Item 1. Business
Company Overview
Our mission is to help people navigate and truly enjoy life’s biggest moments together. Our multi-platform brands guide couples through transformative life stages - from getting married with The Knot, to having a baby with The Bump, and helping bring important celebrations to life with entertainment vendors from GigMasters.
The Knot. The Knot is the nation’s leading wedding resource and marketplace that seamlessly engages, matches, and connects couples with the right products, services, and local wedding professionals they need to plan their wedding. We believe that The Knot, as the flagship brand of XO Group, reaches a majority of couples getting married in the U.S. through the #1 wedding website, TheKnot.com, its mobile apps, national and local wedding magazines, and nationally published books. Based on ComScore data, The Knot generates more unique visitors than the next six largest wedding websites combined. In 2017, The Knot Wedding Planner app for Apple and Android devices was downloaded more than 1 million times, and at times has been ranked in the top 50 lifestyle apps in the Apple app store.
The Bump. The Bump is a leading pregnancy and parenting brand, providing personalized information, content, and tools for navigating the journey from fertility to pregnancy and parenting through the toddler years. The Bump reaches millions of expectant and new parents across its seamless app and web experience.
GigMasters. GigMasters.com (“GigMasters”) is a leading event marketplace for finding and booking the perfect entertainment and vendors for birthday parties, weddings, anniversaries, corporate events and more. Combining the efficiency of the web with the personal touch of a private event planner, GigMasters features approximately 40,000 of the best, client-reviewed entertainers and event vendors in the U.S. and Canada.
Our Largest Market Opportunity
The U.S. wedding market is large and highly fragmented. We estimate there are hundreds of thousands of local wedding professionals serving couples in the U.S. who generate over $50 billion of total annual spend. Additionally, based on our research, wedding guests give approximately 150 million gifts valued at more than $10 billion to marrying couples each year.
Despite the size of this market, there has been no proven and efficient way for couples and guests to connect with relevant partners. As leaders in the weddings space, we believe we are uniquely positioned to help couples better connect with local wedding vendors and guests find and purchase the right gift. If we are able to capitalize on this opportunity, we will be able to capture more of the marketing spend by local wedding vendors and more of the commission payments paid by our retail and commerce partners.
Services
We offer multiplatform media and marketplace services that enable our advertising and transaction partners to connect with our highly engaged audience in the wedding, pregnancy and parenting, and local entertainment markets. We reach our audience through several platforms, including websites, mobile apps, magazines and books, television, and video.
We create value for our audience, advertisers, and partners by delivering relevant and personalized solutions at key decision making moments for some of life’s proudest and happiest events. We generate revenue through four distinct and diversified products:
Local Online Advertising. Our local programs include, but are not limited to, (i) online listings, (ii) digital advertisements, and (iii) direct e-mail marketing. At December 31, 2017, TheKnot.com hosted over 264,500 free local storefront listings in more than 83 local markets highlighting offerings for over 44 categories of wedding planning services. On a trailing twelve month basis, TheKnot.com ended 2017 with more than 27,200 paying vendors, spending an average of $2,995 per year. In addition to TheKnot.com paid storefront listings, local online advertising revenue includes listings revenue generated via
GigMasters.com, an entertainment marketplace, and TwoBrightLights.com, a wedding photography syndication marketplace. In 2017, local online advertising represented 49% of our consolidated revenue.
National Online Advertising. Online programs include, but are not limited to, (i) display advertisements, (ii) custom and brand-integrated content, and (iii) lead generation marketing, including direct e-mails. In 2017, national online advertising represented 23% of our consolidated revenue.
Transactions. Our transaction offerings include a registry service that enables users to create, manage, and share multiple retail store registries from a single source, and retailer and other vendor offerings such as invitations, stationery, reception decor, and personalized gifts. Through our GigMasters.com website, our audience has the opportunity to find, research, and book the right entertainment vendor for them. We earn fixed fees, a percentage of sales, per-unit activity fees, or some combination thereof with respect to these transactions. In 2017, transaction revenue represented 17% of our consolidated revenue and was our fastest growing revenue stream.
Publishing and Other. We publish traditional magazines for our flagship brand, The Knot. The Knot publishes a national magazine four times a year, and a regional magazine semi-annually in 16 U.S. markets. Each magazine provides original, expert-driven content in our signature voice, driving readers back to our digital assets for an interactive experience and additional connections and services. In 2017, publishing and other represented 11% of our consolidated revenue.
Strategy
At XO, we help people navigate and enjoy life's biggest moments together. We create value for our audience, partners, and stockholders by building and scaling two-sided marketplaces that bring together people who are planning their most important life events and the business partners who serve them, making it easy for them to connect and transact.
We attract our audience, which is largely women, by providing them with an indispensable and personalized planning experience.
We attract business partners, ranging from local wedding professionals to large-cap, publicly traded companies, by connecting them to a highly qualified customer base and helping them transact.
We believe our position as a market leader in the wedding space, our best-in-class products, our talented team, and an unwavering commitment to continue to improve, puts us in an advantaged position to continue to create more value for our users, partners, and stockholders.
In order to capitalize on our opportunity, we are pursuing the following strategy, which has been approved by our Board of Directors.
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Focus on our customers' individual planning experiences: Our 20 year history of serving couples has positioned us well to understand the needs of a large variety of users. From that, we have created a platform that can provide a unique planning experience for every user. By focusing on each couple's special journey, we will continue to increase engagement between our couples and business partners, providing both with increasing value.
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Deliver the world's best local wedding marketplace: Our marketplace products provide our local wedding professionals with marketing services that help them build and grow their businesses. We plan to launch more features that unlock more sales inventory, increase quality leads, and provide our pros with improved marketing opportunities.
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Increase transaction revenue: We will continue the growth of our transaction revenue by offering industry-leading wedding websites and registry creation and aggregation tools for couples, while making it easy for guests to purchase gifts for the couple. We will also continue to integrate revenue-generating third-party products and services to facilitate our couples' wedding planning, including invitations, reception decor, hotel room blocks, and more.
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Manage national online advertising and publishing for profit: We will profitably manage our national online and print businesses through the challenges of industry declines while continuing to look for creative new products to offer our advertising partners.
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Invest for the future while pursuing a measured capital allocation strategy: We operate in an ever-evolving industry. In order to ensure we are even more relevant and competitive, we will continue to invest in initiatives that complement our existing business and enhance the experience of our couples, guests, local professionals and partners, which we believe will drive significant results in future years. Our capital allocation strategy is to balance internal investments, strategic investments, mergers and acquisitions, and stock repurchases.
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Live our values: Our values define how we manage our business and make decisions. Our core values are Loving our Users, Doing the Right Thing, Debating It, Owning Our Outcomes, Making Fast Decisions, and Getting Better. We believe these values are essential to our ability to build a high-performing company that makes us proud and creates shareholder value.
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Field the best team in the game: We are as good as our people, and we have some of the best in the world. We will continue to hire, coach, develop, and support the most talented and effective team in the industry.
We believe our strategy will best serve our users and business partners and drive significant long-term shareholder value.
Competition
We compete with companies that seek the attention of our audience and/or the advertising and marketing budgets of our business partners, including, but not limited to, local marketplaces, general market media and internet companies, wedding and baby media and internet companies, social networks, and search engines. We expect ongoing competition because of the size of the markets we serve and business opportunities presented by the growth of the internet and transactional marketplaces. Competition may also intensify as a result of industry consolidation and a lack of substantial barriers to entry in our market. For information regarding competition-related risks, see the information in “Item 1A:
Item 1A. Risk Factors
Certain factors may have a material adverse effect on our business, financial condition and/or results of operations. In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in connection with your investment in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. Because of the following factors, as well as other factors affecting our financial condition and results of operations, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Risks Related to Our Business and Industry
Our operating results may fluctuate, are difficult to predict and could fall below expectations.
Our operating and financial results have fluctuated significantly on a quarterly basis during our operating history and may continue to fluctuate significantly as a result of a variety of factors, many of which are outside of our control. These factors include:
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the level of online usage and traffic on our digital properties;
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the addition or loss of advertisers;
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the advertising budgeting cycles of specific advertisers;
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the willingness and ability of our consumers and vendors to transact on our properties;
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the regional and national magazines’ publishing cycles;
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the amount and timing of capital expenditures and other costs relating to the expansion of our operations, including those related to acquisitions;
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the introduction of new sites and services by us or our competitors;
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changes in our pricing policies or the pricing policies of our competitors; and
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general economic conditions, as well as economic conditions specific to the Internet, online and offline media and transactions.
We cannot assure you that we will be able to meet rapidly changing advertiser, vendor and consumer demands for content, products and user engagement in a timely manner, if at all, even if we are successful in enhancing and upgrading our digital properties (including our websites and mobile properties) in response to advances in technology and evolving preferences. If the number of visitors to our digital properties stagnates or declines, we may not be able to create or maintain sufficient advertiser or vendor interest in our digital platforms. Even if we are successful in driving consumer traffic to our digital properties, advertisers and vendors are sensitive to general economic conditions and reductions in consumer spending, among other events and trends, which could result in lower transactions revenue and reduced advertising expenditures, particularly from national advertisers. We cannot assure you that our current advertisers will fulfill their obligations under existing contracts, continue to advertise beyond the terms of existing contracts or enter into any additional contracts with us. Our advertising and other revenue could also decline as a result of pricing pressures on digital advertising rates due to industry developments, such as the fragmentation of digital media. If we are unable to effectively monetize our digital properties, our business, results of operations, financial condition and prospects could be materially and adversely affected.
Our ability to accurately measure and monetize the level of offline store level traffic attributable to an online digital campaign conducted on our sites.
Due to the foregoing or other factors, it is also possible that our results of operations in one or more future quarters may fall below the expectations of investors and/or securities analysts. We also experience some seasonal trends that may produce variations in quarterly results and financial conditions. To the extent there are significant fluctuations in our financial results, the trading price of our common stock could decline materially. In view of the rapidly evolving nature of our business, period-to-period comparisons of our results of operations may not be meaningful, and you should not rely upon them as an indication of future performance.
Our business depends on strong brands, and failing to maintain and enhance our brands would hurt our business.
Our brands have contributed significantly to the success of our business. Building and maintaining the brand recognition of The Knot, The Bump, GigMasters, and our other brands is critical to attracting and expanding our base of online users and offline readership, advertisers, corporate customers and other partners, and increasing their engagement with our services, and will depend largely on our ability to maintain member trust, be a technology leader and continue to provide high-quality solutions, which we may not do successfully. Our brands may be negatively affected by a number of factors, including the reputation of our content
and products and our ability to adapt to technological changes. Despite our efforts to protect and prevent misuse of our brands, if others misuse our brands or pass themselves off as being endorsed or affiliated with us, it could harm our reputation, and our business could suffer. Our brands are also important in attracting and maintaining highly qualified employees. If we fail to build or maintain awareness of our brands, our business and our results of operations could be materially and adversely affected.
Our ongoing investment in new businesses and new products, services, and technologies is inherently risky, and could disrupt
our ongoing business and/or fail to generate the results we are expecting.
We have invested in, and expect to continue to invest in, new businesses, products, services and technologies. We cannot be certain that our products, services and digital properties will appeal to, and garner acceptance from, the public or our advertisers and other third-party partners. We expect to continue to increase our operating expense growth in excess of historic rates in the near future to launch new products or upgrade existing products. We may not be able to successfully leverage our audience share or brand positioning to create and maintain use of our new products and services. Moreover, even if new features and services prove to be commercially successful, they may reduce usage of our existing features and services. If we are unable to generate sufficient revenue from new services and features to gain a return on our investments, or if our revenue from existing services declines as a direct result of a shift in consumer usage to new services, our business, results of operations and financial condition could be adversely affected.
If we are unable to continue to develop solutions that generate revenue from advertising and other services delivered to mobile devices, our business could be harmed.
The number of people who access the internet through devices other than computers, including mobile phones, and handheld computers such as notebooks and tablets, and who use mobile payment and transaction services, has increased substantially in recent years and is expected to continue to grow. A significant and growing portion of users access our digital platforms through mobile devices. If we cannot continue to provide effective mobile platforms for advertising and other service solutions, we may be unable to attract new and retain existing customers for advertisers or other services. In addition, if we are unable to implement successful monetization strategies for mobile users, or if we incur excessive expenses in our effort to do so, our business and results of operations could be adversely affected.
Our businesses could be negatively affected by changes in Internet search engine and app store search algorithms and email marketing policies.
We depend in part on various Internet search engines and app store search engines to direct traffic to our websites and other properties. Similarly, we depend on high-traffic digital, social, and other properties, as distribution channels, to promote apps, our websites and properties. Our ability to maintain the number of potential customers directed to our websites and properties is not entirely within our control. For example, search engines and app stores often revise their algorithms in an attempt to improve the search results presented to their users. Our ability to influence the search engine and app stores rankings of our websites and properties, through our search engine optimization efforts or otherwise, is limited. In addition, we cannot assure you that distribution through high-traffic digital, social, and other properties will yield additional users or that such relationships will continue to be available on commercially reasonable terms. Changes by Internet search engines in their algorithms, or changes to competitive dynamics that affect our distribution relationships in a negative manner, could cause our websites and properties to receive less user traffic. Fewer potential customers could materially and adversely affect our business, results of operations and financial condition. In addition, email marketing policies and standards are evolving domestically and internationally. If we fail to prevent being blacklisted from major service providers, or if our emails are otherwise blocked by spam filters, we may be subject to significant loss of email marketing revenues and user traffic.
We face intense competition in our markets. If we do not continue to innovate and provide products and services that are useful to users, we may not remain competitive, and our revenue and results of operations could be adversely affected.
The Internet and mobile advertising markets, online markets and publishing markets in which our brands operate are intensely competitive, and we expect competition to intensify in the future. For example, our brands face competition for members, users, readers and advertisers from the following areas:
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stand-alone online services, websites, mobile apps or blogs targeted at brides and grooms, such as those offered by WeddingWire, Weddingbee, Honeybook, Zola, Thumbtack, and MyWedding.com, and at new parents, such as Johnson & Johnson’s BabyCenter and others;
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online and brick and mortar retail stores, manufacturers and regional directories;
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wedding sub-domains, channels or niche sites of major online destinations or portals, such as Pinterest, Amazon, Google and AOL’s Huffington Post and Style Me Pretty;
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bridal magazines and their online destinations, such as Condé Nast’s Brides, and Sequential Brands Group's Martha Stewart Weddings;
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parenting magazines and their online destinations; and
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online and retail stores offering gift registries, especially from retailers offering specific gift registries.
Marketplaces compete in two-sided markets, and must attract both consumers and vendors in order to be successful. Consumers who might use our marketplaces to buy goods or services have a wide variety of alternatives, including traditional department, warehouse, boutique, discount and general merchandise stores (as well as the online and mobile operations of these traditional retailers), online retailers and their related mobile offerings, online and offline classified services and other shopping channels. In addition, consumers have a large number of online and offline channels focused on one or more of the categories of products and services offered on our sites. Consumers and vendors who might use our sites to sell goods or services also have many alternatives, including general online ecommerce sites, and more specialized sites, such as websites operated by bridal gown designers, wedding hall venues, destination wedding resorts, etc. Vendors who use our marketplace may also choose to sell their goods and services through other channels.
The principal competitive factors for marketplaces like ours include the following:
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ability to attract, retain and engage consumers and vendors, as well as maintain user engagement;
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volume of transactions and price and selection of products and services;
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trust in the vendor and the transaction;
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customer service (both that provided by us and that provided by the vendors in our marketplace);
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brand recognition;
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website, mobile platform and application ease-of-use and accessibility;
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system reliability;
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level of service fees; and
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ease of use and quality of search tools.
We expect competition to increase because of the business opportunities presented by the growth of the Internet and transaction-based marketplaces. Our competition may also intensify as a result of industry consolidation and a lack of substantial barriers to entry. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and substantially larger user bases than we have and, therefore, have significant ability to attract advertisers, vendors and users. In addition, many of our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in digital user requirements, as well as devote greater resources than we can to the development, promotion and sale of services.
We cannot assure you that our current or potential competitors will not develop services and products comparable or superior to those that we develop or adapt more quickly than we do to new technologies, evolving industry trends or changing Internet user preferences. Increased competition could result in price reductions, lower margins or loss of market share, any of which would materially and adversely affect our business, results of operations and financial condition. We cannot assure you that we will be able to compete successfully against current and future competitors.
Our transactions business is dependent on third-party participants, whose lack of performance could adversely affect our results of operations.
A growing portion of our revenue is from transactions. Our transactions revenue is dependent on third parties’ participation in our transactions programs, and the success of those partners and vendors. We are dependent on our retail partners and local vendors to manage competitive pressures, and to the extent they are unable to do so, we may experience lower revenue, which could materially and adversely affect our results of operations. Such businesses are also dependent on our partners keeping their respective websites and other digital properties operational, as well as on the visitors who use those sites. Any decline in traffic or technical difficulties experienced by these websites or mobile devices may negatively affect our results of operations.
