TECHTARGET 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 consolidated financial statements and accompanying notes and the other financial information included elsewhere in this Quarterly Report on Form 10-Q. In this discussion and analysis, dollar, share and per share amounts are not rounded to thousands unless otherwise indicated. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly under the heading "Risk Factors." Overview Background We are a leading provider of specialized online content and brand advertising that brings together buyers and sellers of corporate information technology ("IT") products. We sell customized marketing programs that enable IT vendors to reach corporate IT decision makers who are actively researching specific IT purchases.

Our integrated content platform consists of a network of over 115 websites that we complement with targeted in-person events. Throughout the critical stages of the purchase decision process, our content offerings meet IT professionals' needs for expert, peer and IT vendor information, and provide a platform on which IT vendors can launch targeted marketing campaigns that generate measurable, high Return on Investment ("ROI"). As IT professionals have become increasingly specialized, they have come to rely on our sector-specific websites for purchasing decision support. Our content enables IT professionals to navigate the complex and rapidly changing IT landscape where purchasing decisions can have significant financial and operational consequences. Based upon the logical clustering of our users' respective job responsibilities and the marketing focus of the products that our customers are advertising, we currently categorize our content offerings across nine distinct media groups: Application Architecture and Development; Channel; CIO/IT Strategy; Data Center and Virtualization Technologies; Business Applications and Analytics; Networking; Security; Storage; and TechnologyGuide.

Executive Summary During 2011 and the nine-month period ended September 30, 2012, we made significant progress on our strategy to grow our business and increase the reach of our offerings. It continues to be the case that, central to these efforts, is the progress that we are making with our new product platform, Activity Intelligence, and the continued expansion of our direct international capabilities.

Key strategic activities during the period ended September 30, 2012 included: • Activity Intelligence - Approximately 430 of our customers now have access to the Activity Intelligence dashboard and we continue to see growth in purchases of our Nurture and Notify™ offering, as this add-on service has now been sold onto over 100 lead generation campaigns. We also have other product initiatives designed to leverage this platform in the development pipeline that we currently anticipate will increase our penetration of our accounts, as well as potentially leverage our core capabilities in complementary offerings. The first such offering, which is anticipated to be a subscriptionproduct based on our ability to leverage the data that we manage, iscurrently in testing and is anticipated to be generally available in early 2013.

• International Update - International geo-targeted revenue increased by more than 50% in the nine months ended September 30, 2012 as compared to the same period a year ago. We believe that our integrated product offering across regions continues to resonate withinternational marketers and is contributing to our successful results. We plan on continuing to invest in these capabilities as we seekopportunities to increase our global reach. As noted previously, we established an office in Singapore to help better manage Southeast Asia sales operations and work more closely with Asia-Pacific (APAC) regional marketers, and our results from our new direct operations in both Singapore and Australia are contributing to our international growth.

As of June 30, 2012, the most recent date on which thesemetrics were available, we had approximately 435,000 registered members from Southeast Asia and served more than 8 million Southeast Asian ad impressions each quarter across our network of sites that focus on enterprise information technology topics such as data centers, virtualization, cloud computing, storage, networking and business applications. In addition to our offices in Singapore and Australia, we have APAC operational bases in both China and India.

19 -------------------------------------------------------------------------------- Table of Contents • Site launches: In the nine month period ended September 30, 2012, we launched the following new websites: • SearchFinancialApplications.com™, a new websitedesigned to assist business and information technology professionals using technology to manage finance and human resources (HR) functions. Launching with over 25,000 active, registered members, SearchFinancialApplications.com publishes articles, tutorials and other resources to help organizations make smarter technology purchasing decisions in areas such as accounting/general ledger (GL), procurement, analytics, employee financials, payroll, HR/HCM, talent management, workforce analytics and more.

• SearchSolidStateStorage.com™, a new website designed to assist information technology professionals with technical research on solid state storage products including flash technologies. Solid state storage is made from silicon microchips and - unlike traditional spinning hard disk drives and tape media - stores data electronically instead of magnetically, so it has no mechanical parts. Solid state storage is gaining rapid deployment as the latest in a wave of technology innovations intended to add efficiency to storage infrastructures, innovations that include data deduplication, automated tiering, thin provisioning and storage virtualization.

• SearchCloudApplications.com™, a new website dedicated to serving the information needs of information technology (IT) and business professionals deploying Software-as-a-Service (SaaS) business applications in the cloud, and developers and architects tasked with building custom applications leveraging the cloud.

Business Trends The following discussion highlights key trends affecting our business.

• Macro-economic Conditions and Industry Trends. Because all of our customers are IT vendors, the success of our business is intrinsically linked to the health, and subject to market conditions, of the IT industry. In the nine month period ended September 30, 2012, we saw continued weakness in the IT market. Using the six largest Global IT vendors by revenue (HP, IBM, Dell, Microsoft, Cisco and Oracle) as a barometer, their aggregate revenue has declined year over year for three quarters in a row. Additionally, we continue to see evidence that some North American IT vendors' are reacting to the challenging selling landscape by cutting their marketing budgets, laying off marketing staff and reorganizing marketing departments, all of which negatively affects our results. As a result, until management is able to better determine if these trends by our customers are a temporary condition or a new level of spending, although we will continue to invest in growth areas, management will continue to carefully control discretionary spending including travel and entertainment, and the filling of new and replacement positions, in an effort to maintain profit margins and cash flow.

