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Item 8. Financial Statements and Supplementary Data

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Commission file number 001-33634

DemandTec, Inc.
(Exact Name of Registrant as Specified in Its Charter)

One Franklin Parkway, Building 910
San Mateo, California 94403
(Address of Principal Executive Offices)

(650) 645-7100
(Registrant's Telephone Number)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Securities registered pursuant to Section 12(g) of the Exchange Act:
None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No ý

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

         As of August 31, 2010, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of shares of the registrant's common stock held by non-affiliates of the registrant (based upon the closing sale price of $7.46 per share on the NASDAQ Global Market on such date) was approximately $160.5 million.

         As of April 15, 2011, there were 32,298,956 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant's definitive proxy statement for its 2011 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by reference in Part III of this Report on Form 10-K. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K.

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DemandTec, Inc.

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PART I

        This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Please see the section entitled "Forward-Looking Statements" in Item 7 of this Annual Report on Form 10-K for important information to consider when evaluating these statements.

Item 1.    Business

Overview

        We provide a collaborative optimization network of software services connecting retailers and consumer products, or CP, companies, enabling them to define category, brand, and shopper marketing strategies based on a scientific understanding of consumer behavior and make actionable pricing, promotion, assortment, space and other merchandising and marketing decisions to achieve their revenue, profitability, sales volume, and customer loyalty objectives. We deliver our solutions by means of a software-as-a-service, or SaaS, model, which allows us to capture and analyze the most recent retailer and market-level data, enhance our software services rapidly to address our customers' ever-changing merchandising and marketing needs, and connect retailers and CP companies online to enable improved, more collaborative business processes between these trading partners. We were incorporated in November 1999.

        Our solutions consist of software services and complementary consulting and analytical services derived from a uniform platform that supports our software services. We offer our solutions individually or as a suite of integrated software services.

        Our solutions for the retail and CP industries include:

•

DemandTec Lifecycle Price Optimization™, enabling retailers to strategically price items at any stage in their lifecycle, including new items, regular items, promoted items, and clearance items.



•

DemandTec End-to-End Promotion Management™, enabling retailers to manage the complex processes related to retail promotions, from collaborative promotion planning and CP vendor deal management to in-store promotion execution and post-event analysis.



•

DemandTec Assortment & Space™, enabling retailers to create localized assortments by store, cluster, or section, based on shopper demographics, the competitive environment, and a science-based, quantitative understanding of each item's ability to add variety and grow incremental sales in the category.



•

DemandTec Shopper Insights™, a collection of services that enable retailers to better understand key shopper insights, define shopper segments, and plan shopper merchandising and marketing programs for different consumer segments in order to build loyalty, increase sales, and improve profitability.



•

DemandTec Targeted Marketing™, a collection of services that enable retailers and their CP trading partners to better understand key shopper insights, define shopper segments, and plan segment-targeted shopper merchandising and marketing programs to build loyalty, increase sales, and improve profitability.



•

DemandTec Marketing Plan Optimization™, enabling CP executive and brand managers to develop strategic marketing investment allocation decisions and optimize marketing mix decisions across the spectrum of trade and consumer promotion vehicles.



•

DemandTec Total Trade Optimization™, enabling CP companies to optimize and manage the full spectrum of trade funds decisions including strategic trade planning, customer trade planning, deal management and negotiation with retailers, and post-event analytics.

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•

DemandTec Shopper Marketing Optimization™, enabling CP companies to receive valuable shopper insights and to make informed assortment planning decisions leveraging retail customer data and collaborative business processes on the DemandTec network.



•

DemandTec Connect™, enabling retailers and CP companies to collaborate using social messaging and networking capabilities that link intra-company and inter-company groups of users together on the DemandTec network.

        DemandTec provides these software solutions, as well as insights and value-added qualitative content, in an online network where our approximately 16,000 users log in to do business every day. DemandTec is the collaborative optimization network where retailers and CP companies go to log in, access content from DemandTec and DemandTec partners, collaborate both internally within their company and externally with trading partners, analyze insights about consumer behavior and their own businesses, and ultimately make and optimize decisions across a variety of business processes. The DemandTec network is unique in the industry and provides the infrastructure, security, connectivity and services for retailers and CP companies to effectively collaborate on core merchandising, sales, and marketing activities.

        In March 2011, we acquired M-Factor, Inc. ("M-Factor"), a provider of predictive analytics software for marketing mix and trade investment spending. In December 2010, we acquired substantially all of the assets of Applied Intelligence Solutions, LLC ("AIS"), a provider of intelligent software solutions for retail enterprises with a specific focus on softlines retailers.

Industry Background

        Retail trade is one of the world's most widespread activities. There are more than 1,500 retailers worldwide that have annual sales in excess of $500 million, and more than 250 of those retailers have annual sales in excess of $3 billion. Retailing is highly competitive and generally characterized by low profit margins. Furthermore, there are more than 1,300 CP companies worldwide that have annual revenues in excess of $500 million that sell to retailers. The CP industry is becoming increasingly competitive due to factors such as retailer consolidation, more discerning and less loyal consumers, and the growing impact of private label products. To counter these trends, CP companies are making substantial investments in product innovation, market research, branding, and consumer and brand marketing.

Consumer Demand and Retail Merchandising Challenges

        Retailers compete for consumers who are becoming more knowledgeable, more selective and, in many instances, more price sensitive. Consumers today devote considerable time to researching products and comparing prices prior to shopping and have a greater array of choices in price, size, brand, color and features. The growth of discount stores, warehouse clubs, dollar stores and the emergence of the Internet as a viable retail destination offer consumers further alternatives when purchasing goods. Adverse macroeconomic conditions in recent years, including unemployment, housing market declines, volatile fuel prices, and an increasing shift from spending to saving for some families, have further increased the average consumer's price sensitivity. For retailers to compete effectively, they need to better understand and respond to these changes in consumer demand and behavior through targeted pricing, marketing and merchandising strategies.

