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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 000-23709
DOUBLECLICK INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7319 13-3870996
(State of (Primary Standard Industrial I.R.S.Employer
Incorporation) Classification Code) Identification Number)
41 MADISON AVENUE, 32ND FLOOR
NEW YORK, NEW YORK 10010
(212) 683-0001
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
-----------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK $.001 PAR VALUE
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.
/X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
/ /
The aggregate market value of voting stock held by non-affiliates of the
registrant as of January 31, 1999 was $1,526,143,850 (based on the last
reported sale price on the NASDAQ National Market on that date). The
number of shares outstanding of the registrant's common stock as of
January 31, 1999 was 19,643,177.
DOUBLECLICK INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
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Item 1. Business.................................................................................. 1
Item 2. Properties................................................................................ 9
Item 3. Legal Proceedings......................................................................... 10
Item 4. Submissions of Matters to a Vote of Security Holders...................................... 10
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 11
Item 6. Selected Financial Data................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................... 14
Item 8. Financial Statements and Supplementary Data............................................... F-1
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................. I-1
PART III
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Item 10. Directors and Executive Officers of the Registrant........................................ I-2
Item 11. Executive Compensation.................................................................... I-2
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ I-2
Item 13. Certain Relationships and Related Transactions............................................ I-2
PART IV
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Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.......................... I-3
Signatures......................................................................................... I-5
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT DOUBLECLICK AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
DOUBLECLICK'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. DOUBLECLICK UNDERTAKES
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.
ITEM 1. BUSINESS
DoubleClick Inc. was incorporated in Delaware on January 23, 1996 as
DoubleClick Incorporated and changed its name to DoubleClick Inc. on May 14,
1996. Reference in this Report to "DoubleClick", "we", "our", and "us" refer to
DoubleClick Inc. and its subsidiaries. DoubleClick's principal offices are
located at 41 Madison Avenue, 32nd Floor, New York, New York 10010 and its
telephone number at that location is (212) 683-0001.
DoubleClick is a leading provider of comprehensive Internet advertising
solutions for advertisers and Web publishers worldwide. DoubleClick's technology
and media expertise enable DoubleClick to deliver highly targeted, measurable
and cost-effective Internet advertising for advertisers and ad agencies, and to
increase ad sales and improve ad space inventory management for Web publishers.
DoubleClick currently has two principal service offerings: the DoubleClick
Network and DART Service.
- DOUBLECLICK NETWORK (AD SALES). The DoubleClick Network provides
fully-outsourced ad sales, delivery and related services to publishers of
highly-trafficked Web sites, including AltaVista, The Dilbert Zone,
Macromedia and U.S. News Online. The DoubleClick Network focuses on
meeting the advertising needs of Internet advertisers who target users on
a national, international and/or local basis.
- DART SERVICE (AD SERVING). Our DART Service provides Web publishers,
advertisers and ad agencies with the ability to control the targeting,
delivery, measurement and analysis of their online marketing campaigns on
a real-time basis.
DoubleClick's proprietary DART technology provides the platform for
DoubleClick's solutions. This technology enables advertisers to optimize ad
performance by dynamically targeting and delivering ads to Web users based on
pre-selected criteria. As a user visits the Web sites of Web publishers that
utilize DoubleClick's solutions, DART collects information regarding the user
and his or her viewing activities and ad responses, and applies this data to
improve its ability to predict the user's reaction and enhance DART's ad
targeting capabilities. The sophisticated tracking and reporting functionality
incorporated into DART provides advertisers with accurate measurements of ad
performance based on selected criteria. In addition, DART provides Web
publishers with sophisticated ad space inventory management capabilities.
In December 1998, we received over 5.3 billion requests for the delivery of
ads (impressions) generated by an aggregate of approximately 6,400 Web sites of
570 Web publishers which used our solutions. We estimate that more than 48
million users worldwide visited Web sites within the DoubleClick Network during
December 1998. According to Media Metrix, 45.8% of Internet users in the United
States visited Web sites within the DoubleClick Network during the same month.
We believe that the number of Web users worldwide will increase from
approximately 113 million at the end of 1998 to 247 million by the end of 2002.
We also believe that the dollar value of Internet advertising in the United
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States will increase from approximately $1.9 billion in 1998 to $7.7 billion
in 2002. During the fourth quarter of 1998, we managed approximately 18,000
Internet advertisements for over 2,300 advertisers.
In 1998, DoubleClick's DART technology delivered approximately 34 billion
ads worldwide. DART's dynamic matching, targeting and delivery functions enable
Web advertisers to target their advertising based on a variety of factors,
including user interests, time of day, day of week, organization name and size,
domain type (i.e., commercial, government, education, network), operating
system, server type and version, and keywords. In addition, DoubleClick offers
the ability to match geographic location of the user's server and organization
revenue, if known, through third-party databases. DART also manages the
frequency and distribution of ad placements to limit repetitive ad exposures
that can reduce ad effectiveness. Further, in order to deliver the
advertisements on the pages that are likely to result in the best response, DART
improves its predictive capabilities by continuously collecting anonymous
information regarding the user's viewing activities and ad responses.
DART is a powerful ad performance tracking and reporting tool. Detailed
daily online performance reports allow advertisers and Web publishers to
actively monitor and react to the success of particular ads and marketing
campaigns and Web site traffic patterns, respectively. Such reports can be
further tailored to evaluate ad success based on the dynamic ad matching,
targeting and delivering factors set forth above. DART delivers advertising
content developed using most leading Web tools and technologies, including Java,
JavaScript, RealAudio, RealVideo, Enliven and VRML. In addition, DART is
compatible with leading host servers, regardless of the Web publisher's hardware
or software. DART is designed to be highly reliable and to operate 24 hours a
day, seven days a week with minimal downtime. Enhancements of the DART
technology have allowed for the development of additional features providing:
(i) advertisers with the ability to test the effectiveness of the creative
content of an advertisement before launching an ad campaign by comparing
click-through rates on alternative advertisements; (ii) advertisers with the
opportunity to track a user to the advertiser's own Web site to determine what
actions a user takes following a click-through; and (iii) Web publishers with
the ability to accurately manage and record advertising activity and track
related revenue over a network of affiliated Web sites.
PRINCIPAL SERVICE OFFERINGS
TECHNOLOGY OVERVIEW
DoubleClick's proprietary DART technology serves as the enabling platform
for all of DoubleClick's solutions. This centralized ad management technology,
resident on DoubleClick's server, is linked to a Web publisher's and/or
advertiser's server and completes the dynamic ad matching, targeting and
delivering functions within milliseconds. In addition, continuous enhancements
to DART can be made without the need for a Web publisher to upgrade or purchase
new equipment or software upgrades.
DOUBLECLICK NETWORK
Utilizing DoubleClick's proprietary DART technology, the DoubleClick Network
provides effective Internet advertising solutions to both advertisers and Web
publishers. The DoubleClick Network consists of highly-trafficked Web sites
grouped together by DoubleClick in defined categories of interest. In 1998,
approximately 20 billion ads were delivered on the DoubleClick Network.
DoubleClick pays each Web publisher whose Web sites are on the DoubleClick
Network a service fee calculated as a percentage of the amount it charges
advertisers for delivering advertisements on the DoubleClick Network. In
addition, DoubleClick is responsible for billing and collecting for ads
delivered on the DoubleClick Network and typically assumes the risk of
non-payment from advertisers. Since December 1996, DoubleClick has derived
substantially all of its revenues from advertisements delivered on the
DoubleClick Network.
Web publishers seeking to add their Web sites to the DoubleClick Network
must meet defined inclusion and maintenance criteria based upon, among other
things, the demographics of the particular Web site's users, the Web site's
content quality and brand name recognition, the level of existing and projected
traffic on the Web site, and/or the opportunity to provide sponsorship
opportunities. By preserving the integrity of the DoubleClick Network through
the
2
maintenance of such defined criteria, DoubleClick enhances an advertiser's
ability to have its advertisements seen by the appropriate audience. In
addition, the DoubleClick Network provides greater efficiencies to advertisers
by allowing them to reach several different target audiences all through one ad
purchase and ad campaign.
DoubleClick intends to continuously target Web publishers of high quality
directories, search engines and premium Web sites for addition to the existing
categories of interest in the DoubleClick Network and to expand into additional
categories of interest based on advertisers' targeting needs. The following
table identifies the DoubleClick Select Network's categories of interest and a
representative sample of their respective Web sites as of December 1, 1998:
PREMIUM SITES
AltaVista Search
Billboard Online
Fast Company
Macromedia
The Dilbert Zone
U.S. News Online
SEARCH, DIRECTORIES & ISPS
AltaVista Search
Copernic
GTE Internet
GTE SuperPages
Internet Address Finder
MindSpring
Northern Light Research Engine
Open Text's Business Search
Supernews
Yellowpages.com
Ameritech
NEWS, INFORMATION & CULTURE
A&E
A&E's Mysteries.com
Atlantic Unbound
Biography
New York Daily News
PBS Online
The History Channel
U.S. News Online
USA TODAY Marketplace
COLLEGE
Animalhouse.com
JOBTRAK
U.S. News Edu Online
BUSINESS & FINANCE
BigCharts
ClearStation
EDGAR ONLINE
Fast Company
Individual Investor Online
3
Multex Investor Network
StockMaster
USA TODAY/Lipper
Worth Online
TRAVEL
easySABRE
TheTrip.com
Travelocity
Travelon
TravelWeb
AUTOMOTIVE
Autobytel.com
Automobile Magazine
Kelley Blue Book
Popular Mechanics: PM Zone
ENTERTAINMENT
Billboard Online
Sega Online
The WebStakes Network
United Media's ComicZone
Vibe Online
BMG/Bugjuice
BMG/Peeps
BMG/TwangThis!
