Marketo Announces Third Quarter 2015 Results

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Oct 22, 2015, 04:05 ET

Marketo logo.

SAN MATEO, Calif., Oct. 22, 2015 /PRNewswire/ -- Marketo, Inc. (NASDAQ: MKTO), the leading provider of engagement marketing software and solutions, today announced its third quarter 2015 financial results.

Third Quarter Highlights:

Revenue increased 40 percent year over year to $54.9 million
Deferred revenue increased 54 percent year over year to $82.1 million
Calculated billings increased 43 percent year over year to $56.4 million
Generated cash flow from operations of $2.3 million

"Our solid third quarter business performance delivered strong revenue and billings growth, improved operating leverage and another quarter of positive cash flow from operations," said Phil Fernandez, chairman and CEO of Marketo. "We are continuing to innovate and deliver compelling thought leadership to guide the way forward for our industry. Industry analysts, partners and prospects are taking note, and every day I see this translating into true leadership stature and momentum for Marketo."

Results for the third quarter of 2015:

Revenue: Revenue was $54.9 million, an increase of 40 percent over the same period of the prior year.
Deferred Revenue: Deferred revenue at September 30, 2015 was $82.1 million, up 2 percent from $80.6 million at June 30, 2015. This compares to $53.2 million at September 30, 2014.
Calculated Billings: Calculated billings were $56.4 million, an increase of 43 percent over $39.3 million in the same period of the prior year.
Net Loss: GAAP net loss, excluding redeemable non-controlling interests was $18.2 million, and net loss per common share, basic and diluted, was $(0.43). Non-GAAP net loss was $5.3 million, and non-GAAP net loss per common share, basic and diluted, was $(0.12). A reconciliation table titled "Reconciliation of GAAP Measures to Non-GAAP Measures" is provided at the end of this release.
Cash Flow: Cash provided by operating activities was $2.3 million as compared to cash used in operating activities of $1.2 million in the same period of the prior year.
Total Cash and Cash Equivalents: As of September 30, 2015, total cash and cash equivalents was $112.9 million.

Outlook
As of October 22, 2015, Marketo is providing revenue and EPS guidance for its fourth quarter and full year 2015.

For the fourth quarter of 2015, Marketo expects to report:

Revenue in the range of $57.5 to $58.5 million
GAAP net loss per share in the range of $(0.52) to $(0.54)
Non-GAAP net loss per share in the range of $(0.22) to $(0.24)

For the full year 2015, Marketo expects to report:

Revenue in the range of $209 to $210 million
GAAP net loss per share in the range of $(1.82) to $(1.84)
Non-GAAP net loss per share in the range of $(0.71) to $(0.73)

A table titled "Reconciliation of GAAP Net Loss to Non-GAAP Net Loss Per Share Targets" is provided at the end of this release.

Conference Call Information
Marketo will host a conference call and live webcast to discuss financial results at 5:00 p.m. ET/2:00 p.m. PT, on Thursday, October 22, 2015. The conference call can be accessed by dialing (888) 430-8691, or +1 (719) 325-2484 (outside the U.S. and Canada). A live webcast will be available at http://investors.marketo.com. An audio replay of the call will also be available by dialing (888) 203-1112 or +1(719) 457-0820 (outside the U.S. and Canada) and entering passcode 805755#.

Use of Non-GAAP Financial Information
Marketo provides financial statements that are prepared in accordance with generally accepted accounting principles (GAAP). To help understand Marketo's past financial performance and future results, Marketo has supplemented its financial results that it provides in accordance with GAAP with certain non-GAAP financial measures. The method Marketo uses to produce non-GAAP financial results is not computed according to GAAP and may differ from the methods used by other companies. Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with the company's consolidated financial statements prepared in accordance with GAAP. Specifically, management is excluding the following items from its non-GAAP historical and estimated net loss and net loss per common share, basic and diluted:

Stock-Based Compensation Expenses: The company's compensation strategy includes the use of stock-based compensation to attract and retain employees and executives. It is principally aimed at aligning their interests with those of our stockholders and at long-term employee retention, rather than to motivate or reward operational performance for any particular period. Thus, stock-based compensation expense varies for reasons that are generally unrelated to operational decisions and performance in any particular period.
Amortization of Acquired Intangible Assets: The company views amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company's research and development efforts, trade names, customer lists and customer relationships, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are continually evaluated for impairment, amortization of the cost of purchased intangibles is a static expense, one that is not typically affected by operations during any particular period.
Adjustment to the value of redeemable non-controlling interest to the redemption amount is excluded as the company believes it may not be indicative of future operating results and that investors benefit from an understanding of the company's operating results without giving effect to this adjustment.
Additionally, the company believes the following supplemental non-GAAP financial information is useful to investors and others in assessing its operating performance. A calculation of the supplemental non-GAAP financial information is provided in the table titled 'Non-GAAP Supplemental financial information'.
Calculated billings is calculated as revenue plus the change in total deferred revenue as presented on the balance sheet.
Free cash flow is calculated as cash flow provided by (used in) operations less the purchase of property and equipment and capitalized software development costs presented on the statement of cash flows.

Management believes calculated billings offers investors useful supplemental information regarding the performance of our business, and will help investors better understand the sales volumes and performance of our business. Free cash flow metrics is useful as it provides investors an enhanced view of the company's operational performance and the cash available to fund on-going operations. The presentation of non-GAAP free cash flow is not meant to be considered in isolation or as an alternative to net income as an indicator of our performance, or as an alternative to cash flows from operating activities as a measure of liquidity.

The company encourages investors to carefully consider its results under GAAP, as well as its supplemental non-GAAP information and the reconciliation between these presentations, to more fully understand its business. Reconciliations between GAAP and non-GAAP results are presented in the tables of this release.

"Safe harbor" statement under the Private Securities Litigation Reform Act of 1995
This press release contains forward-looking statements. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as "expects," "anticipates," "believes," "could," "seeks," "estimates," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions and the negatives of those terms. Examples of forward-looking statements include, but are not limited to, statements about our opportunities for growth and specific statements about our expected GAAP and non-GAAP financial results for the fourth quarter and the full year of 2015, including revenue, net loss, EPS, stock-based compensation expenses, amortization of acquired intangible assets and adjustments to the value of redeemable non-controlling interest to the redemption amount. The achievement or success of the matters covered by such forward-looking statements involves risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make.

The risks and uncertainties that could cause actual results to differ from the results predicted include, but are not limited to, risks associated with: possible fluctuations in our financial and operating results; our rate of growth and anticipated revenue run rate, including our ability to convert deferred revenue into revenue and, as appropriate, cash flow, and the continued growth and ability to maintain deferred revenue; errors, interruptions or delays in our services or Web hosting; breaches of our security measures; the financial impact of any previous and future acquisitions; the nature of our business model; our ability to continue to release, and gain customer acceptance of, new and improved versions of our services; successful customer deployment and utilization of our existing and future services; changes in our sales cycle; competition; relationships with platform providers; various financial aspects of our subscription model; unexpected increases in attrition or decreases in new business; the emerging markets in which we operate; unique aspects of entering or expanding in international markets; our ability to hire, retain and motivate employees and manage our growth; changes in our customer base; technological developments; regulatory developments; litigation related to intellectual property and other matters, and any related claims, negotiations and settlements; unanticipated changes in our effective tax rate; fluctuations in the number of shares we have outstanding and the price of such shares; foreign currency exchange rates; collection of receivables; interest rates; factors affecting our deferred tax assets and ability to value and utilize them; the risks and expenses associated with our real estate and office facilities space; and general developments in the economy, financial markets, and credit markets.