• Customer Segments. In the three-month period ended September 30, 2012 all three of our customer segments report being negatively affected by the challenging macro-economic conditions. Specifically, during that three-month period, revenues from the top 12 Global IT vendors declined approximately 10%, while revenue from our mid-sized and small customers was roughly flat. Although we expect the short term pressure from the weak macro-economic conditions to continue, from a more long-term perspective we are encouraged by the strategic level of discussions that we continue to have with our largest customers about our new and developing product capabilities.

Sources of Revenues We sell advertising programs to IT vendors targeting a specific audience within a particular IT sector or sub-sector. We maintain multiple points of contact with our customers to provide support throughout their organizations and the sales cycle. As a result, our customers often run multiple advertising programs with us in order to reach discrete portions of our targeted audience. There are multiple factors that can impact our customers' advertising objectives and spending with us, including but not limited to, product launches, increases or decreases to their advertising budgets, the timing of key industry marketing events, responses to competitor activities and efforts to address specific marketing objectives such as creating brand awareness or generating sales leads.

Our services are generally delivered under short-term contracts that run for the length of a given advertising program, typically less than six months.

20-------------------------------------------------------------------------------- Table of Contents We use the following online and event offerings to provide IT vendors with numerous touch points to reach key IT decision makers and to provide IT professionals with highly specialized content across multiple forms of media. We are experienced in assisting advertisers to develop custom advertising programs that maximize branding and ROI. The following is a description of the services we offer: Online. Our network of websites forms the core of our content platform. Our websites provide IT professionals with comprehensive decision support information tailored to their specific areas of responsibility and purchasing decisions. Through our websites, we offer a variety of online media offerings to connect IT vendors to IT professionals. Our lead generation offerings allow IT vendors to maximize ROI by capturing qualified sales leads from the distribution and promotion of content to our audience of IT professionals. In August of 2011, TechTarget released a major upgrade to our Activity Intelligence platform.

Beginning in 2012, all of our lead generation campaigns offer the Activity Intelligence Dashboard. In March 2012, we introduced Nurture & Notify as a new service of the Activity Intelligence platform. Our branding offerings provide IT vendors exposure to targeted audiences of IT professionals actively researching information related to their products and services. Our branding offerings include display advertising and custom offerings. Display advertising can be purchased on specific websites within our network, and against specific technology segments. Our custom offerings allow customers to have content or entire "micro-sites" created that focus on topics related to their marketing objectives and include promotion of these vehicles to our users. These offerings give IT vendors the ability to increase their brand awareness to highly specialized IT sectors.

Our lead generation offerings include the following: • Activity Intelligence Dashboard. This new technology platform gives TechTarget's customer's marketers and sales representatives a real-time view of their prospects, which includes insights on the research activities of technology buying teams, including at an account level.

• White Papers. White papers are technical documents created by IT vendors to describe business or technical problems which are addressed by the vendors' products or services. As part of a lead generation campaign, we post white papers on our relevant websites and our users receive targeted promotions about these content assets. Prior to viewing white papers, our registered members and visitors supply their corporate contact information and agree to receive further information from the vendor. The corporate contact and other qualification information for these leads are supplied to the vendor in real time through our proprietary lead management software.

• Webcasts, Podcasts, Videocasts and Virtual Trade Shows. Webcasts, podcasts, videocasts, virtual trade shows and similar content bring informational sessions directly to attendees' desktops and, in the case of podcasts, directly to their mobile devices. As is the case with white papers, our users supply their corporate contact and qualification information to the webcast, podcast, virtual trade show or videocast sponsor when they view or download the content. Sponsorship includes access to the registrant information and visibility before, during and after the event.

Our other offerings include the following: • Nurture and Notify. This new service, using the Activity Intelligence platform, helps both technology marketers and their sales teams to identify highly active prospects, detect emerging projects, retarget interested buying teams, and accelerate engagement with specific accounts.

• Custom Content Creation. In support of our advertisers lead generation programs, we will sometimes create white papers, case studies, webcasts, or videos to our customers' specifications through our Custom Media team.

These content assets are then promoted to our audience in the context of the advertisers' lead generation programs.

• Content Sponsorships. IT vendors pay us to sponsor editorially created content vehicles on specific technology topics, such as "e-Zines," "e-Books," and "e-Guides." In some cases, these vehicles are supported by multiple sponsors in a single segment, with the registrant information provided to all participating sponsors. Because these offerings are editorially driven, advertisers get the benefit of association with independently created content, and access to qualified sales leads that are researching the topic.

21 -------------------------------------------------------------------------------- Table of Contents • List Rentals. We also offer IT vendors the ability to message relevant registered members on topics related to their interests. IT vendors can rent our e-mail and postal lists of registered members using specific criteria such as company size, geography or job title.

• Third Party Revenue Sharing Arrangements. We have arrangements with certain third parties, including for the licensing of our online content, for the renting of our database of opted-in e-mail subscribers and for which advertising from customers of certain third parties is made available to our website visitors. In each of these arrangements we are paid a share of the resulting revenue.

