News Column

OPOWER, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 14, 2014

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this document and the Risk Factors included in Item 1A of Part II of this Quarterly Report on Form 10-Q. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law. Overview Opower is a leading provider of cloud-based software. Utilities use our software platform to deliver key customer-facing applications that reduce energy demand and improve customer perception of the utility. Our software analyzes energy data and presents personalized insights to consumers in order to motivate reductions in energy consumption. These reductions are valued as a source of energy much like a conventional power plant. We believe we are poised to transform the way the utility industry meets energy demand. Our software platform helps redefine the relationship between utilities and their customers, and we have a track record of motivating consumers to take action. Our growth has been fueled by our focus on big data software architecture, user experience and, above all, scalable results. We offer a growing set of integrated software solutions, Opower Energy Efficiency, Opower Customer Engagement, Opower Demand Response and Opower Thermostat Management. As of December 31, 2013, we had 93 customers in eight countries. Our customers include 27 of the 50 largest electric utilities in the United States, including Commonwealth Edison, Duke Energy, First Energy, National Grid, Pacific Gas & Electric, Southern California Edison and Xcel Energy, as well as E.ON, Electricitie de France and Energy Australia internationally. We generate revenue primarily from subscription fees from utilities for use on our platform, generally based upon the number of households and businesses served and the solutions selected. Although the number of households and businesses has some impact on our revenue, the number of households or businesses served is not directly correlated with revenue. The price we receive per household or business varies for each customer. For this reason, we do not treat the number of households or businesses served as one of our key performance indicators for our business. However, we do monitor this metric to understand the general adoption of our solutions by our customers. We deliver our solutions to utilities through our cloud-based platform. New customers typically contract with us for 12 to 36 months and renew for one year or more. The weighted-average contract term across contracts sold in 2013 was 24.5 months.



Opower was formed in 2007. We currently have four major product solutions.

In 2007, we launched our first solution, Energy Efficiency. This solution

focuses on reducing energy consumption through a data analytics-driven,

behavioral science-informed program.



In 2010, we started offering Customer Engagement solutions, which provide

utilities with a web application that delivers user-friendly energy

consumption and billing information. This solution helps households and

businesses make informed decisions, and thereby save money and energy. It

offers utilities a better way to engage their customers, and thereby

strengthen their brand.



In 2012, we started offering Thermostat Management, which is designed to

interact with third-party hardware and to deliver engaging user

experiences while also creating energy efficiency and demand response

opportunities for our utility customers.



In 2013, we launched Demand Response, aimed at reducing peak demand for

energy while not requiring any hardware installations to function. 19



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We believe both of these newest solutions, Thermostat Management and Demand Response, offer significant growth potential, but both are still in a nascent stage with an immaterial impact on our revenue to date.

Our growth is driven by acquiring new customers and expanding with existing customers. We continue to acquire new customers in the United States and internationally. Our number of utility customers has increased from 63, of which 61 resided in the United States, as of December 31, 2011, to 93 customers in 8 countries as of December 31, 2013. We have expanded with existing customers by cross-selling different solutions and adding households and businesses that use our platform. The number of households and businesses on our platform has grown from 1.4 million at December 31, 2010 to 32.1 million at December 31, 2013. Our investments have yielded significant revenue growth over the past few years. For the years ended December 31, 2011, 2012 and 2013, our revenue was $28.7 million, $51.8 million and $88.7 million, respectively, and for the six months ended June 30, 2013 and 2014, our revenue was $40.3 million and $59.8 million, respectively. Our net losses for the years ended December 31, 2011, 2012 and 2013 were $21.3 million, $12.3 million and $14.2 million, respectively, and our net losses for the six months ended June 30, 2013 and 2014 were $4.7 million and $21.8 million, respectively. We have grown from 162 employees as of December 31, 2010 to 545 employees as of June 30, 2014.



