UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number: 001-34518

Ancestry.com Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		26-1235962 (I.R.S. Employer Identification Number)
360 West 4800 North Provo, Utah		84604
(Address of principal executive offices)		(Zip Code)

(801) 705-7000
(Registrants’ telephone number, including area code)

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

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

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

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

As of July 30, 2010, there were 43,811,304 shares of the registrant’s common stock, par value $0.001, outstanding.

 

 

Ancestry.com Inc.

Table of Contents

		Page
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009			3
Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2010 and 2009			4
Condensed Consolidated Statements of Cash Flows for the Three Months and Six Months Ended June 30, 2010 and 2009			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
Item 4. Controls and Procedures			25
Part II. Other Information
Item 1. Legal Proceedings			25
Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 6. Exhibits			47
Signatures			48
Exhibit Index			49
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

ANCESTRY.COM INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
		2010				2009
		(unaudited)
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	103,417			$	66,941
Restricted cash			2,351				2,181
Short-term investments			30,535				33,331
Accounts receivable, net of allowances of $370 and $472 at June 30, 2010 and December 31, 2009, respectively			4,925				5,860
Income tax receivable			473				2,017
Deferred income taxes			9,176				8,797
Prepaid expenses and other current assets			3,510				5,380
Total current assets			154,387				124,507
Property and equipment, net			17,454				19,430
Content database costs, net			51,130				49,650
Intangible assets, net			34,126				41,484
Goodwill			285,206				285,466
Other assets			2,142				2,811
Total assets		$	544,445			$	523,348
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	9,339			$	6,877
Accrued expenses			21,019				18,850
Escrow liability			1,883				1,763
Deferred revenues			88,799				69,711
Current portion of long-term debt			10,395				28,416
Total current liabilities			131,435				125,617
Long-term debt, less current portion			65,835				71,609
Deferred income taxes			27,859				30,117
Other long-term liabilities			1,115				1,115
Total liabilities			226,244				228,458
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding			—				—
Common stock, $0.001 par value; 175,000 shares authorized; 43,496 and 42,416 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively			43				42
Additional paid-in capital			283,290				272,513
Accumulated other comprehensive income (loss)			7				(41	)
Retained earnings			34,861				22,376
Total stockholders’ equity			318,201				294,890
Total liabilities and stockholders’ equity		$	544,445			$	523,348

See accompanying notes to condensed consolidated financial statements

ANCESTRY.COM INC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(unaudited)
		(In thousands, except per share data)
Revenues:
Subscription revenues		$	70,544			$	50,719			$	130,104			$	99,903
Product and other revenues			3,916				3,854				8,777				7,903
Total revenues			74,460				54,573				138,881				107,806
Costs of revenues:
Cost of subscription revenues			11,228				9,966				22,729				19,722
Cost of product and other revenues			1,280				1,310				2,774				2,824
Total cost of revenues			12,508				11,276				25,503				22,546
Gross profit			61,952				43,297				113,378				85,260
Operating expenses:
Technology and development			9,992				8,692				19,919				17,548
Marketing and advertising			24,490				15,065				46,936				29,986
General and administrative			8,032				6,777				15,774				14,340
Amortization of acquired intangible assets			3,679				4,055				7,358				8,113
Total operating expenses			46,193				34,589				89,987				69,987
Income from operations			15,759				8,708				23,391				15,273
Other income (expense):
Interest expense			(1,493	)			(1,515	)			(2,709	)			(3,356	)
Interest income			76				567				139				698
Other income (expense), net			(12	)			2				(3	)			10
Income before income taxes			14,330				7,762				20,818				12,625
Income tax expense			(5,807	)			(3,082	)			(8,333	)			(4,442	)
Net income		$	8,523			$	4,680			$	12,485			$	8,183
Net income per common share:
Basic		$	0.20			$	0.12			$	0.29			$	0.21
Diluted		$	0.18			$	0.12			$	0.26			$	0.21
Weighted average common shares outstanding
Basic			42,764				38,287				42,612				38,257
Diluted			48,015				40,159				47,754				39,625

See accompanying notes to condensed consolidated financial statements

ANCESTRY.COM INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(unaudited)
		(In thousands)
Operating activities:
Net income		$	8,523			$	4,680			$	12,485			$	8,183
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			2,740				2,687				5,604				5,330
Amortization of content			1,830				1,716				3,664				3,429
Amortization of intangible assets			3,679				4,055				7,358				8,112
Amortization of deferred financing costs			614				181				829				393
Deferred income taxes			(1,487	)			(686	)			(2,637	)			(1,886	)
Stock-based compensation expense			1,262				1,277				2,266				2,803
Changes in operating assets and liabilities:
Accounts receivable			283				483				935				(37	)
Restricted cash			(35	)			422				(50	)			803
Other assets			403				(838	)			1,970				(964	)
Income tax receivable			—				2,896				1,544				2,884
Accounts payable and accrued expenses			4,136				512				8,068				65
Excess tax benefits from stock-based compensation			(3,570	)			(23	)			(3,570	)			(23	)
Deferred revenues			4,654				1,041				19,088				8,646
Other long-term liabilities			—				26				—				26
Net cash provided by operating activities			23,032				18,429				57,554				37,764
Investing activities:
Capitalization of content database costs			(2,349	)			(1,886	)			(5,141	)			(3,672	)
Purchases of property and equipment			(2,221	)			(3,546	)			(3,628	)			(6,151	)
Purchases of short-term investments			(5,193	)			—				(7,193	)			—
Proceeds from sale and maturity of short-term investments			4,991				—				10,037				—
Net cash used in investing activities			(4,772	)			(5,432	)			(5,925	)			(9,823	)
Financing activities:
Proceeds from exercise of stock options			4,858				345				5,072				554
Principal payments on debt			(20,937	)			(13,301	)			(23,795	)			(15,926	)
Excess tax benefits from stock-based compensation			3,570				23				3,570				23
Repurchase of common stock			—				—				—				(100	)
Net cash used in financing activities			(12,509	)			(12,933	)			(15,153	)			(15,449	)
Net increase in cash and cash equivalents			5,751				64				36,476				12,492
Cash and cash equivalents at beginning of period			97,666				52,549				66,941				40,121
Cash and cash equivalents at end of period		$	103,417			$	52,613			$	103,417			$	52,613
Supplemental disclosures of cash flow information:
Cash paid for interest		$	476			$	1,388			$	1,477			$	5,416
Cash paid for income taxes			5,778				4,919				6,181				4,956
Supplemental disclosures of noncash investing and financing activities:
Unrealized gain on short-term investments			18				—				48				—
Capitalization of stock-based compensation			2				—				3				2

See accompanying notes to condensed consolidated financial statements

ANCESTRY.COM INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. NATURE OF OPERATIONS

Ancestry.com Inc. (the “company” or “Ancestry”) is an online family history resource that derives revenues from providing access to digitized historical records on a subscription basis. The company also offers other products including software and self-publishing products.

Basis of Presentation

The condensed consolidated financial statements include the accounts of the company and its wholly owned subsidiaries and a variable interest entity (“VIE”). All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying condensed consolidated balance sheet as of June 30, 2010 and the condensed consolidated statements of operations and condensed consolidated statements of cash flows for the three and six months ended June 30, 2010 and 2009 are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) on the same basis as the audited consolidated financial statements and in the opinion of management, reflect all adjustments (all of which are considered of normal recurring nature) considered necessary to present fairly the company’s financial position, results of its operations and cash flows for the three and six months ended June 30, 2010 and 2009. The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the company’s 2009 Annual Report on Form 10-K (the “2009 Annual Report”) filed with the Securities and Exchange Commission on February 26, 2010.

