UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number: 001-34518

Ancestry.com Inc.

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes 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 þ 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 July 27, 2011, there were 45,452,304 shares of the registrant’s common stock, par value $0.001, outstanding.

 

 

Ancestry.com Inc.

Table of Contents

		Page
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)			3
Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010			3
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2011 and 2010			4
Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2011 and 2010			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
Item 4. Controls and Procedures			25
Part II. Other Information
Item 1. Legal Proceedings			25
Item 1A. Risk Factors			25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 6. Exhibits			41
Signatures			42
Exhibit Index			43
EX-10.2
EX-10.3
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1.		Condensed Consolidated Financial Statements

ANCESTRY.COM INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
		2011				2010
		(unaudited)
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	71,019			$	65,519
Restricted cash			1,940				2,476
Accounts receivable, net of allowances of $422 and $406 at June 30, 2011 and December 31, 2010, respectively			5,679				6,990
Income tax receivable			15,362				8,094
Deferred income taxes			2,779				3,873
Prepaid expenses and other current assets			8,977				9,243
Total current assets			105,756				96,195
Property and equipment, net			19,234				21,252
Content database costs, net			71,098				65,418
Intangible assets, net			25,825				34,281
Goodwill			302,802				303,374
Other assets			2,010				1,666
Total assets		$	526,725			$	522,186
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	9,970			$	9,451
Accrued expenses			38,224				36,978
Deferred revenues			114,285				89,301
Total current liabilities			162,479				135,730
Deferred income taxes			16,534				20,571
Other long-term liabilities			2,017				2,018
Total liabilities			181,030				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; 47,174 shares issued and 45,186 shares outstanding at June 30, 2011 and 45,179 shares issued and outstanding at December 31, 2010			47				45
Additional paid-in capital			362,968				328,957
Treasury stock, at cost; 1,988 and zero shares at June 30, 2011 and December 31, 2010, respectively			(78,095	)			—
Accumulated other comprehensive income			1,025				643
Retained earnings			59,750				34,222
Total stockholders’ equity			345,695				363,867
Total liabilities and stockholders’ equity		$	526,725			$	522,186

See accompanying notes to condensed consolidated financial statements

ANCESTRY.COM INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(unaudited)
		(In thousands, except per share data)
Revenues:
Subscription revenues		$	96,707			$	70,544			$	181,890			$	130,104
Product and other revenues			4,601				3,916				10,446				8,777
Total revenues			101,308				74,460				192,336				138,881
Costs of revenues:
Cost of subscription revenues			14,111				11,228				27,998				22,729
Cost of product and other revenues			1,841				1,280				3,669				2,774
Total cost of revenues			15,952				12,508				31,667				25,503
Gross profit			85,356				61,952				160,669				113,378
Operating expenses:
Technology and development			14,242				9,992				27,910				19,919
Marketing and advertising			30,250				24,490				64,058				46,936
General and administrative			10,111				8,032				19,468				15,774
Amortization of acquired intangible assets			4,297				3,679				8,567				7,358
Total operating expenses			58,900				46,193				120,003				89,987
Income from operations			26,456				15,759				40,666				23,391
Interest and other expense, net			(429	)			(1,429	)			(536	)			(2,573	)
Income before income taxes			26,027				14,330				40,130				20,818
Income tax expense			(9,470	)			(5,807	)			(14,602	)			(8,333	)
Net income		$	16,557			$	8,523			$	25,528			$	12,485
Net income per common share:
Basic		$	0.36			$	0.20			$	0.56			$	0.29
Diluted		$	0.33			$	0.18			$	0.51			$	0.26
Weighted average common shares outstanding
Basic			45,596				42,764				45,484				42,612
Diluted			49,893				48,015				50,082				47,754

