Attached files
file | filename |
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EX-10.5 - EX-10.5 - Ancestry.com Inc. | c16272exv10w5.htm |
EX-31.2 - EX-31.2 - Ancestry.com Inc. | c16272exv31w2.htm |
EX-10.4 - EX-10.4 - Ancestry.com Inc. | c16272exv10w4.htm |
EX-32.1 - EX-32.1 - Ancestry.com Inc. | c16272exv32w1.htm |
EX-10.2 - EX-10.2 - Ancestry.com Inc. | c16272exv10w2.htm |
EX-10.1 - EX-10.1 - Ancestry.com Inc. | c16272exv10w1.htm |
EX-31.1 - EX-31.1 - Ancestry.com Inc. | c16272exv31w1.htm |
EX-10.3 - EX-10.3 - Ancestry.com Inc. | c16272exv10w3.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34518
Ancestry.com Inc.
(Exact name of registrant as specified in its charter)
Delaware | 26-1235962 | |
(State or other jurisdiction of incorporation or organization) | (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)
(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 þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act) Yes o No þ
As of April 26, 2011, there were 45,840,442 shares of the registrants common stock, par
value $0.001, outstanding.
Ancestry.com Inc.
Table of Contents
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EX-10.1 | ||||||||
EX-10.2 | ||||||||
EX-10.3 | ||||||||
EX-10.4 | ||||||||
EX-10.5 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Condensed Consolidated Financial Statements |
ANCESTRY.COM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
(In thousands) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 102,263 | $ | 65,519 | ||||
Restricted cash |
1,984 | 2,476 | ||||||
Accounts receivable, net of allowances of $513 and $406 at March 31, 2011 and December 31, 2010, respectively |
6,687 | 6,990 | ||||||
Income tax receivable |
6,690 | 8,094 | ||||||
Deferred income taxes |
3,873 | 3,873 | ||||||
Prepaid expenses and other current assets |
8,978 | 9,243 | ||||||
Total current assets |
130,475 | 96,195 | ||||||
Property and equipment, net |
18,731 | 21,252 | ||||||
Content database costs, net |
69,221 | 65,418 | ||||||
Intangible assets, net |
30,143 | 34,281 | ||||||
Goodwill |
303,478 | 303,374 | ||||||
Other assets |
1,518 | 1,666 | ||||||
Total assets |
$ | 553,566 | $ | 522,186 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 7,210 | $ | 9,451 | ||||
Accrued expenses |
33,549 | 36,978 | ||||||
Deferred revenues |
109,237 | 89,301 | ||||||
Total current liabilities |
149,996 | 135,730 | ||||||
Deferred income taxes |
19,663 | 20,571 | ||||||
Other long-term liabilities |
1,986 | 2,018 | ||||||
Total liabilities |
171,645 | 158,319 | ||||||
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; 45,707 and 45,179 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively |
46 | 45 | ||||||
Additional paid-in capital |
337,554 | 328,957 | ||||||
Accumulated other comprehensive income |
1,128 | 643 | ||||||
Retained earnings |
43,193 | 34,222 | ||||||
Total stockholders equity |
381,921 | 363,867 | ||||||
Total liabilities and stockholders equity |
$ | 553,566 | $ | 522,186 | ||||
See accompanying notes to condensed consolidated financial statements
3
Table of Contents
ANCESTRY.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
(In thousands, except per | ||||||||
share data) | ||||||||
Revenues: |
||||||||
Subscription revenues |
$ | 85,183 | $ | 59,560 | ||||
Product and other revenues |
5,845 | 4,861 | ||||||
Total revenues |
91,028 | 64,421 | ||||||
Costs of revenues: |
||||||||
Cost of subscription revenues |
13,887 | 11,501 | ||||||
Cost of product and other revenues |
1,828 | 1,494 | ||||||
Total cost of revenues |
15,715 | 12,995 | ||||||
Gross profit |
75,313 | 51,426 | ||||||
Operating expenses: |
||||||||
Technology and development |
13,668 | 9,927 | ||||||
Marketing and advertising |
33,808 | 22,446 | ||||||
General and administrative |
9,357 | 7,742 | ||||||
Amortization of acquired intangible assets |
4,270 | 3,679 | ||||||
Total operating expenses |
61,103 | 43,794 | ||||||
Income from operations |
14,210 | 7,632 | ||||||
Interest and other expense, net |
(107 | ) | (1,144 | ) | ||||
Income before income taxes |
14,103 | 6,488 | ||||||
Income tax expense |
(5,132 | ) | (2,526 | ) | ||||
Net income |
$ | 8,971 | $ | 3,962 | ||||
Net income per common share |
||||||||
Basic |
$ | 0.20 | $ | 0.09 | ||||
Diluted |
$ | 0.18 | $ | 0.08 | ||||
Weighted average common shares outstanding |
||||||||
Basic |
45,371 | 42,459 | ||||||
Diluted |
50,250 | 47,454 | ||||||
See accompanying notes to condensed consolidated financial statements
4
Table of Contents
ANCESTRY.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
(In thousands) | ||||||||
Operating activities: |
||||||||
Net income |
$ | 8,971 | $ | 3,962 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
3,264 | 2,864 | ||||||
Amortization of content |
2,136 | 1,834 | ||||||
Amortization of intangible assets |
4,269 | 3,679 | ||||||
Amortization of deferred financing costs |
69 | 215 | ||||||
Deferred income taxes |
(968 | ) | (1,150 | ) | ||||
Stock-based compensation expense |
1,725 | 1,004 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
309 | 652 | ||||||
Restricted cash |
492 | (71 | ) | |||||
Other assets |
348 | 1,567 | ||||||
Income tax receivable |
1,404 | 1,544 | ||||||
Accounts payable and accrued expenses |
(1,373 | ) | 3,988 | |||||
Excess tax benefit from stock-based compensation |
(4,056 | ) | | |||||
Deferred revenues |
19,852 | 14,434 | ||||||
Other long-term liabilities |
(42 | ) | | |||||
Net cash provided by operating activities |
36,400 | 34,522 | ||||||
Investing activities: |
||||||||
Capitalization of content database costs |
(5,747 | ) | (2,792 | ) | ||||
Purchases of property and equipment |
(725 | ) | (1,407 | ) | ||||
Purchases of short-term investments |
| (2,000 | ) | |||||
Proceeds from sale and maturity of short-term investments |
| 5,046 | ||||||
Net cash used in investing activities |
(6,472 | ) | (1,153 | ) | ||||
Financing activities: |
||||||||
Proceeds from exercise of stock options |
2,732 | 214 | ||||||
Principal payments on debt |
| (2,858 | ) | |||||
Excess tax benefit from stock-based compensation |
4,056 | | ||||||
Net cash provided by (used in) financing activities |
6,788 | (2,644 | ) | |||||
Effect of changes in foreign currency exchange rates on cash and cash equivalents |
28 | | ||||||
Net increase in cash and cash equivalents |
36,744 | 30,725 | ||||||
Cash and cash equivalents at beginning of period |
65,519 | 66,941 | ||||||
Cash and cash equivalents at end of period |
$ | 102,263 | $ | 97,666 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid for interest |
$ | 115 | $ | 1,001 | ||||
Cash paid for income taxes |
275 | 403 | ||||||
Supplemental disclosures of noncash investing and financing activities: |
||||||||
Unrealized gain on short-term investments |
| 30 | ||||||
Capitalization of stock-based compensation |
9 | 1 |
See accompanying notes to condensed consolidated financial statements
5
Table of Contents
ANCESTRY.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ancestry.com Inc. (Ancestry or the company) is an online family history resource that
derives revenues primarily from providing online access to digitized historical records on a
subscription basis. Ancestry is a holding company and all operations are conducted by its
wholly-owned subsidiaries.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the company, its
wholly-owned subsidiaries and a variable interest entity. All significant intercompany accounts
and transactions have been eliminated in consolidation. 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.
Unaudited Interim Financial Statements
The accompanying condensed consolidated balance sheet as of March 31, 2011 and the
condensed consolidated statements of income and cash flows for the three months ended March 31,
2011 and 2010 are unaudited. These unaudited interim condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United
States of America (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 companys financial
position, results of operations and cash flows for the three months ended March 31, 2011 and
2010. The results of operations for the three months ended March 31, 2011 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2011.
These unaudited interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes included in the
companys Annual Report on Form 10-K for the year ended December 31, 2010 (the 2010 Annual
Report) filed with the Securities and Exchange Commission (the SEC).
Use of Estimates
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.
The company evaluates its estimates continually to determine their appropriateness,
including determination of the recoverability of indefinite-lived and long-lived assets, the
estimated useful lives of the companys intangible assets, determination of the fair value of
stock options, income taxes, and allowances for sales returns and uncollectible accounts
receivable. The company bases its estimates on historical experience and on various assumptions
that are believed to be reasonable, the results of which form the basis for the amounts recorded
within the consolidated financial statements.
There have been no changes to the companys significant accounting policies as described in
the 2010 Annual Report except as disclosed in Recent Accounting Pronouncements in this note.
Performance-Based Restricted Stock Units
During the three months ended March 31, 2011, the company began issuing performance-based
restricted stock units (RSUs) to certain company personnel. Performance-based RSUs vest
subject to the achievement of certain predetermined performance goals and employment over the
requisite service period. The amount of stock-based compensation expense recognized in any one
period for such performance-based RSUs is derived from the fair value of the RSU and can vary
based on the achievement or anticipated achievement of these goals. The fair value of each RSU
is based on the closing price of the companys common stock on the date of grant. If a
performance goal is not met or is not expected to be met, no compensation expense is recognized
on the underlying RSUs, and any previously recognized compensation expense on those RSUs is
reversed in the period that expectations change. For the three months ended March 31, 2011, the
number of performance-based RSUs granted was de minimis.
6
Table of Contents
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board issued new revenue recognition
standards for arrangements with multiple deliverables. The new standards permit entities to use
managements best estimate of selling price to value individual deliverables when those
deliverables do not have vendor specific objective evidence of fair value or when third-party
evidence of selling price is not available. Additionally, these new standards modify the manner
in which the selling price is allocated across the separately identified deliverables by no
longer permitting the residual method of allocating the selling price. The requirements of these
new standards are to be applied prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. The adoption of these
standards on January 1, 2011 did not have a material impact on the companys consolidated
financial position, results of operations or cash flows.
2. CASH AND CASH EQUIVALENTS AND FAIR VALUE MEASUREMENTS
Cash and cash equivalents consisted of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Cash |
$ | 19,408 | $ | 12,687 | ||||
Cash equivalents: |
||||||||
Money market funds |
82,855 | 52,832 | ||||||
Total cash and cash equivalents |
$ | 102,263 | $ | 65,519 | ||||
Cash equivalents 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 companys cash equivalents at March 31, 2011 and December 31, 2010 were all classified
within Level 1. There were no movements between fair value measurement levels of the companys
cash equivalents during the three months ended March 31, 2011.
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.
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 shares of common stock outstanding during the period. Potential shares of
common stock consist primarily of incremental shares issuable upon the assumed vesting and
exercise of stock-based awards using the treasury stock method.
