##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 0-23137
 aQuantive, Inc.
 (Exact name of registrant as specified in its charter)
 Washington
    
    91-1819567(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 821 Second Avenue, 18th Floor
Seattle, Washington 98104
(Address of principal executive offices)
(206) 816-8800
(Registrants telephone number, including area code)
 þ o
  þ o o
 o þ




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##### 



AQUANTIVE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
 PagePART I. FINANCIAL
INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements
    
3Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
19Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
32Item 4.
    
    Controls and Procedures
    
33PART II. OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
34Item 6.
    
    Exhibits
    
35EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AQUANTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    277,465
    
    
    $
    76,734Short-term investments
    
    
    46,557
    
    
    
    35,617Accounts receivable, net of allowances of $3,768 and $3,146, respectively
    
    
    196,120
    
    
    
    160,370Other receivables
    
    
    836
    
    
    
    968Prepaid expenses and other current assets
    
    
    5,413
    
    
    
    2,108Deferred tax
assets
    
    
    5,009
    
    
    
    5,416Total current assets
    
    
    531,400
    
    
    
    281,213Property and equipment, net
    
    
    31,844
    
    
    
    27,370Goodwill
    
    
    199,272
    
    
    
    141,075Other intangible assets, net
    
    
    37,557
    
    
    
    32,078Long-term investments
    
    
    8,977
    
    
    
    Other assets
    
    
    1,685
    
    
    
    1,783Deferred financing costs, net
    
    
    997
    
    
    
    1,386Deferred tax assets, net
    
    
    15,015
    
    
    
    23,755Total assets
    
    $
    826,747
    
    
    $
    508,660Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    120,410
    
    
    $
    94,327Accrued liabilities
    
    
    46,529
    
    
    
    38,976Pre-billed media
    
    
    30,039
    
    
    
    18,254Deferred rent, current portion
    
    
    880
    
    
    
    670Deferred revenue
    
    
    11,456
    
    
    
    14,310Total current liabilities
    
    
    209,314
    
    
    
    166,537Long-term accrued liabilities
    
    
    556
    
    
    
    430Notes payable
    
    
    80,000
    
    
    
    80,000Deferred rent, less current portion
    
    
    4,723
    
    
    
    4,753Total liabilities
    
    
    294,593
    
    
    
    251,720Shareholders equity:Common stock, $0.01 par value; 200,000 shares authorized 77,345 and
66,495 shares issued and outstanding, respectively
    
    
    773
    
    
    
    665Paid-in capital
    
    
    509,500
    
    
    
    269,382Retained earnings (accumulated deficit)
    
    
    20,603
    
    
    
    (12,918
    )Accumulated other comprehensive income (loss)
    
    
    1,278
    
    
    
    (189
    )Total shareholders equity
    
    
    532,154
    
    
    
    256,940Total liabilities and shareholders equity
    
    $
    826,747
    
    
    $
    508,660
  3




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##### Table of Contents



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(in thousands, except per share amounts)
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    110,981
    
    
    $
    78,762
    
    
    $
    308,795
    
    
    $
    220,948Costs and expenses:Cost of revenue
    
    
    18,266
    
    
    
    10,218
    
    
    
    46,902
    
    
    
    27,486Client support
    
    
    48,194
    
    
    
    34,717
    
    
    
    141,246
    
    
    
    100,836Product development
    
    
    4,423
    
    
    
    2,482
    
    
    
    11,711
    
    
    
    6,615Sales and marketing
    
    
    6,471
    
    
    
    4,687
    
    
    
    20,442
    
    
    
    12,055General and administrative
    
    
    9,986
    
    
    
    8,047
    
    
    
    29,532
    
    
    
    25,749Amortization of intangible assets
    
    
    2,466
    
    
    
    1,803
    
    
    
    6,651
    
    
    
    5,409Client reimbursed expenses
    
    
    1,582
    
    
    
    1,103
    
    
    
    3,692
    
    
    
    2,740Total costs and expenses
    
    
    91,388
    
    
    
    63,057
    
    
    
    260,176
    
    
    
    180,890Income from operations
    
    
    19,593
    
    
    
    15,705
    
    
    
    48,619
    
    
    
    40,058Interest and other income, net
    
    
    4,170
    
    
    
    495
    
    
    
    9,616
    
    
    
    1,022Interest expense
    
    
    634
    
    
    
    580
    
    
    
    1,798
    
    
    
    1,753Income before provision for income taxes
    
    
    23,129
    
    
    
    15,620
    
    
    
    56,437
    
    
    
    39,327Provision for income taxes
    
    
    9,561
    
    
    