The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ materially from these estimates.

Certain prior period amounts have been reclassified to conform to current year presentation. These reclassifications did not have a significant impact on the condensed consolidated financial statements.

Recent accounting pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued amended standards for determining whether to consolidate a VIE. These new standards amend the evaluation criteria to identify the primary beneficiary of a VIE and require ongoing reassessment of whether an enterprise is the primary beneficiary of the VIE. These standards were effective for the company beginning in the first quarter of 2010. The company has concluded that it is the primary beneficiary of a VIE and therefore has consolidated the financial statements of the VIE into the financial statements of the company. The VIE is not significant to the financial position, results of operations, or cash flows of the consolidated company. At June 30, 2010, the net assets of the VIE were not significant. The adoption of the new standards did not have an impact on the company’s consolidated financial position, results of operations or cash flows.

2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash, cash equivalents and short-term investments consisted of the following (in thousands):

		June 30,				December 31,
		2010				2009
Cash		$	10,377			$	5,159
Cash equivalents:
Money market funds			93,040				61,782
Total cash and cash equivalents		$	103,417			$	66,941
Short-term investments:
U.S. agency securities		$	30,535			$	33,331

Gross unrealized gains and losses on short-term investments were not significant at June 30, 2010 and December 31, 2009. As of June 30, 2010, the company had U.S. agency securities totaling $25.8 million in an unrealized gain position. The company also had U.S. agency securities totaling $4.7 million in an unrealized loss position, which had been in a loss position for less than one year, and are not considered to be other than temporary losses. As of December 31, 2009, all U.S. agency securities were in an unrealized loss position and had been in a loss position for less than one year. The company designates all short-term investments as available-for-sale. As of June 30, 2010 and December 31, 2009, the company did not hold any investments with original maturities greater than one year from the date of purchase.

Cash equivalents and short-term investments are measured at fair value. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the accounting guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.

The company’s cash equivalents and short-term investments at June 30, 2010 and December 31, 2009 were all classified within Level 1. There were no movements between fair value measurement levels of the company’s cash equivalents and short-term investments during the six months ended June 30, 2010.

The carrying amounts reported in the financial statements for accounts receivable and accounts payable approximate their fair values because of the short-term maturities of these financial instruments. The carrying value of long-term debt approximated fair values based on interest rates currently available to the company for debt with similar terms at June 30, 2010 and December 31, 2009.

In anticipation of an acquisition, the company entered into a forward contract to purchase 53 million Swedish kronor. The company did not qualify the contract for hedge accounting and therefore the fair value gains and losses on the contract were recorded in net income. The fair value of the contract was not significant at June 30, 2010 and was recorded in accrued expenses on the balance sheet and in other expense on the statement of operations. In July 2010, the forward contract was settled resulting in a gain of approximately $0.4 million.

3. NET INCOME PER COMMON SHARE

Basic net income per common share is computed using the weighted-average number of outstanding shares of common stock during the period. Diluted net income per common share is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential common shares outstanding during the period. Potential common shares consist primarily of incremental shares issuable upon the assumed exercise of stock-based awards to purchase common stock using the treasury stock method. The computation of diluted net income per share for the three months ended June 30, 2010 and 2009 excludes stock-based awards to acquire 0.4 million and 1.8 million shares, respectively, as their impact was anti-dilutive. The computation of diluted net income per common share for the six months ended June 30, 2010 and 2009 excludes stock-based awards to acquire 0.4 million and 5.3 million shares, respectively, as their impact was anti-dilutive.

A reconciliation of the numerator and the denominator used in the calculation of basic and diluted net income per common share is as follows (in thousands, except per share amounts):

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Basic net income per common share:
Net income		$	8,523			$	4,680			$	12,485			$	8,183
Shares used in computation:
Weighted-average common shares outstanding			42,764				38,287				42,612				38,257
Basic net income per common share		$	0.20			$	0.12			$	0.29			$	0.21
Diluted net income per common share:
Net income		$	8,523			$	4,680			$	12,485			$	8,183
Shares used in computation:
Weighted-average common shares outstanding			42,764				38,287				42,612				38,257
Dilutive stock-based awards			5,251				1,872				5,142				1,368
Weighted-average number of diluted common shares			48,015				40,159				47,754				39,625
Diluted net income per common share		$	0.18			$	0.12			$	0.26			$	0.21

4. COMPREHENSIVE INCOME

Comprehensive Income

Other comprehensive income consists of unrealized gains and losses on available-for-sale securities. The components of comprehensive income were as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net income		$	8,523			$	4,680			$	12,485			$	8,183
Other comprehensive income:
Change in unrealized gain on available for sale securities, net			18				—				48				—
Comprehensive income		$	8,541			$	4,680			$	12,533			$	8,183

5. STOCK-BASED AWARD PLANS

In July 2009, the Board of Directors approved the 2009 Stock Incentive Plan (the “2009 Plan”), which provides for the grant of stock options and other stock-based awards, including restricted stock units, to employees, directors and consultants. The 2009 Plan was effective upon the consummation of the company’s initial public offering on November 10, 2009. The 2009 Plan is subject to various automatic annual increase provisions on the first day of each fiscal year. On January 1, 2010, the number of stock-based awards available for grant under the 2009 Plan increased by 1,696,653 shares. As of June 30, 2010, 3,276,738 stock-based awards were available to be granted under the 2009 Plan. The company has also granted stock options under previously approved plans: the 1998 Stock Option Plan (the “1998 Plan”), the Executive Stock Plan (“ESP”), the 2004 Stock Option Plan (the “2004 Plan”) and the Generations Holding, Inc. Stock Purchase and Option Plan (the “2008 Plan”). The company does not intend to grant additional stock awards under the 1998 Plan, ESP, 2004 Plan or 2008 Plan.

Stock Options

Stock option awards granted generally vest over four years and have a term not greater than ten years from the date of grant. A summary of stock option activity of all the plans for the six months ended June 30, 2010 is as follows:

						Weighted
						Average
		Number of				Exercise
		Shares				Price
Outstanding at December 31, 2009			10,373,290			$	5.29
Granted			252,250				16.07
Exercised			(1,079,473	)			4.70
Canceled			(42,751	)			6.33
Outstanding at June 30, 2010			9,503,316				5.64
Exercisable at June 30, 2010			6,196,643				4.87
Vested and expected to vest			9,376,405				5.58

As of June 30, 2010, the company had $8.2 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock options. The unrecognized compensation expense is expected to be recognized over a weighted average remaining period of 2.4 years. The weighted average remaining contractual life of options outstanding at June 30, 2010 was 6.7 years. The total intrinsic values of options outstanding and options exercisable as of June 30, 2010 were $113.9 million and $79.0 million, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2010 was $13.5 million.

The company estimates the fair value of each option on the date of grant using the Black-Scholes option-pricing model. The weighted average grant date fair values of options granted during the six months ended June 30, 2010 and 2009 were $5.43 and $2.86, respectively. The following weighted average assumptions were used to value option grants.

