Edgar Filing: LoopNet, Inc.

e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-52026

LOOPNET, INC.

(Exact name of registrant as specified in its charter)


Delaware		77-0463987
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

185 Berry Street, Suite 4000
San Francisco, CA 94107
(Address of principal executive offices)
(415) 243-4200
(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.

Yes o No þ

As of July 27, 2007, there were 38,784,190 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS


		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets as of December 31, 2006 and June 30, 2007		1

	Condensed Consolidated Statements of Income for the three and six month periods ended June 30, 2006 and 2007		2

	Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2006 and 2007		3

	Notes to Condensed Consolidated Financial Statements		4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		16

Item 4.	Controls and Procedures		16

PART II — OTHER INFORMATION			16

Item 1.	Legal Proceedings		16

Item 1A.	Risk Factors		16

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25

Item 3.	Defaults Upon Senior Securities		25

Item 4.	Submission of Matters to a Vote of Security Holders		25

Item 5.	Other Information		26

Item 6.	Exhibits		26

Signatures			27
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

LOOPNET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	December 31,			June 30,
	2006			2007
				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	85,790		$	72,439
Short-term investments		3,238			32,738
Accounts receivable, net of allowance of $57 and $35, respectively		1,138			1,538
Prepaid expenses and other current assets		1,518			2,116
Deferred income taxes		402			402

Total current assets		92,086			109,233

Property and equipment, net		1,020			1,858
Goodwill		2,417			2,417
Intangibles, net		1,312			1,260
Deferred income taxes		3,083			3,544
Deposits and other noncurrent assets		287			1,159

Total assets	$	100,205		$	119,471


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	169		$	692
Accrued compensation and benefits		2,200			1,721
Accrued liabilities		864			811
Deferred revenue		6,969			8,951

Total current liabilities		10,202			12,175

Commitments and contingencies
Stockholders’ equity:
Common stock, $.001 par value, 125,000,000 shares authorized; 37,897,114 and 38,736,994 shares issued and outstanding at December 31, 2006 and June 30, 2007, respectively		38			39
Additional paid in capital		97,072			104,723
Other comprehensive loss		(31	)		(38	)
Retained earnings (deficit)		(7,076	)		2,572

Total stockholders’ equity		90,003			107,296

Total liabilities and stockholders’ equity	$	100,205		$	119,471

The accompanying notes are an integral part of these unaudited condensed financial statements.

LOOPNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)


	Three months ended June 30,				Six months ended June 30,
	2006		2007		2006		2007
Revenues	$	11,631	$	17,022	$	21,857	$	32,537
Cost of revenue (1)		1,366		1,874		2,594		3,654

Gross margin		10,265		15,148		19,263		28,883


Operating expenses (1):
Sales and marketing		2,183		3,577		4,132		6,836
Technology and product development		1,032		1,569		1,992		2,919
General and administrative		1,751		2,849		3,229		5,419

Total operating expenses		4,966		7,995		9,353		15,174

Income from operations		5,299		7,153		9,910		13,709

Interest and other income, net		465		1,313		717		2,506

Income before tax		5,764		8,466		10,627		16,215

Income tax expense		2,321		3,367		4,219		6,567

Net income	$	3,443	$	5,099	$	6,408	$	9,648


Net income per share
Basic	$	0.09	$	0.13	$	0.17	$	0.25

Diluted	$	0.09	$	0.13	$	0.17	$	0.24


(1)		Stock-based compensation is allocated as follows:


Cost of revenue	$	24	$	94	$	32	$	161
Sales and marketing		87		351		138		589
Technology and product development		32		150		53		241
General and administrative		56		280		89		439

Total	$	199	$	875	$	312	$	1,430

The accompanying notes are an integral part of these unaudited condensed financial statements.

LOOPNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)


	Six months ended June 30,
	2006			2007
Cash flows from operating activities:
Net income	$	6,408		$	9,648
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		301			397
Stock-based compensation		312			1,430
Net loss (gain) on disposal of assets		3			(2	)
Deferred income tax		2,648			(461	)
Changes in operating assets and liabilities:
Accounts receivable		(231	)		(400	)
Prepaid expenses and other assets		(278	)		(711	)
Income taxes payable		1,191			—
Accounts payable		157			523
Accrued expenses and other current liabilities		463			(53	)
Accrued compensation and benefits		(1	)		(479	)
Deferred revenue		1,486			1,982

Net cash provided by operating activities		12,459			11,874

Cash flows from investing activities:
Proceeds from the sale of assets		—			2
Purchase of property and equipment		(330	)		(1,173	)
Purchase of investments		—			(30,276	)

Net cash used in investing activities		(330	)		(31,447	)

Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs paid		42,309			—
Net proceeds from exercise of stock options		32			1,033
Net proceeds from exercise of preferred warrants		449			—
Net proceeds from payment of note receivable on options exercised and restricted stock purchased		456			—
Tax benefits from exercise of stock options		—			5,189

Net cash provided by financing activities		43,246			6,222


Net increase (decrease) in cash and cash equivalents		55,375			(13,351	)

Cash and cash equivalents at beginning of period		18,765			85,790


Cash and cash equivalents at end of period	$	74,140		$	72,439

The accompanying notes are an integral part of these unaudited condensed financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Background and Basis of Presentation

Basis of Presentation

The accompanying condensed consolidated balance sheet as of June 30, 2007, the statements of income for the three and six months ended June 30, 2006 and 2007 and the statements of cash flows for the six months ended June 30, 2006 and 2007 are unaudited. These statements should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial position and results of operations, contained in the Company’s annual report on Form 10-K for the year ended December 31, 2006.

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2006 and include all adjustments necessary for the fair value presentation of the Company’s financial position for the periods presented. The results for the three and six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2007.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates.

Recent Accounting Pronouncements

The Company adopted the Financial Accounting Standards Board’s Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. The adoption of FIN 48 did not have a material effect on our consolidated financial position or results of operations.

Note 2 — Earnings Per Share

For periods where the Company had two classes of equity securities, it followed EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement 128, which established standards regarding the computation of earnings per share (“EPS”) by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company. EITF Issue No. 03-6 requires earnings available to common shareholders for the period, after deduction of redeemable convertible preferred stock dividends, to be allocated between the common and redeemable convertible preferred shareholders based on their respective rights to receive dividends. Basic EPS is then calculated by dividing income allocable to common shareholders (including the reduction for any undeclared, preferred stock dividends assuming current income for the period had been distributed) by the weighted average number of shares outstanding. EITF Issue No. 03-6 does not require the presentation of basic and diluted EPS for securities other than common stock; therefore, the following EPS amounts only pertain to the Company’s common stock.

Upon the closing of the Company’s initial public offering, all outstanding redeemable convertible preferred shares were converted to common shares. Since the Company became a public company, the Company followed SFAS No. 128, Earnings Per Share, which requires that basic EPS be calculated by dividing earnings available to common shareholders for the period by the weighted average number of common shares outstanding.

The Company calculates diluted EPS under the if-converted method unless the conversion of the redeemable convertible preferred stock is anti-dilutive to basic EPS. To the extent redeemable convertible preferred stock is anti-dilutive, the Company calculates diluted EPS under the two class method to include the effect of potential common shares.

The share count used to compute basic and diluted net income per share is calculated as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2007		2006		2007
Weighted average common shares outstanding (1)		8,148		38,144		8,028		37,959

Weighted average shares outstanding used to compute basic net income per share after conversion of redeemable convertible preferred stock; one class of common shares was outstanding for the period from June 7 to June 30, 2006		36,357				36,357


Weighted average common shares outstanding		15,285		38,144		11,582		37,959
Add dilutive common equivalents:
Stock options		2,617		2,229		2,458		2,284
Unvested restricted stock (2)		615		309		664		341
Redeemable convertible preferred stock		17,445				20,056
Redeemable convertible preferred warrants		1,646				2,178

Shares used to compute diluted net income per share		37,608		40,682		36,938		40,584


(1)		For the three month and six month periods ended June 30, 2006, the Company had two classes of equity securities and followed EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement 128.

(2)		Outstanding unvested common stock purchased by employees is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding for basic earnings per share.