7
Table of Contents
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 data):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Basic net income per common share: |
||||||||
Net income |
$ | 8,971 | $ | 3,962 | ||||
Shares used in computation: |
||||||||
Weighted-average common shares outstanding |
45,371 | 42,459 | ||||||
Basic net income per common share |
$ | 0.20 | $ | 0.09 | ||||
Diluted net income per common share: |
||||||||
Net income |
$ | 8,971 | $ | 3,962 | ||||
Shares used in computation: |
||||||||
Weighted-average common shares outstanding |
45,371 | 42,459 | ||||||
Dilutive stock-based awards |
4,879 | 4,995 | ||||||
Weighted-average number of diluted common shares |
50,250 | 47,454 | ||||||
Diluted net income per common share |
$ | 0.18 | $ | 0.08 | ||||
For the three months ended March 31, 2011 and 2010, stock-based awards excluded from the
diluted calculation as their impact was anti-dilutive were de minimis and 0.5 million shares,
respectively.
4. COMPREHENSIVE INCOME
Comprehensive Income
The components of comprehensive income are as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 8,971 | $ | 3,962 | ||||
Change in unrealized gains on available for sale securities, net |
| 30 | ||||||
Foreign currency translation adjustment |
485 | | ||||||
Comprehensive income |
$ | 9,456 | $ | 3,992 | ||||
5. CREDIT FACILITY
On September 9, 2010, the company entered into a three-year $100.0 million principal amount
senior secured revolving credit facility with Bank of America, N.A., as administrative agent,
and certain other financial institutions (the Credit Facility). Borrowings under the Credit
Facility may be used to finance the on-going working capital needs of the company and its
subsidiaries and for general corporate purposes, including permitted business acquisitions,
capital expenditures and authorized share repurchases. As of March 31, 2011, no borrowings were
outstanding under the Credit Facility. The Credit Facility contains financial and other
covenants, and the company was in compliance with all of these covenants at March 31, 2011.
6. STOCK-BASED AWARD PLANS
The company grants stock options and other stock-based awards, including RSUs, to
employees, directors and consultants under the 2009 Stock Incentive Plan (the 2009 Plan). The
2009 Plan is subject to an automatic annual increase provision on the first day of each fiscal
year. On January 1, 2011, the number of shares available for stock-based awards under the 2009
Plan increased by 1.8 million shares. As of March 31, 2011, 4.4 million shares were available
for stock-based awards under the 2009 Plan.
8
Table of Contents
Stock Options
Stock options granted generally vest over four years. A summary of stock option activity
for the three months ended March 31, 2011 is as follows (shares in thousands):
Weighted | ||||||||
Average | ||||||||
Number of | Exercise | |||||||
Shares | Price | |||||||
Outstanding at December 31, 2010 |
7,792 | $ | 6.07 | |||||
Granted |
15 | 31.33 | ||||||
Exercised |
(528 | ) | 5.17 | |||||
Canceled |
(29 | ) | 6.24 | |||||
Outstanding at March 31, 2011 |
7,250 | 6.18 | ||||||
Exercisable at March 31, 2011 |
5,176 | 5.21 | ||||||
Vested and expected to vest |
6,906 | 6.15 | ||||||
As of March 31, 2011, the company had $6.3 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 2.2 years. The
weighted average remaining contractual life of stock options outstanding at March 31, 2011 was
6.2 years. The total intrinsic values of stock options outstanding and stock options exercisable
as of March 31, 2011 were $212.2 million and $156.5 million, respectively. The total intrinsic
value of stock options exercised during the three months ended March 31, 2011 was $15.0 million.
The company estimates the fair value of each stock option on the date of grant using the
Black-Scholes option-pricing model. The weighted average grant date fair values of stock options
granted during the three months ended March 31, 2011 and 2010 were $12.50 and $5.43, respectively. The following weighted average
assumptions were used in the calculations for the three months ended March 31, 2011 and 2010:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Expected volatility |
42.5 | % | 40 | % | ||||
Expected term (in years) |
5.0 | 4.0 | ||||||
Weighted average risk-free interest rate |
2.1 | % | 1.9 | % | ||||
Weighted average fair value of the underlying common stock |
$ | 31.33 | $ | 16.07 | ||||
Expected dividends |
| |
9
Table of Contents
Restricted Stock Units
During the three months ended March 31, 2011, the company also granted time-based and
performance-based RSUs representing the right to receive one share of the companys common stock
under the 2009 Plan. Time-based RSUs generally vest over four years. Performance-based RSUs vest
subject to the achievement of certain predetermined performance goals and employment over the
requisite service period. For the three months ended March 31, 2011, the number of shares of
performance-based RSUs granted was de minimis.
The following table summarizes RSU activity for the three months ended March 31, 2011 (RSUs
in thousands):
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
RSUs | Fair Value | |||||||
Restricted stock units outstanding at December 31, 2010 |
677 | $ | 20.75 | |||||
Granted |
120 | 31.33 | ||||||
Vested |
| | ||||||
Forfeited |
(15 | ) | 24.96 | |||||
Restricted stock units outstanding at March 31, 2011 |
782 | 22.29 | ||||||
As of March 31, 2011 the company had $12.2 million of total unrecognized compensation
expense, net of estimated forfeitures, related to RSUs. The unrecognized compensation expense is
expected to be recognized over a weighted average period of 3.5 years.
Summary of Stock-Based Compensation Expense
Stock-based compensation expense was included in the following statements of income
captions (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cost of subscription revenues |
$ | 62 | $ | 28 | ||||
Technology and development |
776 | 397 | ||||||
Marketing and advertising |
325 | 68 | ||||||
General and administrative |
562 | 511 | ||||||
Total stock-based compensation expense |
$ | 1,725 | $ | 1,004 | ||||
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7. INCOME TAXES
The company is subject to income taxes in U.S. and foreign jurisdictions and continual
examination by tax authorities. Significant judgment is required in evaluating the companys
uncertain tax positions and determining its provision for income taxes. The companys total
gross unrecognized tax benefits as of March 31, 2011 and December 31, 2010 were $1.0 million and
$0.9 million, respectively. The gross uncertain tax positions, if recognized, would result in
the reduction of tax expense.
8. 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
companys 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 companys business, the
company cannot assure the ultimate outcome of any legal proceeding or contingency in which the
company is or may become involved.
9. SUBSEQUENT EVENTS
On April 28, 2011, the companys board of directors authorized a share repurchase program,
under which up to $125.0 million may be used to repurchase shares of its common stock. Shares of
the companys common stock may be repurchased from time to time through April 30, 2012 in the
open market or in privately negotiated transactions. Any share repurchases are expected to be
funded using cash on hand and the companys existing credit facility.
11
Table of Contents
ITEM 2. | MANAGEMENTS 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, 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 and their choice of subscription package; | |
| 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 with added tools and features and provide value; | |
| our success with respect to any future or recent 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; | |
| our plans to repurchase shares of our common stock; | |
| the seasonality of our business; | |
| the impact of external market forces; | |
| the impact of claims or litigation; and | |
| the impact of potential legislation on privacy, subscription renewal or other aspects of our business. |
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 Managements
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.
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Overview
Ancestry.com is the worlds largest online family history resource, with over 1.6 million
paying subscribers around the world as of March 31, 2011. We offer access on a subscription
basis, typically monthly or annually, to an extensive collection of billions of historical
records that we have digitized, indexed and put online over the past 14 years. 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. These subscribers are our primary source of revenues. We believe 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 by offering a superior value proposition to anyone
interested in learning more about their family history.
The following discussion and analysis is based on 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 Managements Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended
December 31, 2010 (the 2010 Annual Report).
Recent Developments
On April 28, 2011, our board of directors authorized the repurchase of up to $125.0 million
in shares of our outstanding common stock. Shares of our common stock may be repurchased from
time to time through April 30, 2012 in the open market or in privately negotiated transactions.
We expect to fund any share repurchases using cash on hand and our existing credit facility.
Key Business Metrics
Our management regularly reviews a number of financial and operating metrics, including the
following key business metrics to evaluate our business, determine the allocation of resources,
make decisions regarding corporate strategies and evaluate forward-looking projections. The
following key business metrics reflect data with respect to the Ancestry.com Web sites and
exclude our other subscription-based Web sites, such as Footnote.com, Genline.se, myfamily.com
and Genealogy.com.
| Total subscribers. A subscriber is an individual who pays for renewable access or redeems a gift subscription 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 or redeems a gift subscription to one of our Ancestry.com Web sites, net of subscriber 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. |
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Our key business metrics are presented for the three months ended March 31, 2011, December
31, 2010 and March 31, 2010:
Three Months Ended | ||||||||||||
March 31, | December 31, | March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Total subscribers at end of quarter |
1,615,169 | 1,394,910 | 1,211,978 | |||||||||
Gross subscriber additions |
424,531 | 202,509 | 279,100 | |||||||||
Monthly churn |
3.7 | % | 3.9 | % | 3.3 | % | ||||||
Subscriber acquisition cost |
$ | 69.56 | $ | 96.87 | $ | 69.57 | ||||||
Average monthly revenue per subscriber |
$ | 18.05 | $ | 17.78 | $ | 16.70 |
Components of Condensed Consolidated Statements of Income
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 and consist primarily of annual and monthly subscriptions,
net of estimated cancellations. We typically charge our subscribers credit cards for their
subscriptions at the commencement of the 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 revenues. Subscription revenues also include
revenues related to subscriptions to our non-Ancestry.com Web sites.
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
revenues by geographic region:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
United States |
$ | 63,674 | $ | 44,404 | ||||
United Kingdom |
11,196 | 9,717 | ||||||
All other countries |
10,313 | 5,439 | ||||||
Total subscription revenues |
$ | 85,183 | $ | 59,560 | ||||
Product and other revenues. Product and other revenues include sales of desktop software
(Family Tree Maker), physical delivery of copies of historical vital records (birth, marriage
and death certificates), DNA testing (Ancestry.com DNA), advertising, digitization services,
genealogical research services and other products and services. Revenues related to these
products are recognized upon shipment of product or fulfillment of services, as applicable.
Expenses
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.
Costs of Revenues
Cost of subscription revenues. Cost of subscription revenues consists of Web server
operating costs, including depreciation and software licensing on Web servers and related
equipment and Web hosting costs, personnel-related costs for Web hosting and subscriber services
personnel, amortization of our content database costs, credit card processing fees and royalty
costs on certain content licensed from others.
Cost of product and other revenues. Cost of product and other revenues consists of our
direct costs to purchase the products, shipping costs, personnel-related costs of digitization
services and genealogical research personnel and credit card processing fees.
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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 plan to hire a significant number of technology and development
employees during 2011. Competition for qualified technology and development personnel
increased during the three months ended March 31, 2011 compared to the three months ended March
31, 2010. We expect technology and development personnel-related expenses to continue to
increase for the remainder of 2011.
Marketing and advertising. Marketing and advertising expenses consist primarily of direct
expenses related to television and online advertising and personnel-related expenses. Marketing
and advertising costs are principally incurred in the United States, United Kingdom, Australia
and Canada. Television advertising rates increased in the three months ended March 31, 2011
compared to the three months ended March 31, 2010. If television and advertising rates continue
to increase, our marketing and advertising expenses may increase in the remainder of 2011. NBC
has announced that they have renewed a third season of the television show Who Do You Think You
Are?, and we have signed an agreement to continue our involvement in the show. If NBC were to air the third season late in 2011, we
would likely incur additional product integration and advertising expenses in 2011 without realizing a
significant portion of the associated revenues of additional subscribers until 2012, which would
likely result in an increase in our marketing and advertising expenses compared to our current
expectations. Nevertheless, we can provide no assurance that NBC will air a third season of the
show.
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 outside services costs, consisting primarily of consultant,
legal and accounting fees, and other general corporate expenses.
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, resulting from business
acquisitions.
Interest and Other Expense, Net and Income Tax Expense
Interest and other expense,net. Interest and other expense, net includes interest expense
associated with the amortization of deferred financing costs related to our credit facility and
other financing liabilities and, in 2010, the interest expense associated with our long-term
debt. Also included are interest income earned on cash and cash equivalents and any short-term
investments, and other income and expenses.
