Bazaarvoice, Inc.
Bazaarvoice Inc (Form: 10-Q, Received: 12/02/2016 16:53:14)
Table of Contents
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-35433
 
BAZAARVOICE, INC.
(Exact name of registrant as specified in its charter)
 
State of Delaware
 
20-2908277
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
10901 South Stonelake Blvd.
Austin, Texas
 
78759-5749
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (512) 551-6000

Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
ý
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
The number of shares of the registrant’s common stock outstanding as of November 28, 2016 was 83,467,003 .

 

Table of Contents

Bazaarvoice, Inc.
Table of Contents
 
 
 
Page
Part I.
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II.
Item 1.
Item 1A.
Item 2.
Item 6.
 


Table of Contents



Bazaarvoice, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except shares and per share data)
(unaudited)
 
 
October 31,
2016
 
April 30,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
44,427

 
$
43,963

Short-term investments
41,704

 
50,682

Accounts receivable, net of allowance for doubtful accounts of $1,563 and $2,362 as of October 31, 2016 and April 30, 2016, respectively
37,494

 
39,597

Prepaid expenses and other current assets
9,115

 
8,415

Total current assets
132,740

 
142,657

Property, equipment and capitalized internal-use software development costs, net
30,045

 
31,649

Goodwill
139,155

 
139,155

Acquired intangible assets, net
8,662

 
9,607

Other non-current assets
3,944

 
5,214

Total assets
$
314,546

 
$
328,282

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,738

 
$
6,110

Accrued expenses and other current liabilities
18,538

 
23,167

Deferred revenue
62,719

 
62,735

Total current liabilities
84,995

 
92,012

Long-term liabilities:
 
 
 
Revolving line of credit
37,000

 
42,000

Deferred revenue less current portion
2,409

 
2,481

Other liabilities, long-term
6,871

 
7,255

Total liabilities
131,275

 
143,748

Commitments and contingencies (Note 9)

 

Stockholders’ equity:
 
 
 
Common stock – $0.0001 par value; 150,000,000 shares authorized, 83,663,249 shares issued and 83,463,249 shares outstanding as of October 31, 2016; 150,000,000 shares authorized, 82,269,748 shares issued and 82,069,748 shares outstanding at April 30, 2016
8

 
8

Treasury stock, at cost – 200,000 shares as of October 31, 2016 and April 30, 2016

 

Additional paid-in capital
446,343

 
437,239

Accumulated other comprehensive loss
(2,006
)
 
(878
)
Accumulated deficit
(261,074
)
 
(251,835
)
Total stockholders’ equity
183,271

 
184,534

Total liabilities and stockholders’ equity
$
314,546

 
$
328,282


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Bazaarvoice, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except net loss per share data)
(unaudited)
 
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Revenue
$
50,408

 
$
49,926

 
$
100,501

 
$
98,802

Cost of revenue
18,855

 
19,146

 
37,611

 
38,694

Gross profit
31,553

 
30,780

 
62,890

 
60,108

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
15,819

 
16,502

 
31,123

 
35,668

Research and development
9,959

 
10,354

 
21,032

 
20,887

General and administrative
8,051

 
7,643

 
16,310

 
15,881

Restructuring charges
767

 

 
1,094

 

Acquisition-related and other
120

 
224

 
296

 
926

Amortization of acquired intangible assets
310

 
310

 
619

 
619

Total operating expenses
35,026

 
35,033

 
70,474

 
73,981

Operating loss
(3,473
)
 
(4,253
)
 
(7,584
)
 
(13,873
)
Other income (expense), net:
 
 
 
 
 
 
 
Interest income
153

 
74

 
295

 
151

Interest expense
(459
)
 
(461
)
 
(948
)
 
(1,032
)
Other expense
(263
)
 
(88
)
 
(775
)
 
(306
)
Total other expense, net
(569
)
 
(475
)
 
(1,428
)
 
(1,187
)
Loss before income taxes
(4,042
)
 
(4,728
)
 
(9,012
)
 
(15,060
)
Income tax expense
92

 
124

 
227

 
36

Net loss
$
(4,134
)
 
$
(4,852
)
 
$
(9,239
)
 
$
(15,096
)
Net loss per share:
 
 
 
 
 
 
 
Basic and diluted loss per share
$
(0.05
)
 
$
(0.06
)
 
$
(0.11
)
 
$
(0.19
)
Basic and diluted weighted average number of shares outstanding
82,930

 
80,678

 
82,572

 
80,426


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Bazaarvoice, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(4,134
)
 
$
(4,852
)
 
$
(9,239
)
 
$
(15,096
)
Other comprehensive gain (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(488
)
 
(103
)
 
(1,126
)
 
(73
)
Unrealized gain (loss) on investments
(1
)
 
(29
)
 
(2
)
 
1

Total other comprehensive gain (loss), net of tax
(489
)
 
(132
)
 
(1,128
)
 
(72
)
Comprehensive loss
$
(4,623
)
 
$
(4,984
)
 
$
(10,367
)
 
$
(15,168
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Bazaarvoice, Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity
(in thousands)
(unaudited)
 
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Amount
 
Number of
Shares
 
Amount
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity (Deficit)
Balance at April 30, 2016
82,270

 
$
8

 
(200
)
 
$

 
$
437,239

 
$
(878
)
 
$
(251,835
)
 
$
184,534

Excess tax deficiency related to stock-based expense

 

 

 

 
(43
)
 

 

 
(43
)
Stock-based expense

 

 

 

 
8,430

 

 

 
8,430

Issuance of restricted stock awards
91

 

 

 

 

 

 

 

Exercise of stock options and vested restricted stock units
978

 

 

 

 
(188
)
 

 

 
(188
)
Shares issued under employee stock plans
324

 

 

 

 
905

 

 

 
905

Change in foreign currency translation adjustment

 

 

 

 

 
(1,126
)
 

 
(1,126
)
Change in unrealized gain on investments

 

 

 

 

 
(2
)
 

 
(2
)
Net loss

 

 

 

 

 

 
(9,239
)
 
(9,239
)
Balance at October 31, 2016
83,663

 
$
8

 
(200
)
 
$

 
$
446,343

 
$
(2,006
)
 
$
(261,074
)
 
$
183,271


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Bazaarvoice, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Six Months Ended October 31,
 
2016
 
2015
Operating activities:
 
 
 
Net loss
$
(9,239
)
 
$
(15,096
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
7,110

 
6,978

Stock-based expense
8,183

 
7,722

Bad debt expense (recovery)
(243
)
 
61

Amortization of deferred financing costs
118

 
118

Loss on sublease
501

 

Other non-cash expense (benefit)
(127
)
 
45

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,345

 
11,942

Prepaid expenses and other current assets
(514
)
 
977

Other non-current assets
958

 
(930
)
Accounts payable
(2,404
)
 
2,149

Accrued expenses and other current liabilities
(4,569
)
 
(6,008
)
Deferred revenue
(88
)
 
(3,850
)
Other liabilities, long-term
(312
)
 
2,960

Net cash provided by operating activities
1,719

 
7,068

Investing activities:
 
 
 
Proceeds from sale of discontinued operations

 
4,501

Purchases of property, equipment and capitalized internal-use software development costs
(4,873
)
 
(10,219
)
Purchases of short-term investments
(15,040
)
 
(39,855
)
Proceeds from maturities of short-term investments
23,880

 
40,517

Net cash provided by (used in) investing activities
3,967

 
(5,056
)
Financing activities:
 
 
 
Proceeds from employee stock compensation plans
724

 
2,113

Payments on revolving line of credit
(5,000
)
 

Net cash provided by (used in) financing activities
(4,276
)
 
2,113

Effect of exchange rate fluctuations on cash and cash equivalents
(946
)
 
(94
)
Net change in cash and cash equivalents
464

 
4,031

Cash and cash equivalents at beginning of period
43,963

 
54,041

Cash and cash equivalents at end of period
$
44,427

 
$
58,072

Supplemental disclosure of other cash flow information:
 