    6,183
    
    
    
    22,916
    
    
    
    15,720Net income
    
    $
    13,568
    
    
    $
    9,437
    
    
    $
    33,521
    
    
    $
    23,607Basic net income per share
    
    $
    0.18
    
    
    $
    0.15
    
    
    $
    0.45
    
    
    $
    0.37Diluted net income per share
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.41
    
    
    $
    0.33Shares used in computing basic net income per share
    
    
    76,989
    
    
    
    64,456
    
    
    
    73,839
    
    
    
    63,502Shares used in computing diluted net income per share
    
    
    87,934
    
    
    
    77,113
    
    
    
    85,053
    
    
    
    75,665Comprehensive income:Net income
    
    $
    13,568
    
    
    $
    9,437
    
    
    $
    33,521
    
    
    $
    23,607Items of comprehensive income (loss)
    
    
    835
    
    
    
    (111
    )
    
    
    1,467
    
    
    
    (240
    )Comprehensive income
    
    $
    14,403
    
    
    $
    9,326
    
    
    $
    34,988
    
    
    $
    23,367
  4




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##### Table of Contents



AQUANTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    33,521
    
    
    $
    23,607Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    18,626
    
    
    
    13,402Stock-based compensation expense
    
    
    14,105
    
    
    
    46Stock option income tax benefit
    
    
    
    
    
    
    11,681Excess tax benefit from stock-based compensation
    
    
    (12,415
    )
    
    
    Other non-cash items
    
    
    341
    
    
    
    420Changes in operating assets and liabilities, net of acquisitions:Accounts receivable, net
    
    
    (32,672
    )
    
    
    (34,194
    )Other receivables, prepaid expenses and other current assets
    
    
    (3,002
    )
    
    
    (25
    )Other assets
    
    
    449
    
    
    
    (174
    )Accounts payable
    
    
    25,501
    
    
    
    6,737Accrued liabilities
    
    
    (397
    )
    
    
    8,624Pre-billed media
    
    
    11,785
    
    
    
    953Deferred revenue
    
    
    (3,132
    )
    
    
    (90
    )Deferred taxes
    
    
    20,260
    
    
    
    2,556Net cash provided by operating activities
    
    
    72,970
    
    
    
    33,543Cash flows from investing activities:Purchases of property and equipment
    
    
    (15,236
    )
    
    
    (14,517
    )Purchases of
available-for-sale investments
    
    
    (33,400
    )
    
    
    (11,508
    )Proceeds
from sales and maturities of available-for-sale investments
    
    
    13,521
    
    
    
    10,552Transfers to restricted cash
    
    
    (320
    )
    
    
    (538
    )Acquisitions and acquisition earn-out payments, less cash received of $1,017 in 2006
    
    
    (62,277
    )
    
    
    (1,664
    )Net cash used in investing activities
    
    
    (97,712
    )
    
    
    (17,675
    )Cash flows from financing activities:Proceeds from equity offering, net of issuance costs
    
    
    198,250
    
    
    
    Proceeds from exercises of common stock options and issuance of common stock under the ESPP
    
    
    14,824
    
    
    
    10,266Excess tax benefit from stock-based compensation
    
    
    12,415
    
    
    
    Net cash provided by financing activities
    
    
    225,489
    
    
    
    10,266Effect of exchange rate on cash and cash equivalents
    
    
    (16
    )
    
    
    Net increase in cash and cash equivalents
    
    
    200,731
    
    
    
    26,134Cash and cash equivalents, beginning of period
    
    
    76,734
    
    
    
    24,555Cash and cash equivalents, end of period
    
    $
    277,465
    
    
    $
    50,689
  5




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##### Table of Contents



AQUANTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(in thousands, except per share amounts)
(unaudited)
 1. Organization and Operations of the Company
   Digital Marketing Services (DMS).
 Digital Marketing Technologies (DMT).
 Digital Performance Media (DPM).
 2. Summary of Significant Accounting Policies
 Basis of Presentation
    Reclassifications
  Use of Estimates in the Preparation of Financial Statements
 6




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##### Table of Contents



Restricted Cash
  Change in Contingent Tax Liability
  Revenue Recognition
  Digital Marketing Service
   7




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##### Table of Contents



Digital Marketing Technologies. Atlas Digital Marketing Suite, Atlas Media Console Atlas Rich Media Atlas Search Atlas Site Optimization Atlas Publisher Atlas Site
Optimization
 Digital Performance Media
   All Segments
  8




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Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2006
    