Events. Events revenue represented approximately 17% and 16% of total revenues for the three months ended September 30, 2012 and 2011, respectively, and approximately 12% and 13% of total revenues for the nine months ended September 30, 2012 and 2011, respectively. Most of our media groups operate revenue generating events. The majority of our events are free to IT professionals and are sponsored by IT vendors. Attendees are pre-screened based on event-specific criteria such as sector-specific budget size, company size, or job title. We offer three types of events: multi-day conferences, single-day seminars and custom events. Multi-day conferences provide independent expert content for our attendees and allow vendors to purchase exhibit space and other sponsorship offerings that enable interaction with the attendees. We also hold single-day seminars on various topics in major cities. These seminars provide independent content on key sub-topics in the sectors we serve, are free to qualified attendees, and offer multiple vendors the ability to interact with specific, targeted audiences actively focused on buying decisions. Our custom events differ from our seminars in that they are exclusively sponsored by a single IT vendor, and the content is driven primarily by the sole sponsor.

Cost of Revenues, Operating Expenses and Other Expenses consist of cost of revenues, selling and marketing, product development, general and administrative, depreciation, and amortization expenses. Personnel-related costs are a significant component of most of these expense categories except for depreciation and amortization.

Cost of Online Revenue. Cost of online revenue consists primarily of: salaries and related personnel costs; member acquisition expenses (primarily keyword purchases from leading Internet search sites); freelance writer expenses; website hosting costs; vendor expenses associated with the delivery of webcast, podcast, videocast and similar content, and list rental offerings; stock-based compensation expenses; facilities and other related overhead.

Cost of Events Revenue. Cost of events revenue consists primarily of: facility expenses, including food and beverages for the event attendees as well as office space; salaries and related personnel costs; event speaker expenses; stock-based compensation expenses; and other related overhead.

Selling and Marketing. Selling and marketing expense consists primarily of: salaries and related personnel costs; sales commissions; travel, lodging and other out-of-pocket expenses; stock-based compensation expenses; facilities and related overhead. Sales commissions are recorded as expense when earned by the employee, based on recorded revenue.

Product Development. Product development expense includes the creation and maintenance of our network of websites, advertiser offerings and technical infrastructure. Product development expense consists primarily of salaries and related personnel costs; stock-based compensation expenses; facilities and other related overhead.

General and Administrative. General and administrative expense consists primarily of: salaries and related personnel costs; facilities expenses; accounting, legal and other professional fees; and stock-based compensation expenses.

Depreciation. Depreciation expense consists of the depreciation of our property and equipment. Depreciation of property and equipment is calculated using the straight-line method over their estimated useful lives, ranging from two to ten years.

Amortization of Intangible Assets. Amortization of intangible assets expense consists of the amortization of intangible assets recorded in connection with our acquisitions. Separable intangible assets that are not deemed to have an indefinite life are amortized over their estimated useful lives, which range from one to nine years, using methods that are expected to reflect the estimated pattern of economic use.

Interest Income (Expense), Net. Interest income (expense), net consists primarily of interest income earned on cash, cash equivalents and short and long-term investments less any interest expense incurred. We historically have invested our cash in money market accounts, municipal bonds and government agency bonds.

22 -------------------------------------------------------------------------------- Table of Contents Application of Critical Accounting Policies and Use of Estimates The discussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue, long-lived assets, the allowance for doubtful accounts, stock-based compensation, and income taxes. We based our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Our actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements. See the notes to our consolidated financial statements for information about these critical accounting policies as well as a description of our other accounting policies.

Revenue Recognition We generate substantially all of our revenue from the sale of targeted advertising campaigns which we deliver via our network of websites and events.

In all cases, we recognize revenue only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.

The majority of our online media sales involve multiple product offerings.

Although each of our online media offerings can be sold separately, most of our online media sales involve multiple online offerings. Because objective evidence of fair value does not exist for all elements in our bundled product offerings, we use a best estimate of selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third party evidence of fair value. We establish best estimates considering multiple factors including, but not limited to, class of client, size of transaction, available media inventory, pricing strategies and market conditions. We believe the use of the best estimate of selling price allows revenue recognition in a manner consistent with the underlying economics of the transaction. We apply a relative selling price method to allocate arrangement consideration at the inception of the arrangement to each deliverable in a multiple element arrangement. Revenue is then recognized as delivery occurs.

We evaluate all deliverables of an arrangement at inception and each time an item is delivered, to determine whether they represent separate units of accounting. Based on this evaluation, the arrangement consideration is measured and allocated to each of these elements.

Event Sponsorships. We sell our events separately from our other service offerings and recognize sponsorship revenue from events in the period in which the event occurs. The majority of our events are free to qualified attendees; however, certain events are based on a paid attendee model. We recognize revenue for paid attendee events upon completion of the event. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue.

Online Media. Revenue for lead generation campaigns is recognized as follows: • Beginning in the period ended March 31, 2012, our lead generation campaigns all offer the Activity Intelligence Dashboard. In order to manage the lead generation component, we have changed our operational approach and the contractual terms and conditions under which we sell our products. Instead of contracting to sell individual elements, we sell various lead generation campaigns with the dashboard. Accordingly, revenue is recognized ratably over the duration of the campaigns. As part of these offerings, we will guarantee a minimum number of qualified leads to be delivered over the course of the advertising campaign. We determine the content necessary to achieve performance guarantees. Scheduled end dates of advertising campaigns sometimes need to be extended, pursuant to the terms of the arrangement, to satisfy lead guarantees. The customer has cancellation privileges which generally require advance notice by the customer and require proportional payment by the customer for the portion of the campaign period that has been provided.

• In 2011, revenue for elements of lead generation campaigns was recognized as follows: • White Papers. White paper revenue was recognized ratably over the period in which the white paper was available on our websites.