Further information about potential factors that could affect our financial results is included in public reports we file with the Securities and Exchange Commission, including, but not limited to, the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of our Forms 10-K and 10-Q, and the Forms 8-K and other documents we file from time to time.

Any forward-looking statement made by us in this press release speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We assume no obligation and do not intend to publicly update these forward-looking statements, whether as a result of new information, future developments, or otherwise, except as required by law.

About Marketo
Marketo (NASDAQ:MKTO) provides the leading marketing software and solutions designed to help marketers master the art and science of digital marketing. Through a unique combination of innovation and expertise, Marketo is focused solely on helping marketers keep pace in an ever-changing digital world. Spanning today's digital, social, mobile and offline channels, Marketo's Engagement Marketing Platform powers a set of breakthrough marketing automation and marketing management applications to help marketers tackle all aspects of digital marketing from the planning and orchestration of marketing activities to the delivery of personalized interactions that can be optimized in real-time. Marketo's applications are known for their ease-of-use, and are complemented by the Marketing Nation®, a thriving network of more than 450 third-party solutions through our LaunchPoint® ecosystem and over 50,000 marketers who share and learn from each other to grow their collective marketing expertise. The result for modern marketers is unprecedented agility and superior results. Headquartered in San Mateo, CA with offices in Europe, Australia and Japan, Marketo serves as a strategic marketing partner to approximately 4,300 large enterprises and fast-growing small companies across a wide variety of industries. For more information, visit www.marketo.com.

Marketo, the Marketo logo, Marketing Nation and LaunchPoint are trademarks of Marketo, Inc. All other trademarks are the property of their respective owners.

MARKETO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

	September 30,	December 31,
	2015	2014

ASSETS
Current assets:
Cash and cash equivalents	$ 112,853	$ 112,644
Accounts receivable, net	41,885	37,867
Prepaid expenses and other current assets	7,487	5,756
Total current assets	162,225	156,267
Property and equipment, net	20,995	16,832
Goodwill	29,201	29,201
Intangible assets, net	6,309	7,076
Other assets	2,060	1,035
Total assets	$ 220,790	$ 210,411

LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$ 5,835	$ 3,901
Accrued expenses and other current liabilities	22,006	20,691
Deferred revenue	81,868	62,945
Current portion of credit facility	2,473	2,719
Total current liabilities	112,182	90,256
Credit facility, net of current portion	870	2,653
Deferred revenue, long-term	267	-
Other liabilities	4,275	3,526
Total liabilities	117,594	96,435

Redeemable non-controlling interests	3,541	800

Stockholders' equity:
Common stock	4	4
Additional paid-in capital	335,743	297,420
Accumulated other comprehensive loss	(390)	(350)
Accumulated deficit	(235,702)	(183,898)
Total stockholders' equity	99,655	113,176
Total liabilities, redeemable non-controlling interests and stockholders' equity	$ 220,790	$ 210,411

MARKETO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

	Three Months Ended September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014

Revenue:
Subscription and support	$ 48,090	$ 34,210	$ 131,947	$ 94,057
Professional services and other	6,832	5,077	19,655	13,552
Total revenue	54,922	39,287	151,602	107,609
Cost of revenue (1):
Subscription and support	10,504	7,527	29,348	20,638
Professional services and other	8,157	5,698	23,671	16,079
Total cost of revenue	18,661	13,225	53,019	36,717
Gross profit:
Subscription and support	37,586	26,683	102,599	73,419
Professional services and other	(1,325)	(621)	(4,016)	(2,527)
Total gross profit	36,261	26,062	98,583	70,892
Operating expenses (1):
Research and development	9,738	7,681	28,601	22,010
Sales and marketing	33,262	24,973	95,349	69,127
General and administrative	9,726	6,594	27,468	18,517
Total operating expenses	52,726	39,248	151,418	109,654
Loss from operations	(16,465)	(13,186)	(52,835)	(38,762)
Other income (expense), net	(368)	303	249	58
Loss before provision for income taxes	(16,833)	(12,883)	(52,586)	(38,704)
Provision for income taxes	142	126	454	96
Net loss	(16,975)	(13,009)	(53,040)	(38,800)
Net loss and adjustment attributable to redeemable non-controlling interests*	(1,263)	206	(1,306)	376
Net loss attributable to Marketo	$ (18,238)	$ (12,803)	$ (54,346)	$(38,424)