The following is a summary of the securities outstanding during the respective periods that have been excluded from the calculations because the effect on earnings per share would have been anti-dilutive (in thousands):

Three Months Ended

Six Months Ended

June 30,

2006

2007

2006

2007

Stock options

560

229

The following table sets forth the computation of basic and diluted EPS (in thousands, except in per share data):


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006			2007		2006			2007
Calculation of basic net income per share (1):

Net income	$	2,535				$	5,559
Assumed preferred stock dividends		419					978


Net income, net of assumed stock dividends	$	2,116				$	4,581

Percent of net income allocable to common shareholders (2)		26	%				26	%
Net income allocable to common shareholders		550					1,191
Weighted average common shares outstanding		8,148					8,028

Basic net income per share — two-class method	$	0.07				$	0.15

Net income for period during which single class of equity securities was outstanding	$	908		$	5,099	$	849		$	9,648
Weighted average common shares outstanding		36,357			38,144		36,357			37,959

Basic earnings per share for period during which single class of equity securities were outstanding	$	0.02				$	0.02

Basic earnings per share	$	0.09		$	0.13	$	0.17		$	0.25


Calculation of diluted net income per share:

Net income	$	3,443		$	5,099	$	6,408		$	9,648
Weighted average diluted shares outstanding		37,608			40,682		36,938			40,584

Diluted net income per share	$	0.09		$	0.13	$	0.17		$	0.24


(1)		For the three month and six month periods ended June 30, 2006, the Company had two classes of equity securities and followed EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement 128.

(2)		Calculation of percent of net income allocable to common shareholders:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006			2007		2006			2007
Weighted average common shares outstanding		8,148			—		8,028			—
Weighted average redeemable convertible preferred shares outstanding		23,372			—		22,896			—
Weighted average common shares and preferred shares outstanding		31,520			—		30,924			—
Percent of net income allocable to common shareholders		26	%		—		26	%		—

Note 3 — Stock-Based Compensation

In the first quarter of 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R), which revises Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123R requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. Prior to SFAS 123R, the Company disclosed the pro forma effects of SFAS 123 under the minimum value method. The Company adopted SFAS 123R effective January 1, 2006, prospectively for new equity awards issued subsequent to January 1, 2006.

In connection with the adoption of SFAS 123R, the Company reviewed and updated, among other things, its forfeiture rate, expected term and volatility assumptions. The weighted average expected lives of the options for the three and six month periods ended June 30, 2007 reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107 (SAB 107), which was issued in March 2005. The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. Estimated volatility for the three and six month periods ended June 30, 2007 also reflects the application of SAB 107 interpretive guidance and, accordingly, incorporates historical volatility of similar companies whose share price is publicly available.

The fair value of each option is estimated on the date of grant using the Black-Scholes method with the following assumptions:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2007			2006			2007
Risk-free interest rate		4.99	%		4.76	%		4.77	%		4.71	%
Expected volatility		53	%		45	%		53	%		46	%
Expected life	4.6 years			4.6 years			5.5 years			4.6 years
Dividend yield		0	%		0	%		0	%		0	%

The weighted-average fair value of options granted during the three month periods ended June 30, 2006 and 2007 was $6.56 and $8.42, respectively, and during the six month periods ended June 30, 2006 and 2007 was $4.01 and $7.40, respectively, using the Black-Scholes option-pricing model.

Total stock-based compensation has been allocated as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2007		2006		2007
Cost of revenue	$	24	$	94	$	32	$	161
Sales and marketing		87		351		138		589
Technology and product development		32		150		53		241
General and administrative		56		280		89		439

	$	199	$	875	$	312	$	1,430

Stock Plan Activity

Stock options and other equity awards are granted by the Company under its 2006 Equity Incentive Plan. The 2006 Equity Incentive Plan became effective on June 9, 2006. Prior to that date, stock options were granted under the Company’s 2001 Stock Option Plan, which terminated on June 9, 2006.

A summary of the Company’s stock option activity is as follows:


	Options outstanding							Options exercisable
						Weighted						Weighted
				Weighted		Average				Weighted		Average
				Average		Remaining				Average		Remaining
	Number of			Exercise		Contractual		Number of		Exercise		Contractual
	shares			Price		Life (Years)		shares		Price		Life (Years)
	(in thousands)
Outstanding at December 31, 2006		3,737,768		$	4.53				1,349,454	$	0.76
Granted		633,000		$	16.07
Exercised		(374,628	)	$	0.72
Cancelled		(83,179	)	$	13.64

Outstanding at March 31, 2007		3,912,961		$	6.57		7.10		1,187,428	$	1.32		6.36
Granted		131,000		$	19.30
Exercised		(465,237	)	$	1.64
Cancelled		(53,117	)	$	10.12

Outstanding at June 30, 2007		3,525,607		$	7.64		6.98		1,032,541	$	3.14		6.45

Note 4 — Income Taxes

The Company recorded a provision for income taxes of $6.6 million for the six month period ended June 30, 2007, based upon a 40.5% effective tax rate. The effective tax rate is based upon the Company’s estimated fiscal 2007 income before the provision for income taxes. To the extent the estimate of fiscal 2007 income before the provision for income taxes changes, the Company’s provision for income taxes will change as well.

Note 5 — Subsequent Event

On August 2, 2007, the Company acquired all of the shares of capital stock (the “Acquisition”) of Cityfeet.com Inc., a private company incorporated in Delaware (“Cityfeet”), pursaunt to a Stock Purchase Agreement dated as of August 2, 2007, by and among the Company, the stockholders of Cityfeet, and Scripps Ventures II, LLC, as Stockholder Representative.

The consideration paid in the Acquisition consisted of $15.0 million in cash and an earn-out that could result in an additional $3.0 million in cash consideration. The Acquisition was funded from the Company’s working capital.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q . This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A of Part II, “Risk Factors.”

Overview

We believe we are the leading online marketplace for commercial real estate in the United States, based on the number of monthly unique visitors to our marketplace, which averaged approximately 500,000 unique visitors per month during 2005, approximately 800,000 unique visitors per month during 2006, and approximately 950,000 per month during the second quarter of 2007, as reported by comScore Media Metrix. comScore Media Metrix defines a unique visitor as an individual who visited any content of a website, a category, a channel, or an application. Our online marketplace, available at www.LoopNet.com, enables commercial real estate agents, working on behalf of property owners and landlords, to list properties for sale or for lease and submit detailed information on property listings including qualitative descriptions, financial and tenant information, photographs and key property characteristics in order to find a buyer or tenant. We offer two types of memberships on the LoopNet online marketplace. Basic membership is available free-of-charge, and enables members to experience some of the benefits of the LoopNet offering, with limited functionality. LoopNet premium membership is available for a monthly subscription fee and provides enhanced marketing exposure for property listings and full access to LoopNet property listings, as well as numerous other features. The minimum term of a premium membership subscription is one month.

We believe that the key metrics that are material to an analysis of our business are the number of our registered members, the number of our premium members, the rate of conversion of our basic members to premium members, the average monthly subscription price paid by our premium members, and the cancellation rate of our premium members. We also believe that the number of listings on our marketplace and the number of property profiles viewed by our registered members are key metrics, as they affect the attractiveness of our website to current and potential customers. Our total membership has grown from over 1.1 million members as of December 31, 2005, to over 1.7 million members as of December 31, 2006, and to over 2.2 million members as of June 30, 2007. Our base of premium members has grown from over 57,000 premium members as of December 31, 2005, to over 78,000 premium members as of December 31, 2006, and to over 88,000 premium members as of June 30, 2007. Historically, our average monthly rate of conversion of basic members to premium members has been approximately five percent, and our average monthly cancellation rate for premium members has ranged between three and five percent. We believe that a decline in the second quarter of 2007 in our average monthly conversion rate to approximately 4.0% is attributable to an increasing proportion of principals (i.e. investors and tenants) in our membership base, who convert to premium membership at a lower rate than the professional agents and brokers in the market. The average monthly subscription price paid by our premium members has increased from $44.96 in the fourth quarter of 2005 to $47.26 in the fourth quarter of 2006 and to $51.33 in the second quarter of 2007. Premium membership fees have driven the majority of our growth in revenues since 2001 and were the source of approximately 80% of our revenues in 2005, 2006, and in the six month period ended June 30, 2007. The number of listings on our marketplace has grown from approximately 335,000 as of December 31, 2005 to approximately 460,000 as of December 31, 2006, and approximately 518,000 as of June 30, 2007. The number of property profiles that were viewed by our registered members increased from 34 million in the second quarter of 2006 to 39 million in the second quarter of 2007.

