ARI Annual Report 2013

 

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ARI Annual Report 2013

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MESSAGE TO SHAREHOLDERS “I’m excited about the progress we made in FY13 and believe that ARI is better positioned to execute its strategic plan than ever before!” Roy W. Olivier ARI President & CEO The ARI 2013 Annual Report Message to Shareholders Company Overview Governance Team Financials at a Glance Form 10k p. II p. III p. IV p. V-VI p. VII Learn more online at INVESTOR.ARINET.COM I investor.arinet.com

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It’s hard to believe that another year has gone by since my last shareholder letter; Fiscal 2013 was a year of tremendous change at ARI. We completed two acquisitions, paid down a substantial portion of the Company’s debt through a private placement, and closed new senior secured credit facilities with Silicon Valley Bank. We also made significant progress integrating the two acquisitions, all while increasing market share in existing markets and reducing customer churn. We have also made great progress diversifying our revenue streams both in terms of industry and product. In FY12 eCatalog was 67% of our revenues growing at a low single digit rate with Websites being 25% of our revenues. In FY13 eCatalog is now 49% of revenue and Websites are now 46% of revenues growing at 10%-20%. The entire ARI team is very proud of these accomplishments! For the year we grew revenue by 34% but did incur an operating and net income loss for the year. Adjusted for the acquisition related costs we would have been profitable on both counts. Our adjusted EBITDA margin was 12% for the year, down from our historical rate of 19%-23% for the same reasons. I am confident that as we complete the integration of the acquisitions in FY14 our EBITDA margins will start to return to our historic levels. We also continued to execute our investor relations plan, resulting in improved trading volume, market cap and most importantly our stock price, which grew 186% during the year! We are all thrilled with the results this year. In last year’s letter I reported that we would continue to focus on profitable growth by gaining market share in the markets we service, that we would enter the automotive aftermarket, and that we would expand our offerings in selected international markets. I am happy to report that we have made progress on all three. We grew in the markets we serve both by adding new customers and by reducing customer churn; entered the automotive aftermarket, and have entered into agreements with multiple international manufacturers that we believe will add to our revenues as we deploy those solutions to the market. I am also very excited to report that we added two new board members in FY13. First we added Robert (Bob) Y. Newell, IV in November 2012. Bob has held financial management positions with medical and technology companies in Silicon Valley for over 25 years. Second, we added Dwight B. Mamanteo to the board in June 2013. Dwight is a Portfolio Manager at Wynnefield Capital, Inc. which is one of our largest shareholders. I’m excited to have added outstanding financial expertise and a large shareholder representative to our board, as these contributions are invaluable to the structure of ARI’s Board of Directors. In Fiscal 2014 we will continue to focus on growing our business profitably. Specifically we expect to: • Drive organic growth through innovative new service offerings, differentiated content, and geographic expansion – We will aggressively invest in growing our market share, adding new products that we think will generate revenues in the future, and add international content to drive additional sales in selected international markets. Nurture and retain existing customers through world-class customer service and product upgrades – We will continue to invest in delivering outstanding support and new products to existing customers to keep our customers happy and reduce churn. Lead the market with open integration to related platforms – We will continue to integrate our software products with other solutions used by our customers in order to improve overall customer experience and reduce churn. Successfully execute acquisitions that align with our core strategy – We will continue to look for interesting new products, markets, and opportunities to consolidate our position in existing markets. • • • In summary, I expect to make significant progress in terms of growing the business organically and returning our EBITDA margin to historic levels as we complete the integration activities surrounding our game changing acquisition of 50 Below. I absolutely believe that ARI is better positioned to execute its strategic plan than ever before and I’m very excited about our future! Finally I would like to thank our employees, customers, and shareholders for their support and hard work during the year. We would not have made the outstanding progress over the year without their dedication and support. Sincerely, Roy W. Olivier President and Chief Executive Officer investor.arinet.com II