Net loss per share of common stock, basic and diluted	$ (0.43)	$ (0.31)	$ (1.29)	$ (0.96)
Shares used in computing net loss per share of common stock, basic and diluted	42,835	40,668	42,208	40,157

* During the three and nine months ended September 30, 2015 the Company recorded an adjustment to redeemable non-controlling interest of $(1.6) million $(2.5) million, respectively, which is included in this line item.

(1) Amounts include stock-based compensation expense as follows (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014

Cost of subscription and support revenue	$ 706	$ 399	$ 1,951	$ 1,202
Cost of professional services and other revenue	1,178	699	3,215	1,756
Research and development	1,966	1,364	5,921	3,616
Sales and marketing	3,725	2,145	9,931	6,019
General and administrative	3,092	1,908	8,656	4,840
Total stock-based compensation expense	$ 10,667	$ 6,515	$ 29,674	$ 17,433

MARKETO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Three Months Ended September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014
Cash flows from operating activities:
Net loss attributable to Marketo	$ (18,238)	$ (12,803)	$ (54,346)	$ (38,424)
Net loss and adjustment attributable to redeemable non-controlling interests	1,263	(206)	1,306	(376)
Net loss	(16,975)	(13,009)	(53,040)	(38,800)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	3,787	2,432	10,072	6,776
Stock-based compensation expense	10,667	6,515	29,674	17,433
Deferred income taxes	104	96	351	(47)
Provision for doubtful accounts	166	199	402	291
Changes in operating assets and liabilities:
Accounts receivable, net	3,766	3,036	(4,712)	231
Prepaid expenses and other current assets	387	223	(1,632)	(1,928)
Other assets	48	(55)	(813)	(634)
Accounts payable	(56)	(384)	2,132	94
Accrued expenses and other current liabilities	(1,013)	(809)	1,423	(6,632)
Deferred revenue	1,362	492	19,645	12,329
Other liabilities	59	70	232	49
Net cash provided by (used in) operating activities	2,302	(1,194)	3,734	(10,838)
Cash flows from investing activities:
Increase in restricted cash	-	-	(215)	-
Purchase of property and equipment	(3,296)	(1,979)	(11,620)	(6,242)
Capitalized software development	(154)	(59)	(926)	(463)
Net cash used in investing activities	(3,450)	(2,038)	(12,761)	(6,705)
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of stock options	1,747	1,387	4,765	4,714
Proceeds from issuance of common stock issued under employee stock purchase plan	2,744	2,759	5,629	6,143
Investment from redeemable non-controlling interests	-	-	1,678	1,953
Repurchase of unvested common stock from terminated employees	-	(2)	(32)	(48)
Withholding taxes remitted for the net share settlement of equity awards	(326)	(428)	(400)	(2,120)
Repayment of debt	(683)	(656)	(2,029)	(1,524)
Payment of deferred follow-on offering costs	-	-	-	(104)
Payment incurred for common stock registration related to acquisition	-	-	-	(319)
Net cash provided by financing activities	3,482	3,060	9,611	8,695
Effect of foreign exchange rate changes on cash and cash equivalents	74	(748)	(375)	(657)
Net increase (decrease) in cash and cash equivalents	2,408	(920)	209	(9,505)
Cash and cash equivalents — beginning of period	110,445	119,714	112,644	128,299
Cash and cash equivalents —end of period	$ 112,853	$ 118,794	$ 112,853	$ 118,794