Our Revenues and Expenses

Our primary sources of revenues are:

	•		LoopNet premium membership fees;

	•		BizBuySell BrokerWorks membership fees and paid listings;

	•		LoopNet RecentSales membership fees;

	•		advertising on, and lead generation from, our marketplaces; and

	•		LoopLink product license fees.

Our revenues have grown significantly in the past two years from $31.0 million in 2005, to $48.4 million in 2006. We had revenues of $17.0 and $32.5 million in the three and six month periods ended June 30, 2007. We have been profitable and cash flow positive each quarter since the second quarter of 2003. The key factors influencing our growth in revenues are:

	•		the increased adoption of our premium membership services by the commercial real estate industry;

	•		increases in the average monthly subscription price of our premium membership product;

	•		the increased adoption of our RecentSales services by the commercial real estate industry; and

	•		our acquisition of BizBuySell in October, 2004, and the increased adoption of our services by the operating business for sale industry.

Our ability to continue to grow our revenues will largely depend on our ability to expand the number of users of www.LoopNet.com and www.BizBuySell.com and to convince those users to upgrade to our paid services, especially premium membership.

We derive the substantial majority of our revenues from customers that pay monthly fees for a suite of services to market and search for commercial real estate and operating businesses. The fee for our LoopNet premium membership averaged $51.33 per month during the second quarter of 2007. The minimum term of a premium membership subscription is one month. We also offer quarterly and annual memberships which are priced and discounted accordingly, and paid in advance for the subscription period. A customer choosing to cancel a discounted annual or quarterly membership will receive a refund based on the number of months the membership was used and charging the customer at the monthly rate rather than at the discounted quarterly or annual rates. We also license our LoopLink product to commercial real estate brokerage firms who pay a monthly, quarterly or annual fee. For our BrokerWorks product at BizBuySell, we charge $39.95 per month. We also charge fees associated with marketing individual businesses listed on BizBuySell. For our RecentSales product, we charge $29.95 per month or $1.95 to $3.95 for an individual transaction.

Revenues from other sources include advertising and lead generation revenues from both our LoopNet and BizBuySell marketplaces, which are recognized ratably over the period in which the advertisement is displayed, provided that no significant obligations remain and collection of the resulting receivable is probable. Advertising rates are dependent on the services provided and the placement of the advertisements. To date, the duration of our advertising commitments has generally averaged two to three months.

The largest component of our expenses is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation for our employees, including commissions for salespeople. These expenses are categorized in our statements of operations based on each employee’s principal function.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Accordingly, our actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2006.

Seasonality and Cyclicality

The commercial real estate market is influenced by annual seasonality factors, as well as by overall economic cycles. The market is large and fragmented, and different segments of the industry are influenced differently by various factors. Broadly speaking, the commercial real estate industry has two major components: tenants leasing space from owners or landlords, and the investment market for buying and selling properties.

We have experienced seasonality in our business in the past, and expect to continue to experience it in the future. While individual geographic markets vary, commercial real estate transaction activity is fairly consistent throughout the year, with the exception of a slow-down during the end-of-year holiday period. The impact that this has had on our business is that the growth rate in the fourth quarter of each year, while positive, has been slower than in the first three quarters of each year. We expect this pattern to continue.

The commercial real estate industry has historically experienced cyclicality. The different segments of the industry, such as office, industrial, retail, multi-family, and others, are influenced differently by different factors, and have historically moved through cycles with different timing. The “for lease” and “for sale” components of the market also do not necessarily move on the same timing cycle. We do not believe that our results to date have been significantly affected by industry cycles.

Results of Operations

The following table presents our historical operating results as a percentage of revenues for the periods indicated:


	Three months						Six months
	Ended June 30,						Ended June 30,
	2006			2007			2006			2007
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue		11.7			11.0			11.9			11.2

Gross profit		88.3			89.0			88.1			88.8

Operating expenses
Sales and marketing		18.8			21.0			18.9			21.0
Technology and product development		8.9			9.2			9.1			9.0
General and administrative		15.1			16.7			14.8			16.6

Total operating expenses		42.7			46.9			42.8			46.6

Income from operations		45.6			42.1			45.3			42.2
Interest and other income, net		4.0			7.7			3.3			7.7

Income before tax		49.6			49.8			48.6			49.9
Income tax expense		20.0			19.8			19.3			20.2

Net income		29.6	%		30.0	%		29.3	%		29.7	%

Comparison of Three Months Ended June 30, 2006 and 2007

Revenues


	Three Months Ended June 30,
							Percent
	2006		2007		Increase		Change
	(dollars in thousands)
Revenues	$	11,631	$	17,022	$	5,391		46.4	%
Premium members at June 30		71,125		88,451		17,326		24.4	%

The increase in revenues was due primarily to increased adoption of our premium membership product, as well as an increase of approximately 13% in the average monthly price of a premium membership.

We anticipate that revenues will not increase in the future at the same percentage rate as in previous periods, as the rate of premium member growth should decline on a percentage basis as a result of our larger premium member base.

Cost of Revenues


	Three Months Ended June 30,
									Percent
	2006			2007			Increase		Change
				(dollars in thousands)
Cost of revenues	$	1,366		$	1,874		$	508		37.2	%
Percentage of revenues		11.7	%		11.0	%

Cost of revenues consists of the expenses associated with the operation of our website, including depreciation of network infrastructure equipment, salaries and benefits of network operations personnel, Internet connectivity and hosting costs. Cost of revenues also includes salaries and benefits expenses associated with our data quality, data import and customer support personnel and credit card and other transaction fees relating to processing customer transactions.

The increase in cost of revenues was due to an increase in salaries and benefit costs related to an increase in the number of data quality, data import and customer support personnel, which was required in order to support our increased property listing and user activity. Also contributing to the increased cost of revenues was higher credit card fees due to the growth in revenues.

We expect cost of revenues to increase in absolute dollar amounts as we continue to expand our business, but to remain relatively consistent as a percentage of revenues.

Sales and Marketing


	Three Months Ended June 30,
									Percent
	2006			2007			Increase		Change
				(dollars in thousands)
Sales and marketing	$	2,183		$	3,577		$	1,394		63.9	%
Percentage of revenues		18.8	%		21.0	%

Sales and marketing expenses consist of the compensation and associated costs for sales and marketing personnel, advertising expenses as well as public relations and other promotional activities.

The increase in sales and marketing expenses was due largely to an increase in the number of sales personnel and increased commissions paid as a result of growth in our revenues. Additionally, advertising costs were higher, primarily to attract new members to our online marketplace.

Also contributing to the increase was higher stock-based compensation, which increased to $351,000 in the second quarter of 2007 compared to $87,000 in the second quarter of 2006.

We expect sales and marketing expenses to increase in absolute dollar amounts, and potentially as a percentage of revenues, as we continue to expand our marketing program to attract and retain premium members and launch and support new products and services.

Technology and Product Development


	Three Months Ended June 30,
									Percent
	2006			2007			Increase		Change
				(dollars in thousands)
Technology and product development	$	1,032		$	1,569		$	537		52.0	%
Percentage of revenues		8.9	%		9.2	%

Technology and product development costs include expenses for the research and development of new and enhanced products and services, as well as improvements to and maintenance of existing products and services.

The increase in technology and product development expenses was due primarily to increases in salaries and related costs associated with an increase in headcount to assist in the launch of enhanced products and services and the maintenance of our existing services.

Also contributing to the increase was higher stock-based compensation, which increased to $150,000 in the second quarter of 2007 compared to $32,000 in the second quarter of 2006.

We expect technology and product development expenses to increase in absolute dollar amounts as we hire more personnel and continue to build the infrastructure required to support the development of new products and services, but to remain relatively consistent as a percentage of revenues.