BMG/getmusic
SPORTS
Major League Baseball
One on One Sports
USA TODAY Sportscores
WOMEN & FAMILY
Essence Online
Fashion Net
Home & Garden Television
Modern Bride.com
Parent Partners.com
Snoopy.com
The CyberMom
The Food Network
Top Secret Recipes
HEALTH
HealthCentral.com
Intelihealth
Ivanhoe Broadcast News
WEB MD
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TECHNOLOGY
Cosmo Software (VRML)
Diamond Multimedia Systems
Egghead
Macromedia
MFC Programmers' Source Book
My Desktop Network
Network Associates
ShockRave
Softseek
IBM Intellectual Property Network
The Dilbert Zone
WITI (Women in Technology
International)
Over 2,300 advertisers from a variety of industries utilized the DoubleClick
Network during the fourth quarter of 1998, including many of the leading
Internet advertisers. In certain instances, advertisers promote a number of
products at one time. In turn, there may be a number of advertising campaigns
being run simultaneously for each product, each with a number of advertisements.
Further, many advertisers use advertising agencies to strategically place their
advertisements. As a result, DoubleClick maintains relationships with, and
focuses its sales and marketing efforts on, both advertisers and advertising
agencies. Set forth below is a representative list of advertisers that delivered
advertisements on the DoubleClick Network during 1998:
Amazon.com Hewlett Packard
AT&T IBM
Bell South Intel
CDNow Microsoft
Charles Schwab MonsterBoard
Datek Online Quick & Reilly
Discover 3Com
Brokerage Volvo
General Motors Ziff Davis
GTE Interactive
To take advantage of the global reach of the Internet, DoubleClick has
established and is continuing to establish DoubleClick Networks in Europe, Asia
and other international markets. DoubleClick currently has operations in
Australia, Canada, France, Germany, the United Kingdom, and Benelux (Belgium,
Netherlands and Luxembourg) and through its business partners, in Japan,
Iberoamerica (Spain, Portugal and Latin America), Italy and Scandinavia (Sweden,
Norway, Finland, and Denmark). DoubleClick's international operations allow
advertisers to target users in specific countries and worldwide and enables
overseas advertisers to focus their advertising in their own domestic market,
the United States market or globally. Further, by locating ad servers in foreign
locations, DoubleClick is seeking to facilitate the rapid delivery of Internet
advertising in international markets.
DOUBLECLICK LOCAL. Introduced in July 1998, DoubleClick Local uses the
geo-targeting capabilities of DART to allow advertisers to deliver
advertisements to Web sites using the DART technology to users only in specified
cities, states or regions.
DOUBLECLICK DIRECT. Launched on a limited basis in the fourth quarter of
1997, DoubleClick Direct provides direct marketers with the opportunity to
conduct targeted advertising on a cost-per-action basis, paying only when users
click on an ad placed on a Web site, fill out a lead form, download software, or
buy a product. Web publishers, including those in the DoubleClick Network, may
designate a selected portion of their previously unsold inventory on a monthly
basis for such direct marketers. DoubleClick's DART technology analyzes which
ads receive the best response on which
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Web sites and then selects the appropriate ad and places it on the Web sites and
pages within the Web sites where the ad is expected to yield the best results.
Further, DoubleClick Direct tracks and audits transactions in real time, while
at the same time using the information to automatically enhance and update
DoubleClick Direct. DoubleClick expects direct marketers to utilize DoubleClick
Direct pursuant to short-term contracts. DoubleClick Direct has been marketed to
selected direct marketers on a limited basis.
DOUBLECLICK SPONSORSHIP. DoubleClick Sponsorship programs offer advertisers
a more integrated brand presence, more impact than a standard banner campaign,
greater interaction with site users and "ownership" of site content and
functionality. DoubleClick offers expertise in sponsorship development,
assistance in conceptualization and creative development, technical site
integration, tracking and performance. Through programs involving text-links,
microsites, and co-branded content areas, DoubleClick has expanded the amount of
saleable inventory. DoubleClick believes that sponsorship programs will enhance
branding, driving sales, and provide a compelling interactive relationship
between the brand and the user. DoubleClick Sponsorships was launched in the
first quarter of 1998.
DART SERVICE
DART FOR PUBLISHERS. Since January 1997, the DART Service has been provided
as a comprehensive turnkey advertising solution to those Web publishers with
internal sales forces that desire to take advantage of DoubleClick's DART
technology to facilitate and support their Internet ad placements. By utilizing
the DART Service, a Web publisher is provided with all of the dynamic ad
matching, targeting and delivering features of the DART technology, including
the predictive modeling benefits enabled by DoubleClick's continuous collection
of anonymous information regarding the users viewing activities and ad
responses. The DART Service functions as the Web publisher's ad server and works
in coordination with the Web publisher's content server. The DART Service is
generally offered to Web publishers pursuant to annual service contracts
terminable by either party on 30 days prior written notice. As of December 31,
1998, there were 226 Web publishers using the DART Service, including Bloomberg,
NBC, iName, The Wall Street Journal Interactive Edition, Intuit, CBS
Marketwatch, eBay, theglobe.com, and IDGNet.
CLOSED LOOP MARKETING SOLUTIONS. Introduced in the fourth quarter of 1998,
the Closed Loop Marketing Solutions suite of products is designed to provide
Internet advertisers and ad agencies with the ability to control targeting,
delivery, measurement and analysis of their online marketing campaigns on a
real-time basis. This suite of products enables advertisers and ad agencies to
control the delivery of their ad campaigns, including the ability to change
creative, targeting criteria, frequency and other marketplace variables in
real-time. This suite of products includes:
DART FOR ADVERTISERS. DoubleClick's DART technology allows advertisers
and their agencies to control and centralize the targeting, delivery and
reporting of online advertising, regardless of Web site location. DART
centralizes campaign management and creates a single set of reports
(including post-click activity) for entire campaigns. This enhanced
measurement and analysis increases the control and ability of advertisers
to maintain effective decision making.
DOUBLECLICK DATABANK. DataBank is a comprehensive data mining service
that allows advertisers to comprehend the effectiveness of their marketing
strategies and improve their marketing efforts. This service provides the
infrastructure for an advertiser to effectively store and analyze its of
online advertising data and transactions. With DataBank's "knowledge
discovery" mechanism, patterns and correlations between ad campaigns and
customers' activities can be established.
DOUBLECLICK BOOMERANG. Boomerang is a one-to-one targeting solution
that allows advertisers to re-market to specific categories of customers.
DoubleClick's DART technology serves ads specifically to prospects, as
identified by past behavior, subsequent to their visit to a Web site, as
well as marketing to frequent buyers, new customers, or those that have
visited a web site and have not responded or purchased. Boomerang is
designed to increase audience retention and sales revenues, and closes the
loop between advertising and sales. Boomerang targets users on an anonymous
basis based on past behavior as tracked by DoubleClick's cookies or as
provided by their advertiser.
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SALES AND MARKETING
UNITED STATES
DoubleClick sells its solutions in the United States through a sales and
marketing organization which consisted of an aggregate of 221 employees as of
December 31, 1998. These employees are located at DoubleClick's headquarters in
New York, and in DoubleClick's offices in Atlanta, Boston, Chicago, Detroit,
Dallas, Los Angeles and San Francisco. The sales organization is divided into
dedicated groups focused on sales of advertisements to be delivered on the
DoubleClick Network and sales of the DART Service. In addition, the ad sales
group employs an internal telesales force to solicit leads obtained from, and to
respond to inbound inquiries stimulated by, DoubleClick's marketing efforts.
DoubleClick has created business development subgroups for each of the
DoubleClick Network's categories of interest to recruit Web publishers with high
quality Web sites for inclusion in the DoubleClick Network. Business development
salespeople are assigned to a particular category of interest in order to
develop an in-depth understanding of the evolving needs of a particular category
of interest and the Web publishers with Web sites within such category of
interest. This expertise allows DoubleClick to more effectively manage existing
categories of interest and take advantage of opportunities to expand into
additional categories of interest.
To support its direct sales efforts and to actively promote the DoubleClick
brand, DoubleClick conducts comprehensive marketing programs, including public
relations, print advertisements, online advertisements over the DoubleClick
Network and on the Web sites of Web publishers unaffiliated with the DoubleClick
Network, Web advertising seminars, trade shows and ongoing customer
communications programs.
INTERNATIONAL
Through its international subsidiaries based in Dublin, Ireland, DoubleClick
has expanded its operations into Australia, Canada, France, Germany, the United
Kingdom and, in 1999, Benelux, through the creation of a direct sales
organization in each location. DoubleClick's international subsidiaries sell its
solutions internationally through a sales and marketing organization which
consisted of an aggregate of 72 employees as of December 31, 1998. In addition,
DoubleClick's Irish operating subsidiary is party to business relationships in
Japan, Iberoamerica, Italy and Scandinavia to take advantage of the local
marketplace knowledge of its business partners. As it continues to expand
internationally, DoubleClick, through its international subsidiaries, intends to
expand its direct sales and marketing capabilities to create direct sales
organizations in certain international markets and, in other markets, to enter
into business relationships with companies having knowledge of the particular
marketplace.
COMPETITION
DoubleClick's markets, namely Internet advertising and related products and
services, are intensely competitive. DoubleClick expects such competition to
continue to increase because its markets pose no substantial barriers to entry.
Competition may also increase as a result of industry consolidation. DoubleClick
believes that its ability to compete depends on many factors both within and
beyond its control, including the following:
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by either DoubleClick or its competitors;
- customer service and support efforts;
- sales and marketing efforts; and
- the ease of use, performance, price and reliability of solutions developed
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either by DoubleClick or its competitors.
DoubleClick competes for Internet advertising revenues with large Web
publishers and Web search engine companies, such as America Online, Excite,
Lycos, Microsoft, Infoseek and Yahoo! Further, the DoubleClick Network competes
with a variety of Internet advertising networks, including 24/7 Media. In
marketing the DoubleClick Network and DART Service to Web publishers,
DoubleClick also competes with providers of ad servers and related services,
including NetGravity and AdForce. DoubleClick also encounters competition from a
number of other sources, including content aggregation companies, companies
engaged in advertising sales networks, advertising agencies, and other companies
which facilitate Internet advertising.
