $ | 88,917 | $ | 92,555 | ||||
The inputs to the valuation techniques used to measure fair value are classified into the following categories:
Level 1 — Quoted prices in active markets for identical assets or liabilities
Level 2 — Quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
As of September 30, 2015, the Company’s cash and cash equivalents of $86.3 million, and long-term restricted cash on the condensed consolidated balance sheets of $2.6 million, were measured at fair value using Level 1 inputs. During the nine months ended September 30, 2015, there were no transfers in or out of the Company’s Level 1 assets.
Restricted cash of $0.5 million related to an acquisition was released during the three months ended September 30, 2015 as there were no contingencies for which the Company needed to reimburse. Long-term restricted cash consists of $2.6 million held as restricted in relation to the Company’s New York office lease.
3. Stockholders’ Equity and Stock Based Compensation
The Company maintains several stock-based compensation plans, which are more fully described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
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XO GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Stock-Based Compensation - (continued)
During the three and nine months ended September 30, 2015, common stock outstanding decreased as a result of the following activity:
Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2015 | |||||
(In Thousands) | ||||||
Opening balance as of June 30, 2015 and December 31, 2014, respectively | 26,296 | 26,631 | ||||
Issuance of shares of restricted common stock, net of cancellations | (43 | ) | 261 | |||
Issuance of shares of common stock pursuant to the employee stock purchase plan | 25 | 44 | ||||
Shares of common stock repurchased and retired | — | (514 | ) | |||
Shares of restricted common stock surrendered for income tax purposes | (29 | ) | (173 | ) | ||
Ending balance as of September 30, 2015 | 26,249 | 26,249 | ||||
Shares of restricted common stock vested | 77 | 468 | ||||
During the nine months ended September 30, 2015, the Company repurchased shares totaling $8.8 million under the board approved $20.0 million repurchase authorization. Included in this repurchase were 96,948 shares of common stock repurchased on May 20, 2015 for $1.6 million from the wife of David Liu, Chairman of the Company’s Board of Directors, in a privately negotiated share repurchase transaction. The repurchase price was the closing market price of the shares on the day of the repurchase. The transaction was settled in May 2015 and decreased the Company’s common stock by a minimal amount, decreased additional paid in capital by $0.6 million and increased accumulated deficit by $1.0 million within stockholders’ equity.
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XO GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Stock-Based Compensation - (continued)
The Company included total stock-based compensation expense related to all its stock awards in various operating expense categories for the three and nine months ended September 30, 2015 and 2014, as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(In Thousands) | ||||||||||||||||
Product and content development | $ | 174 | $ | 382 | $ | 1,271 | $ | 1,451 | ||||||||
Sales and marketing | 289 | 338 | 1,012 | 1,065 | ||||||||||||
General and administrative | 672 | 729 | 1,969 | 1,931 | ||||||||||||
Total stock-based compensation | $ | 1,135 | $ | 1,449 | $ | 4,252 | $ | 4,447 | ||||||||
4. Supplemental Balance Sheet and Cash Flow Information
The components of certain balance sheet accounts and supplemental cash flow information are as follows:
September 30, 2015 | December 31, 2014 | |||||||
(In Thousands) | ||||||||
Prepaid expenses and other current assets | ||||||||
Taxes | $ | 678 | $ | 786 | ||||
Software licenses and maintenance | 1,194 | 1,538 | ||||||
Compensation and employee benefits | 386 | 496 | ||||||
Deferred production and marketing costs | 160 | 147 | ||||||
Inventory - raw materials | — | 371 | ||||||
Inventory - finished goods | — | 269 | ||||||
Other | 1,389 | 1,089 | ||||||
Total prepaid expenses and other current assets | $ | 3,807 | $ | 4,696 | ||||
Accounts payable and accrued expenses | ||||||||
Compensation and employee benefits | $ | 4,572 | $ | 6,339 | ||||
Accounts payable | 2,297 | 2,540 | ||||||
Taxes | 508 | 528 | ||||||
Other accrued expenses | 4,241 | 3,056 | ||||||
Total accounts payable and accrued expenses | $ | 11,618 | $ | 12,463 | ||||
Nine Months Ended September 30, | ||||||||
2015 | 2014 | |||||||
(In Thousands) | ||||||||
Cash paid for income taxes, net of refunds | $ | 2,420 | $ | 371 | ||||
During the first quarter of 2015, all of the Company’s inventory was sold in conjunction with the closure of its merchandise operations in Redding, CA.
The Company made payments of $0.3 million during the nine months ended September 30, 2015 related to separation charges incurred in conjunction with the closure of its merchandise operations, thus eliminating the restructuring liability that was recorded within accounts payable and accrued expenses on the consolidated balance sheet as of December 31, 2014. During the nine months
8
ended September 30, 2015, the Company incurred additional charges related to the closure of its merchandise operations of $0.4 million.
Amortization of capitalized software was $0.9 million and $2.5 million for the three and nine months ended September 30, 2015, respectively, compared to $0.6 million and $1.7 million for the three and nine months ended September 30, 2014, respectively.
5. Commitments and Contingencies
The Company has certain obligations relating principally to operating leases and a letter of credit. As of September 30, 2015, the Company also has commitments related to purchase orders and other contracts.
As of September 30, 2015, the Company was engaged in certain legal actions arising in the ordinary course of business and believes that the ultimate outcome of these actions will not have a material effect on its results of operations, financial position or cash flows.