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OVERVIEW ARI is a global leader in automating and enhancing the marketing, sales and servicing activities for manufacturers, distributors, dealers and service providers. Our mission is to organize and enrich the vast world of parts, garments, accessories and whole goods content, and make it easily accessible to help Sell More Stuff! TM. Our integrated SaaS and DaaS* solutions and marketing services help our customers sell and service more parts, garments, accessories and whole goods. We focus on vertically-oriented markets with a large base of independent, multi-line dealers that sell and service complex equipment. Our business model primarily consists of recurring revenue generated through subscription fees and usage fees. Worldwide Connections: 14.3 million active parts 469,000 equipment models 22,000 dealers 1,400 manufacturers 195 distributors 90 integration partners SELL MORE STUFF!TM III *Software as a Service (SaaS) and Data as a Service (DaaS) investor.arinet.com

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LEADERSHIP EXECUTIVE TEAM ROY W. OLIVIER President & CEO, Officer DARIN R. JANECEK VP of Finance & CFO, Officer ROB A. OSTERMANN Chief Technology Officer MARVIN A. BERG VP of Operations, Officer ROBERT A. JONES Director of Dealer Sales DAVID S. VALENTINE Director of Outside Sales BOARD OF DIRECTORS BRIAN E. DEARING Chairman of the Board President Emeritus, ARI GORDON J. BRIDGE Director Business Consultant WILLIAM C. MORTIMORE Director Managing Director Keystone Insights, LLC WILLIAM H. LUDEN, III Director Team Leader LIFE JAMES R. JOHNSON Director Founding Director Lister Technologies (P) Ltd. ROBERT Y. NEWELL, IV Director Chief Financial Officer, Cardica, Inc. ROY W. OLIVIER Director & Officer President & CEO, ARI P. LEE POSEIDON Director Venture Partner, JumpStart, Inc. DWIGHT B. MAMANTEO Director Portfolio Manager, Wynnefield Capital investor.arinet.com IV

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FINANCIALS AT-A-GLANCE ($ in 000s) 2013 $30,102 33.80% $(202) (0.70)% $3,500 11.6% $(753) $(0.08) $2 ,404 2012 $22,494 5.4% $1,295 5.8% $4,351 19.3% $1,055 $0.13 $3,507 2011 $21,334 (0.7)% $1,733 8.1% $5,031 23.6% $2,443 $0.31 $3,471 2010 $21,484 22.3% $505 2.4% $2,564 11.9% $777 $0.10 $1,624 2009 $17,560 3.8% $1,109 6.3% $2,738 15.6% $424 $0.06 $2,745 Results of Operations Revenue Growth Operating Income Operating Margin EBITDA, adjusted 1 EBITDA Margin Net Income Diluted EPS Operating Cash Flows Financial Position Cash and Cash Equivalents Total Assets Total Debts Shareholders’ Equity $2 ,195 $33,128 $4 ,693 $16,049 $1,350 $20,509 $4,180 $9,216 $1,134 $21,099 $5,582 $7,831 1 $938 $19,777 $6,555 $5,219 $650 $18,607 $5,841 $4,187 2013 EBITDA adjusted for non-recurring, non-cash charges. “With a 44% increase in recurring revenue along with a 4.5% reduction in churn, 2013 set the stage for us to continue growing revenues while scaling operating margins.” Darin R. Janecek VP of Finance & CFO V investor.arinet.com