Key Factors Affecting Our Performance

Investing in Growth. We will continue to focus on long-term growth. We believe that our market opportunity is large and underpenetrated and we will continue to invest significantly in sales and marketing to grow our customer base, expand with existing customers, grow internationally and drive additional revenue. We also expect to invest in research and development to enhance our platform and develop complementary solutions. To support our expected growth and our transition to a public company, we plan to invest in other operational and administrative functions. We believe that our sales and marketing, research and development and general and administrative costs will decrease as a percentage of revenue in the long term as we are able to reach economies of scale. With this increased operating leverage, we expect our gross and operating margins to increase in the long term. However, in the short term, we intend to focus on the growth of the business and expect our total operating expenses to increase, and have a short-term negative impact on our adjusted EBITDA and operating margin. Adding New Utility Customers. Our customer base is a key indicator of our market penetration, growth and future revenue. We believe that we are positioned to grow significantly for many years to come. With 93 customers as of December 31, 2013, we believe we have a substantial opportunity to expand our number of utility customers in the coming years. The number of new customers signed may vary period to period for several reasons, including the long length and general inconsistency of our sales cycle. Expanding with and Cross-Selling to Existing Customers. Our existing customers continue to represent a large opportunity for us to expand to more households and businesses and to cross-sell additional solutions. 20



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Key Performance Indicators for Our Business

We regularly review a number of metrics to measure our performance, formulate financial projections, evaluate growth trends and determine business strategy. In addition to the metrics discussed below, we also review gross margin and operating expenses, which we discuss in the "Basis of Presentation" section. Three Months Ended Six Months Ended June 30, June 30, 2013 2014 2013 2014 (Dollars in thousands) (Dollars in thousands) Financial Metrics: Revenues $ 21,229$ 31,247$ 40,252$ 59,820 Period-over-period percentage increase 47 % 49 % Adjusted EBITDA(1) $ (2 ) $ (3,738 )$ (1,785 )$ (8,062 )



(1) Adjusted EBITDA is not calculated in accordance with GAAP. A reconciliation

of this non-GAAP measure to the most directly comparable GAAP-based measure

along with a summary of the definition and its material limitations are

included in "-Non-GAAP Financial Measures."

Non-GAAP Financial Measures

To provide investors with additional information regarding our financial results, we have disclosed adjusted EBITDA, a financial measure that is not calculated in accordance with GAAP. We define adjusted EBITDA as net loss adjusted to exclude our income tax provision, other income (expense), including interest, depreciation and amortization and stock-based compensation.

We disclose adjusted EBITDA because it is a key measure used by our management to evaluate our operating performance, generate future operating plans and make strategic decisions. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for the related financial information prepared in accordance with GAAP. Some of these limitations are:



although depreciation and amortization are non-cash charges, the assets

being depreciated and amortized may have to be replaced in the future and

adjusted EBITDA does not reflect cash capital expenditure requirements for

such replacements or for new capital expenditure requirements;



adjusted EBITDA does not reflect changes in, or cash requirements for, our

working capital needs;



adjusted EBITDA does not include the impact of stock-based compensation;

adjusted EBITDA does not reflect income tax payments that may represent a

reduction in cash available to us; and other companies, including companies in our industry, may calculate



adjusted EBITDA differently or not at all, which reduces its usefulness as

a comparative measure.

We believe it is useful to exclude non-cash charges, such as depreciation and amortization and stock-based compensation, from our adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. Because of the aforementioned limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net loss, cash flow metrics and our financial results presented in accordance 21



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with GAAP. The following table presents a reconciliation of net loss, the most directly comparable financial measure as measured in accordance with GAAP, to adjusted EBITDA for each of the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2013 2014 2013 2014 (In thousands) (In thousands) Reconciliation of Net Loss to Adjusted EBITDA: Net loss $ (1,996 )$ (14,805 )$ (4,709 )$ (21,785 ) Provision for (benefit from) income taxes 26 (28 ) 33 16 Other (income) expense, including interest 640 177 528 (220 ) Depreciation and amortization 898 1,642 1,621 2,989 Stock-based compensation 430 9,276 742 10,938 Adjusted EBITDA $ (2 )$ (3,738 )$ (1,785 )$ (8,062 ) Basis of Presentation Revenue We offer subscriptions to our cloud-based data analytics platform. We derive our revenue from fees for these subscriptions. Subscription fees primarily pay for the ongoing integration of utility data into our software platform and the analysis and presentation of this data to energy consumers. We recognize revenue on our subscription fees ratably over the contract term beginning on the date the service is available to the customer, which typically coincides with website launch or first report generation to households and businesses. Our fees are non-refundable once billed, are generally collected in advance of service delivery, and our contracts typically have a term of one to five years. We record amounts that have been billed as deferred revenue and these amounts are recognized evenly over the contract term. Because payment terms may be quarterly for some customers, the annualized value of the orders we enter into with our customers will not be completely reflected in deferred revenue at any single point in time. Accordingly, we do not believe that change in deferred revenue is an accurate indicator of future revenues for a given period of time. Setup fees, which tend not to provide stand-alone value, are recognized over the expected life of the customer relationship. We will continue to evaluate the length of the amortization period of the setup fees as we gain more experience with customers.



