##### 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, 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
(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, 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
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4.
    
    Controls and Procedures
    
    
    30PART II. OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    31Item 6.
    
    Exhibits
    
    
    31EXHIBIT 10.1EXHIBIT 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 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    275,032
    
    
    $
    77,272Short-term investments
    
    
    32,580
    
    
    
    35,617Accounts receivable, net of allowances of $3,672 and $3,146, respectively
    
    
    183,104
    
    
    
    160,370Other receivables
    
    
    2,222
    
    
    
    968Prepaid expenses and other current assets
    
    
    4,715
    
    
    
    2,108Deferred tax asset
    
    
    5,416
    
    
    
    5,416Total current assets
    
    
    503,069
    
    
    
    281,751Property and equipment, net
    
    
    31,111
    
    
    
    27,370Goodwill
    
    
    191,403
    
    
    
    141,075Other intangible assets, net
    
    
    35,062
    
    
    
    32,078Other assets
    
    
    1,067
    
    
    
    1,245Deferred financing costs, net
    
    
    1,126
    
    
    
    1,386Deferred tax assets, net
    
    
    23,964
    
    
    
    23,755Total assets
    
    $
    786,802
    
    
    $
    508,660Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    99,136
    
    
    $
    94,327Accrued liabilities
    
    
    47,794
    
    
    
    38,976Pre-billed media
    
    
    36,175
    
    
    
    18,254Deferred rent, current portion
    
    
    606
    
    
    
    670Deferred revenue
    
    
    12,366
    
    
    
    14,310Total current liabilities
    
    
    196,077
    
    
    
    166,537Long-term accrued liabilities
    
    
    505
    
    
    
    430Notes payable
    
    
    80,000
    
    
    
    80,000Deferred rent, less current portion
    
    
    4,917
    
    
    
    4,753Total liabilities
    
    
    281,499
    
    
    
    251,720Shareholders equity:Common stock, $0.01 par value; 200,000 shares authorized 76,791 and
66,495 shares issued and outstanding, respectively
    
    
    768
    
    
    
    665Paid-in capital
    
    
    497,066
    
    
    
    269,382Retained earnings (accumulated deficit)
    
    
    7,034
    
    
    
    (12,918
    )Accumulated other comprehensive income (loss)
    
    
    435
    
    
    
    (189
    )Total shareholders equity
    
    
    505,303
    
    
    
    256,940Total liabilities and shareholders equity
    
    $
    786,802
    
    
    $
    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
    
    
    Six Months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    105,629
    
    
    $
    77,189
    
    
    $
    197,814
    
    
    $
    142,186Costs and expenses:Cost of revenue
    
    
    15,258
    
    
    
    9,246
    
    
    
    28,636
    
    
    
    17,266Client support
    
    
    47,184
    
    
    
    35,859
    
    
    
    93,052
    
    
    
    66,302Product development
    
    
    3,608
    
    
    
    2,166
    
    
    
    7,288
    
    
    
    4,133Sales and marketing
    
    
    7,331
    
    
    
    3,894
    
    
    
    13,971
    
    
    
    7,187General and administrative
    
    
    10,984
    
    
    
    9,988
    
    
    
    19,546
    
    
    
    17,702Amortization of intangible assets
    
    
    2,149
    
    
    
    1,803
    
    
    
    4,185
    
    
    
    3,606Client reimbursed expenses
    
    
    1,242
    
    
    
    959
    
    
    
    2,110
    
    
    
    1,637Total costs and expenses
    
    
    87,756
    
    
    
    63,915
    
    
    
    168,788
    
    
    
    117,833Income from operations
    
    
    17,873
    
    
    
    13,274
    
    
    
    29,026
    
    
    
    24,353Interest and other income, net
    
    
    3,746
    
    
    
    257
    
    
    
    5,445
    
    
    
    527Interest expense
    
    
    582
    
    
    
    583
    
    
    
    1,164
    
    
    
    1,173Income before provision for income taxes
    
    
    21,037
    
    
    
    12,948
    
    
    
    33,307
    
    
    
    23,707Provision for income taxes
    
    
    8,700
    
    
    
    5,188
    
    
    
    13,355
    
    
    