    2005
    
    2006
    
    2005Customer A
    
    
    10
    %
    
    
    12
    %
    
    
    11
    %
    
    
    12
    %
  Stock-Based Compensation
     Recently Issued Accounting Pronouncements
  9




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##### Table of Contents



3. Acquisitions
     10




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##### Table of Contents



Three Months Ending
    
    

Year Ending December 31,December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    HighDigital Marketing Services (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    40,000
    
    
    $
    74,000Digital Marketing
Technologies/Digital Performance
Media (2)
    
    
    39,000
    
    
    
    44,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    39,000
    
    
    $
    44,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    40,000
    
    
    $
    74,000
 
 (1)
    
    In addition to the contingent payments shown in the table, the Company will also make
guaranteed payments totaling $5,108 subsequent to September 30, 2006. These guaranteed
payments relate to the acquisitions of Neue Digitale and Amnesia and have been accrued on the
Condensed Consolidated Balance Sheet as of September 30, 2006.(2)
    
    Includes estimated contingent payments related to the acquisition of TechnologyBrokers and
MediaBrokers. 4. Goodwill
  Balance as of
    
    
    
    
    
    
    Balance as ofSeptember 30,
    
    
    
    
    
    December 31,2006
    
    
    Increases (1)
    
    
    2005Digital marketing services
    
    $
    162,628
    
    
    $
    41,753
    
    
    $
    120,875Digital marketing technologies
    
    
    17,658
    
    
    
    1,692
    
    
    
    15,966Digital performance media
    
    
    18,986
    
    
    
    14,752
    
    
    
    4,234$
    199,272
    
    
    $
    58,197
    
    
    $
    141,075
 
 (1)
    
    Includes additions to goodwill as a result of purchase price allocation and contingent
consideration. The Company normally enters into agreements that include additional
consideration to the selling shareholders if certain specified earnings levels are achieved in
the future. Goodwill is increased subsequent to the acquisition date when the contingency is
resolved and the additional consideration is distributable and determinable beyond reasonable
doubt. It also includes changes resulting from the foreign currency translation
adjustments of goodwill attributable to our foreign subsidiaries.  11




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5. Stock-Based Compensation
 Stock Option Plans
   Nonvested Share Award
  Employee Stock Purchase Plan
  Valuation of Awards
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Weighted average risk-free interest rate
    
    
    5.08
    
    
    
    4.07
    
    
    
    4.54
    
    
    
    3.98Expected term, in years
    
    
    4.1
    
    
    
    4.5-8
    
    
    
    4.1-7.2
    
    
    
    4.5-8Weighted average expected volatility
    
    
    60
    %
    
    
    91
    %
    
    
    63
    %
    
    
    101
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 12




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Weighted average risk-free interest rate
    
    
    5.25
    
    
    
    3.75
    
    
    
    4.92
    
    
    
    3.22Expected term, in years
    
    
    0.5-1.0
    
    
    
    0.5-1.0
    
    
    
    0.5-1.0
    
    
    
    0.5-1.0Weighted average expected volatility
    
    
    44
    %
    
    
    47
    %
    
    
    46
    %
    
    
    50
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Pro Forma Information for Periods Prior to the Adoption of SFAS No. 123(R)
   Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income, as reported
    
    $
    9,437
    
    
    $
    23,607Add: Stock-based employee compensation expense included in
reported net income, net of tax
    
    
    
    
    
    
    28Deduct: Total stock-based compensation determined under fair
value based method for all awards, net of tax effect of $1,777
and $4,484, respectively
    
    
    (2,780
    )
    
    
    (7,013
    )Pro forma net income, fair value method for all stock-based awards
    
    $
    6,657
    
    
    $
    16,622Basic net income per share:As reported
    
    $
    0.15
    
    
    $
    0.37Pro forma
    
    $
    0.10
    
    
    $
    0.26Diluted net income per share:As reported
    
    $
    0.13
    
    
    $
    0.33Pro forma
    
    $
    0.09
    
    
    $
    0.22
 Impact of the Adoption of 123(R)
   13




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Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2006Cost of revenue
    
    $
    145
    
    
    $
    431Client support
    
    
    2,254
    
    
    
    7,013Product development
    
    
    300
    
    
    
    1,259Sales and marketing
    
    
    268
    
    
    
    1,019General and administrative
    
    
    1,513
    
    
    
    4,383Total stock-based compensation expense
    
    
    4,480
    
    
    
    14,105Total income tax benefit recognized for stock-based compensation expense
    
    
    1,747
    
    
    
    5,501Total stock-based compensation expense, net of tax
    
    $
    2,733
    
    
    $
    8,604Impact on net income per share:Basic
    
    $
    0.03
    
    
    $
    0.12Diluted
    
    $
    0.03
    
    
    $
    0.10
  Award Activity
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateOptions
    