 
 
Cash paid for income taxes, net of refunds
$
450

 
$
515

Cash paid for interest
$
829

 
$
1,075

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Purchase of fixed assets recorded in accounts payable
$
85

 
$
1,859

Capitalized stock-based compensation
$
246

 
$
236



The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Bazaarvoice, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization and Nature of Operations
Bazaarvoice, Inc. (“Bazaarvoice” or the “Company”) was founded on the premise that the collective voice of the consumer is the most powerful marketing tool in the world. The Company's solutions and services allow the Company's retailer and brand clients to understand that consumer voice and the role it plays in influencing purchasing decisions, both online and offline. The Company’s solutions collect, curate and display consumer-generated content including ratings and reviews, questions and answers, customer stories, and social posts, photos, and videos. This content is syndicated and distributed across the Company's clients' marketing channels, including category/product pages, search terms, brand sites, mobile applications, in-store displays, and paid and earned advertising. This consumer-generated content enables the Company's clients to generate more revenue, market share, and brand affinity. The Company's solutions empower the Company's clients to leverage insights derived from consumer-generated content to improve marketing effectiveness, increase success of new product launches, improve existing products and services, effectively scale customer support, decrease product returns, reach consumers when actively shopping via highly targeted audience advertising, and enable retailers to launch and manage on-site advertising solutions and site monetization strategies.

2. Summary of Significant Accounting Policies
Fiscal Year
The Company’s fiscal year end is April 30. References to fiscal year 2017 , for example, refer to the fiscal year ending April 30, 2017 .
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2016 , filed on June 20, 2016. There have been no significant changes to the Company’s accounting policies since April 30, 2016 .
The condensed consolidated balance sheet data as of April 30, 2016 was derived from the audited consolidated financial statements included in the Company’s Annual Report on form 10-K for the fiscal year ended April 30, 2016 . Certain immaterial prior period amounts presented in the consolidated statement of cash flows have been reclassified to conform to current period financial statement presentation. These reclassifications have no effect on previously reported net income.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, income taxes, stock-based expense, accrued liabilities, useful lives of property, equipment and capitalized software development costs, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from the estimates made by management with respect to these items.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and the accounts of the Company’s wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements and notes have been prepared in accordance with GAAP, as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification for interim financial information and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for annual fiscal reporting periods. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair statement of the results of operations, financial position,

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changes in stockholders’ equity and cash flows. The results of operations for the three and six months ended October 31, 2016 are not necessarily indicative of results that may be expected for the fiscal year ending April 30, 2017 or any other period.
Foreign Currency Translation
The U.S. dollar is the reporting currency for all periods presented. The functional currency of the Company’s foreign subsidiaries is generally the local currency. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at the average rate during the period. Equity transactions are translated using historical exchange rates. Adjustments resulting from translating foreign currency financial statements into U.S. dollars are included in accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in net loss for the period. Foreign currency losses, net of hedge gains, were immaterial for the three month periods ended October 31, 2016 and 2015 and for the six month period ended October 31, 2015. The Company recognized foreign currency losses, net of hedge gains, of $0.6 million , for the six month period ended October 31, 2016 .
Derivative Financial Instruments
As a result of the Company’s international operations, it is exposed to various market risks, such as fluctuations in currency exchange rates, which may affect its consolidated results of operations, cash flows and financial position. The Company’s primary foreign currency exposures are in Euros and British Pound Sterling. The Company faces exposure to adverse movements in currency exchange rates as the financial results of certain of its operations are translated from local currency into U.S. dollars upon consolidation. Additionally, foreign exchange rate fluctuations on transactions denominated in currencies other than the functional currency result in gains and losses that are reflected in income.
The Company may enter into derivative instruments to hedge certain net exposures of non-U.S. dollar-denominated assets and liabilities, even though it does not elect to apply hedge accounting or hedge accounting does not apply. Gains and losses resulting from a change in fair value of these derivatives are reflected in income in the period in which the change occurs and are recognized on the condensed consolidated statement of operations in other income (expense). Cash flows from these contracts are classified within net cash provided by operating activities on the condensed consolidated statements of cash flows.
The Company does not use financial instruments for trading or speculative purposes. The Company recognizes all derivative instruments on the balance sheet at fair value, and its derivative instruments are generally short-term in duration. Derivative contracts were not material as of October 31, 2016 and April 30, 2016. The Company is exposed to the risk that counterparties to derivative contracts may fail to meet their contractual obligations.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate their respective fair values due to their short-term nature.
The Company applies the authoritative guidance on fair value measurements for financial assets and liabilities. The guidance defines fair value and increases disclosures surrounding fair value calculations. The guidance establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:
Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company.
Level 2: Inputs that are observable in the marketplace other than those inputs classified as Level 1.
Level 3: Inputs that are unobservable in the marketplace which require the Company to develop its own assumptions.
The valuation techniques used to determine the fair value of our financial instruments having Level 2 inputs are valued using unadjusted, non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models. Our procedures include controls to ensure that appropriate fair values are recorded by a review of the valuation methods and assumptions. The Company did not hold any cash equivalents, restricted cash or short-term investments categorized as Level 3 as of October 31, 2016 or April 30, 2016.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and account receivables. The Company’s cash and cash equivalents are placed with high-credit-quality financial institutions and issuers, and at times may exceed federally insured limits. The Company has not experienced any loss relating to cash and cash equivalents in these accounts to date. The Company maintains an allowance for doubtful accounts receivable balances, performs periodic credit evaluations of its clients and generally does not require collateral of its clients.
No single client accounted for 10% or more of accounts receivable as of October 31, 2016 or April 30, 2016 . No single client accounted for 10% or more of total revenue for the three and six months ended October 31, 2016 or 2015 .

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Revenue Recognition
In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been delivered to the client, (iii) the fee is fixed or determinable and (iv) collectability is reasonably assured. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
The Company generates revenue primarily from sales of the following services:
Software as a Service (“SaaS”) Revenue:
SaaS revenue includes subscription fees from clients accessing the Company’s cloud-based social commerce solutions and application services pursuant to service agreements that vary in length from one to three years . Subscription and support revenue is recognized ratably over the term of the related agreement commencing upon the later of the agreement start date or when all revenue recognition criteria have been met. The client does not have the right to take possession of the software supporting the application service at any time, nor do the arrangements contain general rights of return.
Professional Service Revenue:
Professional services consist of fees associated with providing expert services that educate and assist clients on the best use of the Company’s solutions as well as assist in the implementation of the solutions. Professional services are not required for clients to utilize the Company’s solutions. The majority of the Company's professional services contracts are offered on a time and material basis. Professional services revenue is recognized as the services are rendered.
Advertising Revenue:
Advertising revenue consists primarily of fees charged to advertisers when their advertisements are displayed on websites owned by various third-parties (“Publishers”). The Company receives a fee from the advertisers and pays the Publishers based on their contractual revenue-share agreements or average cost per thousand impressions delivered. Advertising revenue is recognized on a net basis as the Company has determined that it is acting as an agent in these transactions.
Multiple Element Arrangements
Typically, the Company's SaaS revenue from new clients consists of agreements with multiple elements, comprised of subscription fees for the Company’s products and professional services. The Company evaluates each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within the Company’s control. Various subscription-based products have standalone value because they are routinely sold separately by the Company. In determining whether professional services can be accounted for separately from subscription services, the Company considered the availability of the professional services from other vendors, the nature of the Company’s professional services, whether the professional service is required to utilize the Company's solutions and whether the Company sells its applications to new clients without professional services.
If the deliverables have standalone value upon delivery, the Company accounts for each deliverable separately and revenue is recognized for the respective deliverables over the respective service period. If one or more of the deliverables does not have standalone value upon delivery, the deliverables that do not have standalone value are generally combined with the final deliverable within the arrangement and treated as a single unit of accounting. Revenue for arrangements treated as a single unit of accounting is generally recognized over the period commencing upon delivery of the final deliverable and over the remaining term of the subscription contract.
The Company allocates revenue to each element in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence (“VSOE”), if available, third-party evidence (“TPE”), if VSOE is not available, or best estimated selling price (“BESP”), if neither VSOE nor TPE is available. Because the Company has been unable to establish VSOE or TPE for the elements of our arrangements, the Company allocates the arrangement fee to the separate units of accounting based on the Company’s best estimate of selling price. The Company determines BESP price for its deliverables based on the Company’s overall pricing objectives, discounting practices, the size and volume of the Company’s transactions, the client demographic, the Company’s price lists, the Company’s go-to-market strategy, historical standalone sales and contract prices. The determination of BESP is made through consultation with and approval by management, taking into consideration the go-to-market strategy. As the Company’s go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in relative selling prices, including both VSOE and BESP.