        A basic principle of economics is that a change in the price of an item will affect demand for that item. Every item in a store has a unique "price elasticity," or sensitivity between sales volume and price. Small decreases or increases in the prices of some items may lead to significant changes in the demand for those items, whereas larger decreases or increases in the prices of other items may have little effect on demand. In addition, changes in the prices of items in a store often have an impact on the sales volumes of other items in that store. This interdependence is referred to as the "cross elasticity" of demand. Demand is influenced by a wide variety of additional factors, including store location, customer demographics, advertising, in-store displays, the availability of complementary or substitute products, seasonality,

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competitive activity and loyalty and marketing programs. These variables make calculating price elasticity for even a single item an extremely data-intensive and complex process. Calculating the cross-elasticity of demand for thousands of items is exponentially more difficult.

        Applying these economic concepts to make day-to-day pricing decisions presents enormous challenges to retailers of all sizes, particularly large retailers that sell tens of thousands of items and have hundreds, if not thousands, of stores. These retailers must determine how to price each particular item and whether to vary the price among different regions or individual locations. They also must determine the price of each item relative to competing products and the likely impact on their aggregate profitability if the prices of that item or competing items are increased or decreased.

        Consumer demand, though, is driven by more than just the everyday price of an item. In addition, retailers may want to consider whether promoting an item would result in increased sales volume and, if so, whether that increase would represent incremental revenue or merely cannibalize sales of other items. Retailers must also determine which items should be stocked, by store or store cluster. These pricing, inventory, and marketing decisions must also strike a balance between the retailer's financial goals and its desired price and brand image in order to enhance consumer loyalty and maximize sustainable, lifetime value from its customers.

        Consumer demand also differs by consumer segment. Not all consumers are price sensitive to certain brands or respond similarly to particular promotions. Understanding and predicting demand in today's market requires retailers to analyze the differences between various segments of shoppers in their stores. Shopper segments with descriptive names such as "budget families," "young, urban, and affluent," or "foodies" can reflect differences in demographics. However, retailers now must also analyze the purchase decisions and other shopping behaviors of individual consumers in order to properly define consumer segments and identify strategies and tactics to target those segments.

Consumer Demand and CP Company Challenges

        CP companies also compete for consumers. CP companies must make complex decisions when distributing, pricing, and promoting their products. CP companies are faced with rising costs, intense competition, waning consumer loyalty, strong and divergent retailer strategies, and an operating environment in which it is difficult, but sometimes necessary, to raise prices. As ingredient and fuel costs escalate and competitive threats intensify, predicting the relative impact that promotion and everyday price activities will have on volume and margin objectives is an essential planning requirement. CP companies must understand how consumers will respond to promotions, how price changes will affect sales volumes and how often to promote their brands. CP companies also must decide when and how to use trade funds in the form of discounts, offsets or direct cash payments to compensate retailers for offering temporary price reductions on their products and how competitive trade plans will impact their own promoted items, their total portfolio and even the retailer's entire category. According to Capgemini, most CP companies' trade promotion budgets represent 15% or more of their net sales, which is second in magnitude only to their cost of goods sold. In 2008, CP companies globally spent over $175 billion on trade promotions according to a 2009 report by Cannondale Associates, Inc. Despite the pervasive use of trade funds, studies suggest that over 50% of trade promotions have negative returns on investment after taking into consideration execution costs and unintended cannibalization.

        The trade promotion process is often not only generally unprofitable, but also highly inefficient. Submitting and negotiating trade promotions historically have been handled through a combination of fax, voicemail and manual, paper-based processes. This has led to frequent inaccuracies and increasing costs for both CP companies and retailers. CP companies and retailers have lacked an accurate, common, and integrated technology platform for improving the efficiency of their trading relationships.

        In order to attain higher revenue growth, improve profit margins and increase market share, while maintaining proper price and brand image, retailers and CP companies must better understand and predict

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consumer behavior across geographic, demographic, gender, age, income and other segments. However, achieving these objectives through day-to-day pricing and other merchandising and marketing decisions is extremely complex.

Alternative Approaches to Understanding Consumer Demand

        Over the last 20 years, retailers and CP companies have made significant investments in information technology, or IT. Most of these IT investments have focused on achieving cost reductions through increased operational efficiencies and transaction automation, including supply chain management, point of sale, or POS, systems, and marketing automation software.

        As a result of these IT investments, retailers have accumulated vast amounts of sales data. While a number of academic techniques exist to analyze this data, incorporating advanced statistical analytics into a commercially-useful software solution that yields meaningful and actionable insights at the point of decision for retailers and CP companies presents significant scientific, engineering, processing and cost challenges due to the vast amounts of data and the complexities of the required mathematical computing actions. Consequently, existing approaches that incorporate an understanding of consumer demand into retail and CP pricing decisions generally have been limited to modeling sample data sets to provide limited insights. As a result, retailers and CP companies historically have made merchandising, sales, and marketing decisions based on simpler approaches such as:

•

cost-plus or competitor-matching pricing;



•

national pricing of items, regardless of local consumer demand and competitive dynamics;



•

"one-size-fits-all" assortments of goods, regardless of the unique preferences of consumers who shopped in each location;



•

habitual promotions, advertisements, mailers and other marketing programs; and



•

engaging boutique business consultants to provide isolated category-based analyses.

        In recent years, retailers have engaged consultants and used internal data warehousing systems to begin analyzing market basket information and loyalty card data in order to learn new insights about customers, how they shop, what they buy together, and what their lifestyles, preferences, and future behaviors might be. These efforts have been both time- and people-intensive, and have not sufficiently involved the business users requiring those insights to make timely decisions.