Cost of Revenue

Cost of revenue generally consists of information services necessary to perform data analysis, the costs of data center capacity, employee-related expenses, including salaries, benefits and stock-based compensation related to implementing, operating and servicing our internal applications, channel delivery fees, which includes printing and mailing for delivery of reports to utility customers, and amortization of internally capitalized software that delivers our services. In addition, we allocate a portion of overhead costs, including rent, information technology and employee benefit costs, to cost of revenue. Our cost of revenue is expensed as incurred and includes amortization of capitalized software. However, the related revenue for delivery of our services is deferred until commencement of delivery services and is recognized ratably over the related subscription term. Therefore, costs associated with delivering these services are not always expensed in the same period that revenue is recognized. Customer costs tend to be higher in the initial subscription year of a program based on the effort required to develop system integrations and match customer data. 22



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Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses, stock-based compensation, travel and commissions. They also include the cost of advertising, online marketing, promotional events, corporate communications, product marketing and other brand-building activities. We expense sales commissions at the time of contract signing. We intend to continue to invest in sales and marketing activities to expand our business domestically and internationally. We expect to hire additional sales personnel in the United States and internationally. We also intend to expand our sales offices globally, including in the United Kingdom, Singapore and Japan. As we scale our sales and marketing activities in the short to medium term, we expect these expenses to increase in absolute dollars as well as a percentage of revenue. Research and Development. Research and development costs consist primarily of personnel and related expenses, including salaries, benefits and stock-based compensation, research and development consulting fees and allocated overhead. Development costs other than those qualifying for capitalization as internally developed software are expensed as incurred. Our research efforts focus on improving our understanding of the way in which energy consumers use energy and the ways in which the behaviors of those users can be influenced. Additionally, development efforts have focused on creating a scalable data analytics platform with the capability of capturing, analyzing and reporting on large amounts of data captured in small intervals. We also continue to focus development efforts on adding new features and applications, and enhancing the functionality of our platform. In the short term, we expect research and development expenses to increase in absolute dollars as well as on a percentage of revenue basis as we add new platform functionality and expand our system infrastructure. General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for accounting, executive, finance, human resources, legal, information technology and security and recruiting staff, including salaries, benefits, bonuses, stock-based compensation, professional fees, insurance premiums and other supporting overhead costs not allocated to other departments. We expect our general and administrative expenses to increase as we continue to expand our operations, hire additional personnel and transition from a private to a public company. As we transition to being a public entity, we expect to incur additional expense related to increased accounting and auditing services, increased outside counsel assistance, increased compliance requirements including filings with the Securities and Exchange Commission, and enhancing our internal control environment. Other Income and Expenses. Other income and expenses consist primarily of interest income, sublease income, interest expense and gains and losses related to foreign currency transactions. Interest income is income received primarily from deposits of cash and cash equivalents. Sublease income is related to an office sublease arrangement. Interest expense relates to interest incurred related to capital equipment leasing and on our note payable, which was converted to shares of common stock upon the closing of our initial public offering of common stock (the "IPO"). Foreign exchange gains and losses relate to transactions denominated in currencies other than the functional currency of our entities. 23



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Results of Operations

Comparison of the Three Months Ended June 30, 2013 and 2014

The following tables set forth selected consolidated statement of operations data and such data as a percentage of total revenue.

Three Months Ended June 30, 2013 2014 (In thousands) Consolidated Statements of Operations Data: Revenue $ 21,229$ 31,247 Cost of revenue(1) 7,320 10,773 Gross profit 13,909 20,474 Operating expenses(1) Sales and marketing 7,638



17,379

Research and development 6,112



12,200

General and administrative 1,489



5,551

Total operating expenses 15,239



35,130

Operating loss (1,330 )



(14,656 )

Other income (expense), net (640 )



(177 )

Loss before income taxes (1,970 )



(14,833 )

Provision for (benefit from) income taxes 26

(28 ) Net loss $ (1,996 )$ (14,805 )



(1) Stock-based compensation was allocated as follows:

Three Months Ended June 30, 2013 2014 (In thousands) Cost of revenue $ 38$ 534 Sales and marketing 172 4,226 Research and development 171 2,596 General and administrative 49 1,920 Total stock-based compensation $ 430$ 9,276 24



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Table of Contents Three Months Ended June 30, 2013 2014 Percentage of Revenue: Cost of revenue 34 % 34 % Gross profit 66 % 66 % Operating expenses Sales and marketing 36 % 56 % Research and development 29 % 39 % General and administrative 7 % 18 % Total operating expenses 72 % 113 % Operating loss -6 % -47 % Other income (expense), net -3 % -1 % Loss before income taxes -9 % -48 % Provision for (benefit from) income taxes 0 % 0 % Net loss -9 % -48 % Revenue Three Months Ended June 30, 2013 2014 $ Change % Change (Dollars in thousands) Revenue $ 21,229$ 31,247$ 10,018 47 % Revenue increased as a result of the addition of new customers and increased customer penetration as compared to the same period in the prior year. Of the $10.0 million increase in revenue, expansions with existing customers contributed $7.4 million and new customers contributed $2.6 million to revenue for the three months ended June 30, 2014. We increased customer penetration through expanding the number of households and businesses on previously deployed solutions and cross selling additional products to existing customers. International revenue was 9% and 14% of revenue for the three months ended June 30, 2013 and 2014, respectively. We expect international revenue to continue to increase as a percentage of revenue going forward as we continue to expand our international sales presence.



Cost of Revenue, Gross Profit and Gross Margin

Three Months Ended June 30, 2013 2014 $ Change % Change (Dollars in thousands) Cost of revenue $ 7,320$ 10,773$ 3,453 47 % Gross profit 13,909 20,474 $ 6,565 47 % Gross margin 66 % 66 % Employee compensation and related costs increased by $1.3 million as our headcount increased from June 30, 2013 to June 30, 2014. These new employees were primarily focused on implementing and delivering our services. Cost of revenue increased by an additional $1.3 million due to a higher volume of reports to utility customers combined with a related increased cost of delivery. The amortization of capitalized internal-use software costs increased by $0.3 million due to continued investment in our software products. We expect postage and delivery costs to decrease as a percentage of revenue as we shift toward digital channels thereby increasing our gross margin in the long term. 25



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Table of Contents Sales and Marketing Three Months Ended June 30, 2013 2014 $ Change % Change (Dollars in thousands) Sales and marketing $ 7,638$ 17,379$ 9,741 128 % Percentage of revenue 36 % 56 % The increase in sales and marketing expense was primarily attributable to a $7.6 million increase in personnel-related costs, mainly driven by an increase in employee headcount and recognition of stock-based compensation expense. From June 30, 2013 to June 30, 2014, the headcount of our sales and marketing staff increased, which drove a $3.5 million increase in salary and related expenses. Stock-based compensation expense increased $4.1 million primarily related to the recognition of compensation cost for the performance-based restricted stock units in connection with the IPO. Costs related to information technology and rent, market and regulatory consulting as well as customer relationship management software expenses further increased sales and marketing expenses by $0.9 million in the three months ended June 30, 2014. We also increased spending on sales and marketing-related travel and marketing events by $0.9 million in the three months ended June 30, 2014. We expect sales and marketing expenses to increase in absolute dollars in the near to medium term, as we continue to increase the size of the sales and marketing staff both domestically and internationally. Additionally, we expect non-headcount driven marketing expenses will increase as we attempt to increase brand awareness and sponsor additional marketing events with the aim of attracting new customers and expanding our footprint with existing customers. Research and Development Three Months Ended June 30, 2013 2014 $ Change % Change (Dollars in thousands) Research and development $ 6,112$ 12,200$ 6,088 100 % Percentage of revenue 29 % 39 % The increase in research and development expense was primarily attributable to a $5.3 million increase in personnel-related costs, mainly driven by an increase in employee headcount and recognition of stock-based compensation expense. From June 30, 2013 to June 30, 2014, the headcount of our research and development staff increased, which drove a $2.9 million increase in salary and related expenses. Stock-based compensation expense increased $2.4 million primarily related to the recognition of compensation cost for the performance-based restricted stock units in connection with the IPO. Increased travel, information technology and rent, as well as development and integrated software, further increased expenses by $0.3 million. We expect research and development expenses will increase in absolute dollars as we continue to invest in new product capabilities and focus on developing our products for international markets, which may involve different requirements than domestic markets. General and Administrative Three Months Ended June 30, 2013 2014 $ Change % Change (Dollars in thousands) General and administrative $ 1,489$ 5,551$ 4,062 273 % Percentage of revenue 7 % 18 % 26