General and Administrative


	Three Months Ended June 30,
									Percent
	2006			2007			Increase		Change
				(dollars in thousands)
General and administrative	$	1,751		$	2,849		$	1,098		62.7	%
Percentage of revenues		15.1	%		16.7	%

General and administrative expenses consist primarily of salaries and related expenses for executive, accounting, billing and human resources personnel. These costs also include insurance and professional fees, rent and related expenses. Professional fees primarily consist of outside legal and audit fees.

The increase in general and administrative expenses was due primarily to higher office rent associated with our growth in personnel, increased salaries and higher professional fees and directors’ and officers’ liability insurance premiums associated with being a public company.

Also contributing to the increase was higher stock-based compensation, which increased to $280,000 in the second quarter of 2007 compared to $56,000 in the second quarter of 2006.

We expect general and administrative expenses to increase in absolute dollar amounts as we continue to absorb the expenses associated with being a public company, but to potentially decline as a percent of revenue.

Interest and other income

Interest and other income increased by $848,000 to $1,313,000 in the three months ended June 30, 2007, from $465,000 in the three months ended June 30, 2006. This increase was primarily due to a higher average cash balance due in part to proceeds received from our initial public offering. As of June 30, 2007, we held $105.2 million in cash, cash equivalents and short-term investments, compared to $77.3 million in cash, cash equivalents and short-term investments as of June 30, 2006.

Income Taxes

We recorded a provision for income taxes of $3.4 million for the three month period ended June 30, 2007, based upon a 40.5% effective tax rate for the full year of 2007. The effective tax rate is based upon our estimated fiscal 2007 income before the provision for income taxes. To the extent the estimate of fiscal 2007 income before the provision for income taxes changes, our provision for income taxes will change as well.

Comparison of Six Months Ended June 30, 2006 and 2007

Revenues


	Six Months Ended June 30,
							Percent
	2006		2007		Increase		Change
	(dollars in thousands)
Revenues	$	21,857	$	32,537	$	10,680		48.9	%
Premium members at June 30		71,125		88,451		17,326		24.4	%

The increase in revenues was due primarily to increased adoption of our premium membership product, as well as an increase of approximately 12.0% in the average monthly price of a premium membership.

Cost of Revenues


	Six Months Ended June 30,
									Percent
	2006			2007			Increase		Change
				(dollars in thousands)
Cost of revenues	$	2,594		$	3,654		$	1,060		40.9	%
Percentage of revenues		11.9	%		11.2	%

Sales and Marketing


	Six Months Ended June 30,
									Percent
	2006			2007			Increase		Change
				(dollars in thousands)
Sales and marketing	$	4,132		$	6,836		$	2,704		65.4	%
Percentage of revenues		18.9	%		21.0	%

Sales and marketing expenses consist of the compensation and associated costs for sales and marketing personnel, advertising expenses as well as public relations and other promotional activities.

Also contributing to the increase was higher stock-based compensation, which increased to $589,000 in the six months ended June 30, 2007 compared to $138,000 in the six month ended June 30, 2006.

Technology and Product Development


	Six Months Ended June 30,
									Percent
	2006			2007			Increase		Change
				(dollars in thousands)
Technology and product development	$	1,992		$	2,919		$	927		46.5	%
Percentage of revenues		9.1	%		9.0	%

Also contributing to the increase was higher stock-based compensation, which increased to $241,000 in the six month ended June 30, 2007 compared to $53,000 in the six month ended June 30, 2006.

General and Administrative


	Six Months Ended June 30,
									Percent
	2006			2007			Increase		Change
				(dollars in thousands)
General and administrative	$	3,229		$	5,419		$	2,190		67.8	%
Percentage of revenues		14.8	%		16.6	%

Also contributing to the increase was higher stock-based compensation, which increased to $439,000 in the six month ended June 30, 2007 compared to $89,000 in the six months ended June 30, 2006.

Interest and other income

Interest and other income increased by $1,789,000 to $2,506,000 in the six months ended June 30, 2007, from $717,000 in the six months ended June 30, 2006. This increase was primarily due to a higher average cash balance due in part to proceeds received from our initial public offering. As of June 30, 2007, we held $105.2 million in cash, cash equivalents and short-term investments, compared to $77.3 million in cash, cash equivalents and short-term investments as of June 30, 2006.

Income Taxes

We recorded a provision for income taxes of $6.6 million for the six month period ended June 30, 2007, based upon a 40.5% effective tax rate for the full year of 2007. The effective tax rate is based upon our estimated fiscal 2007 income before the provision for income taxes. To the extent the estimate of fiscal 2007 income before the provision for income taxes changes, our provision for income taxes will change as well.

Liquidity and Capital Resources

The following table summarizes our cash flows:


	Six Months Ended
	June 30,
	2006			2007
	(unaudited)
	(in thousands)
Cash flow data:
Cash provided by operating activities	$	12,459		$	11,874
Cash used in investing activities		(330	)		(31,447	)
Cash provided by financing activities		43,246			6,222

From our incorporation in 1997 until the first quarter of 2003, we financed our operations through private placements of our capital stock and cash acquired in the July, 2001 merger with PropertyFirst.com, Inc. Since the first quarter of 2003, we have financed our operations through cash flow that we generate from our operations. On June 12, 2006, we completed the initial public offering of our stock, resulting in net proceeds of $42.3 million.

As of June 30, 2007, our cash, cash equivalents and short-term investments totaled $105.2 million, compared to $77.3 million in cash, cash equivalents and short-term investments as of June 30, 2006.

Cash equivalents and short-term investments consist of money market funds, and debt securities that we classify as available for sale. Our principal sources of liquidity are our cash, cash equivalents and short-term investments, as well as the cash flow that we generate from our operations. We do not currently have any commercial debt or posted letters of credit.

Operating Activities

Net cash provided by operating activities primarily consists of net income adjusted for certain non-cash items, including depreciation, amortization, stock-based compensation, and the effect of changes in working capital. Net cash provided by operating activities was $12.5 and $11.9 million in the six months ended June 30, 2006 and 2007, respectively. The increase in cash provided by operating activities in the six month period ended June 30, 2007 and in the six month period ended June 30, 2006 was primarily due to increased net income generated by the company and increases in deferred revenue related to prepaid subscriptions. The increase in net income is primarily related to higher revenue, due primarily to increased adoption of our premium membership product and higher average monthly prices for our premium membership product. The increase in deferred revenue is primarily related to an increase in the number of premium members who have prepaid for quarterly or annual subscriptions.

Investing Activities

Cash used in investing activities in the six months ended June 30, 2007 of $31.5 million was primarily attributable to the purchase of short-term investments of $30.3 million coupled with capital expenditures amounting to $1.2 million for the purchase of computer equipment, office equipment and furniture, and leasehold improvements.

Cash used in investing activities in the six months ended June 30, 2006 of $330,000 was attributable to capital expenditures for the purchase of computer equipment.

Financing Activities

Cash provided by financing activities in the six months ended June 30, 2007 of $6.2 million consisted of $1.0 million of proceeds from the exercise of stock options and $5.2 million tax benefit from the exercise of stock options.

Cash provided by financing activities in the six months ended June 30, 2006 of $43.2 million consisted of $42.3 million of net proceeds from the sale of common stock, $0.4 million of proceeds from the exercise of warrants and $0.5 million from repayments of promissory notes issued to certain named executive officers as payment for the exercising of stock options and restricted stock.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in short-term, high-quality, interest-bearing securities. Our investments in debt securities are subject to interest rate risk. To minimize our exposure to an adverse shift in interest rates, we invest in short-term securities and maintain an average maturity of one year or less. If interest rates were to instantaneously increase or decrease by 100 basis points, the change in the fair market value of our short-term investment would not be a material amount to our financial statements.

Item 4. Controls and Procedures.

	(a)		Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in periodic SEC reports is reported within the time periods specified in SEC rules and forms.

	(b)		Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Assuming that we meet the definition of “accelerated filer” under Rule 12b-2 of the Exchange Act, we will be required by the Sarbanes-Oxley Act of 2002 to include an assessment of our internal control over financial reporting and attestation from our independent registered public accounting firm in our Annual Report on Form 10-K for our fiscal year ending December 31, 2007.

(c) PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may become involved in litigation relating to claims arising from the ordinary course of our business. We believe that there are no claims or actions pending or threatened against us that would have a material adverse effect on us.

Item 1A. Risk Factors.