		Six Months Ended
		June 30,
		2010				2009
Expected volatility			40	%			50	%
Expected term (in years)			4.0				4.3
Weighted average risk-free interest rate			1.9	%			1.8	%
Weighted average fair value of the underlying common stock		$	16.07			$	6.34
Expected dividends			—				—

Restricted Stock Units

During the six months ended June 30, 2010, the company also issued restricted stock units under the 2009 Plan. Restricted stock unit awards generally vest over four years. The following table summarizes restricted stock unit activity.

						Weighted
						Average
		Number of				Grant Date
		Shares				Fair Value
Restricted stock units outstanding at December 31, 2009			—			$	—
Granted			294,098				16.44
Vested			(200	)			16.26
Forfeited			(3,667	)			16.31
Restricted stock units outstanding at June 30, 2010			290,231				16.44

As of June 30, 2010 the company had $3.8 million of total unrecognized compensation expense, net of estimated forfeitures related to restricted stock units. The unrecognized compensation expense is expected to be recognized over a weighted average period of 3.9 years.

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense included in the statement of operations (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Cost of subscription revenues		$	49			$	32			$	77			$	61
Technology and development			490				360				887				835
Marketing and advertising			118				81				186				169
General and administrative			605				804				1,116				1,738
Total stock-based compensation expense		$	1,262			$	1,277			$	2,266			$	2,803

6. INCOME TAXES

The company is subject to income taxes in the U.S. and foreign jurisdictions. Significant judgment is required in evaluating the company’s uncertain tax positions and determining its provision for income taxes. The company’s total gross unrecognized tax benefits as of June 30, 2010 and December 31, 2009 were $0.6 million. The net uncertain tax positions, if recognized by the company, would affect the company’s effective income tax rate.

7. COMMITMENTS AND CONTINGENCIES

From time to time, the company is a party to or otherwise involved in legal proceedings or other legal matters that arise in the ordinary course of business or otherwise. While the company’s management does not believe that any pending legal claim or proceeding will be resolved in a manner that would have a material adverse effect on the company’s business, the company cannot assure the ultimate outcome of any legal proceeding or contingency in which the company is or may become involved.

8. SUBSEQUENT EVENTS

On July 15, 2010, the company completed the acquisition of Genline AB, the owner and operator of the Swedish family history website Genline.se, for $7.2 million.

 

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements relating to future events and future performance. All statements other than those that are purely historical may be forward-looking statements. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “continue,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “will” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this Quarterly Report include statements about:

	•		our future financial performance, including our revenues, cost of revenues, operating expenses and ability to sustain profitability;
	•		our rate of revenue and expense growth;
	•		the pool of our potential subscribers;
	•		our ability to attract and retain subscribers;
	•		our ability to manage growth;
	•		our ability to generate additional revenues on a cost-effective basis;
	•		our ability to acquire content and make it available online;
	•		our ability to enhance the subscribers’ experience and provide value;
	•		our success with respect to any future acquisitions;
	•		our international expansion plans;
	•		our ability to adequately manage costs and control margins and trends;
	•		our investments in technology and the success of our promotional programs and new products;
	•		our development of brand awareness;
	•		our ability to retain and hire necessary employees;
	•		our competitive position;
	•		our liquidity and working capital requirements and the availability of cash and credit;
	•		the seasonality of our business;
	•		the impact of external market forces; and
	•		the impact of claims or litigation.

Although we believe that the assumptions underlying the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss in this Quarterly Report under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and elsewhere. You should read these factors and the other cautionary statements made in this Quarterly Report as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. All subsequent written or spoken forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

Ancestry.com is the world’s largest online family history resource, with more than 1.3 million paying subscribers around the world as of June 30, 2010. We have been a leader in the family history market for over 20 years and have helped pioneer the market for online family history research. We believe that most people have a fundamental desire to understand who they are and from where they came, and that anyone interested in discovering, preserving and sharing their family history is a potential user of Ancestry.com. We strive to make our service valuable to individuals ranging from the most committed family historians to those taking their first steps towards satisfying their curiosity about their family stories.

The foundation of our service is an extensive and unique collection of billions of historical records that we have digitized, indexed and put online over the past decade. Our subscribers use our proprietary online platform, extensive digital historical record collection, and easy-to-use technology to research their family histories, build their family trees, collaborate with other subscribers, upload their own records and publish and share their stories with their families. We offer our service on a subscription basis, typically annually or monthly. These subscribers are our primary source of revenue. We charge each subscriber for their subscription at the commencement of their subscription period and at each renewal date. Although monthly subscribers have become an increasing proportion of our subscribers, the predominantly annual commitments of our subscribers enhance management’s near-term visibility on our revenues and provide working capital benefits, which we believe enable us to more effectively manage the growth of our business. We provide ongoing value to our subscribers by regularly adding new historical content, enhancing our Web sites with new tools and features and enabling greater collaboration among our users through the growth of our global community.

Our goal is to remain the leading online resource for family history and to grow our subscriber base in the United States and around the world by offering a superior value proposition to anyone interested in learning more about their family history. We have focused on, and will continue to focus on, retaining our loyal base of existing subscribers, on acquiring new subscribers and on expanding the market to new consumers. We believe our previous investments in technology and content have provided us a foundation for a scalable business model that will help us to increase our margins over the long term and effectively manage our costs as our business grows. However, we expect to continue to devote substantial resources and funds to improving our technologies and product offerings and acquiring new and relevant content, and also to expanding the awareness of our brand and category through global marketing, which may dampen our margin expansion in the near term.

The following discussion and analysis is based upon and should be read in conjunction with the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report as well as the Consolidated Financial Statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Annual Report”).

Key Business Metrics

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

	•		Total subscribers. A subscriber is an individual who pays for renewable access to one of our Ancestry.com Web sites. Total subscribers is defined as the number of subscribers at the end of the quarter.
	•		Gross subscriber additions. A gross subscriber addition is a new customer who purchases a subscription to one of our Ancestry Web sites, net of any refunds or returns.
	•		Monthly churn. Monthly churn is a measure representing the number of subscribers that cancel in the quarter divided by the sum of beginning subscribers and gross subscriber additions during the quarter. To arrive at monthly churn, we divide the result by three. Management uses this measure to determine the health of our subscriber base.
	•		Subscriber acquisition cost. Subscriber acquisition cost is external marketing and advertising expense, divided by gross subscriber additions in the quarter. Management uses this metric to determine the efficiency of our marketing and advertising programs in acquiring new subscribers.
	•		Average monthly revenue per subscriber. Average monthly revenue per subscriber is total subscription revenues earned in the quarter from subscriptions to one of the Ancestry.com Web sites divided by the average number of subscribers in the quarter, divided by three. The average number of subscribers for the quarter is calculated by taking the average of the beginning and ending number of subscribers for the quarter.

A significant number of our renewals historically occur in the first quarter of each year. Because we recognize subscription revenues ratably over the subscription period, this trend generally has not resulted in a material seasonal impact on our revenues, but may result in a seasonal effect on one or more of the key business metrics described above.

Performance Highlights

The following represents our performance highlights for Q2 2010, Q1 2010 and Q2 2009:

		Three Months Ended
		June 30,				March 31,				June 30,
		2010				2010				2009
Total subscribers at end of quarter			1,310,562				1,211,978				990,959
Gross subscriber additions			290,589				279,100				160,394
Monthly churn			4.3	%			3.3	%			3.8	%
Subscriber acquisition cost		$	74.04			$	69.57			$	73.27
Average monthly revenue per subscriber		$	18.02			$	16.70			$	16.42

For Q2 2010, our total subscribers and gross subscriber additions increased as compared to Q1 2010 and Q2 2009 primarily as a result of increased interest in Ancestry.com stemming from NBC’s release of the U.S. version of the television show “Who Do You Think You Are?” which first aired on March 5, 2010 and continued through the season finale on April 30, 2010. Subscriber growth has continued after the season finale, driven by our increased brand awareness, marketing efforts and continued television advertising campaigns.