        In the current environment, retailers and CP companies need scalable enterprise software capable of modeling the numerous variables that affect consumer demand, processing massive data sets in a cost-effective manner, presenting valuable shopper insights right at the point of decision, and delivering actionable merchandising and marketing recommendations that help them achieve their revenue, profitability, sales volume, and customer loyalty objectives.

DemandTec Solution

        Our online collaborative optimization network of software services enables retailers and CP companies to define category, brand, and customer strategies based on a scientific understanding of consumer behavior and make actionable pricing, promotion, assortment, space and other merchandising, sales, and marketing recommendations to achieve their revenue, profitability, sales volume, and customer loyalty objectives. The DemandTec network of software and other services is a destination for our customers, an online environment made possible by our SaaS model that allows us to capture and analyze the most recent retailer and market-level data, enhance our software services rapidly to address our customers' ever-changing merchandising and marketing needs, and provide best practices content, social

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messaging features, and other community features to better connect our approximately 16,000 users as they collaborate on business decisions. Our solutions enable retailers and CP companies to:

Understand and predict consumer behavior to make merchandising and marketing decisions that achieve revenue, profitability, sales volume, and customer loyalty objectives

        Our software services enable retailers and CP companies to incorporate a scientific understanding of consumer demand into their day-to-day merchandising, sales, and marketing decision-making processes in order to meet their business objectives. Specifically, our software services allow retailers and CP companies to:

•

make daily pricing, promotion, assortment, space and other merchandising and marketing decisions based on the ability to understand, predict, and influence consumer demand;



•

balance financial goals with price and brand image in order to maximize the lifetime value of their targeted consumer segments;



•

use shopper insights based on analyzing loyalty card data to define and execute merchandising and marketing tactics targeted and tailored to meet the needs of individual consumer segments;



•

enforce pricing rules consistently;



•

forecast sales more accurately;



•

devise more targeted promotions based on consumer segmentation insights;



•

create, version and publish targeted advertisements to be distributed via multiple channels and media vehicles;



•

make strategic marketing investment allocation decisions on a continuous, dynamic basis;



•

develop optimal allocations of marketing funds across the spectrum of trade and consumer vehicles; and



•

manage the full spectrum of strategic and tactical trade planning decisions to better support retail customers.

Incorporate scalable science into merchandising and marketing decision-making processes

        We incorporate advanced econometric modeling techniques and optimization theory into scalable software services that our customers use to make day-to-day merchandising and marketing decisions. Our software automates the process of predicting consumer response to various merchandising and marketing activities, such as pricing, promotion, assortment, space, loyalty programs and media. Our proprietary demand models quantify consumer response at the individual store and item levels based on a number of factors, including store location, consumer demographics, advertising, in-store displays, the availability of complementary and substitute products, seasonality, competitive activity and loyalty and marketing programs. Our software incorporates optimization science that uses a combination of complex algorithms to help our customers determine in real-time the prices, promotions, and markdowns, and assortments that best accomplish their merchandising and marketing objectives, while complying with their business rules.

Leverage technological advancements through a SaaS delivery model that enables us to adapt to our customers' changing business needs, deliver results quickly, and create an online community

        Our investment in the SaaS model leverages a set of pervasive technology trends that includes the availability of greater amounts of computing power at commercially affordable and decreasing prices, dramatic reductions in the cost of data storage and inexpensive and secure access to broadband communication networks. This model represents a dramatic shift from developing and delivering static,

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highly-customized software code that is installed at the customer's site and requires frequent maintenance cycles. Due to the dynamic nature of consumer demand and the changing merchandising and marketing objectives of retailers and CP companies, we believe a solution is delivered most effectively through a SaaS model. By delivering our software as a service, we are able to:

•

capture and analyze the most current transaction-log/loyalty data from retailers, as well as up-to-date market-level data, syndicated data and other third-party demographic content, in order to better understand the dynamic nature of consumer behavior;



•

intimately understand how our customers use our software to make their day-to-day merchandising and marketing decisions so we can continuously enhance our offering to address our customers' business needs;



•

improve user productivity with more frequent but smaller incremental updates and training courses;



•

deliver technical enhancements to our software on a frequent and predictable schedule with little or no disruption to our customers' operations;



•

utilize grid computing and service-oriented-architecture, or SOA, techniques to maximize scalability and processing capacity; and



•

enable interoperability across our customers' diverse legacy systems.

        By delivering our software as a service, we enable our customers to make better pricing, promotion, trade funds management and other day-to-day merchandising, sales, and marketing decisions. With our SaaS model, our customers are able to achieve measurable financial results within a matter of months, not years.

        By combining and packaging our software services as an online, SaaS-based network for our customers, we are also able to develop and nurture a user community and enable collaboration features like those found in the social networking technologies of the consumer software space. Specifically, our SaaS model enables us to provide the following services on the DemandTec network:

•

product information, "tips-and-tricks' forums, message boards, and other community capabilities for the entire network of approximately 16,000 business users;



•

solutions that enable users to create custom groups and communities and define what information to share with each group;



•

the ability to "follow" users on the network as well as defined objects (a pricing plan, for example) such that real-time updates can appear in a customized activity feed on a user's desktop;



•

best practices and other qualitative content provided by DemandTec, our partners, and any user on the network; and



•

online purchasing for services such as premium reports, and shopper insights shared by retailers for use by their CP company suppliers.

Incorporate shopper insights into our software services at the point of decision for merchants and marketers

        We incorporate advanced shopper insights into our solutions to enable retailers and CP companies to both analyze shopper behavior and collaboratively define merchandising and marketing programs based on those insights. Our model is to utilize transaction-log and loyalty data to incorporate detailed insights regarding customer segment and shopper behavior into our software solutions directly at the point where merchants and marketers are making business decisions. This provides retailers and CP companies with a competitive advantage as they are able to address both category objectives for sales, profit, and volume as

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well as customer objectives for loyalty, price image, shopping trips, and basket content. Key capabilities include:

•

advanced market basket insights, including basket metrics trends year over year and in weekly time series, as well as affinity analyses to understand cross-promotional opportunities;



•

customer segment-level insights delivered directly at the point of decision for merchants and marketing professionals, including insights such as penetration, buy rate, dollars per trip, trips per household, and brand switching; and



•

modeling and optimization by segment so as to enable retailers to make targeted assortment, promotion, and pricing decisions based on customer segment preferences and goals.