See accompanying notes to condensed consolidated financial statements

ANCESTRY.COM INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(unaudited)
		(In thousands)
Operating activities:
Net income		$	16,557			$	8,523			$	25,528			$	12,485
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			3,188				2,740				6,452				5,604
Amortization of content database costs			2,279				1,830				4,415				3,664
Amortization of acquired intangible assets			4,297				3,679				8,567				7,358
Amortization of deferred financing costs			69				614				138				829
Deferred income taxes			(2,021	)			(1,487	)			(2,989	)			(2,637	)
Stock-based compensation expense			2,201				1,262				3,926				2,266
Changes in operating assets and liabilities:
Accounts receivable			999				283				1,308				935
Restricted cash			44				(99	)			536				(170	)
Other assets			(581	)			403				(233	)			1,970
Income tax receivable			(8,672	)			—				(7,268	)			1,544
Accounts payable and other liabilities			24,563				4,200				23,148				8,188
Excess tax benefits from stock-based compensation			(16,393	)			(3,570	)			(20,449	)			(3,570	)
Deferred revenues			5,054				4,654				24,906				19,088
Net cash provided by operating activities			31,584				23,032				67,985				57,554
Investing activities:
Capitalization of content database costs			(4,204	)			(2,349	)			(9,951	)			(5,141	)
Purchases of property and equipment			(3,693	)			(2,221	)			(4,418	)			(3,628	)
Purchases of short-term investments			—				(5,193	)			—				(7,193	)
Proceeds from sale and maturity of short-term investments			—				4,991				—				10,037
Net cash used in investing activities			(7,897	)			(4,772	)			(14,369	)			(5,925	)
Financing activities:
Proceeds from exercise of stock options			7,290				4,858				10,022				5,072
Taxes paid related to net share settlement of stock-based awards			(515	)			—				(515	)			—
Principal payments on debt			—				(20,937	)			—				(23,795	)
Excess tax benefits from stock-based compensation			16,393				3,570				20,449				3,570
Repurchases of common stock			(78,095	)			—				(78,095	)			—
Net cash used in financing activities			(54,927	)			(12,509	)			(48,139	)			(15,153	)
Effect of changes in foreign currency exchange rates on cash and cash equivalents			(4	)			—				23				—
Net increase (decrease) in cash and cash equivalents			(31,244	)			5,751				5,500				36,476
Cash and cash equivalents at beginning of period			102,263				97,666				65,519				66,941
Cash and cash equivalents at end of period		$	71,019			$	103,417			$	71,019			$	103,417
Supplemental disclosures of cash flow information:
Cash paid for interest		$	111			$	476			$	226			$	1,477
Cash paid for income taxes			3,282				5,778				3,557				6,181
Supplemental disclosures of noncash investing and financing activities:
Capitalization of stock-based compensation			9				2				18				3

See accompanying notes to condensed consolidated financial statements

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 June 30, 2011 and the condensed consolidated statements of income and cash flows for the three and six months ended June 30, 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 company’s financial position, results of operations and cash flows for the three and six months ended June 30, 2011 and 2010. The results of operations for the three and six months ended June 30, 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 company’s 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 company’s 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 company’s 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

In 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 company’s 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.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued amended standards requiring comprehensive income to be presented as either a continuous statement of comprehensive income or two separate but consecutive statements. The amendments do not affect the disclosures required regarding comprehensive income. These amendments are to be applied retrospectively for interim and fiscal year periods beginning after December 15, 2011. The adoption of these standards will not impact the company’s financial results or disclosures but will have an impact on the presentation of comprehensive income when adopted.

In May 2011, the FASB issued amended standards related to fair value measurements and disclosures that result in common fair value measurements and disclosures between GAAP and International Financial Reporting Standards. The standards include amendments that clarify the intent behind the application of existing fair value measurements and disclosures and other amendments which change principles or requirements for fair value measurements or disclosures. The requirements of these new standards are to be applied prospectively for interim or annual periods beginning after December 15, 2011. The adoption of these standards is not expected to have a material effect on the company’s financial results or disclosures.

In October 2009, the FASB issued new revenue recognition standards for arrangements with multiple deliverables. The new standards permit entities to use management’s 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 company’s 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):

		June 30,				December 31,
		2011				2010
Cash		$	24,237			$	12,687
Cash equivalents:
Money market funds			46,782				52,832
Total cash and cash equivalents		$	71,019			$	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 company’s cash equivalents at June 30, 2011 and December 31, 2010 were all classified within Level 1. There were no movements between fair value measurement levels of the company’s cash equivalents during the six months ended June 30, 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.

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								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Basic net income per common share:
Net income		$	16,557			$	8,523			$	25,528			$	12,485
Shares used in computation:
Weighted-average common shares outstanding			45,596				42,764				45,484				42,612
Basic net income per common share		$	0.36			$	0.20			$	0.56			$	0.29
Diluted net income per common share:
Net income		$	16,557			$	8,523			$	25,528			$	12,485
Shares used in computation:
Weighted-average common shares outstanding			45,596				42,764				45,484				42,612
Dilutive stock-based awards			4,297				5,251				4,598				5,142
Weighted-average number of diluted common shares			49,893				48,015				50,082				47,754
Diluted net income per common share		$	0.33			$	0.18			$	0.51			$	0.26

The computation of diluted net income per common share for the three and six months ended June 30, 2011 excluded 0.7 million shares as their impact was anti-dilutive. The computation of diluted net income per common share for the three and six months ended June 30, 2010 excluded 0.4 million shares as their impact was anti-dilutive.