In connection with the sale of its Ijie operations, the Company has agreed to indemnify the buyers for certain liabilities that may arise related to events prior to the sale transaction or breach of our covenants under the sale agreement.
6. Subsequent Events
On October 1, 2015, the Company paid $6.1 million to acquire the remaining ownership interests in GigMasters.com Incorporated (“GigMasters”). Prior to the acquisition, the Company owned 28% of GigMasters, on a fully diluted basis, and its investment was accounted for under the equity method of accounting. Beginning October 1, 2015, the Company will include GigMasters’ assets, liabilities and results of operations within its consolidated financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report.
Executive Overview
XO Group offers consumer multiplatform media services to the wedding, pregnancy and parenting, and nesting markets. We reach our audience through several platforms, including online properties, mobile applications, magazines and books, and television and video. These platforms are available for all brands, with the exception of mobile applications, television and magazines for The Nest brand. We create value for our consumers, advertisers, and partners by delivering relevant and personalized solutions at key decision making moments for some of life’s proudest and happiest events. We have a large, replenishing and highly motivated audience that drives over $130 billion in spend across the life stages we service (including weddings, honeymoons, registries, and adding a child to a household). We generate revenue through three distinct and diversified product categories: online advertising, registry and commerce, and publishing.
Our mission is to help people navigate and truly enjoy life’s biggest moments, together. Our multiplatform brands guide couples through transformative life stages - from getting married, to moving in together and having a baby - and include The Knot (#1 wedding planning resource), The Nest (the hip guide to all things home for new couples), and The Bump (a leading pregnancy and parenting brand).
Third Quarter 2015 Highlights
• | During the three months ended September 30, 2015, total revenue declined 3.2% year over year. |
• | Revenue increased by $3.3 million or 10.6% excluding merchandise operations, a business we exited. |
• | Adjusted EBITDA grew 2.9% year over year to $7.3 million. |
• | Transaction-based business revenue increased 40.2% year over year, due to growth in registry and commerce. |
• | Total online revenue increased 13.2% year over year, due to market trends of demand toward online media. |
• | Gross margin improved to 94.1% from 86.4%, primarily due to exiting our lower margin merchandise operations. |
• | Total operating expenses grew 4.6% year over year, due to investing in our strategic initiatives, partially offset by savings from the exit of our Ijie and merchandise operations. |
• | Earnings per diluted share rose $0.03 or 38% year over year to $0.11. |
• | We spent $2.5 million during the third quarter to acquire investments in Jetaport, Inc. and a vendor services company. |
• | Our cash balance remained strong at $86.3 million. |
Key Metrics
We evaluate our operating and financial performance using various performance indicators. Our management relies on the key performance indicators set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We discuss revenue and gross margin under Results of Operations, and cash flow results under Liquidity and Capital Resources. Other measures of our performance, including adjusted EBITDA and adjusted net income are defined and discussed under Non-GAAP Financial Measures below.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(Dollar Amounts in Thousands) | ||||||||||||||||
Total net revenue | $ | 34,706 | $ | 35,858 | $ | 103,498 | $ | 106,608 | ||||||||
Gross margin | 94.1 | % | 86.4 | % | 92.7 | % | 85.6 | % | ||||||||
Adjusted EBITDA | $ | 7,256 | $ | 7,054 | $ | 21,534 | $ | 18,796 | ||||||||
Adjusted net income | $ | 2,866 | $ | 2,303 | $ | 7,885 | $ | 5,419 | ||||||||
Cash and cash equivalents at September 30 | $ | 86,318 | $ | 85,683 | $ | 86,318 | $ | 85,683 | ||||||||
Total employees at September 30(a) | 630 | 721 | 630 | 721 | ||||||||||||
(a) Decrease primarily related to the closure of our merchandise operations in Redding, CA and the sale of the Ijie operations
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Non-GAAP Financial Measures
This Form 10-Q includes information about certain financial measures that are not prepared in accordance with U.S. generally accepted accounting principles (“GAAP” or “U.S. GAAP”), including adjusted EBITDA, adjusted net income, adjusted net income per diluted share and free cash flow. These non-GAAP measures have important limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP. Our use of these terms may vary from the use of similarly-titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation.
Management defines its non-GAAP financial measures as follows:
• | Adjusted EBITDA represents GAAP net income adjusted to exclude, if applicable: (1) income tax expense, (2) depreciation and amortization, (3) stock-based compensation expense, (4) asset impairment charges, (5) loss in equity interests, (6) interest and other income (expense), net and (7) other items affecting comparability during the period. |
• | Adjusted net income represents GAAP net income, adjusted for items that impact comparability, which may include: (1) asset impairment charges, (2) executive separation and other severance charges, (3) non-recurring foreign taxes, interest and penalties, and (4) costs related to exit activities. |
• | Adjusted net income per diluted share represents adjusted net income (as defined above), divided by the diluted weighted-average number of shares outstanding for the period. |
• | Free cash flow represents GAAP net cash provided by operations, less capital expenditures. |
Management believes that these non-GAAP financial measures, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provide useful information about our period-over-period growth and provide additional information that is useful for evaluating our operating performance. However, adjusted EBITDA, adjusted net income, adjusted net income per diluted share and free cash flow are not measures of financial performance under U.S. GAAP and, accordingly, should not be considered substitutes for or superior to net income, net income per diluted share and net cash provided by operating activities as indicators of operating performance.