The fulfillment and delivery of products purchased by customers are processed and delivered by our third-party partners. As a result, we are dependent on our partners to manage inventory, process orders and distribute products to our customers in a timely manner. We also rely on information provided by these partners to update and integrate information daily. If our partners experience problems with customer fulfillment or inventory management, or if we cannot integrate our processes with those of our partners, our business, results of operations and financial condition would be harmed.
In addition, our partners are highly dependent on the health of the U.S. or foreign economies and many are further dependent on local economic conditions in the states or countries in which they primarily conduct their businesses. Deterioration in
macroeconomic conditions and consumer confidence that negatively impacts our partners’ businesses could result in lower revenue to our business, which could materially and adversely affect our business, results of operations and financial condition.
Fraudulent or unlawful activities on our marketplace could harm our business, and could severely diminish consumer confidence in and use of our marketplace.
The law relating to the liability of marketplace operators is currently unsettled. We face risks with respect to fraudulent activities on our marketplace and periodically receive complaints from consumers who may not have received the goods or services that they had contracted to purchase. We may also incur losses from claims that the consumer did not authorize the purchase, from consumer fraud, from erroneous transmissions and from consumers who have closed bank accounts or have insufficient funds in them to satisfy payments they are obligated to make. Although we have implemented measures to detect and reduce the occurrence of fraudulent activities, combat bad consumer experiences and increase customer satisfaction, including evaluating vendors on the basis of their transaction history and restricting or suspending their activity where appropriate, we cannot assure you that these measures will be effective in combating fraudulent transactions or improving overall satisfaction among consumers and other participants. Additional measures to address fraud could negatively affect the attractiveness of our marketplace to consumers or vendors, resulting in a reduction in the ability to attract new consumers or vendors or retain current consumers or vendors, damage to our reputation, or a diminution in the value of our brand names. We also may be unable to prevent vendors on our marketplace from selling unlawful goods or services, or selling goods or services in an unlawful manner, and could face civil or criminal liability for unlawful activities by our vendors.
We may be subject to legal liability associated with providing online services or content.
We may be subject to claims for defamation, negligence, copyright or trademark infringement, personal injury or other legal theories relating to the information we publish, display or distribute. These types of claims have been brought, sometimes successfully, against online services, as well as other print publications in the past. We could also be subject to claims based upon the content that is accessible from our online sites through links to other online sites or through content and materials that may be posted by users in message bulletin boards, listings, wedding websites and other areas of the site. Our insurance, which covers commercial general liability, may not adequately protect us against these types of claims.
The laws that shield online service providers such as us from liability for the activities of users of their online services are often challenged in the United States and internationally. We may be unable to prevent users of our services from providing negligent, unlawful or inappropriate advice, information or content via our services, or from behaving in an unlawful manner, and we may be subject to allegations of civil or criminal liability for negligent, fraudulent, unlawful or inappropriate activities carried out by users of our services. Claims could be made against online services companies under both United States and foreign law such as fraud, defamation, libel, invasion of privacy, negligence, data breach, copyright or trademark infringement, or other theories based on the nature and content of the materials disseminated by users of our services. In addition, domestic and foreign legislation has been proposed that could prohibit or impose liability for the transmission over the Internet of certain types of information. Our defense of any of these actions could be costly and involve significant time and attention of our management and other resources.
The listing or sale by our vendors of unlawful, counterfeit or stolen goods or unlawful services, or sale of goods or services in an unlawful manner, may result in allegations of civil or criminal liability for unlawful activities against us involving activities carried out by vendors through our marketplace. Allegations of infringement of intellectual property rights, including but not limited to counterfeit items, have resulted in threatened and actual litigation from time to time by rights owners against the operators of other marketplaces. Plaintiffs in these and similar suits seek, among other remedies, injunctive relief and damages. Statutory damages for copyright or trademark violations could range up to $150,000 per copyrighted work infringed and $2,000,000 per trademark violation (for use of a counterfeit mark) in the United States, and may be even higher in other jurisdictions.
If we become liable for information provided by our users and carried via our service in any jurisdiction in which we operate, we could be directly harmed and we may be forced to implement new measures to reduce our exposure to this liability. In addition, the increased attention focused upon liability issues as a result of these lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business. In addition, negative publicity and user sentiment generated as a result of fraudulent or deceptive conduct by users of our services could damage our reputation, reduce our ability to attract new users or retain our current users, and diminish the value of our brand.
In the future, we may be required to spend substantial resources to take additional protective measures or discontinue certain service offerings, either of which could harm our business. Any costs incurred as a result of potential liability relating to the sale of unlawful services or the unlawful sale of services could harm our business.
Consumers may sue us if any of the products that our retail or other partners sell online or otherwise make available are defective, fail to perform properly or injure the user. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. As a result, any such claims, whether or not successful, could seriously damage our financial results, reputation and brand name.
We may be unable to continue to use the domain names that we use in our business, or prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks or service marks.
We have registered domain names for the websites that we use in our business, such as TheKnot.com, TheBump.com, and GigMasters.com. If we lose the ability to use a domain name, whether due to trademark claims, failure to renew the applicable registration or any other cause, we may be forced to market our products under a new domain name, which could cause us substantial harm or cause us to incur significant expense in order to purchase rights to the domain name in question. In addition, others could attempt to capitalize on our brand recognition by using domain names similar to ours. Domain names similar to ours have been registered by others in the United States and elsewhere. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to or otherwise decrease the value of our brand or our trademarks or service marks. Protecting and enforcing our rights in our domain names may require litigation, which could result in substantial costs and diversion of management’s attention.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brands.
We rely on copyright, trademark, patent and other intellectual property laws to protect our rights in our proprietary technology, processes, designs, content and other intellectual property to the extent such protection is sought or secured at all. We also depend on trade secret protection through, among other things, confidentiality agreements and/or invention assignment agreements with our employees, licensees and others, as well as through license agreements with our licensees and other partners. We may not have agreements containing adequate protective provisions in every case, and the contractual provisions that are in place may not provide us with adequate protection in all circumstances. In addition, the steps we might otherwise take may not be adequate to protect against infringement and misappropriation of our intellectual property by third parties. As an example, we may be unable to secure patent or other intellectual property rights broad or strong enough to protect the underlying proprietary technology.
Intellectual property laws afford us only limited protection. The duration of the protection afforded to our intellectual property depends on the type of property in question, the laws and regulations of the relevant jurisdiction and the terms of our license agreements with others. A third party may be able to develop similar or superior technology, processes, content or other intellectual property independently. In addition, monitoring the unauthorized use of our intellectual property, including our copyrights, trademarks, service marks and patents, is difficult. Third parties may register marks that are confusingly similar to the trademarks or services marks that we have used in the United States and our failure to monitor foreign registrations or mark usage may impact our rights in certain trademarks or services marks. Judicial decisions, legislation, and other patent and intellectual property reform efforts could also undermine the validity, scope, and enforceability of our patent and intellectual property holdings. The unauthorized reproduction or misappropriation of our intellectual property rights could enable third parties to benefit from our technology without paying us for it, diminish the value of our brands, competitive advantages or goodwill and result in decreased sales. If this occurs, our business and prospects would be materially and adversely affected.
In addition, other parties may assert infringement claims against us or claim that we have violated a patent or infringed a copyright, trademark or other proprietary right belonging to them, whether on our own or by virtue of our use of certain third-party technology. If we are subject to claims of infringement or are infringing the rights of third parties, we may not be able to obtain licenses to use those rights on commercially reasonable terms, if at all. In that event, we might need to undertake substantial reengineering to continue our online offerings. Any effort to undertake such reengineering might not be successful, resulting in a failure to continue to provide our services or sell our products. Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages. An injunction or other court order could prevent us from operating products or our business.
Furthermore, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. In addition, we have not obtained copyright and trademark protection for all of our proprietary technology, processes, content and brands in all of the countries where we sell our products or otherwise operate. This could leave us helpless to stop potential infringers or possibly even unable to sell our products or provide our services in certain territories.
Disputes concerning the ownership of our rights to use intellectual property could be costly and time-consuming to litigate, may distract management from other tasks of operating the business and may result in our loss of significant rights and the loss
of our ability to operate our business. Litigation has been and may continue to be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others.
System disruptions, failures, or breaches in of our systems or our third-party service providers, including those resulting from cyber-attacks, security vulnerabilities, defects or errors, natural disasters and acts of terrorism, could harm our business.
The continuing, uninterrupted and secure performance of our computer systems is critical to our success. While we continue to expand our focus on this issue and are taking safeguarding measures, we are vulnerable to the increasing risk of cyber-attacks and other security incidents, such as computer viruses, denial of service attacks, phishing attacks, electronic break-ins and similar disruptions. Because the techniques used in cyber-attacks are becoming more sophisticated in ways that avoid detection, we or our service providers may not be able to anticipate, prevent, identify or adequately remediate such incidents. In addition, third parties may attempt to fraudulently induce employees, users, or our third-party service providers to disclose information in order to gain access to our data. A cyber-attack or other security incident involving our or our service providers’ systems may result in unauthorized access, loss, or other compromise to, among other things, our data, including trade secrets, our customers’ data, billing data such as credit or debit card information, and any other data that is confidential or subject to applicable domestic or foreign privacy or security laws or regulations. If we suffer a cyber-attack or other security incident due to third-party or employee conduct, or otherwise, we could be subject to lawsuits, regulatory investigations, increased costs associated with regulatory compliance and systems remediation, investigations and fines and assessments by payment card companies, harm to our brand and reputation, disruption in our ability to provide our services, any of which could reduce revenue, increase costs, and materially harm our business and results of operations. Although we carry general liability insurance, our insurance may not cover any claims by regulators or by dissatisfied advertisers or customers, or classes of them, and may not be adequate to indemnify us for any costs or liability that may be imposed on us as a result of any system disruptions, failures, cyber-attacks, security breaches or other compromise or to our ability to provide various services to our customers and users.
Our business operations are vulnerable to damage or interruption from power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins, earthquakes, fires, floods, and similar events. Any of these events could have a material adverse impact on our business, results of operations, financial condition, data and reputation, and our insurance coverage may be insufficient to compensate us for losses that may occur. In addition, acts of terrorism could cause disruptions in our business or the economy as a whole. Our principal executive offices are located in New York City, a region that has experienced acts of terrorism in the past. Our servers may also be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data or the unauthorized disclosure of confidential customer data. Although we have disaster recovery capabilities, we cannot assure you that we will not suffer from business interruption as a result of any such events, and any such event could also result in large expenditures necessary to repair or replace such networks or information systems or to protect them from similar events in the future. As we rely heavily on our servers, computer and communications systems and the Internet to conduct our business and provide high-quality service to our customers, such disruptions could negatively impact our ability to run our business, result in loss of existing or potential customers and increased maintenance costs, which would adversely affect our results of operations and financial condition.
Any of these events could have a material adverse impact on our business, results of operations, financial condition, data and reputation, and our insurance coverage may be insufficient to compensate us for losses that may occur.
Privacy concerns relating to our technology could damage our reputation and deter current and potential users from using our products and services.
We currently face a myriad of U.S. federal and state statutory and regulatory rules regarding the collection, use, transfer, and retention of personal information and other data privacy and security issues. These laws and regulations continue to be in a state of flux and are expanding. In addition, because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, even if we don’t have a local entity, employees or infrastructure. In general, foreign data protection, privacy, and other laws and regulations are more restrictive than those in the United States. As in the U.S., the substance and applicability of such laws in Europe and other foreign jurisdictions are subject to continued development and interpretation by agencies and courts. For example, the European Union and many countries within the European Union have adopted and are developing data privacy protection and security directives relating to the collection, use, storage and transfer of data that are more stringent than in the United States. In addition, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in our rapidly evolving industry, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices.
The cost of compliance with any applicable laws could be material, and we may not be able to comply with them in a timely or cost-effective manner, if at all. Compliance with any applicable laws could also delay or impede the development of new products or services, result in negative publicity and damage to our brand an reputation, increase our operating costs, require
significant management time and attention, or subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices. In addition, changes to existing laws or the passage of new laws could create uncertainty in the marketplace that could reduce demand for our services or increase the cost of doing business as a result of litigation costs or increased service delivery costs or otherwise have a material adverse effect on our business, results of operations and financial condition.
In addition, privacy concerns in general may cause visitors to avoid online sites like ours that collect and use information, for purposes such as behavioral targeted advertising, and even the perception of privacy or security concerns, whether or not valid, may inhibit market acceptance of our services. In addition, if our privacy practices are deemed unacceptable by watchdog groups or privacy advocates, such groups may attempt to harm our business by blocking access to our sites or disparaging our reputation and our business and may have a material effect on our results of operations and financial condition. We may also be subject to claims of liability or responsibility for the actions of third parties with whom we interact or upon whom we rely in relation to various services, including but not limited to vendors and business partners. These third parties may be vulnerable to privacy violations, and threats, such as computer hacking, cyber-terrorism or other unauthorized attempts to access, modify or delete our or our customers' information or business assets that they service or maintain on our behalf. The foregoing could have a material effect on our business, results of operations, and financial condition.
We are subject to payments-related risks.
We accept payments using a variety of methods, including credit card, debit card, credit accounts (including promotional financing), gift cards, direct debit from a customer’s bank account, consumer invoicing, physical bank check, and payment upon delivery. As we offer new payment options to our customers, we may become subject to additional regulations and compliance requirements (including obligations to implement enhanced authentication processes that could result in significant costs and reduce the ease of use of our payments products), as well as fraud. If we were found to be in violation of applicable laws or regulations, we could be subject to additional requirements and civil and criminal penalties, or forced to cease providing certain services. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide certain payment methods and payment processing services, including the processing of credit cards, debit cards, electronic checks, and promotional financing. In each case, it could disrupt our business if these companies become unwilling or unable to provide these services to us.
We are also subject to payment card association operating rules, including data security rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business, our reputation, our brand name, and our results of operations could be adversely affected.
We may rely on third-party license agreements for technology related to our products and services, and the failure to secure such agreements could delay or prevent us from being able to commercialize our products and services.
We might need to license third-party software to enhance our products and services and meet evolving customer requirements. These licenses may not continue to be available on commercially reasonable terms or at all. Some of this technology could be difficult to replace once integrated. The loss of, or inability to obtain, these licenses could result in delays or reductions of our applications until we identify, license and integrate or develop equivalent software, and new licenses could require us to pay higher royalties. If we are unable to successfully license and integrate third-party technology, we could experience a reduction in functionality and/or errors or failures of our products or services, which may reduce demand for our products and services. Third-party licenses may expose us to increased risks, including risks associated with the integration of new technology, the impact of new technology integration on our existing technology, open source software conditions on use or disclosure, the diversion of resources from the development of our own proprietary technology, and our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs.
We depend on our management team and other key personnel. Loss of any key member of that team may prevent us from executing our business plan in a timely manner.
Our success depends largely upon our ability to attract and retain executive officers and other key personnel, including senior creative, technical, operational and finance executives. If our management team, including any new-hires, fails to work together effectively and to execute our plans and strategies on a timely basis, or if we fail to successfully integrate newly hired executives or senior managers, or if we fail to attract, integrate or retain key personnel or other highly qualified employees, our business could be harmed. We cannot assure you that if we were to experience a high degree of management change in the future, we would be
able to replace departing members of management in a timely manner or successfully integrate newly-hired executives, managers or highly qualified personnel.
Our business could be adversely affected if we are not able to integrate any future acquisitions successfully or operate successfully under our strategic partnerships.
In the past, we have completed numerous acquisitions and investments in other companies, as well as strategic partnerships. In the future, we may acquire, or invest in, complementary companies, products or technologies or enter into new strategic partnerships. Acquisitions, investments and partnerships involve numerous risks, including:
•difficulties in integrating operations, technologies, products and personnel;
•diversion of financial and management resources from existing operations;
•operating under commercial agreements entered into by an acquisition target;
•risks of entering new markets;
•potential loss of key employees; and
•inability to generate sufficient revenue to offset acquisition or investment costs.
To pay for an acquisition or to enter into a strategic alliance, we might use equity securities, debt, cash, or a combination of the foregoing. If we use equity securities, our existing stockholders may experience dilution. Any such acquisitions or strategic alliances may require us to obtain additional equity or debt financing, which may not be available on commercially acceptable terms, if at all.
Impairment charges related to assets may have a material adverse effect on our financial results.
We have several investments and intangible assets that, depending upon competitive and economic conditions, could become impaired, which could have a material adverse effect on our financial results. In the past we have recorded charges against our earnings for amortization of intangibles with a definite life, as well as impairment charges on certain intangible assets with indefinite lives and investments, and we may be required to take other charges, including write-downs of significant amounts, in the future. Our results of operations and financial condition could be materially and adversely affected by such charges.
The ongoing effects of the U.S. Tax Cuts and Jobs Act (the “Tax Act”) and the refinement of provisional estimates could make our results difficult to predict.