    9,537Net income
    
    $
    12,337
    
    
    $
    7,760
    
    
    $
    19,952
    
    
    $
    14,170Basic net income per share
    
    $
    0.16
    
    
    $
    0.12
    
    
    $
    0.28
    
    
    $
    0.22Diluted net income per share
    
    $
    0.15
    
    
    $
    0.11
    
    
    $
    0.25
    
    
    $
    0.20Shares used in computing basic net income per share
    
    
    76,157
    
    
    
    63,438
    
    
    
    72,207
    
    
    
    63,020Shares used in computing diluted net income per share
    
    
    87,448
    
    
    
    75,677
    
    
    
    83,667
    
    
    
    74,895Comprehensive income:Net income
    
    $
    12,337
    
    
    $
    7,760
    
    
    $
    19,952
    
    
    $
    14,170Items of comprehensive income (loss)
    
    
    640
    
    
    
    (110
    )
    
    
    624
    
    
    
    (129
    )Comprehensive income
    
    $
    12,977
    
    
    $
    7,650
    
    
    $
    20,576
    
    
    $
    14,041
  4




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##### Table of Contents



AQUANTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six months endedJune 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    19,952
    
    
    $
    14,170Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    12,524
    
    
    
    8,878Stock-based compensation expense
    
    
    9,625
    
    
    
    46Stock option income tax benefit
    
    
    
    
    
    
    5,461Excess tax benefit from stock-based compensation
    
    
    (10,774
    )
    
    
    Foreign currency transaction loss
    
    
    116
    
    
    
    Changes in operating assets and liabilities, net of acquisitions:Accounts receivable, net
    
    
    (22,112
    )
    
    
    (27,856
    )Other receivables, prepaid expenses and other current assets
    
    
    (3,805
    )
    
    
    (406
    )Other assets
    
    
    186
    
    
    
    (148
    )Accounts payable
    
    
    4,741
    
    
    
    8,480Accrued liabilities
    
    
    (825
    )
    
    
    4,150Pre-billed media
    
    
    17,920
    
    
    
    157Deferred rent
    
    
    (63
    )
    
    
    375Deferred revenue
    
    
    (2,120
    )
    
    
    (1,266
    )Deferred taxes
    
    
    10,490
    
    
    
    3,186Net cash provided by operating activities
    
    
    35,855
    
    
    
    15,227Cash flows from investing activities:Purchases of property and equipment
    
    
    (10,988
    )
    
    
    (10,290
    )Proceeds from (purchases of) short term investments, net
    
    
    2,499
    
    
    
    (626
    )Acquisitions and acquisition earn-out payments, less cash received of $86 in 2006
    
    
    (47,958
    )
    
    
    (1,573
    )Net cash used in investing activities
    
    
    (56,447
    )
    
    
    (12,489
    )Cash flows from financing activities:Proceeds from equity offering, net of issuance costs
    
    
    198,317
    
    
    
    Proceeds from exercises of common stock options and issuance of common stock under the ESPP
    
    
    9,143
    
    
    
    5,330Excess tax benefit from stock-based compensation
    
    
    10,774
    
    
    
    Net cash provided by financing activities
    
    
    218,234
    
    
    
    5,330Effect of exchange rate on cash and cash equivalents
    
    
    118
    
    
    
    Net increase in cash and cash equivalents
    
    
    197,642
    
    
    
    8,068Cash and cash equivalents, beginning of period
    
    
    77,272
    
    
    
    24,555Cash and cash equivalents, end of period
    
    $
    275,032
    
    
    $
    32,623
  5




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##### Table of Contents



AQUANTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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



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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##### Table of Contents



For the three months
    
    
    For the six monthsended June 30,
    
    
    ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Customer A
    
    
    10
    %
    
    
    12
    %
    
    
    11
    %
    
    
    12
    %
  Stock-Based Compensation
     Recently Issued Accounting Pronouncements
  3. Acquisition
  9




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##### Table of Contents



4. Goodwill
  Acquisition/PurchaseAccountingAdjustments/ForeignBalance as of
    
    
    Currency
    
    
    Balance as ofJune 30,
    
    
    Translation
    
    
    December 31,2006
    
    
    Adjustments
    
    
    2005Digital marketing services
    
    $
    155,040
    
    
    $
    34,165
    
    
    $
    120,875Digital marketing technologies
    
    
    17,548
    
    
    
