| WEBSIDESTORY INC other risks described below under the heading “Item 1A Risk Factors |
| ” Given these uncertainties, you should not place undue reliance on these forward-looking statements |
| Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report |
| Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made |
| Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available |
| Overview We are a leading provider of on-demand and in-house digital marketing and customer analysis solutions |
| Our Active Marketing Suite™ consists of web analytics, website search, web content management, call center analytics and messaging analysis |
| Our Active Marketing Suite will also include keyword bid management after its expected release later in 2006 |
| Customers use our services to understand how Internet users respond to website design and content, online marketing campaigns and e-commerce offerings and to manage the content of their web pages and make them searchable |
| Customers also use our solutions to analyze and understand customer interaction across multiple delivery channels |
| As a result, our customers can make more effective marketing and business decisions and improve the merchandising, sales, support, design and functionality of their websites, thereby improving their return on investment on marketing dollars spent |
| We derive most of our revenue from HBX™, one of our web analytics applications |
| Web analytics refers to the collection, analysis and reporting of information about Internet user activity |
| Our HBX application collects data from web browsers, processes that data and delivers analytic reports of online behavior to our customers on demand, allowing them to improve their websites and their online marketing campaigns |
| 1 _________________________________________________________________ [40]Table of Contents We deliver our HBX, site search and web content management services on-demand over the Internet using secure, proprietary and scalable applications and system architectures |
| This on-demand delivery model allows us to concurrently serve a large number of customers and to efficiently distribute the workload across our networks of servers |
| Our HBX technology is relatively straightforward to implement for most customers, which allows these customers to avoid expensive, up-front hardware expenses and software license fees and to benefit from lower administration costs compared to traditional software licensing |
| Our analytic reporting and data collection processes can be integrated with third-party applications through our published application programming interfaces, or APIs, and through standard-format data feeds |
| Our services are offered by subscription agreements, typically with terms of one to three years |
| As of December 31, 2005, we had over 1cmam100 customers purchasing services from our Active Marketing Suite |
| Our direct sales force sells our services to a broad range of organizations in many industries including sports and entertainment, news, retail, financial services, travel, technology, manufacturing, telecommunications and education |
| Our top ten customers by revenue in 2005 were Allstate Insurance Company, Best Buy Corporation, British Sky Broadcasting, Cisco, Comcast |
| net, FedEx Corporate Services, Fox Sports |
| com, Nokia, PC World Communication and the Walt Disney Internet Group |
| Walt Disney accounted for 14prca of our total revenue in the year ended December 31, 2003; however, none of our customers individually accounted for more than 10prca of our total revenue for the years ended December 31, 2004 or 2005 |
| Recent Acquisitions In May 2005, we acquired Avivo Corporation, which was doing business as Atomz, a provider of on-demand website search and web content management, in exchange for approximately dlra4dtta2 million in cash, 2cmam958cmam713 shares of common stock and 164cmam434 options to purchase our common stock |
| We believe the acquisition of Avivo advanced our strategy of offering a suite of integrated digital marketing applications, which may expand our market opportunity |
| We are in the process of integrating Avivo’s website search and web content management applications, which we refer to as WebSideStory Search and WebSideStory Publish, respectively, with our web analytics application, HBX In February 2006, we acquired Visual Sciences, LLC, a provider of streaming data analysis and visualization software and services, in exchange for dlra22dtta0 million in cash, 568cmam512 shares of common stock, warrants to purchase 1cmam082cmam923 shares of common stock with an exercise price of dlra18dtta4685 per share, and dlra20dtta0 million in aggregate principal amount of senior notes |
| In connection with the transaction, we also granted 189cmam507 shares of restricted common stock to certain employees of Visual Sciences, which vest on January 30, 2007, and non-qualified stock options to purchase 350cmam000 shares of common stock to certain employees of Visual Sciences |
| We believe this merger expands our addressable market by adding customer interaction analysis solutions for the call center, e-mail and, in the future, other non-web delivery channels such as stores and branches |
| This merger also positions us to address the web analytics needs of large enterprises that require in-house solutions |
| Benefits of Our Services With the addition of Visual Sciences, we offer a suite of on-demand and in-house digital marketing and customer analysis solutions that allow our customers to measure and improve the performance of their online businesses and marketing campaigns |
| Our reporting services allow businesses to compare the popularity and effectiveness of their content over time and across sections of their websites |
| These reports can reveal which paths in a website lead to the greatest number of sales and where bottlenecks occur and enable rapid testing of the effects that changes in content and design have on browsing, shopping and buying |
| In addition, our services allow our customers to develop offline marketing strategies based on online analysis |
| We also correlate browsing and searching behavior with purchasing to reveal shopping patterns and trends |
| While our web analytics service provides a basis for decisions affecting online marketing, our customers can use our other Active Marketing Suite applications to implement their decisions |