4. COMPREHENSIVE INCOME

Comprehensive Income

The components of comprehensive income are as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net income		$	16,557			$	8,523			$	25,528			$	12,485
Changes in unrealized gain on available for sale securities, net			—				18				—				48
Foreign currency translation adjustment			(103	)			—				382				—
Comprehensive income		$	16,454			$	8,541			$	25,910			$	12,533

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 June 30, 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 June 30, 2011.

6. STOCKHOLDERS’ EQUITY

On April 28, 2011, the company’s board of directors authorized the repurchase of up to $125.0 million in shares of the company’s outstanding common stock. The shares 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 company’s existing credit facility. During the six months ended June 30, 2011, the company repurchased approximately 1.2 million shares in a private, non-underwritten transaction with selling stockholders, comprised of the company’s chief executive officer and affiliates of Spectrum Equity V, L.P., for $50.0 million, and repurchased approximately 0.8 million shares in the open market for $28.1 million. These shares were recorded as treasury stock at cost. At June 30, 2011, $46.9 million remained available for repurchases of common stock under this authorization.

7. 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 June 30, 2011, 3.8 million shares were available for stock-based awards under the 2009 Plan.

Stock Options

Stock options granted generally vest over four years. A summary of stock option activity for the six months ended June 30, 2011 is as follows (shares in thousands):

						Weighted
						Average
		Number of				Exercise
		Shares				Price
Outstanding at December 31, 2010			7,792			$	6.07
Granted			315				38.96
Exercised			(1,967	)			5.09
Canceled			(119	)			6.14
Outstanding at June 30, 2011			6,021				8.10
Exercisable at June 30, 2011			4,060				5.37
Vested and expected to vest			5,856				8.11

As of June 30, 2011, the company had $9.4 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 3.4 years. The weighted average remaining contractual life of stock options outstanding at June 30, 2011 was 6.3 years. The total intrinsic values of stock options outstanding and stock options exercisable as of June 30, 2011 were $200.4 million and $146.2 million, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2011 was $65.0 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 six months ended June 30, 2011 and 2010 were $15.24 and $5.43, respectively. The following weighted average assumptions were used in the calculations for the six months ended June 30, 2011 and 2010:

		Six Months Ended
		June 30,
		2011				2010
Expected volatility			42.0	%			40	%
Expected term (in years)			5.0				4.0
Weighted average risk-free interest rate			1.8	%			1.9	%
Weighted average fair value of the underlying common stock		$	38.96			$	16.07
Expected dividends			—				—

Restricted Stock Units

During the six months ended June 30, 2011, the company also granted time-based and performance-based RSUs representing the right to receive one share of the company’s common stock under the 2009 Plan. Time-based RSUs generally vest over three to four years. Performance-based RSUs vest subject to the achievement of certain predetermined performance goals and employment over the requisite service period. For the six months ended June 30, 2011, the number of shares of performance-based RSUs granted was de minimis.

The following table summarizes RSU activity for the six months ended June 30, 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			483				37.05
Vested			(41	)			16.63
Forfeited			(33	)			22.49
Restricted stock units outstanding at June 30, 2011			1,086				28.10

As of June 30, 2011 the company had $23.4 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 3.7 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								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Cost of subscription revenues		$	85			$	49			$	147			$	77
Technology and development			911				490				1,687				887
Marketing and advertising			383				118				708				186
General and administrative			822				605				1,384				1,116
Total stock-based compensation expense		$	2,201			$	1,262			$	3,926			$	2,266

8. INCOME TAXES

The company is subject to income taxes in U.S. and foreign jurisdictions and to continual examination by tax authorities. Significant judgment is required in evaluating the company’s uncertain tax positions and determining its provision for income taxes. The company’s total gross unrecognized tax benefits as of June 30, 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.