Income tax expense. Income tax expense consists of federal and state income taxes in the
United States and income taxes in certain foreign jurisdictions.
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Results of Operations
The following table sets forth our condensed consolidated statements of income as a
percentage of revenues for the three months ended March 31, 2011 and 2010. 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 | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Subscription revenues |
93.6 | % | 92.5 | % | ||||
Product and other revenues |
6.4 | 7.5 | ||||||
Total revenues |
100.0 | 100.0 | ||||||
Costs of revenues: |
||||||||
Cost of subscription revenues |
15.3 | 17.9 | ||||||
Cost of product and other revenues |
2.0 | 2.3 | ||||||
Total cost of revenues |
17.3 | 20.2 | ||||||
Gross profit |
82.7 | 79.8 | ||||||
Operating expenses: |
||||||||
Technology and development |
15.0 | 15.4 | ||||||
Marketing and advertising |
37.1 | 34.9 | ||||||
General and administrative |
10.3 | 12.0 | ||||||
Amortization of acquired intangible assets |
4.7 | 5.7 | ||||||
Total operating expenses |
67.1 | 68.0 | ||||||
Income from operations |
15.6 | 11.8 | ||||||
Interest and other expense, net |
(0.1 | ) | (1.7 | ) | ||||
Income before income taxes |
15.5 | 10.1 | ||||||
Income tax expense |
(5.6 | ) | (3.9 | ) | ||||
Net income |
9.9 | 6.2 | ||||||
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Revenues, Cost of Revenues and Gross Profit
Three Months Ended | |||||||||||||||
March 31, | |||||||||||||||
2011 | 2010 | % Change | |||||||||||||
(In thousands) | |||||||||||||||
Revenues: |
|||||||||||||||
Subscription revenues |
$ | 85,183 | $ | 59,560 | 43.0 | % | |||||||||
Product and other revenues |
5,845 | 4,861 | 20.2 | ||||||||||||
Total revenues |
91,028 | 64,421 | 41.3 | ||||||||||||
Cost of revenues: |
|||||||||||||||
Cost of subscription revenues |
13,887 | 11,501 | 20.7 | ||||||||||||
Cost of product and other revenues |
1,828 | 1,494 | 22.4 | ||||||||||||
Total cost of revenues |
15,715 | 12,995 | 20.9 | ||||||||||||
Gross profit |
$ | 75,313 | $ | 51,426 | 46.4 | ||||||||||
Gross profit percentage |
82.7 | % | 79.8 | % |
Subscription revenues
The increase in our subscription revenues of $25.6 million in the three months ended March
31, 2011 compared to the three months ended March 31, 2010 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. Net subscriber additions increased primarily due
to increased interest in Ancestry.com stemming from increased marketing efforts and the airing
of the second season of Who Do You Think You Are? Average monthly revenue per subscriber
increased in the three months ended March 31, 2011 primarily due to both increases in the
percentage of overall subscribers that are monthly subscribers and the percentage of overall
subscribers packages that are premium packages, both of which provide greater monthly revenues
than other subscriptions. The percentage of overall subscribers that are monthly subscribers
increased to 33% at March 31, 2011 from 29% at March 31, 2010. The percentage of overall
subscribers packages that are premium packages increased to 45% at March 31, 2011 from 42% at
March 31, 2010.
Product and other revenues
The increase in product and other revenues of $1.0 million in the three months ended March
31, 2011 compared to the three months ended March 31, 2010 was primarily due to $0.8 million of
digitization services revenue from iArchives, which we acquired in the fourth quarter of 2010.
Cost of subscription revenues
The increase in our cost of subscription revenues of $2.4 million in the three months ended
March 31, 2011 compared to the three months ended March 31, 2010 was primarily due to an
increase of $0.8 million in our credit card processing fees reflecting higher transaction
volumes as a result of increased total subscribers, an increase of $0.8 million in Web server
operating costs partly attributable to greater user traffic volumes and an increase of $0.4
million in our personnel-related costs reflecting an increase in our Web hosting support
personnel.
Cost of product and other revenues
Cost of product and other revenues increased slightly in the three months ended March 31,
2011 compared to the three months ended March 31, 2010 primarily due to the costs associated
with iArchives digitization services.
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Operating Expenses
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | % Change | ||||||||||
(In thousands) | ||||||||||||
Operating expenses: |
||||||||||||
Technology and development |
$ | 13,668 | $ | 9,927 | 37.7 | % | ||||||
Marketing and advertising |
33,808 | 22,446 | 50.6 | |||||||||
General and administrative |
9,357 | 7,742 | 20.9 | |||||||||
Amortization of acquired intangible assets |
4,270 | 3,679 | 16.1 | |||||||||
Total operating expenses |
$ | 61,103 | $ | 43,794 | 39.5 | |||||||
Technology and development
The increase in technology and development expenses of $3.7 million in the three months
ended March 31, 2011 compared to the three months ended March 31, 2010 was primarily the result
of an increase in personnel-related expenses of $3.1 million resulting from a 23% increase in
the number of technology and development personnel at March 31, 2011 as compared to March 31,
2010. In addition, costs of third-party service providers increased $0.3 million primarily due
to outsourced product quality assurance services.
Marketing and advertising
The increase in marketing and advertising expenses of $11.4 million in the three months
ended March 31, 2011 compared to the three months ended March 31, 2010 was primarily due to an
increase of $7.6 million in television ad campaigns, an increase of $1.6 million in sponsorship
and affiliate expenses and an increase of $0.6 million in print advertising expenses. These
increases were primarily a result of our expanded marketing efforts in both domestic and
international markets and were in part attributable to increased advertising and product
integration costs incurred in connection with the second season of Who Do You Think You Are? The increases in second
season costs reflected higher rates and additional episodes airing in the first quarter of 2011 since the second season began airing in
February 2011, compared to the first season of the show, which premiered in March 2010. In
addition, personnel-related costs increased $1.2 million primarily due to a 15% increase in the
number of marketing and advertising personnel at March 31, 2011 compared to March 31, 2010.
General and administrative
The increase in general and administrative expenses of $1.6 million in the three months
ended March 31, 2011 compared to the three months ended March 31, 2010 was primarily the result
of an increase of $0.8 million in certain administrative expenses, an increase of $0.5 million
in outside services, such as consultants, legal services and accounting fees, and an increase of
$0.3 million in personnel-related costs.
Amortization of acquired intangible assets
The increase in amortization of acquired intangible assets of $0.6 million in the three
months ended March 31, 2011 compared to the three months ended March 31, 2010 was primarily due
to the amortization of intangible assets acquired as part of business acquisitions in the second
half of 2010. Certain intangible assets are amortized on an accelerated basis resulting in
higher amortization expense earlier in the intangible assets useful lives.
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Interest and Other Expense, Net and Income Tax Expense
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | % Change | ||||||||||
(In thousands) | ||||||||||||
Interest and other expense, net |
$ | (107 | ) | $ | (1,144 | ) | (90.6 | )% | ||||
Income tax expense |
(5,132 | ) | (2,526 | ) | 103.2 | |||||||
Other data: |
||||||||||||
Effective tax rate |
36.4 | % | 38.9 | % |
Interest and other expense, net
The decrease in interest and other expense, net of $1.0 million in the three months ended
March 31, 2011 compared to the three months ended March 31, 2010 was primarily due to a decrease
in interest expense of $1.0 million reflecting our having no long-term debt outstanding at March 31, 2011.
Income tax expense
Our effective income tax rate decreased by 2.5 percentage points for the three months ended
March 31, 2011 compared to the three months ended March 31, 2010 primarily due to our
recognizing research and development tax credits and benefits resulting from stock-based
compensation expense related to disqualifying dispositions of incentive stock options in the three months
ended March 31, 2011. In addition, state and foreign effective income tax rates decreased in the
three months ended March 31, 2011 compared to the three months ended March 31, 2010 primarily
due to changes in the state tax apportionment factors resulting from enacted legislation.
Other Financial Data
In addition to our results discussed above determined
under accounting principles generally accepted in the United States of America (GAAP), 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 ended March 31, 2011 and 2010, our net
income, adjusted EBITDA and free cash flow were as follows:
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | % Change | ||||||||||
(In thousands) | ||||||||||||
Net income |
$ | 8,971 | $ | 3,962 | 126.4 | % | ||||||
Adjusted EBITDA(1) |
25,604 | 17,013 | 50.5 | |||||||||
Free cash flow(2) |
18,742 | 11,410 | 64.3 |
(1) | Adjusted EBITDA. We define adjusted EBITDA as net income plus net interest and other (income) expense; income tax expense; and non-cash charges including depreciation, amortization, impairment of intangible assets and stock-based compensation expense. | |
(2) | Free cash flow. We define free cash flow as net income (loss) plus net interest and other (income) expense; income tax expense; and non-cash charges including depreciation, amortization, impairment of intangible assets and stock-based compensation expense; and minus capitalization of content database costs, purchases of property and equipment and cash paid for income taxes and interest. |
Adjusted EBITDA and free cash flow are financial data that are not calculated in accordance
with GAAP. The table below 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.
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Table of Contents
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; and in communications with our board of directors concerning our
financial performance. Adjusted EBITDA together with revenues has also been used as a financial
performance objective in determining the bonus pool under our recent performance incentive
programs. 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,
impairment of intangible assets and stock-based compensation expense 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.
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 content database costs, property and equipment; | |
| 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, amortization and impairment of intangible assets and acquired in-process research and development are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for these replacements; and | |
| 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 measure, for the periods presented.
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Reconciliation of adjusted EBITDA and free cash flow to net income: |
||||||||
Net income |
$ | 8,971 | $ | 3,962 | ||||
Interest and other (income) expense, net |
107 | 1,144 | ||||||
Income tax expense |
5,132 | 2,526 | ||||||
Depreciation |
3,264 | 2,864 | ||||||
Amortization |
6,405 | 5,513 | ||||||
Stock-based compensation expense |
1,725 | 1,004 | ||||||
Adjusted EBITDA |
$ | 25,604 | $ | 17,013 | ||||
Capitalization of content database costs |
(5,747 | ) | (2,792 | ) | ||||
Purchases of property and equipment |
(725 | ) | (1,407 | ) | ||||
Cash paid for interest |
(115 | ) | (1,001 | ) | ||||
Cash paid for income taxes |
(275 | ) | (403 | ) | ||||
Free cash flow |
$ | 18,742 | $ | 11,410 | ||||
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Liquidity and Capital Resources
As of March 31, 2011, we had $202.3 million of total liquidity, comprised of $102.3 million
in cash and cash equivalents and the ability to borrow $100.0 million under a three-year $100
million principal amount senior secured revolving credit facility with Bank of America, N.A., as
administrative agent, and certain other financial institutions. Cash and cash equivalents are
comprised of high quality investments including money market funds. Note 2 of the accompanying
Notes to our condensed consolidated financial statements in this Quarterly Report describes
further the composition of our cash and cash equivalents. Note 6 to the Consolidated Financial
Statements included in our 2010 Annual Report describes further the terms of our revolving
credit facility.
Our primary uses of cash include operating costs such as personnel-related expenses,
marketing and advertising, capital expenditures related to content databases, property and
equipment, business acquisitions, expansion of new markets and businesses and Web hosting costs.