Enable and monetize collaborative programs between large retailers and the ecosystem of suppliers (CP companies) serving those retailers

        A number of our software services can be deployed as collaborative programs designed in partnership between DemandTec and key retail customers. In the collaborative model, the software services are designed to be used by both the retail and the CP companies based on roles and responsibilities and business processes defined within the program.

        For example, Assortment Optimization and Shopper Insights are currently sold as standalone offerings to retailers or as collaborative programs. When sold and deployed as part of a collaborative program, the software service is available for subscription by CP companies as part of the program. The underlying data is retailer-specific and, therefore, these solutions and underlying services represent significant new capabilities for the CP companies and the overall program can provide significant value for both trading partners. Ultimately, both parties are able to collaborate on better, win-win plans using shared solutions and a single version of the truth with regard to analytics.

Strategy

        Our objective is to extend our position as the provider of a collaborative optimization network for retailers and CP companies and to grow membership in and capabilities on that network. The three key elements of our strategy to achieve this objective include:

•

Expanding our relationships with our existing retail customers.  We plan to continue to deliver measurable business results to our existing retail customers in order to encourage their renewals of their existing solutions, as well as their adoption of additional solutions. A key element of our strategy is to leverage our domain expertise, proprietary network and advanced analytical capabilities to expand our solutions including new software services, new analytics, and new value-added consulting services.



•

Extending our market position with major retailers worldwide.  The retail industry is an international business, with a significant portion of the world's retailers based outside of the United States. We intend to use our market position and distribution investments to pursue additional retail opportunities around the world, leveraging our partnerships and multi-language product capabilities. We believe that our existing retail customers have the ability to influence other retailers worldwide by changing the competitive dynamics in their respective markets.



•

Expanding our relationships with CP companies.  Developing the right strategic marketing and trade planning strategies has evolved into a rigorous and important discipline for CP companies. We intend to expand upon and leverage our market-leading footprint and empower CP companies to forecast a broad range of sales and marketing decisions in a unified planning environment. Further, the collaborative business model enabled by the DemandTec network creates "ecosystems" between retailers and their CP trading partners. By leveraging our ability to deliver existing and new software

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services through our network, we intend to use our existing retail customer relationships to create and expand our relationships with their CP trading partners. We believe there is a significant opportunity to expand our CP market presence as a result of a network effect.

Offerings

Overview

        Our solutions consist of one or more software services and complementary analytical services. We offer our solutions individually or as a suite of integrated software services. Our software services are configurable to accommodate individual customer needs.

        Our solutions for the retail and CP industries include:

•

DemandTec Lifecycle Price Optimization™, enabling retailers to strategically price items at any stage in their lifecycle, including new items, regular items, promoted items, and clearance items.



•

DemandTec End-to-End Promotion Management™, enabling retailers to manage the complex processes related to retail promotions, from collaborative promotion planning and CP vendor deal management to in-store promotion execution and post-event analysis.



•

DemandTec Assortment & Space™, enabling retailers to create localized assortments by store, cluster, or section, based on shopper demographics, the competitive environment, and a science-based, quantitative understanding of each item's ability to add variety and grow incremental sales in the category.



•

DemandTec Shopper Insights™, a collection of services that enable retailers to better understand key shopper insights, define shopper segments, and plan shopper merchandising and marketing programs better targeted for different consumer segments in order to build loyalty, increase sales, and improve profitability.



•

DemandTec Targeted Marketing™, a collection of services that enable retailers and their CP trading partners to better understand key shopper insights, define shopper segments, and plan segment-targeted shopper merchandising and marketing programs to build loyalty, increase sales, and improve profitability.



•

DemandTec Marketing Plan Optimization™, enabling CP executive and brand managers to develop strategic marketing investment allocation decisions and optimize marketing mix decisions across the spectrum of trade and consumer promotion vehicles.



•

DemandTec Total Trade Optimization™, enabling CP companies to optimize and manage the full spectrum of trade funds decisions including strategic trade planning, customer trade planning, deal management and negotiation with retailers, and post-event analytics.



•

DemandTec Shopper Marketing Optimization™, enabling CP companies to receive valuable shopper insights and to make informed assortment planning decisions leveraging retail customer data and collaborative business processes on the DemandTec network.



•

DemandTec Connect™, enabling retailers and CP companies to collaborate using social messaging and networking capabilities that link intra-company and inter-company groups of users together on the DemandTec network.

Solutions and Software Services

DemandTec Lifecycle Price Optimization™ for Retail

        Packaged together as a solution to enable retailers to manage pricing for new items, regularly priced items, promoted items, and markdown/clearance items, the DemandTec Lifecycle Price

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Optimization™ solution for the retail industry consists of one or more of the following software services, along with complementary consulting and analytical services:

Everyday Price Optimization

        Everyday Price Optimization enables retailers to determine optimized prices to achieve their sales, volume, profit, price image, and customer loyalty objectives for regular, everyday items. Using Everyday Price Optimization, customers create scenarios in which they define strategic objectives such as increased revenues, profitability and/or sales volume and optimize prices to best achieve these objectives. A typical strategic objective might be to maximize net margins, while not sacrificing more than a certain defined percentage of sales volume.

        Retailers use Everyday Price Optimization to optimize and set retail prices in their stores based on their unique cost structure and strategic goals. Everyday Price Optimization would likely generate different optimized prices for the same item carried by competing retailers in stores located in the same geographic location, since consumer behavior varies between competitors and each retailer has its own vendor costs and strategic pricing objectives.