Our effective tax rate may fluctuate in the future as a result of the Tax Act, which was enacted on December 22, 2017. The Tax Act introduces significant changes to U.S. income tax law that will have a meaningful impact on our provision for income taxes. Accounting for the income tax effects of the Tax Act requires significant judgments and estimates in the interpretation and calculations of the provisions of the Tax Act.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements for the year ended December 31, 2017. The U.S. Treasury Department, the Internal Revenue Service (IRS), and other standard-setting bodies may issue guidance on how the provisions of the Tax Act will be applied or otherwise administered that is different from our interpretation. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the IRS or other standard-setting bodies, we may make adjustments to the provisional amounts that could materially affect our financial position and results of operations as well as our effective tax rate in the period in which the adjustments are made.
Our effective tax rate is subject to significant fluctuations, which could have a material adverse effect on our financial results.
Our effective tax rate could fluctuate significantly and could be adversely affected to the extent earnings are lower than anticipated in states where we have lower statutory tax rates and higher than anticipated in states where we have higher statutory tax rates. Our effective tax rate could also fluctuate due to changes in the valuation of our deferred tax assets or liabilities or changes in tax laws, regulations, accounting principles or interpretations thereof. These fluctuations in our effective tax rate, including the impact of adverse outcomes from tax audits by domestic and foreign tax authorities, could have a material adverse effect on our business, results of operations and financial condition.
Material weaknesses in our internal control over financial reporting could, if not remediated, adversely impact the reliability of our financial reports.
Our business and stock price may be adversely affected if our internal control over financial reporting is not effective. Under Section 404 of the Sarbanes-Oxley Act of 2002 and rules promulgated by the SEC, we are required to conduct a comprehensive evaluation of our internal control over financial reporting. To complete this evaluation, we are required to document and test our internal control over financial reporting; management is required to assess and issue a report concerning our internal control over financial reporting; and our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting. Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.
In the course of the external audit of the Consolidated Financial Statements for the year ended December 31, 2016, we identified a material weakness in our controls over national online advertising revenue recognition. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A more complete description of the recently identified errors and the resulting material weakness is included in “Part II. Item 9A. Controls and Procedures” in this annual report on Form 10-K. Although we have remediated this material weakness, we can provide no assurance that our remediation efforts will be effective or that additional material weaknesses in our internal control over financial reporting will not be identified in the future.
The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, which could cause us to fail to meet our reporting obligations, lead to a loss of investor confidence and have a negative impact on the trading price of our common stock.
We could face additional regulatory requirements, tax liabilities and other risks related to our continuing operations in China and Hong Kong, and other markets outside the United States where we may commence operations.
We have continuing operations in China and Hong Kong. There are risks related to doing business in international markets in general, such as:
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difficulties in staffing and managing our current and future foreign operations;
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challenges caused by language, cultural differences and by doing business with foreign agencies and governments;
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changes in regulatory requirements and uncertainty regarding liability for services and content, including data privacy and cybersecurity issues;
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tariffs and other trade barriers;
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fluctuations in currency exchange rates and foreign exchange controls
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adverse tax consequences;
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stringent local labor laws and regulations; and
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political or social unrest or economic instability.
One or more of these factors could harm our current or future international operations.
In addition, compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business and could interfere with our ability to offer, or prevent us from offering, our products and services to one or more countries or expose us or our employees to fines and penalties. These numerous and sometimes conflicting laws and regulations include import and export requirements, content requirements, trade restrictions, tax laws, sanctions, internal and disclosure control rules, data privacy and security requirements, restrictions on the collection and use of consumer data, labor relations laws, U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business, and damage to our reputation. Although we have implemented policies and procedures designed to address these laws, we cannot assure you that our employees, contractors, or agents will not violate our policies or any applicable laws or regulations. Any such violations could include prohibitions on our ability to offer our products and services to one or more countries, and could also materially damage our reputation, our brand, our ability to expand our international operations, our ability to attract and retain employees, our business, and our results of operations, and could expose us to lawsuits and regulatory investigations. In addition, we cannot predict whether duties, taxes, or other similar restrictions will be imposed by the U.S., Asia, or other countries in the future, or what effect any of these actions would have, if any, on our business, results of operations, and financial condition. Changes in regulatory, geopolitical, social, economic, or monetary policies and other factors, may have a material adverse effect on our business in the future, or may require us to significantly modify our current business practices.
We maintain a significant operating presence in China and certain of those operations are subject to local Chinese law. There are uncertainties in the interpretation of Chinese laws and regulations. If our Chinese business interests were found to be in violation of any existing or future Chinese laws or regulations or if interpretations of laws and regulations were to change, the business could be subject to fines and other financial penalties, have licenses revoked, or the operations in China could be forced to shut down entirely.
In addition to the risks associated with our continuing operations in China and Hong Kong, on December 30, 2014, we completed the disposition of our Ijie operations; while we experienced cost savings as a result of this disposition, any benefits we receive may be offset by contingent liabilities or additional tax obligations associated with this disposition. For example, if third parties seek to hold us responsible for the liabilities of the Ijie operations, or if any disputes arise between us and the purchasers of the Ijie operations, our business could be harmed.
It is possible that we may not be able to obtain additional financing necessary to execute our business strategy.
We currently believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for the foreseeable future. Our ability to meet our obligations in the ordinary course of business is dependent upon our ability to maintain profitable operations and/or raise additional financing through public or private equity or debt financings, or other arrangements with corporate sources or other sources of financing to fund operations. However, there is no assurance that we will maintain profitable operations or that additional funding, if required, will be available to us in amounts or on terms acceptable to us.
Risks Related to Our Common Stock
Our stock price has been, and will likely continue to be, highly volatile and subject to significant price and volume fluctuations.
In the recent past, the equity trading markets have experienced, and may continue to experience, significant periods of volatility, resulting in highly variable and unpredictable pricing of equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Our common stock has experienced significant volume and price fluctuations in the past. Our current market price and valuation may not be sustainable. If the market price of our common stock declines significantly, you may be unable to resell your common stock at or above your purchase price. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were to become the subject of securities class action litigation, we could face substantial costs and be negatively affected by diversion of our management’s attention and resources. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly, including a decline below your purchase price, in the future. In addition, the stock markets in general can experience considerable price and volume fluctuations, which could result in substantial losses for our stockholders.
Future sales of shares of our common stock, or the perception that these shares might be sold, could adversely affect the market price of our common stock.
In the past, we have filed shelf registration statements with the SEC covering re-sales of shares of our common stock by institutional investors who purchased our shares in private placements. Certain future holders of our common stock may be granted rights to participate in, or require us to file, registration statements for re-sales of common stock, and we may complete public offerings of shares or issue shares pursuant to acquisitions that are freely tradable.
We cannot predict the effect, if any, that future sales of shares of our common stock into the market, or the availability of shares of common stock for future sale, will have on the market price of our common stock. Sales of substantial amounts of common stock (including shares issued upon the exercise of outstanding stock options or vesting of restricted stock), or the perception that such sales could occur, may materially and adversely affect prevailing market prices for our common stock.
Provisions in our certificate of incorporation, bylaws and Delaware law could deter takeover attempts, which could adversely affect the price of our common stock.
Provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We may issue shares of preferred stock in the future without stockholder approval and upon such terms as our board of directors may determine. Our issuance of this preferred stock could have the effect of making it more difficult for a third party to acquire or of discouraging a third party from acquiring, a majority of our outstanding
stock and potentially prevent the payment of a premium to stockholders in an acquisition. In addition, our certificate of incorporation includes provisions giving the board the exclusive right to fill all board vacancies, providing for a classified board of directors and permitting removal of directors only for cause and with a super-majority vote of the stockholders.
These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders, and may limit the price that investors are willing to pay in the future for shares of our common stock.
As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its outstanding voting stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our board of directors could rely on Delaware law to prevent or delay an acquisition of us. This could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or may otherwise discourage a potential acquirer from attempting to obtain control from us, either of which in turn could have a material adverse effect on the market price of our common stock.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Item 2. Properties
The following table sets forth the location, primary use and size of our properties as of December 31, 2017, all of which are leased. The leases expire at various times through 2025, subject to renewal options. We will be relocating to a larger South Norwalk, Connecticut office during 2018 to support our investment in our local businesses. We believe that our existing facilities are suitable for our current needs.
Item 3.
Item 3. Legal Proceedings
We are engaged in legal actions arising in the ordinary course of business and do not believe that the ultimate outcome of these actions will have a material effect on our results of operations, financial position or cash flows.
Item 4.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
Our common stock currently trades under the symbol “XOXO” on the New York Stock Exchange. The table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the New York Stock Exchange.
On December 31, 2017, the last reported sales price of our common stock on the New York Stock Exchange was $18.46. On February 28, 2018, the last reported sales price of our common stock on the New York Stock Exchange was $19.27.
Holders
As of February 28, 2018, there were approximately 250 holders of record of our common stock. This does not include the number of persons whose stock is in nominee or “street name” accounts through brokers.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. The payment of cash dividends in the future will be at the discretion of our board of directors.
Issuer Purchases of Equity Securities
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(a)
The terms of some awards granted under certain of our stock incentive plans allow participants to surrender or deliver shares of XO Group's common stock to us to satisfy statutory income tax withholding obligations related to the vesting of those awards. The shares listed in the table above represent the surrender or delivery of shares to us in connection with such exercise price payments or tax withholding obligations.
(b)
For purposes of this table, the "price paid per share" is determined by reference to the closing sales price per share of XO Group's common stock on the New York Stock Exchange on the date of surrender, delivery or repurchase (or on the last date preceding such surrender, delivery or repurchase for which such reported price exists) of shares withheld to satisfy tax withholding obligations and shares repurchased, as described below.
(c), (d)
On April 10, 2013, we announced that our Board of Directors had authorized the repurchase of up to $20.0 million of our common stock. On May 23, 2016, our Board of Directors authorized an additional $20.0 million repurchase of our common stock from time to time on the open market or in privately negotiated transactions. The repurchase program may be suspended or discontinued at any time, but it does not have an expiration date. As of December 31, 2017, we have repurchased a total of 1,640,012 shares of our common stock under this program for $27.7 million.
Stock Performance Graph
The graph below compares the yearly change in cumulative total stockholder return on XO Group’s common stock with the cumulative total return of (1) the NYSE Composite Index, and (2) the RDG Internet Composite Index for the five-year period ending on December 31, 2017. Historical stock price performance should not be relied upon as an indication of future stock price performance, our 2017 fiscal year end.
Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate by reference this Annual Report on Form 10-K or future filings made by XO Group under those statutes, the Stock Performance Graph is not deemed filed with the Securities and Exchange Commission, is not deemed soliciting material and shall not be deemed incorporated by reference into any of those prior filings or into any future filings made by XO Group under those statutes, except to the extent that XO Group specifically incorporates such information by reference into a previous or future filing, or specifically requests that such information be treated as soliciting material, in each case under those statutes.
Item 6.
Item 6. Selected Financial Data
The selected statements of operations data for the years ended December 31, 2017, 2016 and 2015 and the selected balance sheet data as of December 31, 2017 and December 31, 2016 have been derived from our audited financial statements included elsewhere herein. The selected statements of operations data for the years ended December 31, 2014 and 2013 and the selected balance sheet data as of December 31, 2015, 2014 and 2013 have been derived from our audited financial statements not included herein. You should read these selected financial data in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations," our financial statements and the notes to those statements included elsewhere herein.
(a)
Merchandise revenue represents revenue generated from our merchandising operations in Redding, California, which were exited in the first quarter of 2015.
(b)
Asset impairment charges of $0.6 million, $0.3 million, $0.8 million, and $1.4 million were recorded during the years ended December 31, 2017, 2015, 2014, and 2013 respectively for certain assets. An immaterial asset impairment was recorded in 2016.
(c)
Amounts include impairment charges of $1 million related to an equity investment (Jetaport, Inc.) in 2017 presented in "(Loss) gain in equity interests", impairment charges of $4.0 million of a cost method investment (Touch Media) in 2015 presented in "Interest and other income (expense)", charges related to the exit of our merchandise operations in 2014, and in 2014 and 2013, amounts include executive separation and other severance charges.
(d)
Includes $3.2 million of a loss on disposition of our Ijie operations during 2014, including $1.4 million of tax expense.
(e)
Reference is made to Note 9: Capital Stock in the Notes to the Consolidated Financial Statements on this Form 10-K, for further details addressing the stock repurchases made during the years ended December 31, 2017, 2016, and 2015.
(f)
In 2017, income tax expense includes approximately $3.0 million related to the revaluation of certain deferred tax assets in conjunction with U.S. corporate income tax reform.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this report. This discussion contains forward-looking statements relating to future events and the future performance of XO Group based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Actual results or events could differ materially from those anticipated in such forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this report, including under the caption "Risk Factors". We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Executive Overview
Our mission is to help people navigate and truly enjoy life's biggest moments together. Our multi-platform brands guide couples through transformative life stages - from getting married with The Knot, to having a baby with The Bump, and helping bring important celebrations to life with entertainment vendors from GigMasters.
XO Group offers multi-platform media and marketplace services that enable our advertising and transaction partners to connect with our highly engaged audience in the wedding, pregnancy and parenting, and local entertainment markets. We reach our audience through several platforms, including websites, mobile apps, magazines and books, and, television and video. We create value for our audience, advertisers, and partners by delivering relevant and personalized solutions at key decision making moments for some of life’s proudest and happiest events. We generate revenue through four distinct and diversified product categories: online advertising (local and national); transactions; and publishing.
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Local online advertising programs include, but are not limited to, (i) online listings, (ii) digital advertisements, and (iii) direct e-mail marketing.
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National online advertising programs include, but are not limited to, (i) display advertisements, (ii) custom and brand-integrated content, and (iii) lead generation marketing, including direct e-mail marketing.
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Our transaction offerings include a registry service that enables users to create, manage, and share multiple retail store registries from a single source, and retailer and other vendor offerings such as invitations, stationery, reception decor, and personalized gifts. Through our GigMasters.com website, our audience has the opportunity to find, research, and book the right entertainment vendor for them. We earn fixed fees, a percentage of sales, per-unit activity fees, or some combination thereof with respect to these transactions.
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Publishing and other revenue is derived from the publication of traditional magazines for our flagship brand, The Knot. The magazines provide original, expert-driven content in our signature voice, driving readers back to our digital assets for an interactive experience and additional connections and services. The Knot is published as a national magazine four times a year, and a regional magazine semi-annually in 16 U.S. markets.
Our expenses largely consist of compensation and related charges and technology costs to support our products, as well as general overhead costs, including facilities and related expenses.
Expenses directly associated with our revenues are defined as “cost of revenue” and primarily consists of costs related to internet and hosting services and payroll and direct expenses for our personnel and external vendors who are responsible for the production of our online media and our national and regional magazines.
We describe our operating expenses in four categories: product and content development; sales and marketing; general and administrative; and depreciation and amortization.
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Product and content development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product managers, developers and editors. In addition, product and content development expenses include outside services and consulting costs to support new features within the website, as well as costs associated with the maintenance of our website, apps, and data servers.
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Sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, travel expense and incentive compensation for our sales and marketing employees. Sales and marketing expenses also include branding, consumer and business-to-business marketing, and public relations costs.
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Our general and administrative expenses primarily consist of salaries, benefits, and stock-based compensation for our chief executive officer, finance, legal, human resources, and other administrative employees. In addition, general and administrative expenses include outside consulting, legal and accounting services, facilities, and other supporting overhead costs.
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Depreciation and amortization expenses primarily consist of depreciation on computer equipment, software, capitalized software development costs and amortization of leasehold improvements and purchased intangible assets.
Full Year 2017 Summary
During 2017, we posted double digit year-over-year revenue increases in the businesses that we believe have the largest long-term growth opportunities, local online advertising and transactions, while managing the remainder of our business in a difficult market. We continued to make investments in our products, which led to strong user engagement across our platforms, driving more users to our site to engage with our growing number of local vendors and with our partners.
Total revenue was up 6% to $160.6 million from $152.1 million during the prior-year period. The revenue growth was led by a 12% increase in local online advertising revenue, which represents 49% of total revenue, and a 19% increase in transactions revenue, which represents 17% of total revenue. Partially offsetting our revenue increases are publishing and other revenue declines of 12% and national online advertising declines of 4% from the prior year-end period, respectively.
Total operating expenses grew 9% from the prior-year period to $135.8 million, led by a 26% increase in general and administrative expenses, a 7% increase in sales and marketing expenses and a 3% increase in product and content expenses. Operating expense growth was primarily driven by headcount costs, elevated general and administrative costs, and bad debt expense, partially offset by lower consultant expense and an increase in capitalized salaries. Overall headcount increased 2% from December 31, 2016.
Our business continued to be profitable, delivering an Adjusted EBITDA margin of 18% and free cash flow of $19.2 million. We ended the year with a solid cash balance of $106.1 million, after we repurchased shares totaling $13.3 million during the year and executed a small acquisition for $3.2 million in cash consideration.
