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QLIK TECHNOLOGIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2013 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 28, 2014. This Quarterly Report on Form 10-Q, except for historical financial information contained herein, contains forward-looking statements, including, but not limited to, statements regarding the value and effectiveness of our products, the introduction of product enhancements or additional products and our growth, expansion and market leadership, that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including statements containing the words, but not limited to, "predicts," "plan," "expects," "focus," "anticipates," "believes," "goal," "target," "estimate," "potential," "may," "help," "key," "will," "might," "momentum," "can," "could," "design," "see," "seek" and similar words. We intend all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in such statements due to various factors, including but not limited to: • risk and uncertainties inherent in our business; • our ability to attract new customers and retain existing customers; • our ability to effectively sell, service and support our products; • our ability to adapt to changing licensing and go to market business models; • our ability to manage our international operations; • our ability to compete effectively; • our ability to develop and introduce new products and add-ons or enhancements to existing products; • our ability to continue to promote and maintain our brand in a cost-effective manner; • our ability to manage growth; • our ability to attract and retain key personnel; • currency fluctuations that affect our revenues and expenses; • our ability to successfully integrate acquisitions into our business; • the scope and validity of intellectual property rights applicable to our products; • adverse economic conditions in general and adverse economic conditions specifically affecting the markets in which we operate; and • other risks discussed in the section titled "Risk Factors," set forth in Part I, Item 1A of our Annual Report on Form 10-K and elsewhere in this Quarterly Report on Form 10-Q. Any statements regarding our products are intended to outline our general product direction and should not be relied on in making a purchase decision, as the development, release and timing of any features or functionality described for our products remains at our sole discretion. Past performance is not necessarily indicative of future results. There can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Therefore, no assurance can be given that the outcomes stated in such forward-looking statements and estimates will be achieved. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q. 16 -------------------------------------------------------------------------------- Table of Contents Introduction Management's Discussion and Analysis of Financial Condition and Results of Operations is provided to help provide an understanding of our financial condition and results of operations. This item of our Quarterly Report on Form 10-Q is organized as follows: • Overview including Key Financial Metrics and Trends. This section provides a general description of our business, the key financial metrics that we use in assessing our performance, and anticipated trends that we expect to affect our financial condition and results of operations. • Consolidated Results of Operations. This section provides an analysis of our results of operations for the three and nine months ended September 30, 2014 and 2013. • Foreign Exchange Rates. This section discusses the impact of foreign exchange rate fluctuations for the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013. • Seasonality. This section discusses the seasonality in the sale of our products and services. • Acquisitions. This section discusses recent acquisitions and how we account for them. • Liquidity and Capital Resources. This section provides an analysis of our cash flows for the nine months ended September 30, 2014 and 2013, a discussion of our capital requirements, and the resources available to us to meet those requirements. • Critical Accounting Policies and Estimates. This section discusses accounting policies that are considered important to our financial condition and results of operations. These accounting policies require significant judgment or require estimates on our part in applying them. Our significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 2 to the unaudited consolidated financial statements. • Contractual Obligations and Commitments. This section discusses contractual obligations and commitments expected to have an effect on our liquidity and cash flow in future periods. • Off-Balance Sheet Arrangements. This section discusses off-balance sheet arrangements expected to have an effect on our liquidity and cash flow in future periods. • Inflation. This section discusses how inflation could impact our financial condition and results of operations. • Recent Accounting Pronouncements. This section provides for recent accounting pronouncements that could impact our financial condition and results of operations. Overview We have pioneered powerful, user-driven Business Intelligence ("BI") solutions that enable our customers to make better and faster business decisions, wherever they are. Our software products help people create and share insights and analysis in groups and across organizations. Business users can explore data, ask and answer their own stream of questions and follow their own path to insight on their own and in teams and groups. Our software products are powered by our in-memory engine which maintains associations in data and calculates aggregations rapidly, as business users interact with our software. Our software products are designed to give our customers significant improvements in usability, flexibility and performance at lower costs compared to traditional BI solutions. In July 2014, we announced the availability of a free version of our next-generation data visualization application, Qlik Sense Desktop. Qlik Sense Desktop delivers an intuitive drag-and-drop experience for data visualization, exploration, and storytelling capabilities in a stand-alone, Windows client. The server edition of Qlik Sense, which was made generally available in September 2014, enables server side development from any device, flexible mobile use, collaboration and sharing, data security and data and application governance. We currently operate in one business segment, namely, the development, commercialization and implementation of software products and related services. See Note 7 to our unaudited consolidated financial statements, Business and Geographic Segment Information, for information regarding our business and the geographies in which we operate. We have a diversified distribution model that consists of a direct sales force, a partner network of solution providers (or resellers), original equipment manufacturers ("OEM") relationships and system integrators. 