9. COMMITMENTS AND CONTINGENCIES

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

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements relating to future events and future performance. All statements other than those that are purely historical may be forward-looking statements. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “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 choices of subscription package;

•

our ability to manage growth, including adding employees and facilities;

•

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 content and technology and the success of our promotional programs and new products;

•

our development of brand awareness;

•

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;

•

fluctuations in our business, including the impact of the television show “Who Do You Think You Are?;”

•

the impact of external market forces;

•

the impact of claims or litigation; and

•

the impact of potential legislation and regulatory changes 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and elsewhere. You should read these factors and the other cautionary statements made in this Quarterly Report as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. All subsequent written or spoken forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

Ancestry.com is the world’s largest online family history resource, with nearly 1.7 million paying subscribers around the world as of June 30, 2011. We offer access on a subscription basis to an extensive collection of billions of historical records that we have digitized, indexed and made available 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”).

Recent Developments

Share Repurchase Program

On April 28, 2011, our board of directors authorized the repurchase of up to $125.0 million in shares of our outstanding common stock. The shares 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 our existing credit facility. During the six months ended June 30 2011, we repurchased approximately 1.2 million shares in a private, non-underwritten transaction with selling stockholders, comprised of our chief executive officer and affiliates of Spectrum Equity V, L.P., for $50.0 million, and we repurchased approximately 0.8 million shares in the open market for $28.1 million. These shares were recorded as treasury stock at cost. At June 30, 2011, $46.9 million remained available for repurchases of common stock under this authorization.

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.

Our key business metrics are presented for the three months ended June 30, 2011, March 31, 2011 and June 30, 2010:

		Three Months Ended
		June 30,				March 31,				June 30,
		2011				2011				2010
Total subscribers at end of quarter			1,672,319				1,615,169				1,310,562
Gross subscriber additions			321,687				424,531				290,589
Monthly churn			4.6	%			3.7	%			4.3	%
Subscriber acquisition cost		$	81.23			$	69.56			$	74.04
Average monthly revenue per subscriber		$	18.88			$	18.05			$	18.02

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, monthly or other), 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								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In thousands)
United States		$	73,296			$	54,110			$	136,970			$	98,514
United Kingdom			11,722				9,965				22,918				19,682
All other countries			11,689				6,469				22,002				11,908
Total subscription revenues		$	96,707			$	70,544			$	181,890			$	130,104

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 products, shipping costs, personnel-related costs of digitization services and genealogical research personnel and credit card processing fees.

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 have hired and plan to hire a significant number of technology and development employees during 2011. In many cases, we have been filling open positions with individuals with more specialized experience than in the past, and we have found that competition for qualified technology and development personnel has increased during the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Due to these factors, we have experienced increases in technology and development personnel-related expenses, and we expect these 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. Media rates increased in the six months ended June 30, 2011 compared to the six months ended June 30, 2010, and we expect to continue to see increases in these rates. 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, including production research. We currently expect the third season of the show will begin to air in the first quarter of 2012. Nevertheless, we can provide no assurance that NBC will air a third season of the show. NBC began re-airing episodes of the second season in July 2011. We do not expect the repeated episodes will have a significant impact on our quarterly or full year results of operations.

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. Due to our continued business growth, we have hired additional personnel to support the expansion. As a result, we expect general and administrative personnel-related expenses to continue to increase for the remainder of 2011.

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, any short-term investments, and other income and expenses, including foreign currency exchange gains and losses.

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

Results of Operations

The following table sets forth our condensed consolidated statements of income as a percentage of revenues for the three and six months ended June 30, 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								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2011				2010				2011				2010
Revenues:
Subscription revenues			95.5	%			94.7	%			94.6	%			93.7	%
Product and other revenues			4.5				5.3				5.4				6.3
Total revenues			100.0				100.0				100.0				100.0
Costs of revenues:
Cost of subscription revenues			13.9				15.1				14.6				16.4
Cost of product and other revenues			1.8				1.7				1.9				2.0
Total cost of revenues			15.7				16.8				16.5				18.4
Gross profit			84.3				83.2				83.5				81.6
Operating expenses:
Technology and development			14.1				13.4				14.5				14.3
Marketing and advertising			29.9				32.9				33.3				33.8
General and administrative			10.0				10.8				10.1				11.4
Amortization of acquired intangible assets			4.2				4.9				4.5				5.3
Total operating expenses			58.2				62.0				62.4				64.8
Income from operations			26.1				21.2				21.1				16.8
Interest and other expense, net			(0.4	)			(2.0	)			(0.2	)			(1.8	)
Income before income taxes			25.7				19.2				20.9				15.0
Income tax expense			(9.4	)			(7.8	)			(7.6	)			(6.0	)
Net income			16.3				11.4				13.3				9.0