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VALUATION As of 7.31.2012 Stock Price Market Cap Trading Volume* $1.05 $8.4M 10,074 As of 7.31.2013 Stock Price Market Cap Trading Volume* $3.00 $38.9M 11,960 *Average daily volume for the most recent 3 month period REVENUE QUALITY Recurring Revenue Growth 2013 2012 2011 2010 2009 Churn Reduction 25% 20% 15% 10% 23.1% 16.5% 13.4% 12.8% $27,016 $18,813 $17,422 $16,844 $14,093 $10 84.6%* 89.7%* 81.7%* 78.4%* 80.3%* * % of Total Revenue 5% 0% (Millions) $5 $15 $20 $25 $30 FY10 FY11 FY12 FY13 Fiscal 2013: Recurring revenues grew by 44% versus fiscal 2012 and now represent ~90% of total revenue. Since Fiscal Year 2010, ARI has reduced churn by 45%. DIVERSIFICATION Product Diversification LEAD GEN & MGMT 4.5% OTHER 3.4% LEAD GEN & MGMT 3.2% OTHER 1.8% Industry Diversification MARINE RECREATIONAL VEHICLES 5.4% INT’L 1.4% 5.9% INT’L 2.9% OTHER 6.0% MARINE 9.2% OUTDOOR POWER EQUIP 58.6% TIRE&WHEEL 11.6% RECREATIONAL VEHICLES MEDICAL 1.1% 1.9% POOL & SPA 0.6% WEBSITE 25% eCATALOG 67.1% WEBSITE 46.0% eCATALOG 49.0% OTHER 11.4% POWERSPORTS 17.3% OUTDOOR POWER EQUIP 42.3% POWERSPORTS 24.3% 2012 % OF RECURRING REVENUE 2013 % OF RECURRING REVENUE 2009 % OF RECURRING REVENUE 2013 % OF RECURRING REVENUE ARI’s acquisitions during Fiscal 2013 accelerated the shift to non-catalog revenue sources. Since 2009, ARI has expanded its industry footprint significantly. investor.arinet.com VI

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 2013 () TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 to For the transition period from Commission file number 000-19608 ARI Network Services, Inc. (Name of small business issuer in its charter) WISCONSIN (State or other jurisdiction of incorporation or organization) 39- 1388360 (IRS Employer Identification No.) 10850 West Park Place, Suite 1200, Milwaukee, Wisconsin 53224 (Address of principal executive office) Issuer's telephone number (414) 973-4300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes No  Indicate by check mark whether the registrant (1) 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  No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (S229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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. (Check one): Large accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Accelerated filer 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  The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing price of the registrant’s common stock on January 31, 2013 as reported on the OTC Bulletin Board, was $11,000,000. As of October 19, 2013, there were 12,996,588 shares of the registrant’s shares outstanding. 2

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ARI Network Services, Inc. FORM 10-K FOR THE FISCAL YEAR ENDED JULY 31, 2013 INDEX PART I Item 1 Item 1A Item 2 Item 3 Item 4 PART II Item 5 Item 6 Item 7 Item 7A Item 8 Item 9 Item 9A Item 9B PART III Item 10 Item 11 Item 12 Item 13 Item 14 PART IV Item 15 Exhibits Signatures Report of Independent Registered Public Accounting Firm Consolidated Financial Statements 44 47 48 49 Directors, Executive Officers, and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Principal Accounting Fees and Services 30 34 40 42 43 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Financial Statements and Supplementary Data Changes In and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information 15 16 17 28 28 28 29 29 Business Risk Factors Properties Legal Proceedings Mine Safety Disclosures – not applicable Page 4 11 15 15 15 3