        Key features of Everyday Price Optimization include:

•

Store/SKU-level modeling—econometric modeling that captures the elasticity of each item, in addition to cannibalization, halo, and cross-elasticity effects, trends, seasonality, and a variety of other causals to deliver accuracy. Models are analyzed at the overall customer base level as well as by customer segment;



•

Optimization and forecasting—full category price optimization, with store/item level forecasting, enables retailers to develop pricing that conforms to their pricing rules while maximizing their primary and secondary goals, such as driving higher sales, increasing volume, and improving profitability, based on a customer segment-specific strategy;



•

Image item analysis—determination of effective price image items for key customer segments;



•

Natural language pricing rules and rules management—non-technical end-users can define and enforce pricing policies by creating pricing scenarios with pricing rules selected from a comprehensive library of retail pricing rules, customized with a rules editor and prioritized with rules relaxation capabilities to handle conflicts;



•

Scenario management—the ability to create and evaluate multiple pricing scenarios to fine-tune pricing strategy before prices hit shelves in order to change goals (maximize profit, sales, or unit volume) or add, remove, modify, or reprioritize pricing rules; and



•

Benefits reporting—the ability to validate the effects of price optimization on actual sales of a particular category and to understand the degree to which factors such as promotions, seasonality and macroeconomic shifts contributed to sales.

Everyday Price Management

        Everyday Price Management enables retailers to improve execution and compliance with their pricing strategy, and dramatically boost efficiency by automating their most cumbersome, time-consuming pricing tasks. Using Everyday Price Management, customers define pricing rules and apply those rules-based prices to merchandise categories that are not modeled and optimized using Everyday Price Optimization. In addition, customers maintain both optimized and rules-based prices using Everyday Price Management as vendor costs and competitor prices change.

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        Key features of Everyday Price Management include:

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Rules-based pricing—define and enforce pricing policies by creating pricing scenarios with rules selected from a comprehensive library of pricing rules such as last digit rules, competitive price index rules, and cross-zone rules, all of which are configured using easy-to-understand natural language;



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Rules management—rules editor and rules relaxation capabilities to handle conflicts;



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Advanced price maintenance—operational price management capabilities to handle frequent vendor cost changes, competitive price changes, and new item introductions; and



•

Advanced pricing delivery—quickly review and approve incoming data and automatically schedule when updated pricing will be delivered to downstream systems.

        Both Everyday Price Optimization and Everyday Price Management utilize a library of configurable business rules that act as constraints on the optimization by limiting the set of possible outcomes. For example, a customer can ensure that larger size items always cost more than smaller size items but are a better value, or that an optimized price is within a given percentage of a competitor's price.

Promotion Optimization

        As part of the DemandTec Lifecycle Price Optimization™ solution, Promotion Optimization can help retailers quickly determine the appropriate discounted price for any item or promoted item group and the best type of temporary price reduction.

        Promotion Optimization uses scientific analysis that takes into account cannibalization, halo, and cross-elasticity effects of existing retail and markdown programs. Promotion Optimization customers can create and simulate multiple scenarios based on mathematical forecasts of results in order to evaluate tradeoffs among various promotions.

        Key features of Promotion Optimization as a part of DemandTec Lifecycle Price Optimization™ include:

•

Store/SKU-level modeling—the ability to plan promotions that maximize total store impact on all categories by taking into account promotional response, in aggregate and by customer segment, by item and by store, as well as cannibalization, halo, and cross-elasticity effects of existing everyday prices; and



•

Scenario management and what-if analysis—the ability to create and evaluate multiple promotion scenarios, in aggregate and by customer segment, to fine-tune promotional pricing and combinations of ad and display support.

        Promotion Optimization is also included in the DemandTec End-to-End Promotion Management™ solution (described below).

Markdown Optimization

        Markdown Optimization enables retailers to eliminate excess inventory by a specified date after which an item will no longer be sold and to maximize profitability of items sold before that date. The Markdown Optimization software service incorporates the science of consumer demand to enable retailers to design optimal plans that set markdown timing and depth (of discounted price) to maximize profitability or meet inventory objectives for every clearance item in every store. Markdown Optimization supports a wide range of markdown types, including seasonal, short product lifecycle, event and holiday, category reset, cycle refresh, and standard discount markdowns.

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        Key features of Markdown Optimization include:

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Scenario management—the ability to create and forecast multiple scenarios in order to evaluate tradeoffs between timing and depth of markdown prices, as well as other factors such as the number of markdowns taken within a time period;



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Science-based—the ability to design markdown plans based on the unique price elasticity and inventory position at each store;



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Rules management—the ability to configure markdown-specific rules;



•

Re-optimization—the ability to re-optimize plans and prices on a weekly basis to adjust for changes in demand and inventory position; and



•

Automated workflow process—the ability to create and initiate new markdown plans and scenarios automatically based on category-specific rules defined by the retailer so that merchants can simply log into the system to review the results of planned optimizations.

Lifecycle Pricing for Softlines

        Lifecycle Pricing for Softlines applies advanced science and technologies to enable retailers to identify opportunities to maximize profitability and meet inventory objectives for clearance items while adhering to markdown budget constraints. Lifecycle Pricing for Softlines uses pattern recognition demand forecasting techniques developed specifically for short-lifecycle softlines products, which requires less data than traditional statistical forecasting tools. This approach allows for faster focus on volatile seasonal merchandise providing a multidimensional forecast-by-demand component that better supports customer centricity at store/SKU levels.