Revenues, Cost of Revenues and Gross Profit

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2011				2010				% Change				2011				2010				% Change
		(In thousands)												(In thousands)
Revenues:
Subscription revenues		$	96,707			$	70,544				37.1	%		$	181,890			$	130,104				39.8	%
Product and other revenues			4,601				3,916				17.5				10,446				8,777				19.0
Total revenues			101,308				74,460				36.1				192,336				138,881				38.5
Cost of revenues:
Cost of subscription revenues			14,111				11,228				25.7				27,998				22,729				23.2
Cost of product and other revenues			1,841				1,280				43.8				3,669				2,774				32.3
Total cost of revenues			15,952				12,508				27.5				31,667				25,503				24.2
Gross profit		$	85,356			$	61,952				37.8			$	160,669			$	113,378				41.7
Gross profit percentage			84.3	%			83.2	%							83.5	%			81.6	%

Subscription revenues

For the three months ended June 30, 2011, our subscription revenues increased $26.2 million compared to the three months ended June 30, 2010. The increase was primarily the result of an increase in the number of total subscribers, as well as an increase in average monthly revenue per subscriber on our Ancestry.com Web sites. Net subscriber additions increased due in part to continued marketing efforts, including the airing of NBC’s television show “Who Do You Think You Are?,” offset by the impact of monthly churn. Average monthly revenue per subscriber increased in the three months ended June 30, 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 June 30, 2011 from 30% at June 30, 2010. The percentage of overall subscribers’ packages that are premium packages increased to 46% at June 30, 2011 from 43% at June 30, 2010.

For the six months ended June 30, 2011, our subscription revenues increased $51.8 million compared to the six months ended June 30, 2010. The increase was driven by the same factors that influenced the three-month results.

Product and other revenues

For the three months ended June 30, 2011, our product and other revenues increased $0.7 million compared to the three months ended June 30, 2010. The increase was primarily due to $0.5 million of digitization services revenue from iArchives, which we acquired in the fourth quarter of 2010, and a $0.3 million increase in revenues related to our Family Tree Maker desktop software.

For the six months ended June 30, 2011, our product and other revenues increased $1.7 million compared to the six months ended June 30, 2010. The increase was primarily due to $1.3 million of digitization services revenue from iArchives, which we acquired in the fourth quarter of 2010.

Cost of subscription revenues

For the three months ended June 30, 2011, our cost of subscription revenues increased $2.9 million compared to the three months ended June 30, 2010. The increase was primarily due to an increase of $0.8 million in Web server operating costs partly attributable to greater user traffic volumes, an increase of $0.7 million in our credit card processing fees reflecting higher transaction volumes as a result of growth in total subscribers, an increase of $0.6 million in our personnel-related costs reflecting additional Web hosting support personnel and an increase of $0.4 million in content database amortization due to continued investment in content database costs.

For the six months ended June 30, 2011, our cost of subscription revenues increased $5.3 million compared to the six months ended June 30, 2010. The increase was primarily due to an increase of $1.6 million in our credit card processing fees reflecting higher transaction volumes as a result of growth in total subscribers, an increase of $1.5 million in Web server operating costs partly attributable to greater user traffic volumes, an increase of $1.0 million in our personnel-related costs reflecting additional Web hosting support personnel and an increase of $0.8 million in content database amortization due to continued investment in content database costs.

Cost of product and other revenues

For the three months ended June 30, 2011, our cost of product and other revenues increased $0.6 million compared to the three months ended June 30, 2010. For the six months ended June 30, 2011, our cost of product and other revenues increased $0.9 million compared to the six months ended June 30, 2010. These increases were primarily due to the costs associated with iArchives’ digitization services and ProGenealogists’ genealogical research, both of which businesses were acquired in the second half of 2010.

Operating Expenses

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2011				2010				% Change				2011				2010				% Change
		(In thousands)												(In thousands)
Operating expenses:
Technology and development		$	14,242			$	9,992				42.5	%		$	27,910			$	19,919				40.1	%
Marketing and advertising			30,250				24,490				23.5				64,058				46,936				36.5
General and administrative			10,111				8,032				25.9				19,468				15,774				23.4
Amortization of acquired intangible assets			4,297				3,679				16.8				8,567				7,358				16.4
Total operating expenses		$	58,900			$	46,193				27.5			$	120,003			$	89,987				33.4

Technology and development

For the three months ended June 30, 2011, our technology and development expenses increased $4.3 million compared to the three months ended June 30, 2010. The increase was primarily the result of an increase in personnel-related expenses of $3.1 million primarily resulting from a 20% increase in the average number of technology and development personnel during the three months ended June 30, 2011 compared to the three months ended June 30, 2010. In many cases, we have been filling open positions with individuals with more specialized experience than in the past, and have found that competition for qualified technology and development personnel has increased during the three months ended June 30, 2011 compared to the three months ended June 30, 2010. In addition, costs of third-party service providers increased $0.8 million primarily due to incremental outsourced product quality assurance services and research and development costs for new products and features.