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This Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed to be forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the markets in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “endeavors,” “strives,” “may,” variations of such words, and similar expressions are intended to identify such forwardlooking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, estimate, or verify, including those identified below under “Item 1A. Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason. PART I Item 1. Business Overview ARI Network Services, Inc. (“ARI”) creates award-winning software-as-a-service (“SaaS”) and data-as-a-service (“DaaS”) solutions that help equipment manufacturers, distributors and dealers in selected vertical markets Sell More Stuff!TM – online and in-store. We remove the complexity of selling and servicing new and used inventory, parts, garments and accessories (“PG&A”) for customers in the automotive tire and wheel (“ATW”), powersports, outdoor power equipment (“OPE”), durable medical equipment (“DME”), marine, RV and white goods industries. Our innovative products are powered by a proprietary library of enriched original equipment and aftermarket content that spans more than 469,000 models from over 1,400 manufacturers. Our customers include nearly all of the largest manufacturers and distributors in each of the vertical markets we serve, and we estimate that more than 22,000 equipment dealers, 195 distributors and 140 manufacturers worldwide leverage our web and eCatalog platforms to Sell More Stuff! TM. We were incorporated in Wisconsin in 1981. Our principal executive office and headquarters is located in Milwaukee, Wisconsin. The office address is 10850 West Park Place, Suite 1200, Milwaukee, WI 53224, and our telephone number at that location is (414) 973-4300. Our principal website address is www.arinet.com. ARI also maintains operations in Duluth, Minnesota; Cypress, California; Virginia Beach, Virginia; Floyds Knobs, Indiana; and Leiden, The Netherlands. Our Solutions Our SaaS and DaaS solutions include: (i) eCommerce-enabled websites, which provide a web presence for dealers and serve as a platform for driving leads and eCommerce sales; (ii) eCatalogs, which drive sales of inventory and PG&A both online and within the dealership; and (iii) lead management software designed to increase sales for dealers through more efficient management and improved closure of leads. Our solutions also improve our customers’ overall customer satisfaction through a highly efficient and accurate data lookup experience at the parts counter and a quicker response time to online inquiries, both which serve to significantly improve a customer’s overall experience with the dealer. Our SaaS and DaaS solutions are sold through our internal sales force and are comprised primarily of recurring hosting, license and eCatalog subscriptions. Customers typically sign annual, auto-renewing contracts. Today, more than 90% of our revenues are recurring. In addition to our award-winning SaaS and DaaS solutions, ARI offers a suite of complementary products and services designed to supplement our three primary offerings in order to help our customers Sell More Stuff! Web Platform Solutions Our eCommerce-enabled websites provide consumers with information about a dealership and its product lines and allow consumers to obtain information on whole goods and purchase PG&A through the dealers’ website 24 hours a day, 7 days a week. Our website solutions are tailored to each of the vertical markets we serve and tightly integrated with our electronic library of inventory and PG&A content. We also offer a mobile solution that allows dealers’ websites to be fully functional on smart mobile phones. 4

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Websites are sold through our inside sales teams, which are aligned by vertical market. The sales process will typically include a live demo of the site and may even include a free trial period (we refer to these as “test drives”). We typically charge a nominal, one-time set-up fee to develop a new dealer website. Recurring fees charged for websites include a monthly hosting fee and a percentage of all online sales. Our websites are typically sold under one year, auto-renewing contracts. We currently host and maintain more than 5,500 websites for dealers in all of our vertical markets. In fiscal 2013, websites accounted for 43% of our total revenue. Subsequent to the November 2012 acquisition of the retail division of 50 Below Sales and Marketing (“50 Below”), which will be discussed in further detail below, websites became ARI’s largest source of revenue and accounted for more than 52% of total revenue in the fiscal 2013 fourth quarter. eCatalog Platform Solutions Our eCatalog solutions, which encompass our PartSmart®, PartSmart Web™ and PartStream™ products, leverage our industry-leading library of electronic whole goods and PG&A content to allow distributors and dealers to view and interact with this information to efficiently support the sales and service of equipment. We believe that our eCatalog solution is the fastest and most efficient in the market, as it allows multi-line dealers to quickly access data for any of the brands serviced from within the same software, allowing the dealer’s parts and service operations to more quickly service and sell to their customers. Our eCatalog solutions include: PartSmart®, our CD-based electronic parts catalog, is used by dealers worldwide in the OPE, powersports, marine and agricultural equipment industries to increase productivity by significantly reducing parts lookup time. Our PartSmart® software allows multiline dealers to look up parts and service information for all manufacturer product lines that the dealer carries, and integrates with more than 90 of the leading dealer business management systems. We also provide a version of our PartSmart® product to the appliance industry, known as PartSmart® IPL. PartSmart Web™, a SaaS solution, is used by distributors and manufacturers to provide their dealers with access to parts and pricing information via the Internet. PartStream™, a SaaS solution, is a modular, consumer-focused illustrated parts lookup application that integrates with existing dealer and distributor websites and shopping carts and allows consumers to quickly identify the desired part, add the part to their electronic shopping cart and check out. It leverages ARI’s parts content, delivering it to PartStream™ users on demand from ARI servers. AccessorySmartTM, a SaaS solution, is the only aftermarket PG&A lookup product of its kind, providing access to more than 500,000 SKUs from more than 1,400 powersports aftermarket manufacturers. AccessorySmart provides parts and service counter personnel a one-stop resource to look up products, cost and availability for all of the leading aftermarket PG&A distributors. AccessorySmart significantly decreases the time it takes to look up PG&A information and availability, allowing dealers to service and sell more stuff to customers on a given day. This product is powered by the fitment data we acquired with the assets of Ready2Ride, Inc. (“Ready2Ride”) in August 2012. We derived approximately 46% of our revenues from our eCatalog solutions in fiscal 2013. Our eCatalog products are sold through our dedicated internal sales team, and fees charged include a recurring license fee, subscription fees for subscribed catalogs, and in some cases, page view fees. Lead Management Product Our award-winning SaaS solution, Footsteps™, is designed to efficiently manage and nurture generated leads, increasing conversion rates and ultimately revenues for our customers. Footsteps™ connects equipment manufacturers with their dealer channel through lead consolidation and distribution, and allows the dealers to handle leads more efficiently and professionally through marketing automation and business management system integration. The product is used as a complete database of customers and prospects, and manages the dealer-to-customer relationship, from generating email campaigns and automated responses, to providing sales teams with a daily followup calendar and reminder notices. We derived approximately 4% of our revenues from Footsteps™ in fiscal 2013. Other Solutions We also offer a suite of complementary solutions, which include search engine marketing, software and website customization services, website hosting, and document transfer and communication services. On a combined basis, these other services accounted for approximately 7% of fiscal 2013 revenues. 5