Many of DoubleClick's existing competitors, as well as a number of potential
new competitors, have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical and
marketing resources than does DoubleClick. These factors allow them to respond
more quickly than DoubleClick can to new or emerging technologies and changes in
customer requirements. They may also allow them to devote greater resources than
DoubleClick can to the development, promotion and sale of their products and
services. Such competitors may also engage in more extensive research and
development, undertake more far-reaching marketing campaigns, adopt more
aggressive pricing policies and make more attractive offers to existing and
potential employees, strategic partners, advertisers and Web publishers. It is
possible that DoubleClick's competitors will develop products or services that
are equal or superior to DoubleClick's solutions or that achieve greater market
acceptance than DoubleClick's solutions. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products or
services to address the needs of DoubleClick's prospective advertising and Web
publisher customers. As a result, it is possible that new competitors may emerge
and rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share. It
is possible that DoubleClick will not be able to compete successfully or that
competitive pressures will not materially and adversely affect its results of
operations or financial condition.
Companies doing business on the Internet, including DoubleClick must also
compete with television, radio, cable and print (traditional advertising media)
for a share of advertisers' total advertising budgets. Advertisers may be
reluctant to devote a significant portion of their advertising budget to
Internet advertising if they perceive the Internet to be a limited or
ineffective advertising medium.
PROPRIETARY RIGHTS AND
RISK OF INFRINGEMENT
DoubleClick's success and ability to compete are substantially dependent on
its internally developed technologies and trademarks, which it protects through
a combination of patent, copyright, trade secret and trademark law. DoubleClick
has filed three patent applications in the United States and one patent
application internationally.
In addition, DoubleClick applies to register its trademarks in the United
States and internationally. (DoubleClick owns the registration for the
DOUBLECLICK trademark in the United States.) There can be no assurance that any
of DoubleClick's patent applications or trademark applications will be approved.
Even if they are approved, such patents or trademarks may be successfully
challenged by others or invalidated. If DoubleClick's trademark registrations
are not approved because third parties own such trademarks, its use of the
trademarks will be restricted unless it enters into arrangements with such third
parties which may be unavailable on commercially reasonable terms.
DoubleClick generally enters into confidentiality, proprietary rights
agreements and/or license agreements with its employees, consultants and
corporate partners, and generally controls access to and distribution of
DoubleClick's technologies, documentation and other proprietary information.
Despite its efforts to protect its proprietary rights from unauthorized use or
disclosure, parties may attempt to disclose, obtain or use DoubleClick's
solutions or technologies. DoubleClick cannot be certain that the steps it has
taken will prevent misappropriation of its solutions or technologies,
particularly in foreign countries where the laws or law enforcement may not
protect its proprietary rights as fully as in the United States.
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DoubleClick's DART technology collects and utilizes data derived from user
activity on the DoubleClick Network and the Web sites of Web publishers using
its solutions. This data is used for ad targeting and predicting ad performance.
Although DoubleClick believes that it has the right to use such data and the
compilation of such data in its database, there can be no assurance that any
trade secret, copyright or other protection will be available for such
information. In addition, others may claim rights to such information. Further,
pursuant to its contracts with Web publishers using its solutions, DoubleClick
is obligated to keep certain information regarding each Web publisher
confidential.
DoubleClick has licensed, and may license in the future, elements of its
trademarks, trade dress and similar proprietary rights to third parties. While
DoubleClick attempts to ensure that the quality of its brand is maintained by
such business partners, such partners may take actions that could materially and
adversely affect the value of DoubleClick's proprietary rights or its
reputation.
DoubleClick cannot be certain that any of its proprietary rights will be
viable or of value in the future since the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries is
uncertain and still evolving. Furthermore, third parties may assert infringement
claims against DoubleClick. From time to time it has been, and it expects to
continue to be, subject to claims in the ordinary course of its business,
including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties by it or the Web publishers with
Web sites in the DoubleClick Network. Although there has not been any litigation
relating to such claims, such claims and any resultant litigation, should it
occur, could subject DoubleClick to significant liability for damages and could
result in the invalidation of its proprietary rights. In addition, even if
DoubleClick wins the litigation, such litigation could be time-consuming and
expensive to defend, and could result in the diversion of DoubleClick's time and
attention, any of which could materially and adversely affect its business,
results of operations and financial condition. Any claims or litigation may also
result in limitations on DoubleClick's ability to use such trademarks and other
intellectual property unless we enter into arrangements with such third parties
which may be unavailable on commercially reasonable terms.
EMPLOYEES
As of December 31, 1998, DoubleClick employed 482 persons, including 293 in
sales, marketing and customer support (72 of whom serve international markets),
95 in business operations, engineering and product development, and 94 in
accounting, human resources, MIS and administration. DoubleClick is not subject
to any collective bargaining agreements and believes that its relationship with
its employees is good.
ITEM 2. PROPERTIES
DoubleClick's principal executive offices are currently located in two
separate facilities in New York, New York. Consisting of an aggregate of
approximately 60,000 square feet, these facilities are currently leased to
DoubleClick under leases which expire at various times through 2002.
DoubleClick also leases space for its sales and marketing efforts in
California, Georgia, Illinois, Massachusetts, Michigan and Texas, as well as
in Australia, Canada, France, Germany, Ireland and the United Kingdom.
DoubleClick is continually evaluating its facilities requirements.
On January 26, 1999, DoubleClick entered into a lease agreement for over
150,000 square feet of office space located at 450 West 33rd Street, New York,
New York 10001, for a term of eleven years with an option to renew the initial
term for an additional five years. DoubleClick will make lease payments of
approximately $800,000 in 1999 on this space. In addition, DoubleClick will pay
monthly payments totaling $4.6 million per annum for the period from January 26,
2000 to January 25, 2004 escalating to $4.85 million for the period from January
26, 2004 to January 25, 2005 and $5.0 million per annum for the period from
January 26, 2006 to the expiration date of the initial term on January 25, 2010.
The new facility will house the corporate headquarters of DoubleClick.
DoubleClick expects that its New York based operations will be relocated to the
new facilities in the fourth quarter of 1999. DoubleClick expects to incur
non-recurring charges in 1999 relating to its relocation. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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ITEM 3. LEGAL PROCEEDINGS
DoubleClick is not a party to any material legal proceedings.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting held on December 21, 1998, the Company submitted
the following matters to a vote of the Company's stockholders through a proxy
solicitation: (1) election of the Company's Class I directors (consisting of
Kevin J. O'Connor, Mark E. Nunnelly and Thomas S. Murphy), and (2) ratification
of PricewaterhouseCoopers LLP as DoubleClick's independent accountants. The
results of the proxy solicitation are set forth below:
Affirmative Votes Negative Votes Votes Withheld
-------------------- ------------------- -------------------
a. Election of Directors
Kevin J. O'Connor 9,846,059 - 6,848,228
Mark E. Nunnelly 9,846,059 - 6,848,228
Thomas S. Murphy 9,846,059 - 6,848,228
b. Ratification of
PricewaterhouseCoopers LLP as
DoubleClick's independent
accountants 9,838,600 4,557 6,851,130
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
DoubleClick's common stock has been quoted on the Nasdaq National Market
under the symbol DCLK since DoubleClick's initial public offering on February
20, 1998. The following table sets forth, for the periods indicated, the high
and low sales prices per share of the common stock as reported on the Nasdaq
National Market:
1998: HIGH LOW
--------- ---------
First Quarter (from February 20, 1998)............... $ 37.00 $ 26.13
Second Quarter....................................... 49.75 30.88
Third Quarter........................................ 77.13 18.19
Fourth Quarter....................................... 58.00 13.50
On December 31, 1998, the last reported sale price of the common stock on the
Nasdaq National Market was $44.50. On February 23, 1999 the last reported sale
price of the common stock on the Nasdaq National Market was $97.44.
HOLDERS
As of February 23, 1999, there were approximately 27,340 holders of record of
the common stock.
DIVIDEND POLICY
DoubleClick has never declared or paid any cash dividends on its capital
stock. DoubleClick currently intends to retain future earnings, if any, to
finance the expansion of its business and does not expect to pay any cash
dividends for the foreseeable future.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
DoubleClick's consolidated statement of operations for the years ended December
31, 1998 and December 31, 1997, and for the period from January 23, 1996
(inception) through December 31, 1996 and with respect to DoubleClick's
consolidated balance sheet as of December 31, 1998 and 1997, are derived from
the audited consolidated financial statements of DoubleClick which are included
elsewhere herein. The selected consolidated financial data set forth below is
qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes to those
statements included elsewhere herein.
DOUBLECLICK INC.
SELECTED FINANCIAL INFORMATION
PERIOD FROM
JANUARY 23, 1996
(INCEPTION) THROUGH
YEAR ENDED DECEMBER 31, DECEMBER 31,
-----------------------
1998 1997 1996
---------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues $ 80,188 $ 30,597 $ 6,514
Cost of revenues 53,964 20,628 3,780
-------- -------- --------
Gross profit 26,224 9,969 2,734
Operating expenses:
Sales and marketing 29,180 10,710 3,079
General and administrative 11,288 6,326 2,145
Product development 6,684 1,398 618
-------- -------- --------
Total operating expenses 47,152 18,434 5,842
-------- -------- --------
Loss from operations (20,928) (8,465) (3,108)
Net interest income (expense) 2,756 109 (84)
-------- -------- --------
Net loss $(18,172) $ (8,356) $ (3,192)
-------- -------- --------
-------- -------- --------
Basic and diluted net loss per share (1) $ (1.13) $ (0.73) $ (0.28)
-------- -------- --------
-------- -------- --------
Weighted average shares used
in basic and diluted net
loss per share calculation (1) 16,091 11,449 11,397
-------- -------- --------
-------- -------- --------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
----------------------------------------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents, and investments $136,814 $ 8,546 $-
Working capital (deficit) 134,118 7,512 (3,038)
Total assets 183,620 21,162 4,526
Total stockholders' (deficit) equity 148,338 9,400 (2,592)
(1) Basic and Diluted net loss per share computations have been restated to
give effect to the conversion of shares of DoubleClick's convertible
preferred stock into Common Stock on February 25, 1998. See Note 1 of
Notes to the Consolidated Financial Statements.