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The table below provides reconciliations between the non-GAAP financial measures discussed above to the comparable U.S. GAAP measures:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(In Thousands, Except for Per Share Data) | ||||||||||||||||
Net income | $ | 2,866 | $ | 2,084 | $ | 7,622 | $ | 4,455 | ||||||||
Income tax expense | 1,718 | 2,234 | 4,939 | 3,551 | ||||||||||||
Depreciation and amortization | 1,361 | 1,868 | 4,027 | 5,393 | ||||||||||||
Stock-based compensation expense | 1,135 | 1,449 | 4,252 | 4,447 | ||||||||||||
Exit of merchandise operations(a) | — | — | 434 | — | ||||||||||||
Interest and other expense (income), net | 3 | (57 | ) | 51 | (55 | ) | ||||||||||
Loss in equity interests | 173 | 68 | 209 | 243 | ||||||||||||
Severance charges(b) | — | — | — | 1,354 | ||||||||||||
Foreign VAT, interest and penalties(c) | — | (592 | ) | — | (592 | ) | ||||||||||
Adjusted EBITDA | $ | 7,256 | $ | 7,054 | $ | 21,534 | $ | 18,796 | ||||||||
Depreciation and amortization | (1,361 | ) | (1,868 | ) | (4,027 | ) | (5,393 | ) | ||||||||
Stock-based compensation expense | (1,135 | ) | (1,449 | ) | (4,252 | ) | (4,447 | ) | ||||||||
Loss in equity interests | (173 | ) | (68 | ) | (209 | ) | (243 | ) | ||||||||
Interest and other (expense) income, net | (3 | ) | 57 | (51 | ) | 55 | ||||||||||
Adjusted income before income taxes | 4,584 | 3,726 | 12,995 | 8,768 | ||||||||||||
Adjusted income tax expense(d) | 1,718 | 1,423 | 5,110 | 3,349 | ||||||||||||
Adjusted net income | $ | 2,866 | $ | 2,303 | $ | 7,885 | $ | 5,419 | ||||||||
Adjusted net income per diluted share | $ | 0.11 | $ | 0.09 | $ | 0.31 | $ | 0.21 | ||||||||
Diluted weighted average number of shares outstanding | 25,449 | 25,670 | 25,537 | 25,547 | ||||||||||||
Net cash provided by operating activities | $ | 4,114 | $ | 7,675 | $ | 11,559 | $ | 11,553 | ||||||||
Less: Capital expenditures | (741 | ) | (1,329 | ) | (2,777 | ) | (3,973 | ) | ||||||||
Free cash flow | $ | 3,373 | $ | 6,346 | $ | 8,782 | $ | 7,580 | ||||||||
(a) | Costs impacting comparability included in operating expenses in the condensed consolidated statements of operations for the nine months ended September 30, 2015 included costs related to the closure of our merchandise operations in Redding, CA consisting of (i) severance of approximately $0.2 million recorded in general and administrative and (ii) rent acceleration and other closure costs of $0.2 million recorded in sales and marketing. |
(b) | Costs impacting comparability included in operating expenses in the condensed consolidated statements of operations for the nine months ended September 30, 2014 include severance of approximately $1.4 million, representing (i) severance charges for certain executive officers and (ii) severance charges for the employees in our Los Angeles, CA office ($0.1 million in product and content development, $0.5 million in sales and marketing and $0.8 million in general and administrative). |
(c) | Included in general and administrative expenses on the condensed consolidated statements of operations for the three and nine months ended September 30, 2014 include a favorable adjustment for foreign value-added tax (“VAT”), interest and penalties of $592,000. |
(d) | Adjusted income tax expense was calculated using an effective tax rate of 37.5% and 38.2% for the three months ended September 30, 2015 and 2014, respectively, and 39.3% and 38.2% for the nine months ended September 30, 2015 and 2014, respectively. |
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Results of Operations
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
The following table summarizes results of operations for the three months ended September 30, 2015 compared to the three months ended September 30, 2014:
Three Months Ended September 30, | |||||||||||||||||||||
2015 | 2014 | Increase/(Decrease) | |||||||||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | Amount | % | ||||||||||||||||
(In Thousands, Except for Per Share Data) | |||||||||||||||||||||
Net revenue | $ | 34,706 | 100.0 | % | $ | 35,858 | 100.0 | % | $ | (1,152 | ) | (3.2 | )% | ||||||||
Cost of revenue | 2,050 | 5.9 | 4,861 | 13.6 | (2,811 | ) | (57.8 | ) | |||||||||||||
Gross profit | 32,656 | 94.1 | 30,997 | 86.4 | 1,659 | 5.4 | |||||||||||||||
Operating expenses | 27,896 | 80.4 | 26,668 | 74.3 | 1,228 | 4.6 | |||||||||||||||
Income from operations | 4,760 | 13.7 | 4,329 | 12.1 | 431 | 10.0 | |||||||||||||||
Loss in equity interest | (173 | ) | (0.5 | ) | (68 | ) | (0.2 | ) | 105 | 154.4 | |||||||||||
Interest and other (expense) income, net | (3 | ) | — | 57 | 0.1 | (60 | ) | (105.3 | ) | ||||||||||||
Income before income taxes | 4,584 | 13.2 | 4,318 | 12.0 | 266 | 6.2 | |||||||||||||||
Income tax expense | 1,718 | 5.0 | 2,234 | 6.2 | (516 | ) | (23.1 | ) | |||||||||||||
Net income | $ | 2,866 | 8.2 | % | $ | 2,084 | 5.8 | % | $ | 782 | 37.5 | % | |||||||||
Net income per share: | |||||||||||||||||||||
Basic | $ | 0.11 | $ | 0.08 | $ | 0.03 | 37.5 | % | |||||||||||||