| Our customers can use our website search application to influence how visitors navigate their website and search for content and products |
| Our web content management application allows our customers to publish and modify website content |
| We expect to release our keyword bid management application later in 2006, which will enable our customers to develop and execute complex keyword bidding strategies |
| • Improve Marketing Return on Investment |
| Our web analytics reports help businesses determine where their marketing budgets are best spent |
| We measure and report online responses to both online and offline marketing campaigns |
| Using our services, our customers can run simultaneous campaigns, assess results in real time and then reallocate marketing resources to the most effective campaigns |
| They can identify which referral sources generate the most customer leads and can assess each campaign’s return on investment in terms of sales relative to costs |
| • Offer a Lower Total Cost of Ownership |
| Our services provide a low total cost of ownership by eliminating the need for large investments in software licenses and upgrades, hardware, extensive implementation and integration services and additional information technology staff |
| Our services are also compatible with all commonly used operating systems and web browsers |
| Additionally, our on-site licenses are, once installed, updated in an automated fashion over encrypted network connections which run over the Internet or private network lines, reducing our requirement to support back releases and creating a hybrid version of in-house software with some of the efficiencies of on-demand delivery |
| • Are Secure and Scalable |
| Our services are delivered over the Internet and have been designed to provide our customers with high levels of security, performance and reliability |
| We maintain security through the use of firewalls, intrusion detection, proprietary monitoring, and network policies and procedures |
| Our proprietary data management systems are highly scalable and can handle large volumes of data at high speeds |
| Our systems generally use commercially available hardware and proprietary software |
| Our Strategy Our goal is to be the global leader in on-demand and in-house digital marketing and customer analysis solutions |
| The key components of our strategy are to: • Expand the Features and Functionality of Our Services |
| We plan to further enhance the features and functionality of our on-demand applications, as well as adapt our services to changing Internet environments and business practices |
| We also plan to continue to increase the number of languages supported by our services |
| We believe that our multi-tenant application architecture is well-designed to accommodate new features and functions |
| For our on-demand solutions, most additions of new features and functions are centrally implemented entirely by us on our servers, which results in the upgrades becoming part of our services |
| • Pursue New Customers in Our Existing Markets, Cross-Sell Our Products and Expand into New Geographic Markets |
| Our on-demand applications currently serve diverse organizations, including Fortune 500 corporations, small and medium businesses and educational institutions |
| We intend to continue marketing our services to a broad range of organizations, primarily through our direct sales force |
| We plan to increase the number of sales people that we employ and to develop other marketing or distribution channels for our services |
| Additionally, we plan to leverage our sales force to cross-sell all of the applications in our Active Marketing Suite across our current and potential customer base |
| We also plan to increase our marketing efforts to customers outside of North America by recruiting local sales and support professionals, and we may also expand outside North America by selectively pursuing acquisitions |
| In May 2005, we acquired Avivo, a provider of on-demand website search and web content management applications, and in February 2006, we acquired Visual Sciences, a provider of streaming data analysis and visualization software and on-demand services |
| We intend to launch our keyword bid management application during 2006 |
| We believe that there are significant benefits through the integration of data, analysis and functionality of our web analytics, website search, web content management and keyword bid management applications |
| We intend to integrate these applications, as well as future applications we acquire or develop in order to enhance the value of the services we provide to our customers |
| We believe that our success in web analytics will help us sell related, on-demand digital marketing services such as website search applications, web content management, keyword bid management, call center analytics, marketing surveys, email marketing and affiliate marketing networks |
| In the past year, we have developed or acquired several of these digital marketing applications, and we intend to develop or acquire additional applications |
| We believe our strengths in data analysis, scalability and delivery of on-demand application services will allow us to compete effectively with other companies that may attempt to offer comparable digital marketing services |
| We believe that we can generate more revenue from our customers by promoting wider and more diverse deployments of our services |
| We seek to learn industry best practices based on feedback from our customers and to incorporate these practices into our technology and professional services |
| This strategy enhances the value our customers receive from our services |
| We intend to keep our customers satisfied by responding promptly to their feedback and requests and by building technology that helps them achieve their goals |
| • Encourage the Development of Third-Party Applications that Integrate with and are Complementary to Our Services |
| Our services are designed to allow third-party developers to create applications complementary to our core services offering |
| Our analytic reporting and data collection processes can be integrated with third-party applications through our published APIs and through standard-format data feeds |
| We actively encourage our customers to integrate our services with other systems and applications that they use to increase the value of our services |