    Exercise
    
    Contractual Term
    
    IntrinsicOutstanding
    
    Price
    
    (Years)
    
    ValueBalance, December 31, 2005
    
    
    13,169
    
    
    $
    7.17Granted
    
    
    1,707
    
    
    
    24.62Exercised
    
    
    (1,756
    )
    
    
    5.25Forfeited and expired
    
    
    (481
    )
    
    
    13.42Balance, September 30, 2006
    
    
    12,639
    
    
    
    9.55
    
    
    
    5.91
    
    
    $
    180,236Exercisable at September 30, 2006
    
    
    6,976
    
    
    
    5.43
    
    
    
    4.82
    
    
    $
    127,273
    Nonvested SharesOutstandingNonvested at December 31, 2005
    
    
    Granted
    
    
    115Vested
    
    
    (9
    )Forfeited and expired
    
    
    Nonvested at September 30, 2006
    
    
    106
  6. Shareholders Equity
  14




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TotalShareholdersEquityBalance, December 31, 2005
    
    $
    256,940Proceeds from equity offering, net of issuance costs
    
    
    198,250Exercise of common stock options
    
    
    9,215Issuance of common stock  Employee Stock Purchase Plan
    
    
    5,609Excess tax benefit from exercise of common stock options
    
    
    13,047Unrealized loss on available for sale investments
    
    
    (77
    )Currency translation gain
    
    
    1,544Stock-based compensation expense
    
    
    14,105Net income
    
    
    33,521Balance, September 30, 2006
    
    $
    532,154
 7. Net Income Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (numerator for basic)
    
    $
    13,568
    
    
    $
    9,437
    
    
    $
    33,521
    
    
    $
    23,607Add: Interest expense on convertible notes, net of tax
    
    
    354
    
    
    
    354
    
    
    
    1,061
    
    
    
    1,068Adjusted net income (numerator for diluted)
    
    $
    13,922
    
    
    $
    9,791
    
    
    $
    34,582
    
    
    $
    24,675Shares (denominator for basic and diluted):Gross weighted average common shares outstanding
    
    
    77,096
    
    
    
    64,456
    
    
    
    73,948
    
    
    
    63,502Less: weighted average shares issued and unvested
    
    
    (107
    )
    
    
    
    
    
    
    (109
    )
    
    
    Shares used in computation of basic net income per share
    
    
    76,989
    
    
    
    64,456
    
    
    
    73,839
    
    
    
    63,502Add: Dilutive effect of employee stock options and stock awards
    
    
    4,782
    
    
    
    6,494
    
    
    
    5,051
    
    
    
    6,000Add: Dilutive effect of convertible debt
    
    
    6,163
    
    
    
    6,163
    
    
    
    6,163
    
    
    
    6,163Shares used in computation of diluted net income per share
    
    
    87,934
    
    
    
    77,113
    
    
    
    85,053
    
    
    
    75,665Basic net income per share
    
    $
    0.18
    
    
    $
    0.15
    
    
    $
    0.45
    
    
    $
    0.37Diluted net income per share
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.41
    
    
    $
    0.33
  8. Segment Reporting
    15




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Three Months Ended September 30, 2006Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (3)
    
    
    TotalRevenue
    
    $
    67,735
    (1)
    
    $
    29,864
    
    
    $
    13,382
    
    
    $
    
    
    
    $
    110,981Costs and expenses:Cost of revenue
    
    
    2,224
    (1)
    
    
    8,671
    
    
    
    7,035
    
    
    
    336
    (2)
    
    
    18,266Client support
    
    
    44,815
    
    
    
    
    
    
    
    1,125
    
    
    
    2,254
    
    
    
    48,194Product development
    
    
    
    
    
    
    4,049
    
    
    
    
    
    
    
    374
    
    
    
    4,423Sales and marketing
    
    
    1,384
    
    
    
    3,028
    
    
    
    1,791
    
    
    
    268
    
    
    
    6,471General and administrative
    
    
    3,445
    
    
    
    1,880
    
    
    
    710
    
    
    
    3,951
    
    
    
    9,986Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,466
    
    
    
    2,466Client reimbursed expenses
    
    
    1,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,582Total costs and expenses
    
    
    53,450
    
    
    
    17,628
    
    
    
    10,661
    
    
    
    9,649
    
    
    
    91,388Income (loss) from operations
    
    $
    14,285
    
    
    $
    12,236
    
    
    $
    2,721
    
    
    $
    (9.649
    )
    