Diluted | $ | 0.11 | $ | 0.08 | $ | 0.03 | 37.5 | % | |||||||||||||
Net Revenue
Net revenue decreased 3.2% to $34.7 million for the three months ended September 30, 2015, compared to $35.9 million for the three months ended September 30, 2014. The following table sets forth revenue by category for the three months ended September 30, 2015 compared to the three months ended September 30, 2014, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods:
Three Months Ended September 30, | |||||||||||||||||
Net Revenue | Percentage Increase/ (Decrease) | Percentage of Total Net Revenue | |||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||||
(In Thousands) | |||||||||||||||||
National online advertising | $ | 8,669 | $ | 7,326 | 18.3 | % | 24.9 | % | 20.4 | % | |||||||
Local online advertising | 16,369 | 14,796 | 10.6 | 47.2 | 41.3 | ||||||||||||
Total online advertising | 25,038 | 22,122 | 13.2 | 72.1 | 61.7 | ||||||||||||
Registry | 4,192 | 3,289 | 27.5 | 12.1 | 9.2 | ||||||||||||
Commerce | 617 | 141 | 337.6 | 1.8 | 0.4 | ||||||||||||
Total registry and commerce | 4,809 | 3,430 | 40.2 | 13.9 | 9.6 | ||||||||||||
Merchandise | — | 4,473 | (100.0 | ) | — | 12.4 | |||||||||||
Publishing and other | 4,859 | 5,833 | (16.7 | ) | 14.0 | 16.3 | |||||||||||
Total net revenue | $ | 34,706 | $ | 35,858 | (3.2 | )% | 100.0 | % | 100.0 | % | |||||||
Online advertising — Revenue from total online advertising increased by 13.2%.
Revenue from national online advertising increased by 18.3% primarily driven by increased advertising in our baby and wedding businesses, and to a lesser extent changes in estimates for multi-element advertising contracts.
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Local online advertising revenue increased by 10.6%, primarily attributable to an increase in the number of local vendors advertising with us on our network of websites as a result of sales to new vendors as well as an increase in our average revenue per vendor. As of September 30, 2015, we had more than 25,000 local vendors who displayed in the aggregate more than 31,700 storefronts, compared to more than 24,300 vendors who displayed in the aggregate more than 32,600 storefronts as of September 30, 2014.
Registry and Commerce — Transaction based registry and commerce grew, collectively, 40.2% year over year. Registry revenue increased 27.5% driven primarily by an increase in guest traffic to our retail partners due to enhancements on our wedding websites and higher purchase conversion rates. An increase of 337.6% in commerce revenue was driven primarily by new product features and advances in user experience with our key commerce partners as a result of our transition from a merchandising and fulfillment-based model to a partner-based model.
Merchandise — The absence of merchandise revenue during the three months ended September 30, 2015 results from the closure of our merchandise operations in Redding, CA in the first quarter of 2015.
Publishing and other — Revenue for publishing and other decreased 16.7% in comparison to prior year primarily as a result of a decrease in the number of ad pages for the national, local and Bump magazines, as well as a reduction in consideration allocated to print sales in multi-element arrangements with our customers. In June, we decided to discontinue the publication of The Bump print magazine by December 31, 2015.
Gross Profit/Gross Margin
Cost of revenues consists of costs related to the production of national and regional magazines, payroll and related expenses for our personnel who are responsible for the production of online and off-line media, costs of internet and hosting services and the cost of merchandise sold, which includes outbound shipping and personalization costs. Gross profit improved 5.4%, with gross margin improving to 94.1% for the three months ended September 30, 2015 compared to 86.4% for the three months ended September 30, 2014. The following table presents the components of gross profit and gross margin for the three months ended September 30, 2015 compared to the three months ended September 30, 2014:
Three Months Ended September 30, | |||||||||||||||||||||
2015 | 2014 | Increase/(Decrease) | |||||||||||||||||||
Gross Profit | Gross Margin % | Gross Profit | Gross Margin % | Gross Profit | Gross Margin % | ||||||||||||||||
(Dollar Amounts In Thousands) | |||||||||||||||||||||
Online advertising (national and local) | $ | 24,355 | 97.3 | % | $ | 21,757 | 98.4 | % | $ | 2,598 | 11.9 | % | |||||||||
Registry | 4,192 | 100.0 | 3,289 | 100.0 | 903 | 27.5 | |||||||||||||||
Commerce | 617 | 100.0 | 141 | 100.0 | 476 | 337.6 | |||||||||||||||
Merchandise | — | — | 1,640 | 36.7 | (1,640 | ) | (100.0 | ) | |||||||||||||
Publishing and other | 3,492 | 71.9 | 4,170 | 71.5 | (678 | ) | (16.3 | ) | |||||||||||||
Total gross profit | $ | 32,656 | 94.1 | % | $ | 30,997 | 86.4 | % | $ | 1,659 | 5.4 | % | |||||||||
The increase in the total gross margin percentage was primarily attributable to the closure of our lower margin merchandise operations.