| Our Services We sell our digital marketing and customer analysis solutions as a suite of applications called the Active Marketing Suite |
| Customers can purchase one or more applications within our Active Marketing Suite |
| Currently, we derive most of our revenue from HBX, one of our on-demand web analytics applications |
| We expect that an increasing number of our customers will purchase more than one of our Active Marketing Suite applications |
| Our Active Marketing Suite consists of: Service Description HBX On-Demand Web Analytics HBX is our on-demand web analytics service that collects, processes, stores and reports on Internet user behavior based on browser activity |
| Reports that we provide give our customers an extensive analysis of what visitors are doing on their web pages |
| For example, HBX can be used to inform our customers which marketing initiatives visitors responded to, what search engines they used, what keywords they entered, how much time they spent on web pages, what they bought online, when they abandoned shopping carts and what geographic area they live in |
| 4 _________________________________________________________________ [43]Table of Contents Service Description WebSideStory Search Search is our on-demand application that delivers relevant search results to visitors of our customers’ websites and guides them, step-by-step, to the products and information they want |
| Search also enables our customers to learn from their website visitors’ behavior and improve their business decisions based on what visitors are searching for and how often they find what they want |
| Customers can customize the search interface and results templates to match their website design |
| WebSideStory Publish Publish is our on-demand web content management application that helps businesses improve their website |
| Publish allows marketers and website owners to control website content, without sacrificing control over workflow, design and permissions required by web teams |
| For example, customers of Publish can navigate their own website to the content they want to modify, click a button and make the change |
| An additional click of a button will publish the changed content |
| Little to no training is required to utilize this application, and no technical expertise is needed |
| WebSideStory Bid (expected to be released during 2006) Bid is our on-demand keyword bid management application that will enable search engine marketers to actively manage pay-per-click bids from a single, easy-to-use interface |
| Bid will be integrated with HBX to enable customers to analyze the effectiveness of their keyword bid strategies |
| We plan to release the first version of Bid during 2006 |
| Visual Site Visual Site provides customers real-time visibility into Internet channel campaigns, sites, visitors and segments |
| Visual Call Visual Call provides customers real-time visibility into voice channel systems, customers and segments |
| Visual Mail Visual Mail provides customers real-time visibility into e-mail channel content, customers and segments |
| In addition to our Active Marketing Suite, our other services include the following: Professional Services |
| We also offer professional services to help our customers implement and use our on-demand digital marketing applications |
| Our advice helps them interpret analytic reports, and we develop recommendations for improving our customers’ websites and marketing programs |
| We assist in implementing our own recommendations, analyze the results and develop new recommendations based on these results |
| HBX DataFeed allows companies to combine our on-demand web analytics with most in-house data applications |
| Customers that want the raw behavioral data that we collect can obtain it through data feeds that are easy to implement and compatible with standard database formats |
| HitBox Professional |
| HitBox Professional is a web analytics application for small and medium-sized businesses that need web analytics services, but do not need all of the features and capabilities of HBX HitBox Professional includes many, but not all of the features of HBX, and is offered at a lower base price |
| Express Search is a reduced-feature version of WebSideStory Search for small businesses and other website operators |
| We provide Express Search in exchange for the right to display text advertisements in the search results on our customers’ websites |
| We generate revenue from these online text advertisements |
| 5 _________________________________________________________________ [44]Table of Contents Technology and Operations Technology Our on-demand and in-house technologies are highly scalable, allowing us to serve large numbers of customers, including high-volume customers |
| Our proprietary software is designed to run on custom-built computer networks that we control and maintain |
| Unlike traditional software vendors, for our on-demand solutions, we do not need to support different hardware, operating systems or databases, or develop software for customers’ unique computing environments |
| As a result, we can dedicate a greater proportion of our development resources to improve the features, functions, reliability and speed of our services |
| Our technology is based on multi-tenant application architecture |
| We use commercially available hardware and proprietary software |
| To a lesser extent, we also use some commercially available software as components of our technology |
| We have custom-built core services such as visitor session measurement and a data management system that allow us to achieve both data manipulation and real-time reporting |
| We have built a distributed environment for both data collection and end-user report generation that routes both tasks efficiently to many servers, instead of to single, dedicated servers |
| Our customers can access our on-demand services through a web browser without installing any software |
| They can also receive reports and data from our systems through data feeds, a browser plug-in, a Microsoft Excel plug-in, our APIs and scheduled email delivery |
| To handle large volumes of data efficiently at high speeds, we have built our own proprietary data management systems |
| These systems include proprietary data management software, data storage methods and compression algorithms |