For the six months ended June 30, 2011, our technology and development expenses increased $8.0 million compared to the six months ended June 30, 2010. The increase was primarily the result of an increase in personnel-related expenses of $6.2 million resulting from a 21% increase in the average number of technology and development personnel during the six months ended June 30, 2011 compared to the six months ended June 30, 2010. In many cases, we have been filling open positions with individuals with more experience than in the past, and have found that competition for qualified technology and development personnel has increased during the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Further, costs of third-party service providers increased $1.1 million primarily due to incremental outsourced product quality assurance services and research and development costs for new products and features. In addition, depreciation expense related to technology and development increased $0.3 million.

Marketing and advertising

For the three months ended June 30, 2011, our marketing and advertising expenses increased $5.8 million compared to the three months ended June 30, 2010. The increase was primarily due to an increase of $5.5 million in television ad campaigns primarily resulting from our expanded marketing efforts in both domestic and international markets and increased advertising and product integration costs incurred in connection with the second season of “Who Do You Think You Are?,” which reflected higher rates compared to the first season of the show. In addition, paid search increased $1.0 million and personnel-related costs increased $1.0 million primarily due to a 17% increase in the average number of marketing and advertising personnel during the three months ended June 30, 2011 compared to the three months ended June 30, 2010. These increases were partially offset by reductions of $1.7 million in online display advertising and affiliate expenses.

For the six months ended June 30, 2011, our marketing and advertising expenses increased $17.1 million compared to the six months ended June 30, 2010. The increase was primarily due to an increase of $13.5 million in television ad campaigns, an increase of $3.6 million in paid search, an increase of $1.7 million in sponsorship expense and an increase of $0.7 million in print advertising. These increases primarily resulted from our expanded marketing efforts in both domestic and international markets and increased advertising and product integration costs incurred in connection with the second season of “Who Do You Think You Are?,” which reflected higher rates compared to the first season of the show. In addition, personnel-related costs increased $2.2 million primarily due to a 16% increase in the average number of marketing and advertising personnel during the six months ended June 30, 2011 compared to the six months ended June 30, 2010. These increases were partially offset by reductions of $4.7 million in online display advertising and affiliate expenses.

General and administrative

For the three months ended June 30, 2011, our general and administrative expenses increased $2.1 million compared to the three months ended June 30, 2010. The increase was primarily the result of an increase of $1.4 million in personnel-related costs resulting from a 15% increase in the average number of general and administrative personnel during the three months ended June 30, 2011 as compared the three months ended June 30, 2010. In addition, we incurred $0.4 million in costs related to the registration of securities in an underwritten secondary offering of our common stock on behalf of certain existing stockholders.

For the six months ended June 30, 2011, our general and administrative expenses increased $3.7 million compared to the six months ended June 30, 2010. The increase was primarily the result of an increase of $1.8 million in personnel-related costs resulting from a 14% increase in the average number of general and administrative personnel during the six months June 30, 2011 as compared to the six months ended June 30, 2010. In addition, certain administrative expenses increased $1.5 million and we incurred $0.4 million in costs related to the registration of securities in the underwritten secondary offering of our common stock on behalf of certain existing stockholders.

Amortization of acquired intangible assets

For the three months ended June 30, 2011, our amortization of acquired intangible assets increased $0.6 million compared to the three months ended June 30, 2010. For the six months ended June 30, 2011, our amortization of acquired intangible assets increased $1.2 million compared to the six months ended June 30, 2010. These increases were 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.

Interest and Other Expense, Net and Income Tax Expense

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2011				2010				% Change				2011				2010				% Change
		(In thousands)												(In thousands)
Interest and other expense, net		$	(429	)		$	(1,429	)			(70.0	)%		$	(536	)		$	(2,573	)			(79.2	)%
Income tax expense			(9,470	)			(5,807	)			63.1				(14,602	)			(8,333	)			75.2
Other data:
Effective tax rate			36.4	%			40.5	%							36.4	%			40.0	%

Interest and other expense, net

For the three months ended June 30, 2011, our interest and other expense, net decreased $1.0 million compared to the three months ended June 30, 2010. For the six months ended June 30, 2011, our interest and other expense, net decreased $2.0 million compared to the six months ended June 30, 2010. These decreases were primarily due to a decrease in interest expense reflecting our having no long-term debt outstanding at June 30, 2011.