17 -------------------------------------------------------------------------------- Table of Contents We have grown our customer base to approximately 33,000 active customers as of September 30, 2014 and increased our revenue at approximately a 27% compound annual growth rate from January 1, 2010 through September 30, 2014. During the nine months ended September 30, 2014, our solution addressed the needs of a diverse range of customers from middle market customers to large enterprises such as 3P Learning Pty Ltd, AAF International Company Inc. (American Air Filter), AllianceBernstein LP, Arkema Inc., Analogic Corporation, Canadian Pacific Railway Limited, Center Parcs (Operating Company) Limited, Children's Hospital of Wisconsin, Community Health Network, David Lloyd Leisure, Deutsche Börse AG, Direct Line Group, Harbour Industries, Inc., Harris Farm Markets, Hindustan Zinc, IKEA Japan K.K., Ingram Micro UK Ltd, JBS Swift & Company, Kuoni Destination Management, LastMinute.Com, Mission Health, New Hanover Regional Medical Center, Nestlé Nederland BV, Palmetto Health, Roadchef Limited, Saint-Gobain Corporation, Sime Darby Global Services Centre Sdn Bhd, Snapdeal, Southern Illinois Healthcare, STAR India Pvt Ltd, Suguna Foods, Sunstar Americas, Inc., Topps Tiles (UK) Ltd, Tupperware, the U.S. Department of Justice and ZF Friedrichshafen AG. We currently have customers in over 100 countries and, for the three and nine months ended September 30, 2014, approximately 69% and 71%, respectively, of our revenue was derived internationally. For the three and nine months ended September 30, 2013, approximately 69% and 70%, respectively, of our revenue was derived internationally. We have a differentiated business model designed to accelerate the adoption of our product to reduce the time and cost to purchase and implement our software products. Our low risk approach to product sales provides a needed alternative to costly, all-or-nothing traditional BI models. We initially focus on specific business users or departments within a prospective customer's organization and seek to solve a targeted business need. After demonstrating our product's benefits to initial adopters within an organization, we work to expand sales of our product to other business units, geographies and use cases with the long-term goal of broad organizational deployment. We license our software products under perpetual licenses which generally include one year of maintenance as part of the initial purchase price of the product. Our customers can renew, and generally have renewed, their maintenance agreements for a fee that is based upon a percentage of the initial license fee paid. For the nine months ended September 30, 2014, our total revenue was comprised of 50% license revenue, 40% maintenance revenue and 10% professional services revenue. For the nine months ended September 30, 2013, our total revenue was comprised of 54% license revenue, 37% maintenance revenue and 9% professional services revenue. Total billings from our OEM relationships accounted for approximately 7% and 8% of our total billings during the nine months ended September 30, 2014 and 2013, respectively. Additionally, our online Qlik Community provides us with a loyal and growing network of users who promote our software, provide support for other users and contribute valuable insights and feedback for our product development efforts. To complement our software products, we have developed a differentiated business model that has the following attributes: • Broad User Focus - marketing and selling our software products directly to the business user by providing an easy-to-use platform that can be used with minimal training. • Low Risk Rapid Product Adoption - providing a low risk alternative to costly, all-or-nothing, enterprise-wide deployment requirements. • "Land and Expand" Customer Approach - initially targeting specific business users or departments in an organization to create a loyal user base that promotes broad adoption of our software products across an organization. • Globally Diversified Distribution Model - employing a multi-pronged international sales approach that leverages a direct sales force and partner network. • Community-Based Marketing and Support - augmenting our development, marketing and support efforts through our online Qlik Community. In evaluating our operating results, we focus on the productivity of our sales force, the effectiveness of our channel partners, the effectiveness of our local and corporate level marketing, our ability to close opportunities generated by our marketing leads and the competitiveness of our technology. In each of these areas, we have taken steps designed to improve our operating results, including undertaking additional sales training for our sales representatives, hiring more experienced regional sales management, making additional investments in marketing activities, developing a partner enablement program to focus on the results of our sales partners around the world and expanding our research and development staff with a focus on product enhancement, testing and quality assurance. From a risk perspective, we have had to deal with the impact of the recessionary global environment during the past several years and the unsettled global economic environment could affect our operating results in future periods. Approximately 71% of our revenue during the nine months ended September 30, 2014 was derived internationally, of which 53% was derived in Europe. Approximately 70% of our revenue 18 -------------------------------------------------------------------------------- Table of Contents during the nine months ended September 30, 2013 was derived internationally, of which 53% was derived in Europe. We have faced pricing pressure from some of our competitors and we seek to minimize the impact by demonstrating the value delivered by our software products in comparison to these other BI products. In addition, as we continue to further penetrate the enterprise market and the size and complexity of our