For Q2 2010, our monthly churn increased as compared to Q1 2010 and Q2 2009. New subscribers, i.e., those who have been subscribers for less than 100 days, tend to churn at a higher rate than the average subscriber. The number of new subscribers, as a percent of total subscribers, increased due to the large growth in gross subscriber additions and an increase in the proportion of monthly subscriptions to annual subscriptions in the first half of 2010. These factors contributed to an increase in churn for Q2 2010 as compared to Q1 2010 and Q2 2009.

For Q2 2010, our subscriber acquisition cost increased as compared to Q1 2010, while remaining comparable to Q2 2009. The increase was due to increased marketing expenses as compared to the increase in gross subscriber additions.

For Q2 2010, our average monthly revenue per subscriber increased as compared Q2 2009 due to both an increase in the proportion of monthly subscriptions to annual subscriptions and an increase in the proportion of premium packages to basic packages. As compared to Q1 2010, our average revenue per subscriber increased in Q2 2010 primarily due to the timing of revenue recognition attributable to gross subscriber additions related to “Who Do You Think You Are?” Because the majority of the Q1 2010 gross subscriber additions related to the television show were added in the second half of March, we did not recognize a significant portion of revenue related to these subscribers until Q2 2010; however, these subscriber additions were reflected in our average monthly revenue per subscriber calculation in Q1 2010.

Components of Condensed Consolidated Statements of Operations

Revenues

Subscription revenues. We derive subscription revenues primarily from providing access to our services via our various Ancestry.com Web sites. Subscription revenues are recognized ratably over the subscription period, which consists primarily of annual and monthly subscriptions, net of estimated cancellations. We typically charge each subscriber’s credit card for their subscription at the commencement of their subscription period and at each renewal date (whether annual or monthly), unless they cancel their subscription before the renewal date. The amount of unrecognized revenues is recorded in deferred revenue.

A majority of our subscription revenues is derived from subscribers in the United States. We attribute subscription revenues by country based on the billing address of the subscriber, regardless of the Web site to which the person subscribes. The following presents subscription revenue by geographic region (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
United States		$	54,110			$	38,402			$	98,514			$	75,478
United Kingdom			9,965				8,274				19,682				16,419
All other countries			6,469				4,043				11,908				8,006
Total subscription revenues		$	70,544			$	50,719			$	130,104			$	99,903

Product and other revenues. Product and other revenues include sales of desktop software (Family Tree Maker), vital records certificates, DNA testing (Ancestry.com DNA), advertising and other products and services. Revenues related to these products are recognized upon shipment of product or fulfillment of services, as applicable.

Cost of Revenues

Cost of subscription revenues. Cost of subscription revenues consists of amortization of our database content costs, depreciation expense on web servers and equipment, credit card processing fees, web hosting costs, royalty costs on certain content licensed from others and personnel-related costs for database content support and subscriber services personnel.

Cost of product and other revenues. Cost of product and other revenues consists of our direct costs to purchase the products, shipping costs, credit card processing fees, personnel-related costs of warehouse personnel, warehouse storage costs and royalties on products licensed from others.

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

Operating Expenses

Technology and development. Technology and development expenses consist of personnel-related costs incurred in product development, maintenance and testing of our Web sites, enhancing our record search and linking technologies, developing solutions for new product lines, internal information systems and infrastructure, third-party development, and other internal-use software systems. Our development costs are primarily based in the United States and are primarily devoted to providing accessibility to content and tools for individuals to do family history research. We expect that in the remainder of 2010, as we continue to invest in personnel and other resources to further improve our service, technology and development costs will continue to increase in absolute dollars as compared to the six months ended June 30, 2010.

Marketing and advertising. Marketing and advertising expenses consist primarily of direct expenses related to television and online advertising and personnel-related expenses. We expect that in the remainder of 2010, marketing costs will continue to increase in absolute dollars as compared to the six months ended June 30, 2010.

General and administrative. General and administrative expenses consist principally of personnel-related expenses for our executive, finance, legal, human resources and other administrative personnel, as well as accounting and legal professional fees and other general corporate expenses. We expect that in the remainder of 2010, general and administrative costs will continue to increase in absolute dollars as compared to the six months ended June 30, 2010.

Amortization of acquired intangible assets. Amortization of acquired intangible assets is the amortization expense associated with subscriber relationships and contracts, core technologies, and intangible assets, including trademarks and tradenames.

Other Income (Expense) and Income Tax Expense

Interest expense. Interest expense includes the interest expense associated with our long-term debt and amortization of deferred financing costs. Our interest expense varies based on the level of debt outstanding and changes in interest rates.

Interest income. Interest income includes interest earned on cash and cash equivalents and short-term investments.

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

Results of Operations

The following table sets forth our condensed consolidated statements of operations as a percentage of revenues for the three and six months ended June 30, 2010 and 2009. The information contained in the table below should be read in conjunction with our condensed consolidated financial statements and the related notes.

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2010				2009				2010				2009
Revenues:
Subscription revenues			94.7	%			92.9	%			93.7	%			92.7	%
Product and other revenues			5.3				7.1				6.3				7.3
Total revenues			100.0				100.0				100.0				100.0
Costs of revenues:
Cost of subscription revenues			15.1				18.3				16.4				18.3
Cost of product and other revenues			1.7				2.4				2.0				2.6
Total cost of revenues			16.8				20.7				18.4				20.9
Gross profit			83.2				79.3				81.6				79.1
Operating expenses:
Technology and development			13.4				15.9				14.3				16.3
Marketing and advertising			32.9				27.6				33.8				27.8
General and administrative			10.8				12.4				11.4				13.3
Amortization of acquired intangible assets			4.9				7.4				5.3				7.5
Total operating expenses			62.0				63.3				64.8				64.9
Income from operations			21.2				16.0				16.8				14.2
Other income (expense):
Interest expense			(2.1	)			(2.8	)			(2.0	)			(3.1	)
Interest income			0.1				1.0				0.1				0.6
Other income, net			—				—				0.1				—
Income before income taxes			19.2				14.2				15.0				11.7
Income tax expense			(7.8	)			(5.6	)			(6.0	)			(4.1	)
Net income			11.4				8.6				9.0				7.6

Revenues, Cost of Revenues and Gross Profit

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2010				2009				% Change				2010				2009				% Change
		(In thousands)												(In thousands)
Revenues:
Subscription revenues		$	70,544			$	50,719				39.1	%		$	130,104			$	99,903				30.2	%
Product and other revenues			3,916				3,854				1.6				8,777				7,903				11.1
Total revenues			74,460				54,573				36.4				138,881				107,806				28.8
Cost of revenues:
Cost of subscription revenues			11,228				9,966				12.7				22,729				19,722				15.2
Cost of product and other revenues			1,280				1,310				(2.3	)			2,774				2,824				(1.8	)
Total cost of revenues			12,508				11,276				10.9				25,503				22,546				13.1
Gross profit		$	61,952			$	43,297				43.1			$	113,378			$	85,260				33.0
Gross profit percentage			83.2	%			79.3	%							81.6	%			79.1	%

Subscription revenues

For Q2 2010, our subscription revenues increased $19.8 million as compared to Q2 2009. The increase was primarily the result of an increase in the number of total subscribers, as well as an increase in average monthly revenue per subscriber on our Ancestry.com Web sites. Average monthly revenue per subscriber increased due to both an increase in the proportion of monthly subscriptions to annual subscriptions, and an increase in the proportion of premium packages to basic packages. During Q2 2010, changes in foreign currency exchange rates had an insignificant impact on subscription revenues.