23 -------------------------------------------------------------------------------- Table of Contents • Webcasts, Podcasts, Videocasts and Virtual Trade Shows. Webcast, podcast, videocast, virtual trade show and similar content revenue was recognized ratably over the period in which the webcast, podcast, videocast or virtual trade show was available on our websites.

Revenue for other online media offerings is recognized as follows for 2011 as well as for the three and nine-month periods ended September 30, 2012: • Custom Content Creation. Custom content revenue is recognized when the creation is completed and delivered to the customer.

• Content Sponsorships. Content sponsorship revenue is recognized ratably over the period in which the related content vehicle is available on our websites.

• List Rentals. List rental revenue is recognized in the period in which the list is sent to our customers.

• Banners. Banner revenue is recognized in the period in which the banner impressions or clicks occur.

• Third Party Revenue Sharing Arrangements. Revenue from third party revenue sharing arrangements is recognized on a net basis in the period in which the services are performed. For certain third party agreements where we are the primary obligor, revenue is recognized on a gross basis in the period in which the services are performed.

We recognize revenue from cost per lead advertising in the period during which the leads are delivered, which is typically less than six months.

Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue.

Long-Lived Assets, Goodwill and Indefinite-lived Intangible Assets Our long-lived assets consist primarily of property and equipment, goodwill and other intangible assets. Goodwill and other intangible assets have arisen principally from our acquisitions. The amount assigned to intangible assets is subjective and based on our estimates of the future benefit of the intangible assets using accepted valuation techniques, such as discounted cash flow and replacement cost models. Our long-lived assets, other than goodwill, are amortized over their estimated useful lives, which we determined based on the consideration of several factors including the period of time the asset is expected to remain in service. Intangible assets are amortized over their estimated useful lives, which range from one to nine years, using methods of amortization that are expected to reflect the estimated pattern of economic use.

We evaluate the carrying value and remaining useful lives of long-lived assets, other than goodwill, whenever indicators of impairment are present. We evaluate the carrying value of goodwill annually, and whenever indicators of impairment are present, using a discounted cash flow approach to fair value determinations.

Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts receivable and accounts payable. The carrying value of these instruments approximates their estimated fair values.

Allowance for Doubtful Accounts We offset gross trade accounts receivable with an allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We review our allowance for doubtful accounts on a regular basis, and all past due balances are reviewed individually for collectability. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Provisions for doubtful accounts are recorded in general and administrative expense. If our historical collection experience does not reflect our future ability to collect outstanding accounts receivable, our future provision for doubtful accounts could be materially affected. To date, we have not incurred any write-offs of accounts receivable significantly different than the amounts reserved.

The allowance for doubtful accounts was $1.1 million at both September 30, 2012 and at December 31, 2011.

24 -------------------------------------------------------------------------------- Table of Contents Stock-Based Compensation We measure stock-based compensation at the grant date based on the fair value of the award and recognize stock-based compensation expense in the Statement of Operations using the straight-line method over the vesting period of the award or using the accelerated method if the award is contingent upon performance goals. We use the Black-Scholes option-pricing model to determine the fair-value of stock option awards. We calculated the fair values of the options granted using the following estimated weighted-average assumptions: Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011 Expected volatility * 79.83 % * 79.41 % Expected term * 6.25 years * 6.25 years Risk-free interest rate * 1.54 % * 1.92 % Expected dividend yield * 0.00 % * 0.00 % Weighted-average grant date fair value per share * $ 4.39 * $ 4.77 * there were no options granted in the first three quarters of 2012 As there was no public market for our common stock prior to our initial public offering in May 2007, and there has been limited historical information on the volatility of our common stock since the date of our initial public offering, we determine the volatility for options granted based on an analysis of the historical volatility of our stock and reported data for a peer group of companies that issued options with substantially similar terms. There were no options granted during the first three quarters of 2012.

The expected volatility of options granted has been determined using a weighted average of the historical volatility of our stock and the peer group of companies for a period equal to the expected life of the option. The risk-free interest rate is based on a zero coupon United States treasury instrument whose term is consistent with the expected life of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. We applied an estimated annual forfeiture rate based on our historical forfeiture experience of 4.5% and 3.6% in determining the expense recorded in the nine months ended September 30, 2012 and 2011, respectively.

Internal-Use Software and Website Development Costs We capitalize costs of materials, consultants and compensation and related expenses of employees who devote time to the development of internal-use software and website applications and infrastructure involving developing software to operate our websites. However, we expense as incurred website development costs for new features and functionalities since it is not probable that they will result in additional functionality until they are both developed and tested with confirmation that they are more effective than the current set of features and functionalities on our websites. Our judgment is required in determining the point at which various projects enter the states at which costs may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized, which is generally three years. To the extent that we change the manner in which we develop and test new features and functionalities related to our websites, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of website development costs we capitalize and amortize in future periods would be impacted. We review capitalized internal-use software and website development costs for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. We would recognize an impairment loss only if the carrying amount of the asset is not recoverable and exceeds its fair value. We capitalized internal-use software and website development costs of $0.7 million and $1.0 million for the three months ended September 30, 2012 and 2011, respectively, and $2.3 million and $2.6 million for the nine months ended September 30, 2012 and 2011.

Income Taxes We are subject to income taxes in both the United States and foreign jurisdictions, and we use estimates in determining our provision for income taxes. We recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates.