We have updated the risk factors previously disclosed in Part I Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, which was filed with the Securities and Exchange Commission on March 19, 2007. We do not believe any of the changes constitute material changes from the risk factors previously disclosed.

Because of the following factors, as well as other variables affecting our operating results and financial condition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

Risks Related to Our Business

Our business is largely based on a subscription model, and accordingly, any failure to increase the number of our customers or retain existing customers could cause our revenues to decline.

Our customers include premium members of our LoopNet marketplace, LoopLink users, users of our BizBuySell marketplace, RecentSales subscriptions, and advertising and lead generation customers. Most of our revenues are generated by subscription fees paid by our premium members. Our growth depends in large part on increasing the number of our free basic members and then converting them into paying premium members, as well as retaining existing premium members. Either category of members may decide not to continue to use our services in favor of alternate services or because of budgetary constraints or other reasons. Historically, our average monthly rate of conversion of basic members to premium members has been approximately five percent, and our average monthly cancellation rate for premium members has ranged between three and five percent. We believe that a decline in the second quarter of 2007 in our average monthly conversion rate to approximately 4.0% is attributable to an increasing proportion of principals (i.e. investors and tenants) in our membership base, who convert to premium membership at a lower rate than the professional agents and brokers in the market. If our existing members choose not to use our services, decrease their use of our services, or change from being premium members to basic members, or we are unable to attract new members, listings on our site could be reduced, search activity on our website could decline, the usefulness of our services could be diminished, and we could incur significant expenses and/or experience declining revenues.

The value of our marketplace to our customers is dependent on increasing the number of property listings provided by and searches conducted by our members. To grow our marketplace, we must convince prospective members to use our services. Prospective members may not be familiar with our services and may be accustomed to using traditional methods of listing, searching, marketing and advertising commercial real estate. We cannot assure you that we will be successful in continuing to acquire more members, in continuing to convert free basic members into paying premium members or that our future sales efforts in general will be effective. Further, it is difficult to estimate the total

number of active commercial real estate agents, property owners, landlords, buyers and tenants in the United States during any given period. As a result, we do not know the extent to which we have penetrated this market. If we reach the point at which we have attempted to sell our services to a significant majority of commercial real estate transaction participants in the United States, we will need to seek additional products and markets in order to maintain our rate of growth of revenues and profitability.

We rely on our marketing efforts to generate new registered members. If our marketing efforts are ineffective, we could fail to attract new registered members, which could reduce the attractiveness of our marketplace to current and potential customers and lead to a reduction in our revenues.

We believe that the attractiveness of our services and products to our current and potential customers increases as we attract additional members who provide additional property listings or conduct searches on our marketplace. This is because an increase in the number of our members and the number of listings on our website increases the utility of our website and of its associated search, listing and marketing services. In order to attract new registered members, we rely on our marketing efforts, such as word-of-mouth referrals, direct marketing, online and traditional advertising, sponsoring and attending local industry association events, and attending and exhibiting at industry trade shows and conferences. There is no guarantee that our marketing efforts will be effective. If we are unable to effectively market our products and services to new customers, or convert existing basic members into premium members, our revenues and operating results could decline as a result of current premium members failing to renew their premium memberships and potential premium members failing to become premium members.

We may be unable to compete successfully with our current or future competitors.

The market to provide listing, searching and marketing services to the commercial real estate industry is highly competitive and fragmented, with limited barriers to entry. Our current or new competitors may adopt certain aspects of our business model, which could reduce our ability to differentiate our services. All of the services which we provide to our customers, including property and business listing, searching, and marketing services, are provided separately or in combination to our current or potential customers by other companies that compete with us. These companies, or new market entrants, will continue to compete with us. Listings in the commercial real estate industry are not marketed exclusively through any single channel, and accordingly our competition could aggregate a set of listings similar to ours. Increased competition could result in a reduction in our revenues or our rate of acquisition of new customers, or loss of existing customers or market share, any of which would harm our business, operating results and financial condition.

We compete with CoStar Group, Inc., a provider of information and research services to the commercial real estate market. Some of the services that CoStar offers directly compete with our product offering. For example, CoStar provides commercial real estate for sale and for lease property listings which compete directly with our online commercial real estate marketplace.

Several companies, such as Property Line International, Inc., have created online property listing services that compete with us. These companies aggregate property listings obtained through various sources, including from commercial real estate agents. In addition, newspapers typically include on their websites listings of commercial real estate for sale and for lease. If our current or potential customers choose to use these services rather than ours, demand for our services could decline.

Additionally, the National Association of REALTORS(C), or NAR, its local boards of REALTORS(C), affiliates such as CCIM, and other third parties have in the past created, and they or others may in the future create, commercial real estate information and listing services in partnership with companies such as Catylist Real Estate Software, Inc. These services could provide commercial real estate for sale and for lease property listings which compete directly with our online commercial real estate marketplace. If they succeed in attracting a significant number of commercial real estate transaction participants, demand for our services may decrease.

Large Internet companies that have large user bases and significantly greater financial, technical and marketing resources than we do, such as eBay Inc. and craigslist, Inc. provide commercial real estate listing or advertising services in addition to a wide variety of other products or services. eBay and craigslist operate real estate listing services which include commercial real estate and operating businesses. Other large Internet companies, such as Google, Yahoo! and Microsoft, have classified listing services which could be used to market and search for commercial real estate property listings. Competition by these companies could reduce demand for our services or require us to make additional expenditures, either of which could reduce our profitability.

If we are unable to obtain or retain listings from commercial real estate brokers, agents, and property owners, our marketplace could be less attractive to current or potential customers, which could result in a reduction in our revenues.

Our success depends substantially on the number of commercial real estate property listings submitted by brokers, agents and property owners to our online marketplace. The number of listings on our marketplace has grown from approximately 224,000 as of December 31, 2003 to approximately 460,000 as of December 31, 2006, and as of June 30, 2007, we had approximately 518,000 listings. If agents marketing large numbers of property listings, such as large brokers in key real estate markets, choose not to continue their listings with us, or choose to list them with a competitor, our website would be less attractive to other real estate industry transaction participants, thus resulting in cancelled premium memberships, failure to attract and retain new members, or failure to attract advertising and lead generation revenues.

Our operating results and revenues are subject to fluctuations that may cause our stock price to decline, and our quarterly financial results may be subject to seasonality, each of which could cause our stock price to decline.

Our revenues, expenses and operating results have fluctuated in the past and are likely to continue to do so in the future. Our revenues, expenses and operating results may fluctuate from quarter to quarter due to factors including those described below and elsewhere in this Quarterly Report on Form 10-Q:

	•		rates of member adoption and retention;

	•		changes in our marketing or other corporate strategies;

	•		our introduction of new products and services or changes to existing products and services;

	•		the amount and timing of our operating expenses and capital expenditures;

	•		the amount and timing of non-cash stock-based charges;

	•		costs related to acquisitions of businesses or technologies; and

	•		other factors outside of our control.

Our results of operations could vary significantly from quarter to quarter due to the seasonal nature of the commercial real estate industry. The timing of widely observed holidays and vacation periods, particularly slow downs during the end-of-year holiday period, and availability of real estate agents and related service providers during these periods could significantly affect our quarterly operating results during that period. For example, we have historically experienced a significant decline in the rate of growth of both new memberships and revenues during the fourth quarter.

These fluctuations or seasonality effects could negatively affect our results of operations during the period in question and/or future periods or cause our stock price to decline.

Our revenues, expenses and operating results could be affected by general economic conditions or by changes in commercial real estate markets, which are cyclical.

Our business is sensitive to trends in the general economy and trends in commercial real estate markets, which are unpredictable. Therefore, our operating results, to the extent they reflect changes in the broader commercial real estate industry, may be subject to significant fluctuations. A number of factors could have an effect on the commercial real estate industry, such as:

	•		periods of economic slowdown or recession globally, in the United States or locally;

	•		inflation;

	•		flows of capital into or out of real estate investment in the United States or various regions of the United States;

	•		rates of unemployment;

	•		interest rates;

	•		wage and salary levels; or

	•		concerns about any of the foregoing.