    1,582
    
    
    
    15,966Digital performance media
    
    
    18,815
    
    
    
    14,581
    
    
    
    4,234$
    191,403
    
    
    $
    50,328
    
    
    $
    141,075
  5. Stock-Based Compensation
 Stock Option Plans
   Nonvested Share Award
  10




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##### Table of Contents



Employee Stock Purchase Plan
  Valuation of Awards
   Three Months ended
    
    
    Six Months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average risk-free interest rate
    
    
    4.90
    %
    
    
    3.91
    %
    
    
    4.48
    %
    
    
    3.98
    %Expected term, in years
    
    
    4.1-7.2
    
    
    
    4.5-8
    
    
    
    4.1-7.2
    
    
    
    4.5.-8Weighted average expected volatility
    
    
    61
    %
    
    
    99
    %
    
    
    63
    %
    
    
    102
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Six Months endedJune 30,2006
    
    
    2005Weighted average risk-free interest rate
    
    
    4.53
    %
    
    
    2.36
    %Expected lives (in years)
    
    
    0.5-1
    
    
    
    0.5-1Weighted average expected volatility
    
    
    47.0
    %
    
    
    54.3
    %Dividend yield
    
    
    
    
    
    
    
  Pro Forma Information for Periods Prior to the Adoption of SFAS No. 123(R)
  11




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##### Table of Contents



Three Months
    
    
    Six Months endedended June 30, 2005
    
    
    June 30, 2005Net income, as reported
    
    $
    7,760
    
    
    $
    14,170Add: Stock-based employee compensation expense included in
reported net income, net of tax
    
    
    28
    
    
    
    28Deduct: Total stock-based compensation determined under fair
value based method for all awards, net of tax effect of $1,669
and $2,706, respectively
    
    
    (2,610
    )
    
    
    (4,233
    )Pro forma net income, fair value method for all stock-based awards
    
    $
    5,178
    
    
    $
    9,965Basic net income per share:As reported
    
    $
    0.12
    
    
    $
    0.22Pro forma
    
    $
    0.08
    
    
    $
    0.16Diluted net income per share:As reported
    
    $
    0.11
    
    
    $
    0.20Pro forma
    
    $
    0.07
    
    
    $
    0.14
 Impact of the Adoption of 123(R)
   Three Months
    
    
    Six Months endedended June 30, 2006
    
    
    June 30, 2006Cost of revenue
    
    $
    143
    
    
    $
    286Client support
    
    
    2,452
    
    
    
    4,759Product development
    
    
    385
    
    
    
    959Sales and marketing
    
    
    381
    
    
    
    751General and administrative
    
    
    1,515
    
    
    
    2,870Total stock-based compensation expense
    
    
    4,876
    
    
    
    9,625Total income tax benefit recognized for stock-based compensation expense
    
    
    1,902
    
    
    
    3,754Total stock-based compensation expense, net of tax
    
    $
    2,974
    
    
    $
    5,871Impact on net income per share:Basic
    
    $
    0.04
    
    
    $
    0.08Diluted
    
    $
    0.03
    
    
    $
    0.07
  Award Activity
 12




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##### Table of Contents



WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateOptions
    
    
    Exercise
    
    
    Contractual Term
    
    
    IntrinsicOutstanding
    
    
    Price
    
    
    (Years)
    
    
    ValueBalance, December 31, 2005
    
    
    13,169
    
    
    $
    7.17Granted
    
    
    1,519
    
    
    
    24.79Exercised
    
    
    (1,396
    )
    
    
    4.85Forfeited and expired
    
    
    (359
    )
    
    
    12.19Balance, June 30, 2006
    
    
    12,933
    
    
    
    9.35
    
    
    
    6.13
    
    
    $
    207,410Exercisable at June 30, 2006
    
    
    6,957
    
    
    
    5.31
    
    
    
    4.98
    
    
    $
    139,527
    Nonvested SharesOutstandingNonvested at December 31, 2005
    
    
    Granted
    
    
    115Vested
    
    
    (7
    )Forfeited and expired
    
    
    Nonvested at June 30, 2006
    
    
    108
  6. Shareholders Equity
  13




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7. Net Income Per Share
  Three Months ended
    
    
    Six Months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (numerator for basic)
    