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Operating Expenses
The following table presents the components of operating expenses and the percentage of revenue that each component represented for the three months ended September 30, 2015 compared to the three months ended September 30, 2014:
Three Months Ended September 30, | |||||||||||||||||
Operating Expenses | Percentage Increase/ (Decrease) | Percentage of Total Net Revenue | |||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||||
(In Thousands) | |||||||||||||||||
Product and content development | $ | 9,901 | $ | 8,569 | 15.5 | % | 28.5 | % | 23.9 | % | |||||||
Sales and marketing | 10,679 | 10,842 | (1.5 | ) | 30.8 | 30.2 | |||||||||||
General and administrative | 5,955 | 5,389 | 10.5 | 17.2 | 15.1 | ||||||||||||
Depreciation and amortization | 1,361 | 1,868 | (27.1 | ) | 3.9 | 5.2 | |||||||||||
Total operating expenses | $ | 27,896 | $ | 26,668 | 4.6 | % | 80.4 | % | 74.4 | % | |||||||
Our operating expenses for the three months ended September 30, 2015 increased 4.6% year over year. We had lower costs as a result of exiting our merchandise operations and the sale of our Ijie operations during the fourth quarter of 2014, where historical expenses had a greater concentration in sales and marketing and general and administrative expenses. Savings from the exited businesses have been invested in our marketplace strategy, with a particular focus on product and content development expenses. In addition, 2014 included a favorable adjustment for foreign value-added tax (“VAT”), interest and penalties of $0.6 million. We ended the third quarter of 2015 with 630 employees.
Product and Content Development — The increase of 15.5% was primarily attributable to an increase in employee headcount, as well as an increase in expenditures to support our initiatives in product and technology development.
Sales and Marketing — The decrease of 1.5% was primarily attributable to lower expenses as a result of exiting our merchandise and Ijie operations.
General and Administrative — Prior year results included a favorable adjustment for foreign VAT, interest and penalties of $0.6 million. Excluding this adjustment, general and administrative expenses decreased 0.4% primarily attributable to lower expenses as a result of exiting our merchandise and Ijie operations, partially offset by an increase in expenditures to support our initiatives.
Depreciation and Amortization — The decrease of 27.1% was primarily attributable to additional amortization expense in the prior year related to the Weddingchannel.com trade name, which was amortized through December 31, 2014.
Loss in Equity Interests
Loss in equity interests for the three months ended September 30, 2015 and 2014 was $173,000 and $68,000, respectively, which represents our share of losses for the three months ended September 30, 2015 and 2014.
Provision for Income Taxes
We had an income tax expense of $1.7 million for the three months ended September 30, 2015, compared to an income tax expense of $2.2 million for the three months ended September 30, 2014. The effective tax rate for the three months ended September 30, 2015 was 37.5%, compared to 51.7% for the three months ended September 30, 2014. The higher effective tax rate in 2014 was primarily a result of finalizing our prior year U.S. income tax returns and the resolution of certain prior year foreign tax matters. These incremental tax expenses increased our effective tax rate by 10.9%.
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Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
The following table summarizes results of operations for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014:
Nine Months Ended September 30, | |||||||||||||||||||||
2015 | 2014 | Increase/(Decrease) | |||||||||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | Amount | % | ||||||||||||||||
(In Thousands, Except for Per Share Data) | |||||||||||||||||||||
Net revenue | $ | 103,498 | 100.0 | % | $ | 106,608 | 100.0 | % | $ | (3,110 | ) | (2.9 | )% | ||||||||
Cost of revenue | 7,551 | 7.3 | 15,363 | 14.4 | (7,812 | ) | (50.8 | ) | |||||||||||||
Gross profit | 95,947 | 92.7 | 91,245 | 85.6 | 4,702 | 5.2 | |||||||||||||||
Operating expenses | 83,126 | 80.3 | 83,051 | 77.9 | 75 | 0.1 | |||||||||||||||
Income from operations | 12,821 | 12.4 | 8,194 | 7.7 | 4,627 | 56.5 | |||||||||||||||
Loss in equity interest | (209 | ) | (0.2 | ) | (243 | ) | (0.2 | ) | (34 | ) | (14.0 | ) | |||||||||
Interest and other (expense) income, net | (51 | ) | — | 55 | — | 106 | (192.7 | ) | |||||||||||||
Income before income taxes | 12,561 | 12.2 | 8,006 | 7.5 | 4,555 | 56.9 | |||||||||||||||
Income tax expense | 4,939 | 4.8 | 3,551 | 3.3 | 1,388 | 39.1 | |||||||||||||||
Net income | $ | 7,622 | 7.4 | % | $ | 4,455 | 4.2 | % | $ | 3,167 | 71.1 | % | |||||||||
Net income per share: | |||||||||||||||||||||
Basic | $ | 0.30 | $ | 0.18 | $ | 0.12 | 66.7 | % | |||||||||||||
Diluted | $ | 0.30 | $ | 0.17 | $ | 0.13 | 76.5 | % | |||||||||||||
Net Revenue
Net revenue decreased to $103.5 million for the nine months ended September 30, 2015, compared to $106.6 million for the nine months ended September 30, 2014. The following table sets forth revenue by category for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods:
Nine Months Ended September 30, | |||||||||||||||||
Net Revenue | Percentage Increase/ (Decrease) | Percentage of Total Net Revenue | |||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||||
(In Thousands) | |||||||||||||||||
National online advertising | $ | 25,219 | $ | 21,777 | 15.8 | % | 24.4 | % | 20.4 | % | |||||||
Local online advertising | 48,460 | 43,745 | 10.8 | 46.8 | 41.1 | ||||||||||||
Total online advertising | 73,679 | 65,522 | 12.4 | 71.2 | 61.5 | ||||||||||||
Registry | 9,848 | 7,954 | 23.8 | 9.5 | 7.5 | ||||||||||||
Commerce | 1,418 | 433 | 227.5 | 1.4 | 0.4 | ||||||||||||
Total registry and commerce | 11,266 | 8,387 | 34.3 | 10.9 | 7.9 | ||||||||||||
Merchandise | 878 | 12,902 | (93.2 | ) | 0.8 | 12.1 | |||||||||||
Publishing and other | 17,675 | 19,797 | (10.7 | ) | 17.1 | 18.5 | |||||||||||
Total net revenue | $ | 103,498 | $ | 106,608 | (2.9 | )% | 100.0 | % | 100.0 | % | |||||||
Online advertising — Revenue from total online advertising increased by 12.4%.