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Deferred Revenue
Deferred revenue consists of billings or payments received in advance of revenue recognition and is recognized as the revenue recognition criteria are met. The Company invoices clients in a variety of installments and, consequently, the deferred revenue balance does not represent the total contract value of its non-cancelable subscription agreements. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as non-current deferred revenue.
Recent Accounting Pronouncements
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued Accounting Standards Update 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," (“ASU 2016-15”) to clarify and provide specific guidance on eight cash flow classification issues that are not addressed by current GAAP and thereby reduce the current diversity in practice. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption to have a material impact on its consolidated financial statements and may consider early adoption, which is permitted in any interim or annual period. 
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued Accounting Standards Update 2016-09, "Improvements to Employee Share-Based Payment Accounting," (“ASU 2016-09”) which requires excess tax benefits and tax deficiencies to be recorded in the income statement. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows entities to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on the cash flow statement, and provides an accounting policy election to account for forfeitures as they occur. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-09 will have on its consolidated financial statements.
Leases (Topic 842)
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases (Topic 842),” (“ASU 2016-02”) which requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position. ASU 2016-02 also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard must be adopted using a modified retrospective approach and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements.
Intangibles – Goodwill and Other – Internal Use Software
In April 2015, the FASB issued Accounting Standards Update 2015-05, “Intangible-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” (“ASU 2015-05”) which provides guidance to customers with cloud computing arrangements that include a software license. If a cloud computing arrangement includes a software license, the customer is required to account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 does not change the accounting for a customer’s accounting for service contracts. As a result of the ASU 2015-05, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The Company adopted this updated guidance effective fiscal year 2017. Adoption of this guidance did not have a material impact on our consolidated results of operations, financial position or liquidity.
Presentation of Financial Statements – Going Concern (Subtopic 205-40)
In August 2014, the FASB issued Accounting Standards Update 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern,” (“ASU 2014-15”) which sets forth management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. The updated guidance will be effective for annual periods ending after December 15, 2016

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with early adoption permitted. The updated guidance will be effective for the fiscal year ending April 30, 2017 and is not expected to have a material impact on our consolidated financial statements.
Revenue
In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”) which provides updated, comprehensive revenue recognition guidance for contracts with customers, including a new principles-based five step framework that eliminates much of the industry-specific guidance in current accounting literature. Under ASU 2014-09, revenue recognition is based on a core principle that companies recognize revenue in an amount consistent with the consideration it expects to be entitled to in exchange for the transfer of goods or services. The standards update also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of recognized revenue. In August 2015, The FASB issued Accounting Standards Update 2015-14, "Revenue from Contracts with Customers," ("ASU 2015-14") which defers the effective date of ASU 2014-09 by one year. The updated guidance will be effective for annual periods beginning after December 15, 2017 and may be applied on either a full or modified retrospective basis. Early adoption is permitted for annual periods beginning after December 15, 2016, the original effective date of ASU 2014-09. The updated guidance will be effective for the fiscal year ending April 30, 2019 and the Company is currently evaluating the impact of this standards update on the Company’s consolidated financial statements.
The Company has reviewed other new accounting pronouncements that were issued as of October 31, 2016 and does not believe that these pronouncements are applicable to the Company, or that they will have a material impact on its financial position or results of operations.

3. Fair Value of Financial Assets and Liabilities
The following table summarizes the Company’s cash and cash equivalents as of October 31, 2016 and April 30, 2016 (in thousands):
 
October 31,
2016
 
April 30,
2016
Demand deposit accounts
$
34,656

 
$
38,692

Money market funds
9,421

 
922

Commercial paper
350

 
4,349

Total cash and cash equivalents
$
44,427

 
$
43,963

The following table summarizes the Company’s short-term investments as of October 31, 2016 (in thousands):
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Certificates of deposit
$
2,470

 
$

 
$

 
$
2,470

Municipal debt securities
546

 

 

 
546

Commercial paper
848

 

 

 
848

U.S. Treasury securities
8,720

 

 
(11
)
 
8,709

U.S. government agency debt securities
21,537

 
7

 

 
21,544

Corporate debt securities
7,594

 

 
(7
)
 
7,587

Total short-term investments
$
41,715

 
$
7

 
$
(18
)
 
$
41,704


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The following table summarizes the Company’s short-term investments as of April 30, 2016 (in thousands):
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Certificates of deposit
$
7,090

 
$

 
$
(1
)
 
$
7,089

Commercial paper
4,043

 

 

 
4,043

U.S. Treasury securities
8,764

 

 

 
8,764

U.S. government agency debt securities
24,841

 
4

 
(9
)
 
24,836

Corporate debt securities
5,954

 
1

 
(5
)
 
5,950

Total short-term investments
$
50,692

 
$
5

 
$
(15
)
 
$
50,682

Realized and unrealized gains and losses on short-term investments were not material for the three and six months ended October 31, 2016 and 2015 . An impairment charge is recorded in the consolidated statements of operations for declines in fair value below the cost of an individual investment that are deemed to be other-than-temporary. The Company assesses whether a decline in value is temporary based on the length of time that the fair market value has been below cost, the severity of the decline, as well as the intent and ability to hold, or plans to sell, the investment. There have been no impairment charges recognized related to short-term investments for the three and six months ended October 31, 2016 and 2015 .
Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties. We may sell these securities at any time for use in current operations or for other purposes, such as consideration for acquisitions, even if they have not yet reached maturity. As a result, we classify our investments, including securities with maturities beyond twelve months as current assets in the accompanying condensed consolidated balance sheets. As of October 31, 2016 there was no difference between actual and contractual maturities of our investments.
The following table summarizes the fair value of the Company’s financial assets and liabilities that were measured on a recurring basis as of October 31, 2016 and April 30, 2016 (in thousands):
 
Fair Value Measurements at October 31, 2016
 
Fair Value Measurements at April 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
9,421

 
$

 
$

 
$
9,421

 
$
922

 
$

 
$

 
$
922

Commercial paper

 
350

 

 
350

 

 
4,349

 

 
4,349

Total cash equivalents
9,421

 
350

 

 
9,771

 
922

 
4,349

 

 
5,271

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit

 
2,470

 

 
2,470

 

 
7,089

 

 
7,089

Municipal debt securities

 
546

 

 
546

 

 

 

 

Commercial paper

 
848

 

 
848

 

 
4,043

 

 
4,043

U.S. Treasury securities
8,709

 

 

 
8,709

 
8,764

 

 

 
8,764

U.S. government agency securities
21,544

 

 

 
21,544

 
24,836

 

 

 
24,836

Corporate securities

 
7,587

 

 
7,587

 

 
5,950

 

 
5,950

Total short-term investments
30,253

 
11,451

 

 
41,704

 
33,600

 
17,082

 

 
50,682

Total assets
$
39,674

 
$
11,801

 
$

 
$
51,475

 
$
34,522

 
$
21,431

 
$

 
$
55,953

The Company measures certain assets, including property and equipment, goodwill and intangible assets, at fair value on a non-recurring basis. These assets are recognized at fair value when they are deemed to be impaired. The Company evaluates transfers between levels at the end of the fiscal year and assumes that any identified transfers are deemed to have occurred at the end of the reporting year. There were no transfers between levels in any of the periods presented.