Performance Indicators
We evaluate our operating and financial performance using various performance indicators. Our management relies on the key performance indicators set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We discuss revenue and gross margin under Results of Operations, and cash flow results under Liquidity and Capital Resources. Other measures of our performance, including Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income, Adjusted net income per diluted share, and free cash flow are defined and discussed under Non-GAAP Financial Measures below.
(a) For computation of metrics see Non-GAAP Financial Measures section of Management's Discussion and Analysis.
(b) The increase in year-over-year revenue growth and total gross margin from 2015 to 2016 was driven by our decision to exit our lower gross margin merchandising operations.
Results of Operations
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The following table summarizes results of operations for 2017 compared to 2016:
Net Revenue
The following table sets forth revenue by category for the year ended December 31, 2017 compared to the year ended December 31, 2016, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods:
Online advertising - Local online advertising revenue increased 12%, primarily driven by growth in new vendor sales and improved vendor retention on TheKnot.com over the past twelve months. During the trailing twelve months ended December 31, 2017, TheKnot.com averaged 24,748 paying vendors (up 10% from prior year), with an average spend of $2,995 (up 1% from prior year) and a retention rate of 80% (up from a 63% retention rate at December 31, 2016). As of December 31, 2017, paying vendors totaled 27,252, up 24% from December 31, 2016.
Revenue from national online advertising was down 4% year-over-year due to a reduction in revenue across all ad products with the exception of display banners and social media offerings. Revenue from display banners was driven by growth in impressions
sold, partially offset by a slight decrease in eCPM. See "Non-GAAP Financial Measures" disclosure for the definition of eCPM. By brand, we experienced a decrease in national online revenue of 6% from TheKnot.com while TheBump.com remained flat.
Transactions - Revenue from transactions increased 19%. The increase in revenue was primarily due to an increase in traffic to our registry partners and an increase in the take rate we receive for our registry creations service. Conversion and our take rates were flat for the majority of our services. See "Non-GAAP Financial Measures" for the definition of take rate.
Publishing and other - Revenue from publishing and other decreased 12%, primarily due to a decrease in advertising revenue related to The Knot national and regional publications. Additionally, two fewer regional magazines were issued during the current-year period due to timing of our publication schedule as compared to the twelve months ended December 31, 2016.
Gross Profit/Gross Margin
The following table presents the components of gross profit and gross margin for the year ended December 31, 2017 compared to the year ended December 31, 2016:
Gross margin was flat in 2017 compared to 2016 driving a 5% increase in gross profit dollars. Increases in higher margin transactions and online advertising revenue were offset by declines in revenue and margin in Publishing and other.
Operating Expenses
Operating expenses increased 9% to $135.8 million in 2017 compared to $124.5 million in 2016. The following table presents the components of operating expenses and the percentage of net revenue that each component represented for the year ended December 31, 2017 compared to the year ended December 31, 2016:
Product and Content Development - The 2017 increase in product and content development expenses of 3% was primarily due to higher compensation costs largely related to increased headcount in our technology and product teams supporting our strategy to enhance our user experience and the functionality of our local vendor marketplace. Product and content employees account for 51% of the total company headcount, and in 2017, grew 3% to 378 employees. The increase in compensation was offset by a reduction in consultant expense and an increase in capitalizable salaries.
Sales and Marketing - The increase in sales and marketing expense of 7% was largely due to higher salaries and related expense as we invest in expanding our local sales organization to increase new vendor acquisition and vendor retention, as well
as severance expense due to exiting employees in our national business. Offsetting these increases are a reduction in stock based compensation due to the termination of awards of former employees and lesser costs associated with marketing events.
General and Administrative - The 2017 increase of 26% was primarily due to higher compliance costs that included outside professional service fees, specifically accounting and legal, as well as higher bad debt expense related to the uncollectibility of a receivable held by a national advertiser which declared bankruptcy.
Depreciation and Amortization - The increase in depreciation and amortization expense of 6% was primarily due to the accelerated amortization of a capitalized software project that we discontinued as we shift resources to optimize our product portfolio.
Loss in Equity Interests
Loss in equity interests for the years ended December 31, 2017 and December 31, 2016 was $1.2 million and $0.3 million, respectively. During the year ended December 31, 2017, we recognized $1.2 million of losses from equity method investments primarily due to an impairment of our investment in Jetaport, Inc. During the year ended December 31, 2016, we recognized $0.3 million of losses from equity method investments.
Income Tax Expense
Our provision for income taxes in 2017 increased approximately $2.5 million, or 44.2%, compared to 2016 , primarily due to the effects of the Tax Act that was enacted on December 22, 2017, offset by a decrease in income before income taxes, as well as an increase in excess tax benefits recognized from share-based compensation resulting from the adoption of ASU 2016-09. As a result of the Tax Act, we recognized a one-time mandatory transition tax on accumulated foreign subsidiary earnings, remeasured our U.S. deferred tax assets and liabilities, and reassessed the net realizability of our deferred tax assets and liabilities, which increased our provision for income taxes in 2017 by approximately $3.0 million.
Our effective tax rate in 2017 increased to 59.2%, compared to 31.5% in 2016, primarily due to the Tax Act. This impact was offset by a tax rate benefit from share-based compensation, as well as a decrease in income before income taxes, compared to 2016.
Absent unanticipated events and unexpected effects of the Tax Act, we anticipate our effective tax rate in 2018 will be lower than it was in 2017. Our 2017 effective tax rate was significantly affected by the Tax Act. In addition, since we recognize excess tax benefits/tax deficiencies on a discrete basis, we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price in each period.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The following table summarizes results of operations for 2016 compared to 2015:
Net Revenue
The following table sets forth revenue by category for the year ended December 31, 2016 compared to the year ended December 31, 2015, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods:
Online advertising - Revenue from national online advertising increased 9%. Such increase was primarily due to an increase in custom and display advertising. The increase in display advertising was driven by a greater number of impressions sold, offset by declines in CPMs. National online advertising revenue increased 7% on TheKnot.com, 15% on TheBump.com and revenue on TheNest.com, which accounts for less than 1% of our total revenue, decreased 6% compared to 2015.
Local online advertising revenue increased 7%. Such increase was primarily due to the acquisition and subsequent growth in revenue from GigMasters.com resulting from higher membership fees and greater renewal rates during 2016 compared to 2015. In addition, revenue on The Knot grew, but at a smaller percentage due to the trailing revenue impact of declines in sales resulting from sales team productivity issues encountered early in the year. On a trailing twelve month basis, TheKnot.com ended full year 2016 with 22,447 paying vendors (down 8% from prior year), with an average spend of $2,955 (up 12% from prior year) and a retention rate of 63% (down from a 74% retention rate at December 31, 2015).
Transactions - Revenue from transactions increased 55%, primarily due to an increase in couple and guest purchase conversions with our retail partners. During 2016, increases in purchase conversions were driven by increased traffic and improved conversion for our transactional partners resulting from product enhancements, while average order value and take rate remained stable. Additionally, transactions revenue includes commission revenue generated via our GigMasters brand. Throughout 2016, increased bookings and conversion rates via GigMasters led to higher revenue compared to 2015.
Merchandise - Revenue from merchandising operations decreased 100%, due to the exit of our warehouse operations in Redding, California in the first quarter of 2015.
Publishing and other - Revenue from publishing and other decreased 17%, primarily due to a decrease in advertising revenue related to The Knot national and regional publications and The Bump magazines. In June 2015, we discontinued the publication of The Bump print magazine. The last issue of The Bump magazine was distributed in December 2015.
Gross Profit/Gross Margin
The following table presents the components of gross profit and gross margin for the year ended December 31, 2016 compared to the year ended December 31, 2015:
Gross margin improved 1% to 94% in 2016 compared to 93% in 2015. The increase in the total gross margin percentage was primarily due to increases in transactions and online advertising revenue, offset by declines in our lowest margin business, print.
Operating Expenses
Operating expenses increased 9% to $124 million in 2016 compared to $114 million in 2015. This increase was primarily driven by investments made to support our marketplace, attract registry sales and enhance audience development, as well as strengthen our technology infrastructure as our business continues to grow.
The following table presents the components of operating expenses and the percentage of revenue that each component represented for the year ended December 31, 2016 compared to the year ended December 31, 2015:
Product and Content Development - Product and content development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product managers, developers and editors. In addition, product and content development expenses include outside services and consulting costs to support new features within the website, as well as costs associated with the maintenance of our website and data servers.
The 2016 increase of 11% was primarily driven by the growth of compensation expense related to the annualized impact of the October 2015 acquisition of GigMasters, as well as additional product and development resources to enhance our marketplace functionality. New tools and features include, but are not limited to, request-to-quote, book-a-tour, closed loop inbox system, and venue price calculator.
Product and content staffing accounted for approximately 64% of the total company's 2016 headcount growth, or 43 employees. We continue to leverage cost efficiencies overseas. The 123 person technology team located in China grew approximately 19% during 2016.
Sales and Marketing - Sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, travel expense and incentive compensation for our sales and marketing employees. In addition, sales and marketing expenses include branding, consumer marketing and public relations costs.
The 2016 increase of 15% was predominantly driven by an increase in paid media and search engine marketing to enhance and broaden brand awareness, user engagement, and guest traffic to our transactions products and advertising partners. Also contributing to the increase was higher compensation expense related to the annualized impact of the October 2015 GigMasters acquisition, as well as support for our marketplace efforts.
General and Administrative - Our general and administrative expenses primarily consist of salaries, benefits, and stock-based compensation for our executive officers, finance, legal, human resources, and other administrative employees. In addition, general and administrative expenses include outside consulting, legal and accounting services, facilities, and other supporting overhead costs.
The 2016 decrease of 3% was primarily attributable to a decrease in bad debt expense resulting from efficiencies gained through the newly implemented local marketplace operating system. Additionally, collection efforts improved as a result of tightening certain credit monitoring and collections processes. Normalized for the impact of bad debt expense, we estimate general and administrative expenses slightly increased as a result of increased employee headcount to expand the operational support team, offset by decreased professional fee expenses.
Depreciation and Amortization - Depreciation and amortization expenses primarily consist of depreciation on computer equipment, software, capitalized software development costs and amortization of leasehold improvements and purchased intangibles.
The 2016 increase of 10% was primarily attributable to an increase in amortization from intangible assets acquired with the October 2015 acquisition of GigMasters.
Interest and Other Income (Expense), Net
Interest and other (expense) income for the year ended December 31, 2016 was immaterial. Interest and other (expense) income was $(4.0) million for the year ended December 31, 2015, which included an impairment loss on discontinued operations in China.
(Loss) Gain in Equity Interests
(Loss) gain in equity interests for the years ended December 31, 2016 and December 31, 2015 was $(0.3) million and $0.5 million, respectively. During the year ended December 31, 2016, we recognized $(0.3) million of losses from equity method investments. During the year ended December 31, 2015, we recognized a $0.8 million gain associated with our existing investment in GigMasters as part of the 100% acquisition of GigMasters, partially offset by $(0.3) million of losses from equity method investments.
Income Tax Expense
The effective tax rate for the year ended December 31, 2016 was 31.5% , compared to 60.2% for the year ended December 31, 2015. The decrease in our effective tax rate in the current year was primarily attributable to the 2014 sale of our Ijie operations in China. We expect an effective tax rate of approximately 40% on an ongoing basis; however, our effective tax rate may fluctuate significantly based on the mix of our taxable income among states, changes in the valuation of our deferred tax assets or liabilities, and changes in tax laws, regulations, or interpretations thereof.
Liquidity and Capital Resources
Cash Flow
Cash and cash equivalents consist of cash and highly liquid investments with original maturities of 90 days or less at the date of acquisition. At December 31, 2017, we had $106.1 million in cash and cash equivalents, compared to $105.7 million at December 31, 2016 and $88.5 million at December 31, 2015.
The following table sets forth our cash flows from operating activities, investing activities and financing activities for the periods indicated:
Operating Activities
Net cash provided by operating activities was $24.8 million for the year ended December 31, 2017. This was driven by our net income of $5.5 million adjusted for $20.7 million of non-cash items, including stock-based compensation of $7.8 million, depreciation and amortization expense of $6.8 million, deferred income tax expense of $3.7 million, and a loss in equity interests, including our impairment of Jetaport, of $1.2 million. Offsetting the increases, accounts payable and accrued expenses decreased by $1.6 million driven by the timing of payments, other assets decreased $0.6 million, and deferred rent decreased $0.4 million.
Net cash provided by operating activities was $27.4 million for the year ended December 31, 2016. This was driven by our net income of $12.1 million adjusted for $16.0 million of non-cash items, including depreciation and amortization expense of $6.4 million, stock-based compensation of $8.4 million, and deferred income tax expense of $1.6 million. Accounts receivable, net of deferred revenue, decreased $1.5 million, as a result of efficiencies gained via the new local operating system as well as improved collections performance. In addition, our deferred rent balance decreased by $0.8 million as a result of our standard lease obligation. This was offset by accounts payable and accrued expenses, which increased by $1.8 million. This increase was driven by timing of payments made related to 2016 expenses, as well as a larger amount of invoice accruals as a result of our year-over-year growth in operating expenses.
Net cash provided by operating activities was $20.5 million for the year ended December 31, 2015. This was driven by our net income of $5.5 million adjusted for $20.5 million of non-cash items, including depreciation and amortization expense of $5.8
million, stock-based compensation of $6.0 million, and an increase in our allowance for doubtful accounts of $1.8 million. Accounts receivable, net of deferred revenue, increased $(4.7) million, driven by a mix shift towards transactions and national advertising revenues, which generally have longer payment terms. Additionally, there was also a continuing impact in the early part of 2015 from the adjustment to our billing practices for our national advertising business which was initiated in 2014. In addition, accounts payable and accrued expenses increased by $0.6 million, driven by higher taxes payable as of December 31, 2015 as compared to December 31, 2014.
Investing Activities
Net cash used in investing activities was $8.8 million for the year ended December 31, 2017, primarily related to investments in capitalized software and other fixed assets of $5.6 million, as well as the $3.2 million payment made for the acquisition of the assets of Veri, Inc.
Net cash used in investing activities was $4.8 million for the year ended December 31, 2016 , primarily related to investments in capitalized software and other fixed assets of $4.3 million, as well as the $1.4 million payment made for the acquisition of the assets of How He Asked LLC. This was offset by $1.4 million in maturities of our T-Bills, relating to the expiration of the restriction on the letter of credit associated with the terms of our New York lease that were not required to be reinvested.
Net cash used in investing activities was $11.6 million for the year ended December 31, 2015, primarily related to the acquisition of the portion of GigMasters not already owned by us totaling $5.6 million, as well as $2.5 million of minority investments in Jetaport, Inc. and a vendor services company. In addition the Company made $3.1 million of investments in capitalized software.
Financing Activities
Net cash used in financing activities was $15.6 million for the year ended December 31, 2017, primarily driven by the repurchase of shares totaling $13.3 million, and cash used to satisfy tax withholding obligations for employees related to the vesting of their restricted stock awards of $3.8 million. These decreases in cash were partially offset by proceeds pursuant to employee stock-based compensation plans of $1.5 million.
Net cash used in financing activities was $5.4 million for the year ended December 31, 2016, primarily driven by the repurchase of shares totaling $4.0 million and the surrender of restricted common stock for income tax purposes totaling $2.9 million. This was offset by $0.9 million relating to the issuance of common stock during 2016.
Net cash used in financing activities was $10.4 million for the year ended December 31, 2015, primarily driven by the repurchase of shares totaling $8.8 million and the surrender of restricted common stock for income tax purposes totaling $3.1 million.
We expect our sources of liquidity to primarily include cash generated from operations. We believe that our existing cash and cash equivalents, together with cash expected to be generated from operations, will be sufficient to fund our operating activities, anticipated capital expenditures, investments in product and technology, potential business and asset acquisitions, strategic investments, and repurchases of our common stock for the foreseeable future.
Contractual Obligations and Commitments
The following table summarizes XO Group’s contractual obligations as of December 31, 2017:
Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2017, we are unable to make a reasonably reliable estimate of the timing of any potential cash settlements with taxing authorities. Therefore, $0.7 million of unrecognized tax benefits have been excluded from the contractual obligation table above due to uncertain tax positions.
Off-Balance Sheet Arrangements
As of December 31, 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Seasonality
We believe the impact of the frequency of weddings varying from quarter-to-quarter results in lower transactions revenue in the first and fourth quarters. Our publishing business experiences fluctuations resulting in quarter-to-quarter declines in the first and third quarters due to the cyclical publishing schedule of our regional publications. As our business continues to change, we could experience new and potentially different seasonal patterns going forward.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities on an on-going basis. Significant estimates and assumptions made by management include the determination of the fair value of our reporting unit, capitalized software, stock-based compensation, the valuation of intangible assets (and their related useful lives), certain components of the income tax provisions, including valuation allowances on our deferred tax assets, compensation accruals, allowances for doubtful accounts and sales returns, and estimates in revenue recognition, including the determination of best estimated selling prices in multiple element arrangements. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could differ from estimates in amounts that may be material to the financial statements.