Revenue from national online advertising increased by 15.8% driven by increased advertising primarily from our baby and wedding businesses.
Local online advertising revenue increased by 10.8%, primarily attributable to an increase in our average revenue per vendor as well as the number of local vendors advertising with us on our network of websites as a result of sales to new vendors. As of
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September 30, 2015, we had more than 25,000 local vendors who displayed in the aggregate more than 31,700 storefronts, compared to more than 24,300 vendors who displayed in the aggregate more than 32,600 storefronts as of September 30, 2014.
Registry and Commerce — Transaction based registry and commerce revenue grew, collectively, 34.3% year over year. Registry revenue increased 23.8%, driven primarily by an increase in guest traffic to our retail partners due to enhancements on our wedding websites and higher purchase conversion rates. An increase of 227.5% in commerce was driven primarily by new product features and advances in user experience with our key commerce partners as a result of our transition from a merchandising and fulfillment-based model to a partner-based model.
Merchandise — The decrease of 93.2% was driven primarily by lower revenue generated as a result of clearing inventory in connection with the closure of our merchandise operations in Redding, CA in the first quarter of 2015.
Publishing and other — Revenue for publishing and other decreased 10.7% primarily as a result of a decrease in the number of ad pages for the national and Bump magazine, as well as a reduction in consideration allocated to print sales in multi-element arrangements with our customers. In June, we decided to discontinue the publication of The Bump print magazine by December 31, 2015.
Gross Profit/Gross Margin
Cost of revenues consists of costs related to the production of national and regional magazines, payroll and related expenses for our personnel who are responsible for the production of online and off-line media, costs of internet and hosting services and the cost of merchandise sold, which includes outbound shipping and personalization costs. Gross profit improved 5.2%, with gross margin improving to 92.7% for the nine months ended September 30, 2015 compared to 85.6% for the nine months ended September 30, 2014. The following table presents the components of gross profit and gross margin for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014:
Nine Months Ended September 30, | |||||||||||||||||||||
2015 | 2014 | Increase/(Decrease) | |||||||||||||||||||
Gross Profit | Gross Margin % | Gross Profit | Gross Margin % | Gross Profit | Gross Margin % | ||||||||||||||||
(Dollar Amounts In Thousands) | |||||||||||||||||||||
Online advertising (national and local) | $ | 72,090 | 97.8 | % | $ | 64,185 | 98.0 | % | $ | 7,905 | 12.3 | % | |||||||||
Registry | 9,848 | 100.0 | 7,954 | 100.0 | 1,894 | 23.8 | |||||||||||||||
Commerce | 1,418 | 100.0 | 433 | 100.0 | 985 | 227.5 | |||||||||||||||
Merchandise | (2 | ) | (0.2 | ) | 4,796 | 37.2 | (4,798 | ) | (100.0 | ) | |||||||||||
Publishing and other | 12,593 | 71.2 | 13,877 | 70.1 | (1,284 | ) | (9.3 | ) | |||||||||||||
Total gross profit | $ | 95,947 | 92.7 | % | $ | 91,245 | 85.6 | % | $ | 4,702 | 5.2 | % | |||||||||
The increase in the total gross margin percentage was primarily attributable to the closure of our lower margin merchandise operations, as well as growth in higher margin online advertising and registry and commerce revenue.
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Operating Expenses
The following table presents the components of operating expenses and the percentage of revenue that each component represented for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014:
Nine Months Ended September 30, | |||||||||||||||||
Operating Expenses | Percentage Increase/ (Decrease) | Percentage of Total Net Revenue | |||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||||
(In Thousands) | |||||||||||||||||
Product and content development | $ | 29,300 | $ | 26,274 | 11.5 | % | 28.3 | % | 24.6 | % | |||||||
Sales and marketing | 31,683 | 32,606 | (2.8 | ) | 30.6 | 30.6 | |||||||||||
General and administrative | 18,116 | 18,778 | (3.5 | ) | 17.5 | 17.6 | |||||||||||
Depreciation and amortization | 4,027 | 5,393 | (25.3 | ) | 3.9 | 5.1 | |||||||||||
Total operating expenses | $ | 83,126 | $ | 83,051 | 0.1 | % | 80.3 | % | 77.9 | % | |||||||
Our operating expenses for the nine months ended September 30, 2015 were flat with prior period. We recognized lower costs resulting from exiting our merchandise operations and the sale of our Ijie operations during the fourth quarter of 2014 and incurred $1.4 million in severance charges and a favorable adjustment of $0.6 million for foreign VAT, interest and penalties during the nine months ended September 30, 2014, offset in part by expense increases as we continued to expand our marketplace strategy with a particular focus on product and content development expenses. Historical expenses in our merchandise and Ijie operations had a greater concentration in sales and marketing and general and administrative expenses, as compared to product and content development expenses. Savings from the exited businesses have been invested in our marketplace strategy. We ended the third quarter of 2015 with 630 employees.