During 2010, we also used cash for payments on our prior credit facility and to repurchase $25.0
million of shares of our common stock. Our future capital requirements may vary significantly
from those now planned and will depend on many factors, including:
| the levels of advertising and promotion required to retain and acquire subscribers; | |
| the development of new services; | |
| market acceptance of our services; | |
| 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; | |
| our engaging in future business acquisitions; | |
| amounts we must spend to integrate and operate acquired businesses; | |
| future stock repurchases by us (including under our recently approved $125.0 million stock repurchase authorization); | |
| the building of infrastructure necessary to support our growth; and | |
| our relationships with subscribers and vendors. |
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 and capital expenditures) for at least the next 12 months.
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Summary cash flow information for cash and cash equivalents and short-term investments for
the three months ended March 31, 2011 and 2010 is set forth below. For the purpose of this cash
flow analysis, we have included our highly liquid short-term investments, which we believe we
can readily convert to cash on a short-term basis. We consider cash, cash equivalents and
short-term investments in evaluating our overall cash position.
March 31, | ||||||||||||
2011 | 2010 | % Change | ||||||||||
(In thousands) | ||||||||||||
Net cash and cash equivalents and short-term investments provided by
(used in): |
||||||||||||
Operating activities |
$ | 36,400 | $ | 34,522 | 5 | % | ||||||
Investing activities |
(6,472 | ) | (4,169 | ) | 55 | |||||||
Financing activities |
6,788 | (2,644 | ) | (357 | ) | |||||||
Effect of changes in foreign currency exchange rates on cash and
cash equivalents and short-term investments |
28 | | N/M | |||||||||
Increase in cash and cash equivalents and short-term investments |
$ | 36,744 | $ | 27,709 | 33 | |||||||
Cash Flow Analysis
Sources and uses of cash
Cash and cash equivalents and short-term investments increased $36.7 million to $102.3
million in the three months ended March 31, 2011 compared to an increase of $27.7 million in the
three months ended March 31, 2010. This increase was primarily due to cash provided by operating
activities. Cash and cash equivalents and short-term investments were $128.0 million at March
31, 2010. During each of the periods presented, net cash provided by operating activities was
used primarily for investments in content databases, property and equipment. In addition, in the
three months ended March 31, 2010, net cash provided by operating activities was used for debt
repayments.
Net cash provided by operating activities
For the three months ended March 31, 2011, net cash provided by operating activities was
$36.4 million, an increase of $1.9 million compared to the three months ended March 31, 2010.
Net cash provided by operating activities consists of net income as adjusted for non-cash
expenses and changes in operating assets and liabilities. Net income was $9.0 million for the
three months ended March 31, 2011, an increase of $5.0 million over the three months ended March
31, 2010. Our non-cash expenses, including depreciation, amortization of content database costs,
amortization of acquired intangible assets, amortization of deferred financing costs, deferred
income taxes and stock-based compensation expense totaled $10.5 million, an increase of $2.0
million over the three months ended March 31, 2010. Our net cash used in the changes in
operating assets and liabilities, excluding deferred revenues, totaled $2.9 million, an increase
in cash used of $10.6 million from cash provided by changes in these assets and liabilities of
$7.7 million for the three months ended March 31, 2010. The change in our deferred revenues,
which represents cash received from subscribers but not yet recognized in revenues, totaled
$19.9 million, an increase of $5.4 million over the three months ended March 31, 2010. This
increase primarily reflects subscriber growth and subscription package mix during the quarter.
Subscriber growth increased deferred revenues due to the impact of overall subscription volume
on revenues. The increase in the percentage of overall subscription packages that are premium
packages also drove the increase as premium packages provide more revenue per subscription. The
effect of these increases was partially offset by the increase in the percentage of overall
subscribers that are monthly subscriptions, as monthly subscriptions provide less deferred
revenues than annual subscriptions.
Net cash used in investing activities
For the three months ended March 31, 2011, net cash used in investing activities totaled
$6.5 million, an increase of $2.3 million compared to the three months ended March 31, 2010. Net
cash used in investing activities consisted of investments in content databases and property and
equipment for each of the three month periods. For the three months ended March 31, 2011
compared to the three months ended March 31, 2010 investments in content databases increased
$3.0 million, while investments in property and equipment decreased $0.7 million.
Net cash provided by (used in) financing activities
For the three months ended March 31, 2011, net cash provided by financing activities
totaled $6.8 million, a change of $9.4 million from net cash used in financing activities, which
totaled $2.6 million in the three months ended March 31, 2010. Net cash provided by financing
activities consisted primarily of proceeds from stock option exercises of $2.7 million and
excess tax benefits from stock-based compensation of $4.1 million. In the three months ended
March 31, 2010, net cash used in financing activities included $2.9 million of principal
payments on long-term debt.
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Contractual Obligations
There have been no significant changes to our contractual obligations since December 31,
2010. We have entered into various non-cancelable operating lease agreements for our offices and
certain equipment throughout the world. 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, our operating
results, financial condition and cash flows are not subject to off-balance sheet risks.
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,
expenses and related disclosures. These estimates and assumptions are often based on historical
experience and judgments that we believe to be reasonable under the circumstances at the time
made. However, all such estimates and assumptions are inherently uncertain and unpredictable and
actual results may differ. 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.
We consider the assumptions and estimates associated with recoverability of
indefinite-lived and long-lived assets, the period of amortization of our content database
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 2010 Annual Report. There have been no changes to our
significant accounting policies since December 31, 2010 except as discussed in Note 1 to the
condensed consolidated financial statements of this Quarterly Report.
Performance-Based Restricted Stock Units
During the three months ended March 31, 2011, we began issuing performance-based restricted
stock units (RSUs) to certain company personnel. Performance-based RSUs vest subject to the
achievement of certain predetermined performance goals and employment over the requisite service
period. The amount of stock-based compensation expense recognized in any one period for such
performance-based RSUs is derived from the fair value of the RSUs and can vary based on the
achievement or anticipated achievement of these goals. The fair value of each RSU is based on
the closing price of the companys common stock on the date of grant. If a performance goal is
not met or is not expected to be met, we recognize no compensation expense on the underlying
RSUs, and any previously recognized compensation expense on those RSUs is reversed in the period
that our expectations change. For the three months ended March 31, 2011, the number of
performance-based RSUs granted was de minimis.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to market risks in the ordinary course of our business which currently are
comprised primarily of foreign currency exchange rate risks. For financial market risks related
to foreign currency exchange, refer to Item 7A Quantitative and Qualitative Disclosures about
Market Risk contained in Part II of our 2010 Annual Report. Our exposure to market risk has not
changed significantly since December 31, 2010.
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 SECs 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.
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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 quarter ended March 31, 2011 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, we are party to other legal proceedings arising in the ordinary course of
business and may become subject to additional proceedings in the future. 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 revenues 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 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 $150.6 million in 2006 to $300.9 million in
2010, representing a compound annual growth rate of 18.9%. In the three months ended March 31,
2011, our revenues grew 41% over the prior year quarter. 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 have undertaken 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.
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If we experience excessive rates of subscriber cancellation, or churn, our revenues and business
may 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, a perception that they do not have sufficient time to use the service or otherwise 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 did in 2010, the rate of subscriber cancellation, or churn,
may also increase as it did beginning in the second quarter of 2010 with churn rising from 3.3%
in the first quarter of 2010 to 4.3% in the second quarter of 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 may 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 may 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 revenues,
churn and revenue visibility.
A majority of our subscribers has 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 March 31, 2011, the percentage of overall subscribers that were monthly
subscribers had increased by 4 percentage points to 33% at March 31, 2011 from 29% at December
31, 2010. If this trend continues, more of our revenues 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
revenues and churn.
Additionally, the largely annual commitments of our subscribers enhance our near-term
visibility on our revenues, which we believe enables 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 revenues, 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 represent a majority of our subscriptions, a large portion of our
revenues for each quarter reflects deferred revenues 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 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 fixed-cost and performance-based marketing and advertising
programs to promote our products and services, and we periodically adjust our mix of marketing
and advertising programs. We have 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. Television
advertising comprises a large percentage of our marketing and advertising expense, 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 revenues associated with such expenses, as in the
case of television programming, and our marketing and advertising expenditures may not continue
to result in increased revenues 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, as
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.
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We have begun to distribute free software applications as part of our marketing efforts to
retain and attract new subscribers. If service providers involved in the distribution of our free
applications were to impose fees or commissions upon us in connection with the applications, with
or without our consent, we may be forced to cease distributing the applications through the
service providers, incur additional expense, or have limited information about our customers,
which could adversely affect our financial condition and results of operations.
We cannot predict whether the television show Who Do You Think You Are? will continue to have
an impact on our business in the future.
We have purchased product integration in
all three seasons of the television show Who Do
You Think You Are? in the United States, including seasons one and two, which aired in 2010 and 2011 respectively, and season three,
which NBC recently announced. Although the airing of this series, together with our
increased television advertising, caused increased interest in our core business that resulted in
a greater number of subscribers, we cannot guarantee that the show will have a long-term
favorable effect on our net income. We cannot assure you that NBC will air any future seasons of the show, including the third season or, if they do, that we will always participate. If we do not
receive lasting benefits from Who Do You Think You Are?, or if the show does not continue to be
well received or cancelled, it could have a negative effect on our business and our stock price.
If NBC were to air the third season of Who Do You Think You Are? late in 2011, we would likely incur expenses earlier than anticipated, which would likely have a
negative impact on our 2011 results of operations.
Because we generate substantially all of our revenues from online family history resources,
particularly in the United States and United Kingdom, a decline in demand for our services or for
online family history resources in general, and particularly of the United States and United
Kingdom, could cause our revenues to decline.
We generate substantially all of our revenues from our online family history services, and
we expect that we will continue to depend upon our online family history services for
substantially all of our revenues in the foreseeable future. Because we depend on our online
family history services, factors such as changes in consumer preferences for these products may
have a disproportionately greater impact on us than if we offered multiple services. The market
for online family history resources, and for consumer services in general, is subject to rapidly
changing consumer demand and trends in preferences. If consumer interest in our online family
history services declines, or if consumer interest in family history in general declines, we
would likely experience a significant loss of revenues and net income. Some of the potential
factors that could affect interest in and demand for online family history services include:
| individuals interest in, and their willingness to spend time and money, conducting family history research; | |
| availability of discretionary funds; | |
| awareness of our brand and the family history category, including through the television show Who Do You Think You Are?; | |
| the appeal, reliability and performance of our services; | |
| the price, performance and availability of competing family history products and services; | |
| public concern regarding privacy and data security; | |
| our ability to maintain high levels of customer satisfaction; and | |
| the rate of growth in online commerce generally. |
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In addition, substantially all of our revenues are from subscribers in the United States,
the United Kingdom, and to a lesser extent, Canada and Australia. Consequently, a decrease of
interest in and demand for online family history services, or increased competition, in these
countries could have a disproportionately greater impact on us than if our geographical mix of
revenues was less concentrated.
Challenges in acquiring historical content and making it available online could adversely affect
our ability to retain and expand our subscriber base, and therefore adversely affect our
business, financial condition and results of operations.
In order to retain and expand our subscriber base, both domestically and internationally, we
must continue to expend significant resources to acquire significant amounts of additional
historical content, digitize it and make it available to our subscribers online. We face legal,
logistical, cultural and commercial challenges in acquiring new content. Relevant governmental
records may be widely dispersed and held at a national, state or local level.