We believe the following critical accounting policies involve significant areas of management’s estimates and judgments in the preparation of our Consolidated Financial Statements. For further information, refer to Note 2 of the Consolidated Financial Statements included herein.
Revenue Recognition
We recognize revenue primarily from the sale of local and national online advertising, commissions earned in connection with the successful completion of a transaction, and the publication of magazines, provided that there is persuasive evidence of an arrangement, the service has been provided or the product has been shipped, selling price is fixed or determinable, collection is reasonably assured and we have no significant remaining obligation.
Online programs include (i) online listings, including preferred placement, (ii) digital and native banner advertising, (iii) direct e-mail marketing, (iv) sponsored and brand-integrated content, and (v) placement in our online search tools. Certain elements of online advertising contracts provide for the delivery of a minimum number of impressions. Impressions are the featuring of a customer’s advertisement, banner, link or other form of content on our sites. Performance is measured for advertising contracts that contain minimum guaranteed impressions or other performance criteria primarily through tracking delivery of impressions. Revenue is recognized as performance criteria are met, which is typically on a straight-line basis. To the extent that minimum guaranteed impressions are not met, we are often obligated to extend the period of the contract until the guaranteed impressions are achieved. If this occurs, we defer and recognize the corresponding revenue over the extended period based on impressions delivered. We do not have any material open-ended subscriptions with our vendors.
Our transaction offerings provide opportunities for our audience to purchase products and services. We offer programs that enable vendors to sell through our online properties and their own branded websites and properties. We earn fixed fees, a percentage of sales, per-unit activity fees, or some combination thereof with respect to these transactions. Transactions revenue includes revenue from our transaction services, and primarily represents commissions from retailers who participate in our registry aggregation service, which offers couples and their guests the opportunity to view multiple registries in one location and for guests to order gifts off of these registries. After the retail partners take a sales order or ship the sales order, depending on our contractual agreement with the registry partner, the related commissions are contractually earned by us and recognized as revenue. Product returns or exchanges do not materially impact the commissions earned by us. We only record net commissions, and not
gross revenue and cost of revenue associated with these products, since we are not the primary obligor in these transactions, the transactions are not subject to inventory risk and amounts earned are determined using a fixed percentage. Also included in Transactions revenue are commissions earned from marketplace bookings between party planners/hosts (customers) and providers of entertainment and event services (vendors) on our Gigmasters site. These commissions are generally recognized by us at a point in time when an event takes place and services are rendered by the vendor to the customer.
Publishing revenue primarily includes print advertising revenue derived from the publication of national and regional magazines. Publishing revenue is recognized upon the publication of the related magazines, at which time all material services related to the magazine have been performed. Additionally, publishing revenue is derived from the sale of magazines on newsstands and in bookstores. Title and risk of loss passes to our customer at the time they are received by the retailers. Revenue from the sale of magazines is reduced by an allowance for estimated sales returns.
Merchandise revenue generally includes the selling price of wedding supplies through our websites, as well as related outbound shipping and handling charges since we, as the primary party obligated in a transaction, are subject to inventory risk, establishing pricing, and selection of suppliers. Title and risk of loss related to our merchandise operations passed to buyers generally upon shipment. We typically refunded customers or shipped replacement products in the event that there were damaged or lost products prior to delivery to the customer. Merchandise revenue is recognized when products are shipped, reduced by discounts as well as an allowance for estimated sales returns. Merchandise revenue excludes related sales taxes collected.
Our advertising arrangements often include multiple-element deliverables, primarily online and print advertising. We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting with standalone value. Each of our deliverables typically represents separate units of accounting and the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling prices. We use our best estimated selling price to determine the relative selling price as vendor specific objective evidence and third party objective evidence do not currently exist for any of our separate units of accounting. We evaluate our best estimated selling price by reviewing historical data related to sales of it's deliverables. Our best estimate of selling price is intended to represent the price at which we would sell the item regularly on a stand-alone basis. The arrangement consideration allocated to online products and services is recognized as revenue based on delivery from the start date to the end date of the arrangement, which is typically on a straight-line basis, except for direct e-mails and social media posts which are recognized on the date of delivery. The arrangement consideration allocated to print products is recognized as revenue upon the publication of the related magazines. During the year ended December 31, 2017, there were no material changes to the methods or assumptions used to determine the best estimated selling price for separate units of accounting that would have a material effect on the allocation of arrangement consideration. We evaluate multiple contracts entered into with the same advertiser as these contracts may need to be combined and accounted for as a single arrangement when the economics of the individual contracts cannot be understood without reference to the arrangement as a whole.
We limit the amount that is allocable to delivered items in our multiple-deliverable arrangements to the amount that is not contingent upon the delivery of other items in the arrangement. We have concluded that our right to receive consideration from the customer for delivered items is not linked to the successful delivery of the remaining performance obligations in the multiple-deliverable arrangement; however, revenue recognized for the value of each deliverable is limited to the amount contracted.
Allowance for Doubtful Accounts and Reserves
We maintain an allowance for doubtful accounts and reserves for estimated returns resulting from the inability of our customers to make required payments and for returns, primarily relating to the sale of our magazines. In determining these allowances, we evaluate a number of factors, including the credit risk of customers, historical trends and other relevant information. If the financial condition of our customers were to deteriorate, additional allowances may be required. Allowance for doubtful accounts and reserves has ranged between $1.4 million to $2.7 million over the three year period ended December 31, 2017. A 1% change in the balance of allowance for doubtful accounts and reserves as a percentage of gross accounts receivable would change our annual operating expense by $0.2 million.
Goodwill, Other Intangible and Long-lived Assets
The purchase price of acquired companies is allocated between intangible assets and the net tangible assets of the acquired businesses with the residual of the purchase price recorded as goodwill. At December 31, 2017, we had goodwill of $51.4 million and intangible assets, net of accumulated amortization of $4.0 million. We evaluate goodwill and indefinite-lived intangible assets annually as of October 1 for impairment, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. To complete our impairment analysis of goodwill and indefinite-lived intangible assets, we estimate fair value using multiple approaches and also consider whether events or changes in circumstances such as significant declines in
revenue or earnings, or material adverse changes in the business climate indicate that the carrying value of assets may be impaired. There were no impairments of goodwill in any of the periods presented in the Consolidated Financial Statements.
Our definite-lived intangible assets include customer and advertiser relationships, developed technology and patents, media content, trademarks and trade names, and service contracts. All definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which we believe is consistent with the expected future cash flows to be generated by the respective assets. Definite-lived intangible assets and other long-lived assets are evaluated for recoverability whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In evaluating an asset for recoverability, we estimate the future cash flow expected to result from the use of the asset and eventual disposition. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized. For the years ended December 31, 2017, 2016 and 2015, impairment charges for definite-lived intangible assets were immaterial. See Note 7 to our Consolidated Financial Statements for additional details.
Other long-lived assets primarily consist of software, leasehold improvements, computer and office equipment and furniture and fixtures, which are subject to depreciation or amortization over the useful life of the asset. The useful lives of other long-lived assets are determined based on our estimate of the period over which the asset will be utilized; such periods are periodically reviewed for reasonableness. We may be required to change these estimates based on changes in our industry or other changing circumstances. If these estimates change in the future, we may be required to recognize increased or decreased depreciation or amortization expense for these assets.
Income Taxes
We account for income taxes using the asset and liability method, as required by the accounting standard for income taxes ASC 740. Under this method, 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, as well as net operating loss and tax credit carryforwards. Deferred taxes 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 taxes of a change in tax rates is recognized in results of operations in the period that includes the enactment date. The effects of any future changes in tax laws or rates have not been considered. We regularly review deferred tax assets to assess their potential realization and establish a valuation allowance for portions of such assets to reduce the carrying value if we do not consider it to be more likely than not that the deferred tax assets will be realized. Our review includes evaluating both positive (e.g., sources of taxable income) and negative (e.g., recent historical losses) evidence that could impact the realizability of our deferred tax assets.
We recognize the impact of an uncertain tax position in our financial statements if, in management's judgment, the position is not more-likely-then-not sustainable upon audit based on the position's technical merits. This involves the identification of potential uncertain tax positions, the evaluation of applicable tax laws and an assessment of whether a liability for an uncertain tax position is necessary. We operate and are subject to audit in multiple taxing jurisdictions.
We record interest and penalties related to income taxes as a component of income tax expense.
A substantial portion of our net operating losses were acquired in connection with the acquisition of WeddingChannel.com and are subject to a limitation on future utilization under Section 382 of the Internal Revenue Code. We currently estimate that the effect of Section 382 will generally limit the amount of the loss carryforwards of WeddingChannel.com that are available to offset future taxable income to approximately $3.6 million annually. The overall determination of the annual loss limitation is subject to interpretation; therefore, the annual loss limitation could be subject to change.
A 1% change to our effective tax rate would have changed our annual net income by approximately $0.1 million during each of the three years ended December 31, 2017, 2015, and for 2016, $0.2 million.
Stock-Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments based on the measurement-date fair value of the award. The fair value of restricted stock awarded under the 2017 Stock Incentive Plan (formerly referred to as the "Amended and Restated 2009 Stock Incentive Plan", as amended) is determined using the intrinsic value of the stock at the time of grant.
The fair value of the stock options granted during 2017 was determined using the Black-Scholes option pricing model (see Note 4 to our Consolidated Financial Statements for further details). Using this model, fair value was calculated based on
assumptions with respect to (i) expected volatility of our stock price, (ii) the expected term of the award, (iii) expected dividend yield on our stock, and (iv) a risk-free interest rate, which is based on quoted U.S. Treasury rates for securities with maturities approximating the expected term. Specifically, the expected term of the options granted during 2017 was determined using the "simplified method" as prescribed by Staff Accounting Bulletin ("SAB") Topic 14D.2, which is presumed to be the midpoint between the vesting date and the end of the contractual term. The simplified method was used to determine the expected term of the options, due to the extended period of time that has lapsed since our last granted options, as well as differences in the contractual terms of the option awards compared to options granted in prior periods, such that our historical share option experience does not provide a reasonable basis to estimate the expected term. We intend to continue to consistently apply the simplified method until a sufficient amount of historical information regarding exercise data becomes available. Expected volatility is calculated using historical prices of our stock. The expected dividend yield is zero, as we have never paid dividends and currently intend to retain future earnings, if any, to finance the expansion of the business
The fair value of the Employee Stock Purchase Plan (“ESPP”) rights granted from the 2009 Employee Stock Purchase Plan is estimated on the date of grant using the Black-Scholes option-pricing model (see Note 4 to our Consolidated Financial Statements for further details). Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of our stock price, (ii) the expected life of the award, which for ESPP rights is the period of time between the offering date and the exercise date (as defined in Note 4 to our Consolidated Financial Statements), (iii) expected dividend yield on our stock, and (iv) a risk-free interest rate, which is based on quoted U.S. Treasury rates for securities with maturities approximating the expected term. . The use of different assumptions in the Black-Scholes pricing model would result in different amounts of stock-based compensation expense related to the ESPP; however, in total, stock-based compensation expense for the ESPP is not material to our Consolidated Financial Statements.
For grants of restricted stock and options, we record compensation expense based on the fair value of the shares on the grant date over the requisite service period. Compensations expense for ESPP rights is recorded in line with each respective offering period.
In 2017, forfeitures of equity awards have been recorded as they occur based on the adoption of ASU 2016-09 rather than as estimated forfeitures. Refer to "Recently Issued Accounting Pronouncements" in Note 2 for further detail.
Non-GAAP Financial Measures
This Form 10-K includes information about certain financial measures that are not prepared in accordance with U.S. generally accepted accounting principles (“GAAP” or “U.S. GAAP”), including Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income, Adjusted net income per diluted share, and Free cash flow. These non-GAAP measures have important limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP. Our use of these terms may vary from the use of similarly-titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation.
We define our non-GAAP financial measures as follows:
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Adjusted EBITDA represents GAAP income from operations adjusted for items that impact comparability, which may include: (1) depreciation and amortization, (2) stock-based compensation expense, (3) asset impairment charges, and (4) other items affecting comparability during the period.
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Adjusted net income represents GAAP net income, adjusted for items that impact comparability, which may include: (1) asset impairment charges, (2) executive separation and other severance charges, (3) impact of U.S. tax reform and non-recurring foreign taxes, interest and penalties, (4) costs related to exit activities, and (5) other items affecting comparability during the period.
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Adjusted net income per diluted share represents adjusted net income (as defined above), divided by the diluted weighted-average number of shares outstanding for the period.
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Adjusted EBITDA margin represents adjusted EBITDA (as defined above), divided by total GAAP revenue.
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Free cash flow represents GAAP net cash provided by operations, less capital expenditures.
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National online advertising programs include display advertisements. Revenue from display advertisements is largely generated by sold impressions (the number of views or displays of a customer’s advertisement, banner, link or other form of content on our online properties for which we earn revenue). Display advertising revenue per one thousand sold impressions derives our effective CPM (“eCPM”).
•
Through our transactions business, we earn fixed fees, a percentage of sales, per-unit activity fees, or some combination thereof with respect to these transactions, which we refer to collectively as our “take rate.”
Management believes that these non-GAAP financial measures, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provide useful information about our period-over-period growth and provide additional information that is useful for evaluating our operating performance. However, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income (loss), Adjusted net income (loss) per diluted share, and Free cash flow are not measures of financial performance under U.S. GAAP and, accordingly, should not be considered substitutes for or superior to net income (loss), net income (loss) per diluted share and net cash provided by operating activities as indicators of operating performance.
The table below provides reconciliations between the non-GAAP financial measures discussed above to the comparable U.S. GAAP measures (in thousands, except for per share data):
a.
Loss in equity interests excludes the other-than-temporary impairment that reduced the carrying value of our equity investment in Jetaport, Inc. to zero. In addition, general and administrative operating expenses excludes bad debt expense associated with a loan previously made to Jetaport, Inc.
b.
In 2017, income tax expense includes approximately $3.0 million related primarily to the revaluation of certain deferred tax assets in conjunction with the U.S. Tax Cuts and Job Acts of 2017.
c.
To eliminate costs associated with the exit of our merchandising operations, including (i) severance of approximately $0.2 million recorded in general and administrative and (ii) rent acceleration and other closure costs of $0.2 million recorded in sales and marketing.
d.
To eliminate asset impairment charges included in Depreciation and Amortization.
e.
To eliminate the impairment expense of a cost method investment included in Interest and other income (expense), net for the year ended December 31, 2015.
f.
To eliminate a gain on our existing equity method investment in GigMasters, included in Gain (Loss) in Equity Interests for the year ended December 31, 2015.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position, results of operations, or cash flows due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks.
We are exposed to market risk through interest rates related to the investment of our current cash and cash equivalents of $106.1 million as of December 31, 2017. These funds are generally invested in highly liquid debt instruments. As such instruments mature and the funds are re-invested, we are exposed to changes in market interest rates. This risk is not considered material, and we manage such risk by continuing to evaluate the best investment rates available for short-term, high quality investments.
Our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates, particularly between the U.S. Dollar, Hong Kong Dollar and Chinese Renminbi. During the years ended December 31, 2017, 2016 and 2015, we incurred immaterial foreign currency translation (losses) gains.
Item 8.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of XO Group Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of XO Group Inc. (the "Company") as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 2, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditors since 1998.
New York, New York
March 2, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of XO Group Inc.
Opinion on Internal Control over Financial Reporting
We have audited XO Group Inc.'s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, XO Group, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and schedule and our report dated March 2, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
New York, New York
March 2, 2018
XO GROUP INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except for share and per share data)
See accompanying Notes to Consolidated Financial Statements
XO GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except for per share data)
See accompanying Notes to Consolidated Financial Statements
XO GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts in thousands)
See accompanying Notes to Consolidated Financial Statements
XO GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
See accompanying Notes to Consolidated Financial Statements
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
1. Nature of Operations
XO Group Inc.’s ("the Company") mission is to help people navigate and truly enjoy life’s biggest moments together. The Company’s multi-platform brands guide couples through transformative life stages - from getting married, to having a baby - and include The Knot, The Bump, and GigMasters. The Company offers content and marketing solutions, targeted advertising programs, transactions and merchandise.
2. Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial Statements include the accounts of XO Group Inc. and all 100% and majority owned subsidiaries, prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). All intercompany transactions and balances are eliminated in consolidation. Investments in which the Company has at least a 20%, but not more than a 50% interest are generally accounted for under the equity method. Investment interests below 20% are generally accounted for under the cost method, except if the Company could exercise significant influence, the investment would be accounted for under the equity method.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period.
Significant estimates and assumptions made by management include the determination of fair value of equity awards issued, fair value of the Company’s reporting unit, valuation of assets and liabilities acquired in purchase accounting, including intangible assets (and their related useful lives), certain components of the income tax provisions, including valuation allowances on the Company’s deferred tax assets, compensation accruals, allowances for bad debts, reserves for future returns, estimates used in software capitalization, and the determination of best estimated selling prices in multiple element arrangements. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could differ from estimates in amounts that may be material to the financial statements.