For the six months ended June 30, 2010, our subscription revenues increased $30.2 million as compared to the six months ended June 30, 2009. The increase was driven by the same factors that influenced the three month results.

Product and other revenues

Product and other revenues remained relatively flat between Q2 2010 and Q2 2009.

For the six months ended June 30, 2010, product and other revenues increased $0.9 million as compared to the six months ended June 30, 2009. The increase was primarily due to the recognition of deferred revenues upon a change in our software distribution partners and increased revenues related to our vital records products.

Cost of subscription revenues

For Q2 2010, our cost of subscription revenues increased $1.3 million as compared to Q2 2009. The increase was primarily due to a $0.5 million increase in personnel-related costs attributable to increased web hosting support personnel, a $0.5 million increase in credit card processing fees due to increased transaction volumes as a result of increased total subscribers and a $0.2 million increase in web hosting costs attributable to greater user traffic volumes due to increased total subscribers.

For the six months ended June 30, 2010, our cost of subscription revenues increased $3.0 million as compared to the six months ended June 30, 2009. The increase was primarily due to a $1.2 million increase in personnel-related costs attributable to increased web hosting support personnel, a $0.9 million increase in credit card processing fees attributable to increased transaction volumes as a result of increased total subscribers, a $0.5 million increase in web hosting costs attributable to greater user traffic volumes due to increased total subscribers and a $0.3 million increase in content amortization.

Cost of product and other revenues

Cost of product and other revenues remained relatively flat between Q2 2010 and Q2 2009 as well as between the six months ended June 30, 2010 and the six months ended June 30, 2009.

Operating Expenses

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2010				2009				% Change				2010				2009				% Change
		(In thousands)
Operating expenses:
Technology and development		$	9,992			$	8,692				15.0	%		$	19,919			$	17,548				13.5	%
Marketing and advertising			24,490				15,065				62.6				46,936				29,986				56.5
General and administrative			8,032				6,777				18.5				15,774				14,340				10.0
Amortization of acquired intangible assets			3,679				4,055				(9.3	)			7,358				8,113				(9.3	)
Total operating expenses		$	46,193			$	34,589				33.5			$	89,987			$	69,987				28.6

Technology and development

For Q2 2010, our technology and development expenses increased $1.3 million as compared to Q2 2009. For the six months ended June 30, 2010, our technology and development expenses increased $2.4 million as compared to six months ended June 30, 2009. The increases were primarily the result of increases in personnel-related expenses reflecting increases in the number of technology and development personnel.

Marketing and advertising

For Q2 2010, our marketing and advertising expenses increased $9.4 million as compared to Q2 2009. For the six months ended June 30, 2010, our marketing and advertising expenses increased $17.0 million as compared to the six months ended June 30, 2009. The increases were due to increased television and online advertising in both the domestic and international markets, which included marketing and advertising expenses around the U.S. version of the television show “Who Do You Think You Are?”

General and administrative

For Q2 2010, our general and administrative expenses increased $1.3 million as compared to Q2 2009. The increase was primarily due to a $0.5 million increase in outside service costs, consisting primarily of consultants, legal services, and accounting fees, and due to a $0.5 million change in position from foreign currency gains in Q2 2009 to losses Q2 2010.

For the six months ended June 30, 2010, our general and administrative expenses increased $1.4 million as compared to the six months ended June 30, 2009. The increase was primarily due to a $0.6 million increase in outside service costs, consisting primarily of consultants, legal services, and accounting fees, and due to a $0.7 million change in position from foreign currency gains in the six months ended June 30, 2009 to losses in the six months ended June 30, 2010.

Amortization of acquired intangible assets

For Q2 2010, amortization of acquired intangible assets decreased $0.4 million as compared to Q2 2009. For the six months ended June 30, 2010, amortization of acquired intangible assets decreased $0.8 million as compared to the six months ended June 30, 2009. The decreases were due to decreased amortization of our subscriber relationship intangible asset, which is amortized on an accelerated basis.

Other Income (Expense), Net and Income Tax Expense

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2010				2009				% Change				2010				2009				% Change
		(In thousands)
Other income (expense):
Interest expense		$	(1,493	)		$	(1,515	)			(1.5)	%		$	(2,709	)		$	(3,356	)			(19.3)	%
Interest income			76				567				(86.6	)			139				698				(80.1	)
Other income (expense), net			(12	)			2				(700.0	)			(3	)			10				(130.0	)
Income tax expense			(5,807	)			(3,082	)			88.4				(8,333	)			(4,442	)			87.6
Other data:
Effective tax rate			40.5	%			39.7	%							40.0	%			35.2	%

Interest expense

For Q2 2010, interest expense remained relatively flat as compared to Q2 2009. However, decreased cash interest expense was offset by increased non-cash deferred financing costs. This was primarily due to the acceleration of $0.4 million of deferred financing costs related to the excess cash payment of $18.6 million made on our credit facility during Q2 2010. This excess cash payment is determined based working capital available at the end of the previous fiscal year. Cash interest expense decreased due to $43.3 million of principal payments, including the excess cash payment, made on our credit facility during the previous 12 months, which reduced our debt balance. The effective interest rate on our credit facility was approximately the same as of June 30, 2010 as compared to June 30, 2009.

For the six months ended June 30, 2010, interest expense decreased $0.6 million as compared to the six months ended June 30, 2009. Cash interest expense decreased due to $43.3 million of principal payments, including the excess cash payment, made on our credit facility during the previous 12 months. The decrease was partially offset by the acceleration of $0.4 million of non-cash deferred financing costs related to the excess cash payment made on our credit facility during Q2 2010. The effective interest rate on our credit facility was approximately the same as of June 30, 2010 as compared to June 30, 2009.

Interest income

For Q2 and the six months ended June 30, 2010, our interest income decreased $0.5 million and $0.6 million as compared to Q2 and the six months ended June 30, 2009, respectively. The decreases were primarily due to $0.5 million in interest earned on an income tax refund received in Q2 2009.

Other income (expense), net

Other income (expense), net was not significant in either Q2 or the six months ended June 30, 2010 or 2009.

Income tax expense

For Q2 2010, our effective income tax rate of 40.5% differed from the federal statutory rate of 35% principally due to state income taxes of 2.3%, foreign income taxes of 1.6% as a result of net operating losses in foreign jurisdictions for which no income tax benefit has been recognized, non-deductible stock-based compensation expenses of 1.3% and other items of 0.3%.

For Q2 2009 our effective income tax rate of 39.7% differed from the federal statutory rate of 35% primarily due to state income taxes of 1.4%, non-deductible stock-based compensation expenses of 2.0% and other items of 1.3%.

For the six months ended June 30, 2010, our effective income tax rate of 40.0% differed from the federal statutory rate of 35% principally due to state income taxes of 2.3%, foreign income taxes of 1.1% as a result of net operating losses in foreign jurisdictions for which no income tax benefit has been recognized, non-deductible stock-based compensation expenses of 1.3% and other items of 0.3%.