    $
    12,337
    
    
    $
    7,760
    
    
    $
    19,952
    
    
    $
    14,170Add: Interest expense on convertible notes, net of tax
    
    
    354
    
    
    
    355
    
    
    
    707
    
    
    
    714Adjusted net income (numerator for diluted)
    
    $
    12,691
    
    
    $
    8,115
    
    
    $
    20,659
    
    
    $
    14,884Shares (denominator for basic and diluted):Gross weighted average common shares outstanding
    
    
    76,266
    
    
    
    63,438
    
    
    
    72,316
    
    
    
    63,020Less: weighted average shares issued and unvested
    
    
    (109
    )
    
    
    
    
    
    
    (109
    )
    
    
    Shares used in computation of basic net income per share
    
    
    76,157
    
    
    
    63,438
    
    
    
    72,207
    
    
    
    63,020Add: Dilutive effect of employee stock options and stock awards
    
    
    5,128
    
    
    
    6,076
    
    
    
    5,337
    
    
    
    5,712Add: Dilutive effect of convertible debt
    
    
    6,163
    
    
    
    6,163
    
    
    
    6,163
    
    
    
    6,163Shares used in computation of diluted net income per share
    
    
    87,448
    
    
    
    75,677
    
    
    
    83,667
    
    
    
    74,895Basic net income per share
    
    $
    0.16
    
    
    $
    0.12
    
    
    $
    0.28
    
    
    $
    0.22Diluted net income per share
    
    $
    0.15
    
    
    $
    0.11
    
    
    $
    0.25
    
    
    $
    0.20
  14




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##### Table of Contents



Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (3)
    
    
    TotalThree Months ended June 30, 2006Revenue
    
    $
    64,064
    (1)
    
    $
    29,683
    
    
    $
    11,882
    
    
    $
    
    
    
    $
    105,629Costs and expenses:Cost of revenue
    
    
    1,254
    (1)
    
    
    7,625
    
    
    
    6,044
    
    
    
    335
    (2)
    
    
    15,258Client support
    
    
    43,793
    
    
    
    
    
    
    
    939
    
    
    
    2,452
    
    
    
    47,184Product development
    
    
    
    
    
    
    3,031
    
    
    
    
    
    
    
    577
    
    
    
    3,608Sales and marketing
    
    
    1,397
    
    
    
    3,837
    
    
    
    1,716
    
    
    
    381
    
    
    
    7,331General and administrative
    
    
    3,489
    
    
    
    2,562
    
    
    
    536
    
    
    
    4,397
    
    
    
    10,984Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,149
    
    
    
    2,149Client reimbursed expenses
    
    
    1,242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,242Total costs and expenses
    
    
    51,175
    
    
    
    17,055
    
    
    
    9,235
    
    
    
    10,291
    
    
    
    87,756Income (loss) from operations
    
    $
    12,889
    
    
    $
    12,628
    
    
    $
    2,647
    
    
    $
    (10,291
    )
    
    $
    17,873
 15




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##### Table of Contents



Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    TotalThree Months ended June 30, 2005Revenue
    
    $
    48,252
    
    
    $
    22,482
    
    
    $
    6,455
    
    
    $
    
    
    
    $
    77,189Costs and expenses:Cost of revenue
    
    
    
    
    
    
    5,378
    
    
    
    3,676
    
    
    
    192
    (2)
    
    
    9,246Client support
    
    
    34,836
    
    
    
    
    
    
    
    1,023
    
    
    
    
    
    
    
    35,859Product development
    
    
    
    
    
    
    2,166
    
    
    
    
    
    
    
    
    
    
    
    2,166Sales and marketing
    
    
    1,082
    
    
    
    2,618
    
    
    
    194
    
    
    
    
    
    
    
    3,894General and administrative
    
    
    4,223
    
    
    
    2,295
    
    
    
    409
    
    
    
    3,061
    
    
    
    9,988Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,803
    
    
    
    1,803Client reimbursed expenses
    
    
    959
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    959Total costs and expenses
    
    
    41,100
    
    
    
    12,457
    
    
    
    5,302
    
    
    
    5,056
    
    
    
    63,915Income (loss) from operations
    
    $
    7,152
    
    
    $
    10,025
    
    
    $
    1,153
    
    
    $
    (5,056
    )
    
    $
    13,274
 Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (3)
    