Income tax expense

Our effective income tax rate decreased by 4.1 percentage points for the three months ended June 30, 2011 compared to the three months ended June 30, 2010. Our effective income tax rate decreased by 3.6 percentage points for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. The decreases were primarily due to our recognizing research and development tax credits and tax benefits resulting from stock-based compensation expense related to disqualifying dispositions of incentive stock options in the three and six months ended June 30, 2011. In addition, state effective income tax rates decreased in the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010 primarily due to changes in the state tax apportionment factors resulting from recently legislated changes.

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 and six months ended June 30, 2011 and 2010, our net income, adjusted EBITDA and free cash flow were as follows:

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2011				2010				% Change				2011				2010				% Change
		(In thousands)												(In thousands)
Net income		$	16,557			$	8,523				94.3	%		$	25,528			$	12,485				104.5	%
Adjusted EBITDA(1)			38,421				25,270				52.0				64,026				42,283				51.4
Free cash flow(2)			27,131				14,446				87.8				45,874				25,856				77.4

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.

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								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In thousands)
Reconciliation of adjusted EBITDA and free cash flow to net income:
Net income		$	16,557			$	8,523			$	25,528			$	12,485
Interest and other expense, net			429				1,429				536				2,573
Income tax expense			9,470				5,807				14,602				8,333
Depreciation			3,188				2,740				6,452				5,604
Amortization			6,576				5,509				12,982				11,022
Stock-based compensation expense			2,201				1,262				3,926				2,266
Adjusted EBITDA		$	38,421			$	25,270			$	64,026			$	42,283
Capitalization of content database costs			(4,204	)			(2,349	)			(9,951	)			(5,141	)
Purchases of property and equipment			(3,693	)			(2,221	)			(4,418	)			(3,628	)
Cash paid for interest			(111	)			(476	)			(226	)			(1,477	)
Cash paid for income taxes			(3,282	)			(5,778	)			(3,557	)			(6,181	)
Free cash flow		$	27,131			$	14,446			$	45,874			$	25,856

Liquidity and Capital Resources

As of June 30, 2011, we had $171.0 million of total liquidity, comprised of $71.0 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 source of cash in the periods presented in this Quarterly Report (described in further detail below) was net cash provided by operating activities.

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 and Web hosting costs. We also use cash for other purposes including repurchases of shares of our common stock, business acquisitions and expansion of new markets and businesses. During 2010, we used cash to repay our prior credit facility. 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 current $125.0 million stock repurchase authorization, of which $46.9 million remains available for repurchases);

•

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 have also increased our investments in content databases and property and equipment in the first half of 2011 compared to the first half of 2010, and we expect to continue to increase our investments in these categories in the remainder of 2011 compared to 2010. We expect cash on hand, cash provided by operating activities 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.

Summary cash flow information for cash and cash equivalents and short-term investments for the three and six months ended June 30, 2011 and 2010 is set forth below. For the purpose of this cash flow analysis, we have included highly liquid short-term investments, which we consider readily convertible to cash on a short-term basis. We consider cash, cash equivalents and short-term investments in evaluating our overall cash position.

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2011				2010				% Change				2011				2010				% Change
		(In thousands)												(In thousands)
Net cash and cash equivalents and short-term investments provided by (used in):
Operating activities		$	31,584			$	23,032				37	%		$	67,985			$	57,554				18	%
Investing activities			(7,897	)			(4,552	)			73				(14,369	)			(8,721	)			65
Financing activities			(54,927	)			(12,509	)			339				(48,139	)			(15,153	)			218
Effect of changes in foreign currency exchange rates on cash and cash equivalents and short-term investments			(4	)			—				N/M				23				—				N/M
Increase (decrease) in cash and cash equivalents and short-term investments		$	(31,244	)		$	5,971				(623	)		$	5,500			$	33,680				(84	)

Cash Flow Analysis

Net cash provided by operating activities

For the three months ended June 30, 2011, net cash provided by operating activities was $31.6 million, an increase of $8.6 million compared to the three months ended June 30, 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 $16.6 million for the three months ended June 30, 2011, an increase of $8.0 million over the three months ended June 30, 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 $10.0 million, an increase of $1.4 million over the three months ended June 30, 2010. Our net cash provided as a result of changes in accounts payable and other liabilities and excess tax benefits from stock-based compensation totaled $8.2 million, an increase of $7.5 million over the three months ended June 30, 2010 primarily due to the increase in employee payroll taxes that we withheld as a result of the net share settlement of stock-based awards and increased payables resulting from the increase in operating expenses in the three months ended June 30, 2011. Net cash used as a result of changes in income tax receivable increased $8.7 million primarily due to stock-based award benefits in the three months ended June 30, 2011, partially offset by income tax expense. The change in our deferred revenues, which represents cash received from subscribers but not yet recognized in revenues, totaled $5.1 million, an increase of $0.4 million over the three months ended June 30, 2010.