For the six months ended June 30, 2009 our effective income tax rate of 35.2% differed from the federal statutory rate of 35% primarily due to changes in the state tax apportionment factors resulting from enacted legislation, which resulted in a benefit of 9.4%, net operating loss adjustments of 4.3%, non-deductible stock-based compensation expenses of 3.3%, foreign income taxes of 1.1% as a result of net operating losses in foreign jurisdictions for which no income tax benefit has been recognized and other items of 0.9%.

Other Financial Data

In addition to our results determined under U.S. generally accepted accounting principles (“GAAP”) discussed above, we believe adjusted EBITDA and free cash flow are useful to investors in evaluating our operating performance because securities analysts use adjusted EBITDA and free cash flow as supplemental measures to evaluate the overall operating performance of companies. For the three months and six months ended June 30, 2010 and 2009, our net income, adjusted EBITDA and free cash flow were as follows:

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2010				2009				% Change				2010				2009				% Change
Net Income		$	8,523			$	4,680				82.1	%		$	12,485			$	8,183				52.6	%
Adjusted EBITDA(1)			25,270				18,443				37.0				42,283				34,947				21.0
Free cash flow(2)			14,446				6,704				115.5				25,856				14,752				75.3

Adjusted EBITDA and free cash flow are financial data that are not calculated in accordance with GAAP. The table below in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” provides a reconciliation of these non-GAAP financial measures to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. We prepare adjusted EBITDA and free cash flow to eliminate the impact of items that we do not consider indicative of our core operating performance. We encourage you to evaluate these adjustments and the reasons we consider them appropriate, as well as the material limitations of non-GAAP measures.

Our management uses adjusted EBITDA and free cash flow as measures of operating performance; for planning purposes, including the preparation of our annual operating budget; to allocate resources to enhance the financial performance of our business; to evaluate the effectiveness of our business strategies; to provide consistency and comparability with past financial performance; to facilitate a comparison of our results with those of other companies; and in communications with our board of directors concerning our financial performance. We also use adjusted EBITDA and have used free cash flow as factors when determining management’s incentive compensation.

Management believes that the use of adjusted EBITDA and free cash flow provides consistency and comparability with our past financial performance, facilitates period to period comparisons of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. Management believes that it is useful to exclude non-cash charges such as depreciation, amortization and stock-based compensation from adjusted EBITDA and free cash flow because (i) the amount of such non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods as a result of new acquisitions, full amortization of previously acquired tangible and intangible assets or the timing of new stock-based awards, as the case may be.

Although adjusted EBITDA and free cash flow are frequently used by investors and securities analysts in their evaluations of companies, adjusted EBITDA and free cash flow each have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:

	•		adjusted EBITDA and free cash flow do not reflect our future requirements for contractual commitments and adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures;
	•		adjusted EBITDA and free cash flow do not reflect changes in, or cash requirements for, our working capital;

	•		adjusted EBITDA does not reflect interest income or interest expense;
	•		adjusted EBITDA does not reflect cash requirements for income taxes;
	•		adjusted EBITDA and free cash flow do not reflect the non-cash component of employee compensation;
	•		although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and adjusted EBITDA and free cash flow do not reflect any cash requirements for these replacements;
	•		other companies in our industry may calculate adjusted EBITDA or free cash flow or similarly titled measures differently than we do, limiting their usefulness as comparative measures.

The following table presents a reconciliation of our adjusted EBITDA and free cash flow to net income, the most comparable GAAP financial measure, for each of the periods identified.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Reconciliation of adjusted EBITDA and free cash flow to net income:
Net income		$	8,523			$	4,680			$	12,485			$	8,183
Interest expense, net			1,417				948				2,570				2,658
Income tax expense			5,807				3,082				8,333				4,442
Depreciation expense			2,740				2,687				5,604				5,330
Amortization expense			5,509				5,771				11,022				11,541
Stock-based compensation			1,262				1,277				2,266				2,803
Other income, net			12				(2	)			3				(10	)
Adjusted EBITDA		$	25,270			$	18,443			$	42,283			$	34,947
Capitalization of content database costs			(2,349	)			(1,886	)			(5,141	)			(3,672	)
Capital expenditures			(2,221	)			(3,546	)			(3,628	)			(6,151	)
Cash paid for interest			(476	)			(1,388	)			(1,477	)			(5,416	)
Cash paid for income taxes			(5,778	)			(4,919	)			(6,181	)			(4,956	)
Free cash flow		$	14,446			$	6,704			$	25,856			$	14,752

Liquidity and Capital Resources

In December 2007, Spectrum Equity Investors contributed cash and equity with an aggregate value of $138.6 million and we entered into a credit facility that included a $140 million term loan as part of a larger transaction, which we refer to as the Spectrum investment. On November 10, 2009, we received net proceeds of $47.8 million from our initial public offering. With the exception of our initial public offering, we have funded our operations primarily from cash flows from operations, which in Q2 2010 and the six months ended June 30, 2010 satisfied all of our cash requirements.

Our primary uses of cash include operating costs such as personnel-related expenses, marketing and advertising, payments related to our long-term debt, capital and content database costs and expansion of new markets and businesses. Our future capital requirements may vary materially from those now planned and will depend on many factors, including:

	•		the development of new services;
	•		market acceptance of our services;
	•		the levels of advertising and promotion required to retain and acquire subscribers;
	•		the launch of additional services and improvement of our competitive position in the marketplace;
	•		the level of new content acquisition required to retain and acquire subscribers;
	•		the expansion of our development and marketing organizations;
	•		the building of infrastructure necessary to support our growth; and
	•		our relationships with suppliers and customers.

We have experienced increases in our expenditures in connection with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase in the future. We expect cash on hand, internally generated cash flow and available credit from our credit facility will provide adequate funds for operating and recurring cash needs (e.g., working capital, capital expenditures, and debt repayments) for at least the next 12 months.

As of June 30, 2010, we had $143.9 million of total liquidity, comprised of $103.4 million in cash and cash equivalents, $30.5 million in short-term investments and the ability to borrow $10.0 million under the revolving portion of our credit facility. Cash and cash equivalents are comprised of high quality investments including money market funds. Short-term investments are classified as available-for-sale and are held in high quality investments including U.S. government agency securities with maturities less than a year. Note 2 to our condensed consolidated financial statements included in this Quarterly Report describes further the composition of our cash and cash equivalents and short-term investments.

Summary cash flow information for cash and cash equivalents and short-term investments for Q2 2010 and Q2 2009 and six months ended June 30, 2010 and 2009 is set forth below. For the purposes of this cash flow analysis, we have included our highly liquid short-term investments.

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2010				2009				% Change				2010				2009				% Change
		(In thousands)												(In thousands)
Net cash and cash equivalents and short-term investments provided by (used in):
Operating activities		$	23,032			$	18,429				25	%		$	57,554			$	37,764				52	%
Investing activities			(4,552	)			(5,432	)			(16	)			(8,721	)			(9,823	)			(11	)
Financing activities			(12,509	)			(12,933	)			(3	)			(15,153	)			(15,449	)			(2	)
Increase in cash and cash equivalents and short-term investments		$	5,971			$	64			NM				$	33,680			$	12,492				170

Cash Flow Analysis

Sources and uses of cash

For Q2 2010, our cash and cash equivalents and short-term investments increased $6.0 million to $134.0 million, as compared to an increase of $0.1 million in Q2 2009. Net cash provided by operating activities was used primarily for debt repayments and investments in capital expenditures and content database costs.