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4. Acquired Intangible Assets, net
Acquired intangible assets, net, as of October 31, 2016 and April 30, 2016 are as follows (in thousands):
 
October 31,
2016
 
April 30,
2016
 
Gross Fair
Value
 
Accumulated
Amortization
 
Net Book
Value
 
Gross Fair
Value
 
Accumulated
Amortization
 
Net Book
Value
Customer relationships
$
11,835

 
$
(4,777
)
 
$
7,058

 
$
11,835

 
$
(4,158
)
 
$
7,677

Developed technology
3,265

 
(1,661
)
 
1,604

 
3,265

 
(1,335
)
 
1,930

Total
$
15,100

 
$
(6,438
)
 
$
8,662

 
$
15,100

 
$
(5,493
)
 
$
9,607

The amortization of customer relationships is recorded as amortization expense and the amortization for developed technology is amortized to cost of revenue.
The following table presents our estimate of future amortization expense for definite-lived intangible assets (in thousands):
Fiscal period:
Amount
Remaining six months of Fiscal year 2017
$
945

Fiscal year 2018
1,890

Fiscal year 2019
1,856

Fiscal year 2020
1,130

Fiscal year 2021
1,130

Thereafter
1,711

Total
$
8,662


5. Income Taxes
The Company computes its interim provision for income taxes by applying the estimated annual effective tax rate to income from operations and adjusts the provision for discrete tax items occurring in the period. The Company’s effective tax rate for the three months ended October 31, 2016 was an expense of 2.3 percent compared to an expense of 2.6 percent for the three months ended October 31, 2015 . The Company’s effective tax rate for the six months ended October 31, 2016 was an expense of 2.5 percent compared to an expense of 0.2 percent for the six months ended October 31, 2015 . The tax expense for the three and six months ended October 31, 2016 was primarily attributable to estimated foreign and state income tax expense. The tax expense for the three and six months ended October 31, 2015 was primarily attributable to foreign and state income tax expense, with an offset from the income tax benefit from research and development credits provided by the State of Texas.

6. Restructuring Charges

In February 2016, the Company made the decision to suspend sales of its BV Local product, reduce its cost structure to improve operating efficiencies and align resources with its growth strategies. Costs associated with these restructuring activities include workforce reductions charges, and facilities charges related to the loss recorded on the sub-lease of excess office space at the Company's headquarters.
The Company recorded pre-tax charges of approximately  $0.8 million and $1.1 million during the three and six month periods ended October 31, 2016, consisting primarily a loss on the sublease of the Company's San Francisco office which commenced in August 2016 and severance and related costs. As of October 31, 2016 and April 30, 2016, the accrued liability associated with the Company's restructuring activities consisted of the following (in thousands):
 
Workforce Reduction
 
Excess Facilities
 
Total
 
(in thousands)
Balance at April 30, 2016
$
497

 
$
546

 
$
1,043

    Restructuring charges
459

 
635

 
1,094

    Utilization
(929
)
 
(837
)
 
(1,766
)
Balance at October 31, 2016
27

 
344

 
371


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Expenses recorded related to these restructuring activities are included in the "Restructuring charges" line item in our consolidated statement of operations. The Company does not expect to record any additional significant charges related to this restructuring.

7. Debt
Credit Facility
On July 18, 2007, the Company entered into a loan and security agreement with Comerica Bank which was most recently amended and restated on November 21, 2014. The Amended and Restated Credit Facility (the “Credit Facility”) provides for a secured, revolving line of credit of up to $70.0 million , with a sublimit of $3.0 million for the incurrence of swingline loans and a sublimit of $15.0 million for the issuance of letters of credit. Borrowings under the Credit Facility are collateralized by substantially all assets of the Company and of its U.S. subsidiaries. The revolving line of credit bears interest at the adjusted LIBOR rate plus 3.5% . Availability under the Credit Facility was $23.7 million as of October 31, 2016 . The Company had letters of credit outstanding of $9.3 million as of October 31, 2016 . The Credit Facility expires on November 21, 2017 with all advances immediately due and payable. The Company was in compliance with all covenants contained in the Credit Facility as of October 31, 2016 .
The Company incurred $0.7 million of fees in connection with the Amended and Restated Credit Facility which were capitalized and are being amortized to interest expense using the straight-line method, which approximates the effective interest method, over the life of the Credit Facility. The Company incurred amortization expense on deferred financing costs of $0.1 million and $0.1 million , respectively, for the three and six months ended October 31, 2016 and 2015.
During the six months ended October 31, 2016 the Company paid $5.0 million on the balance outstanding under its Credit Facility, reducing the Company's outstanding debt to $37.0 million .

8. Net Loss Per Share
The following table sets forth the computations of net loss per share applicable to common stockholders for the three and six months ended October 31, 2016 and 2015 , respectively (in thousands, except net loss per share data):
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(4,134
)
 
$
(4,852
)
 
$
(9,239
)
 
$
(15,096
)
Basic and diluted loss per share
$
(0.05
)
 
$
(0.06
)
 
$
(0.11
)
 
$
(0.19
)
Basic and diluted weighted average number of shares outstanding
82,930

 
80,678

 
82,572

 
80,426

Potentially dilutive securities (1) :
 
 
 
 
 
 
 
Outstanding stock options
363

 
212

 
236

 
266

Restricted shares
826

 
11

 
440

 
38

(1)
The impact of potentially dilutive securities on earnings per share is anti-dilutive in a period of net loss.

9. Commitments and Contingencies
In the ordinary course of business, the Company may be subject to various legal proceedings and claims including alleged infringement of third-party patents and other intellectual property rights. The Company reviews the status of each matter and records a provision for a liability when it is considered both probable that a liability has been incurred and that the amount of the loss can be reasonably estimated. Legal fees incurred in connection with loss contingencies are recognized as incurred when the legal services are provided, and therefore are not recognized as a part of a loss contingency accrual. These provisions are reviewed quarterly and adjusted as additional information becomes available. We are not presently a party to any legal proceedings that in the opinion of our management would have a material adverse effect on our business, financial condition, operating results or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
The Company is subject to audit in various jurisdictions, and such jurisdictions may assess additional income and sales tax liabilities against us.  Although we believe our tax estimates are reasonable, the final outcome of tax audits and any related litigation could be materially different from our historical income and sales tax provisions and accruals. Developments in an audit or litigation could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. As of October 31, 2016 ,certain of the Company's state tax returns are currently under audit by state tax authorities. As of October 31, 2016 , the Company had accrued tax liabilities of $0.7 million , representing the best estimate of sales tax obligations it believes are probable to be incurred as a result of these assessments and audits. In addition,

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in conjunction with an open Texas state sales tax audit, the Company is challenging the taxability of certain web-hosting and cloud technologies that are integral to the Company's products which may result in a sales tax refund for all years open to audit.
During the three months ended October 31, 2016, the Company determined that for certain forms of employee compensation, primarily equity grants, 401(k) deferrals were not being withheld as required by the Company's 401(k) plan. As a result, the Company recorded a $0.5 million accrual representing the Company's best estimate of employer contributions the Company expects to make on behalf of its employees.