    $
    19,593
 16




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##### Table of Contents



Three Months Ended September 30, 2005Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    TotalRevenue
    
    $
    48,495
    
    
    $
    23,514
    
    
    $
    6,753
    
    
    $
    
    
    
    $
    78,762Costs and expenses:Cost of revenue
    
    
    
    
    
    
    5,756
    
    
    
    4,250
    
    
    
    212
    (2)
    
    
    10,218Client support
    
    
    34,344
    
    
    
    
    
    
    
    373
    
    
    
    
    
    
    
    34,717Product development
    
    
    
    
    
    
    2,482
    
    
    
    
    
    
    
    
    
    
    
    2,482Sales and marketing
    
    
    1,084
    
    
    
    2,765
    
    
    
    838
    
    
    
    
    
    
    
    4,687General and administrative
    
    
    3,113
    
    
    
    1,888
    
    
    
    320
    
    
    
    2,726
    
    
    
    8,047Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,803
    
    
    
    1,803Client reimbursed expenses
    
    
    1,103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,103Total costs and expenses
    
    
    39,644
    
    
    
    12,891
    
    
    
    5,781
    
    
    
    4,741
    
    
    
    63,057Income (loss) from operations
    
    $
    8,851
    
    
    $
    10,623
    
    
    $
    972
    
    
    $
    (4,741
    )
    
    $
    15,705
 Nine Months Ended September 30, 2006Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (3)
    
    
    TotalRevenue
    
    $
    187,011
    (1)
    
    $
    87,216
    
    
    $
    34,568
    
    
    $
    
    
    
    $
    308,795Costs and expenses:Cost of revenue
    
    
    4,205
    (1)
    
    
    23,333
    
    
    
    18,358
    
    
    
    1,006
    (2)
    
    
    46,902Client support
    
    
    131,427
    
    
    
    
    
    
    
    2,806
    
    
    
    7,013
    
    
    
    141,246Product development
    
    
    
    
    
    
    10,004
    
    
    
    
    
    
    
    1,707
    
    
    
    11,711Sales and marketing
    
    
    4,370
    
    
    
    10,580
    
    
    
    4,473
    
    
    
    1,019
    
    
    
    20,442General and administrative
    
    
    8,438
    (4)
    
    
    6,880
    
    
    
    1,658
    
    
    
    12,556
    
    
    
    29,532Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,651
    
    
    
    6,651Client reimbursed expenses
    
    
    3,692
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,692Total costs and expenses
    
    
    152,132
    
    
    
    50,797
    
    
    
    27,295
    
    
    
    29,952
    
    
    
    260,176Income (loss) from operations
    
    $
    34,879
    
    
    $
    36,419
    
    
    $
    7,273
    
    
    $
    (29,952
    )
    
    $
    48,619
 17




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##### Table of Contents



Nine Months Ended September 30, 2005Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    TotalRevenue
    
    $
    135,834
    
    
    $
    66,637
    
    
    $
    18,477
    
    
    $
    
    
    
    $
    220,948Costs and expenses:Cost of revenue
    
    
    
    
    
    
    15,752
    
    
    
    11,138
    
    
    
    596
    (2)
    
    
    27,486Client support
    
    
    98,907
    
    
    
    
    
    
    
    1,929
    
    
    
    
    
    
    
    100,836Product development
    
    
    
    
    
    
    6,615
    
    
    
    
    
    
    
    
    
    
    
    6,615Sales and marketing
    
    
    3,259
    
    
    
    7,368
    
    
    
    1,428
    
    
    
    
    
    
    
    12,055General and administrative
    
    
    10,474
    
    
    
    5,978
    
    
    
    969
    
    
    
    8,328
    
    
    
    25,749Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,409
    
    
    
    5,409Client reimbursed expenses
    
    
    2,740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,740Total costs and expenses
    
    
    115,380
    
    
    
    35,713
    
    
    
    15,464
    
    
    
    14,333
    
    
    
    180,890Income (loss) from operations
    
    $
    20,454
    
    
    $
    30,924
    
    
    $
    3,013
    
    
    $
    (14,333
    )
    
    $
    40,058
 
 1)
    
    DNA, acquired in December 2005, generates revenue that is presented on a gross basis.
Accordingly, both revenue and cost of revenue include the cost of media purchased for DNA
clients.(2)
    
    For the three and nine months ended September 30, 2006 cost of revenue classified as
unallocated corporate expenses included $192 and $575, respectively, and for the three and
nine months ended September 30, 2005, included $212 and $596, respectively, related to the
amortization of developed technology resulting from the acquisition of GO TOAST and
NetConversions.(3)
    
