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ZIPCAR INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q.
This Quarterly Report on Form 10-Q contains "forward-looking statements" that
involve risks and uncertainties, as well as assumptions that, if they never
materialize or prove incorrect, could cause our results to differ materially
from those expressed or implied by such forward-looking statements. The
statements contained in this Quarterly Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements include
expectations regarding: any expectation of earnings, revenues or other financial
items; any statements of the plans, strategies and objectives of management for
future operations; any projections or estimates as to market size; factors that
may affect our operating results; statements related to future economic
conditions or performance; statements as to industry trends and other matters
that do not relate strictly to historical facts or statements of assumptions
underlying any of the foregoing. These statements are often identified by the
use of words such as, but not limited to, "anticipate," "believe," "continue,"
"could," "estimate," "expect," "intend," "may," "will," "plan," "target,"
"continue," and similar expressions or variations intended to identify
forward-looking statements. These statements are based on the beliefs and
assumptions of our management based on information currently available to
management. Such forward-looking statements are subject to risks, uncertainties
and other important factors that could cause actual results and the timing of
certain events to differ materially from future results expressed or implied by
such forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in Part II Item 1A
titled "Risk Factors" in this Quarterly Report on Form 10-Q and in our other
filings with the Securities and Exchange Commission, or SEC. Furthermore, such
forward-looking statements speak only as of the date of this report. We
undertake no obligation to update any forward-looking statements to reflect
events or circumstances after the date of such statements.
Overview
Zipcar operates the world's leading car sharing network. We operate our
membership-based business with over 10,000 vehicles in 20 major metropolitan
areas and on more than 300 college campuses in the United States, Canada, the
United Kingdom, Spain and Austria. Our car sharing service provides more than
760,000 members with cars on demand in reserved parking spaces within an easy
walk of where they live and work. Our members may reserve cars by the hour or by
the day at rates that include gas, insurance and other costs associated with car
ownership. We offer our solution to individuals, universities, businesses and
government agencies.
On April 19, 2011, we closed our initial public offering, or IPO, of 11,136,726
shares of common stock at an offering price of $18.00 per share, of which
6,666,667 shares were sold by us and 4,470,059 shares were sold by selling
stockholders, including 1,452,617 shares pursuant to the underwriters' option to
purchase additional shares, resulting in net proceeds to us of approximately
$111.6 million, after deducting underwriting discounts. Upon the closing of the
IPO, we used $51.4 million of the proceeds to repay all outstanding balances
including interest as of the payment date associated with certain debt balances.
Our revenue has grown from $57.8 million in 2007 to $241.6 million in 2011 and
$208.2 million for the nine months ended September 30, 2012. Since our
inception, a substantial portion of our revenue has been generated in North
America. As of September 30, 2012, we had an accumulated deficit of $71.8
million. Our business initially requires fleet, marketing and infrastructure
investments in each metropolitan area. As markets develop and membership
increases, our business benefits from operational efficiencies and economies of
scale. Cash flows from our more mature markets are used to fund new and emerging
markets as well as investments in our infrastructure.
Although our principal growth has been organic, we have also grown through
acquisitions. In November 2007, we acquired Flexcar, a national operator of car
sharing services. In December 2009, we made an equity investment for a minority
ownership stake in Catalunya Carsharing S.A., known as Avancar, the largest car
sharing operator in Spain. In April 2010, we expanded our London operations with
the acquisition of Streetcar Limited, or Streetcar, a car sharing service in the
United Kingdom. In February 2012, we increased our ownership in Avancar to a
majority holding of 60% and made an equity investment of $8.7 million for a
minority ownership interest in Wheelz, Inc., a peer-to-peer car sharing company
targeting university and other campus communities. In July 2012, we continued to
grow our car sharing network globally, expanding our geographical footprint
further into Europe with our acquisition of Denzel Mobility CarSharing GmbH, a
leading car sharing service in Austria, known as CarSharing.at.
Revenue
We derive revenue primarily from vehicle usage and membership fees. A
prospective member applies for membership online. This initial application is
accepted following a driving record check and validation of credit card
information provided. To cover these costs, we charge a one-time non-refundable
application fee in most markets.
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Vehicle usage revenue is recognized as chargeable hours are incurred. Annual
membership fees are deferred and recognized ratably over the one-year period of
membership. Membership application fees are recorded as deferred revenue and
recognized ratably as revenue over the average life of the member relationship,
which we currently estimate to be five years. In 2008, we began to offer a fleet
management solution, known as FastFleet, by licensing our proprietary
vehicle-on-demand technology on a software as a service, or SaaS, basis to
organizations that manage their own fleets of vehicles, including local, state
and federal government agencies. Customers are charged a monthly fee, which is
recognized ratably. If upfront fees are charged then the upfront fees are
recorded as deferred revenue and recognized as revenue over the expected
customer relationship period commencing from the day the customer is granted
access to the system.