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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the fiscal year ended April 30, 2016 , filed on June 20, 2016. In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements may be identified by the use of forward-looking words such as “anticipate,” “believe,” “may,” “will,” “continue,” “seek,” “estimate,” “intend,” “hope,” “predict,” “could,” “should,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions, although not all forward-looking statements contain these words. Statements that contain these words should be read carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other forward-looking information. Factors that can cause actual results to differ materially from those reflected in the forward-looking statements include, among others, those discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended April 30, 2016 and this Quarterly Report on Form 10-Q. We urge you not to place undue reliance on these forward looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations. Historical results are not necessarily indicative of the results expected for any future period.
Factors or risks that could cause our actual results to differ materially from the results we anticipate include, but are not limited to:
our ability to develop and launch new products and the market's acceptance of such new products;
our ability to retain clients and satisfy their obligations and needs and upsell to existing clients;
our ability to maintain pricing for our products and services;
our ability to attract new clients and initiate services without delays;
our ability to increase adoption of our platforms by our clients’ internal and external users;
our ability to protect our users’ information and adequately address security and privacy concerns;
our ability to maintain an adequate rate of growth and control expenses;
our ability to effectively execute and adapt our business model in a dynamic market;
our ability to reduce our cost structure and improve operating efficiencies;
our future expenses;
our ability to expand our network;
our ability to integrate clients, employees and operations of acquired companies into our business;
our ability to earn revenue on ads served based on data accumulated from our network;
our ability to timely and effectively scale and adapt our existing technology and network infrastructure;
our plan to continue investing in long-term growth and research and development, enhancing our platforms and pursuing strategic acquisitions of complementary businesses and technologies to drive future growth;
our ability to increase engagement of our solutions by new and existing clients, partners and professional organizations and launch those solutions without delay;
our anticipated trends of our operating metrics and financial and operating results;
the effects of increased competition and commoditization of products we offer, including pricing pressure, reduced profitability or loss of market share;
our ability to successfully enter new markets and manage our international expansion and sell our products internationally;
our ability to maintain, protect and enhance our brand and intellectual property;
changes in accounting standards;
the impact of the Department of Justice stipulation regarding PowerReviews on our business;
the attraction and retention of qualified employees and key personnel;
our expectations regarding the outcome of litigation proceedings; and
other risk factors included under “Risk Factors” in this Quarterly Report on Form 10-Q.



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The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from our forward-looking statements, including those factors discussed in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for our fiscal year ended April 30, 2016 and in Part II, Item 1A: “Risk Factors” of this Quarterly Report on Form 10-Q and other risks and uncertainties detailed in this and our other reports and filings with the SEC. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Overview
Bazaarvoice was founded on the premise that the collective voice of the consumer is the most powerful marketing tool in the world. Our solutions and services allow our retailer and brand clients to understand that consumer voice and the role it plays in influencing purchasing decisions, both online and offline. Our solutions collect, curate, and display consumer-generated content including ratings and reviews, questions and answers, customer stories, and social posts, photos, and videos. This content is syndicated and distributed across our clients' marketing channels, including category/product pages, search terms, brand sites, mobile applications, in-store displays, and paid and earned advertising. This consumer-generated content enables our clients to generate more revenue, market share, and brand affinity. Our solutions are designed to empower our clients to leverage insights derived from consumer-generated content to improve marketing effectiveness, increase success of new product launches, improve existing products and services, effectively scale customer support, decrease product returns, reach consumers when actively shopping via highly targeted audience advertising, and enable retailers to launch and manage on-site advertising solutions and site monetization strategies.
For the three and six months ended October 31, 2016 , through the continued enhancement and expansion of our social commerce platform, we achieved continued growth in our number of active clients as compared to the three and six months ended October 31, 2015 . Our revenue was $50.4 million and $100.5 million for the three and six months ended October 31, 2016 , which represents a 1.0% and 1.7% increase from the three and six months ended October 31, 2015 , respectively.
As of October 31, 2016 , we had 775 full-time employees compared to 855 full-time employees as of the same date last year.
Business Model
Our business model focuses on adding new clients and maximizing the lifetime value of such client relationships. We make significant investments in acquiring new clients and believe that we will be able to achieve a favorable return on these investments by growing our relationships over time and ensuring that we have a high level of client retention.
In connection with the acquisition of new clients, we incur and recognize significant upfront costs. These costs include sales and marketing costs associated with generating client agreements, such as sales commission expenses that are recognized fully in the period in which we execute a client contract. In addition, we incur implementation costs which are generally recognized in periods prior to recognizing revenue. However, we recognize revenue ratably over the entire term of those contracts, which commences when the client is able to begin using our solution. Although we expect each client to be profitable for us over the duration of our relationship, the costs we incur with respect to any client relationship may exceed revenue in earlier periods because we recognize those costs in advance of the recognition of revenue. As a result, an increase in the mix of new clients as a percentage of total clients will initially have a negative impact on our operating results. On the other hand, we expect that a decrease in the mix of new clients as a percentage of total clients will initially have a positive impact on our operating results. Additionally, some clients pay in advance of recognition of revenue and, as a result, our cash flow from these clients may exceed the amount of revenue recognized for those clients in earlier periods of our relationship. As we depend on third-party Internet-hosting providers to operate our business, increased computing and storage consumption by some of our customers can increase our hosting costs and impact our gross margins.

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Key Business Metrics
In addition to macroeconomic trends affecting the demand for our solutions, management regularly reviews a number of key financial and operating metrics to evaluate our business, determine the allocation of our resources, make decisions regarding corporate strategies and evaluate forward-looking projections and trends affecting our business. The following table summarizes our key business metrics for continuing operations:
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except number of clients and client retention rate)
Revenue:
 
 
 
 
 
 
 
SaaS
$
48,121

 
$
47,671

 
$
95,920

 
$
94,501

Advertising (previously referred to as media)
2,287

 
2,255

 
4,581

 
4,301

Total revenue
$
50,408

 
$
49,926

 
$
100,501

 
$
98,802

Cash flow provided by operations
$
1,590

 
$
13,444

 
$
1,719

 
$
7,068

Number of active SaaS clients (period end)
1,412

 
1,360

 
1,412

 
1,360

SaaS revenue per active client (1)
$
34.3

 
$
35.4

 
$
68.2

 
$
70.2

Active SaaS client retention rate (2)
95.2
%
 
94.0
%
 
90.4
%
 
89.0
%
Total revenue per employee (3)
$
65.4

 
$
59.1

 
$
131.3

 
$
117.6

SaaS impressions served (in millions)
75,667

 
71,784

 
160,953

 
142,803

(1)
Calculated based on the average number of active SaaS clients for the three and six month period.
(2)
Calculated based on active SaaS client retention over a three and six month period.
(3)
Calculated based on the average number of full-time employees for the three and six month period.
Revenue
SaaS revenue consists primarily of fees from the sale of subscriptions to our hosted social commerce solutions, and we generally recognize revenue ratably over the related subscription period, which is typically from one to three years. We regularly review our revenue and revenue growth rate to measure our success. We believe that trends in revenue are important to understanding the overall health of our marketplace, and we use these trends in order to formulate financial projections and make strategic business decisions.
Advertising revenue consists primarily of fees charged to advertisers when their advertisements are displayed on publishers’ websites and is net of amounts paid to such publishers.
Cash Flow Provided By Operations
Cash flow provided by operations is the cash provided by the normal course of business and is measured prior to the impact of investing or financing activities. Due to the fact that we incur a significant amount of upfront costs associated with the acquisition of new clients with revenue recognized over an extended period, we consider cash flow provided by operations to be a key measure of our operating performance.
Number of Active SaaS Clients
We define an active client as an organization with which we have a contract to provide one or more of our hosted social commerce solutions pursuant to which we are recognizing revenue as of the last day of the quarter, and we count organizations that are closely related as one active client, even if they have signed separate contractual agreements.
SaaS Revenue per Active Client
SaaS revenue per active client is calculated as SaaS revenue recognized during the period divided by the average number of active clients for the period. SaaS revenue per active client is expected to continue to decrease for the remainder of fiscal 2017, compared to fiscal 2016, as a result of increased price based competition.
Active SaaS Client Retention Rate
Active client retention rate is calculated based on the number of active clients at period end that were also active clients at the start of the period divided by the number of active clients at the start of the period. We believe that our ability to retain our active clients and expand their use of our solutions over time is a leading indicator of the stability of our revenue base and the long-term value of our client relationships.