        Key features of Lifecycle Pricing for Softlines include:

•

Pattern-Recognition Based—the ability to recommend pricing plans using limited sales data based on behavior of similar historical items;



•

Real Time Optimization—the ability to selectively identify items to mark down together and quickly provide optimal pricing recommendations;



•

Rules Driven—the ability to define business rules to guide the optimized price recommendations;



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Multi-Dimentional Targets—the ability to define varying goals across product areas, enabling recommendations to be aligned to merchandise targets; and



•

Graphical Reporting—the ability to view detailed graphical representations of the correlations between inventory, demand, and price.

DemandTec End-to-End Promotion Management™ (for Retail)

        Managing retail promotions is a complex, multi-faceted process. Successful retailers are able to collaborate internally among senior management, merchants, marketing, advertising managers, and others, and collaborate externally with CP trading partners to build promotion plans that provide win-win results for all parties. Leading retailers are also able to quickly predict the outcome of any of the thousands of CP company trade promotion offers they receive every month, and evaluate alternative versions of any promotion to ensure they're capitalizing on the full potential of each promotion and maximizing the impact of every category plan.

        The DemandTec End-to-End Promotion Management™ solution for the retail industry consists of the Promotion Optimization software service discussed above and/or the software services listed below, along with complementary DemandTec analytical services.

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Deal Management

        Our Deal Management software service enables retailers to automate and streamline the presentation, negotiation and reconciliation of trade promotion offers they receive from their CP trading partners in a secure, Web-based environment.

        Key features of Deal Management for the retailer include:

•

Proprietary offer sheet mapping—uses each retailer's existing paper-based offer format to ease adoption by retailers;



•

Online collaboration—provides a common platform for retailers and their CP trading partners to present and negotiate the terms of trade promotion offers, eliminating the large number of emails, faxes, and spreadsheets that typically go back and forth between parties, thereby reducing errors;



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Web portal—boosts the retailer's productivity by pushing data entry work to the CP trading partners and allowing them to enter trade promotion offer information;



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Retailer item catalog-based entry—provides CP trading partners use of retailer-specific item catalogs in order to eliminate data-entry errors;



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Electronic document and deal history archive—provides version control of trade promotion offers, final contract terms, user activity and communications in order to facilitate regulatory compliance and dispute resolution and to eliminate the need for costly post-trade promotion offer audits; and



•

Accounting and reconciliation—provides for reconciliation of invoicing and deduction notices with CP trading partners.

        When a retailer implements Deal Management, that retailer requires that all of its CP trading partners submit and negotiate their future trade promotion offers electronically through the Deal Management software service. We offer two editions of this service for CP companies: "Deal Management," which is offered at no charge and allows CP trading partners to submit trade promotion offers by selecting valid items from the retailer's item catalog, and "Advanced Deal Management", which is a paid upgrade that includes additional features specific to a CP company, such as accounting and reconciliation, transaction and workflow reporting, catalog management, vendor item catalog synchronization and trade promotion offer history archiving.

Allowance Billing

        Allowance Billing automatically creates invoices and accruals based on negotiated trade promotion offers in Deal Management and based on transaction details from point-of-sale, warehouse, and store receipts. By automatically creating invoices, retailers save labor, improve accuracy, and get their invoices and accruals incorporated into their financial statements sooner.

        Key features of Allowance Billing include:

•

Direct access to trade promotion offers in Deal Management—automatically creates accounting entries and feeds those directly into existing accounting systems, thereby reducing the time and labor required to enter the data and eliminating the possibility of introducing errors into the system;



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Robust workflow management engine—provides version control of trade promotion offers, final contract terms, user activity and communications in order to facilitate regulatory compliance and dispute resolution and to eliminate the need for costly post-trade promotion offer audits;



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Interface displays transaction details—allows financial analysts to identify additional funds that should be billed based on the trade promotion offer, reducing the required efforts of a retailer's internal audit team and allowing retailers to invoice and collect trade promotion funds earlier; and

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•

Electronic bill distribution—distributes invoices through the online Advanced Deal Management system or via email and tracks undeliverable invoices and manages CP company invoice distribution lists all in a simple, integrated interface.

Promotion Planning & Management

        Our Promotion Planning & Management software service enables retailers to establish a single repository for all their information and content about promotional offers and events, greatly improving visibility and accountability, reducing costly errors, and increasing consistency across media channels. As the core or base module of the DemandTec End-to-End Promotion Management™ solution, Promotion Planning & Management allows retailers to build, develop, and manage promotional plans with a collaborative platform that enables versioning and cross-functional collaboration.

        Key features of Promotion Planning & Management include:

•

Central repository—plan and manage all promotions and events in a collaborative environment so as to create a single system of record for all promotions and a centralized data repository for merchandising product and pricing data, ad copy and images;



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Integrated workflow controls processes and security—enables collaboration between analysts, marketing departments, buyers/merchants, advertising departments, and other partners;



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Centralized merchandising and marketing calendar and integrated workflow system—view all promotions in a single, integrated calendar and plan and forecast merchandising activities in a single collaborative system, which enables collaboration between analysts, marketing, buyers/merchants, advertising and other partners;



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Dynamic layout and versioning capabilities—view and select items, build and manage sophisticated promotional offers and create multiple versions customized for different regions, clusters of stores, customer segments, or advertising zones;



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Highly-configurable enterprise architecture—supports complex requirements to integrate with key retail production systems;



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Integration with DemandTec's Promotion Optimization—the ability to present promotion analytics directly at the point of decision within the dynamic layout and publishing process, enabling a more scientific approach to selecting items and building promotions; and



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Enterprise integration—provides multiple integration points with the customer's IT systems: large incoming and outgoing data feeds use data-level integration to transfer bulk files on an automated basis, and industry-standard web services protocols communicate with customer systems and process customer system requests.