We believe that the commercial real estate industry is composed of many submarkets, each of which is influenced differently, and often in opposite ways, by various economic factors. We believe that commercial real estate submarkets can be differentiated based on factors such as geographic location, value of properties, whether properties are sold or leased, and other factors. Each such submarket may be affected differently by, among other things:

	•		economic slowdown or recession;

	•		changes in levels of rent or appreciation of asset values;

	•		changing interest rates;

	•		tax and accounting policies;

	•		the availability and cost of capital;

	•		costs of construction;

	•		increased unemployment;

	•		lower consumer confidence;

	•		lower wage and salary levels;

	•		war, terrorist attacks or natural disasters; or

	•		the public perception that any of these conditions may occur.

For example, as of June 30, 2007, more than 28% of our premium members were based in California and more than 13% were based in Florida. Negative conditions in these or other significant commercial real estate submarkets could disproportionately affect our business as compared to competitors who have less or different geographic concentration of their customers. Additionally, negative general economic conditions could reduce the overall amount of sale and leasing activity in the commercial real estate industry, and hence the demand for our services. Events such as a war or a significant terrorist attack are also likely to affect the general economy, which could cause a slowdown in the commercial real estate industry and therefore reduce utilization of our marketplace, which could reduce our revenue from premium members. In addition, the occurrence of any of the events listed above could increase our need to make significant expenditures to continue to attract customers to our marketplace.

If we are unable to introduce new or upgraded services or products that our customers recognize as valuable, we may fail to attract new customers or retain existing customers. Our efforts to develop new and upgraded products and services could require us to incur significant costs.

To continue to attract new members to our online marketplace, we may need to continue to introduce new products or services. We may choose to develop new products and services independently or choose to license or otherwise integrate content and data from third parties. For example, in early 2006 we introduced our RecentSales product and aerial imagery MapSearch feature to address perceived customer needs or to add additional searching enhancements, both of which utilize content and technology licensed from third parties. The introduction of these improvements imposed costs on our business and required the use of our resources, and there is no guarantee that we will continue to be able to access these technologies and content on commercially reasonable terms or at all. If customers or potential customers do not recognize the value of our new services or enhancements to existing services, they might choose not to become premium members or to otherwise utilize our marketplace.

Developing and delivering these new or upgraded services or products may impose costs and require the attention of our product and technology department and management. This process is costly, and we may experience difficulties in developing and delivering these new or upgraded services or products. In addition, successfully launching and selling a new service or product will require the use of our sales and marketing resources. Efforts to enhance and improve the ease of use, responsiveness, functionality and features of our existing products and services have inherent risks, and we may not be able to manage these product developments and enhancements successfully. If we are unable to continue to develop new or upgraded services or products, then our customers may choose not to use our products or services.

We could face liability for information on our website.

We provide information on our website, including commercial real estate listings, that is submitted by our customers and third parties. We also allow third parties to advertise their products and services on our website and include links to third-party websites. We could be exposed to liability with respect to this information. Customers could assert that information concerning them on our website contains errors or omissions and third parties could seek damages for losses incurred if they rely upon incorrect information provided by our customers or advertisers. We could also be subject to claims that the persons posting information on our website do not have the right to post such information or are infringing the rights of third parties. For example, in 1999 CoStar sued us, claiming that we had directly and indirectly infringed their copyrights in photographs by permitting our members to post those photographs on our website. Although the court issued rulings that were favorable to us in that litigation, other persons might assert similar or other claims in the future. Among other things, we might be subject to claims that by directly or indirectly providing links to websites operated by third parties, we would be liable for wrongful actions by the third parties operating those websites. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against these claims.

The Digital Millennium Copyright Act, or DMCA, allows copyright owners to obtain subpoenas compelling disclosure by an Internet service provider of the names of customers of that Internet service provider. We have been served with such subpoenas in the past, and may in the future be served with additional such subpoenas. Compliance with subpoenas under the DMCA may divert our resources, including the attention of our management, which could impede our ability to operate our business.

Our potential liability for information on our websites or distributed by us to others could require us to implement additional measures to reduce our exposure to such liability, which may require us to expend substantial resources and limit the attractiveness of our online marketplace to users. Our general liability insurance may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed.

If we are unable to convince commercial real estate brokers and other commercial real estate professionals that our services and products are superior to traditional methods of listing, searching, and marketing commercial real estate, they could choose not to use our marketplace, which could reduce our revenues or increase our expenses.

A primary source of new customers for us is the commercial real estate professional community. Many commercial real estate professionals are used to listing, searching and marketing real estate in traditional ways, such as through the distribution of print brochures,

sharing of written lists, placing signs on properties, word-of-mouth, and newspaper advertisements. Commercial real estate professionals may prefer to continue to use traditional methods or may be slow to adopt our products and services. If we are not able to continue to persuade commercial real estate professionals of the efficacy of our products and services, they may choose not to use our marketplace, which could reduce our revenues. In addition, we could be required to increase our marketing and other expenditures to continue our efforts to attract these potential customers.

We may be unable to effectively manage our growth.

As our operations have expanded, we have experienced rapid growth in our headcount. Our overall employee base has grown from 71 employees as of December 31, 2003 to 198 employees as of December 31, 2006 and we had 224 employees as of June 30, 2007. We expect to continue to increase headcount in the future. Our rapid growth has demanded, and will continue to demand, substantial resources and attention from our management. We will need to continue to hire additional qualified software engineers, client and account services personnel, and sales and marketing staff and improve and maintain our technology to properly manage our growth. If we do not effectively manage our growth, our customer service and responsiveness could suffer and our costs could increase, which could harm our brand, increase our expenses, and reduce our profitability.

Our business depends on retaining and attracting capable management and operating personnel.

Our success depends in large part on our ability to retain and attract high-quality management and operating personnel, including our President, Chief Executive Officer and Chairman of the Board of Directors, Richard J. Boyle, Jr.; our Chief Financial Officer and Senior Vice President, Finance and Administration, Brent Stumme; our Chief Marketing Officer and Senior Vice President, Marketing and Sales, Thomas Byrne; our Chief Product Officer and Senior Vice President, Business and Product Development, Jason Greenman; and our Chief Technology Officer and Senior Vice President, Information Technology, Wayne Warthen. Our business plan was developed in large part by our senior-level officers, and its implementation requires their skills and knowledge. We may not be able to offset the impact on our business of the loss of the services of Mr. Boyle or other key officers or employees. We have no employment agreements that prevent any of our key personnel from terminating their employment at any time, and we do not maintain any “key-person” life insurance for any of our personnel.

Furthermore, our business requires skilled technical, management, product and technology, and sales and marketing personnel, who are in high demand and are often subject to competing offers. Competition for qualified employees is intense in our industry, and the loss of a substantial number of qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for the expansion of our activities, could harm our business. To retain and attract key personnel, we use various measures, including an equity incentive program and incentive bonuses for key executive officers and other employees. These measures may not be enough to attract and retain the personnel we require to execute our business plan.

If we fail to protect confidential information against security breaches, or if our members or potential members are reluctant to use our marketplace because of privacy concerns, we might face additional costs, and activity in our marketplace could decline.

As part of our membership registration process, we collect, use and disclose personally identifiable information, including names, addresses, phone numbers, credit card numbers and email addresses. Our policies concerning the collection, use and disclosure of personally identifiable information are described on our websites. While we believe that our policies are adequate and that we are in compliance with our policies, we could be subject to legal claims, government action or harm to our reputation if actual practices fail to comply or are seen as failing to comply with our policies or with local, state or federal laws concerning personally identifiable information or if our policies are inadequate to protect the personally identifiable information that we collect.

Concern among prospective customers regarding our use of the personal information collected on our websites could keep prospective customers from using our marketplace. Industry-wide incidents or incidents with respect to our websites, including misappropriation of third-party information, security breaches, or changes in industry standards, regulations or laws could deter people from using the Internet or our website to conduct transactions that involve the transmission of confidential information, which could harm our business. Under California law and the laws of a number of other states, if there is a breach of our computer systems and we know or suspect that unencrypted personal customer data has been stolen, we are required to inform any customers whose data was stolen, which could harm our reputation and business.