    Unallocated corporate expenses include stock-based compensation expense. This expense is not
allocated to our segments, as it is centrally managed at the corporate level and not reviewed
by the Companys chief operating decision maker in evaluating results by segment. For the
three and nine months ended September 30, 2006, stock-based compensation expense was as
follows: Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2006Cost of revenue
    
    $
    145
    
    
    $
    431Client support
    
    
    2,254
    
    
    
    7,013Product development
    
    
    300
    
    
    
    1,259Sales and marketing
    
    
    268
    
    
    
    1,019General and administrative
    
    
    1,513
    
    
    
    4,383Total stock-based compensation expense
    
    $
    4,480
    
    
    $
    14,105
 (4)
    
    For the nine months ended September 30, 2006, general and administrative expense for the
digital marketing services line of business includes the $1,900 reversal of a contingent
business tax liability. See Footnote 2 for additional information about this change in
contingent tax liability.The Company recorded $23,924 and $62,828 of revenue to international customers during the three
and nine months ended September 30, 2006 compared to $9,808 and $26,051 during the three and nine
months ended September 30, 2005, respectively. The Company classifies revenue as international
or domestic based on the geographical location where services are delivered.Pursuant to SFAS No. 131, total segment assets have not been disclosed as this information is not
reported to or used by the chief operating decision maker.
 9. Legal Proceedings
  18




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##### Table of Contents



10. Subsequent Events
 .
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 This Quarterly Report contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and intentions. Words such
as anticipates, expects, intends, plans, believes, estimates, may, will and similar
expressions are intended to identify forward-looking statements. In addition, any statements that
refer to expectations, projections or other characterizations of future events or circumstances,
including any underlying assumptions, are forward-looking statements. Our actual results could
differ materially and adversely from those discussed in any forward-looking statements as a result
of various factors. Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section entitled Risk Factors, included in our Annual Report
on Form 10-K , for the year ended December 31, 2005 as filed with the SEC, as supplemented by the
section entitled Risk Factors included in out Quarter Report on Form 10-Q for the quarter ended
June 30, 2006 as filed with the SEC. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We undertake no
obligation to revise any forward-looking statements in order to reflect events or circumstances
that may subsequently arise. Readers are urged to carefully review and consider the various
disclosures made in this report and in our other reports filed with the Securities and Exchange
Commission that attempt to advise interested parties of the risks and factors that may affect our
business, prospects and results of operations.
  Overview
  Acquisitions and Comparability of Operations
  Digital Marketing Services (DMS)
 19




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##### Table of Contents



Digital Marketing Technologies (DMT)
  Digital Performance Media (DPM)
  Recent Developments
 Public Offering of Common Stock
  Critical Accounting Policies and Judgments
   20




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##### Table of Contents



Accounting for Stock-Based Compensation
     Estimates and Assumptions Related to Financial Statements
  Results of Operations
  21




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Three Months Ended September 30, 2006Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (3)
    
    
    Total(in thousands)Revenue
    
    $
    67,735
    (1)
    
    $
    29,864
    
    
    $
    13,382
    
    
    $
    
    
    
    $
    110,981Costs and expenses:Cost of revenue
    
    
    2,224
    (1)
    
    
    8,671
    
    
    
    7,035
    
    
    
    336
    (2)
    
    
    18,266Client support
    
    
    44,815
    
    
    
    
    
    
    
    1,125
    
    
    
    2,254
    
    
    
    48,194Product development
    
    
    
    
    
    
    4,049
    
    
    
    
    
    
    
    374
    
    
    
    4,423Sales and marketing
    
    
    1,384
    
    
    
    3,028
    
    
    
    1,791
    
    
    
    268
    
    
    
    6,471General and administrative
    
    
    3,445
    
    
    
    1,880
    
    
    
    710
    
    
    
    3,951
    
    
    
    9,986Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,466
    
    
    
    2,466Client reimbursed expenses
    
    
    1,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,582Total costs and expenses
    
    
    53,450
    
    
    
    17,628
    
    
    
    10,661
    
    
    
    9,649
    
    
    
    91,388Income (loss) from operations
    
    $
    14,285
    
    
    $
    12,236
    
    
    $
    2,721
    
    
    $
    (9,649
    )
    
    $
    19,593Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,170Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    634Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,561Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    13,568
 Three Months Ended September 30, 2005Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    Total(in thousands)Revenue
    
    $
    48,495
    
    
    $
    23,514
    
    
    $
    6,753
    
    
    $
    
    
    
    $
    78,762Costs and expenses:Cost of revenue
    
    
    
    
    
    
    5,756
    
    
    