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Growth Strategy ARI’s goal is to become the leading provider of SaaS and DaaS solutions that help our customers, in selected vertical markets, efficiently and effectively sell and service more whole goods and PG&A – in other words, to Sell More Stuff! We aim to grow revenues at a doubledigit rate and to grow earnings faster than revenues through scalability. We will provide our solutions to dealers, distributors, manufacturers, service providers, and consumers in vertical markets where the finished goods are complex equipment requiring service and are primarily sold through an independent dealer channel. We believe this strategy will drive increased value to our shareholders, employees, and customers. We also believe the execution of the following strategic pillars will enable us to achieve the growth and profitability needed to drive longterm sustainable value for our shareholders. These strategic foundations are primarily centered on enhancing the value proposition to our customers, which will lead to additional revenues through pricing actions, product and feature upsells, and reduced customer churn rates, and expansion by leveraging our core competencies in new markets where appropriate. Although each of these strategic pillars is a longterm foundation for growth, within each one we have established near-term goals, as discussed below. Drive organic growth through innovative new solutions, differentiated content, entering new markets and expanding geographically As a subscription-based, recurring revenue (“RR”) business, the most important drivers of future growth are increasing the level of our RR and reducing the rate of our customer churn. We define RR as revenue from products and services which are subscription-based and renewable, including license fees, maintenance fees, catalog subscription fees and hosting fees, and we define churn as the percentage of RR that does not renew. In fiscal 2013 our RR increased 44.3% over last year and the percentage of our total revenues that were RR increased to 89.7% from 83.2% in fiscal 2012. Our overall churn rate decreased from 13.4% in fiscal 2012 to 12.8% in fiscal 2013, as we continue to near our goal of sub-10%, or single digit, churn.  Develop and deploy innovative new solutions. We have resources assigned to each of our core products that continue to research and develop new value-added features and functionality for our existing products and we continued to increase our investment in our research and development team during fiscal 2013. The introduction of new solutions, upgrades to existing products, and new feature sets are all designed to grow our average revenue per dealer (“ARPD”), an important measure for a subscriptionbased business, and the increase in our customer base serves to quickly compound the benefits of an increased ARPD. In fiscal 2013 we released a number of new features, upgrades and products including the following: o We released AccessorySmart, an aftermarket parts lookup solution powered by the aftermarket fitment data published by our recent acquisition, Ready2Ride. AccessorySmart, a first-of-its-kind solution in the powersports industry, is designed to significantly decrease the time it takes dealers to look up PG&A information and availability, allowing dealers to service and sell more customers on a given day. We released a major upgrade to our web platform used by ATW dealers that supports the unique needs of these dealers and significantly improves the overall effectiveness of the websites. The upgrade includes an improved mobile shopping and purchase experience, streamlined quote and service requests, and a new tire and wheel comparison shopping feature set. We launched a web platform add-on that allows powersports dealers with a 50 Below website to post their inventory on craigslist, eBay, and Facebook. o o  Differentiate our content. We believe we have the largest library of whole goods and PG&A content in the vertical markets we serve. However, simply offering the largest content library in the markets we serve is not sufficient to drive the long-term growth we desire. We strive to deliver more value to our customers through enrichment of our content. Content enrichment can take several forms, including the incorporation of user reviews and feedback into our existing content, further enhancing content provided to us by our OEM customers, and creating new forms of content that further our customers’ ability to efficiently service and sell more whole goods and PG&A. Our August 2012 acquisition of Ready2Ride expanded our content library to include aftermarket fitment data for the powersports industry, which is the only content of its type available electronically. We have already leveraged this content in our new AccessorySmartTM product, which was previously discussed. Enter new markets. ARI currently maintains a significant share of the OPE and white goods markets. Accordingly, we anticipate low single-digit growth in these markets. The acquisition of 50 Below more than doubled our website business and catapulted the Company into one of the leaders in the powersports industry. Although we anticipate continued growth in this market, we expect that growth to slow from its historical rates. As we continue to increase our share in our current markets, leveraging our  6