In addition, another California law requires businesses that maintain personal information about California residents in electronic databases to implement reasonable measures to keep that information secure. To date, there are no cases or regulations that give any guidance as to the minimum scope that will be deemed necessary to satisfy that requirement. Our practice is to encrypt all personal information, but we do not know whether our current practice will be deemed sufficient under the new California law. Other states have enacted different and sometimes contradictory requirements for protecting personal information collected and maintained electronically. Compliance with numerous and contradictory requirements of the different states is particularly difficult for an online business such as ours which collects personal information from customers in multiple jurisdictions.

Another consequence of failure to comply is the possibility of adverse publicity and loss of consumer confidence were it known that we did not take adequate measures to assure the confidentiality of the personally identifiable information that our customers had given to us. This could result in a loss of customers and revenue that could jeopardize our success. While we intend to comply fully with all relevant laws and regulations, we cannot assure you that we will be successful in avoiding all potential liability or disruption of business in the event that we do not comply in every instance or in the event that the security of the customer data that we collect is compromised, regardless of whether our practices comply or not. If we were required to pay any significant amount of money in satisfaction of claims under these laws or if we were forced to cease our business operations for any length of time as a result of our inability to comply fully with any such laws, our business, operating results and financial condition could be adversely affected. Further, complying with the applicable notice requirements in the event of a security breach could result in significant costs.

Our services may infringe the intellectual property rights of others and we may be subject to claims of intellectual property rights infringement.

We may be subject to claims against us alleging infringement of the intellectual property rights of others, including our competitors. Any intellectual property claims, regardless of merit, could be expensive to litigate or settle and could significantly divert our management’s attention from other business concerns.

Our technologies and content may not be able to withstand third-party claims of infringement. If we were unable to successfully defend against such claims, we might have to pay damages, stop using the technology or content found to be in violation of a third party’s rights, seek a license for the infringing technology or content, or develop alternative noninfringing technology or content. Licenses for the infringing technology or content may not be available on reasonable terms, if at all. In addition, developing alternative noninfringing technology or content could require significant effort and expense. If we cannot license or develop technology or content for any infringing aspects of our business, we may be forced to limit our service offerings. Any of these results could reduce our ability to compete effectively and harm our business.

Our trademarks are important to our business. Other companies may own, obtain or claim trademarks that could prevent, limit or interfere with our use of trademarks. If we were unable to use our trademarks, we would need to devote substantial resources toward developing different brand identities.

If we are unable to enforce or defend our ownership and use of intellectual property, our business, competitive position and operating results could be harmed.

The success of our business depends in large part on our intellectual property, and our intellectual property rights, including existing and future trademarks, trade secrets, and copyrights, are and will continue to be valuable and important assets of our business. Our business could be significantly harmed if we are not able to protect the content of our databases and our other intellectual property.

We have taken measures to protect our intellectual property, such as requiring our employees and consultants with access to our proprietary information to execute confidentiality agreements. We also have taken action, and in the future may take action against, competitors or other parties who we believe to be infringing our intellectual property. We may in the future find it necessary to assert claims regarding our intellectual property. These measures may not be sufficient or effective to protect our intellectual property.

We also rely on laws, including those regarding patents, copyrights, and trade secrets, to protect our intellectual property rights. Current laws may not adequately protect our intellectual property or our databases and the data contained in them. In addition, legal standards relating to the validity, enforceability and scope of protection of proprietary rights in Internet-related businesses are uncertain and evolving, and we cannot assure you of the future viability or value of any of our proprietary rights.

Others may develop technologies that are similar or superior to our technology. Any significant impairment of our intellectual property rights could require us to develop alternative intellectual property, incur licensing or other expenses, or limit our product and service offerings.

If we are not able to successfully identify or integrate future acquisitions, our management’s attention could be diverted, and efforts to integrate future acquisitions could consume significant resources.

We may in the future further expand our markets and services in part through acquisitions of, or investments in, other complementary businesses, services, databases and technologies. For example, in October, 2004, we acquired BizBuySell, an online marketplace for operating businesses for sale, in June, 2007, we acquired a minority position in Xceligent, Inc. and on August 2, 2007, we acquired Cityfeet.com Inc. Mergers and acquisitions are inherently risky, and we cannot assure you that our acquisitions will be successful. The successful execution of any future acquisition strategy will depend on our ability to identify, negotiate, complete and integrate such acquisitions and, if necessary, obtain satisfactory debt or equity financing to fund those acquisitions. Failure to manage and successfully integrate acquired businesses could harm our business. Acquisitions involve numerous risks, including the following:

	•		difficulties in integrating the operations, technologies, and products of the acquired companies;

	•		diversion of management’s attention from normal daily operations of the business;

	•		inability to maintain the key business relationships and the reputations of acquired businesses;

	•		entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;

	•		dependence on unfamiliar affiliates and partners;

	•		insufficient revenues to offset increased expenses associated with acquisitions;

	•		reduction or replacement of the sales of existing services by sales of products or services from acquired lines of business;

	•		responsibility for the liabilities of acquired businesses;

	•		inability to maintain our internal standards, controls, procedures and policies; and

	•		potential loss of key employees of the acquired companies.

We may also incur costs, and divert our management’s attention from our business, by pursuing potential acquisitions or other investments which are never consummated.

Although we undertake a due diligence investigation of each business that we acquire, there may be liabilities of the acquired companies that we fail to or are unable to discover during the due diligence investigation and for which we, as a successor owner, may be responsible. In connection with acquisitions, we generally seek to minimize the impact of these types of potential liabilities through indemnities and warranties from the seller, which may in some instances be supported by deferring payment of a portion of the purchase price. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to limitations in scope, amount or duration, financial limitations of the indemnitor or warrantor or other reasons.

In addition, if we finance or otherwise complete acquisitions or other investments by issuing equity or convertible debt securities, our existing stockholders may be diluted.

Unless we develop, maintain and protect our brand identity, our business may not grow and our financial results may suffer.

In an effort to obtain additional registered members and increase use of our online marketplace by commercial real estate transaction participants, we intend to continue to pursue a strategy of enhancing our brand both through online advertising and through traditional print media and to increase our marketing and business development expenditures to maintain and enhance our brand in the future. These efforts can involve significant expense and may not have a material positive impact on our brand identity. In addition, maintaining our brand will depend on our ability to provide products and services that are perceived as being high-value, which we may not be able to implement successfully. If we are unable to maintain and enhance our brand, our ability to attract and retain customers or successfully expand our operations will be harmed.

If we are unable to effectively implement enhanced systems and internal controls, we may incur increased general and administrative costs, which could reduce our profitability, and investor confidence in us may decrease, which could cause our stock price to decline.

As we grow, our success will depend on our ability to continue to implement and improve our operational, financial and management information and control systems on a timely basis, together with maintaining effective cost controls, in order to comply with the more stringent requirements of being a public company, such as the requirements of Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, which require management to evaluate and assess the effectiveness of our internal controls and our disclosure controls and procedures. We are continuing to evaluate and, where appropriate, enhance our systems, procedures and internal controls. If our systems, procedures or controls are not adequate to support our operations and reliable, accurate and timely financial and other reporting, we may not be able to successfully satisfy regulatory and investor scrutiny, offer our services and implement our business plan. The implementation of these new systems, procedures and controls will likely increase our general and administrative costs in 2007 and thereafter. If we fail to effectively implement these new systems, procedures and controls, investors may choose not to invest in us, which could cause our stock price to decline.

Changes in or interpretations of accounting rules and regulations, such as expensing of stock options, could result in unfavorable accounting charges or require us to change our compensation policies.

In the first quarter of 2006, we adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R), which revises SFAS 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123R requires that share-based payment transactions with employees be recognized in the financial statements based on their value and recognized as compensation expense over the vesting period. Prior to FAS 123R we disclosed the pro forma effects of FAS 123 under the minimum value method. We adopted SFAS 123R effective January 1, 2006, prospectively for new equity awards issued subsequent to January 1, 2006. As a result of SFAS 123R, we may choose to reduce our reliance on stock options as a compensation tool. If we reduce our use of stock options and do not adopt other forms of compensation, it may be more difficult for us to attract and retain qualified employees. If we do not reduce our reliance on stock options, our operating expenses would increase. We currently rely on stock options to retain existing employees and attract new employees. Although we believe that our accounting practices are consistent with current accounting pronouncements, changes to or interpretations of accounting methods or policies in the future may require us to or interpretations of accounting methods or policies in the future may require us to adversely revise how our consolidated financial statements are prepared.