Our deferred tax assets are comprised primarily of book to tax differences on stock-based compensation and net operating loss ("NOL") carryforwards. As of December 31, 2011, we had state NOL carryforwards of approximately $17.6 million, which may be used to offset future taxable income. The NOL carryforwards expire through 2029.

25-------------------------------------------------------------------------------- Table of Contents Net Income (Loss) Per Share We calculate basic earnings per share ("EPS") by dividing earnings available to common shareholders for the period by the weighted average number of common shares and vested, undelivered restricted stock awards. Because the holders of unvested restricted stock awards do not have nonforfeitable rights to dividends or dividend equivalents, we do not consider these awards to be participating securities that should be included in our computation of earnings per share under the two-class method. Diluted EPS is computed using the weighted-average number of common shares and vested, undelivered restricted stock awards during the period, plus the dilutive effect of potential future issuances of common stock relating to stock option programs and other potentially dilutive securities using the treasury stock method. In calculating diluted EPS, the dilutive effect of stock options and restricted stock awards is computed using the average market price for the respective period. In addition, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense and assumed tax benefit of stock options and restricted stock awards that are in-the-money. This results in the "assumed" buyback of additional shares, thereby reducing the dilutive impact of stock options.

Results of Operations The following table sets forth our results of operations for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011 ($ in thousands) Revenues: Online $ 20,447 83 % $ 21,763 84 % $ 65,556 88 % $ 66,294 87 % Events 4,102 17 4,129 16 9,076 12 10,266 13 Total revenues 24,549 100 25,892 100 74,632 100 76,560 100 Cost of revenues: Online 5,828 24 5,547 21 17,818 24 16,873 22 Events 1,371 6 1,488 6 3,289 4 3,607 5 Total cost of revenues 7,199 29 7,035 27 21,107 28 20,480 27 Gross profit 17,350 71 18,857 73 53,525 72 56,080 73 Operating expenses: Selling and marketing 9,082 37 10,182 39 27,472 37 28,997 38 Product development 1,919 8 1,874 7 5,655 8 5,690 7 General and administrative 3,433 14 3,105 12 10,061 13 10,362 14 Restructuring - - - - - - 384 1 Depreciation 850 3 692 3 2,428 3 2,001 3 Amortization of intangible assets 843 3 955 4 2,654 4 3,030 4 Total operating expenses 16,127 66 16,808 65 48,270 65 50,464 66 Operating income 1,223 5 2,049 8 5,255 7 5,616 7 Interest income, net 37 * 20 * 85 * 32 * Income before provision for income taxes 1,260 5 2,069 8 5,340 7 5,648 7 Provision for income taxes 588 2 1,106 4 2,338 3 2,942 4 Net income $ 672 3 % $ 963 4 % $ 3,002 4 % $ 2,706 4 % * Not meaningful 26 -------------------------------------------------------------------------------- Table of Contents Comparison of Three Months Ended September 30, 2012 and 2011 Revenues Three Months Ended September 30, Increase Percent 2012 2011 (Decrease) Change ($ in thousands) Revenues: Online $ 20,447 $ 21,763 $ (1,316 ) (6 )% Events 4,102 4,129 (27 ) (1 ) Total revenues $ 24,549 $ 25,892 $ (1,343 ) (5 )% Online. The decrease in online revenue was primarily attributable to a $1.5 million decrease in branding revenues, primarily due to decreases in banner sales volume, as well as a $0.1 million decrease in third party revenues. The decrease was offset in part by a $0.3 million increase in lead generation offerings. The decrease is primarily in North American sales, caused by delays in IT purchases due to uncertainty in the macro environment, offset in part by an increase in international revenues.

Events. Events revenue was relatively flat year over year.

Cost of Revenues and Gross Profit Three Months Ended September 30, Increase Percent 2012 2011 (Decrease) Change ($ in thousands) Cost of revenues: Online $ 5,828 $ 5,547 $ 281 5 % Events 1,371 1,488 (117 ) (8 ) Total cost of revenues $ 7,199 $ 7,035 $ 164 2 % Gross profit $ 17,350 $ 18,857 $ (1,507 ) (8 )% Gross profit percentage 71 % 73 % Cost of Online Revenues. The increase in cost of online revenues was primarily attributable to a $0.4 million increase in payroll-related expenses due to international growth and a $0.2 million increase in search engine marketing costs. These increases are offset in part by a reduction of variable direct and third party costs due to the decrease in online revenues year over year.

Cost of Events Revenues. Cost of events revenues decreased in the third quarter as compared to the same period a year ago, primarily due to decreases in variable direct costs as a result of the decrease in the number of events that we conducted and a reduction in payroll-related expenses due to decreased headcount.

Gross Profit. Our gross profit is equal to the difference between our revenues and our cost of revenues for the period. Gross profit for the third quarter of 2012 was 71% as compared to 73% for the same period of 2011. The decrease in online gross profit was $1.6 million, attributable to the decrease in online revenue in combination with an overall increase in online cost of revenues, due primarily to the fixed nature of some of these costs, as compared to the third quarter of 2011. Events gross profit remained flat year over year. Because the majority of our costs are labor-related, we expect our gross profit to fluctuate from period to period depending on the total revenues for the period, as well as the relative contribution of online and events revenues to our total revenues.

