##### 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 June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission
File Number: 0-29361
 aQuantive, Inc.
 (Exact name of registrant as specified in its charter)
 Washington
(State of Incorporation)
    
    91-1819567
(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 June 30, 2007
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
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    24Item 4. Controls and Procedures
    
    25PART II. OTHER INFORMATIONItem 1.
Legal Proceedings
    
    26Item 1A. Risk Factors
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    26Item 6. Exhibits
    
    27EXHIBIT 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)
 June 30,
    
    
    December 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    95,144
    
    
    $
    147,795Short-term investments
    
    
    214,553
    
    
    
    131,012Accounts
receivable, net of allowances of $3,853 and $4,087 at June 30, 2007 and December 31, 2006, respectively
    
    
    271,093
    
    
    
    273,174Other receivables
    
    
    3,132
    
    
    
    2,312Prepaid expenses and other current assets
    
    
    6,407
    
    
    
    4,459Deferred tax assets, net
    
    
    4,451
    
    
    
    4,475Total current assets
    
    
    594,780
    
    
    
    563,227Property and equipment, net
    
    
    43,152
    
    
    
    34,343Goodwill
    
    
    276,875
    
    
    
    269,325Other intangible assets, net
    
    
    45,627
    
    
    
    47,255Long-term investments
    
    
    18,975
    
    
    
    32,509Other assets
    
    
    3,544
    
    
    
    2,754Deferred tax assets, net
    
    
    12,187
    
    
    
    2,915Total assets
    
    $
    995,140
    
    
    $
    952,328Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    164,848
    
    
    $
    194,386Accrued liabilities
    
    
    60,710
    
    
    
    56,686Pre-billed media
    
    
    23,643
    
    
    
    27,945Deferred rent, current portion
    
    
    1,120
    
    
    
    1,027Deferred revenue
    
    
    13,726
    
    
    
    16,517Total current liabilities
    
    
    264,047
    
    
    
    296,561Long-term accrued liabilities
    
    
    596
    
    
    
    3,720Notes payable
    
    
    79,715
    
    
    
    80,000Deferred rent, less current portion
    
    
    4,055
    
    
    
    4,221Total liabilities
    
    
    348,413
    
    
    
    384,502Shareholders equity:Preferred stock, $0.01 par value; 21,084 shares authorized and none issued
or outstandingCommon stock, $0.01 par value; 200,000 shares authorized; 80,046 and 77,768 issued
and outstanding at June 30, 2007 and December 31, 2006, respectively
    
    
    801
    
    
    
    778Paid-in capital
    
    
    575,086
    
    
    
    522,657Retained earnings
    
    
    64,891
    
    
    
    41,036Accumulated other comprehensive income
    
    
    5,949
    
    
    
    3,355Total shareholders equity
    
    
    646,727
    
    
    
    567,826Total liabilities and shareholders equity
    
    $
    995,140
    
    
    $
    952,328
  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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    155,975
    
    
    $
    105,629
    
    
    $
    298,596
    
    
    $
    197,814Expenses:Cost of revenue
    
    
    24,793
    
    
    
    15,258
    
    
    
    48,381
    
    
    
    28,636Client support
    
    
    72,019
    
    
    
    46,458
    
    
    
    136,986
    
    
    
    91,630Product development
    
    
    4,873
    
    
    
    3,608
    
    
    
    9,712
    
    
    
    7,288Sales and marketing
    
    
    10,318
    
    
    
    7,331
    
    
    
    20,849
    
    
    
    13,971General and administrative
    
    
    25,948
    
    
    
    11,710
    
    
    
    40,998
    
    
    
    20,968Amortization of intangible assets
    
    
    2,912
    
    
    
    2,149
    
    
    
    5,655
    
    
    
    4,185Client reimbursed expenses
    
    
    2,544
    
    
    
    1,242
    
    
    
    4,599
    
    
    
    2,110Total costs and expenses
    
    
    143,407
    
    
    
    87,756
    
    
    