MARKETO, INC.
RECONCILIATION OF GAAP MEASURES TO NON-GAAP MEASURES
(In thousands, except per share data)
(Unaudited)

To supplement our condensed consolidated financial statements presented on a GAAP basis, Marketo uses non-GAAP measures of operating loss, net loss and net loss per share, which are adjusted to exclude certain costs, expenses, gains and losses we believe appropriate to enhance an overall understanding of our past financial performance and also our prospects for the future. These adjustments to our current period GAAP results are made with the intent of providing both management and investors a more complete understanding of Marketo's underlying operational results and trends and our marketplace performance. In addition, these adjusted non-GAAP results are among the information management uses as a basis for our planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with generally accepted accounting principles in the United States of America.


		Three Months Ended June 30, 2015	Three Months Ended September 30, 2015	Three Months Ended September 30, 2014	Nine Months Ended September 30, 2015	Nine Months Ended September 30, 2014
Revenue:
	Subscription and support	$ 43,757	$ 48,090	$ 34,210	$ 131,947	$ 94,057
	Professional services and other	6,923	6,832	5,077	19,655	13,552
Total Revenue		$ 50,680	$ 54,922	$ 39,287	$ 151,602	$ 107,609

Cost of revenue reconciliation:
	GAAP Subscription and support	$ 9,770	$ 10,504	$ 7,527	$ 29,348	$ 20,638
	Stock-based compensation	(626)	(706)	(399)	(1,951)	(1,202)
	Amortization of acquired intangible assets	(377)	(377)	(286)	(1,131)	(856)
	Non-GAAP subscription and support	$ 8,767	$ 9,421	$ 6,842	$ 26,266	$ 18,580

	GAAP Professional services and other	$ 8,177	$ 8,157	$ 5,698	$ 23,671	$ 16,079
	Stock-based compensation	(1,100)	(1,178)	(699)	(3,215)	(1,756)
	Amortization of acquired intangible assets	-	-	-	-	-
	Non-GAAP professional services and other	$ 7,077	$ 6,979	$ 4,999	$ 20,456	$ 14,323

Gross profit and gross margin reconciliation:
	Non-GAAP subscription and support gross profit	$ 34,990	$ 38,669	$ 27,368	$ 105,681	$ 75,477
	Non-GAAP professional services and other gross profit	(154)	(147)	78	(801)	(771)
	Non-GAAP gross profit	$ 34,836	$ 38,522	$ 27,446	$ 104,880	$ 74,706
	Non-GAAP subscription and support gross margin	80.0%	80.4%	80.0%	80.1%	80.2%
	Non-GAAP professional services and other gross margin	-2.2%	-2.2%	1.5%	-4.1%	-5.7%
	Non-GAAP gross margin	68.7%	70.1%	69.9%	69.2%	69.4%

Operating expenses reconciliation:
	GAAP Research and development	$ 9,168	$ 9,738	$ 7,681	$ 28,601	$ 22,010
	Stock-based compensation	(1,639)	(1,966)	(1,364)	(5,921)	(3,616)
	Amortization of acquired intangible assets	(37)	(38)	-	(112)	-
	Non-GAAP research and development	$ 7,492	$ 7,734	$ 6,317	$ 22,568	$ 18,394
	As a % of total revenues, non-GAAP	14.8%	14.1%	16.1%	14.9%	17.1%

	GAAP Sales and marketing	$ 32,055	$ 33,262	$ 24,973	$ 95,349	$ 69,127
	Stock-based compensation	(3,404)	(3,725)	(2,145)	(9,931)	(6,019)
	Amortization of acquired intangible assets	(137)	(136)	(136)	(410)	(429)
	Non-GAAP sales and marketing	$ 28,514	$ 29,401	$ 22,692	$ 85,008	$ 62,679
	As a % of total revenues, non-GAAP	56.3%	53.5%	57.8%	56.1%	58.2%