Religious and private records are even more widely dispersed. These problems often pose
particular challenges in acquiring content internationally. Desirable content may not be
available to us on favorable terms, or at all, due to competition for a particular collection,
privacy concerns relative to information contained in a given collection or our lack of
negotiating leverage with a certain content provider. For example, some of our most popular
databases include vital records content namely, historical birth, marriage and death records
made available by certain governmental agencies. To help prevent identity theft, or even
terrorist activities, governments may attempt to restrict the release of all or substantial
portions of their vital records content, and particularly birth records, to third parties. If
these efforts are successful, it may limit or altogether prevent us from acquiring these types of
vital record content or continuing to make them available online. In some cases, we have to lobby
for legislation to be changed or otherwise work to surmount administrative or other bureaucratic
hurdles to enable government or other bodies to grant us access to records.
While we own or license most of the images in our database, we generally do not own the
underlying historical documents. If owners of content have sold or licensed the rights to
digitize that content, even on a non-exclusive basis, they may elect not to sell or license it
for digitization purposes to any other person. Therefore, if one of our competitors acquires
rights to digitize a set of content, even on a non-exclusive basis, we may be unable to acquire
rights to digitize that content. Conversely, the owners of historical records may allow more than
one party to digitize those records and our competitors may digitize and make available the same
content that we offer. In some cases, acquisition of content involves competitive bidding, and we
may choose not to bid or may not successfully bid to acquire content rights. In addition, a
number of governmental bodies and other organizations are interested in making historical content
available for free and owners of historical records may license or sell their records to such
governmental bodies and organizations in addition to or instead of licensing or selling their
content to us. Our inability to offer vital records or other valuable content as part of our
family history research databases or the widespread availability of such content elsewhere at
lower cost or for free could result in our subscription services becoming less valuable to
consumers, which could have an adverse impact on our number of subscribers or subscriber churn,
and therefore on our business, financial condition and results of operations.
We depend in part upon third party licenses for some of our historical content, and a loss of
these licenses, or disputes regarding royalties under these licenses, could adversely affect our
ability to retain and expand our subscriber base, and therefore adversely affect our revenues,
financial condition and results of operations.
We acquire a portion of our content pursuant to ongoing license agreements. Some of these
agreements have finite terms and we may not be able to renew the agreements on terms that are
advantageous to us or at all. For example, we license a significant amount of our United Kingdom
content from the United Kingdom National Archives under several license agreements that
generally have ten year terms that begin expiring as soon as 2012, and which have varying automatic
extension periods. The agreements are generally terminable by either party for breach by the
other party and by the United Kingdom National Archives upon our insolvency or bankruptcy. Some
of these agreements permit the United Kingdom National Archives to terminate these licenses if we
undergo a change of control.
If a current or future license for a significant content collection were to be terminated,
we may not be able to obtain a new license on terms advantageous to us or at all and we could be
required to immediately remove the relevant content from our Web sites, either immediately or
after some period of time. If a content provider were to license or sell us content in violation
of that content providers agreements with other parties, we could be required to remove that
content from our Web sites. If we were required to remove a material amount of content from our
Web sites, as a result of the termination of one or more licenses or otherwise, it could
adversely affect our business and results of operations. Some of these license agreements
restrict the manner in which we use the applicable content, which could limit our ability to
leverage that content for new uses as we expand our business. We pay royalties under some of
these license agreements, and the other party to those royalty-bearing agreements may have a
right to audit the calculation of our royalty payments. If there were to be a disagreement
regarding the calculation of royalty payments, we could be required to make additional payments
under those agreements. We also have indemnification obligations under many of these agreements.
We could experience claims in the future which, if material, could have a negative impact on our
results of operations and financial condition.
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Digitizing and indexing new content can take a significant amount of time and expense, and can
expose us to risks associated with the loss or damage of historical documents. Our inability to
maintain or acquire content or make new content available online in a timely and cost-effective
manner, or liability for loss of historical documents, could have an adverse effect on our
business, financial condition and results of operations.
Digitizing and indexing new historical content can take a significant amount of time and
expense and we generally incur the expenses related to such content significantly in advance of
the time we can make it available to our subscribers. We have invested over $100 million to
acquire and develop content, including content acquired through business acquisitions, and we
expect to continue to spend significant resources on content. Increases in the cost or time
required to digitize and index new content could harm our financial results. Currently, two
transcription vendors perform substantially all of our data transcription as measured by cost. We
do not have long-term contracts with any of our transcription vendors. If we were to replace one
of these transcription vendors for any reason, we would be required to provide extensive training
to the new vendor, which could delay our ability to make our new content available to our
subscribers, and our relationships with the new transcription vendors may be on financial or
other terms less favorable to us than our existing arrangements. Our inability to maintain or
acquire content or to make new content available online in a timely and cost-effective manner
would have an adverse effect on our business, financial condition and results of operations.
While we are digitizing content, we may be in possession of valuable and irreplaceable
original historical documents. While we maintain insurance with respect to such documents, any
loss or damage to such documents, while in our possession, could cause us significant expense and
could have a material adverse effect on our reputation and the potential willingness of content
owners to license or lend their content to us.
We face competition from a number of different sources, and our failure to compete effectively
could adversely impact our revenues, results of operations and financial condition.
We face competition in our business from a variety of organizations, some of which provide
genealogical records free of charge. We expect competition to increase in the future. Many
external factors, including the cost of marketing, content acquisition and technology and our
current and future competitors pricing and marketing strategies, can significantly affect our
competitive strategies, including pricing. Some of our competitors provide genealogical records
free of charge. If we fail to meet our subscribers expectations, we could fail to retain
existing or attract new subscribers, either of which could harm our business and results of
operations.
Ancestry.com and our similar international Web sites face competition from:
| FamilySearch, and its Web site FamilySearch.org, a genealogy organization that is part of The Church of Jesus Christ of Latter-day Saints. FamilySearch has an extensive collection of paper and microfilm records. FamilySearch has digitized a large quantity of these records and has published them online at FamilySearch.org, where it makes them available to the public for free and through thousands of family history centers located throughout the world. FamilySearch is a well-funded organization and is undertaking a large-scale digitization project to make its collection available online. FamilySearch could partner with commercial entities to broaden the distribution of its records. | ||
| Commercial entities, including online genealogical research services, library content distributors, search engines and portals, retailers of books and software related to genealogical research and family tree creation and family history oriented social networking Web sites. | ||
| Non-profit entities and organizations, genealogical societies, governments and agencies that may make vital statistics or other records available to the public for free or that partner with commercial entities to make their records widely-available. For example, Yad Vashem, a Jerusalem-based archive devoted to the documentation, research, education and commemoration of the Holocaust, has partnered with Google to facilitate free online access to the worlds largest historical collection on the Holocaust. |
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We expect our competition to grow, both through industry consolidation and the emergence of
new participants. Our future competitors may include other Internet-based and offline businesses,
governments and other entities. The market for Internet-based services evolves at a very rapid
pace and our competitors may offer products and services that are superior to any of our products
and services. In addition, Internet business models are constantly changing. The online family
history market could move to an advertising-supported model to the detriment of our
subscription-based model. Our competitors may have greater resources, more well-established brand
recognition or more sophisticated technologies, such as search algorithms, than we do.
Additionally, our competitors may more easily obtain relevant records in domestic and
international markets or offer new categories of content, products or services before us, or at
lower prices, which may give them a competitive advantage in attracting subscribers. To compete
effectively, we may need to expend significant resources on content acquisition, technology or
marketing and advertising, which could reduce our margins and have a material adverse effect on
our business, financial condition and results of operations. If we do not compete effectively,
our ability to retain and expand our subscriber base, and our revenues, results of operations and
financial condition, could be adversely affected.
Our failure to attract, integrate and retain highly qualified personnel in the future could harm
our business.
To execute our growth plan, we must attract and retain highly qualified personnel.
Competition for these employees is intense, and we may not be successful in attracting and
retaining qualified personnel. 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. Many of the companies with which we compete for
experienced personnel have greater resources than we have. In addition, in making employment
decisions, particularly in the Internet and high-technology industries, job candidates often
consider the value of the stock-based awards they may receive in connection with their
employment. Accounting principles generally accepted in the United States relating to the
expensing of stock-based awards may discourage us from granting the size or type of awards that
job candidates may require to join our company. If our stock price declines, we may face
increased difficulty attracting and retaining personnel through the use of stock-based awards. If
we fail to attract new personnel, or fail to retain and motivate our current personnel, our
business and future growth prospects could be adversely affected.
Our growth could strain our personnel, technology and infrastructure resources, and if we are
unable to implement appropriate controls and procedures to manage our growth, and hire and
integrate appropriate personnel, we may not be able to successfully implement our business plan.
Our growth in operations has placed a significant strain on our management, administrative,
technological, operational and financial infrastructure. Anticipated future growth, including
growth related to the broadening of our product and service offerings, will continue to place
similar strains on our personnel, technology and infrastructure. Our full-time employee headcount
increased 20% in 2010, and we plan to continue to hire aggressively in 2011. Particularly when
adding staff quickly, we may not make optimal hiring decisions or may not integrate personnel
effectively. A sudden increase in the number of our registered users could strain our capacity
and result in Web site performance issues. Our success will depend in part upon the management
ability of our officers with respect to growth opportunities. To manage the expected growth of
our operations, we will need to continue to improve our operational, financial, technological and
management controls and our reporting systems and procedures. Additional personnel and capital
investments will increase our cost base, which, if we fall short of anticipated revenue growth,
will make it more difficult to decrease expenses in the short term. If we fail to successfully
manage our growth, it could adversely affect our business, financial condition and results of
operations.
Any significant disruption in service on our Web sites or in our computer systems, which are
currently hosted primarily by a single third-party, could damage our reputation and result in a
loss of subscribers, which would harm our business and operating results.
Subscribers access our service through our Web sites, where our family history research
databases are located, and our internal billing software and operations are integrated with our
product and service offerings. Our brand, reputation and ability to attract, retain and serve our
subscribers depend upon the reliable performance of our Web sites, network infrastructure,
content delivery processes and payment systems. We have experienced interruptions in these
systems in the past, including server failures that temporarily slowed down our Web sites
performance and users access to content, or made our Web sites inaccessible, and we may
experience interruptions in the future. Interruptions in these systems, whether due to system
failures, computer viruses or physical or electronic break-ins, could affect the security or
availability of our Web sites and prevent our subscribers from accessing our data and using our
products and services. Problems with the reliability or security of our systems may harm our
reputation and require disclosure to our lenders, and the cost of remedying these problems could
negatively affect our business, financial condition and results of operations.
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Substantially all of our communications, network and computer hardware used to operate our
Web sites are co-located in a facility in Salt Lake City, Utah. We do not own or control the
operation of this facility. We have established a disaster recovery facility located at a
third-party facility in Denver, Colorado. Our systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of
war, electronic and physical break-ins, computer
viruses, earthquakes and similar events. The occurrence of any of the foregoing events could
result in damage to our systems and hardware or could cause them to fail completely, and our
insurance may not cover such events or may be insufficient to compensate us for losses that may
occur. Our systems are not completely redundant, so a failure of our system at our primary site
could result in reduced functionality for our subscribers, and a total failure of our systems at
both sites could cause our Web sites to be inaccessible by our subscribers. Problems faced by our
third-party Web hosting provider, with the telecommunications network providers with whom it
contracts or with the systems by which it allocates capacity among its customers, including us,
could adversely affect the experience of our subscribers. Our third-party Web hosting provider
could decide to close its facilities without adequate notice. In addition, any financial
difficulties, such as bankruptcy reorganization, faced by our third-party Web hosting provider or
any of the service providers with whom it contracts may have negative effects on our business,
the nature and extent of which are difficult to predict. Additionally, if our third-party Web
hosting provider is unable to keep up with our growing needs for capacity, this could have an
adverse effect on our business. Any errors, defects, disruptions or other performance problems
with our services could harm our reputation and have an adverse effect on our business, financial
condition and results of operations.