Comparative Data
Certain prior year financial statement line items have been reclassified to conform to the current year's presentation.
For the years ended December 31, 2016 and 2015, rent expense was reclassed from "Product and content development" and from "Sales and marketing" to "General and administrative" within "Operating expenses" on the Consolidated Statements of Operations.
For the years ended December 31, 2016 and 2015, "Asset impairment charges" have been reclassified into "Depreciation and amortization".
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market funds. The market value of the Company’s cash equivalents approximates their cost plus accrued interest.
Fair Value of Financial Instruments
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
2. Significant Accounting Policies - (continued)
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate fair value as of December 31, 2017 and 2016 due to the short-term nature of these instruments.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the remaining term of the related lease agreement. The Company capitalizes qualifying computer software costs incurred during the application development stage and amortizes these costs over the estimated useful life of the software, ranging from one to three years, on a straight-line basis, beginning when the software is ready for its intended use. Maintenance and repair costs are expensed as incurred while expenditures for major renewals and improvements are capitalized. Upon the disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts.
Goodwill and Other Intangible Assets
Goodwill is the excess purchase price remaining from an acquisition after an allocation of purchase price has been made to identifiable assets acquired and liabilities assumed based on estimated fair values. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. The Company tests goodwill for impairment annually as of October 1 and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The goodwill impairment analysis is a two-step test that is performed at the reporting unit level. The first step, used to identify potential impairment, involves comparing the reporting unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, the applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of a potential impairment and the second step of the test is performed to measure the amount of impairment. Should the carrying amount for a reporting unit exceed its fair value, then the first step of the quantitative impairment test is failed and the magnitude of any goodwill impairment is determined under the second step, which is a comparison of the implied fair value of a reporting unit’s goodwill to its carrying value. The implied fair value of goodwill is the excess of the fair value of the reporting unit over its carrying value, excluding goodwill. Impaired goodwill is written down to its implied fair value with a charge to expense in the period the impairment is identified. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.
In accordance with accounting guidance, the Company may first perform a qualitative goodwill assessment to determine whether events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Factors such as macroeconomic conditions, industry and market considerations, cost and other factors are used to assess the validity of goodwill. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test, as described above, is not necessary. If, however, the Company concludes otherwise, then the Company must perform the first step of the two-step impairment test by comparing the reporting unit’s fair value with its carrying value including goodwill. If the carrying value exceeds fair value, then the Company must perform the second step of the goodwill impairment test to measure the impairment loss, if any.
The Company’s intangible assets deemed to have definite lives are amortized over their estimated useful lives, on a straight-line basis as follows:
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
2. Significant Accounting Policies - (continued)
The Company’s long-lived assets include software, computer and office equipment, and furniture and fixtures, which are subject to depreciation over the useful life of the asset and leasehold improvements, which are subject to amortization over the shorter of the useful life of the asset or the lease term. Long-lived assets, including definite-lived intangible assets, are evaluated for recoverability whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. In evaluating an asset for recoverability, the Company estimates the future cash flow expected to result from the use of the asset and eventual disposition. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized.
The Company performs impairment evaluations annually as of October 1, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. See Note 7 for additional details on the impairments of certain intangible assets recorded during the year.
Revenue Recognition
The Company recognizes revenue primarily from the sale of online advertising programs, commissions earned in connection with the successful completion of a transaction, the publication of magazines and the sale of merchandise, provided that there is persuasive evidence of an arrangement, the product has been shipped or the service has been provided, selling price is fixed or determinable, collection is reasonably assured and the Company has no significant remaining obligation.
Online programs include (i) online listings, including preferred placement, (ii) digital and native banner advertising, (iii) direct e-mail marketing, (iv) sponsored and brand-integrated content, and (v) placement in our online search tools. Certain elements of online advertising contracts provide for the delivery of a minimum number of impressions. Impressions are the featuring of a customer’s advertisement, banner, link or other form of content on the Company’s sites. Performance is measured for advertising contracts that contain minimum guaranteed impressions or other performance criteria primarily through tracking delivery of impressions. Revenue is recognized as performance criteria are met, which is typically on a straight-line basis. To the extent that minimum guaranteed impressions are not met, the Company is often obligated to extend the period of the contract until the guaranteed impressions are achieved. If this occurs, the Company defers and recognizes the corresponding revenue over the extended period based on impressions delivered. The Company does not have any material open-ended subscriptions with its advertisers.
The Company’s transaction offerings provide opportunities for its audience to purchase products and services. The Company offers programs that enable vendors to sell through its online properties and their own branded websites and properties. The Company earns fixed fees, a percentage of sales, per-unit activity fees, or some combination thereof with respect to these transactions. Transactions revenue primarily represents commissions from retailers who participate in the Company’s registry aggregation service, which offers couples and their guests the opportunity to view multiple registries in one location and for guests to order gifts off of these registries. After the retail partners take a sales order or ship the sales order, depending on our contractual agreement with the registry partner, the related commissions are contractually earned by us and recognized as revenue. Product returns or exchanges do not materially impact the commissions earned by us. The Company only records net commissions, and not gross revenue and cost of revenue associated with these products, since the Company is not the primary obligor in these transactions, it is not subject to inventory risk and amounts earned are determined using a fixed percentage. Also included in Transactions revenue are commissions earned from marketplace bookings between party planners/hosts (customers) and providers of entertainment and event services (vendors) on our Gigmasters site. These commissions are generally recognized by the Company at a point in time when an event takes place and services are rendered by the vendor to the customer.
Publishing revenue primarily includes print advertising revenue derived from the publication of national and regional magazines and guides. Publishing revenue is recognized upon the publication of the related magazines, at which time all material services related to the magazine have been performed. Additionally, publishing revenue is derived from the sale of magazines on newsstands and in bookstores. Title and risk of loss passes to our customer at the time they are received by the retailers. Revenue from the sale of magazines is reduced by an allowance for estimated sales returns.
Merchandise revenue generally includes the selling price of wedding supplies through the Company’s websites, as well as related outbound shipping and handling charges since the Company is the primary party obligated in a transaction, is subject to inventory risk and establishes its own pricing and selection of suppliers. Title and risk of loss related to the Company’s merchandise
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
2. Significant Accounting Policies - (continued)
operations passed to buyers generally upon shipment. The Company typically refunded customers or shipped replacement products in the event that there were damaged or lost products prior to delivery to the customer. Merchandise revenue is recognized when products are shipped, reduced by discounts as well as an allowance for estimated sales returns. Merchandise revenue excludes related sales taxes collected. There was no merchandise revenue for the years ended December 31, 2017 or 2016 as the Company exited its warehouse operations in Redding, California in the first quarter of 2015.
The Company’s advertising arrangements often include multiple-element deliverables, primarily online and print advertising. The Company evaluates each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting with standalone value. Each of the Company’s deliverables typically represents separate units of accounting and the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling prices. The Company uses its best estimated selling price to determine the relative selling price as vendor specific objective evidence and third party objective evidence do not currently exist for any of the Company’s separate units of accounting. The Company evaluates its best estimated selling price by reviewing historical data related to sales of its deliverables. The Company's best estimate of selling price is intended to represent the price at which it would sell the item regularly on a stand-alone basis. The arrangement consideration allocated to online products and services is recognized as revenue based on delivery from the start date to the end date of the arrangement, which is typically on a straight-line basis, except for direct e-mails and social media posts which are recognized on the date of delivery. The arrangement consideration allocated to print products is recognized as revenue upon the publication of the related magazines. During the years ended December 31, 2017, 2016, and 2015, there were no material changes to the methods or assumptions used to determine the best estimated selling price for separate units of accounting that would have a material effect on the allocation of arrangement consideration. The Company evaluates multiple contracts entered into with the same advertiser as these contracts may need to be combined and accounted for as a single arrangement when the economics of the individual contracts cannot be understood without reference to the arrangement as a whole. Incremental costs incurred related to the acquisition of customer contracts is expensed as the related revenue is recognized.
The Company limits the amount that is allocable to delivered items in its multiple-deliverable arrangements to the amount that is not contingent upon the delivery of other items in the arrangement. The Company has concluded that its right to receive consideration from the customer for delivered items is not linked to the successful delivery of the remaining performance obligations in the multiple-deliverable arrangement; however, revenue recognized for the value of each deliverable is limited to the amount contracted.
Cost of Revenue
Cost of revenue consists of costs related to internet and hosting services, payroll and direct expenses for Company personnel and external vendors who are responsible for the production of online media, the production of national and regional magazines, and the cost of merchandise sold, which includes outbound shipping and personalization costs.
Deferred Revenue
Deferred revenue represents payments received or billings in excess of revenue recognized, which are primarily related to online and print advertising contracts.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was consistent each year at $3.8 million for the years ended December 31, 2017, 2016, and $1.3 million in 2015.
Shipping and Handling Charges
There were no shipping and handling charges in 2017 or 2016 as a result of exiting our merchandise business in the first quarter of 2015. Merchandise revenues included outbound shipping and handling charges of $0.1 million for the year ended December 31, 2015.
Concentration of Credit Risk
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
2. Significant Accounting Policies - (continued)
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and investments, and accounts receivable. Although the Company deposits its cash with more than one major financial institution, its deposits, at times, may exceed federally insured limits. The Company has not experienced any losses on cash and cash equivalent accounts to date and the Company believes it is not exposed to any significant credit risk related to cash.
For the years ended December 31, 2017, 2016 and 2015, no individual customer represented more than 10% of net revenue. At December 31, 2017 and 2016, no individual customer accounted for more than 10% of accounts receivable. The Company’s customers are concentrated in the United States. The Company performs ongoing credit evaluations, generally does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information.
Stock-Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the measurement-date fair value of the award. The fair value of restricted stock awarded under the 2017 Stock Incentive Plan is determined using the intrinsic value of the stock at the time of grant.
The fair value of the stock options granted in 2017, 2016, and 2015 from the 2017 Stock Incentive Plan was determined using the Black-Scholes option pricing model (see Note 4 for further details). Using this model, fair value was calculated based on assumptions with respect to (i) expected volatility of the Company's stock price, (ii) the expected term of the award, (iii) expected dividend yield on the Company's stock, and (iv) a risk-free interest rate, which is based on quoted U.S. Treasury rates for securities with maturities approximating the expected term. Specifically, the expected term of the options granted during 2017, 2016, and 2015 was determined using the "simplified method" as prescribed by Staff Accounting Bulletin ("SAB") Topic 14D.2, which is presumed to be the midpoint between the vesting date and the end of the contractual term. The simplified method was used to determine the expected term of the options, due to the infrequency in which the Company grants options, as well as differences in the contractual terms of the option awards compared to options granted in prior periods, such that the Company's historical share option experience does not provide a reasonable basis to estimate the expected term. The Company intends to continue to consistently apply the simplified method until a sufficient amount of historical information regarding exercise data becomes available. Expected volatility is calculated using historical prices for the Company's stock. The expected dividend yield is zero, as the Company has never paid dividends and currently intends to retain future earnings, if any, to finance the expansion of the business.
The fair value of the Employee Stock Purchase Plan (“ESPP”) rights granted from the amended and restated 2009 Employee Stock Purchase Plan is estimated on the date of grant using the Black-Scholes option-pricing model (see Note 4 for further details). Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of the Company's stock price, (ii) the expected life of the award, which for ESPP rights is the period of time between the offering date and the exercise date (as defined in Note 4), (iii) expected dividend yield on the Company's stock, and (iv) a risk-free interest rate, which is based on quoted U.S. Treasury rates for securities with maturities approximating the expected term.
For grants of restricted stock and stock options, the Company records compensation expense based on the fair value of the shares on the grant date over the requisite service period, less estimated forfeitures. Compensation expense for ESPP rights is recorded in line with each respective offering period.
In 2017, forfeitures of equity awards have been recorded as they occur based on the adoption of ASU 2016-09 rather than estimated at the grant date. Refer to "Recently Issued Accounting Pronouncements" in Note 2 for further detail.
Income Taxes
The Company accounts for income taxes using the asset and liability method, as required by the accounting standard for income taxes. Under this method, 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, as well as net operating loss and tax credit carryforwards. Deferred taxes are measured using enacted tax rates expected to apply to taxable
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
2. Significant Accounting Policies - (continued)
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in results of operations in the period that includes the enactment date. The effects of any future changes in tax laws or rates have not been considered. The Company regularly reviews deferred tax assets to assess their potential realization and establish a valuation allowance for portions of such assets to reduce the carrying value if the Company does not consider it to be more likely than not that the deferred tax assets will be realized. The review includes evaluating both positive (e.g., sources of taxable income) and negative (e.g., recent historical losses) evidence that could impact the realizability of our deferred tax assets.
The Company records interest and penalties related to income taxes as a component of income tax expense.
The Company recognizes the impact of an uncertain tax position in its financial statements if, in management's judgment, the position is more-likely-than-not sustainable upon audit based on the position's technical merits. This involves the identification of potential uncertain tax positions, the evaluation of applicable tax laws and an assessment of whether a liability for an uncertain tax position is necessary. We operate and are subject to audit in multiple taxing jurisdictions.
A 1% change to our effective tax rate would have changed our annual net income by approximately $0.1 million during each of the years ended December 31, 2017, and 2015, and for 2016, $0.2 million.
Earnings per Share
Basic earnings per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share adjusts basic earnings per share for the effects of stock options, restricted stock, and the “ESPP”, only in the periods in which the effects are dilutive. The accounting standard pertaining to earnings per share precludes the calculation of diluted earnings per share when a net loss is presented. Common equivalent shares are excluded from the diluted computation if their effect is antidilutive.
The following table sets forth the number of weighted average stock options, restricted stock, and ESPP shares excluded from the calculation of diluted earnings per share for the years ended December 31, 2017, 2016, and 2015 because to include them in the calculation would be antidilutive.
Segments and Geographical Areas
The Company operates in one reportable segment, as it is organized around its online and offline media service lines. The Company has defined its Chief Operating Decision Maker ("CODM") to be its Chief Executive Officer. The Company's CODM receives monthly financial results, which contain revenues, cost of revenues, and gross margin of the three components of the Company's business: (i) Local (ii) National and (iii) Transactions. In addition, there is a substantial amount of costs that benefit all service lines, but are not allocated to individual cost of revenue categories. Revenue information at the product or service level is not captured in the Company’s financial reporting systems and is not included in internal management reporting. The Company does not currently disclose revenue from products and services as it is currently impractical to obtain the necessary data.
No individual foreign country accounted for more than 10% of the Company's revenue during the years ended December 31, 2017, 2016, or 2015. No individual foreign country accounted for more than 10% of the Company's accounts receivable during the years ended December 31, 2017 or 2016. The Company holds fixed assets in the United States and China. The Company does not hold greater than 10% of the Company's fixed assets outside of the United States.
Recently Issued Accounting Pronouncements
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
2. Significant Accounting Policies - (continued)
In May 2014, FASB and the International Accounting Standards Board jointly issued a new revenue recognition standard that is designed to improve financial reporting by creating common recognition guidance for U.S. GAAP and International Financial Reporting Standards. The new guidance issued under ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”) provides a more robust framework for addressing revenue issues, improves the comparability of revenue recognition practices across industries, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the presentation of financial statements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance permits the use of either of the following transition methods: (i) a full retrospective method reflecting the application of the standard in each prior reporting period with the option to elect certain practical expediencies, or (ii) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). The original effective date of the new standard was for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In August 2015, the FASB issued an ASU that defers by one year the effective date of this new revenue recognition standard. As a result, the new standard will be effective for annual reporting periods beginning after December 15, 2017, although companies may adopt the standard as early as the original effective date. Early application prior to the original effective date is not permitted.
The Company will adopt the standard as of January 1, 2018 utilizing the full retrospective adoption method in order to provide for comparative results in all periods presented. Using the full retrospective method, the Company will recast its 2017 and 2016 consolidated financial statements beginning in the first quarter of 2018. The Company has completed the majority of its assessment of the impact of adopting this new standard and expects that the overall impact will be immaterial. The Company is in the process of completing its analysis of accounting for modifications, however, also expects that the impact of accounting for modifications will be immaterial to its consolidated financial statements. The Company does not believe there are any remaining significant implementation topics associated with the adoption of ASC 606 that have not yet been addressed.
Under ASC 606, entities are required to disaggregate revenue into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The Company expects to disaggregate our revenues consistently with the disaggregation presented in these consolidated financial statements. The Company is evaluating the disclosure requirements beyond the requirement to disaggregate revenue as well as assessing the impact of ASC 606 on its internal controls over financial reporting.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities guidance requiring equity securities to be measured at fair value with changes in fair value recognized through net income and will eliminate the cost method for equity securities without readily determinable fair values. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, an accounting standards update that replaces existing lease accounting standards. The new standard requires lessees to recognize on the balance sheet a right-of use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. Treatment of lease payments in the statement of earnings and statement of cash flows is relatively unchanged from previous guidance. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The standard is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently in the process of evaluating its existing leases. As such, the Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) intended to simplify several areas of accounting for share-based compensation arrangements. ASU 2016-09 requires all tax effects related to share-based payments at settlement or expiration to be recorded through the statement of operations and be reported as operating activities on the statement of cash flows. Further, under the new guidance, entities are
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
2. Significant Accounting Policies - (continued)
permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards; forfeitures can either be estimated (as required under the previous guidance) or recognized when they occur. The guidance also provides that cash paid to a tax authority when shares are withheld from employees to satisfy a company's statutory income tax withholding obligation be classified as financing activities on the statement of cash flows.