    267,180
    
    
    
    168,788Other operating income
    
    
    505
    
    
    
    
    
    
    
    1,551
    
    
    
    Income from operations
    
    
    13,073
    
    
    
    17,873
    
    
    
    32,967
    
    
    
    29,026Interest and other income, net
    
    
    4,380
    
    
    
    3,746
    
    
    
    8,509
    
    
    
    5,445Interest expense
    
    
    603
    
    
    
    582
    
    
    
    1,190
    
    
    
    1,164Income before income taxes
    
    
    16,850
    
    
    
    21,037
    
    
    
    40,286
    
    
    
    33,307Provision for income taxes
    
    
    7,237
    
    
    
    8,700
    
    
    
    16,431
    
    
    
    13,355Net income
    
    $
    9,613
    
    
    $
    12,337
    
    
    $
    23,855
    
    
    $
    19,952Basic net income per share
    
    $
    0.12
    
    
    $
    0.16
    
    
    $
    0.30
    
    
    $
    0.28Diluted net income per share
    
    $
    0.11
    
    
    $
    0.15
    
    
    $
    0.27
    
    
    $
    0.25Shares used in computing basic net income per share
    
    
    79,238
    
    
    
    76,157
    
    
    
    78,688
    
    
    
    72,207Shares used in computing diluted net income per share
    
    
    90,844
    
    
    
    87,448
    
    
    
    89,970
    
    
    
    83,707Comprehensive income:Net income
    
    $
    9,613
    
    
    $
    12,337
    
    
    $
    23,855
    
    
    $
    19,952Items of comprehensive income
    
    
    1,984
    
    
    
    640
    
    
    
    2,594
    
    
    
    624Comprehensive income
    
    $
    11,596
    
    
    $
    12,977
    
    
    $
    26,448
    
    
    $
    20,576
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##### Table of Contents



AQUANTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six Months EndedJune 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    23,855
    
    
    $
    19,952Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    16,494
    
    
    
    11,774Stock-based compensation expense
    
    
    9,370
    
    
    
    9,625Excess tax benefit from stock-based compensation
    
    
    (25,895
    )
    
    
    (10,774
    )Other non-cash items
    
    
    (658
    )
    
    
    866Changes in operating assets and liabilities, net of acquisitions:Accounts receivable, net
    
    
    8,706
    
    
    
    (22,112
    )Other receivables, prepaid expenses and other current assets
    
    
    (1,266
    )
    
    
    (3,805
    )Other assets
    
    
    (1,655
    )
    
    
    186Accounts payable
    
    
    (34,725
    )
    
    
    4,741Accrued liabilities
    
    
    3,455
    
    
    
    (825
    )Pre-billed media
    
    
    (4,538
    )
    
    
    17,920Deferred revenue
    
    
    (2,973
    )
    
    
    (2,120
    )Deferred rent
    
    
    (77
    )
    
    
    (63
    )Deferred taxes
    
    
    15,615
    
    
    
    10,490Net cash provided by operating activities
    
    
    5,708
    
    
    
    35,855Cash flows from investing activities:Purchases of property and equipment
    
    
    (18,289
    )
    
    
    (10,988
    )Purchases of available-for-sale investments
    
    
    (157,692
    )
    
    
    (7,529
    )Proceeds from sales and maturities of available-for-sale investments
    
    
    92,991
    
    
    
    10,028Purchases of other long-term investments
    
    
    (4,182
    )
    
    
    Acquisitions and related earn-out payments, less cash received of $86 in 2006
    
    
    (13,584
    )
    
    
    (47,958
    )Net cash used in investing activities
    
    
    (100,756
    )
    
    
    (56,447
    )Cash flows from financing activities:Proceeds from equity offering, net of issuance costs
    
    
    
    
    
    
    198,317Proceeds from exercises of common stock options and issuance of common stock under the ESPP
    
    
    16,229
    
    
    
    9,143Excess tax benefit from stock-based compensation
    
    
    25,895
    
    
    