Businesses or technologies we acquire could prove difficult to integrate, disrupt our ongoing
business, dilute stockholder value or have an adverse effect on our results of operations.
As part of our business strategy, we may engage in acquisitions of businesses or
technologies to augment our organic or internal growth, as we did in 2010. While we have engaged
in acquisitions in the past, our experience with integrating and managing acquired businesses or
assets is still limited. Acquisitions involve challenges and risks in negotiation, execution,
valuation and integration. Moreover, we may not be able to find suitable acquisition
opportunities on terms that are acceptable to us. Even if successfully negotiated, closed and
integrated, certain acquisitions may not advance our business strategy, may fall short of
expected return-on-investment targets or may fail. Any recent or future acquisition could involve
numerous risks including:
| potential disruption of our ongoing business and distraction of management; | |
| difficulty integrating the operations and products of the acquired business; | |
| use of cash or borrowings under our credit facility or otherwise to fund the acquisition or for unanticipated expenses; | |
| inability to effectively operate the new business; | |
| exposure to unknown liabilities, including litigation, against the companies we acquire; | |
| additional costs due to differences in culture, geographical locations and duplication of key talent; | |
| acquisition-related accounting charges affecting our balance sheet and results of operations; | |
| difficulty integrating the financial reports of the acquired business in our consolidated financial statements and implementing our internal controls in the acquired business; | |
| potential impairment of goodwill and acquired intangible assets; | |
| dilution to our current stockholders from the issuance of equity securities; and | |
| potential loss of key employees or customers of the acquired company. |
In the event we enter into any acquisition agreements, closing of the transactions could be
delayed or prevented by regulatory approval requirements, including antitrust review, or other
conditions. We may not be successful in addressing these risks or any other problems encountered
in connection with any attempted acquisitions, and we could assume the economic risks of such
failed or unsuccessful acquisitions.
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We face many risks associated with our plans to continue to expand our international offerings
and marketing and advertising efforts, which could harm our business, financial condition and
results of operations.
In addition to our United States and United Kingdom Web sites, we have launched Web sites
directed at Canada, Australia, Sweden, Germany, France, Italy and China and launched our global
Mundia.com Web site. As of March 31, 2011, approximately 29% of subscribers to our Ancestry.com
Web sites, and, for the three months ended March 31, 2011, approximately 25% of our subscription
revenues were from locations outside the United States. We are subject to many of the risks of
doing business internationally, including the following:
| exposure to foreign currency exchange rate fluctuations; | |
| compliance with changing tax laws and the interpretation of those laws; | |
| compliance with changing and conflicting legal and regulatory regimes; | |
| compliance with U.S. laws affecting operations outside of the U.S., including the Foreign Corrupt Practices Act; | |
| compliance with varying and conflicting intellectual property laws; | |
| difficulties in staffing and managing international operations; | |
| prevention of business or user fraud; and | |
| effective implementation of internal controls and processes across diverse operations and a dispersed employee base. |
We anticipate that our continuing international expansion will entail increased marketing
and advertising of our products, services and brands, and the development of localized Web sites
throughout our geographical markets. We may not succeed in these efforts or achieve our
subscriber acquisition or other goals. For some international markets, customer preferences and
buying behaviors may be different than those in our current markets, and we may use business
models that are different from our traditional subscription models. Our revenues from new foreign
markets may not exceed the costs of acquiring, establishing, marketing and maintaining
international offerings, and therefore may not be profitable on a sustained basis, if at all. The
risks of international expansion include:
| difficulties in developing and marketing our offerings and brands as a result of distance, language and cultural differences; | |
| more stringent consumer and data protection laws; | |
| inability to effectively deal with local socio-economic and political conditions; | |
| technical difficulties and costs associated with the localization of our service offerings; | |
| strong local competitors; and | |
| lack of experience in certain geographical markets. |
One or more of these factors could harm our business, financial condition and results of
operations.
If we are unable to improve market recognition of and loyalty to our brands, or if our reputation
were to be harmed, we could lose subscribers or fail to increase the number of subscribers, which
could harm our revenues, results of operations and financial condition.
We believe that maintaining and enhancing our Ancestry.com brand and other brands is
critical to our success. We believe that the importance of brand recognition and loyalty will
only increase in light of increasing competition in our markets. We plan to continue to promote
our brands, both domestically and internationally, but there is no guarantee that our selected
strategies will increase the favorable recognition of our brands. Some of our existing and
potential competitors, including search engines, media companies and government and religious
institutions have well-established brands with greater brand recognition than we have.
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Additionally, from time to time, our subscribers express dissatisfaction with our service,
including, among other things, dissatisfaction with our auto-renewal and other billing policies,
our handling of personal data and the way our services operate. To
the extent that dissatisfaction with our service is widespread or not adequately addressed,
our brand may be adversely impacted. If our efforts to promote and maintain our brand are not
successful, our operating results and our ability to attract and retain subscribers may be
adversely affected. In addition, even if our brand recognition and loyalty increases, this may
not result in increased use of our products and services or higher revenues. Many of our
subscribers are passionate about family history research, and many of these subscribers
participate in blogs on this topic both on our Web sites and elsewhere. If actions we take or
changes we make to our products upset these subscribers, their blogging could negatively affect
our brand and reputation, which could harm our revenues, results of operations and financial
condition.
Our future growth may differ materially from our historic growth rates and our projections, which
could harm our results of operations and financial condition.
Online family history research is a relatively young industry. Consequently, it is difficult
to predict the ultimate size of the industry and the acceptance by the market of our products and
services. Our business strategy and projections rely on a number of assumptions, some or all of
which may be incorrect. For example, we believe that consumers will be willing to pay for
subscriptions to our online family history resources, notwithstanding the fact that some of our
current and future competitors may provide such resources free of charge. We cannot accurately
predict whether our products and services will achieve significant acceptance by potential users
in significantly larger numbers than at present. You should therefore not rely on our historic
growth rates as an indication of future growth.
If we are unable to continually enhance our products and services and adapt them to technological
changes and subscriber needs, we may not remain competitive and our business may fail to grow or
decline.
Our business is rapidly changing. To remain competitive, we must continue to provide
relevant content and enhance and improve the functionality and features of our products and
services. If we fail to do so, or if competitors introduce new solutions embodying new
technologies, our existing products and services may become obsolete. Our future success will
depend, among other things, on our ability to:
| anticipate demand for new products and services; | |
| enhance our existing solutions, cross-platform compatibility, systems capacity and processing speed; and | |
| respond to technological advances on a cost-effective and timely basis. |
Developing the technologies in our products entails significant technical and business
risks. We may use new technologies ineffectively, or we may fail to adapt our products and
services to the demands of our subscribers. If we face material delays in introducing new or
enhanced solutions, our subscribers may forego the use of our solutions in favor of those of our
competitors.
Undetected product or service errors or defects could result in the loss of revenues, delayed
market acceptance of our products or services or claims against us.
We offer a variety of Internet-based services and a software product, Family Tree Maker,
which are complex and frequently upgraded. Our Internet-based services and software product may
contain undetected errors, defects, failures or viruses, especially when first introduced or when
new versions or enhancements are released. Despite product testing, our products, or third party
products that we incorporate into ours, may contain undetected errors, defects or viruses that
could, among other things:
| require us to make extensive changes to our subscription services or software product, which would increase our expenses; | |
| expose us to claims for damages; | |
| require us to incur additional technical support costs; | |
| cause a negative registered user reaction that could reduce future sales; | |
| generate negative publicity regarding us and our subscription services and software product; or | |
| result in subscribers delaying their subscription or software purchase or electing not to renew their subscriptions. |
Any of these occurrences could have an adverse effect upon our business, financial condition
and results of operations.
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Privacy concerns could require us to incur significant expense and modify our operations in a
manner that could result in restrictions and prohibitions on our use of certain information, and
therefore harm our business.
As part of our business, we make biographical and historical data available through our Web
sites, we use registered users personal data for internal purposes and we host Web sites and
message boards, among other things, that contain content supplied by third parties. In addition,
in connection with our Ancestry.com DNA product, we obtain biological DNA samples used for
genetic testing. For privacy or security reasons, privacy groups, governmental agencies and
individuals may seek to restrict or prevent our use or publication of certain biological or
historical information pertaining to individuals, particularly living persons. We will also face
additional privacy issues as we expand into other international markets, as many nations have
privacy protections more stringent than those in the United States. We have incurred, and will
continue to incur, expenses to comply with privacy and security standards and protocols imposed
by law, regulation, industry standards or contractual obligations. Increased domestic or
international regulation of data utilization and distribution practices, including
self-regulation, could require us to modify our operations and incur significant expense, which
could have an adverse effect on our business, financial condition and results of operations.
Our possession and use of personal information presents risks and expenses that could harm our
business. Unauthorized disclosure or manipulation of such data, whether through breach of our
network security or otherwise, could expose us to costly litigation and damage our reputation.
Maintaining our network security is of critical importance because our online systems store
confidential registered user, employee and other sensitive data, such as names, addresses, credit
card numbers and other personal information. In particular, a substantial majority of our
subscribers use credit and debit cards to purchase our products and services. If we or our
processing vendors were to have problems with our billing software, it could have an adverse
effect on our subscriber satisfaction and could cause one or more of the major credit card
companies to disallow our continued use of their payment services. In addition, if our billing
software fails to work properly and, as a result, we do not automatically charge our subscribers
credit cards on a timely basis or at all, our business, financial condition, cash flows and
results of operations could be adversely affected.
In addition, our online systems store the content that our registered users upload onto our
Web sites, such as family records and photos. This content is often personally meaningful, and
our registered users may rely on our online system to store digital copies of such content. If we
were to lose such content, if our users private content were to be publicly available or if
third parties were able to access and manipulate such content, we may face liability and harm to
our brand and reputation.
We and our vendors use commercially available encryption technology to transmit personal
information when taking orders. We use security and business controls to limit access and use of
personal information, including registered users uploaded content. However, third parties may be
able to circumvent these security and business measures by developing and deploying viruses,
worms and other malicious software programs that are designed to attack or attempt to infiltrate
our systems and networks. In addition, employee error, malfeasance or other errors in the
storage, use or transmission of personal information could result in a breach of registered user
or employee privacy.
If third parties improperly obtain and use the personal information of our registered users
or employees, we may be required to expend significant resources to resolve these problems. A
major breach of our network security and systems could have serious negative consequences for our
businesses, including possible fines, penalties and damages, reduced demand for our products and
services, an unwillingness of subscribers to provide us with their credit card or payment
information, an unwillingness of registered users to upload family records or photos onto our Web
sites, harm to our reputation and brand and loss of our ability to accept and process subscriber
credit card orders. Similarly, if a well-publicized breach of data security at any other major
consumer Web site were to occur, there could be a general public loss of confidence in the use of
the Internet for commercial transactions. Any of these events could have adverse effects on our
business, financial condition and results of operations.
Any claims related to activities of registered users and the content they upload could result in
expenses that could harm our results of operations and financial condition.
Our registered users often upload their own content onto our Web sites. The terms of use of
such content are set forth in the terms and conditions of our Web sites and a submission
agreement to which registered users must agree when they upload their content. Disputes or
negative publicity about the use of such content could make members more reluctant to upload
personal content or harm our reputation. We do not review or monitor content uploaded by our
registered users, and could face claims arising from or liability for making any such content
available on our Web sites. In addition, our collaboration tools and other features of our site
allow registered users to contact each other. While registered users can choose to remain
anonymous in such communications, registered users may choose to engage with one another without
anonymity. If any such contact were to lead to fraud or other harm, we may face claims against us
and negative publicity. Litigation to defend these claims or efforts to counter any negative
publicity could be costly and any other liabilities we incur in connection with any such claims
may harm our business, financial condition and results of operations.