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technology in new and underserved markets will be important to maintaining substantial organic growth rates. The acquisition of 50 Below also provided ARI entrance into two new potentially high-growth markets – ATW and DME. ARI currently enjoys a leading share of the ATW market with more than 2,000 dealer websites. We estimate that the total market approximates 18,000 dealers and further, the broader automotive aftermarket comprises nearly 80,000 dealers, more than all of our other markets combined. We intend to continue to invest heavily in this market, including seeking opportunities to leverage our products and services in the broader automotive aftermarket. 50 Below was one of the first website providers to service the DME. We estimate that this market comprises nearly 25,000 dealers, and believe the market to be in its infancy with respect to eCommerce. We recently invested in dedicated resources designed to expedite our growth in this market. Ready2Ride was the first to market with electronic aftermarket fitment data for the power sports industry. We estimate that the availability of this data almost doubles the size of our addressable market in the powersports industry. In February 2013 we launched our new AccessorySmartTM product. AccessorySmart is the only aftermarket PG&A lookup solution of its kind, providing access to more than 500,000 SKUs from more than 1,400 aftermarket manufacturers. AccessorySmart provides parts and service counter personnel a one-stop resource to look up products, cost and availability for all of the leading aftermarket PG&A distributors. AccessorySmart significantly decreases the time it takes to look up PG&A information and availability, allowing dealers to service and sell more customers on a given day. We plan to leverage our aftermarket publishing experience and product capabilities in our other vertical markets where the market will support it.  Expand geographically. Although we maintain relationships with dealers throughout the world, we have very low penetration into international markets. Growing our international business will require us to secure and publish electronic content from OEMs outside the U.S. and make changes to our existing products that will allow us to rapidly deploy these products in a scalable and efficient manner and without the need to have “boots on the ground” in those countries. To this end we have a business development resource solely dedicated to obtaining new international content and to date, we have expanded our content offerings in the international OPE market and begun to establish relationships with OEMs in China and Europe. Also, we have upgraded our product roadmaps to allow us to rapidly deploy our products in these markets as discussed above. Nurture and retain existing customers through world-class customer service and value-added product feature updates In order to achieve sustained double-digit organic growth, we not only need to execute the new growth strategies described above, we must also retain our existing customers. In a SaaS business, the cost to retain an existing customer is much less than the cost to acquire a new customer. Accordingly, customer churn is one of the most important metrics we track and manage. We have experienced marked improvements in our churn rates the past several years as a result of strategic actions taken by the Company, all of which are designed to enhance the “stickiness” of our product within our customers’ operations. We will continue to leverage our relationships with existing customers and closely monitor and manage the level of customer churn. In fiscal 2013, our overall rate of customer churn improved to 12.8% from 13.4% in fiscal 2012. Lead the market with open integration to related platforms One of our strategic advantages is our focus on integrating our solutions with dealer business management systems (“DMS”) in order to pass key information, including customer and transactional data, between our solutions and the DMS, saving our customers valuable time and eliminating redundant data entry. We currently have integration capabilities with over 90 DMS’s (we refer to these relationships as “Compass Partners”) and we continue to seek other strategic alliances that can be integrated with our product and service offerings. In March 2013, ARI signed a multi-year reseller agreement with the number one DMS provider in the automotive, heavy truck, and powersports markets, whose network includes more than 25,000 dealers across the world. During the first half of fiscal 2013, ARI announced an integration of its WebSiteSmartTM product with CycleTrader.com, one of the top classified sites for the buying and selling of new and used motorcycles. This integration will allow ARI dealer customers to synchronize their inventory between their ARI website and CycleTrader.com. 7