    10,774Net cash provided by financing activities
    
    
    42,124
    
    
    
    218,234Effect of exchange rate on cash and cash equivalents
    
    
    273
    
    
    
    118Net (decrease) increase in cash and cash equivalents
    
    
    (52,651
    )
    
    
    197,760Cash and cash equivalents, beginning of period
    
    
    147,795
    
    
    
    77,272Cash and cash equivalents, end of period
    
    $
    95,144
    
    
    $
    275,032
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##### Table of Contents



AQUANTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(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
  6




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Use of Estimates in the Preparation of Financial Statements
  Change in Accrued Business Tax Liability
  Revenue Recognition
  Digital Marketing Service
    7




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Digital Marketing Technologies. Atlas Digital Marketing Suite, Atlas Media Console Atlas Rich Media Atlas Search Atlas Site Optimization Atlas Publisher Atlas Site
Optimization Software Revenue
Recognition
 Digital Performance Media
   All Segments
  Recently Issued Accounting Pronouncements
   8




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##### Table of Contents



3. Acquisitions and Other Investments
 Business Combinations
   Year Ending December 31,2008
    
    2009
    
    2010
    
    2011Low
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    Low
    
    HighDigital Marketing Services (1)
    
    $
    
    
    
    $
    
    
    
    $
    39,500
    
    
    $
    77,700
    
    
    $
    5,800
    
    
    $
    8,700
    
    
    $
    3,500
    
    
    $
    12,200
 
 (1)
    
    In addition to the contingent payments shown in the table, we will also make
non-contingent payments totaling $8,736 subsequent to June 30, 2007. These payments relate
to the acquisitions made during 2006 and 2007 and have been accrued on our Condensed
Consolidated Balance Sheet as of June 30, 2007. Other Investments
  4. Merger Agreement
   9




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5. Goodwill
  Balance as of
    
    
    
    
    
    
    Balance as ofJune 30,
    
    
    
    
    
    
    December 31,2007
    
    
    Increases
    
    
    2006Digital marketing services
    
    $
    170,542
    
    
    $
    5,759
    
    
    $
    164,783Digital marketing technologies
    
    
    60,307
    
    
    
    715
    
    
    
    59,592Digital performance media
    
    
    46,026
    
    
    
    1,076
    
    
    
    44,950$
    276,875
    
    
    $
    7,550
    
    
    $
    269,325
   6. Stock-Based Compensation
 Stock Options and Share Awards
   10




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Employee Stock Purchase Plan
  Valuation of Awards
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Weighted average risk-free interest rate
    
    
    4.74
    %
    
    
    4.90
    %
    
    
    4.58
    %
    
    
    4.48
    %Expected term, in years
    
    
    4.2
    
    
    
    4.1  7.2
    
    
    
    4.2
    
    
    
    4.1  7.2Weighted average expected volatility
    
    
    59
    %
    
    
    61
    %
    
    
    56
    %
    
    
    63
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Six Months EndedJune 30,2007
    
    2006Weighted average risk-free interest rate
    
    
    5.17
    
    
    
    4.53
    %Expected term, in years
    
    
    0.5  1
    
    
    
    0.5  1Weighted average expected volatility
    
    
    45
    %
    
    
    47
    %Dividend yield
    
    
    
    
    
    
    
  Award Activity
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateOptions
    
    Exercise
    
    Contractual Term
    
    IntrinsicOutstanding
    
    Price
    
    (Years)
    
    ValueBalance, December 31, 2006
    
    
    12,332
    
    
    $
    9.69Granted
    
    
    1,366Exercised
    
    
    (2,072
    )Forfeited and expired
    
    
    (200
    )Balance, June 30, 2007
    
    
    11,426
    
    
    $
    12.34
    
    
    
    5.4
    
    
    $
    587,964Exercisable at June 30, 2007
    
    
    5,972
    
    
    $
    6.97
    
    
    
    4.3
    
    
    $
    339,386
 11




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Nonvested SharesOutstandingNonvested at December 31, 2006
    