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Increases in credit card processing fees would increase our operating expenses and adversely
affect our results of operations, and the termination of our relationship with any major credit
card company could have a severe, negative impact on our ability to collect revenues from
subscribers.
The substantial majority of our subscribers pay for our products and services using credit
cards. From time to time, the major credit card companies or the issuing banks may increase the
fees that they charge for each transaction using their cards. An increase in those fees would
require us to increase the prices we charge for our products and services or negatively impact
our profitability, either of which could adversely affect our business, financial condition and
results of operations.
In addition, our credit card fees may be increased by credit card companies if our
chargeback rate or the refund rate exceeds certain thresholds. If we are unable to maintain our
chargeback rate at acceptable levels, our credit card fees for chargeback transactions, or for
all credit card transactions, may be increased, and, if the problem significantly worsens, credit
card companies may further increase our fees or terminate their relationships with us. Any
increases in our credit card fees could adversely affect our results of operations, particularly
if we elect not to raise our subscription rates to offset the increase. The termination of our
ability to process payments on any major credit or debit card would significantly impair our
ability to collect revenues from subscribers.
Our operating results depend on numerous factors and may fluctuate from period to period, which
could make them difficult to predict.
Our quarterly and annual operating results are tied to certain financial and operational
metrics that have fluctuated in the past and may fluctuate significantly in the future. As a
result, you should not rely upon our past operating results as indicators of future performance.
Our operating results depend on numerous factors, many of which are outside of our control. For
the reasons set forth in this Risk Factors section or other reasons, the results of any prior quarterly or annual periods should not be relied
upon as indications of our future performance and our revenues and operating results in the
future may differ materially from the expectations of management or investors.
If government
regulation of the Internet or other areas of our business changes or if consumer attitudes toward
use of the Internet change, we may need to change the manner in which we conduct our business in
a manner that is less profitable or incur greater operating expenses, which could harm our
results of operations.
The adoption, modification or interpretation of laws or regulations relating to the Internet
or other areas of our business could adversely affect the manner in which we conduct our business
or the overall popularity or growth in use of the Internet. Such laws and regulations may cover
automatic subscription renewal, credit card processing procedures, sales and other procedures,
tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic
contracts, consumer protection, broadband residential Internet access and the characteristics and
quality of services. In foreign countries, such as countries in Europe, such laws may be more
restrictive than in the United States. It is not clear how existing laws governing issues such as
property ownership, sales and other taxes, libel and personal privacy apply to the Internet. If
we are required to comply with new regulations or legislation or new interpretations of existing
regulations or legislation, this compliance could cause us to incur additional expenses, make it
more difficult to renew subscriptions automatically, make it more difficult to attract new
subscribers or otherwise alter our business model. Any of these outcomes could have a material
adverse effect on our business, financial condition or results of operations.
Our revenues may be adversely affected if we are required to charge sales taxes in additional
jurisdictions and/or other taxes for our products and services.
We collect or have imposed upon us sales or other taxes related to the products and services
we sell in certain states and other jurisdictions. Additional states or one or more countries or
other jurisdictions may seek to impose sales or other tax collection obligations on us in the
future or states or jurisdictions in which we already pay tax may increase the amount of taxes we
are required to pay. A successful assertion by any country, state or other jurisdiction in which
we do business that we should be collecting sales or other taxes on the sale of our products and
services could, among other things, result in substantial tax liabilities for past sales, create
significant administrative burdens for us, discourage registered users from purchasing from us or
otherwise substantially harm our business and results of operations.
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Our credit facility contains a number of financial and operating covenants which could limit our
flexibility in operating our business.
Our credit facility contains a number of financial and operating covenants that could limit
our flexibility in operating our business, including a covenant to maintain a specified ratio of
a measure of certain funded indebtedness (excluding subordinated indebtedness) to a measure of
EBITDA (as EBITDA is defined in our credit facility) and a covenant to maintain a specified ratio
of a measure of EBITDA to a measure of fixed charges.
As of March 31, 2011, we had no borrowings outstanding under our credit facility. Our
future indebtedness could:
| make us more vulnerable to unfavorable economic conditions; | |
| make it more difficult to obtain additional financing in the future for working capital, capital expenditures or other general corporate purposes; | |
| limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate; | |
| require us to dedicate or reserve a large portion of our cash flow from operations for making payments on our indebtedness, which would prevent us from using it for other purposes; | |
| make us susceptible to fluctuations in market interest rates that affect the cost of our borrowings to the extent that our variable rate debt is not covered by interest rate derivative agreements, if any; and | |
| make it more difficult to pursue strategic acquisitions, alliances and collaborations. |
Any obligations under our credit facility are secured by collateral, which includes
substantially all of our assets, including our intellectual property. If we draw funds under our
credit facility and we are not able to satisfy our obligations under the credit facility, the
lenders could exercise their rights under the credit facility, including taking control of the
collateral, including our intellectual property, which would have a material adverse effect on
our business. In addition, we cannot assure you that our lenders will have sufficient liquidity
to provide funds to us if and when we seek to borrow under the credit facility.
We face risk associated with currency exchange rate fluctuations, which could adversely affect
our revenues and operating results.
For the three months ended March 31, 2011, approximately 22% of our total revenues were
received, and approximately 9% of our total expenses were paid, in currencies other than the
United States dollar, such as the British pound sterling, the Canadian dollar and the Australian
dollar. As a result, we are at risk for exchange rate fluctuations between such foreign
currencies and the United States dollar, which could affect our revenues and results of
operations. If the U.S. dollar strengthens against foreign currencies, the translation of these
foreign currency denominated transactions will result in decreased revenues, operating expenses
and net income. We may not be able to offset adverse foreign currency impact with increased
subscription pricing or volume. We attempt to limit our exposure by paying our operating expenses
incurred in foreign jurisdictions with revenues received in the applicable currency, but if we do
not have enough local currency to pay all our expenses in that currency, we are exposed to
currency exchange rate risk with respect to those expenses. We are also exposed to exchange rate
risk with respect to our revenues earned in foreign currencies. Even if we were to implement
hedging strategies to mitigate foreign currency risk, these strategies might not eliminate our
exposure to foreign exchange rate fluctuations and would involve costs and risks of their own,
such as ongoing management time and expertise, external costs to implement the strategies and
potential accounting implications.
Our business may be significantly impacted by a change in the economy, including any resulting
effect on consumer spending.
Our business may be affected by changes in the economy generally, including any resulting
effect on consumer spending specifically. Our products and services are discretionary purchases,
and consumers may reduce their discretionary spending on our products and services during an
economic downturn such as the one we recently experienced. Although we did not experience a
material increase in subscription cancellations or a material reduction in subscription renewals
during that downturn, we may yet be impacted if employment and personal income do not improve.
Conversely, consumers may spend more time using the Internet during an economic downturn and may
have less time for our products and services in a period of economic growth. In addition, we have already seen a
rise in media
prices, including television advertising, and prices may further increase if the economy continues to recover or grow, which could significantly
increase our marketing and advertising expenses. As a result, our business, financial condition
and results of operations may be significantly affected by changes in the economy generally.
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The loss of one or more of our key personnel could harm our business.
We depend on the continued service and performance of our key personnel, including Timothy
Sullivan, our President and Chief Executive Officer. We do not maintain key man insurance on any
of our officers or key employees. We also do not have long-term employment agreements with any of
our officers or key employees. In addition, much of our key technology and systems are
custom-made for our business by our personnel. The loss of key personnel, including key members
of our management team, as well as certain of our key marketing, product development or
technology personnel could disrupt our operations and have an adverse effect on our ability to
operate our business.
We have made significant estimates in calculating our income tax provision and other tax assets
and liabilities. If these estimates are incorrect, our operating results and financial condition
may be adversely affected.
We are subject to regular review and audit by both domestic and foreign tax authorities. Any
adverse outcome of such a review or audit could have a negative effect on our operating results
and financial condition. In addition, the determination of our provision for income taxes and
other tax assets and liabilities requires significant judgment, and there are many transactions
and calculations where the ultimate tax determination is uncertain at the present time. Although
we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts
recorded in our financial statements and may have an adverse effect on our operating results and
financial condition.
Expenses or liabilities resulting from litigation could adversely affect our results of
operations and financial condition.
From time to time, we may be subject to claims or litigation. Any such claims or litigation
may be time-consuming and costly, divert management resources, require us to change our products
and services, require us to accept returns of software products or have other adverse effects on
our business. Any of the foregoing could have a material adverse effect on our results of
operations and could require us to pay significant monetary damages. For example, in August 2009,
we received a letter from Shutterfly, Inc., alleging infringement of certain of their patents by
our operation of the MyCanvas.com Web site. While MyCanvas.com revenues have represented a small
percentage of our total revenues, intellectual property litigation is subject to inherent
uncertainties, and there can be no assurance that the expenses associated with defending any
litigation or the resolution of this dispute would not have a material adverse impact on our
results of operations or cash flows. We cannot assure you of the ultimate outcome of any legal
proceeding or contingency in which we are or may become involved.
Risks Related to Intellectual Property
If our intellectual property and technologies are not adequately protected to prevent use or
appropriation by our competitors, the value of our brand and other intangible assets may be
diminished, and our business may be adversely affected.
Our future success and competitive position depend in part on our ability to protect our
proprietary technologies and intellectual property. We rely and expect to continue to rely on a
combination of confidentiality and license agreements with our employees, consultants and third
parties with whom we have relationships, as well as trademark, copyright, patent and trade secret
protection laws, to protect our proprietary technologies and intellectual property. Many of our
trademarks contain words or terms having a somewhat common usage and, as a result, we may have
difficulty registering them in certain jurisdictions. Although we possess intellectual property
rights in some aspects of our digital content, search technology, software products and
digitization and indexing processes, our digital content is not protected by any registered
copyrights or other registered intellectual property or statutory rights. Rather, our digital
content is protected by user agreements that limit access to and use of our data, and by our
proprietary indexing and search technology that we apply to make our digital content searchable.
However, compliance with use restrictions is difficult to monitor, and our proprietary rights in
our digital content databases may be more difficult to enforce than other forms of intellectual
property rights.
There can be no assurance that the steps we take will be adequate to protect our
technologies and intellectual property, that our patent and trademark applications will lead to
issued patents and registered trademarks in all instances, that others will not develop or patent
similar or superior technologies, products or services, or that our patents, trademarks and other
intellectual property will not be challenged, invalidated or circumvented by others. Furthermore,
the intellectual property laws of other countries at which our Web sites are or may be in the
future be directed may not protect our products and intellectual property rights to the same
extent as the laws of the United States. The legal standards relating to the validity,
enforceability and scope of protection of intellectual property rights in Internet-related
industries are uncertain and still evolving, both in the United States and in other countries. In
addition, third parties may knowingly or unknowingly infringe our patents, trademarks and other
intellectual property rights, and litigation may be necessary to protect and enforce our
intellectual property rights. Any such litigation could be very costly and could divert
management attention and resources. If the protection of our technologies and intellectual
property is inadequate to prevent use or appropriation by third parties, the value of our brand
and other intangible assets may be diminished and competitors may be able to more effectively
mimic our subscription services and methods of operations. Any of these events would have a
material adverse effect on our business, financial condition and results of operations.