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Total Revenue per Employee
Revenue per employee is calculated as revenue recognized during the period divided by the average number of full-time employees for the period. We believe revenue per employee is a leading indicator of our productivity and operating leverage. The growth of our business is dependent on our ability to hire the talented people we require to effectively capitalize on our market opportunity and scale with growth while maintaining a high level of client service.
SaaS Impressions
We define an impression as a single online word of mouth instance delivered to an end user’s web browser. We believe that in combination with our active client base, impressions delivered is an indicator of the reach of our network.
Key Components of Our Condensed Consolidated Statements of Operations
Revenue
We generate revenue principally from fixed commitment subscription contracts under which we provide clients with various services, including access to our hosted software platforms. For agreements with multiple elements, we evaluate each element in the arrangement to determine whether it represents a separate unit of accounting and recognize the allocated revenue for each unit of accounting over the respective service period. We sell these services under contractual agreements for service terms that are generally one to three years in length. Clients typically commit to fixed rate fees for the service term. Any revenue that does not meet the revenue recognition criteria is recorded as deferred revenue on our balance sheet. We invoice clients on varying billing cycles, including annually, quarterly and monthly; therefore, our deferred revenue balance does not represent the total contract value of our non-cancelable subscription agreements. Fees payable under these agreements are generally due in full within 30 to 90 days of invoicing and are non-refundable regardless of the actual use of the services and contain no general rights of return. No single client accounted for more than 10% of our revenue for the three and six months ended October 31, 2016 and 2015 .
To date our revenue growth has been primarily driven by the sale of our core SaaS solutions. We currently expect our SaaS revenue growth rates for the remainder of fiscal 2017 will be lower than our historical growth rates as a result of increased competitive pressure that has led to intensified price-based competition. Advertising revenue is expected to increase during the remainder of fiscal 2017 as a result of anticipated growth of our shopper advertising solutions.
Cost of Revenue
Cost of revenue consists primarily of personnel costs and related expenses associated with employees and contractors who provide our subscription services, our implementation team, our content moderation teams and other support services provided as part of the fixed commitment subscription contracts. Cost of revenue also includes professional fees, including third-party implementation support, travel-related expenses and an allocation of general overhead costs. We allocate general overhead expenses to all departments based on the number of employees in each department, which we consider to be a fair and representative means of allocation and, as such, general overhead expenses, including depreciation and facilities costs, are reflected in our cost of revenue. Personnel costs include salaries, benefits, bonuses and stock-based expense. We generally invest in increasing our capacity, particularly in the areas of implementation and support, ahead of the growth in revenue, which can result in lower margins in a given investment period.
Cost of revenue also includes hosting costs, the amortization of capitalized internal-use software development costs incurred in connection with our hosted software platforms and third-party service costs to support and retain our clients.
We intend to continue to invest resources in our client services teams and in the capacity of our hosting service infrastructure due to increases in the volume of impressions and, as we continue to invest in technology innovation through our research and development organization, we will likely see an increase in the amortization expense associated with capitalized internal-use software development. The level and timing of investment in these areas could affect our cost of revenue, both in terms of absolute dollars and as a percentage of revenue in the future.
Operating Expenses
We classify our operating expenses into five categories: sales and marketing; research and development; general and administrative; acquisition-related and other; and amortization of acquired intangible assets. In each category, our operating expenses consist primarily of personnel costs, program expenses, professional fees, travel-related expenses and an allocation of our general overhead expenses, as applicable.
Sales and marketing . Sales and marketing expenses consist primarily of personnel costs for our sales, marketing and business development employees and executives, including salaries, benefits, stock-based expense, bonuses and commissions earned by our sales personnel. Sales and marketing also includes non-personnel costs such as professional fees, an allocation of our general overhead expenses and the costs of our marketing and brand awareness programs. Our marketing programs include our Client Summits, regional user groups, corporate communications, public relations and other brand building and product marketing

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expenses. We expense sales commissions when a client contract is executed. We plan to continue investing in sales and marketing by focusing our marketing efforts on direct sales support and pipeline generation, which we believe will enable us to add new clients and increase penetration within our existing client base. During fiscal 2017, we expect to gain further operating leverage as we continue to improve sales and marketing productivity. Sales and marketing expense is expected to continue to be our largest operating expense for the foreseeable future.
Research and development . Research and development expenses consist primarily of personnel costs for our product development employees and executives, including salaries, benefits, stock-based expense and bonuses. Also included are non-personnel costs such as professional fees payable to third-party development resources and an allocation of our general overhead expenses. A substantial portion of our research and development efforts are focused on enhancing our software architecture and adding new features and functionality to our platforms to address social and business trends as they evolve. We expect research and development expenses in fiscal 2017 to remain relatively consistent with fiscal 2016.
General and administrative . General and administrative expenses consist primarily of personnel costs, including salaries, benefits, stock-based expense and bonuses for our administrative, legal, human resources, finance, accounting and information technology employees and executives. Also included are non-personnel costs, such as travel-related expenses, professional fees, bad debt expense and other corporate expenses, along with an allocation of our general overhead expenses. We will continue to incur incremental costs to meet the increased compliance requirements associated with being a public company. Those costs include increases in our accounting and legal personnel, additional consulting, legal, audit and tax fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act. General and administrative expenses as a percentage of revenue are expected to remain relatively consistent for fiscal 2017 compared to fiscal 2016.
.
Acquisition-related and other. Acquisition-related and other expenses consist of ongoing costs to comply with our obligations resulting from the divestiture of the PowerReviews business. Included in “acquisition-related and other expenses” are legal and advisory fees for the U.S. Department of Justice suit related to our acquisition of PowerReviews.
Amortization of acquired intangible assets. The amortization of acquired intangible assets represents amortization of acquired customer relationship intangible assets from FeedMagnet and Longboard Media.
Restructuring charges. In February 2016, we made the decision to suspend sales of our BV Local product, reduce our cost structure to improve operating efficiencies and align resources with our growth strategies. Costs associated with these restructuring activities include workforce reductions charges, and facilities charges related to the loss recorded on the sub-lease of excess office space at our headquarters.
Other Income (Expense), Net
Other income (expense) consists primarily of interest income, interest expense related to our revolving line of credit, foreign exchange gains and losses and the resulting gain or loss from foreign exchange contracts. Interest income represents interest received on our cash and short-term investments. Foreign exchange gains and losses arise from revaluations of foreign currency denominated monetary assets and liabilities and are partially offset by the change in market value of our foreign exchange contracts.
Income Tax Expense
As a result of our current net operating loss position in the United States, income tax expense consists primarily of corporate income taxes resulting from profits generated in foreign jurisdictions by wholly-owned subsidiaries, along with state income taxes payable in the United States. We expect our income tax expense to increase in the future if we become profitable both in the United States and in foreign jurisdictions.