Product and Content Development — The increase of 11.5% was primarily attributable to an increase in employee headcount, as well as an increase in expenditures to support our initiatives in product and technology development.
Sales and Marketing — The decrease of 2.8% was primarily attributable to a decrease in compensation costs due to severance costs of $0.5 million incurred in 2014, as well as lower expenses as a result of exiting our merchandise and Ijie operations.
General and Administrative — The decrease of 3.5% was primarily attributable to a decrease in compensation costs as a result of severance costs of $0.8 million incurred in 2014, as well as lower expenses as a result of exiting our merchandise and Ijie operations. This decrease is also driven by a favorable adjustment for foreign VAT, interest and penalties of $0.6 million in 2014. Excluding this adjustment, general and administrative expenses decreased 6.5%.
Depreciation and Amortization — The decrease of 25.3% was primarily attributable to additional amortization expense in the prior year related to the Weddingchannel.com trade name, which was amortized through December 31, 2014.
Loss in Equity Interests
Loss in equity interests for the nine months ended September 30, 2015 and 2014 was $209,000 and $243,000, respectively, which primarily represents our share of losses for the nine months ended September 30, 2015 and 2014.
Provision for Income Taxes
We had an income tax expense of $4.9 million for the nine months ended September 30, 2015, compared to an income tax expense of $3.6 million for the nine months ended September 30, 2014. The effective tax rate for the nine months ended September 30, 2015 was 39.3%, compared to 44.4% for the nine months ended September 30, 2014. The higher effective tax rate in 2014 was primarily a result of finalizing our prior year U.S. income tax returns and the resolution of certain prior year foreign tax matters. These incremental tax expenses increased our effective tax rate by 6.2%.
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Liquidity and Capital Resources
Cash Flow
Cash and cash equivalents consist of cash and highly liquid investments with maturities of 90 days or less at the date of acquisition. At September 30, 2015, we had $86.3 million in cash and cash equivalents, compared to $90.0 million at December 31, 2014.
The following table sets forth our cash flows from operating activities, investing activities and financing activities for the periods indicated:
Nine Months Ended September 30, | ||||||||
2015 | 2014 | |||||||
(In Thousands) | ||||||||
Net cash provided by operating activities | $ | 11,559 | $ | 11,553 | ||||
Net cash used in investing activities | (5,140 | ) | (13,743 | ) | ||||
Net cash used in financing activities | (10,056 | ) | (2,824 | ) | ||||
Decrease in cash and cash equivalents | $ | (3,637 | ) | $ | (5,014 | ) | ||
Operating Activities
Net cash provided by operating activities was $11.6 million for the nine months ended September 30, 2015. This was driven by our net income of $7.6 million and adjustments of $10.2 million for non-cash items including depreciation, amortization and stock-based compensation, partially offset by a net cash outflow from changes in operating assets and liabilities of $6.3 million. The net cash outflow from changes in operating assets and liabilities was mainly driven by an increase in trade accounts receivable net of deferred revenue of $6.7 million and a decrease in accounts payable and accrued expenses of $0.8 million, partially offset by a decrease in prepaid expenses and other assets of $1.7 million.
Net cash provided by operating activities was $11.6 million for the nine months ended September 30, 2014. This was driven by our net income of $4.5 million, plus adjustments of $10.3 million for non-cash items including depreciation, amortization and stock-based compensation, partially offset by a net cash outflow from changes in operating assets and liabilities of $3.2 million. The net cash outflow from changes in operating assets and liabilities was mainly driven by a $3.3 million increase in trade accounts receivable net of deferred revenue, primarily due to increased receivables related to national online advertising campaigns and registry services, as well as a decrease in accounts payable and accrued expenses of $1.3 million. Partially offsetting the net increase in operating assets and liabilities was a decrease of $1.9 million in prepaid expenses and other assets.
Investing Activities
Net cash used in investing activities was $5.1 million for the nine months ended September 30, 2015, driven by expenditures of $2.8 million, primarily related to capitalized software, as well as payments to acquire investments of $2.5 million.
Net cash used in investing activities was $13.7 million for the nine months ended September 30, 2014, which primarily related to acquisitions totaling $5.7 million, as well as an investment of $4.0 million. Also contributing to the net cash used in investing activities were capitalized expenditures of $4.0 million, primarily related to capitalized software.
Financing Activities
Net cash used in financing activities was $10.1 million for the nine months ended September 30, 2015, primarily driven by the repurchase of shares totaling $8.8 million and by cash used to satisfy tax withholding obligations for employees related to the vesting of their restricted stock awards of $2.7 million, partially offset by excess tax benefits related to these stock awards of $1.0 million. Following the repurchases from 2014 and the first three quarters of 2015, $9.6 million in shares of common stock may be purchased under such $20.0 million repurchase authorization.
Net cash used in financing activities was $2.8 million for the nine months ended September 30, 2014, primarily driven by cash used to satisfy tax withholding obligations for employees related to the vesting of their restricted stock awards of $4.4 million, partially offset by excess tax benefits related to these stock awards of $1.3 million. We also repurchased shares totaling $0.6
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million, which was partially offset by the proceeds from the issuances of common stock in connection with our employee stock purchase plan and the exercise of stock options of $0.9 million.