    4,250
    
    
    
    212
    (2)
    
    
    10,218Client support
    
    
    34,344
    
    
    
    
    
    
    
    373
    
    
    
    
    
    
    
    34,717Product development
    
    
    
    
    
    
    2,482
    
    
    
    
    
    
    
    
    
    
    
    2,482Sales and marketing
    
    
    1,084
    
    
    
    2,765
    
    
    
    838
    
    
    
    
    
    
    
    4,687General and administrative
    
    
    3,113
    
    
    
    1,888
    
    
    
    320
    
    
    
    2,726
    
    
    
    8,047Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,803
    
    
    
    1,803Client reimbursed expenses
    
    
    1,103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,103Total costs and expenses
    
    
    39,644
    
    
    
    12,891
    
    
    
    5,781
    
    
    
    4,741
    
    
    
    63,057Income (loss) from operations
    
    $
    8,851
    
    
    $
    10,623
    
    
    $
    972
    
    
    $
    (4,741
    )
    
    $
    15,705Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    495Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    580Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,183Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,437
 Nine months Ended September 30, 2006Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (3)
    
    
    Total(in thousands)Revenue
    
    $
    187,011
    (1)
    
    $
    87,216
    
    
    $
    34,568
    
    
    $
    
    
    
    $
    308,795Costs and expenses:Cost of revenue
    
    
    4,205
    (1)
    
    
    23,333
    
    
    
    18,358
    
    
    
    1,006
    (2)
    
    
    46,902Client support
    
    
    131,427
    
    
    
    
    
    
    
    2,806
    
    
    
    7,013
    
    
    
    141,246Product development
    
    
    
    
    
    
    10,004
    
    
    
    
    
    
    
    1,707
    
    
    
    11,711Sales and marketing
    
    
    4,370
    
    
    
    10,580
    
    
    
    4,473
    
    
    
    1,019
    
    
    
    20,442General and administrative
    
    
    8,438
    (4)
    
    
    6,880
    
    
    
    1,658
    
    
    
    12,556
    
    
    
    29,532Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,651
    
    
    
    6,651Client reimbursed expenses
    
    
    3,692
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,692
 22




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Nine months Ended September 30, 2006Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (3)
    
    
    Total(in thousands)Total costs and expenses
    
    
    152,132
    
    
    
    50,797
    
    
    
    27,295
    
    
    
    29,952
    
    
    
    260,176Income (loss) from operations
    
    $
    34,879
    
    
    $
    36,419
    
    
    $
    7,273
    
    
    $
    (29,952
    )
    
    $
    48,619Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,616Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,798Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,916Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    33,521
 Nine months Ended September 30, 2005Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    Total(in thousands)Revenue
    
    $
    135,834
    
    
    $
    66,637
    
    
    $
    18,477
    
    
    $
    
    
    
    $
    220,948Costs and expenses:Cost of revenue
    
    
    
    
    
    
    15,752
    
    
    
    11,138
    
    
    
    596
    (2)
    
    
    27,486Client support
    
    
    98,907
    
    
    
    
    
    
    
    1,929
    
    
    
    
    
    
    
    100,836Product development
    
    
    
    
    
    
    6,615
    
    
    
    
    
    
    
    
    
    
    
    6,615Sales and marketing
    
    
    3,259
    
    
    
    7,368
    
    
    
    1,428
    
    
    
    
    
    
    
    12,055General and administrative
    
    
    10,474
    
    
    
    5,978
    
    
    
    969
    
    
    
    8,328
    
    
    
    25,749Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,409
    
    
    
    5,409Client reimbursed expenses
    
    
    2,740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,740Total costs and expenses
    
    
    115,380
    
    
    
    35,713
    
    
    
    15,464
    
    
    
    14,333
    
    
    
    180,890Income (loss) from operations
    
    $
    20,454
    
    
    $
    30,924
    
    
    $
    3,013
    
    
    $
    (14,333
    )
    
    $
    40,058Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,022Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,753Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,720Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,607
 
 (1)
    
    DNA, acquired in December 2005, generates revenue that is presented on a gross basis of
accounting. Accordingly, both revenue and cost of revenue include the cost of media purchased for DNA clients.(2)
    
    For the three and nine months ended September 30, 2006 cost of revenue classified as
unallocated corporate expenses included $192 and $575, respectively, and for the three and
nine months ended September 30, 2005 $212 and 596, respectively, related to the amortization
of developed technology resulting from the acquisition of GO TOAST and NetConversions.(3)
    