For the six months ended June 30, 2010, our cash and cash equivalents and short-term investments increased $33.7 million to $134.0 million, as compared to an increase of $12.5 million in the six months ended June 30, 2009. Net cash provided by operating activities was used primarily for debt repayments and investments in capital expenditures and content database costs.

Net cash provided by operating activities

For Q2 2010, net cash provided by operating activities was $23.0 million, reflecting an increase of $4.6 million as compared to Q2 2009, which was primarily the result of increased net income. Net cash provided by operating activities consists of net income as adjusted for non-cash expenses and changes in operating assets and liabilities. For Q2 2010, our net income totaled $8.5 million, reflecting an increase of $3.8 million as compared to Q2 2009. Our non-cash expenses, including depreciation, amortization of content database costs, amortization of acquired intangible assets, amortization of deferred financing costs, stock-based compensation and deferred income taxes, totaled $8.6 million, reflecting a decrease of $0.6 million. Our net cash provided by changes in operating assets and liabilities excluding deferred revenue totaled $1.2 million, reflecting a decrease of $2.3 million. The change in our deferred revenue, which represents cash received from subscribers but not yet recognized in revenue, totaled $4.7 million, reflecting an increase of $3.6 million. Deferred revenue increased primarily due to the net increase in subscribers and the increase in the proportion of premium packages over basic packages.

For the six months ended June 30, 2010, net cash provided by operating activities was $57.6 million, reflecting an increase of $19.8 million as compared to the six months ended June 30, 2009. Net cash provided by operating activities consists of net income as adjusted for non-cash expenses and changes in operating assets and liabilities. For the six months ended June 30, 2010, our net income totaled $12.5 million, reflecting an increase of $4.3 million as compared to the six months ended June 30, 2009. Our non-cash expenses, including depreciation, amortization of content database costs, amortization of acquired intangible assets, amortization of deferred financing costs, stock-based compensation and deferred income taxes, totaled $17.1 million, reflecting a decrease of $1.1 million. Our net cash provided by changes in operating assets and liabilities excluding deferred revenue totaled $8.9 million, reflecting an increase of $6.1 million. The change in our deferred revenue, which represents cash received from subscribers but not yet recognized in revenue, totaled $19.1 million, reflecting an increase of $10.4 million. Deferred revenue increased primarily due to the net increase in subscribers and the increase in the proportion of premium packages over basic packages.

Net cash used in investing activities

For Q2 2010, net cash used in investing activities totaled $4.6 million, reflecting a decrease of $0.9 million as compared to Q2 2009. Net cash used in investing activities consisted of investments in capital equipment and content database costs. The decrease in net cash used in investing activities was due to decreased purchases of capital equipment partially offset by increased content database costs.

For the six months ended June 30, 2010, net cash used in investing activities totaled $8.7 million, reflecting a decrease of $1.1 million as compared to the six months ended June 30, 2009. Net cash used in investing activities consisted of investments in capital equipment and content database costs. The decrease in net cash used in investing activities was due to decreased purchases of capital equipment partially offset by increased content database costs.

Net cash used in financing activities

For Q2 2010, net cash used in financing activities totaled $12.5 million, reflecting a decrease of $0.4 million as compared to Q2 2009. Net cash used in financing activities consisted primarily of principal payments on long-term debt of $20.9 million partially offset by proceeds from stock option exercises of $4.9 million and excess tax benefits from stock-based compensation of $3.6 million.

For the six months ended June 30, 2010, net cash used in financing activities totaled $15.2 million, reflecting a decrease of $0.3 million as compared to the six months ended June 30, 2009. Net cash used in financing activities consisted primarily of principal payments on long-term debt of $23.8 million partially offset by proceeds from stock option exercises of $5.1 million and excess tax benefits from stock-based compensation of $3.6 million.

Contractual Obligations

Long-term Debt

At June 30, 2010, long-term debt outstanding under our credit facility totaled $76.2 million. Of the amount outstanding at June 30, 2010, $10.4 million is due in the next 12 months. We expect to repay the credit facility with cash on hand, including the proceeds from our initial public offering and cash flow generated from operations. We were in compliance with all debt covenants under the credit facility at June 30, 2010. The credit facility includes a revolving commitment of up to $10.0 million, of which $10.0 million was available for borrowing at June 30, 2010. There were no changes to the credit facility during the six months ended June 30, 2010. Note 6 to our consolidated financial statements in the 2009 Annual Report describes further our credit facility and related long-term debt.

Operating Leases

We have entered into various non-cancelable operating lease agreements for our offices and distribution centers globally with original lease periods expiring through 2016. We recognize rent expense on our operating leases on a straight-line basis beginning at the commencement of the lease.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not engage in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. Accordingly, we are not subject to financing, liquidity, market risk, or credit risk arising due to off-balance sheet arrangements.

Recent Developments

On July 15, 2010, we acquired Genline AB, owner and operator of the Swedish website Genline.se, for $7.2 million. At acquisition, Genline.se had more than 17,000 paying members with access to 26 million pages of digitized Swedish church records spanning more than 400 years from the 17th to the 20th century.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in conformity with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. These estimates and assumptions are often based on judgments that we believe to be reasonable under the circumstances at the time made, but all such estimates and assumptions are inherently uncertain and unpredictable. Actual results may differ from those estimates and assumptions, and it is possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that would result in material changes to our operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.

We consider the assumptions and estimates associated with recoverability of intangible assets, the period of amortization of our database content costs, stock-based compensation and income taxes to be our critical accounting estimates. For further information on our significant accounting policies, see Note 1 to our consolidated financial statements included in our 2009 Annual Report. There have been no changes to our significant accounting policies since December 31, 2009 except as discussed below in Recent Accounting Pronouncements.

Recent Accounting Pronouncements

There have been no new accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2010, as compared to the recent accounting pronouncements described in the 2009 Annual Report, that are of significance, or potential significance, to the company that we expect to adopt in the future.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. These risks include primarily interest rate and foreign currency exchange risks. For financial market risks related to changes in interest rates and foreign currency exchange, reference is made to Item 7A “Quantitative and Qualitative Disclosures About Market Risk” contained in Part II of our 2009 Annual Report.

In anticipation of the acquisition of Genline AB, we entered into a forward contract to purchase 53 million Swedish kronor. We entered into the forward contract to lock in the amount of U.S. dollars required to settle the transaction and acquire Genline. We did not qualify the contract for hedge accounting and therefore the fair value gains and losses on the contract are recorded in net income. As of June 30, 2010, the fair value of the contract was not significant and is recorded in accrued expenses on the balance sheet and in other expense on the statement of position. In July 2010, the forward contract was settled resulting in a gain of approximately $0.4 million.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Quarterly Report our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all error and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Ancestry.com have been detected.

(b) Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

In August 2009, we received a letter from counsel to Shutterfly, Inc., alleging infringement of certain of its patents by our operation of our MyCanvas.com Web site. If litigation were to commence, we believe that we have substantive and meritorious defenses to these claims and would contest any claim vigorously.

In addition, from time to time, we are a party to or otherwise involved in legal proceedings or other legal matters that arise in the ordinary course of business or otherwise. While management does not believe that any pending legal claim or proceeding will be resolved in a manner that would have a material adverse effect on our business, we cannot assure you of the ultimate outcome of any legal proceeding or contingency in which we are or may become involved.