Operating Expenses and Other Three Months Ended September 30, Increase Percent 2012 2011 (Decrease) Change ($ in thousands) Operating expenses: Selling and marketing $ 9,082 $ 10,182 $ (1,100 ) (11 )% Product development 1,919 1,874 45 2 General and administrative 3,433 3,105 328 11 Depreciation 850 692 158 23 Amortization of intangible assets 843 955 (112 ) (12 ) Total operating expenses $ 16,127 $ 16,808 $ (681 ) (4 )% Interest income, net $ 37 $ 20 $ 17 85 % Provision for income taxes $ 588 $ 1,106 $ (518 ) (47 )% 27 -------------------------------------------------------------------------------- Table of Contents Selling and Marketing. Selling and marketing expenses decreased $1.1 million, primarily due to a $0.3 million decrease in incentive compensation due to lower revenues, a $0.3 million decrease in stock-based compensation due to the completion of vesting of certain equity awards and a $0.3 million decrease in travel costs as a result of a focused effort to reduce these costs.

Product Development. Product development expense remained flat year over year.

General and Administrative. The increase in general and administrative expense was primarily attributable to a $0.4 million increase in our bad debt reserve based on a review of our aging at September 30, 2012, and a $0.2 million increase in stock-based compensation, primarily due to a modification for the acceleration of vesting of certain equity awards, offset in part by a decrease in incentive compensation related directly to our financial results.

Depreciation and Amortization of Intangible Assets. The increase in depreciation expense is related to our increased fixed asset base, primarily as a result of our continued investment in internal-use software development costs and, to a lesser extent, computer equipment. The decrease in amortization of intangible assets expense was primarily attributable to certain intangible assets becoming fully amortized during 2011.

Interest Income, Net. The increase in interest income, net, reflects our higher cash balances in the three months ended September 30, 2012 as compared to the same period in 2011.

Provision for Income Taxes. Our effective income tax rate was 46.7% and 53% for the three months ended September 30, 2012 and 2011, respectively. The decrease in the tax rate year over year is caused by decreases in the amount of non-deductible stock-based compensation and changes in the relative amounts of earnings from the different jurisdictions. The effective income tax rate is based upon the estimated annual effective tax rate in compliance with Accounting Standards Codification ("ASC") 740, Income Taxes, and other related guidance. We update the estimate of our annual effective tax rate at the end of each quarterly period. Our estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and interpretations of tax laws.

Comparison of Nine Months Ended September 30, 2012 and 2011 Revenues Nine Months Ended September 30, Increase Percent 2012 2011 (Decrease) Change ($ in thousands) Revenues: Online $ 65,556 $ 66,294 $ (738 ) (1 )% Events 9,076 10,266 (1,190 ) (12 ) Total revenues $ 74,632 $ 76,560 $ (1,928 ) (3 )% Online. The decrease in online revenue was primarily attributable to a $2.7 million decrease in branding revenues, primarily due to decreases in banner sales volume, as well as a $0.2 million decrease in third party revenues. The decrease was offset in part by a $2.2 million increase in lead generation offerings. The decrease is primarily in North American sales, caused by delays in IT purchases due to uncertainty in the macro environment, offset in part by an increase in international revenues.

Events. The decrease in events revenue is primarily due to a reduction in seminars and custom events.

Cost of Revenues and Gross Profit Nine Months Ended September 30, Increase Percent 2012 2011 (Decrease) Change ($ in thousands) Cost of revenues: Online $ 17,818 $ 16,873 $ 945 6 % Events 3,289 3,607 (318 ) (9 ) Total cost of revenues $ 21,107 $ 20,480 $ 627 3 % Gross profit $ 53,525 $ 56,080 $ (2,555 ) (5 )% Gross profit percentage 72 % 73 % 28 -------------------------------------------------------------------------------- Table of Contents Cost of Online Revenues. The increase in cost of online revenues was primarily attributable to a $1.4 million increase in payroll-related expenses due to international expansion and a $0.2 million increase in search engine marketing costs. These increases are offset in part by a reduction of variable direct and third party costs due to the decrease in online revenues year over year.

Cost of Events Revenues. Cost of events revenues decreased in the nine months ended September 30, 2012 as compared to the same period a year ago, primarily due to a reduction in payroll-related costs due to a decrease in headcount and lower variable direct costs as a result of the decrease in the number of events that we conducted.

Gross Profit. Our gross profit is equal to the difference between our revenues and our cost of revenues for the period. Gross profit for the nine months ended September 30, 2012 was 72%, as compared to 73% for the same period in 2011. Online gross profit decreased $1.7 million in the nine months ended September 30, 2012 as compared to the same period in 2011, attributable to the decrease in online revenue in combination with an overall increase in online cost of revenues, due primarily to the fixed nature of some of these costs, as compared to the same period a year ago. Events gross profit decreased by $0.9 million, primarily as a result of the lower events revenues, which were offset in part by a reduction in related variable direct costs. Because the majority of our costs are labor-related, we expect our gross profit to fluctuate from period to period depending on the total revenues for the period, as well as the relative contribution of online and events revenues to our total revenues.