If our operating results do not meet the expectations of investors or equity research analysts, our market price may decline and we may be subject to class action litigation.

It is possible that in the future our operating results will not meet the expectations of investors or equity research analysts, causing the market price of our common stock to decline. In the past, companies that have experienced decreases in the market price of their stock have been subject to securities class action litigation. A securities class action lawsuit against us could result in substantial costs and divert our management’s attention from other business concerns.

If our website or our other services experience system failures, our customers may be dissatisfied and our operations could be impaired.

Our business depends upon the satisfactory performance, reliability and availability of our website. Problems with our website could result in reduced demand for our services. Furthermore, the software underlying our services is complex and may contain undetected errors. Despite testing, we cannot be certain that errors will not be found in our software. Any errors could result in adverse publicity, impaired use of our services, loss of revenues, cost increases or legal claims by customers.

Additionally, our services substantially depend on systems provided by third parties, over whom we have little control. Interruptions in our services could result from the failure of data providers, telecommunications providers, or other third parties. We depend on these third-party providers of Internet communication services to provide continuous and uninterrupted service. We also depend on Internet service providers that provide access to our services. Any disruption in the Internet access provided by third-party providers or any failure of third-party providers to handle higher volumes of user traffic could harm our business.

Our internal network infrastructure could be disrupted or penetrated, which could materially impact our ability to provide our services and our customers’ confidence in our services.

Our operations depend upon our ability to maintain and protect our computer systems, most of which are located in redundant and independent systems in Los Angeles, California and San Francisco, California. In addition, our BizBuySell website is hosted at a co-location facility in Virginia. While we believe that our systems are adequate to support our operations, our systems may be vulnerable to damage from break-ins, unauthorized access, vandalism, fire, floods, earthquakes, power loss, telecommunications failures and similar events. Although we maintain insurance against fires, floods, and general business interruptions, the amount of coverage may not be adequate in any particular case. Furthermore, any damage or disruption could materially impair or prohibit our ability to provide our services, which could significantly impact our business.

Experienced computer programmers, or hackers, may attempt to penetrate our network security from time to time. Although we have not experienced any security breaches to date and we maintain a firewall, a hacker who penetrates our network security could misappropriate proprietary information or cause interruptions in our services. We might be required to expend significant capital and resources to protect against, or to alleviate, problems caused by hackers. We also may not have a timely remedy against a hacker who is able to penetrate our network security. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could expose us to litigation or to a material risk of loss. Any of these incidents could materially impact our ability to provide our services as well as materially impact the confidence of our customers in our services, either of which could significantly impact our business.

We may be subject to regulation of our advertising and customer solicitation or other newly-adopted laws and regulations.

As part of our membership registration process, our customers agree to receive emails and other communications from us. However, we may be subject to restrictions on our ability to communicate with our customers through email and phone calls. Several jurisdictions have proposed or adopted privacy-related laws that restrict or prohibit unsolicited email or “spam.” These laws may impose significant monetary penalties for violations. For example, the CAN-SPAM Act of 2003, or CAN-SPAM, imposes complex and often burdensome requirements in connection with sending commercial email. Key provisions of CAN-SPAM have yet to be interpreted by the courts. Depending on how it is interpreted, CAN-SPAM may impose burdens on our email marketing practices or services we offer or may offer. Although CAN-SPAM is thought to have pre-empted state laws governing unsolicited email, the effectiveness of that preemption is likely to be tested in court challenges. If any of those challenges are successful, our business may be subject to state laws and regulations that may further restrict our email marketing practices and the services we may offer. The scope of those regulations is unpredictable. Compliance with laws and regulations of different jurisdictions imposing different standards and requirements is very burdensome for an online business. Our business, like most online businesses, offers products and services to customers in multiple state jurisdictions. Our business efficiencies and economies of scale depend on generally uniform service offerings and uniform treatment of customers. Compliance requirements that vary significantly from jurisdiction to jurisdiction impose an added cost to our business and increased liability for compliance deficiencies. In addition, laws or regulations that could harm our business could be adopted, or reinterpreted so as to affect our activities, by the government of the United States, state governments, regulatory agencies or by foreign governments or agencies. This could include, for example, laws regulating the source, content or form of information or listings provided on our websites, the information or services we provide or our transmissions over the Internet. Violations or new interpretations of these laws or regulations may result in penalties or damage our reputation or could increase our costs or make our services less attractive.

An important aspect of the new Internet-focused laws is that where federal legislation is absent, states have begun to enact consumer-protective laws of their own and these vary significantly from state to state. Thus, it is difficult for any company to be sufficiently aware of the requirements of all applicable state laws; and it is further difficult or impossible for any company to fully comply with their inconsistent standards and requirements. In addition to the consequences that could result from violating one or another state’s laws, the cost of attempting to comply will be considerable. Also, as our business grows to be world-wide, we will be required to comply with the laws of all foreign countries; and the costs of that compliance effort will be considerable.

Our stock price may be volatile and you may be unable to sell your shares at or above the purchase price.

The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this section of this Quarterly Report on Form 10-Q, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us.

Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock.

In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

Our amended and restated certificate of incorporation and our bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

	•		providing for a classified board of directors with staggered, three-year terms;

	•		not providing for cumulative voting in the election of directors;

	•		authorizing the board to issue, without stockholder approval, preferred stock rights senior to those of common stock;

	•		prohibiting stockholder action by written consent;

	•		limiting the persons who may call special meetings of stockholders; and

	•		requiring advance notification of stockholder nominations and proposals.

In addition, the provisions of Section 203 of the Delaware General Corporate Law govern us. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.

These and other provisions in our amended and restated certificate of incorporation, our bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

We had no issuance of unregistered securities during the three months ended June 30, 2007.

On June 6, 2006, the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (File No. 333-132138) for our initial public offering. The net offering proceeds received by us in the offering after deducting total estimated expenses, including the underwriters’ discount were $42,309,000.

We have no current specific plan for the use of the proceeds of the offering or a significant portion thereof.

We have invested all of the net proceeds from the offering in short-term, investment-grade securities. We cannot predict whether the net proceeds invested will yield a favorable return.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

a) Annual meeting

Our annual meeting was held on May 23, 2007.

c) Matters voted upon at the meeting and the results of each vote

1. The election of the nominees for the Board of Directors who will serve a term to expire at the 2010 Annual Meeting of Stockholders. The nominees, both of whom were elected, were William Byrnes and Thomas E. Unterman.

The Inspector of Election certified the following vote tabulations:


Directors:	Votes For		Votes Withheld
William Byrnes		33,766,104		492,315
Thomas E. Unterman		33,760,239		498,180

2. A proposal to ratify the selection of Ernst & Young LLP as independent registered public accounting firm for the Company for fiscal year 2007 was approved by the stockholders.

The Inspector of Election certified the following vote tabulations:


For	Against		Abstaining		Broker Nonvotes
34,221,501		35,300		1,608		0

3. A proposal to ratify the material terms of the Company’s 2006 Equity Incentive Plan was approved by the stockholders.

The Inspector of Election certified the following vote tabulations:


For	Against		Abstaining		Broker Nonvotes
27,036,140		1,422,612		57,572		5,742,095

Item 5. Other Information.

Item 6. Exhibits.

Note 5 — Subsequent Event

Exhibits:


31.1		Rule 13a-14(a) Certification (CEO)

31.2		Rule 13a-14(a) Certification (CFO)

32.1		Section 1350 Certification (CEO)

32.2		Section 1350 Certification (CFO)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	LOOPNET, INC.
Date: August 3, 2007	By:	/s/ Richard J. Boyle, Jr.
		Richard J. Boyle, Jr.
		President, Chief Executive Officer, and Chairman of the Board of Directors Principal Executive Officer


Date: August 3, 2007	By:	/s/ Brent Stumme
		Brent Stumme
		Chief Financial Officer and Senior Vice President, Finance and Administration Principal Financial or Accounting Officer

EXHIBIT INDEX

31.1		Rule 13a-14(a) Certification (CEO)

31.2		Rule 13a-14(a) Certification (CFO)

32.1		Section 1350 Certification (CEO)

32.2		Section 1350 Certification (CFO)

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