Our revenue is not concentrated within any one customer or business.
Substantially all of our members and customers pay their fees and vehicle usage
charges via credit card and other forms of electronic payment. Our revenue is
currently derived from the United States, the United Kingdom, Canada, Spain and
Austria.
Fleet Operations
Fleet operations consist principally of costs associated with operating our
vehicles such as lease expense, depreciation, parking, fuel, insurance, gain or
loss on disposal of vehicles, accidents, repairs and maintenance as well as
employee-related costs. Our fuel costs fluctuate as gasoline prices increase or
decrease. We expect fleet operation costs to increase as we expand the number of
vehicles in our fleet to service an expanding membership base and support future
revenue growth. Over time, however, we expect these costs to decline as a
percentage of revenue as we achieve increased efficiencies in our operations, a
greater percentage of our markets reach critical mass and vehicle usage levels
increase and a greater portion of our vehicles are financed under our asset
backed loan facility, which we refer to as the ABS facility.
Member Services and Fulfillment
Member services and fulfillment expenses consist of the cost of our outsourced
contact center, personnel expenses related to our member support teams and
credit card processing fees. Member services and fulfillment costs are expected
to increase as our membership base increases.
Research and Development
Research and development expenses consist primarily of labor-related costs
incurred in coding, testing, maintaining and modifying our technology platform.
We have focused our research and development efforts on both improving ease of
use and functionality of our reservation, back-end and in-vehicle systems. Our
internal and external costs associated with new and enhanced functionality are
capitalized and amortized generally over three years. We expect research and
development expenses to increase as we continue to enhance and expand our
technological capabilities but to decrease over time as a percentage of revenue
as we leverage our technology platform over a larger membership base.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of labor-related
expenses for sales and marketing, administrative, human resources, internal
information technology support, legal, finance and accounting personnel, online
search and advertising, trade shows, marketing agency fees, public relations and
other promotional expenses, professional fees, insurance and other corporate
expenses including certain acquisition related costs. Online search and
advertising costs, which are expensed as incurred, include online advertising
media such as banner ads and pay-per-click payments to search engines. We expect
to continue to invest in sales and marketing activities to increase our
membership base and brand awareness. Additionally, we expect that general and
administrative expenses will increase as we continue to add personnel to support
the growth of our business. We also have incurred and expect to continue to
incur additional personnel expenses, professional service fees, including audit
and legal, investor relations, costs of compliance with securities laws and
regulations, and higher director and officer insurance costs related to
operating as a public company. As a result, we expect that our selling, general
and administrative expenses will continue to increase in the future but decrease
as a percentage of revenue over time as our membership base and related revenue
increases.
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Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States, or GAAP. The preparation of our
financial statements and related disclosures requires us to make estimates,
assumptions and judgments that affect the reported amount of assets,
liabilities, revenue, costs and expenses and related disclosures. We believe
that the estimates, assumptions and judgments involved in the accounting
policies described in the notes to the condensed consolidated financial
statements appearing elsewhere in this Quarterly Report on Form 10-Q and in our
2011 Annual Report on Form 10-K filed with the SEC on March 9, 2012 have the
greatest potential impact on our financial statements and, therefore, we
consider these to be our critical accounting policies. We believe that the
following policies involve the most judgment and complexity:
• Revenue recognition;
• Software development costs;
• Income taxes;
• Valuation of Long-Lived and Intangible Assets, Including Goodwill;
• Accounting for Acquisitions;
• Stock-based compensation; and
• Valuation of Marketable Securities
Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our
actual results may differ from these estimates under different assumptions and
conditions.
New Accounting Guidance. Effective January 1, 2012, we retrospectively adopted
ASU 2011-05, "Comprehensive Income: Presentation of Comprehensive Income", or
ASU 2011-05, authoritative guidance which allows an entity the option to present
the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. ASU
2011-05 eliminates the option to present the components of other comprehensive
income as part of the statement of changes in stockholders' equity.
Additionally, in December 2011, the FASB issued ASU 2011-12 "Deferral of the
Effective Date for Amendments to the Presentation of Reclassifications of Items
Out of Accumulated Other Comprehensive Income in Accounting Standards Update
No. 2011-05" to defer the new requirement under ASU 2011-05 to present
components of reclassifications of other comprehensive income on the face of the
income statement. The adoption of this guidance did not have a material effect
on our consolidated financial statements.
Effective January 1, 2012, we adopted ASU 2011-04 "Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in GAAP and International
Financial Reporting Standards, or IFRS", which is intended to result in
convergence between GAAP and IFRS requirements for measurement of, and
disclosures about, fair value. The new standard clarifies or changes certain
fair value measurement principles and enhances the disclosure requirements,
particularly for Level 3 fair value measurements. The adoption of this ASU did
not have a material effect on our consolidated financial statements.
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