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Results of Operations
The following tables set forth our results of operations for the specified periods. The period-to-period comparisons of results of operations are not necessarily indicative of results for future periods.
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
(in thousands)
Revenue
$
50,408

 
$
49,926

 
$
100,501

 
$
98,802

Cost of revenue (1)
18,855

 
19,146

 
37,611

 
38,694

Gross profit
31,553

 
30,780

 
62,890

 
60,108

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing (1)
15,819

 
16,502

 
31,123

 
35,668

Research and development (1)
9,959

 
10,354

 
21,032

 
20,887

General and administrative (1)
8,051

 
7,643

 
16,310

 
15,881

Restructuring charges
767

 

 
1,094

 

Acquisition-related and other
120

 
224

 
296

 
926

Amortization of acquired intangible assets
310

 
310

 
619

 
619

Total operating expenses
35,026

 
35,033

 
70,474

 
73,981

Operating loss
(3,473
)
 
(4,253
)
 
(7,584
)
 
(13,873
)
Total other expense, net
(569
)
 
(475
)
 
(1,428
)
 
(1,187
)
Loss before income taxes
(4,042
)
 
(4,728
)
 
(9,012
)
 
(15,060
)
Income tax expense
92

 
124

 
227

 
36

Net loss
$
(4,134
)
 
$
(4,852
)
 
$
(9,239
)
 
$
(15,096
)
Other Financial Data:
 
 
 
 
 
 
 
Adjusted EBITDA (2)
$
5,160

 
$
3,092

 
$
9,074

 
$
1,753

(1)
       Includes stock-based expense as follows:
 
 
 
 
 
 
 
Cost of revenue
$
486

 
$
607

 
$
830

 
$
1,079

Sales and marketing
843

 
643

 
1,423

 
1,727

Research and development
907

 
798

 
1,960

 
1,441

General and administrative
2,003

 
1,739

 
3,970

 
3,475

 
(2)
During the first quarter of fiscal 2017, we updated our definition of Adjusted EBITDA to enhance comparability between ourselves and our peers.  We define Adjusted EBITDA as generally accepted accounting principles (“GAAP”) net loss from continuing operations adjusted for stock-based expense (net of capitalized stock-based compensation related to development of internal-use software), contingent consideration related to acquisitions, depreciation and amortization (including amortization of capitalized internal-use software development costs), restructuring charges, integration and other costs related to acquisitions, other non-business costs and benefits, income tax expense and other (income) expense, net.  Our prior definition of Adjusted EBITDA excluded amortization of capitalized internal-use software development costs from adjusted depreciation and amortization and included capitalized stock-based compensation in stock-based expense. All prior periods have been revised to conform to the current period definition of Adjusted EBITDA.

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The following table presents a reconciliation of Adjusted EBITDA as previously defined to Adjusted EBITDA under the updated definition:
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
(in thousands)
Adjusted EBITDA, previous definition
$
3,114

 
$
1,135

 
$
4,988

 
$
(2,134
)
Add: Amortization of capitalized internal-use software development costs
2,170

 
2,079

 
4,332

 
4,123

Less: Capitalized portion of stock-based compensation
(124
)
 
(122
)
 
(246
)
 
(236
)
Adjusted EBITDA, current definition
$
5,160

 
$
3,092

 
$
9,074

 
$
1,753

Adjusted EBITDA is a financial measure that is not calculated in accordance with GAAP and should not be considered as an alternative to net loss or income, operating loss or income or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner. We prepare Adjusted EBITDA to eliminate the impact of certain non-cash charges and items that we do not consider indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate.
We believe Adjusted EBITDA is useful to investors in evaluating our operating performance for the following reasons:
 
Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items, such as stock-based expense, depreciation and amortization, acquisition costs, income tax expense and other income, net, that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;
Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of operating performance and the effectiveness of our business strategies and in communications with our board of directors concerning our financial performance;
Adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP operating results; and
Our investor and analyst presentations include Adjusted EBITDA as a supplemental measure to evaluate our overall operating performance.
We understand that although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. These limitations include:
 
Depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future; Adjusted EBITDA does not reflect any cash requirements for these replacements;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;
Adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income; and
Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

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The following table presents a reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated:
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
(in thousands)
GAAP net loss
$
(4,134
)
 
$
(4,852
)
 
$
(9,239
)
 
$
(15,096
)
Stock-based expense
4,239

 
3,787

 
8,183

 
7,722

Depreciation and amortization
3,532

 
3,334

 
7,110

 
6,978

Restructuring charges
767

 

 
1,094

 

Acquisition-related and other expense
120

 
224

 
296

 
926

Other stock-related benefit (1)
(25
)
 

 
(25
)
 

Income tax expense
92

 
124

 
227

 
36

Total other expense, net
569

 
475

 
1,428

 
1,187

Adjusted EBITDA
$
5,160

 
$
3,092

 
$
9,074

 
$
1,753

(1)    Other stock-related benefit represents estimated liabilities for taxes and related items in connection with the treatment of certain equity grants. Since the estimated liability directly relates to equity grants and as stock-based expenses are consistently excluded from the Company's non-GAAP financial measures, the Company excluded these estimated liabilities in determining Adjusted EBITDA. During the three and six months ended October 31, 2016, the Company recorded a benefit of $0.5 million due to a reduction in previously recorded estimated tax liabilities that have exceeded the statute of limitations. This benefit was partially offset by a $0.5 million liability related to estimated employer contributions the Company expects to make on behalf of its employees related to 401(k) deferrals on employee stock-based compensation.

The following table sets forth our results of operations for the specified periods as a percentage of revenue. The period-to-period comparisons of results are not necessarily indicative of results for future periods.
Consolidated Statements of Operations Data:
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue (1)
37.4

 
38.3

 
37.4

 
39.2

Gross profit
62.6

 
61.7

 
62.6

 
60.8

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing (1)
31.4

 
33.1

 
31.0

 
36.1

Research and development (1)
19.8

 
20.7

 
20.9

 
21.1

General and administrative (1)
16.0

 
15.3

 
16.2

 
16.1

Restructuring charges
1.5

 

 
1.1

 

Acquisition-related and other
0.3

 
0.5

 
0.4

 
1.0

Amortization of acquired intangible assets
0.6

 
0.6

 
0.6

 
0.6

Total operating expenses
69.6

 
70.2

 
70.2

 
74.9

Operating loss
(7.0
)
 
(8.5
)
 
(7.6
)
 
(14.1
)
Total other expense, net
(1.1
)
 
(1.0
)
 
(1.4
)
 
(1.2
)
Loss before income taxes
(8.1
)
 
(9.5
)
 
(9.0
)
 
(15.3
)
Income tax expense
0.2

 
0.2

 
0.2

 

Net loss
(8.3
)%
 
(9.7
)%
 
(9.2
)%
 
(15.3
)%
Other Financial Data:
 
 
 
 
 
 
 
Adjusted EBITDA
10.2
 %
 
6.2
 %
 
9.0
 %
 
1.8
 %
(1)  Includes stock-based expense as follows:
 
 
 
 
 
 
 
Cost of revenue
1.0
 %
 
1.2
 %
 
0.8
 %
 
1.1
 %
Sales and marketing
1.7
 %
 
1.3
 %
 
1.4
 %
 
1.7
 %
Research and development
1.8
 %
 
1.6
 %
 
2.0
 %
 
1.5
 %
General and administrative
4.0
 %
 
3.5
 %
 
4.0
 %
 
3.5
 %

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Comparison of the Three Months Ended October 31, 2016 and 2015
Revenue
 
Three Months Ended October 31,
 
2016
 
2015
 
% Change
 
(dollars in thousands)
Revenue
$
50,408

 
$
49,926

 
1.0
%
Our revenue increased $0.5 million , or 1.0% , for the three months ended October 31, 2016 compared to the three months ended October 31, 2015 . The increase in revenue primarily consisted of a $0.5 million increase in SaaS revenue.
The $0.5 million increase in SaaS revenue, consisted primarily of a $3.5 million increase in revenue generated from new launches of active clients utilizing our platform and solutions since the prior year period, partially offset by a $3.0 million decrease in revenue from the existing active client base compared to the three months ended October 31, 2015 . The decrease in revenue from the existing active client base was primarily a result of lower revenue per existing active client due to increased competitive pressure that has led to intensified price-based competition. SaaS revenue per active client (in thousands) was $34.3 for the three months ended October 31, 2016 compared to SaaS revenue per active client (in thousands) of $35.4 for the three months ended October 31, 2015 . For the three months ended October 31, 2016 our active client retention rate was 95.2% compared to an active client retention rate of 94.0% for the three months ended October 31, 2015 . Our client retention rates can be impacted due to a variety of reasons including, but not limited to, non-renewals and the cyclical and discretionary nature of marketing and advertising spending.