    
    105Granted
    
    
    Vested
    
    
    (5
    )Forfeited and expired
    
    
    Nonvested at March 31, 2007
    
    
    100
  7. Shareholders Equity
  TotalShareholdersEquityBalance, December 31, 2006
    
    $
    567,826Exercise of common stock options
    
    
    13,102Issuance of common stock  Employee Stock Purchase Plan
    
    
    3,127Excess tax benefit from exercise of common stock options
    
    
    26,568Unrealized loss on available for sale investments
    
    
    (11
    )Currency translation gain
    
    
    2,605Stock-based compensation expense
    
    
    9,370Conversion of convertible notes
    
    
    285Net income
    
    
    23,855Balance, June 30, 2007
    
    $
    646,727
 8. Other Operating Income
  12




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9. Net Income Per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (numerator for basic)
    
    $
    9,613
    
    
    $
    12,337
    
    
    $
    23,855
    
    
    $
    19,952Add: Interest expense on convertible notes, net of tax
    
    
    354
    
    
    
    354
    
    
    
    707
    
    
    
    707Adjusted net income (numerator for diluted)
    
    $
    9,967
    
    
    $
    12,691
    
    
    $
    24,562
    
    
    $
    20,659Shares (denominator for basic and diluted):Gross weighted average common shares outstanding
    
    
    79,341
    
    
    
    76,266
    
    
    
    78,791
    
    
    
    72,316Less: weighted average shares issued and unvested
    
    
    (103
    )
    
    
    (109
    )
    
    
    (103
    )
    
    
    (109
    )Shares used in computation of basic net income per share
    
    
    79,238
    
    
    
    76,157
    
    
    
    78,688
    
    
    
    72,207Add: Dilutive effect of employee stock options and stock awards
    
    
    5,448
    
    
    
    5,128
    
    
    
    5,121
    
    
    
    5,337Add: Dilutive effect of convertible debt
    
    
    6,158
    
    
    
    6,163
    
    
    
    6,161
    
    
    
    6,163Shares used in computation of diluted net income per share
    
    
    90,844
    
    
    
    87,448
    
    
    
    89,970
    
    
    
    83,707Basic net income per share
    
    $
    0.12
    
    
    $
    0.16
    
    
    $
    0.30
    
    
    $
    0.28Diluted net income per share
    
    $
    0.11
    
    
    $
    0.15
    
    
    $
    0.27
    
    
    $
    0.25
  10. Segment Reporting
    13




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Three Months Ended June 30, 2007Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (2)
    
    
    TotalRevenue
    
    $
    94,162
    (1)
    
    $
    40,188
    
    
    $
    21,625
    
    
    $
    
    
    
    $
    155,975Costs and expenses:Cost of revenue
    
    
    754
    (1)
    
    
    11,568
    
    
    
    12,264
    
    
    
    207
    
    
    
    24,793Client support
    
    
    67,815
    
    
    
    
    
    
    
    1,858
    
    
    
    2,346
    
    
    
    72,019Product development
    
    
    
    
    
    
    4,493
    
    
    
    
    
    
    
    380
    
    
    
    4,873Sales and marketing
    
    
    2,126
    
    
    
    4,787
    
    
    
    3,078
    
    
    
    327
    
    
    
    10,318General and administrative
    
    
    6,283
    
    
    
    3,453
    
    
    
    866
    
    
    
    15,346
    (3)
    
    
    25,948Amortization of intangible assets
    
    
    2,120
    
    
    
    298
    
    
    
    494
    
    
    
    
    
    
    
    2,912Client reimbursed expenses
    
    
    2,544
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,544Total costs and expenses
    
    
    81,642
    
    
    
    24,599
    
    
    
    18,560
    
    
    
    18,606
    
    
    
    143,407Other operating income
    
    
    505
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    505Income (loss) from operations
    
    $
    13,025
    
    
    $
    15,589
    
    
    $
    3,065
    
    
    $
    (18,606
    )
    