The Company adopted ASU 2016-09 as of January 1, 2017, which had the following impact during the twelve months ended December 31, 2017:
•
Using the modified retrospective approach, the cumulative effect recognized upon adoption was an adjustment to increase the Company's accumulated deficit by $0.7 million and increase its deferred tax assets by $0.4 million, with a corresponding increase to additional paid-in capital of $1.1 million, all within the Consolidated Balance sheet.
•
The Company recorded a $1.3 million benefit to its provision for income taxes, within the Consolidated Statement of operations, which impacted the Company’s effective tax rate for the twelve months ended December 31, 2017, due to the recognition of excess tax benefits for options exercised and the vesting of equity awards.
•
Using the prospective approach for the presentation on the Consolidated Statements of cash flows, the $1.3 million of excess tax benefits during the twelve months ended December 31, 2017 was a component of operating activity, while $0.5 million of excess tax benefits from stock-based compensation during the twelve months ended December 31, 2016 was presented as financing activity.
•
The Company elected to change from estimating forfeiture rates to accounting for forfeitures in each period they occur.
•
The presentation requirements for cash flows related to taxes paid to satisfy statutory income tax withholding obligations had no impact on our consolidated statements of cash flows for any of the periods presented because such cash flows have historically been presented as a financing activity.
In March 2016, FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”), which eliminated the requirement to restate historical financial statements, as if the equity method had been used during all previous periods, when an existing cost method investment qualifies for use of the equity method. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive loss may be recognized through earnings. The Company adopted ASU 2016-07 as of January 1, 2017 with no impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments guidance for the accounting for credit losses on instruments within its scope. Given the breadth of that scope, this guidance will impact both financial services and non-financial services entities. The standard is effective for fiscal years beginning after December 15, 2020. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, guidance on statement of cash flows presentation for eight specific cash flow issues where diversity in practice exists. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
In October 2016, FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, guidance intended to reduce the complexity of U.S. GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash guidance amending the presentation of restricted cash within the statement of cash flows. The new guidance requires that restricted cash be included
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
2. Significant Accounting Policies - (continued)
within cash and cash equivalents on the statement of cash flows. The guidance is effective retrospectively for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business in ASC 805, Business Combinations. The amendments in ASU 2017-01 are intended to make application of the guidance more consistent and cost-efficient.
ASU 2017-01 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted for transactions that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The Company adopted ASU 2017-01 as of September 30, 2017. The adoption did not have a material impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718, Compensation - Stock Compensation. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification.
ASU 2017-09 is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company does not expect the adoption of ASU 2017-09 to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment guidance that would eliminate Step 2 from the goodwill impairment test. This guidance is effective for the fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted this guidance effective with its October 1, 2017 annual goodwill impairment analysis. The adoption did not have a material impact on the Company's consolidated financial statements.
Other
Product and content development, sales and marketing expenses, and general and administrative expenses are all presented exclusive of depreciation and amortization, which are shown separately within "Operating expenses."
3. Fair Value Measurements
Cash and cash equivalents and investments consist of the following:
The inputs to the valuation techniques used to measure fair value are classified into the following categories:
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
3. Fair Value Measurements - (continued)
Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 - Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
As of December 31, 2017, the Company’s investment in cash and cash equivalents of $106.1 million, short-term investments of $0.1 million and long-term restricted cash of $1.2 million were measured at fair value using Level 1 inputs. The short-term investments amount is included in “Prepaid expenses and other current assets” on the Consolidated Balance Sheet as of December 31, 2017. Long-term restricted cash consists of a letter of credit collateralized by U.S. Treasury bills that are restricted as to withdrawal or use under terms of the Company’s New York office lease. During the year ended December 31, 2017, there were no transfers in or out of the Company’s Level 1 assets.
4. Stock-Based Compensation
The Company maintains several stock-based compensation plans, which are more fully described below. The Company includes total stock-based compensation expense related to all its stock awards in various operating expense categories for the years ended December 31, 2017, 2016 and 2015, as shown in the table below.
XO Group Stock-Based Incentive Plans
The Company’s 2017 Stock Incentive Plan (formerly referred to as the Amended and Restated 2009 Stock Incentive Plan, as amended, and referred to herein as the “Incentive Plan”) was originally adopted by the Board of Directors, and became effective in May 2009 following approval by the Company's stockholders, as a successor plan to the Company’s 1999 Stock Incentive Plan (the “1999 Plan”). All incentive stock options, nonqualified stock options (incentive and nonqualified stock options are collectively referred to as “options”), stock appreciation rights, stock issuances which may be subject to the attainment of designated performance goals or service requirements (“restricted stock”), or any combination thereof outstanding under the 1999 Plan have been incorporated into the Incentive Plan. Initially, 1,000,000 shares of common stock of the Company were reserved for issuance in addition to the 4,829,344 shares that were incorporated from the 1999 Plan. Following approval by the stockholders, effective May 2014, an additional 2,700,000 shares were added to the shares reserved for the Incentive Plan. Thereafter, following approval by the stockholders, effective May 2017, the Amended and Restated 2009 Stock Incentive Plan was renamed the 2017 Stock Incentive Plan, an additional 3,700,000 shares were added to the shares reserved for the Incentive Plan, and the term remaining under the Incentive Plan was extended from May 20, 2019 to March 31, 2027.
The Incentive Plan provides that awards may be granted to such non-employee directors, officers, employees and consultants of the Company as the Compensation Committee of the Board of Directors shall select in its discretion. Only employees of the Company are eligible to receive grants of incentive stock options. Options are granted at the fair market value of the stock on the date of grant. Options vest over periods up to four years and have terms not to exceed ten years. Restricted stock awards vest over periods ranging from one year to four years.
As of December 31, 2017, there were 4,966,712 shares available for future grants under the Incentive Plan. Increases to the number of shares available for future grants under the Incentive Plan require approval by the Board of Directors and the Company's stockholders.
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
4. Stock-Based Compensation - (continued)
Options
The following table represents a summary of the Company’s stock option activity under the 2009 Plan and related information, without regard for estimated forfeitures, for the years ended December 31, 2017 and December 31, 2016:
The fair value of the options granted during the year ended December 31, 2017 have been estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
The expected term of the options granted during the year ended December 31, 2017 was generally determined using the "simplified method" as prescribed by SAB Topic 14D.2, which is presumed to be the midpoint between the vesting date and the end of the contractual term. The simplified method was used to determine the expected term of the options granted during the years ended December 31, 2017, 2016 and 2015, due to the extended period of time that has lapsed since the Company's last granted options, as well as differences in the contractual terms of the option awards compared to options granted in prior periods, such that our historical share option experience does not provide a reasonable basis to estimate the expected term. The risk-free interest rates are based on quoted U.S. Treasury rates for securities with maturities approximating the expected term of the options. Expected volatility is based on the historical volatility of the market price of the Company’s stock.
During the years ended December 31, 2017, 2016, and 2015 the Company recorded $1.7 million, $1.2 million, and $0.5 million of compensation expense related to options, respectively. The weighted average grant-date fair value of options granted during the years ended December 31, 2017, 2016, and 2015, was $6.79, $6.04, and $8.09, respectively. The intrinsic value of the options exercised during the years ended December 31, 2017 and December 31 2016, was $0.3 million and $0.1 million, respectively. No options were exercised during the year ended December 31, 2015.
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
4. Stock-Based Compensation - (continued)
The following table summarizes information about options outstanding and exercisable at December 31, 2017:
The aggregate intrinsic value of stock options outstanding at December 31, 2017 was $2.3 million. The aggregate intrinsic value of exercisable options outstanding at December 31, 2017 was $1.3 million. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the quoted closing price of the Company’s common stock as of December 31, 2017.
Service-Based Restricted Stock Awards
The following table summarizes the activity for awards of restricted stock with service-based vesting terms for the years ended December 31, 2017 and December 31, 2016:
For the years ended December 31, 2017, 2016 and 2015, the weighted average grant date fair value for service-based restricted stock granted was $17.77, $16.49 and $16.30, respectively. The fair value of service-based restricted stock that vested during these periods was $9.1 million, $5.5 million and $5.2 million, respectively. During the years ended December 31, 2017, 2016 and 2015, 198,043, 162,101 and 193,088 shares of service-based restricted stock, respectively, were repurchased by the Company in connection with the surrender of these shares by employees to satisfy tax withholding obligations related to the vesting of the service-based stock awards. The aggregate intrinsic value of unvested service-based restricted shares as of December 31, 2017 was $13.6 million. The intrinsic value for service-based restricted shares is calculated based on the par value of the underlying shares and the quoted price of the Company’s common stock as of December 31, 2017.
As of December 31, 2017, there was $9.1 million of total unrecognized compensation cost related to non-vested service-based restricted shares, which is expected to be recognized over a weighted average period of 2.27 years. During the years ended December 31, 2017, 2016 and 2015, the Company recorded $5.9 million, $6.4 million and $5.1 million, respectively, of compensation expense related to service-based restricted shares.
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
4. Stock-Based Compensation - (continued)
Performance-Based Restricted Stock Awards
During each of the years ended December 31, 2016, and 2015, the Company granted 31,250 performance based restricted shares of common stock to its CEO, pursuant to his employment agreement. Vesting of these awards was based upon (1) the achievement of performance goals established by the Compensation Committee of the Board and (2) continued employment with the Company through the vesting date. The performance period for these awards ended on December 31 of each year with 2016 being the final year. During the years ended 2016, and 2015, the Company incurred stock-based compensation expense related to these performance-based restricted stock awards of $0.6 million and $0.4 million, respectively. An immaterial amount of expense was recorded in 2017 in connection with marking the award to market. As of December 31, 2017, the award has fully vested and there is no remaining expense on non-vested shares outstanding. During the years ended December 31, 2017, 2016 and 2015, 11,803, 12,954, and 12,882 shares of performance-based restricted stock, respectively, were repurchased by the Company in connection with the surrender of these shares by employees to satisfy tax withholding obligations related to the vesting of the performance-based stock awards. For the year ended December 31, 2017 no additional performance-based awards were granted.
Employee Stock Purchase Plan ("ESPP")
The 2009 Employee Stock Purchase Plan (the “2009 ESPP”) was adopted by the Board of Directors, and was approved by the stockholders in May 2009, as a successor plan to the Company’s 1999 Employee Stock Purchase Plan (the “1999 ESPP”). The first offering period under the 2009 ESPP began August 1, 2009 and shares were first purchased under this plan on January 31, 2010. The 2009 ESPP was amended and restated in May 2016 (the "Amended 2009 ESPP") following the approval by the Company's stockholders. The Compensation Committee of the Board of Directors administers the ESPP. The 2009 ESPP permits a participating employee to make contributions to purchase shares of common stock by having withheld from his or her salary an amount between 1% and 15% of compensation. Under the Amended 2009 ESPP, eligible employees of the Company may elect to participate before the start date of a semi-annual offering period. On each purchase date during an offering period, a participating employee’s contributions will be used to purchase up to 1,000 shares of the Company’s common stock for such participating employee at a 15% discount from the fair market value, as defined in the 2009 ESPP, of such stock. In addition to the 1,000 share purchase limit, the cost of shares purchased under the plan by a participating employee cannot exceed $25,000 in any plan year.
Under the terms of the Amended 2009 ESPP, 600,000 shares of common stock of the Company were reserved for issuance. As of December 31, 2017, there were 243,656 shares available for future grants under the 2009 Amended ESPP. Increases to the number of shares available for future grants under the Amended 2009 ESPP require approval by the Board of Directors and the Company's stockholders.
During the years ended December 31, 2017 and 2016, the Company issued shares of common stock under the 2009 ESPP and Amended 2009 ESPP, as follows:
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
4. Stock-Based Compensation - (continued)
The fair value of 2009 ESPP rights have been estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Expected volatility is based on the historical volatility of the market price of the Company’s stock. The expected lives of ESPP rights granted are based on the period of time between the offering date and the exercise date. The risk-free interest rates are based on the quoted U.S. Treasury rates for securities with maturities approximating the expected term. The fair value for 2009 ESPP rights includes the option exercise price discount from market value provided for under the 2009 ESPP.
During each of the years ended December 31, 2017, 2016 and 2015, the Company recorded $0.2 million of compensation expense related to 2009 ESPP rights. The weighted average grant-date fair value of 2009 ESPP rights arising from elections made by ESPP participants was $3.48, $3.01 and $3.13 during the years ended December 31, 2017, 2016 and 2015, respectively. The fair value of 2009 ESPP rights that vested during the years ended December 31, 2017 and 2016 was $0.2 million, and $0.1 million, in 2015 respectively.
The intrinsic value of shares purchased through the 2009 ESPP during the year ended December 31, 2017 was $0.2 million. The intrinsic value of outstanding 2009 ESPP rights as of December 31, 2017 was $0.1 million. The intrinsic value of the shares of 2009 ESPP rights is calculated as the discount from the quoted price of the Company’s common stock, as defined in the 2009 ESPP, which was available to employees as of the respective dates.
As of December 31, 2017, there was approximately $14.9 thousand of unrecognized compensation cost for the 2009 ESPP rights related to a 2017 offering period, which is expected to be recognized over a period of one month.
The Company received cash from the exercise of options and 2009 ESPP rights of $1.8 million, $0.9 million and $0.5 million for the years ended December 31, 2017, 2016 and 2015, respectively, for which the Company issued new shares of common stock.
The tax benefit attributable to all recorded stock-based compensation was $3.1 million, $2.6 million and $2.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.
5. Acquisitions and Exit Activities
Acquisitions
On September 15, 2017 the Company acquired the assets of Veri, Inc., a photo-sharing app focused on weddings and events, in exchange for consideration of $3.5 million, of which approximately $3.2 million was paid in cash during the quarter. The remaining approximately $0.3 million was retained by the Company as a holdback and accrued as a liability to settle indemnification claims made by the Company and its affiliates, should such claims arise. The holdback is included in “Other liabilities” on the Consolidated Balance Sheets as of December 31, 2017. The holdback period is 18 months, and the balance of the accrual will either be used to settle indemnification claims or be released to the seller in March 2019. An allocation of purchase price has been completed as of December 31, 2017 which resulted in a technology value in the amount of $0.7 million based upon its fair value assessed as of the acquisition date. The technology value is included in “Intangible assets, net” on the Consolidated Balance Sheet as of December 31, 2017. The excess of the purchase price over the fair value of the assets acquired, of approximately $2.8 million, was allocated to goodwill and is expected to be deductible for tax purposes. The goodwill is primarily attributable to the synergies expected to arise after the acquisition.
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
5. Acquisitions and Exit Activities - (continued)
On September 7, 2016 the Company acquired the assets of How He Asked LLC, a digital and social media brand for pre-engaged couples, in exchange for consideration of $1.5 million, of which approximately $1.4 million was paid in cash during the third quarter. The remaining approximate $0.1 million was retained by the Company as a holdback and accrued as a liability to settle indemnification claims made by the Company and its affiliates, should such claims arise. The holdback period was 12 months, and the balance of the accrual was released to the seller in September 2017. A portion of the purchase price was allocated to a trade name in the amount of $0.2 million based upon its fair value assessed as of the acquisition date. The trade name value is included in “Intangible assets, net” on the Consolidated Balance Sheets. The excess of the purchase price over the fair value of the assets acquired, of approximately $1.3 million was allocated to goodwill and is expected to be deductible for tax purposes. The goodwill is primarily attributable to the synergies expected to arise after the acquisition.
On October 1, 2015, the Company acquired GigMasters.com Incorporated ("GigMasters"), a marketplace for party planners and hosts to find entertainment and event services. The Company previously owned 28.7% of GigMasters and paid $6.1 million in cash for the remaining 71.3% representing a total enterprise value of $7.9 million. In connection with the acquisition, the Company recorded a gain of $0.8 million related to the fair market value of its noncontrolling interest in GigMasters. A portion of the purchase price was allocated to the net tangible and intangible assets, in the amounts of $0.5 million and $3.7 million, respectively, based upon their fair values assessed as of the acquisition date. The excess of the purchase price over these fair values was allocated to goodwill, all of which is deductible for tax purposes. The goodwill is primarily attributable to the synergies expected to arise after the acquisition. The allocation of the purchase price is as follows:
Exit Activities
The Company's merchandise operations included the fulfillment of customer orders from its warehouse facility in Redding, California. After reviewing the past and expected financial performance of the operations, in October 2014, the Company committed to a plan to cease operations at its warehouse in Redding, California. The process was completed in the first quarter of 2015. The Company continues to serve the transactional needs of its users through a registry and partner-based model for providing users with desired products and services.