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Successfully execute acquisitions that align with our core strategy Since 1995 we have had a formal corporate development program aimed at identifying, evaluating and closing acquisitions that align with our strategy. Since the program’s inception until the end of fiscal 2013, we closed twelve acquisitions. A summary of some of our most recent acquisitions is as follows: Acquisition OC-Net, Inc. Info Access Channel Blade Technologies Ready2Ride, Inc. 50 Below Sales & Marketing, Inc. (Retail Division) Date January 2007 July 2008 April 2009 August 2012 November 2012 Strategy New website platform Market-leading entrance into white goods market Market-leading entrance into marine and RV markets New lead management product, Footsteps™ First of its kind aftermarket fitment data for the powersports industry ▪ A market leader in the powersports industry ▪ Entrance into ATW and DME industries ▪ New award-winning website platform ▪ ▪ ▪ ▪ ▪ All of these acquisitions, with the exception of 50 Below, have been fully integrated into our operations. We continue to integrate the 50 Below operations into ARI and anticipate 50 Below’s operations to be fully integrated into ARI in the first half of fiscal 2014. Our two fiscal 2013 acquisitions, Ready2Ride and 50 Below, will be discussed in detail below. Our Competitive Strengths Market Leader in Core Verticals We believe that we are one of the leaders in each of our core vertical markets and also believe we are the market leader in the OPE, marine, and appliance markets. We now manage more than 5,500 dealer websites, and our direct relationships with approximately 22,000 dealers, 140 manufacturers, and 195 distributors allow us to cost-effectively leverage our published catalog content into a large and diversified customer base and to launch new product enhancements and technology-enabled solutions to this customer base. Breadth and Depth of Published Content The breadth and depth of our catalog content, as well as our ability to enhance and efficiently publish manufacturers’ PG&A data as it becomes available, provides ARI with a critical competitive advantage and represents a high barrier to entry for potential new competitors. Our eCatalog content enables multi-line dealers to easily access catalog content for multiple manufacturers using a single software platform. This advantage, which saves our customers significant time, provides "stickiness" to our catalog customer base that allows us to efficiently and cost effectively nurture our existing customers while devoting resources to develop new products and services, enabling us to grow our overall customer base as well as ARPD. Recurring Revenue Model As of the fourth quarter of fiscal 2013, more than 90% of our revenue is subscription-based and RR. The majority of our customers are on contracts of twelve months or longer, and these contracts typically auto-renew for additional twelve month terms. This provides us with advanced visibility into our future revenues and opportunities to sell additional services to our customers. Our RR model also emphasizes the importance of maintaining a low rate of customer churn, one of the key financial drivers of any SaaS business. We closely monitor customer churn and the reasons we may lose customers so that we can take action on those reasons that are within our control in order to reduce churn rates in the future. Our RR model, when combined with low rates of customer churn, significantly reduces the cost to maintain and nurture our customer base. This in turn frees up resources to enhance our existing products and work toward new revenue-generating product innovations. Additionally, a substantial portion of our eCatalog business is focused on our customers’ service and repair operations. This allows our revenues to remain strong even in a down economy, as consumers tend to repair their equipment rather than buy new equipment, during challenging economic times. 8

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