    
    TotalSix Months ended June 30, 2006Revenue
    
    $
    119,276
    (1)
    
    $
    57,352
    
    
    $
    21,186
    
    
    $
    
    
    
    $
    197,814Costs and expenses:Cost of revenue
    
    
    1,981
    (1)
    
    
    14,662
    
    
    
    11,323
    
    
    
    670
    (2)
    
    
    28,636Client support
    
    
    86,612
    
    
    
    
    
    
    
    1,681
    
    
    
    4,759
    
    
    
    93,052Product development
    
    
    
    
    
    
    5,955
    
    
    
    
    
    
    
    1,333
    
    
    
    7,288Sales and marketing
    
    
    2,986
    
    
    
    7,552
    
    
    
    2,682
    
    
    
    751
    
    
    
    13,971General and administrative
    
    
    4,993
    
    
    
    5,000
    
    
    
    948
    
    
    
    8,605
    
    
    
    19,546Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,185
    
    
    
    4,185Client reimbursed expenses
    
    
    2,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,110Total costs and expenses
    
    
    98,682
    
    
    
    33,169
    
    
    
    16,634
    
    
    
    20,303
    
    
    
    168,788Income (loss) from operations
    
    $
    20,594
    
    
    $
    24,183
    
    
    $
    4,552
    
    
    $
    (20,303
    )
    
    $
    29,026
 16




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##### Table of Contents



Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    TotalSix Months ended June 30, 2005Revenue
    
    $
    87,339
    
    
    $
    43,123
    
    
    $
    11,724
    
    
    $
    
    
    
    $
    142,186Costs and expenses:Cost of revenue
    
    
    
    
    
    
    9,994
    
    
    
    6,888
    
    
    
    384
    (2)
    
    
    17,266Client support
    
    
    64,563
    
    
    
    
    
    
    
    1,739
    
    
    
    
    
    
    
    66,302Product development
    
    
    
    
    
    
    4,133
    
    
    
    
    
    
    
    
    
    
    
    4,133Sales and marketing
    
    
    2,175
    
    
    
    4,605
    
    
    
    407
    
    
    
    
    
    
    
    7,187General and administrative
    
    
    7,361
    
    
    
    4,090
    
    
    
    649
    
    
    
    5,602
    
    
    
    17,702Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,606
    
    
    
    3,606Client reimbursed expenses
    
    
    1,637
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,637Total costs and expenses
    
    
    75,736
    
    
    
    22,822
    
    
    
    9,683
    
    
    
    9,592
    
    
    
    117,833Income (loss) from operations
    
    $
    11,603
    
    
    $
    20,301
    
    
    $
    2,041
    
    
    $
    (9,592
    )
    
    $
    24,353
 
 1)
    
    DNA, acquired in December 2005, generates revenue that is recognized under the gross method
of accounting. Accordingly, both revenue and cost of revenue include the cost of media
purchased for DNA clients.(2)
    
    For both the three and six months ended June 30, 2006 and 2005, cost of revenue classified as
unallocated corporate expenses included $192 and $384, 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 six months ended June 30, 2006, stock-based compensation
expense was as follows:
 Three Months
    
    
    Six Months endedended June 30, 2006
    
    
    June 30, 2006Cost of revenue
    
    $
    143
    
    
    $
    286Client support
    
    
    2,452
    
    
    
    4,759Product development
    
    
    385
    
    
    
    959Sales and marketing
    
    
    381
    
    
    
    751General and administrative
    
    
    1,515
    
    
    
    2,870Total stock-based compensation expense
    
    $
    4,876
    
    
    $
    9,625
 (4)
    
    For the six months ended June 30, 2006, general and administrative expense for the digital
marketing services line of business included the $1,900 reversal of a contingent business tax
liability. See Footnote 2 for additional information about this change in contingent tax
liability.
   9. Legal Proceedings
  17




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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. 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.
   18




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##### Table of Contents



Overview
  Acquisitions and Comparability of Operations
  Digital Marketing Services (DMS)
  Digital Marketing Technologies (DMT)
  Digital Performance Media (DPM)
  Recent Developments
 Public Offering of Common Stock
  Critical Accounting Policies and Judgments
  19




---



##### Table of Contents



Accounting for Stock-Based Compensation
     Estimates and Assumptions Related to Financial Statements
  Results of Operations
  20