    
    13,073Interest and
other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,380Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    603Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,850Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,237Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,613
 Three Months Ended June 30, 2006Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (2)
    
    
    TotalRevenue
    
    $
    64,064
    (1)
    
    $
    29,683
    
    
    $
    11,882
    
    
    $
    
    
    
    $
    105,629Costs and expenses:Cost of revenue
    
    
    1,254
    (1)
    
    
    7,817
    
    
    
    6,044
    
    
    
    143
    
    
    
    15,258Client support
    
    
    43,089
    
    
    
    
    
    
    
    939
    
    
    
    2,430
    
    
    
    46,458Product development
    
    
    
    
    
    
    3,031
    
    
    
    
    
    
    
    577
    
    
    
    3,608Sales and marketing
    
    
    1,397
    
    
    
    3,837
    
    
    
    1,716
    
    
    
    381
    
    
    
    7,331General and administrative
    
    
    4,193
    
    
    
    2,562
    
    
    
    536
    
    
    
    4,419
    
    
    
    11,710Amortization of intangible assets
    
    
    1,583
    
    
    
    311
    
    
    
    255
    
    
    
    
    
    
    
    2,149Client reimbursed expenses
    
    
    1,242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,242Total costs and expenses
    
    
    52,758
    
    
    
    17,558
    
    
    
    9,490
    
    
    
    7,950
    
    
    
    87,756Income (loss) from operations
    
    $
    11,306
    
    
    $
    12,125
    
    
    $
    2,392
    
    
    $
    (7,950
    )
    
    
    17,873Interest and
other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,746Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    582Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,037Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,700Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    12,337
 14




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##### Table of Contents



Six Months Ended June 30, 2007Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (2)
    
    
    TotalRevenue
    
    $
    177,215
    (1)
    
    $
    78,332
    
    
    $
    43,049
    
    
    $
    
    
    
    $
    298,596Costs and expenses:Cost of revenue
    
    
    858
    (1)
    
    
    22,686
    
    
    
    24,450
    
    
    
    387
    
    
    
    48,381Client support
    
    
    128,785
    
    
    
    
    
    
    
    3,591
    
    
    
    4,610
    
    
    
    136,986Product development
    
    
    
    
    
    
    8,929
    
    
    
    
    
    
    
    783
    
    
    
    9,712Sales and marketing
    
    
    4,750
    
    
    
    9,316
    
    
    
    6,166
    
    
    
    617
    
    
    
    20,849General and administrative
    
    
    12,463
    
    
    
    7,229
    
    
    
    1,632
    
    
    
    19,674
    (3)
    
    
    40,998Amortization of intangible assets
    
    
    4,027
    
    
    
    642
    
    
    
    986
    
    
    
    
    
    
    
    5,655Client reimbursed expenses
    
    
    4,599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,599Total costs and expenses
    
    
    155,482
    
    
    
    48,802
    
    
    
    36,825
    
    
    
    26,071
    
    
    
    267,180Other operating income
    
    
    1,551
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,551Income (loss) from operations
    
    $
    23,284
    
    
    $
    29,530
    
    
    $
    6,224
    
    
    $
    (26,071
    )
    
    
    32,967Interest and
other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,509Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,190Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,286Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,431Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,855
 Six Months Ended June 30, 2006Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (2)
    
    
    TotalRevenue
    
    $
    119,276
    (1)
    
    $
    57,352
    
    
    $
    21,186
    
    
    $
    
    
    
    $
    197,814Costs and expenses:Cost of revenue
    
    
    1,981
    (1)
    
    
    15,046
    
    
    
    11,323
    
    
    
    286
    
    
    
    28,636Client support
    
    
    85,232
    
    
    
    
    
    
    
    1,681
    
    
    
    4,717
    
    
    
    91,630Product development
    
    
    
    
    
    
    5,955
    
    
    
    
    
    
    
    1,333
    
    
    
    7,288Sales and marketing
    
    
    2,986
    
    
    
    7,552
    
    
    