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We also expect that the more successful we are, the more likely it will become that
competitors will try to develop products that are similar to ours, which may infringe on our
proprietary rights. It may also be more likely that competitors will claim that our products and
services infringe on their proprietary rights. If we are unable to protect our proprietary rights
or if third parties independently develop or gain access to our or similar technologies, our
business, revenues, reputation and competitive position could be harmed.
Confidentiality agreements with employees and others may not adequately prevent disclosure of
trade secrets and other proprietary information. Failure to protect our proprietary information
could make it easier for third parties to compete with our products and harm our business.
A substantial amount of our tools and technologies are protected by trade secret laws. In
order to protect our proprietary technologies and processes, we rely in part on security
measures, as well as confidentiality agreements with our employees, licensees, independent
contractors and other advisors. These measures and agreements may not effectively prevent
disclosure of confidential information, including trade secrets, and may not provide an adequate
remedy in the event of unauthorized disclosure of confidential information. We could potentially
lose future trade secret protection if any unauthorized disclosure of such information occurs. In
addition, others may independently discover our trade secrets and proprietary information, and in
such cases we could not assert any trade secret rights against such parties. Laws regarding trade
secret rights in certain markets in which we operate may afford little or no protection to our
trade secrets. The loss of trade secret protection could make it easier for third parties to
compete with our products by copying functionality. In addition, any changes in or unexpected
interpretations of the trade secret and other intellectual property laws in any country in which
we operate may compromise our ability to enforce our trade secret and intellectual property
rights. Costly and time-consuming litigation could be necessary to enforce and determine the
scope of our proprietary rights, and failure to obtain or maintain trade secret protection could
adversely affect our business, revenues, reputation and competitive position.
Intellectual property claims against us could be costly and result in the loss of significant
rights related to, among other things, our Web sites, content indexes, and marketing and
advertising activities.
Trademark, copyright, patent and other intellectual property rights are important to us and
other companies. Our intellectual property rights extend to our technologies, business processes
and the content on our Web sites. We use intellectual property licensed from third parties in
merchandising our products and marketing and advertising our services. From time to time, third
parties may allege that we have violated their intellectual property rights. If there is a valid
claim against us for infringement, misappropriation, misuse or other violation of third party
intellectual property rights, and we are unable to obtain sufficient rights or develop
non-infringing intellectual property or otherwise alter our business practices on a timely basis,
our business and competitive position may be adversely affected. Many companies are devoting
significant resources to obtaining patents that could potentially affect many aspects of our
business. There are numerous patents that broadly claim means and methods of conducting business
on the Internet. We have not exhaustively searched patents relevant to our technologies and
business. If we are forced to defend ourselves against intellectual property infringement claims,
whether they are with or without merit or are determined in our favor, we may face costly
litigation, diversion of technical and management personnel, limitations on our ability to use
our current Web sites or inability to market or provide our products or services. As a result of
any such dispute, we may have to develop non-infringing technology, pay damages, enter into
royalty or licensing agreements, cease providing certain products or services, adjust our
merchandizing or marketing and advertising activities or take other actions to resolve the
claims. These actions, if required, may be costly or unavailable on terms acceptable to us. In
addition, many of our co-branding, distribution and other partnering agreements require us to
indemnify our partners for third-party intellectual property infringement claims, which could
increase the cost to us of an adverse ruling in such an action.
In addition, as a publisher of online content, we face potential liability for negligence,
copyright, patent or trademark infringement or other claims based on the nature and content of
data and materials that we publish or distribute. These claims could potentially arise with
respect to both company-acquired content and user-generated content. Litigation to defend these
claims could be costly and any other liabilities we incur in connection with the claims may harm
our business, financial condition and results of operations.
If we are unable to protect our domain names, our reputation and brand could be affected
adversely, which may negatively impact our ability to compete.
We have registered domain names for Web site destinations that we use in our business, such
as Ancestry.com, Ancestry.co.uk and iArchives. However, if we are unable to maintain our rights
in these domain names, our competitors could capitalize on our brand recognition by using these
domain names for their own benefit. In addition, our competitors could capitalize on our brand
recognition by using domain names similar to ours. Domain names similar to ours have been
registered in the United States and elsewhere, and in many countries the top-level domain names
ancestry or genealogy are owned by other parties. Although we own the ancestry.co.uk domain
name in the United Kingdom, we might not be able to, or may choose not to, acquire or maintain
other country-specific versions of the ancestry and genealogy domain names. Further, the
relationship between regulations governing domain names and laws protecting trademarks and
similar proprietary rights varies from jurisdiction to jurisdiction and is unclear in some
jurisdictions. We may be unable to prevent third parties from acquiring and using
domain names that infringe on, are similar to, or otherwise decrease the value of, our brand
or our trademarks or service marks. Protecting and enforcing our rights in our domain names and
determining the rights of others may require litigation, which could result in substantial costs
and divert management attention. We may not prevail if any such litigation is initiated.
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Risks Related to our Common Stock and Corporate Structure
Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could
delay or discourage takeover attempts that stockholders may consider favorable.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or
preventing a change of control or changes in our management. For example, our board of directors
has the authority to issue up to five million shares of preferred stock in one or more series and
to fix the powers, preferences and rights of each series without stockholder approval. The
ability to issue preferred stock could discourage unsolicited acquisition proposals or make it
more difficult for a third party to gain control of our company, or otherwise could adversely
affect the market price of our common stock. Our certificate of incorporation requires that any
action to be taken by stockholders must be taken at a duly called meeting of stockholders, which
may only be called by our board of directors, the chairperson of our board of directors or the
chief executive officer, with the concurrence of a majority of our board of directors, and may
not be taken by written consent. Our bylaws also require that any stockholder proposals or
nominations for election to our board of directors meet specific advance notice requirements and
procedures, which make it more difficult for our stockholders to make proposals or director
nominations. In addition, we have a classified board of directors with three-year staggered
terms, which could delay the ability of stockholders to change membership of a majority of our
board of directors.
Furthermore, because we are incorporated in Delaware, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law. These provisions may prohibit or restrict
large stockholders, in particular those owning 15% or more of our outstanding voting stock, from
merging or combining with us. These provisions in our certificate of incorporation and bylaws and
under Delaware law could discourage potential takeover attempts and could reduce the price that
investors might be willing to pay for shares of our common stock in the future and result in our
market price being lower than it would without these provisions.
Our share price may be volatile due to fluctuations in our operating results and other factors,
each of which could cause our stock price to decline.
The market price of shares of our common stock could be subject to wide fluctuations in
response to many risks listed herein and others beyond our control, including:
| actual or anticipated fluctuations in our key operating metrics, financial condition and operating results; | |
| a greater than expected gain or loss of existing subscribers; | |
| a change in one or more of our key metrics; | |
| actual or anticipated changes in our growth rate; | |
| issuance of new or updated research or reports by securities analysts; | |
| our announcement of actual results for a fiscal period that are higher or lower than projected or expected results or our announcement of revenues or earnings guidance that is higher or lower than expected; | |
| fluctuations in the valuation of companies perceived by investors to be comparable to us; | |
| share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; | |
| sales or expected sales of common stock by us or others; or market reaction to announced repurchases of common stock by us; | |
| announcements from, or operating results of, our competitors; or | |
| general economic and market conditions. |
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Furthermore, during the last few years, the stock markets have experienced extreme price and
volume fluctuations and the market prices of some equity securities continue to be volatile.
These fluctuations often have been unrelated or disproportionate to the operating performance of
these companies. These broad market and industry fluctuations, as well as general economic,
political and market conditions such as recessions, interest rate changes or international
currency fluctuations, may cause the market price of shares of our common stock to decline. In
the past, companies that have experienced volatility in the market price of their stock have been
subject to securities class action litigation. We may be the target of this type of litigation in
the future. Securities litigation against us could result in substantial costs and divert our
managements attention from other business concerns, which could seriously harm our business.
Our stock price may be affected by coverage by securities analysts.
The trading of our common stock is influenced by the reports and research that industry or
securities analysts publish about us or our business. If analysts stop covering us, or if too few
analysts cover us, the trading price of our stock would likely decrease. If one or more of the
analysts who cover us downgrade our stock, our stock price will likely decline. If one or more of
these analysts cease coverage of our company or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could cause our stock price or trading
volume to decline.
Financial forecasting by us and financial analysts who may publish estimates of our performance
may differ materially from actual results.
Given the dynamic nature of our business, the current uncertain economic climate and the
inherent limitations in predicting the future, forecasts of our revenues, gross margin, operating
expenses, number of paying subscribers and other financial and operating data may differ
materially from actual results. Such discrepancies could cause a decline in the trading price of
our common stock.
Spectrum Equity Investors and its affiliates own a substantial portion of our outstanding common
stock, and their interests may not always coincide with the interests of the other holders of our
common stock.
As of March 31, 2011, Spectrum Equity Investors V, L.P. and certain of its affiliates
beneficially owned in the aggregate shares representing approximately 41% of our outstanding
voting power. Two persons associated with Spectrum Equity Investors V, L.P. currently serve on
our board of directors. As a result, Spectrum Equity Investors V, L.P. and certain of its
affiliates could have significant influence over all matters presented to our stockholders for
approval, including election and removal of our directors and change of control transactions. The
interests of Spectrum Equity Investors V, L.P. and certain of its affiliates may not always
coincide with the interests of the other holders of our common stock.
Item 6. | Exhibits |
Exhibit | ||||
Number | Exhibit Description | |||
10.1 | First Amendment, dated April 8, 2011, to Credit Agreement, dated as of September 9, 2010, among
Ancestry.com Operations Inc., certain domestic subsidiaries of Ancestry.com Operations Inc., Bank
of America, N.A. and certain other lender parties thereto. |
|||
10.2 | Employment Letter by and between Timothy Sullivan and Ancestry.com Inc., dated April 6, 2011. |
|||
10.3 | Amendment No. 1, dated April 22, 2011, to Employment Letter dated July 22, 2010, between Joshua
Hanna and Ancestry.com Inc. |
|||
10.4 | Amendment No. 2, dated April 26, 2011, to Offer Letter dated March 30, 2010, between Eric Shoup
and Ancestry.com Inc. |
|||
10.5 | Ancestry.com Inc. Description of 2011 Performance Incentive Program. |
|||
31.1 | * | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
31.2 | * | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
32.1 | * | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
* | These certifications are not deemed filed with the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Ancestry.com Inc. |
||||
Dated: May 3, 2011 | By: | /s/ Timothy Sullivan | ||
Timothy Sullivan | ||||
President and Chief Executive Officer |
Dated: May 3, 2011 | By: | /s/ Howard Hochhauser | ||
Howard Hochhauser | ||||
Chief Financial Officer |
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EXHIBIT INDEX
Exhibit | ||||
Number | Exhibit Description | |||
10.1 | First Amendment, dated April 8, 2011, to Credit Agreement, dated as of September 9, 2010, among
Ancestry.com Operations Inc., certain domestic subsidiaries of Ancestry.com Operations Inc., Bank
of America, N.A. and certain other lender parties thereto. |
|||
10.2 | Employment Letter by and between Timothy Sullivan and Ancestry.com Inc., dated April 6, 2011. |
|||
10.3 | Amendment No. 1, dated April 22, 2011, to Employment Letter dated July 22, 2010, between Joshua
Hanna and Ancestry.com Inc. |
|||
10.4 | Amendment No. 2, dated April 26, 2011, to Offer Letter dated March 30, 2010, between Eric Shoup
and Ancestry.com Inc. |
|||
10.5 | Ancestry.com Inc. Description of 2011 Performance Incentive Program. |
|||
31.1 | * | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
31.2 | * | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
32.1 | * | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
* | These certifications are not deemed filed with the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. |
41