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
6. Property and equipment
The components of Property and equipment are as follows:
For the years ended December 31, 2017, 2016 and 2015, the Company recorded amortization of capitalized software of $4.2 million, $4.0 million, and $3.3 million, and depreciation expense of $1.1 million, $1.4 million, and $1.8 million respectively. For the year ended December 31, 2017, the Company recorded impairments of capitalized software of $0.6 million. For the years ended, December 31, 2016 and 2015, no impairments of property and equipment were made.
7. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 are as follows:
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
7. Goodwill and Other Intangible Assets - (continued)
Other intangible assets consisted of the following:
The Company evaluates intangible assets annually as of October 1 for impairment, or more often if indicators of impairment exist. In its assessment of impairment of intangible assets, the Company considers whether events or changes in circumstances such as significant declines in revenues, earnings or material adverse changes in the business climate indicate that the carrying value of assets may be impaired. For the year ended December 31, 2017, no impairment charges were recorded.
The Company recorded an immaterial amount of impairment of its intangibles, related to URLs, during the year ended December 31, 2016, which is recorded within the "Depreciation and Amortization" line within the Consolidated Statement of Operations.
The annual impairment analysis as of October 1, 2015 resulted in the Company concluding that definite-lived assets, related to patents, were impaired, resulting in an impairment charge of $0.3 million.
Amortization expense for definite-lived intangible assets was $2.2 million, $0.8 million and $0.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. Estimated annual amortization expense is $0.9 million in 2018, $0.8 million in 2019, $0.7 million in 2020, $0.5 million in 2021, and $0.7 million thereafter.
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
8. Investments
As of December 31, 2017, the Company's investments of $1.4 million include equity ownership in the following entities:
On July 17, 2015, the Company made an investment of $1.0 million in cash in exchange for a 21.1% equity interest (based on common and preferred shares outstanding) in A Vendor Services Company. During the twelve months ended December 31, 2016, the Company purchased additional equity interests in exchange for cash, increasing it's ownership to 34.1%. The Company uses the equity method of accounting for this investment since the ownership percentage is greater than 20% and the Company exercises significant influence.
As of December 31, 2017, the Company has an investment of $0.4 million in Catchafire, Inc., an entity that matches professionally skilled volunteers with non-profits and social enterprises, that is accounted for using the cost method. In January, 2017, Catchafire, Inc. raised additional funding in a round in which the Company did not participate resulting in a decrease in its equity interest to 3.6%.
On July 2, 2015, the Company contributed $1.5 million in cash in exchange for a 17.6% equity interest (based on common and preferred shares outstanding) in Jetaport, a hotel room block marketplace technology company. During the three months ended June 30, 2017, the Company determined that impairment indicators existed in its investment. As of June 30, 2017, Jetaport, Inc. had not yet raised additional capital, and based upon Jetaport, Inc.'s financial condition, an other-than-temporary impairment of $1.0 million was recorded to reduce its carrying value of Jetaport, Inc. to zero. The impairment is included in “Loss in equity interests” within the 2017 Consolidated Statement of Operations.
On January 16, 2014 the Company entered into an agreement to contribute $4 million in cash in exchange for a minority equity interest of approximately 3% in Touch Media International Holdings ("Touch Media"), During the year ended December 31, 2015, the Company determined that impairment indicators existed based upon consistent material underperformance to Touch Media's financial projections and a weak financial condition. As a result, the Company recorded an impairment charge of $4.0 million to reduce it's investment to $0.
The Company's proportionate shares of the operating results of its equity method investments, including GigMasters through September 30, 2015, are recorded in gain (loss) in equity interests in the Company's Consolidated Statements of Operations.
(Loss) gain in equity interests for the years ended December 31, 2017, 2016 and 2015 were $(1.2) million, $(0.3) million, and $0.5 million, respectively.
9. Capital Stock
The Company’s Amended and Restated Certificate of Incorporation provides for 105,000,000 authorized shares of capital stock consisting of 100,000,000 shares of common stock, each having a par value of $0.01 per share and 5,000,000 shares of preferred stock, each having a par value of $0.001.
The Board of Directors is authorized, without further stockholder approval, to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock, in one or more series and to fix or alter the designations, preferences, rights, and any qualifications, limitations or restrictions, of the shares of each series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designation of series.
At December 31, 2017, the Company had reserved the following shares of common stock for future issuance under the Company’s 2017 Stock Incentive Plan (formerly referred to as the Amended and Restated 2009 Stock Incentive Plan, as amended,
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
9. Capital Stock - (continued)
and referred to herein as the “Incentive Plan”) and the Amended and Restated 2009 Employee Stock Purchase Plan (collectively, the “Plans”):
On April 10, 2013, the Company announced that its Board of Directors authorized the repurchase of up to $20.0 million of the Company’s common stock (the “April 2013 Repurchase Program”). On May 23, 2016, our Board of Directors authorized an additional $20.0 million repurchase of our common stock from time to time on the open market or in privately negotiated transactions, together with the April 2013 Repurchase Program (collectively, the “Repurchase Programs”).
During the twelve months ended December 31, 2017, the Company repurchased and retired 775,370 shares of its common stock pursuant to the Repurchase Programs. The Company used $13.3 million of cash for such repurchases at an average price paid per share of $17.16. During the twelve months ended December 31, 2016, the Company repurchased and retired 230,163 shares of its common stock using $4.0 million of cash for such repurchases at an average price paid per share of $17.19.
As of December 31, 2017, the Company has repurchased a total of 1,640,012 shares of its common stock for an aggregate of $27.7 million with approximately $12.3 million remaining under the Repurchase Programs.
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
10. Income Taxes
The components of the provision for income taxes are as follows:
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and significant changes to the U.S. tax code that affects the year ended December 31, 2017, including, but not limited to, a change in the federal rate from 35% to 21%, as well as the requirement to pay a one-time transition tax (“deemed repatriation tax”) on all undistributed earnings of foreign subsidiaries.
As of December 31, 2017, the Company had not completed its accounting for the tax effects of the Tax Act; however, the Company made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with Staff Accounting Bulletin 118 (“SAB 118”), income tax effects of the Tax Act may be refined upon obtaining, preparing, or analyzing additional information during the measurement period and such changes could be material. During the measurement period, provisional amounts may be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by U.S. regulatory and standard-setting bodies.
The reconciliation of income tax expense computed at the U.S. federal statutory rate to the income tax provision for the years ended December 31, 2017, 2016 and 2015 is as follows:
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
10. Income Taxes - (continued)
The Company adopted ASU 2016-09 as of January 1, 2017, which resulted in the Company recording excess tax benefits from share-based award activity as a reduction of the provision for income taxes, whereas they were previously recognized in equity. Refer to "Recently Issued Accounting Pronouncements" in Note 2 for further detail.
The Tax Act reduces the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. The Company recorded a provisional expense of $3.0 million with a corresponding decrease to its net deferred tax assets. Included in the $3.0 million amount is the Company's estimate of the deemed repatriation tax in the amount of $0.3 million. The deemed repatriation tax is a tax on previously untaxed earnings and profits of certain foreign subsidiaries. To determine the amount of the tax, the Company must determine, in addition to other factors, the amount of earnings and profits subject to U.S. tax for the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company continues to gather additional information to more precisely compute the amount of deemed repatriation tax, which may be impacted by further legislative technical corrections, amendments and/or revised earnings and profits computations.
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
10. Income Taxes - (continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities consist of the following:
As of December 31, 2017, the Company had net operating loss carryforwards of approximately $23.4 million for federal tax purposes, which are set to expire in years 2018 through 2028. The majority of this amount represents acquired tax loss carryforwards of WeddingChannel.com, which are subject to limitation on future utilization under Section 382 of the Internal Revenue Code of 1986. Section 382 imposes limitations on the availability of a company’s net operating losses after a more than 50 percentage point ownership change occurs over a 3 year period. It is estimated that the effect of Section 382 will generally limit the amount of the net operating loss carryforwards of WeddingChannel.com that is available to offset future taxable income to approximately $3.6 million annually. The overall determination of the annual loss limitation is subject to interpretation, and, therefore, the annual loss limitation could be subject to change.
The following is a reconciliation of the Company’s unrecognized tax benefits for 2017 and 2016:
As of December 31, 2017, $0.7 million of unrecognized tax benefits is presented within other long-term liabilities in the Consolidated Balance Sheets. These unrecognized tax benefits would affect the Company's effective income tax rate, if and when recognized in future years. The remainder of the unrecognized tax benefits has been netted against the related deferred and current tax assets and, if recognized, would also be reported as a reduction of income tax expense. The Company does not presently anticipate such uncertain tax positions will significantly increase or decrease in the next twelve months; however, actual developments could differ from those currently expected.
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
10. Income Taxes - (continued)
The Company is subject to income tax in the United States and various foreign state and local jurisdictions. During 2017, the IRS completed an audit on the 2015 tax year and concluded there were no adjustments necessary to the filed tax return.
The Company currently has no state and foreign audits pending. During 2017, the Company received a “Notice of Proposed Deficiency” from the state of Illinois in the amount of $9,000, including interest and penalties. The Company agreed with the auditor’s assessment. State income tax returns are generally subject to examination for a period of three to five years after filing of the return. However, the state impact of any federal changes remains subject to examination by various states for a period generally up to one year after formal notification to the states of the federal changes.
The Company records interest and penalties as a component of income tax expense. The total interest and penalties included in the Company's tax provision for the years ended December 31, 2017 and 2016 was immaterial.
11. Commitments and Contingencies
Long-Term Restricted Cash
Long-term restricted cash consists of a $1.2 million letter of credit collateralized by U.S. Treasury bills that are restricted as to withdrawal or use under terms of the Company's New York office lease.
Operating Leases
The Company leases office facilities under non-cancelable operating lease agreements which expire at various dates through 2025. Rent-free periods and scheduled rent increases are recorded as components of rent expense on a straight-line basis over the related terms of such leases. Certain leases contain incentive allowances which are recorded as reductions to rent expense on a straight-line basis over the remaining lease terms from such time that the allowances were authorized. Rent expense for each of the years ended December 31, 2017, 2016 and 2015 amounted to $2.9 million, $2.4 million and $3.0 million, respectively.
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
11. Commitments and Contingencies - (continued)
Future minimum lease payments under non-cancelable operating leases are as follows (amounts in thousands):
Legal Proceedings
As of December 31, 2017, the Company was engaged in certain legal actions arising in the ordinary course of business and believes that the ultimate outcome of these actions will not have a material effect on its results of operations, financial position or cash flows.
Other Commitments and Contingencies
The Company has additional purchase commitments in connection with information technology contracts which extend into 2019.
In connection with the sale of our Ijie operations in December 2014, the Company agreed to indemnify the buyers for certain liabilities that may arise related to events prior to the sale transaction or breach of our covenants under the sale agreement. We do not believe this will have a material effect on the Consolidated Financial Statements.
12. 401(k) Plan
The Company maintains a 401(k) plan covering all eligible employees and provides for a Company match on a portion of eligible compensation. Employees may contribute up to 92% of their eligible compensation, subject to IRS maximums. The Company matches 25% of the first 4% of eligible compensation. The Company’s matching contributions are made in cash and amounted to $0.6 million, $0.5 million and $0.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.
XO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
13. Quarterly Financial Data (Unaudited)
The following tables set forth certain unaudited Condensed Consolidated quarterly Statement of Operations data for the eight quarters ended December 31, 2017. This information is unaudited, but in the opinion of management, it has been prepared substantially on the same basis as the audited Consolidated Financial Statements and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited Consolidated quarterly Results of Operations. The Condensed Consolidated Quarterly Data should be read in conjunction with our audited Consolidated Financial Statements and the notes to such statements. The results of operations for any quarter are not necessarily indicative of the results of operations for any future period.
(1)
The sum of the quarterly earnings per share may not equal the full year amount, as the computations of the weighted-average number of common basic and diluted shares outstanding for each quarter and the full year are performed independently.
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 2017, 2016 and 2015
(amounts in thousands)
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company has established disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and, as such, is accumulated and communicated to the Company’s management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.
Report of Management on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2017 based upon Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
As previously described in “Part II. Item 9A. Controls and Procedures” of the Company’s 2016 Form 10-K, we had identified a material weakness, which is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Specifically, certain controls over national online advertising did not operate effectively as they did not ensure that revenue is recognized based on the targeting of impressions ordered by our customers. As a result, in some instances, the controls did not prevent the recognition of revenue for impressions ordered by our customers that we did not deliver to the correct targeting.
The errors arising from the underlying deficiency were not material to the Consolidated Financial Statements reported in any interim or annual period and therefore, did not result in a revision to previously filed Consolidated Financial Statements. However, this control deficiency could have resulted in a material misstatement to the annual or interim Consolidated Financial Statements that would not be prevented or detected in a timely manner. Accordingly, we determined that this control deficiency constituted a material weakness.
In response to the material weakness, we implemented a remediation plan that included the following:
•
Implementing specific review procedures designed to ensure inventory is being accurately matched to customer orders
•
Strengthening our user access to the systems that execute our national online advertising.
Our enhanced review procedures and access standards were in place during 2017. We have tested the enhanced internal controls and related procedures and accesses. We have concluded, through testing, that the newly implemented controls have operated for a sufficient period of time and are operating effectively, and that the material weakness previously identified has been remediated.
Based on our evaluation, our management, including the CEO and the CFO, has concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to our management, as appropriate to allow timely decisions regarding required disclosure.
The independent registered public accounting firm, Ernst & Young LLP, has audited the consolidated financial statements included in this Form 10-K and, as part of the audit, has issued a report on the effectiveness of our internal control over financial reporting as of December 31, 2017, which is included in this Form 10-K in Item 8, “Financial Statements and Supplementary Data.”
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including the Company’s CEO and CFO, does not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting will prevent or detect all error and all fraud. A control system, regardless of how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 is incorporated by reference to the sections captioned “Election of Directors,” “Management,” “Board Meetings and Committees - Audit Committee,” “Corporate Governance - Codes of Conduct,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Board Meetings and Committees - Nominating and Corporate Governance Committee” in our definitive proxy statement for the 2018 Annual Meeting of Stockholders, which we plan to file with the Securities and Exchange Commission within 120 days of the end of the calendar year to which this report relates.
Item 11.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to the sections captioned “Compensation Discussion and Analysis,” “Compensation Committee Report” (which information shall be deemed furnished in this Annual Report on Form 10-K), “Executive and Director Compensation” and “Compensation Committee Interlocks and Insider Participation” in our definitive proxy statement for the 2018 Annual Meeting of Stockholders, which we plan to file with the Securities and Exchange Commission within 120 days of the end of the calendar year to which this report relates.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about our equity compensation plans as of December 31, 2017. All outstanding awards relate to our common stock. For additional information about our equity compensation plans, refer to Notes 4 and 8 of the Consolidated Financial Statements included in Item 8.
The other information required by this Item 12 is incorporated by reference to the section captioned “Ownership of Securities” in our definitive proxy statement for the 2018 Annual Meeting of Stockholders, which we plan to file with the Securities and Exchange Commission within 120 days of the end of the calendar year to which this report relates.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated by reference to the sections captioned “Certain Relationships and Related Party Transactions” and “Corporate Governance - Director Independence” in our definitive proxy statement for the 2018 Annual Meeting of Stockholders, which we plan to file with the Securities and Exchange Commission within 120 days of the end of the calendar year to which this report relates.
Item 14.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 is incorporated by reference to the sections captioned “Fees” and “Pre-Approval Policies and Procedures” in the proposal related to ratification of the appointment of our independent registered public accounting firm in our definitive proxy statement for the 2018 Annual Meeting of Stockholders, which we plan to file with the Securities and Exchange Commission within 120 days of the end of the calendar year to which this report relates.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
Financial Statements.
See Index to Financial Statements in Item 8.
Financial Statement Schedules.
See Index to Financial Statements in Item 8.
Incorporated by reference to the Exhibit Index immediately preceding the exhibits attached to this Annual Report on Form
10-K.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, XO Group Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of New York, State of New York, on this 2nd day of March 2018.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 2, 2018.
Signature
Title(s)
/s/ Michael Steib
Michael Steib
Chief Executive Officer, President and Director (Principal Executive Officer)
/s/ Gillian Munson
Gillian Munson
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ David Liu
David Liu
Chairman of the Board of Directors
/s/ Charles Baker
Charles Baker
Director
/s/ Diane Irvine
Diane Irvine
Director
/s/ Barbara Messing
Barbara Messing
Director
/s/ Peter Sachse
Peter Sachse
Director
/s/ Elizabeth Schimel
Elizabeth Schimel
Director
/s/ Michael Zeisser
Michael Zeisser
Director
EXHIBIT INDEX
*
Management contract or compensatory plan or arrangement
**
Pursuant to applicable securities laws and regulations, the Registrant is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Registrant has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. These interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.