    2,682
    
    
    
    751
    
    
    
    13,971General and administrative
    
    
    6,373
    (4)
    
    
    5,000
    
    
    
    948
    
    
    
    8,647
    
    
    
    20,968Amortization of intangible assets
    
    
    3,218
    
    
    
    622
    
    
    
    345
    
    
    
    
    
    
    
    4,185Client reimbursed expenses
    
    
    2,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,110Total costs and expenses
    
    
    101,900
    
    
    
    34,175
    
    
    
    16,979
    
    
    
    15,734
    
    
    
    168,788Income (loss) from operations
    
    $
    17,376
    
    
    $
    23,177
    
    
    $
    4,207
    
    
    $
    (15,734
    )
    
    
    29,026Interest and
other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,445Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,164Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,307Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,355Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,952
 
 (1)
    
    A small portion of our media business generates revenue that is presented on a gross basis.
Accordingly, both revenue and cost of revenue include the cost of media purchased for our
clients. 15




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(2)
    
    For the three and six months ended June 30, 2007 and 2006, stock-based compensation expense
included in unallocated corporate expenses was as follows:
 Three Months Ended June 30,
    
    
    Six Months Ended June 302007
    
    
    2006
    
    
    2007
    
    
    2006Cost of revenue
    
    $
    207
    
    
    $
    143
    
    
    $
    387
    
    
    $
    286Client support
    
    
    2,346
    
    
    
    2,430
    
    
    
    4,610
    
    
    
    4,717Product development
    
    
    288
    
    
    
    385
    
    
    
    585
    
    
    
    959Sales and marketing
    
    
    314
    
    
    
    381
    
    
    
    604
    
    
    
    751General and administrative
    
    
    1,511
    
    
    
    1,537
    
    
    
    3,184
    
    
    
    2,912Total stock-based compensation
    
    $
    4,666
    
    
    $
    4,876
    
    
    $
    9,370
    
    
    $
    9,625
 (3)
    
    For the three and six months ended June 30, 2007, unallocated general and administrative
expense includes $10,860 in investment banking fees and other expenses related to the Merger.
See Note 4 for additional information about the Merger.(4)
    
    For the six months ended June 30, 2006, general and administrative expense for the digital
marketing services segment includes the $1,900 reversal of a business tax liability. See Note
2 for additional information about this change in tax liability. 11. Legal Proceedings
    16




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##### Table of Contents



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, the risk of unforeseen changes in client online marketing and advertising budgets,
unanticipated loss of clients or delays in anticipated campaigns and projects, the potential
failure to attract new clients due to our inability to competitively market our services, the risk
of fluctuating demand for the our services, the potential negative effects on our business of
consolidation in the internet advertising industry, the potential failure to maintain desired
client relationships or to achieve effective advertising campaigns for clients,
slower-than-expected development of the Internet advertising market either domestically or in
international markets, quarterly fluctuations in operating results, costs and risks related to
acquisitions of technologies, businesses or brands, risks relating to international operations, the
short term nature of our contracts with clients, which generally are cancelable on 90 days or less
notice, and the uncertainties, potential costs, and possible business impacts of new legislation or
litigation involving us. A complete list of our risk factors are included in our Annual Report
on Form 10-K , for the year ended December 31, 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
  Merger Announcement
   Acquisitions and Comparability of Operations
  17




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##### Table of Contents



Company
    
    Acquisition Date
    
    Segment
    
    LocationDuke
    
    March 2007
    
    DMS
    
    FranceAccipiter
    
    December 2006
    
    DMT
    
    United Statese-Crusade
    
    October 2006
    
    DMS
    
    ChinaNeue Digitale
    
    August 2006
    
    DMS
    
    GermanyAmnesia
    
    July 2006
    
    DMS
    
    AustraliaFranchise Gator
    
    May 2006
    
    DPM
    
    United States
 Digital Marketing Services (DMS)
  Digital Marketing Technologies (DMT)
  Digital Performance Media (DPM)
  Critical Accounting Policies and Judgments
   Estimates and Assumptions Related to Financial Statements
  18