| These data management systems allow us to make information and reports related to data collected over long periods of time available on demand |
| Our services provide extensive reporting and analytics functionality accessible through hierarchical menus and interactive graphical reports available on demand |
| Users can customize reports and dashboards, schedule report delivery, model scenario analyses based on business criteria that they determine and monitor the results over time |
| Other applications can address our services either through our APIs or through the use of data feeds from our network |
| Our systems allow customers and technology partners to insert and collect information from our services |
| We maintain security through the use of firewalls, intrusion detection, proprietary monitoring and network policies and procedures |
| Our research and development expenses, including related stock-based compensation expenses, were dlra5dtta0 million, dlra3dtta8 million and dlra3dtta5 million in the years ended December 31, 2005, 2004 and 2003, respectively |
| Operations All of our servers and our customers’ data are located at three, third-party co-location facilities: one in San Diego, California operated by Level 3 Communications, LLC, which we use primarily for our HBX web analytics services; one in San Jose, California operated by Equinix Operating Co, Inc, which we use for our site search and web content management services; and one in Ashburn, Virginia also operated by Equinix, which we use for our Visual Sciences’ business |
| Our co-location agreements generally obligate the vendor to provide us with secure facilities, which generally includes biometric access screening and escort-controlled access, and on-site backup generators in the event of a power failure |
| The co-location agreements generally give us the right to keep our own network operators on-site around-the-clock |
| We regularly rotate tapes of customer data out of these facilities and store them in a separate location in the event of data loss at any of the facilities |
| In addition, we gain access to the Internet through several diverse Internet service providers, including Level 3 |
| Our agreement with Level 3 expires in September 2007 |
| Our agreement with Equinix for the San Jose facility expires in April 2006 but is subject to automatic one-year renewals unless either party provides notice of non-renewal to the other party at least 45 days prior to the end of the then-applicable term |
| Our agreement with Equinix for the Ashburn facility expires in November 2006 but is subject to automatic one-year renewals unless either party provides notice of non-renewal to the other party at least 90 days prior to the end of the then-applicable term |
| 6 _________________________________________________________________ [45]Table of Contents We regularly monitor the performance of our services |
| The monitoring features we have built or licensed include centralized performance consoles, automated load distribution and various self-diagnostic tools and programs |
| We have service-level agreements with our customers warranting certain levels of uptime reliability and permitting them to receive credits or terminate their agreements in the event that we fail to meet those levels |
| In the event of a disaster or serious network outage, we believe that complete data processing and reporting could be restored within 21 days, with an additional seven days to back process the collected and logged data |
| We also keep off-site archival copies of customer data for reconstitution of reporting |
| Customers As of December 31, 2005, we had over 1cmam100 customers purchasing services from our Active Marketing Suite |
| The revenue generated by the company from The Walt Disney Internet Group accounted for 14prca of total revenues for the year ended December 31, 2003 |
| None of our customers individually accounted for more than 10prca of our revenues for the years ended December 31, 2004 or 2005 |
| Sales and Marketing Direct Sales We primarily sell our services through our direct sales force, consisting of telesales and field sales personnel |
| Our telesales representatives are responsible for sales to customers assigned by region or industry, as well as following up on leads generated from our marketing campaigns |
| Our field sales personnel are responsible for our business customers, and they generally sell our services in one-on-one client meetings rather than over the telephone |
| We organize our sales and marketing programs by geographic regions and by product lines |
| Our North America sales programs are managed out of our San Diego, California headquarters and our San Bruno, California office |
| All of our European sales programs are managed out of our Amsterdam facility |
| In addition, we have sales consultants in Australia, Singapore and Canada |
| Marketing Our marketing strategy is to build our brand name and raise awareness of WebSideStory as a leading provider of on-demand digital marketing applications |
| Our marketing campaigns include a variety of advertising, public relations activities and web-based seminars, all of which are targeted at executives and other decision makers within business organizations |
| Our principal marketing initiatives include: • advertising on industry-related websites; • participation in, and sponsorship of, Internet user conferences, trade shows and industry events; • partnering with well-known organizations within the industry; • using our website to provide product and company information and industry-related downloads; and • issuing press releases about business and product developments as appropriate |
| Customer Service and Support We believe that customer service and support begins with our sales personnel who are trained to understand our 7 _________________________________________________________________ [46]Table of Contents customers’ needs |
| Our sales people work with our technologists to ensure that our customers receive the services they need for their businesses |
| Continuing superior customer support beyond the signing of our service contract helps us retain and expand our customer base |
| Our customer support group is equipped to answer general inquiries regarding our services and more technical questions relating to the use of our services |