	GAAP General and administrative	$ 8,960	$ 9,726	$ 6,594	$ 27,468	$ 18,517
	Stock-based compensation	(2,957)	(3,092)	(1,908)	(8,656)	(4,840)
	Amortization of acquired intangible assets	(46)	(46)	(46)	(138)	(138)
	Non-GAAP general and administrative	$ 5,957	$ 6,588	$ 4,640	$ 18,674	$ 13,539
	As a % of total revenues, non-GAAP	11.8%	12.0%	11.8%	12.3%	12.6%

Loss from operations reconciliation:
	GAAP loss from operations	$ (17,450)	$ (16,465)	$ (13,186)	$ (52,835)	$ (38,762)
	Stock-based compensation	9,726	10,667	6,515	29,674	17,433
	Amortization of acquired intangible assets	597	597	468	1,791	1,423
	Non-GAAP loss from operations	$ (7,127)	$ (5,201)	$ (6,203)	$ (21,370)	$ (19,906)

Net loss reconciliation:
	GAAP Net loss attributable to Marketo	$ (17,950)	$ (18,238)	$ (12,803)	$ (54,346)	$ (38,424)
	Stock-based compensation	9,726	10,667	6,515	29,674	17,433
	Amortization of acquired intangible assets	597	597	468	1,791	1,423
	Adjustment to redeemable non-controlling interests	912	1,630	-	2,542	-
	Non-GAAP Net loss attributable to Marketo	$ (6,715)	$ (5,344)	$ (5,820)	$ (20,339)	$ (19,568)

Basic and diluted net loss per share
	GAAP	$ (0.43)	$ (0.43)	$ (0.31)	$ (1.29)	$ (0.96)
	Non-GAAP	$ (0.16)	$ (0.12)	$ (0.14)	$ (0.48)	$ (0.49)

Shares used to compute basic and diluted GAAP and Non-GAAP net loss per share		42,163	42,835	40,668	42,208	40,157

MARKETO, INC.
NON-GAAP SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands)
(Unaudited)


1) Calculated Billings

	Three Months Ended September 30, 2015	Three Months Ended September 30, 2014
Total revenue	$ 54,922	$ 39,287
Add increase in total deferred revenue	1,515	48
Total calculated billings	$ 56,437	$ 39,335


2) Reconciliation of GAAP Operating Cash Flow to Free Cash Flow

	Three Months Ended September 30, 2015	Three Months Ended September 30, 2014
GAAP net cash provided by operating activities	$ 2,302	$ (1,194)
Less purchases of property plant and equipment	(3,296)	(1,979)
Less capitalized software development	(154)	(59)
Free cash flow	$ (1,148)	$ (3,232)

MARKETO, INC.
RECONCILIATION OF GAAP NET LOSS TO NON-GAAP NET LOSS PER SHARE TARGETS
(In thousands, except per share data)
(Unaudited)

	Three Months Ending			Twelve Months Ending
	December 31, 2015			December 31, 2015


GAAP net loss per diluted share range	$ (0.52)	-	$ (0.54)	$ (1.82)	-	$ (1.84)
Adjustments:
Stock-based compensation	0.25		0.25	0.95		0.95
Amortization of acquired intangibles per share	0.01		0.01	0.06		0.06
NCI adjustment to redemption value	0.04		0.04	0.10		0.10
Non-GAAP net loss per diluted share range	$ (0.22)	-	$ (0.24)	$ (0.71)	-	$ (0.73)

Weighted Average Shares Outstanding	43,472		43,472	42,526		42,526

The GAAP and non-GAAP net income per share targets provided above and elsewhere in this press release are estimates. Marketo's future performance involves risks and uncertainties and the Company's actual results could differ materially from such estimates. Some of the factors that could affect the Company's operating results are set forth under the caption " 'Safe harbor' statement under the Private Securities Litigation Reform Act of 1995" in this release.

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SOURCE Marketo, Inc.