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##### Table of Contents



Three Months ended June 30, 2006Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (3)
    
    
    Total(amounts in thousands)Revenue
    
    $
    64,064
    (1)
    
    $
    29,683
    
    
    $
    11,882
    
    
    $
    
    
    
    $
    105,629Costs and expenses:Cost of revenue
    
    
    1,254
    (1)
    
    
    7,625
    
    
    
    6,044
    
    
    
    335
    (2)
    
    
    15,258Client support
    
    
    43,793
    
    
    
    
    
    
    
    939
    
    
    
    2,452
    
    
    
    47,184Product development
    
    
    
    
    
    
    3,031
    
    
    
    
    
    
    
    577
    
    
    
    3,608Sales and marketing
    
    
    1,397
    
    
    
    3,837
    
    
    
    1,716
    
    
    
    381
    
    
    
    7,331General and administrative
    
    
    3,489
    
    
    
    2,562
    
    
    
    536
    
    
    
    4,397
    
    
    
    10,984Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,149
    
    
    
    2,149Client reimbursed expenses
    
    
    1,242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,242Total costs and expenses
    
    
    51,175
    
    
    
    17,055
    
    
    
    9,235
    
    
    
    10,291
    
    
    
    87,756Income (loss) from operations
    
    $
    12,889
    
    
    $
    12,628
    
    
    $
    2,647
    
    
    $
    (10,291
    )
    
    $
    17,873Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,746Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    582Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,700Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    12,337
 Three Months ended June 30, 2005Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    Total(amounts in thousands)Revenue
    
    $
    48,252
    
    
    $
    22,482
    
    
    $
    6,455
    
    
    $
    
    
    
    $
    77,189Costs and expenses:Cost of revenue
    
    
    
    
    
    
    5,378
    
    
    
    3,676
    
    
    
    192
    (2)
    
    
    9,246Client support
    
    
    34,836
    
    
    
    
    
    
    
    1,023
    
    
    
    
    
    
    
    35,859Product development
    
    
    
    
    
    
    2,166
    
    
    
    
    
    
    
    
    
    
    
    2,166Sales and marketing
    
    
    1,082
    
    
    
    2,618
    
    
    
    194
    
    
    
    
    
    
    
    3,894General and administrative
    
    
    4,223
    
    
    
    2,295
    
    
    
    409
    
    
    
    3,061
    
    
    
    9,988Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,803
    
    
    
    1,803Client reimbursed expenses
    
    
    959
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    959Total costs and expenses
    
    
    41,100
    
    
    
    12,457
    
    
    
    5,302
    
    
    
    5,056
    
    
    
    63,915Income (loss) from operations
    
    $
    7,152
    
    
    $
    10,025
    
    
    $
    1,153
    
    
    $
    (5,056
    )
    
    $
    13,274Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    257Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    583Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,188Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,760
 Six months ended June 30, 2006Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (3)
    
    
    Total(amounts in thousands)Revenue
    
    $
    119,276
    (1)
    
    $
    57,352
    
    
    $
    21,186
    
    
    $
    
    
    
    $
    197,814Costs and expenses:Cost of revenue
    
    
    1,981
    (1)
    
    
    14,662
    
    
    
    11,323
    
    
    
    670
    (2)
    
    
    28,636Client support
    
    
    86,612
    
    
    
    
    
    
    
    1,681
    
    
    
    4,759
    
    
    
    93,052Product development
    
    
    
    
    
    
    5,955
    
    
    
    
    
    
    
    1,333
    
    
    
    7,288Sales and marketing
    
    
    2,986
    
    
    
    7,552
    
    
    
    2,682
    
    
    
    751
    
    
    
    13,971General and administrative
    
    
    4,993
    
    
    
    5,000
    
    
    
    948
    
    
    
    8,605
    
    
    
    19,546Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,185
    
    
    
    4,185Client reimbursed expenses
    
    
    2,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,110
 21




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##### Table of Contents



Six months ended June 30, 2006Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (3)
    
    
    Total(amounts in thousands)Total costs and expenses
    
    
    98,682
    
    
    
    33,169
    
    
    
    16,634
    
    
    
    20,303
    
    
    
    168,788Income (loss) from operations
    
    $
    20,594
    
    
    $
    24,183
    
    
    $
    4,552
    
    
    $
    (20,303
    )
    