Operating Expenses and Other Nine Months Ended September 30, Increase Percent 2012 2011 (Decrease) Change ($ in thousands) Operating expenses: Selling and marketing $ 27,472 $ 28,997 $ (1,525 ) (5 )% Product development 5,655 5,690 (35 ) (1 ) General and administrative 10,061 10,362 (301 ) (3 ) Restructuring charge - 384 (384 ) - Depreciation 2,428 2,001 427 21 Amortization of intangible assets 2,654 3,030 (376 ) (12 ) Total operating expenses $ 48,270 $ 50,464 $ (2,194 ) (4 )% Interest income, net $ 85 $ 32 $ 53 166 % Provision for income taxes $ 2,338 $ 2,942 $ (604 ) (21 )% Selling and Marketing. Selling and marketing expenses decreased $1.5 million, primarily due to a $1.2 million decrease in stock-based compensation due to the completion of vesting of certain equity awards, a $0.6 million decrease in incentive compensation due to lower revenues, and a $0.3 million decrease in travel costs as a result of a focused effort to reduce these costs.

Product Development. Product development expense remained flat year over year.

General and Administrative. The decrease in general and administrative expense was primarily attributable to a $0.4 million reduction in stock-based compensation, primarily due to the completion of vesting of certain equity awards, and a $0.3 million decrease in incentive compensation related directly to our financial results, offset in part by a $0.4 million increase in our bad debt reserve based on a review of our aging at September 30th.

Restructuring Charge. The restructuring charge in 2011 was for redundancy costs related to the Computer Weekly acquisition.

Depreciation and Amortization of Intangible Assets. The increase in depreciation expense is related to our increased fixed asset base, primarily as a result of our continued investment in internal-use software development costs and computer equipment. The decrease in amortization of intangible assets expense was primarily attributable to certain intangible assets becoming fully amortized during 2011.

Interest Income, Net. The increase in interest income, net, reflects our higher cash balances in the nine months ended September 30, 2012 as compared to the same period in 2011.

Provision for Income Taxes. Our effective income tax rate was 43.8% and 52% for the nine months ended September 30, 2012 and 2011, respectively. The decrease in the tax rate year over year is caused by a decrease in the amount of non tax-deductible stock-based compensation during those respective periods. The effective income tax rate is 29 -------------------------------------------------------------------------------- Table of Contents based upon the estimated annual effective tax rate in compliance with ASC 740, Income Taxes, and other related guidance. We update the estimate of our annual effective tax rate at the end of each quarterly period. Our estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and interpretations of tax laws.

Seasonality The timing of our revenues is affected by seasonal factors. Our revenues are seasonal primarily as a result of the annual budget approval process of many of our customers, the normal timing at which our customers have their new product introductions and the historical decrease in advertising and events activity in summer months. Events revenue may vary depending on which quarters we produce the event, which may vary when compared to previous periods. The timing of revenues in relation to our expenses, much of which does not vary directly with revenue, has an impact on the cost of online revenues, selling and marketing, product development, and general and administrative expenses as a percentage of revenue in each calendar quarter during the year.

The majority of our expenses are personnel-related and include salaries, stock-based compensation, benefits and incentive-based compensation plan expenses. As a result, we have not experienced significant seasonal fluctuations in the timing of our expenses period to period.

Liquidity and Capital Resources Resources We believe that our existing cash, cash equivalents and investments, our cash flow from operating activities and available bank borrowings will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future working capital requirements will depend on many factors, including the operations of our existing business, our potential strategic expansion internationally, future acquisitions we might undertake, and the expansion into complementary businesses. To the extent that our cash, cash equivalents and investments, our cash flow from operating activities and available bank borrowings are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more additional acquisitions of businesses.

September 30, December 31, 2012 2011 ($ in thousands) Cash, cash equivalents and investments $ 72,561 $ 63,221 Accounts receivable, net $ 25,939 $ 26,272 Cash, Cash Equivalents and Investments Our cash, cash equivalents and investments at September 30, 2012 were held for working capital purposes and were invested primarily in money market accounts and municipal bonds. We do not enter into investments for trading or speculative purposes.

Accounts Receivable, Net Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. The fluctuations vary depending on the timing of our service delivery and billing activity, cash collections, and changes to our allowance for doubtful accounts. We use days' sales outstanding, ("DSO"), as a measurement of the quality and status of our receivables. We define DSO as net accounts receivable at period end divided by total revenue for the applicable period, multiplied by the number of days in the applicable period. DSO was 96 days for the quarter ended September 30, 2012 and 84 days at December 31, 2011. The increase in DSO is primarily the result of cash collections being $1.6 million lower than billings during the first nine months of the year due to the timing of annual billing cycles with some of our customers. The aged accounts receivable balance at September 30, 2012 was also reflective of approximately $0.4 million of additional reserves that were booked in the quarter which increased the allowance for doubtful accounts.

Cash Flows Nine Months Ended September 30, 2012 2011 ($ in thousands) Net cash provided by operating activities $ 12,335 $ 10,572 Net cash used in investing activities(1) $ (3,182 ) $ (5,645 ) Net cash provided by financing activities $ 959 $ 1,856 (1) Cash used in investing activities is shown net of investment activity of $5.7 million and ($14.1) million for the nine months ended September 30, 2012 and 2011, respectively.