12
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated quarterly
statement of operations data for the eight quarters ended December 31, 1998.
This information is unaudited, but in the opinion of management, it has been
prepared substantially on the same basis as the audited consolidated financial
statements appearing elsewhere in this report, and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the unaudited consolidated quarterly
results of operations. The consolidated quarterly data should be read in
conjunction with the audited consolidated financial statements of DoubleClick
and the notes to such statements appearing elsewhere in this report. The results
of operations for any quarter are not necessarily indicative of the results of
operations for any future period.
WEIGHTED
AVERAGE BASIC AND DILUTED
QUARTER GROSS LOSS FROM NET COMMON NET LOSS PER
ENDED REVENUES PROFIT OPERATIONS LOSS SHARES COMMON SHARE
- -------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998
March 31 $13,004 $ 4,159 $(4,840) $(4,427) 14,116 $ (0.31)
June 30 17,293 5,569 (5,491) (4,674) 16,459 (0.28)
September 30 20,777 6,807 (5,434) (4,714) 16,566 (0.28)
December 31 29,114 9,689 (5,164) (4,357) 17,129 (0.25)
1997
March 31 $ 5,329 $ 1,935 $(1,170) $(1,242) 11,397 $ (0.11)
June 30 6,138 2,044 (1,179) (1,230) 11,397 (0.11)
September 30 8,190 2,630 (2,270) (2,140) 11,447 (0.19)
December 31 10,940 3,360 (3,846) (3,744) 11,447 (0.33)
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF DOUBLECLICK TOGETHER WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES TO SUCH STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT DOUBLECLICK AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
DOUBLECLICK'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THE "RISK FACTORS" SECTION AND ELSEWHERE IN 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.
OVERVIEW
DoubleClick is a leading provider of comprehensive Internet advertising
solutions for advertisers and Web publishers worldwide. DoubleClick currently
has two principal service offerings. The DoubleClick Network (ad sales) provides
fully-outsourced ad sales, delivery and related services to publishers of
highly-trafficked Web sites, including AltaVista, The Dilbert Zone, Macromedia
and U.S. News Online. The DoubleClick Network focuses on meeting the needs of
Internet advertisers who target users on a national, international and/or local
basis. DoubleClick's DART Service (ad serving), consisting of DART for Web
publishers and the recently introduced Closed Loop Marketing Solutions suite of
products for advertisers and ad agencies, provides Web publishers, advertisers
and ad agencies with the ability to control the targeting, delivery, measurement
and analysis of their online marketing campaigns on a real-time basis. The
DoubleClick Network and DART Service lines of business are available to Web
publishers and advertisers in international markets. DoubleClick's proprietary
DART technology, which dynamically matches and delivers ads to the target
audience within milliseconds, is the platform for all of DoubleClick's
solutions.
DoubleClick completed its initial public offering on February 25, 1998 and
received net proceeds of approximately $62.5 million. In addition, on December
10, 1998, DoubleClick received net proceeds of approximately $93.7 million from
its additional public offering. The net proceeds of these two public offerings
were added to DoubleClick's working capital and, pending their use, DoubleClick
has invested such funds in short-term, interest-bearing investment grade
obligations.
DoubleClick was founded in January 1996 by Kevin J. O'Connor, DoubleClick's
Chief Executive Officer, Dwight A. Merriman, DoubleClick's Chief Technical
Officer, and Poppe Tyson, Inc. DoubleClick has grown from 13 employees as of
March 31, 1996 to 482 employees as of December 31, 1998.
From January 23, 1996 (inception) through May 1996, DoubleClick's operating
activities related primarily to developing the DART technology and the
DoubleClick Network, and recruiting personnel. During the same period,
substantially all of DoubleClick's revenues resulted from Internet advertising
sales on a commission basis on behalf of the Netscape and Excite Web sites. For
the period from January 23, 1996 (inception) through December 31, 1996, such
commissions constituted 16.5% of DoubleClick's revenues. All ads sold on behalf
of the Netscape and Excite Web sites were delivered directly by such entities,
as their Web sites were not on the DoubleClick Network.
Since the fourth quarter of 1996, DoubleClick has derived substantially all
of its revenues from the DoubleClick Network. DoubleClick offers advertising on
the DoubleClick Network to third party advertisers with pricing generally
determined on a CPM (cost per thousand ads delivered) or cost per day basis.
Discounts are offered based on a variety of
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
factors, including the duration and gross dollar amount of advertising
campaigns. Advertisements delivered by DoubleClick are typically sold pursuant
to purchase order agreements, which are subject to cancellation.
DoubleClick's revenues from the DoubleClick Network are received from the
advertiser that orders the ad, and DoubleClick typically pays the Web publisher
(on whose Web site such advertisement is delivered) a service fee. This service
fee is calculated as a percentage of such advertising revenues, which amount is
included in cost of revenues. DoubleClick is responsible for billing and
collecting for ads delivered on the DoubleClick Network, and typically assumes
the risk of non-payment from advertisers. In addition, DoubleClick earns service
fees for providing the DART Service to Web publishers and the Closed Loop
Marketing Solutions suite of products to Internet advertisers and ad agencies.
To date, revenues from DoubleClick's DART Service have not been significant.
Advertising revenues are recognized in the period that the advertisement is
delivered, provided that no significant obligations remain and collection of the
resulting receivable is probable. DoubleClick also sells sponsorship
advertising, which involves a greater degree of integration among DoubleClick,
the advertiser and the Web sites on the DoubleClick Network. These sponsorships
are typically priced based on the length of time that the sponsorship runs,
rather than a CPM basis. Revenues relating to sponsorship advertising are
recognized ratably over the sponsorship period. As part of the DoubleClick
Network, DoubleClick also offers DoubleClick Direct, an Internet advertising
solution for direct marketers. DoubleClick Direct advertising is priced on a
"cost-per-click", "cost-per-lead" and "cost-per-sale or download" basis, rather
than a CPM basis.
DoubleClick expects the DoubleClick Network will continue to account for a
substantial portion of DoubleClick's revenues for the foreseeable future.
Moreover, ads delivered on the Web sites of the top four Web publishers on the
DoubleClick Network, including AltaVista, accounted for approximately 58.8% of
DoubleClick's revenues, and 61.2% of DoubleClick's revenues for the years ended
December 31, 1998 and 1997, respectively. Of the 58.8% for the year ended
December 31, 1998, approximately 46.5% of DoubleClick's revenues related to
AltaVista and an aggregate of approximately 12.3% of DoubleClick's revenues
related to the Web sites of the next three top DoubleClick publishers on the
DoubleClick Network. Other than the AltaVista web site, no other Web site or
DoubleClick publisher accounted for more than 10% of DoubleClick's revenue in
1998. DoubleClick typically enters into short-term contracts with DoubleClick
publishers for inclusion of their Web sites in the DoubleClick Network. The
failure to successfully market the DoubleClick Network, the loss of one or more
of the Web sites which account for a significant portion of DoubleClick's
revenues from the DoubleClick Network, or any significant reduction in traffic
on such Web sites could have a material adverse effect on DoubleClick's
business, results of operations and financial condition.
To take advantage of the global reach of the Internet, DoubleClick has
established DoubleClick Networks in Europe, Asia and other international
markets. DoubleClick currently has operations in Australia, Canada, France,
Germany, United Kingdom, and Benelux (Belgium, Netherlands, and Luxembourg) and
through its business partners, in Japan, Iberoamerica, Italy and Scandinavia.
DoubleClick expects to continue to invest in building its international
operations.
In December 1996, DoubleClick entered into a Procurement and Trafficking
Agreement with Digital Equipment Corporation (acquired by Compaq in June 1998)
pursuant to which Double Click had the exclusive right to sell and deliver all
advertising on specified pages within the AltaVista Web site. In accordance with
this agreement, DoubleClick paid AltaVista a service fee calculated as a
percentage of the revenues derived from delivery of advertisements on or through
the AltaVista Web site.
Effective January 1, 1999, DoubleClick changed its relationship with Compaq
by entering into an Advertising Services Agreement that superceded the
Procurement and Trafficking Agreement. Pursuant to the Advertising Services
Agreement, Compaq has agreed to use DoubleClick's DART technology for ad
delivery and to outsource to DoubleClick certain ad sales functions for
domestic, international, and local ad sales. In consideration for such services
performed by DoubleClick, Compaq will pay to DoubleClick (i) a DART Services fee
for all domestic, international and local advertising delivered by DoubleClick
to the AltaVista Web site, (ii) a sales commission based on the net revenues
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
generated from all advertisements sold by DoubleClick on behalf of Compaq and
(iii) a billing and collections fee for all billing and collections services
performed by DoubleClick on behalf of Compaq. Under the new agreement, the
manner in which DoubleClick reports its financial results related to the
services it provides AltaVista has changed. Through December 31, 1998,
DoubleClick recognized as revenues the gross amount of billings related to ads
delivered by Double Click to the AltaVista Web site. Beginning January 1, 1999,
DoubleClick will recognize as revenues the DART Service fee, the sales
commission and billing and collection fees. As a result of the change in
relationship with AltaVista, we expect our overall gross margin to increase as
we are no longer required to pay service fees to AltaVista for ads delivered on
the AltaVista Web site. The Advertising Services Agreement will expire on
December 31, 2001, subject to prior termination in certain limited circumstances
or further extension in accordance with the terms of the Advertising Services
Agreement.
DoubleClick has incurred significant losses since its inception, and as of
December 31, 1998 had an accumulated deficit of $54.7 million, of which $29.7
million related to cumulative losses and $25 million related to the redemption
of shares of common stock from certain stockholders in connection with
DoubleClick's recapitalization that occurred simultaneously with the completion
of a private placement of DoubleClick's securities in June 1997. In addition,
during the year ended December 31, 1997, DoubleClick recorded deferred
compensation of $1.5 million, which represents the difference between the
exercise price and the fair market value of common stock issuable upon the
exercise of certain stock options granted to employees. The deferred
compensation is being amortized over the vesting periods of the related options.
Of the total deferred compensation amount, approximately $1.1 million had been
amortized as of December 31, 1998.