| We offer training to our customers to help them use the services they purchase from us |
| International Sales In fiscal 2005, 2004 and 2003, we generated approximately 14prca, 16prca and 11prca of our total revenue, respectively, from subsidiaries located outside the United States |
| Our international operations primarily consist of sales activities for customers based in Europe and Asia |
| Our United States operations provide technical, legal and network operating support services to support our European and Asian customers |
| Our international direct and indirect subsidiaries were established for the purpose of paying the salaries of our sales personnel based in Europe and other expenses related to the billing and collecting of revenue from our European customers |
| Our current international strategy is to grow and strengthen our presence in international markets by hiring additional sales personnel and designing our services to support additional languages |
| Competition The market for digital marketing applications is rapidly evolving and highly competitive |
| We expect competition to increase from existing competitors as well as new market entrants |
| We compete primarily with other application service providers and software vendors on the basis of product functionality, price, performance and level of service |
| We also compete with companies that offer web analytics software bundled with other products or services |
| Our current principal competitors include: • web analytics providers such as Coremetrics, Omniture and WebTrends; • website search providers such as Endeca, Google and Verity; and • web content management providers such as Interwoven and Vignette |
| As we introduce our keyword bid management service, we anticipate that we will face competition from providers of keyword management services |
| In addition, we face competition from companies that develop similar technologies for their own use |
| Many companies, including some of our largest potential customers, use internally-developed interactive marketing software rather than the commercial services or software offered by us or our competitors |
| These companies may seek to offer their internally-developed software commercially in the future, which will bring us into direct competition with their products |
| We believe the principal competitive factors in our market include the following: • product functionality and breadth of services offered; • speed and ease of implementation and use; • price and cost of ownership; • brand name and reputation; • rates of user adoption among the decision makers; • performance, security, scalability, reliability and flexibility of the services; 8 _________________________________________________________________ [47]Table of Contents • ability to gather and process large amounts of data; • ease of integration with existing applications; and • quality of customer support and services |
| We believe that we compete favorably on the basis of these factors |
| However, some competitors may have features in their services that we do not include, and that customers prefer |
| Many of our current competitors and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical and marketing resources than we have |
| As a result, our competitors may be able to devote a greater portion of their resources to the development, marketing and sale of their products than we can and may be able to respond more quickly to the rapid advancements in technology and to the constant changes in customer needs |
| We cannot assure you that our current or potential competitors will not offer or develop services that are considered superior to ours, or that services other than ours will not achieve greater market acceptance |
| Intellectual Property We rely on a combination of trademark, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brands |
| We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to software, documentation and other proprietary information |
| We pursue the registration of our trademarks and service marks in the United States and in other countries, although we have not secured registration of all of our marks |
| WebSideStory and HitBox, among others, are our United States registered service marks |
| WebSideStory, HitBox and HBX are also registered in several international jurisdictions as well as the European Union |
| As of December 31, 2005, we had two issued patents, both relating to Internet website traffic analysis, which both expire in 2019 |
| We also have nine patent applications pending in the United States, as well as one international patent application pending under the Patent Cooperation Treaty and one pending patent application in Europe, Canada and Australia |
| In addition, we have entered into a cross license agreement with NetIQ, pursuant to which we have a license to NetIQ’s US Patent Nodtta 6cmam112cmam238, which expires in 2017, and certain patents pending and NetIQ has a license to our patents and certain patents pending |
| We do not believe that this cross license is material to our ability to sell our current web analytics services |
| This cross license agreement will terminate on the date the last patent expires |
| We cannot assure you that our pending, or any future, patent applications will be granted, that any existing or future patents will not be challenged, invalidated or circumvented, or that the rights granted under any patent that may issue will provide competitive advantages to us |
| Many of our current and potential competitors dedicate substantially greater resources to the protection and enforcement of intellectual property rights, especially patents |
| If a patent has been or is issued to a third party that prevents us from using some or all of our non-patented technology, we would need either to obtain a license to, or to design around, that patent |
| We may not be able to obtain a license on acceptable terms, if at all, or design around the patent, which could harm our ability to provide our services |
| The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights |
| For example, we, along with several of our competitors with technology similar to ours, are currently involved in patent litigation with NetRatings, Inc |
| NetRatings recently filed a patent infringement lawsuit against us in New York federal court, and we have filed a similar patent infringement lawsuit against NetRatings in federal court in |