        Retailers use Promotion Planning & Management to manage the production process and execute more targeted, customer-centric promotions across multiple channels and media vehicles while also dynamically creating the highly-granular promotion history required to achieve effective promotion analytics and complete the promotion cycle with post event measurement and improved modeling for future periods. Promotion Planning & Management enables retailers to make better decisions about promotional offers based on insight into past performance and visibility to cross-channel promotions, to reduce errors and to improve the ability to target promotions and to version products and prices by market, zone or customer segment.

Promotion Optimization

        As part of the DemandTec End-to-End Promotion Management™ solution, Promotion Optimization helps retailers to develop promotional offers and placements that maximize the total store impact on all

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categories. Promotion Optimization uses scientific analysis that takes into account cannibalization, halo, and cross-elasticity effects of existing retail and markdown programs. Promotion Optimization customers can create and simulate multiple scenarios based on mathematical forecasts of results in order to evaluate tradeoffs among various promotions.

        Key features of Promotion Optimization as a part of DemandTec End-to-End Promotion Management™ include:

•

Store/SKU-level modeling—the ability to plan promotions that maximize total store impact on all categories by taking into account promotional response, in aggregate and by customer segment, by item by store, cannibalization, halo, and cross-elasticity effects of existing everyday prices;



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Scenario management and what-if analysis—the ability to create and evaluate multiple promotion scenarios, in aggregate and by customer segment, to fine-tune promotional pricing and combinations of ad and display support;



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Category plan and master calendar management—the ability to generate, view and forecast multiple promotions on one plan, taking into account factors such as cannibalization of regular priced items, concurrent promotions and the pantry-loading effect of successive promotions;



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Deal Management integration—the ability for all CP trade promotion offers entered into DemandTec's Deal Management software service to flow directly into Promotion Optimization for analysis, optimization and forecasting; and



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Promotion Planning & Management integration—Promotion Optimization is the analytics engine providing embedded insights within the Promotion Planning & Management workflow. The two modules work together to enable merchants to identify the right items to promote, forecast the impact of different pricing and merchandising options, build and forecast a complete promotional calendar, and then manage the downstream execution (integrating to Promotion Execution) to complete the end to end process.

        Promotion Optimization is also included in the DemandTec Lifecycle Price Optimization™ solution (described above).

Promotion Execution

        Our Promotion Execution software service enables retail users to execute the promotion plans built in Promotion Planning & Management with direct integration into major promotion plan output mechanisms including Adobe® InDesign® for print, signage systems and the retailer's website. Promotion Execution streamlines the promotion plan proofing process with an online system that simplifies the proofing of multiple promotion plan versions, enables retail users to proof anywhere and anytime, and manages the proofing workflow. By simplifying promotion plan publication, retailers are able to execute promotions more quickly, thereby gaining a competitive advantage.

        Key features of Promotion Execution include:

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Powerful version-enabled environment—rapidly build page-oriented promotions, streamline the flow of promotional content and details to the creative team, and automatically communicate all the versioned content, images, prices and layout directly to Adobe InDesign®, where artists can quickly build pages and maintain links to highly versioned promotional elements;



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Highly graphical and easy-to-use web-based software—automate and streamline the collaborative advertising proofing process to accelerate the process and reduce errors;



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Integrated signage software—efficiently push versioned signage information to existing systems both in-store and at headquarters, thereby improving efficiencies and eliminating errors between pricing and messaging in the advertising circular with the information sent to the stores;

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•

Multi-channel/cross-media publishing—create content for planned promotional events once and then manage and publish the content and digital assets across print, email, website, mobile device, and other multi-channel/media publishing; and



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iFlyer module—automate the execution of promotional flyers to targeted customer groups and distribute them on-line through an email link, posting an electronic Flyer on the retailer's web site, or to a web device.

DemandTec Assortment & Space™ (for Retail)

        The DemandTec Assortment & Space™ solution for the retail industry consists of the following software services, along with complementary consulting and analytical services:

Assortment Optimization

        Assortment Optimization enables retailers to determine which items should be stocked, by store or store cluster, based on the customers that shop at each store, the competitive environment, and a quantified understanding of whether each item in a category is merely duplicative or truly provides variety and adds incremental sales to the category. Key features of Assortment Optimization include:

•

Advanced modeling and optimization science—enables the creation of efficient, customer-centric assortments based on a quantitative understanding of incrementality (an item's ability to increase overall category sales) and transferable demand (the degree to which sales volume shifts to similar items or leaves the store when one item is delisted);



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Multiple data inputs—incorporates market, loyalty card, planogram, and cost data into the optimization process;



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Automated processes—includes automated processes and wizards to address the assortment challenges merchants face every day, such as performing straight optimizations, increasing or decreasing SKU count and space, and making one-in-one-out changes to assortments;



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"What if" analyses—enables retailers to run multiple scenarios and compare results to identify the best strategy to meet company objectives such as protecting private label items and image items; and



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Macro-space optimization—enables retailers to add or decrease category space within the store layout in order to maximize category growth and customer loyalty.

DemandTec Shopper Insights™ (for Retail)

        The DemandTec Shopper Insights™ solution includes the analytical services to segment shoppers into discrete groups that a CP company or retailer can target with merchandising and marketing programs, as well as the software service that makes those segments actionable.

Shopper Insights

        This software service provides powerful analysis capabilities as well as highly actionable delivery of insights. The key features of this software service are:

•

InsightCenter—the InsightCenter is an online collection of dashboards that are designed to provide comprehensive analysis into shopper segments and the shopper behavior of those segments in the retailer's stores.



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Insights Embedded—in addition to the dashboards housed in InsightCenter, Shopper Insights can also deliver a subset of those insights directly at the point of decision within the other DemandTec software services.