DoubleClick believes that quarter-to-quarter comparisons of its results of
operations should not be relied upon as an indication of future performance.
DoubleClick plans to significantly increase its operating expenses to increase
its sales and marketing operations, to continue its international expansion, to
upgrade and enhance its DART technology and to market and support its solutions.
DoubleClick may be unable to modify its planned spending quickly enough to
offset any unexpected revenue shortfall. If DoubleClick has a shortfall in
revenues in relation to its expenses, or if DoubleClick's expenses precede
increased revenues, then DoubleClick's results of operations and financial
condition may be materially and adversely affected. As a result of these
factors, there can be no assurance that DoubleClick will not incur significant
losses on a quarterly and annual basis for the foreseeable future.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth the consolidated results of operations of
DoubleClick expressed as a percentage of revenues:
PERIOD FROM
JANUARY 23, 1996
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
----------------------------- DECEMBER 31,
1998 1997 1996
----------------------------------------------------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues 100.0% 100.0% 100.0%
Cost of revenues 67.3 67.4 58.0
---------- --------- ---------
Gross profit 32.7 32.6 42.0
Operating expenses:
Sales and marketing 36.4 35.0 47.3
General and administrative 14.1 20.7 32.9
Product development 8.3 4.6 9.5
---------- --------- ---------
Total operating expenses 58.8 60.3 89.7
---------- --------- ---------
Loss from operations (26.1) (27.7) (47.7)
Net interest income (expense) 3.4 0.4 (1.3)
---------- --------- ---------
Net loss (22.7%) (27.3%) (49.0%)
---------- --------- ---------
---------- --------- ---------
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
DoubleClick's revenues are derived primarily from the delivery of
advertisements on the Web sites of Web publishers on the DoubleClick Network.
Revenues increased 162.1% to $80.2 million for the year ended December 31, 1998
from $30.6 million for the year ended December 31, 1997. The increase in
revenues was due primarily to an increase in the number of advertisers and ads
delivered on the DoubleClick Network, and an increase in DART revenues, offset
in part by lower average price per advertisement. Revenues earned from
advertisements delivered on or through the AltaVista Web site were $37.3
million, or 46.5% of revenues for the year ended December 31, 1998, compared to
$13.7 million, or 44.7% of revenues for the year ended December 31, 1997.
Approximately $3.0 million of revenues for the year ended December 31, 1998
resulted from sales of inventory on the AltaVista Web site which was derived
from an arrangement between AltaVista and another search engine that expired on
June 30, 1998, and was therefore non-recurring. AltaVista is a significant part
of the DoubleClick Network. No other Web site accounted for more than 10.0% of
revenues for the year ended December 31, 1998, and no one advertiser accounted
for more than 10.0% of revenues during the same period.
COST OF REVENUES
Cost of revenues consists primarily of service fees paid to Web publishers
for ads delivered to the Web sites on the DoubleClick Network. Cost of revenues
also includes other costs of delivering advertisements, including depreciation
of the ad delivery system and Internet access costs. Gross margin was 32.7% and
32.6% for the years ended December 31, 1998 and 1997, respectively. Gross margin
increased for the year ended December 31, 1998 compared to December 31, 1997 due
to an increase in revenues from its higher margin DART services as a percentage
of total revenues in 1998, which was offset, in part, by a decrease in
DoubleClick's sales of advertisements on a commission basis as a percentage of
DoubleClick's total revenue. To the extent revenues from its DART Services
increase as a percentage of total revenues, DoubleClick anticipates that its
overall gross margin will increase.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, advertising, maintenance of DoubleClick's Web site, trade
show expenses, seminars and costs of marketing materials. Sales and marketing
expenses were $29.2 million and $10.7 million for the years ended December 31,
1998 and 1997, respectively, or 36.4% and 35.0% of revenues, respectively. The
increase in absolute dollars was primarily attributable to the increase in sales
personnel, commissions associated with the increase in revenues, costs
associated with expanding international operations, and costs related to the
continued development and implementation of DoubleClick's marketing and branding
campaigns. The increase in sales and marketing expenses as a percentage of
revenues resulted from such expenses increasing more rapidly than revenues as
DoubleClick continued to build its sales and marketing infrastructure.
DoubleClick expects sales and marketing expenses to increase on an absolute
dollar basis but decrease as a percentage of revenues as DoubleClick hires
additional personnel, expands into new markets and continues to promote the
DoubleClick brand.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation and professional services fees and related supplies
and materials. General and administrative expenses were $11.3 million and $6.3
million for the years ended December 31, 1998 and 1997, respectively, or 14.1%
and 20.7% of revenues,
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
respectively. The increase in absolute dollars was primarily the result of
expenses related to increased personnel and professional service fees.
DoubleClick expects general and administrative expenses to continue to increase
on an absolute dollar basis but continue to decrease as a percentage of revenues
as DoubleClick hires additional personnel and incurs additional costs related to
the growth of its business and its operations as a public company.
PRODUCT DEVELOPMENT. Product development expenses consist primarily of
compensation and consulting expenses and enhancements to the DART technology. To
date, all product development costs have been expensed as incurred. Product
development expenses were $6.7 million and $1.4 million for the years ended
December 31, 1998 and 1997, respectively, or 8.3% and 4.6% of revenues,
respectively. The increase in absolute dollars was due primarily to increases in
product development personnel and consulting expenses. The increase in product
development expenses as a percentage of revenues resulted from such expenses
increasing more rapidly than revenues as DoubleClick continued the development
of its DART technology and its solutions. DoubleClick believes that continued
investment in product development is critical to attaining its strategic
objectives and, as a result, expects product development expenses to increase on
an absolute dollar basis.
LOSS FROM OPERATIONS
DoubleClick's loss from operations was $20.9 million and $8.5 million for
the years ended December 31, 1998 and 1997, respectively. The increase in the
loss from operations was primarily due to the hiring of additional personnel,
particularly in sales and marketing, and product development. DoubleClick
expects to hire additional personnel and increase its spending for sales and
marketing, upgrade and enhance DoubleClick's DART technology and continue
international expansion. However, DoubleClick expects that the loss from
operations may decrease both on an absolute dollar basis and as a percentage of
revenues in the future.
INTEREST INCOME (EXPENSE)
Net interest income was $2.8 million for the year ended December 31, 1998.
Interest income was attributable to cash, cash equivalents and short-term
investments as a result of the net proceeds received by DoubleClick from its
public offerings of common stock in 1998. Interest income in future periods may
fluctuate as a result of fluctuations in average cash balances maintained by
DoubleClick and changes in the market rate of its investments.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM JANUARY 23, 1996
(INCEPTION) THROUGH DECEMBER 31, 1996
REVENUES
Revenues increased to $30.6 million for the year ended December 31, 1997
from $6.5 million for the period from January 23, 1996 (inception) through
December 31, 1996. During the period from January 23, 1996 (inception) through
December 31, 1996, $1.1 million of DoubleClick's revenues were derived from
commissions received from the sale of advertising that was placed on the Web
sites of Netscape and Excite. Revenues recognized from commissions for the year
ended December 31, 1997 were not material. The increase in revenues was due
primarily to an increase in the number of advertisers and ads delivered on the
DoubleClick Network, and to the addition of the AltaVista Web site to the
DoubleClick Network in December 1996. Revenues earned during the year ended
December 31, 1997 from advertisements delivered on or through the AltaVista Web
site were $13.7 million, or 44.7% of revenues. AltaVista is a significant part
of the DoubleClick Network. For the year ended December 31, 1997, no one
advertiser accounted for more than 10% of DoubleClick's revenues. Through
December 31, 1997, DoubleClick had not derived significant revenues from its
DART Service.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
COST OF REVENUES
Gross margin was 32.6% and 42.0% for the year ended December 31, 1997 and
for the period from January 23, 1996 (inception) through December 31, 1996
respectively. Gross margin decreased in 1997 due to the shift in DoubleClick's
revenue mix away from the sale of advertisements on a commission basis.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses were $10.7 million and
$3.1 million for the year ended December 31, 1997 and for the period from
January 23, 1996 (inception) through December 31, 1996, respectively, or 35.0%
and 47.3% of revenues, respectively. The increase in absolute dollars was due
primarily to the increase in sales personnel, commissions and costs related to
the continued development and implementation of DoubleClick's marketing and
branding campaigns.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $6.3
million and $2.1 million for the year ended December 31, 1997 and for the period
from January 23, 1996 (inception) through December 31, 1996, respectively, or
20.7% and 32.9% of revenues, respectively. The increase in absolute dollars was
primarily a result of expenses related to increased personnel, professional
service fees and facility expenses necessary to support DoubleClick's domestic
and international growth.
PRODUCT DEVELOPMENT. Product development expenses were $1.4 million and $0.6
million for the year ended December 31, 1997 and for the period from January 23,
1996 (inception) through December 31, 1996, respectively, or 4.6% and 9.5% of
revenues, respectively. The increase in absolute dollars was due primarily to
increases in product development personnel and consulting expenses. Product
development expenses incurred during the year ended December 31, 1997 were
primarily related to enhancements to the DART technology and its solutions.
LOSS FROM OPERATIONS
DoubleClick's loss from operations was $8.5 million for the year ended
December 31, 1997 and $3.1 million for the period from January 23, 1996
(inception) through December 31, 1996. The increase in the loss from operations
was primarily due to the hiring of additional personnel in all areas of
DoubleClick as it continued to build its infrastructure, expand its markets and
increase its brand awareness.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, DoubleClick has financed its operations primarily
through the private placement of equity securities, borrowings from a related
party, and public offerings of its common stock. In June 1997, DoubleClick
completed a private placement of equity securities to new investors and received
$39.8 million in net proceeds, of which $25.0 million was used to redeem shares
of common stock from certain stockholders. On December 30, 1997, $5,000,000 in
borrowings from a related party pursuant to a convertible promissory note were
converted into 779,302 shares of common stock. In February 1998, DoubleClick
received net proceeds of approximately $62.5 million from the initial public
offering of 4,025,000 shares of common stock at a price of $17.00 per share. In
December 1998, DoubleClick received net proceeds of approximately $93.7 million
from an additional public offering of 2,875,000 shares of common stock at a
price of $34.44 per share.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
Net cash used in operating activities was $13.8 million and $5.8 million for
the years ended December 31, 1998 and 1997, respectively. Cash used in operating
activities for the year ended December 31, 1998 resulted from net losses and an
increase in accounts receivable and other current assets, which were partially
offset by increases in accounts payable, accrued expenses and deferred revenues.