Off-Balance Sheet Arrangements
As of September 30, 2015, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Seasonality
We believe that the impact of the frequency of weddings varying from quarter to quarter results in lower registry services and commerce revenues in the first and fourth quarters. Our publishing business typically experiences a quarter to quarter revenue decline in the first and third quarters due to the cyclical pattern of our regional publishing schedule. We could experience new seasonal patterns in results as a result of our commerce transition.
Critical Accounting Policies and Estimates
Our discussion of our results of operations and financial condition relies on our consolidated financial statements, which are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. We believe that investors need to be aware of these policies and how they impact our financial statements as a whole, as well as our related discussion and analysis presented herein. While we believe that these accounting policies are based on sound measurement criteria, actual future events can result in outcomes that may be materially different from these estimates or forecasts.
The accounting policies and related risks described in our Annual Report on Form 10-K for the year ended December 31, 2014 are those that depend most heavily on these judgments and estimates. During the nine months ended September 30, 2015, there were no material changes to the critical accounting policies contained therein.
The total reserve balances that require management’s judgment and estimates were $2.9 million related to the allowance for doubtful accounts and $3.7 million related to the allowance for doubtful accounts and inventory as of September 30, 2015 and December 31, 2014, respectively.
Recently Issued Accounting Pronouncements
Reference is made to Note 1 of Notes to Condensed Consolidated Financial Statements for information concerning recent accounting pronouncements since the filing of the Company’s Annual Report on Form 10-K, filed with the Securities Exchange Commission on March 16, 2015.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position, results of operations, or cash flows due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks.
We are exposed to market risk through interest rates related to the investment of our current cash and cash equivalents of $86.3 million as of September 30, 2015. These funds are generally invested in highly liquid debt instruments. As such instruments mature and the funds are reinvested, we are exposed to changes in market interest rates. This risk is not considered material, and we manage such risk by continuing to evaluate the best investment rates available for short-term, high quality investments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as that term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2015. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported,
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within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended September 30, 2015 identified in connection with the evaluation thereof by our management, including the Chief Executive Officer and Chief Financial Officer, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are effective at that reasonable assurance level.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are engaged in certain legal actions arising in the ordinary course of business and believe that the ultimate outcome of these actions will not have a material effect on our results of operations, financial position or cash flows.
Item 1A. Risk Factors
Risks that could have a negative impact on our business, results of operations and financial condition include without limitation, (i) our online wedding-related and other websites, mobile and other digital properties may fail to generate sufficient revenue to survive over the long term, (ii) we incurred losses for many years following our inception and may incur losses in the future, (iii) we may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall, (iv) efforts to launch new or upgrading existing technology and features may not generate significant new revenue or may reduce revenue from existing services, (v) we may be unable to develop solutions that generate revenue from advertising and other services delivered to mobile phones and wireless devices, (vi) the significant fluctuation to which our quarterly revenue and operating results are subject, (vii) the seasonality of the wedding industry, (viii) our operations are dependent on internet search engine rankings, and our ability to influence those rankings is limited, (ix) the dependence of our registry and commerce services business on third parties, (x) increased competition in our markets could reduce our market share and (xi) other factors detailed in documents we file from time to time with the SEC. A more detailed description of each of these and other risk factors can be found under the caption “Risk Factors” in our most recent Annual Report on Form 10-K, filed with the SEC on March 16, 2015. There have been no material changes to the risk factors described in our most recent Annual Report on Form 10-K.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased(a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(b) | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(c) | ||||||||||
July 1 to July 31, 2015 | 19,582 | $ | 16.23 | — | $ | 9,564,302 | ||||||||
August 1 to August 31, 2015 | 5,291 | $ | 15.33 | — | $ | 9,564,302 | ||||||||
September 1 to September 30, 2015 | 4,202 | $ | 14.12 | — | $ | 9,564,302 | ||||||||
Total | 29,075 | $ | 15.76 | — | $ | 9,564,302 | ||||||||
_____________
(a) | The terms of some awards granted under certain of our stock incentive plans allow participants to surrender or deliver shares of XO Group’s common stock to us to pay for the exercise price of those awards or to satisfy tax withholding obligations related to the exercise or vesting of those awards. Certain of the shares listed in the table above represent the surrender or delivery of shares to us in connection with such exercise price payments or tax withholding obligations. For purposes of this table, the “price paid per share” is determined by reference to the closing sales price per share of XO Group’s common stock on the New York Stock Exchange on the date of such surrender or delivery (or on the last date preceding such surrender or delivery for which such reported price exists). |
(b), (c) | On April 10, 2013, we announced that our Board of Directors had authorized the repurchase of up to $20.0 million of our common stock from time to time in the open market or in privately negotiated transactions. The repurchase program may be suspended or discontinued at any time, but it does not have an expiration date. As of September 30, 2015, we have repurchased a total of 634,479 shares of our common stock under this program for $10.4 million. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
Incorporated by reference to the Exhibit Index immediately preceding the exhibits attached to this Quarterly Report on Form 10-Q.
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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.
Date: November 3, 2015 | XO GROUP INC. |
By: /s/ Gillian Munson Gillian Munson Chief Financial Officer (principal financial officer and duly authorized officer) | |
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EXHIBIT INDEX
Number | Description | |
21.1 | Subsidiaries of the Registrant | |
31.1 | Certification of Chief Executive Officer and President Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1* | Certification of Chief Executive Officer and President Pursuant to 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 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 Labels Linkbase Document | |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document | |
* These certifications are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings.
** In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.
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