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The increase in general and administrative expense was primarily attributable to a $3.4 million increase in personnel-related costs, mainly driven by an increase in employee headcount and recognition of stock-based compensation expense. From June 30, 2013 to June 30, 2014, the headcount of our general and administrative staff increased, which drove a $1.5 million increase in salary and related expenses. Stock-based compensation expense increased $1.9 million primarily related to the recognition of compensation cost for the performance-based restricted stock units in connection with the IPO. Financial services and consultants combined to increase expenses by $0.4 million in the three months ended June 30, 2014. We expect general and administrative expenses will continue to grow in absolute dollars as we continue to invest in our infrastructure with a greater number of employees. Additionally, general and administrative expenses are likely to increase further related to costs necessary to operate as a public company. Other Income (Expense), Net Three Months Ended June 30, 2013 2014 $ Change % Change (Dollars in thousands) Other income (expense) $ (640 )$ (177 )$ 463 -72 % Percentage of revenue -3 % -1 % For the three months ended June 30, 2014, other income (expense), net, increased primarily as a result of a decrease in foreign currency losses of $0.4 million and rental income of $0.1 million related to an office sublease agreement executed in the third quarter of 2013.



Comparison of the Six Months Ended June 30, 2013 and 2014

The following tables set forth selected consolidated statement of operations data and such data as a percentage of total revenue.

Six Months Ended June 30, 2013 2014 (In thousands) Consolidated Statements of Operations Data: Revenue $ 40,252$ 59,820 Cost of revenue(1) 15,269 20,708 Gross profit 24,983 39,112 Operating expenses(1) Sales and marketing 14,224



29,378

Research and development 11,845



22,954

General and administrative 3,062



8,769

Total operating expenses 29,131



61,101

Operating loss (4,148 )



(21,989 )

Other income (expense), net (528 )



220

Loss before income taxes (4,676 )



(21,769 )

Provision for income taxes 33 16 Net loss $ (4,709 )$ (21,785 )



(1) Stock-based compensation was allocated as follows:

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Table of Contents Six Months Ended June 30, 2013 2014 (In thousands) Cost of revenue $ 66$ 613 Sales and marketing 256 4,975 Research and development 349 2,893 General and administrative 71 2,457 Total stock-based compensation $ 742$ 10,938 Six Months Ended June 30, 2013 2014 Percentage of Revenue: Cost of revenue 38 % 35 % Gross profit 62 % 65 % Operating expenses Sales and marketing 35 % 49 % Research and development 29 % 38 % General and administrative 8 % 15 % Total operating expenses 72 % 102 % Operating loss -10 % -37 % Other income (expense), net -1 % 0 % Loss before income taxes -11 % -37 % Provision for income taxes 0 % 0 % Net loss -11 % -37 % Revenue Six Months Ended June 30, 2013 2014 $ Change % Change (Dollars in thousands) Revenue $ 40,252$ 59,820$ 19,568 49 % Revenue increased $19.6 million as a result of the addition of new customers and increased customer penetration as compared to the same period in the prior year. Expansions with existing customers contributed $13.6 million and new customers contributed $6.0 million to revenue for the six months ended June 30, 2014. We increased customer penetration through expanding the number of households and businesses on previously deployed solutions and cross selling additional products to existing customers. International revenue was 8% and 14% of revenue for the six months ended June 30, 2013 and 2014, respectively. We expect international revenue to continue to increase as a percentage of revenue going forward as we continue to expand our international sales presence.



Cost of Revenue, Gross Profit and Gross Margin

Six Months Ended June 30, 2013 2014 $ Change % Change (Dollars in thousands) Cost of revenue $ 15,269$ 20,708$ 5,439 36 % Gross profit 24,983 39,112 $ 14,129 57 % Gross margin 62 % 65 % 28