    $
    29,026Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,445Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,164Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,355Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,952
 Six months ended June 30, 2005Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    Total(amounts in thousands)Revenue
    
    $
    87,339
    
    
    $
    43,123
    
    
    $
    11,724
    
    
    $
    
    
    
    $
    142,186Costs and expenses:Cost of revenue
    
    
    
    
    
    
    9,994
    
    
    
    6,888
    
    
    
    384
    (2)
    
    
    17,266Client support
    
    
    64,563
    
    
    
    
    
    
    
    1,739
    
    
    
    
    
    
    
    66,302Product development
    
    
    
    
    
    
    4,133
    
    
    
    
    
    
    
    
    
    
    
    4,133Sales and marketing
    
    
    2,175
    
    
    
    4,605
    
    
    
    407
    
    
    
    
    
    
    
    7,187General and administrative
    
    
    7,361
    
    
    
    4,090
    
    
    
    649
    
    
    
    5,602
    
    
    
    17,702Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,606
    
    
    
    3,606Client reimbursed expenses
    
    
    1,637
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,637Total costs and expenses
    
    
    75,736
    
    
    
    22,822
    
    
    
    9,683
    
    
    
    9,592
    
    
    
    117,833Income (loss) from operations
    
    $
    11,603
    
    
    $
    20,301
    
    
    $
    2,041
    
    
    $
    (9,592
    )
    
    $
    24,353Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    527Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,173Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,537Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,170
 
 1)
    
    DNA, acquired in December 2005, generates revenue that is recognized under the gross method
of accounting and includes the cost of media purchased for DNA clients.(2)
    
    For the three and six months ended June 30, 2006 and 2005, cost of revenue classified as
unallocated corporate expenses included $192 and $384, 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 six months ended June 30, 2006, stock-based compensation expense was as follows: Three Months ended
    
    
    Six Months endedJune 30, 2006
    
    
    June 30, 2006Cost of revenue
    
    $
    143
    
    
    $
    286Client support
    
    
    2,452
    
    
    
    4,759Product development
    
    
    385
    
    
    
    959Sales and marketing
    
    
    381
    
    
    
    751General and administrative
    
    
    1,515
    
    
    
    2,870Total stock-based compensation expense
    
    $
    4,876
    
    
    $
    9,625
 (4)
    
    For the six months ended June 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.
 Revenue
  22




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##### Table of Contents



Total
    
    
    Digital Marketing ServicesThree Months ended June 30,
    
    
    Three Months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue, as reported
    
    $
    105,629
    
    
    $
    77,189
    
    
    $
    64,064
    
    
    $
    48,252Less cost of media purchases
    
    
    (1,254
    )
    
    
    
    
    
    
    (1,254
    )
    
    
    Revenue, net of digital marketing services media purchases
    
    $
    104,375
    
    
    $
    77,189
    
    
    $
    62,810
    
    
    $
    48,252
 Total
    
    
    Digital Marketing ServicesSix Months ended June 30,
    
    
    Six Months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue, as reported
    
    $
    197,814
    
    
    $
    142,186
    
    
    $
    119,276
    
    
    $
    87,339Less cost of media purchases
    
    
    (1,981
    )
    
    
    
    
    
    
    (1,981
    )
    
    
    Revenue, net of digital marketing services media purchases
    
    $
    195,833
    
    
    $
    142,186
    
    
    $
    117,295
    
    
    $
    87,339
   Atlas Digital Marketing Suite Atlas Rich Media Atlas Rich Media Atlas Digital Marketing Suite
  Cost of Revenue
   23




---



##### Table of Contents



Total
    
    
    Digital Marketing ServicesThree Months ended June 30,
    
    
    Three Months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Cost of revenue, as reported
    
    $
    15,258
    
    
    $
    9,246
    
    
    $
    1,254
    
    
    $
    Less cost of media purchases
    
    
    (1,254
    )
    
    
    
    
    
    
    (1,254
    )
    
    
    Cost of revenue, net of digital
marketing services media
purchases
    
    $
    14,004
    
    
    $
    9,246
    
    
    $
    
    
    
    $
    
 Total
    
    
    Digital Marketing ServicesSix months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Cost of revenue, as reported
    