    Unallocated corporate expenses include stock-based compensation expense. This expense is not
allocated to our segments, as it is centrally managed at the corporate level and not reviewed
by our chief operating decision maker in evaluating results by segment. For the three and nine
months ended September 30, 2006, stock-based compensation expense was as follows: Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2006Cost of revenue
    
    $
    145
    
    
    $
    431Client support
    
    
    2,254
    
    
    
    7,013Product development
    
    
    300
    
    
    
    1,259Sales and marketing
    
    
    268
    
    
    
    1,019General and administrative
    
    
    1,513
    
    
    
    4,383Total stock-based compensation expense
    
    $
    4,480
    
    
    $
    14,105
 (4)
    
    For the nine months ended September 30, 2006, general and administrative expense for the
digital marketing services line of business includes a $1,900 reversal of contingent business
tax liability. See Footnote 2 in the Notes to Condensed Consolidated Financial Statements for
additional information about this change in contingent tax liability.
 23




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##### Table of Contents



Revenue
   Atlas Digital Marketing Suite Atlas
Rich Media Atlas Rich Media Atlas Digital
Marketing Suite
  Cost of Revenue
 24




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##### Table of Contents



Client Support
  25




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##### Table of Contents



Product Development
 Atlas Publisher, Atlas Rich Media Atlas Search Atlas Digital Marketing Suite
  Sales and Marketing
   26




---



##### Table of Contents



General and Administrative
  Amortization of Intangible Assets
  Client Reimbursed Expenses
 27




---



##### Table of Contents



Income from Operations
    Interest and Other Income, Net
  Interest Expense
  Provision for Income Taxes
  28




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##### Table of Contents



Liquidity, Capital Resources and Commitments
   Net Cash from Operating Activities
    Net Cash from Investing Activities
  29




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##### Table of Contents



Nine Months Ended September 30,2006
    
    
    2005(in thousands)iFRONTIER
    
    $
    26,460
    
    
    $
    176Franchise Gator
    
    
    19,673
    
    
    
    DNA
    
    
    9,877
    
    
    
    Amnesia
    
    
    3,108
    
    
    
    GO TOAST
    
    
    1,333
    
    
    
    583Neue Digitale
    
    
    1,244
    
    
    
    NetConversions
    
    
    582
    
    
    
    188TechnologyBrokers/Media Brokers
    
    
    
    
    
    
    758SBI.Razorfish
    
    
    
    
    
    
    (41
    )Total cash payments
    
    $
    62,277
    
    
    $
    1,664
  30




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##### Table of Contents



Three Months Ending
    
    

Year
Ending December 31,December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    HighDigital Marketing Services (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    40,000
    
    
    $
    74,000Digital Marketing
Technologies/Digital Performance
Media (2)
    
    
    39,000
    
    
    
    44,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    39,000
    
    
    $
    44,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    40,000
    
    
    $
    74,000
 
 (1)
    
    In addition to the contingent payments shown in the table, the Company will also make
guaranteed payments totaling $5,108 subsequent to September 30, 2006. These guaranteed
payments relate to the acquisitions of Neue Digitale and Amnesia and have been accrued on the
Condensed Consolidated Balance Sheet as of September 30, 2006.(2)
    
    Includes estimated contingent payments related to the acquisition of TechnologyBrokers and
MediaBrokers. Net Cash from Financing Activities
      Contractual Obligations
 31




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##### Table of Contents



Three MonthsEnding
    
    
    Year Ending December 31,December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2010 and2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalCommitments:Operating leases
    
    $
    3,040
    
    
    $
    11,765
    
    
    $
    10,833
    
    
    $
    10,206
    
    
    $
    46,058
    
    
    $
    81,902Ad content delivery services
    
    
    697
    
    
    
    734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,431Convertible debt (including interest payments)
    
    
    
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    107,000
    
    
    
    112,400Total commitments
    
    $
    3,737
    
    
    $
    14,299
    
    
    $
    12,633
    
    
    $
    12,006
    
    
    $
    153,058
    
    
    $
    195,733
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   Foreign Currency Exchange Rate Risk
   32




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  33




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  34




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##### Table of Contents



ITEM 6. EXHIBITS
 31.1
    
    Certification of Brian P. McAndrews Pursuant to Rule 13a-14(a) of the
Securities and Exchange Act of 1934, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of M. Wayne Wisehart Pursuant to Rule 13a-14(a) of the
Securities and Exchange Act of 1934, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Brian P. McAndrews Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    Certification of M. Wayne Wisehart Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 35




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##### Table of Contents



SIGNATURES
  AQUANTIVE, INC.By:
    /s/ M. WAYNE WISEHARTM. Wayne WisehartChief Financial Officer
(Authorized Officer and Principal Financial Officer) 36