Net cash used in investing activities was $18.2 million and $8.1 million for
the years ended December 31, 1998 and 1997, respectively. Cash used in investing
activities for the year ended December 31, 1998 resulted from purchases of
property and equipment, investments, and purchases, sales and maturities of
short-term investments, net.
Net cash provided by financing activities was $156.4 million and $16.5
million for the years ended December 31, 1998 and 1997, respectively. Cash
provided by financing activities for the year ended December 31, 1998 consisted
primarily of net proceeds received by DoubleClick in connection with the closing
of its public offerings in 1998.
As of December 31, 1998, DoubleClick had $127.2 million of cash and cash
equivalents and $9.6 million in short-term investments. As of December 31, 1998,
DoubleClick's principal commitments consisted of obligations under operating and
capital leases.
Although DoubleClick has no material commitments for capital expenditures,
management anticipates that it will experience a substantial increase in its
capital expenditures and lease commitments consistent with its anticipated
growth in operations, infrastructure and personnel, and the scheduled build-out
of its newly leased New York headquarters facilities. DoubleClick currently
anticipates that it will continue to experience significant growth in its
operating expenses for the foreseeable future and that its operating expenses
will be a material use of DoubleClick's cash resources. DoubleClick believes
that the net proceeds of the offerings, together with its existing cash and cash
equivalents and short-term investments, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at least
the next twelve months.
YEAR 2000 COMPLIANCE
OVERVIEW
Currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
STATE OF READINESS. DoubleClick has generally completed its initial
assessment of the Year 2000 readiness of its information technology ("IT")
systems, including the hardware and software that enable DoubleClick to provide
and deliver its solutions, and its non-IT systems. DoubleClick's assessment plan
consists of (i) quality assurance testing of its internally developed
proprietary software incorporated in its solutions ("Solutions Software"); (ii)
contacting third-party vendors and licensors of material hardware, software and
services that are both directly and indirectly related to the delivery of
DoubleClick's solutions to its Web publisher and advertiser customers; (iii)
contacting vendors of material non-IT systems; (iv) assessment of repair or
replacement requirements; (v) repair or replacement; (vi) implementation; and
(vii) creation of contingency plans in the event of Year 2000 failures.
DoubleClick is conducting quality assurance testing to ensure Year 2000
compliance of all new internally developed proprietary code incorporated into
its Solutions Software. DoubleClick plans to perform a Year 2000 simulation on
its Solutions Software during the second quarter of 1999, following the
implementation of revisions to the Solutions Software planned for the first
quarter of 1999. Based on the results of its Year 2000 simulation test,
DoubleClick intends to revise the code of its Solutions Software as necessary to
improve the Year 2000 compliance of its Solutions Software.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
DoubleClick has been informed by many of its vendors of material hardware
and software components of its IT systems that the products used by DoubleClick
are currently Year 2000 compliant. DoubleClick is in the process of requiring
vendors of the other material hardware and software components in its IT systems
to provide assurances of their Year 2000 compliance. DoubleClick plans to
complete this process during the first half of 1999. DoubleClick has completed
an assessment of the materiality of its non-IT systems and is in the process of
seeking assurances of Year 2000 compliance from providers of its material non-IT
systems. In addition, DoubleClick, like all businesses, is dependent on the
continued functioning, domestically and internationally, of basic services such
as electrical utilities, telephony, mail delivery, and transportation in order
to conduct its business. While DoubleClick is taking steps to attempt to ensure
that the third parties on which it is reliant are Year 2000 compliant, it cannot
predict the likelihood of such compliance nor the direct or indirect costs to
the DoubleClick of non-compliance by those third parties or of securing
alternate services from Year 2000 compliant parties.
Pending completion of its planned Year 2000 simulation test of its
Solutions Software and its program of requesting Year 2000 assurances from
vendors and licensors of material IT and non-IT systems, DoubleClick has not yet
completed its Year 2000 compliance repair or replacement analysis, or of its
contingency plans. DoubleClick plans to complete all Year 2000 planning and
analysis before the end of the fourth quarter.
COSTS. To date, DoubleClick has not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
its expenses have related to, and are expected to include, the operating costs
associated with time spent by employees in the evaluation process and Year 2000
compliance matters generally. At this time, DoubleClick does not possess the
information necessary to estimate the potential costs of revisions to its
Solutions Software should such revisions be required or the replacement of
third-party software, hardware or services that are determined not to be Year
2000 compliant. Although DoubleClick does not anticipate that such expenses will
be material, such expenses, if higher than anticipated, could have a material
adverse effect on DoubleClick's business, results of operations and financial
condition.
RISKS. DoubleClick believes that it has established an effective program to
resolve material Year 2000 issues in its sole control in a timely manner. As
noted above, however, DoubleClick has not yet completed all phases of its
program and is dependent on third parties whose progress is not within its
control. The failure by such third parties to be Year 2000 compliant could
result in a systematic failure beyond the control of DoubleClick from delivering
its services to its customers, decrease the use of the Internet or prevent users
from accessing the Web sites of its Web publishers customers, which could have
material adverse effect on DoubleClick's business, results of operations and
financial condition. In addition, there can be no assurance that DoubleClick
will not discover Year 2000 compliance problems in our Solutions Software that
will require substantial revisions which could be costly and time-consuming to
remedy. In the event that DoubleClick does not complete any of its currently
planned additional remediation prior to the Year 2000, DoubleClick could
experience significant difficulty in producing and delivering solutions and
conducting its business in the Year 2000 as it has in the past, which could
result in lost revenues, increased operating costs, the loss of customers and
other business interruptions, any of which could have a material adverse effect
on DoubleClick's business, results of operations and financial condition.
Moreover, the failure to adequately address Year 2000 compliance issues could
result in claims of mismanagement, misrepresentation or breach of contract and
related litigation, which could be costly and time-consuming to defend. The
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.
CONTINGENCY PLAN. As discussed above, DoubleClick is engaged in an ongoing
Year 2000 assessment and has not yet developed any contingency plans. The
results of DoubleClick's Year 2000 simulation testing and the responses received
from third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
FORWARD-LOOKING STATEMENTS. The foregoing Year 2000 discussion and the
information contained herein is provided as a "Year 2000 Readiness Disclosure"
as defined in the Year 2000 Information and Readiness Disclosure Act of 1998
(Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and contains
"forward-looking statements"
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
within the meaning of the Private Securities Litigation reform Act of 1995. Such
statements, including without limitation, anticipated costs and the dates by
which DoubleClick expects to complete certain actions, are based on management's
best current estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain resources,
representations received from third parties and other factors. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially form those anticipated. Specific factors that might
cause such material difference include, but are not limited to, the ability to
identify and remediate all relevant systems, results of Year 2000 testing,
adequate resolution of Year 2000 issues by governmental agencies, businesses and
other third parties who are outsourcing service providers, suppliers, and
vendors of DoubleClick, unanticipated system costs, the adequacy of and ability
to implement contingency plans and uncertainties. The "forward-looking
statements" made in the foregoing Year 2000 discussion speak only as of the date
on which such statements are made, and DoubleClick undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.
CURRENCY RATE FLUCTUATIONS
DoubleClick's results of operations, financial position, and cash flows are
affected by changes in the relative values of non-U.S. currencies to the U.S.
dollar. DoubleClick does not use derivative financial instruments to limit its
foreign currency risk exposure. Therefore, volatility in currency exchange rates
could have a material adverse effect on those revenues and assets denominated in
non-U.S. currencies.
INTEREST RATE RISK
DoubleClick's investments are classified as available for sale securities
therefore changes in the market's interest rates effect the value of the
investment as recorded by DoubleClick and are recorded as unrealized gains and
losses on the financial statements.
22
RISK FACTORS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT DOUBLECLICK AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
DOUBLECLICK'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. DOUBLECLICK UNDERTAKES
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.
LIMITED OPERATING HISTORY
We were incorporated in January 1996 and have a limited operating history.
An investor in our common stock must consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, including the Internet advertising market. These risks include our:
- ability to sustain historical revenue growth rates;
- dependence on a continuing relationship with AltaVista;
- reliance on the DoubleClick Network;
- need to manage our expanding operations;
- competition;
- ability to attract, retain and motivate qualified personnel;
- ability to maintain our current, and develop new, strategic relationships
with Web publishers;
- ability to anticipate and adapt to the changing Internet market; and
- ability to attract and retain a large number of advertisers from a variety
of industries.
We also depend on the growing use of the Internet for advertising, commerce
and communication, and on general economic conditions. We cannot assure you that
our business strategy will be successful or that we will successfully address
these risks. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our limited
operating history.
HISTORY OF LOSSES AND ANTICIPATION OF
CONTINUED LOSSES
We incurred net losses of $3.2 million for the period from January 23, 1996
(inception) through December 31, 1996, $8.4 million for the year ended December
31, 1997, and $18.2 million for the year ended December 31, 1998. As of December
31, 1998, our accumulated deficit was $54.7 million. We have not achieved
profitability and expect to continue to incur operating losses at least into the
year 2000. We expect to continue to incur significant operating and capital
expenditures and, as a result, we will need to generate significant revenues to
achieve and maintain profitability. Although our revenues have grown in recent
quarters, we cannot assure you that we will achieve sufficient revenues for
23
profitability. Even if we do achieve profitability, we cannot assure you that we
can sustain or increase profitability on a quarterly or annual basis in the
future. If revenues grow slower than we anticipate, or if operating expenses
exceed our expectations or cannot be adjusted accordingly, our business, results
of operations and financial condition will be materially and adversely affected.
Please see "Item 6. Selected Consolidated Financial Data" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for detailed information on our history of losses and anticipation
of continued losses.