sales opportunities continue to expand, we have seen an increase in the average length of time in our sales cycles. As a result, we seek to improve the management of our sales pipeline in response to these dynamics. Also, the recent growth in our business has required the continued hiring of experienced staff across all of our geographic territories. To aid this effort we have focused on improving our local recruiting initiatives, as well as on developing further internal training programs to prepare employees for greater responsibilities. We believe global economic conditions remain unstable and have contributed to an increase in the average length of time in our sales cycles. In addition, these conditions may result in an increase in the average length of time it takes to collect outstanding accounts receivable. Key Financial Metrics and Trends Revenues Our revenue is comprised of license, maintenance and professional services. We license our software under perpetual licenses which generally include one year of maintenance as part of the initial purchase price of the product. License revenue reflects the revenue recognized from sales of licenses to new customers and additional licenses to existing customers. Billings to existing customers for license and first year maintenance were approximately 64% for the three months ended September 30, 2014 and 58% for the three months ended September 30, 2013. Based upon our land and expand sales strategy, we expect that on an annual basis the contribution of license and first year maintenance from existing customers will continue to exceed the contribution of license and first year maintenance from new customers. Customers can renew, and generally have renewed, their maintenance agreements for a fee that is based upon a percentage of the initial license fee paid. Current customers with maintenance agreements are entitled to receive unspecified upgrades and enhancements when and if they become available. We have experienced growth in maintenance revenue primarily due to increased license sales and growth in our customer base and high retention of those customers. In the nine months ended September 30, 2014 and 2013, our annual maintenance renewal rates were greater than 90%. Professional services revenue is comprised of training, installation and other consulting revenues, and represented approximately 10% of total revenues for the nine months ended September 30, 2014 and 9% of total revenues for the nine months ended September 30, 2013. We do not expect the percentage contribution to change significantly during the near term. The contribution from our partner network has grown over time and we anticipate that revenues from partners will continue to be more than 50% of total revenues. Given the size of the U.S. market and our current penetration there, we expect that the U.S. will represent our largest growth opportunity in terms of absolute U.S. dollars during the near term and will likely be an important contributor to future revenue growth. Due to the global diversity of our customer base, our results are impacted by movements in the currencies of the major territories in which we operate. The primary foreign currencies generally impacting our results are the Swedish kronor, the euro and the British pound. Inflation and changing prices had no material effect on our revenue or income from operations during the three and nine months ended September 30, 2014 and 2013. Cost of Revenue Cost of revenue primarily consists of personnel costs, fees paid to subcontractors providing technical support services, referral fees paid to third parties in connection with software license sales, amortization of technology related intangible assets acquired and other discrete professional services. Personnel costs include salaries, employee benefit and social costs, bonuses and stock-based compensation. Operating Expenses We classify our operating expenses into three categories: sales and marketing, research and development, and general and administrative. Our operating expenses primarily consist of personnel costs, sales commissions, travel costs, marketing program costs, facilities, legal, accounting, outside contractors and consultants, the cost of our annual employee summit, other professional services costs and depreciation and amortization. Personnel costs include salaries, employee benefit and social costs, bonuses and stock-based compensation. Historically, we have focused on the continued growth of our license revenues, and as a result, sales and marketing has represented the largest amount of total expenses both in absolute dollar terms and as a percentage of total revenues. Sales and Marketing. Sales and marketing expenses primarily consist of personnel costs for our sales, marketing and business development employees and executives; commissions earned by our sales related personnel; travel costs; facilities costs attributable to our sales and marketing personnel; the cost of marketing programs; the cost of employee training programs; and the cost of business development programs. We have made incremental investments in sales and marketing in 2014, including the hiring of additional sales personnel in both the U.S. and our international locations. In the fourth quarter of 2014, we will continue to make incremental investments as we will be holding our first global user event. We expect that our sales and marketing expenses will continue to increase in absolute dollars and remain constant or decline as a percentage of revenue over time as we expect to derive greater efficiencies from the investments made in our sales organization. Research and Development. Research and development expenses primarily consist of personnel and facility costs for our research and development and product management employees along with the amortization of research and development related intangible assets acquired. The vast majority of our research and development staff is based in Lund, Sweden. We have devoted our development efforts primarily to enhancing the functionality and expanding the capabilities of our software products. We 19 -------------------------------------------------------------------------------- Table of Contents expect that our research and development expenses will continue to increase in absolute dollars, but remain relatively constant as a percentage of revenue in the near term as we increase our research and development and product management headcount to further strengthen and enhance our software products. General and Administrative. General