Cost of Revenue and Gross Profit Percentage
 
Three Months Ended October 31,
 
2016
 
2015
 
% Change
 
(dollars in thousands)
Cost of revenue
$
18,855

 
$
19,146

 
(1.5
)%
Gross profit
31,553

 
30,780

 
2.5

Gross profit percentage
62.6
%
 
61.7
%
 
 
Cost of revenue decreased $0.3 million , or 1.5% , for the three months ended October 31, 2016 compared to the three months ended October 31, 2015 . The decrease in cost of revenue was primarily due to a $0.8 million decrease in personnel-related costs resulting from headcount reductions related to the Company's restructuring activities which began in the fourth quarter of fiscal 2016 (see "Restructuring Costs" below and Note 6 to our consolidated financial statements for further discussion). This decrease was partially offset by increased hosting and platform technology fees.
Operating Expenses
 
Three Months Ended October 31,
 
 
 
2016
 
2015
 
 
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
%
Change
 
(dollars in thousands)
Sales and marketing
$
15,819

 
31.4
%
 
$
16,502

 
33.1
%
 
(4.1
)%
Research and development
9,959

 
19.8

 
10,354

 
20.7

 
(3.8
)
General and administrative
8,051

 
16.0

 
7,643

 
15.3

 
5.3

Restructuring charges
767

 
1.5

 

 

 
100.0

Acquisition-related and other
120

 
0.3

 
224

 
0.5

 
(46.4
)
Amortization of acquired intangible assets
310

 
0.6

 
310

 
0.6

 

Total operating expenses
$
35,026

 
69.6
%
 
$
35,033

 
70.2
%
 
 %
Sales and marketing . Sales and marketing expenses decreased by $0.7 million , or 4.1% , for the three months ended October 31, 2016 compared to the same period in 2015 . The decrease in sales and marketing expenses was primarily related to a $0.9 million reduction in personnel-related expenses as a result of a decrease in headcount related to the cessation of sales and marketing operations in our APAC offices, our restructuring activities initiated in February of fiscal 2016 and general sales efficiencies.This decrease was partially offset by a $0.2 million increase in professional services related primarily to market research.

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Research and development . Research and development expenses decreased by $0.4 million , or 3.8% , for the three months ended October 31, 2016 compared to the same period in 2015 as a result of decreased personnel-related expenses related to headcount reductions.
General and administrative . General and administrative expenses increased $0.4 million, or 5.3%, for the three months ended October 31, 2016 compared to the same period in 2015 primarily as a result of an increase in rent expense related to the Company's new corporate headquarters and an increase in professional services. In addition, during the three months ended October 31, 2016 the Company recorded a benefit of $0.5 million due to a reduction in previously recorded estimated tax liabilities that have exceeded the statute of limitations. This benefit was partially offset by a $0.5 million liability related to estimated employer contributions the Company expects to make on behalf of its employees related to 401(k) deferrals on employee stock-based compensation.
Restructuring charges. In February 2016 we made the decision to suspend sales of our BV Local product, reduce our cost structure to improve operating efficiencies and align resources with our growth strategies. As a result of these restructuring activities, during the fourth quarter of fiscal 2016 the Company reduced global headcount by approximately 6%. See Note 6, Restructuring Charges, to the Consolidated Financial Statements for further discussion regarding our restructuring activities. Restructuring charges for the three months ended October 31, 2016 , consisted primarily of impairment charges on leasehold improvements and furniture incurred as a result of the Company entering into a sub-lease for its San Fransisco office during the second quarter of fiscal 2017.
Acquisition-related and other. Acquisition-related and other consists primarily of legal and other advisory expenditures incurred to comply with our ongoing obligations from the divestiture of PowerReviews. These costs are expected to continue to decrease as our remaining obligations from the divestiture wind down.
Amortization of acquired intangibles. Amortization for acquired intangible assets remained constant at $0.3 million for the three months ended October 31, 2016 and 2015 . Amortization of acquired intangible assets represents amortization of acquired customer relationship intangible assets from FeedMagnet and Longboard Media.
Other Expense, Net
 
Three Months Ended October 31,
 
2016
 
2015
 
 
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
%
Change
 
(dollars in thousands)
Interest income
$
153

 
0.3
 %
 
$
74

 
0.1
 %
 
106.8
 %
Interest expense
(459
)
 
(0.9
)
 
(461
)
 
(0.9
)
 
(0.4
)
Other expense
(263
)
 
(0.5
)
 
(88
)
 
(0.2
)
 
198.9

Total other expense, net
$
(569
)
 
(1.1
)%
 
$
(475
)
 
(1.0
)%
 
19.8
 %
Total other expense, net, remained relatively constant for the three months ended October 31, 2016 compared to the same period in 2015 .
Income Tax Expense
 
Three Months Ended October 31,
 
2016
 
2015
 
 
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
%
Change
 
(dollars in thousands)
Income tax expense
$
92

 
0.2
%
 
$
124

 
0.2
%
 
(25.8
)%
Income tax expense remained relatively constant for the three months ended October 31, 2016 compared to the same period in 2015 . Income tax expense consists primarily of estimated foreign and state income tax.


24

Table of Contents

Comparison of the Six Months Ended October 31, 2016 and 2015
Revenue
 
 
Six Months Ended October 31,
 
2016
 
2015
 
% Change
 
(dollars in thousands)
Revenue
$
100,501

 
$
98,802

 
1.7
%
Our revenue increased by $1.7 million , or 1.7% , for the six months ended October 31, 2016 compared to the six months ended October 31, 2015 . Included in this increase in revenue was an increase in SaaS revenue of $1.4 million and an increase in Advertising revenue of $0.3 million.
The $1.4 million increase in SaaS revenue consisted of $7.4 million generated from new launches of active clients utilizing our platform and solutions since the prior year period, partially offset by a $6.0 million decrease in revenue from the existing active client base compared to the six months ended October 31, 2015 . The decrease in revenue from the existing active client base was primarily a result of lower revenue per existing active client due to increased competitive pressure that has led to intensified price-based competition. SaaS revenue per active client (in thousands) was $68.2 for the six months ended October 31, 2016 compared to SaaS revenue per active client (in thousands) of $70.2 for the six months ended October 31, 2015 . For the six months ended October 31, 2016 our active client retention rate was 90.4% compared to an active client retention rate of 89.0% for the six months ended October 31, 2015 . Our client retention rates can be impacted due to a variety of reasons including, but not limited to, non-renewals and the cyclical and discretionary nature of marketing and advertising spending.
Cost of Revenue and Gross Profit Percentage
 
Six Months Ended October 31,
 
2016
 
2015
 
% Change
 
(dollars in thousands)
Cost of revenue
$
37,611

 
$
38,694

 
(2.8
)%
Gross profit
62,890

 
60,108

 
4.6

Gross profit percentage
62.6
%
 
60.8
%
 
 
Cost of revenue decreased $1.1 million , or 2.8% , for the six months ended October 31, 2016 compared to the six months ended October 31, 2015 . The decrease in cost of revenue was primarily due to a decrease in personnel-related costs resulting from headcount reductions related to the Company's restructuring activities which began in the fourth quarter of fiscal 2016 (see "Restructuring Costs" below and Note 6 to our consolidated financial statements for further discussion). This decrease was partially offset by increased hosting and platform technology fees of $0.3 million.
Operating Expenses
 
Six Months Ended October 31,
 
2016
 
2015
 
 
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
%
Change
 
(dollars in thousands)
Sales and marketing
31,123

 
31.0
%
 
35,668

 
36.1
%
 
(12.7
)%
Research and development
21,032

 
20.9
%
 
20,887

 
21.1
%
 
0.7

General and administrative
16,310

 
16.2
%
 
15,881

 
16.1
%
 
2.7

Restructuring charges
1,094

 
1.1
%
 

 
%
 
100.0