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Results of Operations
  Revenue
   Atlas Digital Marketing Suite Atlas Rich Media Atlas Rich Media Atlas Digital Marketing Suite
  Cost of Revenue
    19




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Client Support
   Product Development
 Atlas Publisher, Atlas Rich Media Atlas Search Atlas Digital Marketing Suite
 Sales and Marketing
    General and Administrative
  20




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Amortization of Intangible Assets
  Client Reimbursed Expenses
  Other Operating Income
  Income from Operations
    21




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Interest and Other Income, Net
  Interest Expense
  Provision for Income Taxes
  Liquidity, Capital Resources and Commitments
   Net Cash from Operating Activities
    22




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Net Cash from Investing Activities
     Six Months Ended June 30,2007
    
    
    2006(in thousands)Duke
    
    $
    9,435
    
    
    $
    Franchise Gator
    
    
    1,986
    
    
    
    19,583eCrusade
    
    
    708
    
    
    
    TechnologyBrokers/Media Brokers
    
    
    687
    
    
    
    Accipiter
    
    
    768
    
    
    
    GO TOAST
    
    
    
    
    
    
    1,333iFRONTIER
    
    
    
    
    
    
    26,460NetConversions
    
    
    
    
    
    
    582Total cash payments
    
    $
    13,584
    
    
    $
    47,958
 Net Cash from Financing Activities
     23




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##### Table of Contents



Contractual Obligations
  Six MonthsEnding
    
    
    Year Ending December 31,December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2011 and2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalCommitments:Operating leases
    
    $
    13,627
    
    
    $
    14,520
    
    
    $
    13,980
    
    
    $
    13,529
    
    
    $
    42,198
    
    
    $
    97,854Ad content delivery services
    
    
    2,595
    
    
    
    4,336
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,931Convertible debt (including interest payments)
    
    
    900
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    104,915
    
    
    
    111,215Accrued liabilities (1)
    
    
    6,206
    
    
    
    2,760
    
    
    
    100
    
    
    
    100
    
    
    
    175
    
    
    
    9,341Total commitments
    
    $
    23,328
    
    
    $
    23,416
    
    
    $
    15,880
    
    
    $
    15,429
    
    
    $
    147,288
    
    
    $
    225,341
 
 (1)
    
    Accrued liabilities mostly relate to short and long term payments to selling shareholders
of businesses acquired during 2006 and 2007. These short and long term liabilities amount to $9.0
million and $0.3 million, respectively and are presented in the liability section of our
Consolidated Balance Sheet at June 30, 2007.  Year Ending December 31,2008
    
    2009
    
    2010
    
    2011Low
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    Low
    
    HighDigital Marketing Services
    
    $
    
    
    
    $
    
    
    
    $
    39,500
    
    
    $
    77,700
    
    
    $
    5,800
    
    
    $
    8,700
    
    
    $
    3,500
    
    
    $
    12,200
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   24




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Foreign Currency Exchange Rate Risk
     
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  25




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
    
 ITEM 1A. RISK FACTORS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   For
    
    WithheldLinda J. Srere
    
    
    73,547,891
    
    
    
    340,035Jaynie M. Studenmund
    
    
    73,481,030
    
    
    
    406,896
   For
    
    
    73,557,231Against
    
    
    274,376Abstain
    
    
    56,319
 26




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##### Table of Contents



ITEM 6. EXHIBITS
 2.1
    
    Agreement and Plan of Merger by and among Microsoft Corporation, Arrow Acquisition Company,
and aQuantive, Inc., dated as of May 17, 2007 (incorporated
herein by reference to Exhibit 2.1 filed with our current Report on
Form 8-K filed May 18, 2007).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
 27




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SIGNATURES
  AQUANTIVE, INC.By:
    
    /s/ M. WAYNE WISEHART

M. Wayne WisehartChief Financial Officer(Authorized Officer and Principal Financial Officer)
 28