Item 1A. Risk Factors

A wide range of factors could materially affect our performance. The following factors and other information included in this Quarterly Report should be carefully considered. Although the risk factors described below are the ones management deems significant, additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following events actually occur, our business, financial condition and results of operations could be adversely affected.

Risks Related to Our Business

If our efforts to retain and attract subscribers are not successful, our revenues will be adversely affected.

We generate substantially all of our revenue from subscriptions to our services. We must continue to retain existing and attract new subscribers. If our efforts to satisfy our existing subscribers are not successful, we may not be able to retain them, and as a result, our revenues would be adversely affected. For example, if consumers do not perceive our services to be reliable, valuable and of high quality, if we fail to regularly introduce new and improved services, or if we introduce new services that are not favorably received by the market, we may not be able to retain existing or attract new subscribers. We rely on our marketing and advertising efforts, including television and online and offline performance-based and fixed-cost programs, to attract new subscribers and retain existing subscribers. If we are unable to effectively retain existing subscribers and attract new subscribers, our business, financial condition and results of operations would be adversely affected.

The relative service levels, pricing and related features of competitors to our products and services are some of the factors that may adversely impact our ability to retain existing subscribers and attract new subscribers. Some of our current competitors provide genealogical records free of charge. Some governments or private organizations may make historical records available online at no cost to consumers and some commercial entities could choose to make such records available on an advertising-supported basis rather than a subscription basis. If consumers are able to satisfy their family history research needs at no or lower cost, they may not perceive value in our products and services. If our efforts to satisfy and retain our existing subscribers are not successful, we may not be able to continue to attract new subscribers through word-of-mouth referrals. Further, subscriber growth may decrease as a result of a decline in interest in family history research. Any of these factors could cause our subscriber growth rate to fall, which would adversely impact our business, financial condition and results of operations.

Our recent performance may not be sustainable, which could negatively affect our stock price or financial condition and results of operations.

Our revenues have grown rapidly, increasing from $140.3 million in 2005 to $224.9 million in 2009, representing a compound annual growth rate of 12.5%. In Q2 2010 and the six months ended June 30, 2010, our revenue growth was 36% and 29%, respectively, over the prior year periods. We may not be able to sustain our recent growth rate in future periods and you should not rely on the revenue growth of these periods or any prior period or year as an indication of our future performance. Additionally, we expect to continue to devote substantial resources and funds to improving our technologies and product offerings and acquiring new and relevant content, and also to expanding awareness of our brand and category through marketing, such as the increased advertising we undertook in connection with the television program “Who Do You Think You Are?” which may reduce our margins in the near term. If our margins or our future growth resulting from our implementation of these strategies fail to meet investor or analyst expectations, it could have a negative effect on our stock price. If our growth rate were to decline significantly or become negative, it could adversely affect our financial condition and results of operations.

If we experience excessive rates of subscriber cancellation, or churn, our revenues and business will be harmed.

We must continually add new subscribers both to replace subscribers who choose to cancel their subscriptions and to grow our business beyond our current subscriber base. Subscribers choose to cancel their subscriptions for many reasons, including a desire to reduce discretionary spending or a perception that they do not use the service sufficiently, the service is a poor value, competitive services provide a better value or experience, or subscriber service issues are not satisfactorily resolved. Subscribers may choose to cancel their subscription at any time prior to the renewal date. When we add subscribers as rapidly as we have in the first half of 2010, the rate of subscriber cancellation, or churn, may also increase as it did in Q2 2010. If we are unable to attract new subscribers in numbers greater than our subscriber churn, our subscriber base will decrease and our business, financial condition and results of operations will be adversely affected.

If our subscriber churn increases, we may be required to increase the rate at which we add new subscribers in order to maintain and grow our revenues. If excessive numbers of subscribers cancel our service, we may be required to incur significantly higher marketing and advertising expenses than we currently anticipate to replace these subscribers with new subscribers. A significant increase in our subscriber churn would have an adverse effect on our business, financial condition and results of operations.

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

A majority of our subscribers have annual subscriptions. At any point in time, however, the majority of new subscribers generally signs up for monthly subscriptions and may or may not choose to renew. We generally experience higher rates of churn for monthly subscribers than for annual subscribers. As of June 30, 2010, the percentage of overall subscribers that are monthly subscribers had increased as compared to June 30, 2009. If this trend continues, more of our revenue would become dependent on monthly renewals, and we would likely have higher churn. We continually evaluate the types of subscriptions that are most appropriate for us and our subscribers. As we make these evaluations, we may more aggressively market subscriptions that are shorter than our annual subscriptions. Any material change in our mix of subscription duration could have a significant impact on our revenue and churn.

Additionally, the largely annual commitments of our subscribers enhance our near-term visibility on our revenues, which we believe enable us to more effectively manage the growth of our business and provide working capital benefits. A shift in subscriber mix towards more monthly subscriptions may result in diminished visibility with respect to forecasting revenue, which could make it more difficult to manage our growth and effectively budget future working capital requirements.

Because we recognize revenues from subscriptions to our service over the term of the subscription, downturns or upturns in subscriptions may not be immediately reflected in our operating results and therefore could affect our operating results in later periods.

We recognize revenues from subscribers ratably over the term of their subscriptions. Given that annual subscriptions still represent a substantial majority of our subscriptions, a large portion of our revenues for each quarter reflects deferred revenue from subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter will not necessarily be fully reflected in the revenues in that quarter but will negatively affect our revenues in future quarters. Accordingly, the effect of significant downturns or upturns in subscriptions or market acceptance of our service, or changes in subscriber churn, may not fully impact our results of operations until future periods.

If our marketing and advertising efforts fail to generate additional revenues on a cost-effective basis, or if we are unable to manage our marketing and advertising expenses, it could harm our results of operations and growth.

Our future growth and profitability, as well as the maintenance and enhancement of our brands, will depend in large part on the effectiveness and efficiency of our marketing and advertising expenditures and the continued success of television programming related to family history. We use a diverse mix of online and offline performance-based and fixed-cost marketing and advertising programs to promote our products and services and programming, and we periodically adjust our mix of marketing and advertising programs to reflect our television audience. We have recently experienced price increases in some of our marketing and advertising channels. Significant increases in the pricing of one or more of our marketing and advertising channels would increase our marketing and advertising expense or cause us to choose less expensive but potentially less effective marketing and advertising channels. As we implement new marketing and advertising strategies, we have expanded into television advertising, which may have significantly higher costs than other channels and which could adversely affect our profitability. Further, we may over time become disproportionately reliant on one channel or partner, such as NBC in future seasons of “Who Do You Think You Are?” which could increase our operating expenses. We have incurred and may in the future incur marketing and advertising expenses significantly in advance of the time we anticipate recognizing revenue associated with such expenses, as in the case of television programming, and our marketing and advertising expenditures may not continue to result in increased revenue or generate sufficient levels of brand awareness. If we are unable to maintain our marketing and advertising channels on cost-effective terms or replace existing marketing and advertising channels with similarly effective channels, our marketing and advertising expenses could increase substantially, our subscriber levels could be affected adversely, and our business, financial condition and results of operations may suffer.

In addition, our expanded marketing efforts may increase our subscriber acquisition cost. For example, our decision to expand our international marketing and advertising efforts will lead to a significant increase in our marketing and advertising expenses. Any of these additional expenses may not result in sufficient customer growth to offset cost, which would have an adverse effect on our business, financial condition and results of operations.