    $
    28,636
    
    
    $
    17,266
    
    
    $
    1,981
    
    
    $
    Less cost of media purchases
    
    
    (1,981
    )
    
    
    
    
    
    
    (1,981
    )
    
    
    Cost of revenue, net of digital
marketing services media
purchases
    
    $
    26,655
    
    
    $
    17,266
    
    
    $
    
    
    
    $
    
    Client Support
   24




---



##### Table of Contents



Product Development
 Atlas
Publisher Atlas Search Atlas Digital Marketing Suite
  Sales and Marketing
  Atlas Rich Media Atlas Search
  25




---



##### Table of Contents



General and Administrative
  Amortization of Intangible Assets
  Client Reimbursed Expenses
  Interest and Other Income, Net
  26




---



##### Table of Contents



Interest Expense
  Provision for Income Taxes
  Income from Operations
    Liquidity, Capital Resources and Commitments
  27




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##### Table of Contents



Net Cash from Operating Activities
   Net Cash from Investing Activities
     Six months ended June 30,2006
    
    
    2005(In thousands)iFRONTIER
    
    $
    26,460
    
    
    $
    176Franchise Gator
    
    
    19,583
    
    
    
    TechnologyBrokers/Media Brokers
    
    
    
    
    
    
    758NetConversions
    
    
    582
    
    
    
    188GO TOAST
    
    
    1,333
    
    
    
    500SBI.Razorfish
    
    
    
    
    
    
    (49
    )Total cash payments
    
    $
    47,958
    
    
    $
    1,573
 28




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##### Table of Contents



Six months ending
    
    
    Year ending December 31,(in thousands)
    
    December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    HighTechnologyBrokers/Media
Brokers(1)
    
    $
    39,000
    
    
    $
    45,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    DNA(2)
    
    
    9,400
    
    
    
    9,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,000
    
    
    
    43,000Total
    
    $
    48,400
    
    
    $
    54,400
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    26,000
    
    
    $
    43,000
 
 (1)
    
    The TechnologyBrokers and MediaBrokers future contingent payment will
be determined based on certain earnings thresholds through July 31, 2006. There is no
maximum payment specified in the agreement.(2)
    
    The DNA payment due in 2006 includes an amount based on DNAs
earnings through March 31, 2006 of approximately $7,603 and a guaranteed payment of
$1,816. Both amounts are accrued on the consolidated balance sheet as of June 30, 2006.
The future contingent payment due in 2009 will be determined based on actual earnings
results of DNA through December 5, 2008. There is no maximum payment specified in the
agreement. Net Cash from Financing Activities
      29




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##### Table of Contents



Commitments and Contingencies
  Six Monthsending
    
    
    Year ending December 31,December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2010 and2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalCommitments:Operating leases
    
    $
    5,194
    
    
    $
    10,085
    
    
    $
    9,051
    
    
    $
    8,499
    
    
    $
    33,896
    
    
    $
    66,725Ad content delivery services
    
    
    773
    
    
    
    734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,507Convertible debt (including interest payments)
    
    
    900
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    107,000
    
    
    
    113,300Total commitments
    
    $
    6,867
    
    
    $
    12,619
    
    
    $
    10,851
    
    
    $
    10,299
    
    
    $
    140,896
    
    
    $
    181,532
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  30




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  Our operating results and the growth of our business could be harmed if we do not successfully
manage our international operations.
   
    
    difficulties and costs of staffing and managing foreign operations;
 
    
    uncertain demand for our products and services;
 
    
    changes in and differences between regulatory requirements, including those relating to
data protection;
 
    
    reduced protection for intellectual property rights in a number of countries;
 
    
    potentially adverse tax consequences;
 
    
    the impact of recessions in economies outside the United States;
 
    
    political and economic instability; and
 
    
    seasonal reductions in business activity.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Nominee
    
    For
    
    
    WithheldRichard P. Fox
    
    
    60,026,565
    
    
    
    2,794,754Michael B. Slade
    
    
    60,505,801
    
    
    
    2,315,518
   For
    
    
    62,200,712Against
    
    
    178,614Abstain
    
    
    441,993Broker non-votes
    
    
    4,498,395
 
 ITEM 6. EXHIBITS
 10.1
    
    Amended 1999 Employee Stock Purchase Plan .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
 31




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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) 32