OUR DEPENDENCE ON ALTAVISTA
Approximately 46.5% of our revenues for the year ended December 31, 1998
and approximately 44.7% of our revenues for the year ended December 31, 1997
resulted from revenues from advertisements delivered on or through the AltaVista
Web site. On January 20, 1999, DoubleClick agreed with Compaq to enter into an
Advertising Services Agreement to replace the existing Procurement and
Trafficking Agreement. The Advertising Services Agreement is effective as of
January 1, 1999 and will expire on December 31, 2001, subject to prior
termination in certain limited circumstances or further extension in accordance
with the terms of the Advertising Services Agreement. The loss of AltaVista or
any significant reduction in traffic on or through the AltaVista Web site would
materially and adversely affect our business, results of operations and
financial condition.
Please see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our dependence
on AltaVista.
WEB PUBLISHER CONCENTRATION
We derive a substantial portion of our DoubleClick Network revenues from
ads we deliver on the Web sites of a limited number of Web publishers.
Approximately 58.8% of our revenues for the year ended December 31, 1998 and
approximately 61.2% of our revenues for the year ended December 31, 1997
resulted from ads delivered on the Web sites of the top four Web publishers on
the DoubleClick Network. Of the 58.8% for the year ended December 31, 1998,
approximately 46.5% of our revenues related to AltaVista and an aggregate of
approximately 12.3% of our revenues related to the Web sites of the next three
top Web publishers on the DoubleClick Network. Our business, results of
operations and financial condition could be materially and adversely affected by
the loss of one or more of the Web publishers which account for a significant
portion of our DoubleClick Network revenues or any significant reduction in
traffic on such Web publisher's Web sites. In addition, advertisers or Web
publishers may leave the DoubleClick Network because of such a loss, which could
materially and adversely affect our business, results of operations and
financial condition. Typically we enter into short-term contracts with Web
publishers for inclusion of their Web sites in the DoubleClick Network. Since
these contracts are short-term, we will have to negotiate new contracts or
renewals in the future which may have terms that are not as favorable to us as
the terms of the existing contracts. Our business, results of operations and
financial condition could be materially and adversely affected by such new
contracts or renewals. Please see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" for detailed information on
our Web publisher concentration.
OUR RELIANCE ON THE DOUBLECLICK NETWORK
Since the third quarter of 1996, we have derived substantially all of our
revenues from advertisements we deliver to Web sites on the DoubleClick Network.
We expect that the DoubleClick Network will continue to account for a
substantial portion of our revenues for the foreseeable future. The DoubleClick
Network consists of Web sites of a limited number of Web publishers with which
we have short-term contracts. We cannot assure you that such Web publishers will
remain associated with the DoubleClick Network, that any DoubleClick Network Web
site will maintain consistent or increasing levels of traffic over time, or that
we will be able to timely or effectively replace any exiting DoubleClick Network
Web site with other Web sites with comparable traffic patterns and user
demographics. Our failure to successfully market the DoubleClick Network, the
loss of one or more of the Web publishers which account for a significant
portion of our revenues from the DoubleClick Network, or the failure of the Web
sites on the DoubleClick Network to maintain consistent or increasing levels of
traffic would materially and adversely affect our business, results
24
of operations and financial condition. Please see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
detailed information on our reliance on the DoubleClick Network.
QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, not all of which are in our control. These
factors include:
- advertiser and Web publisher demand for our solutions;
- user traffic levels and the number of available impressions on the
DoubleClick Network's Web sites;
- seasonal fluctuations in Internet usage;
- changes in service fees we pay to Web publishers;
- changes in the growth rate of Internet usage;
- the commitment of advertising budgets to Internet advertising;
- the mix of revenues from our various Internet advertising solutions;
- the timing and amount of costs relating to the expansion of our
operations;
- changes in our pricing policies or those of our competitors;
- the introduction of new solutions by us or our competitors;
- the mix of domestic and international sales;
- costs related to acquisitions of technology or businesses; and
- general economic and market conditions.
Our revenues for the foreseeable future will remain dependent on user
traffic levels and advertising activity on the DoubleClick Network. Such future
revenues are difficult to forecast. In addition, we plan to significantly
increase our operating expenses to increase our sales and marketing operations,
to continue our international expansion, to upgrade and enhance our DART
technology, and to market and support our solutions. We may be unable to adjust
spending quickly enough to offset any unexpected revenue shortfall. If we have a
shortfall in revenues in relation to our expenses, or if our expenses precede
increased revenues, then our business, results of operations and financial
condition would be materially and adversely affected. Such a result would likely
affect the market price of our common stock in a manner which may be unrelated
to our long-term operating performance.
We believe that advertising sales in traditional media, such as television
and radio, generally are lower in the first calendar quarter of each year. If
our market makes the transition from an emerging to a more developed medium,
seasonal and cyclical patterns may develop in our industry. Our revenues may
also be affected by seasonal and cyclical patterns in Internet advertising
spending if they emerge.
Due to all of the foregoing factors and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future
25
periods our results of operations may be below the expectations of public
market analysts and investors. In this event, the price of our common stock may
fall. Please see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Sales and Marketing" for detailed
information on our quarterly operating results.
NEED TO MANAGE GROWTH
To successfully implement our business plan in the rapidly evolving market
for Internet advertising requires an effective planning and management process.
We continue to increase the scope of our operations both domestically and
internationally, and we have grown our workforce substantially. As of March 31,
1996, we had a total of 13 employees and, as of December 31, 1998, we had a
total of 482 employees. In addition, we plan to continue to expand our sales and
marketing and customer support organizations both domestically and
internationally. This growth has placed, and our anticipated future growth in
our operations will continue to place, a significant strain on our management
systems and resources. We expect that we will need to continue to improve our
financial and managerial controls and reporting systems and procedures, and will
need to continue to expand, train and manage our workforce. Our future
performance may also depend on the effective integration of acquired businesses.
Such integration, even if successful, may take a significant period of time and
expense, and may place a significant strain on our resources. Our business,
results of operations and financial condition will be materially and adversely
affected if we are unable to effectively manage our expanding operations or the
relocation of our data operations.
RECENT DEVELOPMENT OF THE INTERNET
ADVERTISING MARKET AND UNPROVEN
ACCEPTANCE AND EFFECTIVENESS OF
WEB ADVERTISING
Our future success is highly dependent on an increase in the use of the
Internet as an advertising medium. The Internet advertising market is new and
rapidly evolving, and it cannot yet be compared with traditional advertising
media to gauge its effectiveness. As a result, demand and market acceptance for
Internet advertising solutions is uncertain. Most of our current or potential
advertising customers have little or no experience using the Internet for
advertising purposes and they have allocated only a limited portion of their
advertising budgets to Internet advertising. The adoption of Internet
advertising, particularly by those entities that have historically relied upon
traditional media for advertising, requires the acceptance of a new way of
conducting business, exchanging information and advertising products and
services. Such customers may find Internet advertising to be less effective for
promoting their products and services relative to traditional advertising media.
In addition, most of our current and potential Web publisher customers have
little or no experience in generating revenues from the sale of advertising
space on their Web sites. We cannot assure you that the market for Internet
advertising will continue to emerge or become sustainable. If the market for
Internet advertising fails to develop or develops more slowly than we expect,
then our business, results of operations and financial condition could be
materially and adversely affected.
There are currently no standards for the measurement of the effectiveness
of Internet advertising and standard measurements may need to be developed to
support and promote Internet advertising as a significant advertising medium.
Our advertising customers may challenge or refuse to accept our or third-party
measurements of advertisement delivery results, and our customers may not accept
any errors in such measurements. In addition, the accuracy of database
information used to target advertisements is essential to the effectiveness of
Internet advertising that may be developed in the future. The information in our
database, like any database, may contain inaccuracies which our customers may
not accept.
Substantially all of our revenues are derived from the delivery of banner
advertisements. If advertisers determine that banner advertising is an
ineffective or unattractive advertising medium, we cannot assure you that we
will be able to effectively make the transition to any other form of Internet
advertising. Also, there are "filter" software programs that limit or prevent
advertising from being delivered to a user's computer. The commercial viability
of Internet advertising, and our business, results of operations and financial
condition, would be materially and adversely affected by Web users' widespread
adoption of such software.
26
PRIVACY CONCERNS
Web sites usually place certain information ("cookies") on a user's hard
drive usually without the user's knowledge or consent. Web sites use cookies for
a variety of reasons. Our DART technology uses cookies to limit the frequency
with which the user is shown a particular ad. Certain currently available
Internet browsers allow users to modify their browser settings to remove cookies
at any time or to prevent cookies from being stored on their hard drive. In
addition, some Internet commentators, privacy advocates and governmental bodies
have suggested limiting or eliminating the use of cookies. The effectiveness of
our DART technology could be limited by any reduction or limitation in the use
of cookies.
The European Union has recently adopted a directive addressing data privacy
that may result in limitations on the collection and use of certain information
regarding Internet users. These limitations may limit our ability to target
advertising or collect and use information in certain European countries. Since
implementing regulations have not been adopted at this time, we cannot yet
determine the full impact of the directive on us.
UNPROVEN BUSINESS MODEL
Our business model is to generate revenues solely by providing Internet
advertising solutions to advertisers, ad agencies and Web publishers. The profit
potential for our business model is unproven. To be successful, both Internet
advertising and our solutions will need to achieve broad market acceptance by
advertisers, ad agencies and Web publishers. Our ability to generate significant
revenues from advertisers will depend, in part, on our ability to contract with
Web publishers that have Web sites with adequate available ad space inventory.
Further, these Web sites must generate sufficient user traffic with demographic
characteristics attractive to our advertisers. The intense competition among
Internet advertising sellers has led to the creation of a number of pricing
alternatives for Internet advertising. These alternatives make it difficult for
us to project future levels of advertising revenues and applicable gross margin
that can be sustained by us or the Internet advertising industry in general.
Market acceptance of our new solutions, including DoubleClick Local and the
Closed Loop Marketing Solutions suite of products, will depend on the continued
emergence of Internet commerce, communication and advertising, and market demand
for our solutions. We cannot assure you that the market for our new solutions
will develop or that demand for our new solutions will emerge or become
sustainable.