30 -------------------------------------------------------------------------------- Table of Contents Operating Activities Cash provided by operating activities primarily consists of net income adjusted for certain non-cash items including depreciation and amortization, the provision for bad debt, stock-based compensation, deferred income taxes, and the effect of changes in working capital and other activities. Cash provided by operating activities for the nine months ended September 30, 2012 was $12.3 million compared to cash provided by operating activities of $10.6 million in the nine months ended September 30, 2011. The increase in cash provided by operating activities was a result of changes in operating assets and liabilities of ($0.5) million in the nine months ended September 30, 2012 compared to ($2.2) million in the nine months ended September 30, 2011. Significant components of the changes in assets and liabilities included a slight decrease in accounts receivable in 2012 compared to an increase of $2.5 million in 2011, primarily due to strong collections in the second and third quarters of 2012 and the timing of annual billing cycles with some of our larger customers; an increase in deferred revenue of $2.4 million in the nine months ended 2012 as compared with an increase of $1.1 million in the nine months ended 2011 caused by the timing of billings associated with campaigns; and smaller increases caused by changes in our prepaid balances (primarily related to an income tax receivable balance at September 30, 2012) and decreases in accrued compensation (primarily related to incentive compensation) and other liabilities (related to deferred rent). These changes were offset in part by a $1.2 million decrease in accrued expenses during the nine months ended 2012 compared to an increase of $1.6 million in the nine months ended 2011, caused primarily by the payment of contingent compensation in the nine months ended 2012; and a decrease in income taxes payable of $0.6 million in 2012 as compared with an increase of $0.5 million in 2011.

Investing Activities Cash used in investing activities in the nine months ended September 30, 2012, net of investment activity, was $3.2 million for the purchase of property and equipment made up primarily of website development costs, computer equipment and related software and internal-use development costs. Cash used in investing activities in the nine months ended September 30, 2011 includes $2.0 million for the acquisition of Computer Weekly and its sister channel-targeted brand, MicroScope, from Reed Business Information Limited.

Equity Financing Activities We received proceeds from the exercise of stock options in the amounts of $0.8 million and $1.1 million in the nine months ended September 30, 2012 and 2011, respectively.

On August 3, 2012, our Board of Directors authorized a $20 million stock repurchase program (the "Program"). We are authorized to repurchase our common stock from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased will be determined based on an evaluation of market conditions and other factors. We may elect to implement a Rule 10b5-1 trading plan to make such purchases, which would permit shares to be repurchased when we might otherwise be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time.

During the quarter ended September 30, 2012 we repurchased 36,147 shares of common stock for $180,000 pursuant to the Program. All repurchased shares are funded with cash on hand.

Term Loan and Credit Facility Borrowings In August 2006, we entered into a credit agreement (the "Credit Agreement") with a commercial bank, which included a $10.0 million term loan (the "Term Loan") and a $20.0 million revolving credit facility (the "Revolving Credit Facility").

The Credit Agreement was amended in August 2007, in December 2008, in December 2009 and again in August 2011. The amendment in 2009 reduced the Revolving Credit Facility to $5.0 million. We paid off the remaining balance of the Term Loan in December 2009. The amendment in August 2011 extended the term of the facility and adjusted certain other financial terms and covenants.

The Revolving Credit Facility matures on August 31, 2016. Unless earlier payment is required by an event of default, all principal and unpaid interest will be due and payable on August 31, 2016. At our option, the Revolving Credit Facility bears interest at either the prime rate less 1.00% or the London Interbank Offered Rate ("LIBOR") plus the applicable LIBOR margin. The applicable LIBOR margin is based on the ratio of total funded debt to EBITDA for the preceding four fiscal quarters. As of September 30, 2012, the applicable LIBOR margin was 1.25%.

31 -------------------------------------------------------------------------------- Table of Contents We are also required to pay an unused line fee on the daily unused amount of our Revolving Credit Facility at a per annum rate based on the ratio of total funded debt to EBITDA for the preceding four fiscal quarters. As of September 30, 2012, unused availability under the Revolving Credit Facility totaled $3.2 million and the per annum unused line fee rate was 0.20%.

At September 30, 2012 and 2011 there were no amounts outstanding under this revolving loan agreement. There is a $1.2 million standby letter of credit related to our corporate headquarters lease that is outstanding at September 30, 2012, bringing our available borrowings on the $5.0 million facility to $3.8 million.

Borrowings under the Credit Agreement are collateralized by a security interest in substantially all of our assets. Covenants governing the Credit Agreement include the maintenance of certain financial ratios. At September 30, 2012 we were in compliance with all covenants under the Credit Agreement.

Capital Expenditures We have made capital expenditures primarily for computer equipment and related software needed to host our websites, internal-use software development costs, as well as for leasehold improvements and other general purposes to support our growth. Our capital expenditures totaled $3.2 million and $3.6 million for the nine month periods ended September 30, 2012 and 2011. A majority of our capital expenditures in the first nine months of 2012 and 2011 were internal-use development costs and, to a lesser extent, computer equipment and related software. We are not currently party to any purchase contracts related to future capital expenditures.

Contractual Obligations and Commitments As of September 30, 2012, our principal commitments consist of obligations under leases for office space. The offices are leased under noncancelable operating lease agreements that expire through 2020. The following table sets forth our commitments to settle contractual obligations in cash as of September 30, 2012: Payments Due By Period Less than More than Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years ($ in thousands) Operating leases $ 26,614 $ 3,068 $ 7,624 $ 6,877 $ 9,045 At September 30, 2012, we had an irrevocable standby letter of credit outstanding in the aggregate amount of $1.2 million. This letter of credit supports the lease we entered into in 2009 for our corporate headquarters. This letter of credit, subject to certain reductions, extends annually through February 28, 2020 unless notification of termination is received.

Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements.

Recent Accounting Pronouncements See Note 2 of "Notes to Consolidated Financial Statements" for recent accounting pronouncements that could have an effect on our consolidated financial statements.

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