For the six months ended June 30, 2011, net cash provided by operating activities was $68.0 million, an increase of $10.4 million compared to the six months ended June 30, 2010. Net income was $25.5 million for the six months ended June 30, 2011, an increase of $13.0 million over the six months ended June 30, 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 $20.5 million, an increase of $3.4 million over the six months ended June 30, 2010. Our net cash provided as a result of changes in accounts payable and other liabilities and excess tax benefits from stock-based compensation totaled $2.7 million, a decrease of $1.9 million from the six months ended June 30, 2010. Net cash used as a result of changes in income tax receivable increased $8.8 million primarily due to stock-based award benefits in the six months ended June 30, 2011, partially offset by income tax expense. Our net cash provided by the changes in other operating assets totaled $1.6 million, a decrease of $1.1 million from cash provided by changes in these assets of $2.7 million for the six months ended June 30, 2010. The change in our deferred revenues, which represents cash received from subscribers but not yet recognized in revenues, totaled $24.9 million, an increase of $5.8 million over the six months ended June 30, 2010. This increase primarily reflects subscriber growth and subscription package mix during the six months ended June 30, 2011. 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 June 30, 2011, net cash used in investing activities totaled $7.9 million, an increase of $3.3 million compared to the three months ended June 30, 2010. Net cash used in investing activities consisted of investments in content databases and property and equipment for both three month periods. For the three months ended June 30, 2011 compared to the three months ended June 30, 2010 investments in content databases and property and equipment increased $1.8 million and $1.5 million, respectively.

For the six months ended June 30, 2011, net cash used in investing activities totaled $14.4 million, an increase of $5.6 million compared to the six months ended June 30, 2010. Net cash used in investing activities consisted of investments in content databases and property and equipment for both six month periods. For the six months ended June 30, 2011 compared to the six months ended June 30, 2010 investments in content databases and property and equipment increased $4.8 million and $0.8 million, respectively. We increased our investment in content databases primarily through increased content acquisitions of our core content (i.e., census and vital records) in the first half of 2011 and second half of 2010.

Net cash used in financing activities

For the three months ended June 30, 2011, net cash used in financing activities totaled $54.9 million, an increase of $42.4 million compared to $12.5 million in the three months ended June 30, 2010. Net cash used in financing activities consisted primarily of repurchases of shares of our common stock of $78.1 million, which was partially offset by an increase in proceeds from stock option exercises of $2.4 million and an increase in excess tax benefits from stock-based compensation of $12.8 million. In the three months ended June 30, 2010, net cash used in financing activities included $20.9 million of principal payments on long-term debt, which we did not have outstanding at June 30, 2011.

For the six months ended June 30, 2011, net cash used in financing activities totaled $48.1 million, an increase of $33.0 million compared to $15.2 million in the six months ended June 30, 2010. Net cash used in financing activities consisted primarily of repurchases of shares of our common stock of $78.1 million, which was partially offset by an increase in proceeds from stock option exercises of $5.0 million and an increase in excess tax benefits from stock-based compensation of $16.9 million. In the six months ended June 30, 2010, net cash used in financing activities included $23.8 million of principal payments on long-term debt, which we did not have outstanding at June 30, 2011.

Contractual Obligations

In June 2011, we entered into a lease to relocate our San Francisco, California office to a new office space beginning in 2012. The new space is significantly larger than our current office space in San Francisco and has rent payments totaling $15.6 million through 2019. The new lease will be accounted for as an operating lease and we will recognize rent expense on a straight line basis beginning with our occupation of the space, expected to begin in May 2012. This new lease will increase total minimum annual rental payments as disclosed in the December 31, 2010 Annual Report by the following amounts:

						Payments Due by Period
						Less than				1-3				4-5				After
		Total				1 Year				Years				Years				5 Years
		(In thousands)
Operating leases		$	15,597			$	—			$	2,839			$	4,250			$	8,508