and administrative expenses primarily consist of personnel costs for our executive, finance, legal, human resources, information systems and administrative personnel, as well as the cost of facilities attributable to general and administrative operations, the cost of employee training programs, depreciation and amortization, legal, accounting, other professional services fees and other corporate expenses. We also expect that general and administrative expenses will continue to increase in absolute dollars because of our efforts to expand our global operations, but we believe over time general and administrative costs will decline as a percentage of revenues as we expect to derive greater efficiencies from the investments made in our corporate infrastructure. Stock-Based Compensation. Stock-based compensation expense is based on the fair value of those awards at the date of grant. We use the Black-Scholes-Merton ("Black-Scholes") option pricing model to determine the fair value of common stock option awards and Stock-settled Stock Appreciation Rights ("SSARs"). The fair value of a restricted stock unit is determined by using the closing price of our common stock on the date of grant. The estimated fair value of Maximum Value Stock-settled Stock Appreciation Rights ("MVSSSARs") is determined by utilizing a lattice model under the option pricing method. The estimated fair value of stock-based compensation awards on the date of grant is amortized on a straight-line basis over the requisite service period. Stock-based compensation expense is recorded within cost of revenue, sales and marketing, research and development and general and administrative expenses. Other Income (Expense), net Other income (expense), net primarily consists of net interest and foreign exchange gains or losses. Net interest represents interest income received on our cash and cash equivalents and interest expense associated with outstanding debt. Foreign exchange gains or losses relate to our business activities in foreign countries and the re-measurement of intercompany transactions between subsidiaries with different functional reporting currencies, as well as the impact of our short-term foreign currency forward contracts related to certain intercompany borrowings. As a result of our business activities in foreign countries, we expect that foreign exchange gains or losses will continue to occur due to fluctuations in exchange rates in the countries where we do business. (Provision) Benefit for Income Taxes (Provision) benefit for income taxes primarily consists of corporate income taxes related to income at our U.S. and international subsidiaries. The provision includes amounts for U.S. federal, state and foreign income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against deferred tax assets if it is more-likely-than-not that such assets will not be realized in the near term. The factors used to assess the likelihood of realization are the forecast of future taxable income, the remaining time period to utilize any tax operating losses and tax credits and available tax planning strategies that could be implemented to realize deferred tax assets. In evaluating our ability to realize deferred tax assets, we consider all available positive and negative evidence. Our negative evidence includes historical taxable losses generated by certain subsidiaries. Our positive evidence includes historical taxable income at certain subsidiaries as well as projected future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Impact of Foreign Currency Translation Approximately 68% of our revenues for the nine months ended September 30, 2014 and 2013 were earned in foreign denominated currencies, including the euro, the British pound and the Swedish kronor. We continue to monitor our foreign exchange risk in part through operational means, including monitoring the proportion of same-currency revenues in relation to same-currency costs and the proportion of same-currency assets in relation to same-currency liabilities. As we operate in multiple foreign currencies, changes in those currencies relative to the U.S. dollar will impact our revenues and expenses. If the U.S. dollar weakens against a specific foreign currency, our revenues will increase having a positive impact on net income, and our overall expenses will increase, having a negative impact on net income. Likewise, if the U.S. dollar strengthens against a specific foreign currency, our revenues will decrease having a negative impact on net income, and our overall expenses will decrease, having a positive impact on net income. Therefore, significant shifts in foreign currencies can impact our short-term results, as well as our long-term forecasts and targets. 20 -------------------------------------------------------------------------------- Table of Contents Foreign currency exchange rate fluctuations negatively impacted total revenue for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 by approximately $0.6 million, principally driven by the strengthening of the U.S. dollar relative to the Swedish kronor, the euro, the Canadian dollar and the Japanese yen, partially offset by the weakening of the U.S. dollar relative to the British pound. Total cost of revenue and operating expenses for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 were positively impacted as a result of foreign exchange rate fluctuations by approximately $0.8 million, principally driven by the strengthening of the U.S. dollar relative to the Swedish kronor, the euro, the Canadian dollar and the Japanese yen, partially offset by the weakening of the U.S. dollar relative to the British pound. Foreign currency exchange rate fluctuations positively impacted total revenue for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 by approximately $2.9 million, principally driven by the weakening of the U.S. dollar relative to the euro and the British pound, partially offset by the strengthening of the U.S. dollar to the Swedish kronor, the Brazilian real, the Australian dollar, the Japanese yen and the Canadian dollar. Total cost of revenue and operating expenses for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 were negatively impacted as a result of foreign exchange rate fluctuations by approximately $1.8 million, principally driven by the weakening of the U.S. dollar relative to the euro and the British pound, partially offset by the strengthening of the U.S. dollar to the Swedish kronor, the Brazilian real, the Australian dollar, the Japanese yen and the Canadian dollar. |