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Employee compensation and related costs increased by $2.3 million as our headcount increased from June 30, 2013 to June 30, 2014. These new employees were primarily focused on implementing and delivering our services. Cost of revenue increased by an additional $1.3 million due to a higher volume of reports to utility customers combined with an increased cost of delivery. The amortization of capitalized internal-use software costs increased by $0.7 million due to continued investment in our software products. Costs related to a user conference in February 2014 resulted in an increase to cost of revenue of $0.4 million for the six months ended June 30, 2014. Gross margin was negatively impacted in the six months ended June 30, 2013 primarily due to increased costs related to home energy reports delivered by the U.S. Postal Service. In January 2013, the U.S. Postal Service determined that these reports should be charged first class postage rates rather than standard mail rates, thereby increasing our postage cost. A subsequent modification to our home energy reports allowed us to return to standard postage rates during the third quarter of 2013. We expect postage and delivery costs to further decrease as a percentage of revenue as we shift toward digital channels thereby increasing our gross margin in the long term. Sales and Marketing Six Months Ended June 30, 2013 2014 $ Change % Change (Dollars in thousands) Sales and marketing $ 14,224$ 29,378$ 15,154 107 % Percentage of revenue 35 % 49 % The increase in sales and marketing expense was primarily attributable to an $11.3 million increase in personnel-related costs, mainly driven by an increase in employee headcount and recognition of stock-based compensation expense. From June 30, 2013 to June 30, 2014, the headcount of our sales and marketing staff increased, which drove a $6.6 million increase in salary and related expenses. Stock-based compensation expense increased $4.7 million primarily related to the recognition of compensation cost for the performance-based restricted stock units in connection with the IPO. Costs related to information technology and rent, market and regulatory consulting as well as customer relationship management software expenses further increased sales and marketing expenses by $1.6 million in the six months ended June 30, 2014. We also increased spending on sales and marketing-related travel and marketing events by $1.3 million in the six months ended June 30, 2014. We expect sales and marketing expenses to increase in absolute dollars in the near to medium term, as we continue to increase the size of the sales and marketing staff both domestically and internationally. Additionally, we expect non-headcount driven marketing expenses will increase as we attempt to increase brand awareness and sponsor additional marketing events with the aim of attracting new customers and expanding our footprint with existing customers. Research and Development Six Months Ended June 30, 2013 2014 $ Change % Change (Dollars in thousands) Research and development $ 11,845$ 22,954$ 11,109 94 % Percentage of revenue 29 % 38 % The increase in research and development expense was primarily attributable to an $8.5 million increase in personnel-related costs, mainly driven by an increase in employee headcount and recognition of stock-based compensation expense. From June 30, 2013 to June 30, 2014, the headcount of our research and development 29



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staff increased, which drove a $6.0 million increase in salary and related expenses. Stock-based compensation expense increased $2.5 million primarily related to the recognition of compensation cost for the performance-based restricted stock units in connection with the IPO. Spending related to external consultants engaged to support product development increased by $0.8 million as compared to the prior year period. Increased travel, information technology and rent further increased expenses by $0.7 million. We expect research and development expenses will increase in absolute dollars as we continue to invest in new product capabilities and focus on developing our products for international markets, which may involve different requirements than domestic markets. General and Administrative Six Months Ended June 30, 2013 2014 $ Change % Change (Dollars in thousands) General and administrative $ 3,062$ 8,769$ 5,707 186 % Percentage of revenue 8 % 15 % The increase in general and administrative expense was primarily attributable to a $4.9 million increase in personnel-related costs, mainly driven by an increase in employee headcount and recognition of stock-based compensation expense. From June 30, 2013 to June 30, 2014, the headcount of our general and administrative staff increased, which drove a $2.5 million increase in salary and related expenses. Stock-based compensation expense increased $2.4 million primarily related to the recognition of compensation cost for the performance-based restricted stock units in connection with the IPO. Financial services and consultants combined to increase expenses by $0.8 million in the six months ended June 30, 2014. We expect general and administrative expenses will continue to grow in absolute dollars as we continue to invest in our infrastructure with a greater number of employees. Additionally, general and administrative expenses are likely to increase further related to costs necessary to operate as a public company.



Other Income (Expense), Net

Six Months Ended June 30, 2013 2014 $ Change % Change (Dollars in thousands) Other income (expense) $ (528 )$ 220$ 748 -142 % Percentage of revenue -1 % 0 % For the six months ended June 30, 2014, other income (expense), net, increased primarily as a result of a decrease in foreign currency losses of $0.4 million compared to the prior period and rental income of $0.2 million related to an office sublease agreement beginning in the third quarter of 2013 and continuing through the current period.