YEAR 2000 RISKS
Currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
We have generally completed our preliminary assessment of our Year 2000
readiness. We plan to perform a Year 2000 simulation on our software during the
second quarter of 1999, following the implementation of revisions to our
software contemplated in the first quarter of 1999. We are also in the process
of contacting certain third-party vendors, licensors and providers of software,
hardware and services regarding their Year 2000 readiness. Following this
testing and after contacting these vendors and licensors, we will be better able
to make a complete evaluation of our Year 2000 readiness, to determine what
costs will be necessary to be Year 2000 compliant, and to determine whether
contingency plans need to be developed. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000
Compliance" for detailed information on our state of readiness, potential risks
and contingency plans regarding the Year 2000 issue.
27
RISK OF SYSTEM FAILURE
The DART technology resides on a computer system located in our New York
City offices and in DoubleClick data centers in New Jersey, California,
Australia, Brazil, England, France, Germany, Netherlands and Sweden. This
system's continuing and uninterrupted performance is critical to our success.
Customers may become dissatisfied by any system failure that interrupts our
ability to provide our services to them, including failures affecting our
ability to deliver advertisements without significant delay to the viewer.
Sustained or repeated system failures would reduce the attractiveness of our
solutions to advertisers, ad agencies and Web publishers. Slower response time
or system failures may also result from straining the capacity of our deployed
software or hardware due to an increase in the volume of advertising delivered
through our servers. To the extent that we do not effectively address any
capacity constraints or system failures, our business, results of operations and
financial condition would be materially and adversely affected.
Our operations are dependent on our ability to protect our computer systems
against damage from fire, power loss, water damage, telecommunications failures,
vandalism and other malicious acts, and similar unexpected adverse events. In
addition, interruptions in our solutions could result from the failure of our
telecommunications providers to provide the necessary data communications
capacity in the time frame we require. Despite precautions we have taken,
unanticipated problems affecting our systems have from time to time in the past
caused, and in the future could cause, interruptions in the delivery of our
solutions. DoubleClick's ad serving capabilities, operational information and
data storage are presently redundant, as well as archived. We expect all of our
back-end systems for disaster recovery to be fully redundant by the second
quarter of 1999. Our business, results of operations and financial condition
could be materially and adversely affected by any damage or failure that
interrupts or delays our operations.
OUR MARKETS ARE HIGHLY COMPETITIVE
Our markets, namely Internet advertising and related products and services,
are intensely competitive. We expect such competition to continue to increase
because our markets pose no substantial barriers to entry. Competition may also
increase as a result of industry consolidation. We believe that our ability to
compete depends upon many factors both within and beyond our control, including
the following:
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed either by us or our competitors;
- customer service and support efforts;
- sales and marketing efforts; and
- the ease of use, performance, price and reliability of solutions
developed either by DoubleClick or its competitors.
We compete for Internet advertising revenues with large Web publishers and
Web search engine companies, such as America Online, Excite, Lycos, Microsoft,
Infoseek and Yahoo!. Further, our DoubleClick Network competes with a variety of
Internet advertising networks, including 24/7 Media. In marketing our
DoubleClick Network and DART Service to Web publishers, we also compete with
providers of ad servers and related services, including NetGravity and AdForce.
We also encounter competition from a number of other sources, including content
aggregation companies, companies engaged in advertising sales networks,
advertising agencies, and other companies which facilitate Internet advertising.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. These factors may allow them to respond more quickly than
we can to new or emerging technologies and changes in customer requirements. It
may also allow them to devote greater resources than we can to the development,
promotion and sale of their products and services. Such competitors may also
engage in more extensive research and
28
development, undertake more far-reaching marketing campaigns, adopt more
aggressive pricing policies and make more attractive offers to existing and
potential employees, strategic partners, advertisers and Web publishers. We
cannot assure you that our competitors will not develop products or services
that are equal or superior to our solutions or that achieve greater market
acceptance than our solutions. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products or services to
address the needs of our prospective advertising, ad agency and Web publisher
customers. As a result, it is possible that new competitors may emerge and
rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share. We
cannot assure you that we will be able to compete successfully or that
competitive pressures will not materially and adversely affect our business,
results of operations or financial condition.
Companies doing business on the Internet, including ours, must also compete
with television, radio, cable and print (traditional advertising media) for a
share of advertisers' total advertising budgets. Advertisers may be reluctant to
devote a significant portion of their advertising budget to Internet advertising
if they perceive the Internet to be a limited or ineffective advertising medium.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR INVESTMENTS
We may acquire or make investments in complementary businesses, products,
services or technologies. From time to time we have had discussions with
companies regarding our acquiring, or investing in, their businesses, products,
services or technologies. We cannot assure you that we will be able to identify
suitable acquisition or investment candidates. Even if we do identify suitable
candidates, we cannot assure you that we will be able to make such acquisitions
or investments on commercially acceptable terms. If we buy a company, we could
have difficulty in assimilating that company's personnel and operations. In
addition, the key personnel of the acquired company may decide not to work for
us. If we make other types of acquisitions, we could have difficulty in
assimilating the acquired products, services or technologies into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our results
of operations due to accounting requirements such as goodwill. Furthermore, we
may incur debt or issue equity securities to pay for any future acquisitions.
The issuance of equity securities could be dilutive to our existing
stockholders.
DEPENDENCE ON KEY PERSONNEL
Our future success depends to a significant extent on the continued service
of our key technical, sales and senior management personnel, in particular,
Kevin J. O'Connor, our Chief Executive Officer and Chairman of the Board of
Directors, Kevin P. Ryan, our President and Chief Operating Officer, and Dwight
A. Merriman, our Chief Technical Officer. We have no employment agreements with
any of these executives. The loss of the services of Messrs. O'Connor, Ryan or
Merriman, or certain other key employees, would likely have a material adverse
effect on our business, results of operations and financial condition. Our
future success also depends on our continuing to attract, retain and motivate
highly skilled employees. Competition for employees in our industry is intense.
We may be unable to retain our key employees or attract, assimilate or retain
other highly qualified employees in the future. We have from time to time in the
past experienced, and we expect to continue to experience in the future,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications.
DEPENDENCE ON THE WEB INFRASTRUCTURE
Our success will depend, in large part, upon the maintenance of the Web
infrastructure, such as a reliable network backbone with the necessary speed,
data capacity and security, and timely development of enabling products such as
high speed modems, for providing reliable Web access and services and improved
content. We cannot assure you that the Web infrastructure will continue to
effectively support the demands placed on it as the Web continues to experience
increased numbers of users, frequency of use or increased bandwidth requirements
of users. Even if the necessary infrastructure or technologies are developed, we
may have to spend considerable amounts to adapt our solutions accordingly.
Furthermore, the Web has experienced a variety of outages and other delays due
to damage to portions of its infrastructure. Such
29
outages and delays could impact the Web sites of Web publishers using our
solutions and the level of user traffic on Web sites on the DoubleClick Network.
DEPENDENCE ON PROPRIETARY RIGHTS AND RISK OF INFRINGEMENT
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of patent, copyright, trade secret and trademark law. We have filed
three patent applications in the United States and one patent application
internationally. In addition, we apply to register our trademarks in the United
States and internationally. (We own the registration for the DoubleClick
trademark in the United States.) We cannot assure you that any of our patent
applications or trademark applications will be approved. Even if they are
approved, such patents or trademarks may be successfully challenged by others or
invalidated. If our trademark registrations are not approved because third
parties own such trademarks, our use of such trademarks will be restricted
unless we enter into arrangements with such third parties which may be
unavailable on commercially reasonable terms.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our solutions or technologies. We cannot assure you that the steps we have taken
will prevent misappropriation of our solutions or technologies, particularly in
foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States.
Our DART technology collects and utilizes data derived from user activity
on the DoubleClick Network and the Web sites of Web publishers using our
solutions. This data is used for ad targeting and predicting ad performance.
Although we believe that we have the right to use such data and the compilation
of such data in our database, we cannot assure you that any trade secret,
copyright or other protection will be available for such information. In
addition, others may claim rights to such information. Further, pursuant to our
contracts with Web publishers using our solutions, we are obligated to keep
certain information regarding each Web publisher confidential.
We have licensed, and we may license in the future, elements of our
trademarks, trade dress and similar proprietary rights to third parties. While
we attempt to ensure that the quality of our brand is maintained by these
business partners, such partners may take actions that could materially and
adversely affect the value of our proprietary rights or our reputation.
We cannot assure you that any of our proprietary rights will be viable or
of value in the future since the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries is
uncertain and still evolving. Furthermore, third parties may assert infringement
claims against us. From time to time we have been, and we expect to continue to
be, subject to claims in the ordinary course of our business, including claims
of alleged infringement of the trademarks and other intellectual property rights
of third parties by us or the Web publishers with Web sites in the DoubleClick
Network. Such claims and any resultant litigation, should it occur, could
subject us to significant liability for damages and could result in the
invalidation of our proprietary rights. In addition, even if we prevail, such
litigation could be time-consuming and expensive to defend, and could result in
the diversion of our time and attention, any of which could materially and
adversely affect our business, results of operations and financial condition.
Any claims or litigation from third parties may also result in limitations on
our ability to use the trademarks and other intellectual property subject to
such claims or litigation unless we enter into arrangements with the third
parties responsible for such claims or litigation which may be unavailable on
commercially reasonable terms.
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE
The Internet and Internet advertising markets are characterized by rapidly
changing technologies, evolving industry standards, frequent new product and
service introductions, and changing customer demands. Our future success will
depend on our ability to adapt to rapidly changing technologies and to enhance
existing solutions and develop and introduce a variety of new solutions to
address our customers' changing demands. We may experience difficulties that
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could delay or prevent the successful design, development, introduction or
marketing of our solutions. In addition, our new solutions or enhancements must
meet the requirements of our current and prospective customers and must achieve
significant market acceptance. Material delays in introducing new solutions and
enhancements may cause customers to forego purchases of o