Liquidity and Capital Resources

As of June 30, 2014, our principal source of liquidity was cash and cash equivalents of $148.7 million, which were held for working capital purposes. Since our inception, we have financed our operations primarily through private placements of preferred stock, customer payments, exercises of options to purchase shares of common stock and, more recently, capital lease obligations and the E.ON SE loan. 30



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In April 2014, we closed our IPO, in which we sold 7,015,000 shares of common stock at a price to the public of $19.00 per share, including shares sold in connection with the exercise of the underwriters' over-allotment option. The offer and sale of all of the shares in the IPO were registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a registration statement on Form S-1 (File No. 333-194264), which was declared effective by the SEC on April 3, 2014. We raised $121.7 million in net proceeds after deducting underwriting discounts and commissions of $9.3 million and offering expenses of $2.2 million. We have a revolving credit facility of $15.0 million. The facility contains various covenants that limit our other indebtedness, investments, liens and transactions. In addition, the facility contains financial covenants that require a minimum adjusted quick ratio and minimum cash balances. As of June 30, 2014, we were in compliance with each of these financial covenants and have not yet drawn on the facility. In March 2013, we entered into a convertible loan agreement with E.ON SE, one of our utility customers, pursuant to which E.ON SE issued us a $2.5 million loan with an interest rate of 5% per year, compounding annually. In connection with our IPO, the loan with E.ON SE converted into 157,664 shares of our common stock. For the six months ended June 30, 2014, we recognized revenue of $3.9 million from our relationship with E.ON SE. We believe our current cash and cash equivalents, cash flows from operations and amounts available under our credit facility will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.



The following table summarizes our cash flows for the periods indicated:

Six Months Ended June 30, 2013 2014 (In thousands) Net cash provided by operating activities $ 6,529$ 1,020 Net cash used in investing activities (3,949 ) (5,011 ) Net cash provided by financing activities 4,100



123,827

Effect of foreign exchange rate changes on cash and equivalents

(80 )



19

Net increase in cash and equivalents $ 6,600$ 119,855 Operating Activities For the six months ended June 30, 2014, net cash provided by operating activities was $1.0 million as compared to $6.5 million for the six months ended June 30, 2013. The decrease in cash provided by operating activities for the six months ended June 30, 2014 was primarily related to our increase in investments in both sales and marketing and research and development, consisting primarily of payments of compensation to employees. These increases were partially offset by the net impact of changes in our operating assets and liabilities, with an increase in deferred revenue of $11.6 million partially offset by an increase in accounts receivable of $4.3 million. As we increase investments in sales and marketing and research and development, we expect that we will experience a net usage of cash flows from operations for fiscal year 2014. Investing Activities Cash used in investing activities for the six months ended June 30, 2014 was $5.0 million compared to $3.9 million for the six months ended June 30, 2013. The primary use of cash in investing activities for both periods was the purchase of equipment and the payment of salaries for employees and consultants relating to the development of capitalized software for internal use. 31



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Financing Activities

Cash provided by financing activities for the six months ended June 30, 2014 was $123.8 million compared to $4.1 million for the six months ended June 30, 2013. The increase in cash provided by financing activities for the six months ended June 30, 2014 was primarily related to our initial public offering where we raised $124.0 million in proceeds, net of underwriting discounts and commissions partially offset by $1.3 million in payment of offering cost and a $2.5 million loan from E.ON SE in the prior year.



Application of Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). Accounting policies, methods and estimates are an integral part of the preparation of consolidated financial statements in accordance with U.S. GAAP and, in part, are based upon management's current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the consolidated financial statements and because of the possibility that future events affecting them may differ markedly from management's current judgments. While there are a number of accounting policies, methods and estimates affecting our consolidated financial statements, areas that are particularly significant include: Revenue recognition; Stock-based compensation; and Income taxes. There were no significant changes in our critical accounting policies and estimates during the six months ended June 30, 2014. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our final prospectus for our initial public offering filed on April 4, 2014 for a more complete discussion of our critical accounting policies and estimates. Commitments As of December 31, 2013 and June 30, 2014, we had outstanding letters of credit totaling $1.1 million in favor of certain landlords for office space and collateralized as part of our secured loan agreement. To date, no amounts have been drawn against the letters, which renew annually and mature at various dates through September 2015.



Our principal commitments primarily consist of obligations under leases for office space and obligations under capital leases for equipment.

Off-Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such entities often being referred to as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.


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Source: Edgar Glimpses


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