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DemandTec Marketing Plan Optimization™ (for CP)

        The DemandTec Marketing Plan Optimization™ solution enables CP company executives and brand managers to develop strategic marketing investment allocation decisions and optimize marketing mix decisions across the spectrum of trade and consumer vehicles, and includes:

Strategic Marketing Planning

        Unlike a traditional, one-time marketing mix study, Strategic Marketing Planning is a software service that enables users to continually test the impact of shifting capital across marketing and trade categories and different marketing vehicles with visibility into critical volume and profit metrics. Key features of Strategic Marketing Planning include:

•

Optimization and forecasting—decomposes volume into drivers and inhibitors and accurately predicts volume and financial impact of multiple marketing mix variables and decisions;



•

What-if analysis—enables users to configure and predict multiple scenarios for comparison in addition to automated optimization; and



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Continuous planning/course corrections—tracks actual sales over time and enables course correction decisions in a dynamic, continuous manner throughout a year or other planning period.

DemandTec Total Trade Optimization™ (for CP)

        The DemandTec Total Trade Optimization™ solution enables CP companies to optimize and manage the full spectrum of trade funds decisions ranging from strategic trade planning, customer trade planning, deal management and negotiation with retailers, and post-event analytics.

Strategic Trade Planning

        Strategic Trade Planning enables headquarter-driven funds allocation and price and promotion simulation across broad geographies, accounts, and brands. These insights can guide and inform downstream customer trade planning decisions. Key features include:

•

Optimization and forecasting—accurately predict key volume and financial metrics for shelf price changes, promotion support changes, and timing of events;



•

Common analytical platform—optimize trade planning with unified pricing and promotion planning based on the same underlying consumption data;



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Plan based on multiple hierarchies—create plans, reporting, and reconciliation across markets, channels, regions, accounts, categories, and brands; and



•

Align brand and customer teams—pass along annual objectives and guidelines to inditate customer planning process (see DemandTec's Customer Trade Planning software service).

Customer Trade Planning

        Customer Trade Planning enables customer-facing teams to develop and simulate individual price and promotion events, and entire category plans. Key features of the Customer Trade Planning software service include:

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Optimization and forecasting—accurately predict key volume and financial metrics for brands and overall retail category;



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Common analytical platform—optimize trade planning with unified pricing and promotion planning based on the same underlying consumption data;

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•

Comprehensive trade planning use cases—create, forecast and build plans that include periodic trade promotions (i.e., temporary discounts with or without ad or display support) as well as price advances or buy-downs of the retail price using trade promotion funds; and



•

Demand elasticity curves for every item in the category—quantify the financial impact of competitive trade activity against promoted items, total portfolio and even a retailer's entire category.

Advanced Deal Management

        Advanced Deal Management provides capabilities that are tailored for CP companies and CP brokers to capture greater value from the online trade promotion offer management experience. As a paid upgrade to the basic Deal Management service, Advanced Deal Management provides a CP company-centric set of reports and workflow privileges that help further reduce costs, increase user effectiveness and enhance data visibility. Advanced Deal Management subscribers also have access to add-on services that are unavailable to basic Deal Management subscribers. Key features of Deal Management for CP companies and CP brokers include:

•

Role-based access—access to multiple users by product line enables rapid and more effective user adoption;



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Customized item catalog—CP-centric item catalog customized by promoted group supports a more logical way of building and entering promotions;



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Long-term deal archive—full seven-year history of all promotion offer data, including full documentation of promotion offer versions and written negotiations between retail trading partners supports, among other benefits, compliance with regulatory requirements;



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Advanced data reporting—detailed reporting and data export features support better business decisions; and



•

Funds tracking—accurate visibility into available trade spending balances and the ability to reconcile planned trade promotion activity against actual in-store execution.

DemandTec Shopper Marketing Optimization™ (for CP)

        The DemandTec Shopper Marketing Optimization™ solution enables CP companies to make informed shopper insights and assortment planning decisions leveraging retail customer data and collaborative business processes on the DemandTec network. This solution is enabled for a CP company based on a retailer deploying the DemandTec Assortment & Space™ solution and the DemandTec Shopper Insights™ solution. The CP companies on the network, as part of a collaborative program with the retailer, receive access to the Shopper Insights and Assortment Optimization software services.

DemandTec Connect™ (for Retail and CP)

        In addition to the industry solutions and software services above, the DemandTec offering also includes DemandTec Connect™, a set of capabilities on the network for both retailers and CP companies. DemandTec Connect™ delivers social messaging and collaboration capabilities to users on the DemandTec network. DemandTec Connect enables users to be more productive and keep institutional knowledge in context and integrated with business applications. DemandTec Connect translates capabilities first popularized by consumer social networks into business-oriented features, including:

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Profiles:  DemandTec users can put a face to a name and learn more about their colleagues and partners on the network by customizing their profile.

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•

Community:  DemandTec customers can establish any number of communities or work groups, comprising other related users on the network. A community could be a small internal pricing team or cross-company lines and include a retail merchant and his or her supplier contacts.



•

Sharing:  Excel files and other documents associated with the merchandising and marketing activities performed using DemandTec can be shared online with other members of a community. Other community members can comment on shared files and add to the conversation.



•

Following:  Users can follow other users or objects (such as a category plan or a master calendar) and automatically receive updates in a real-time activity feed to their desktop. DemandTec Connect is also designed to integrate with and extend other social platforms or broader enterprise knowledge management solutions.

Consulting Services

        Our consulting services organization works closely with our customers to implement our software so that our customers can rapidly begin to achieve their merchandising and marketing objectives. The organization consists of field consultants and project managers, technology integration specialists, modeling experts, and training specialists with experience in implementing software in various retail and CP segments. Depending on a specific customer's requirements, we also may engage third parties to assist with implementations. We generally make our software available to a customer within two weeks of signing its agreement, with several product categories being fully operational within a matter of months.

        The Analytical Services group within our consulting services organization works with prospects and customers to identify actionable insights in order to improve our customers' returns on investment from using our software. Leveraging our software platform, retailer transaction-log/loyalty data, and additional third-party data sources, we offer a number of strategic analytical insights both as part of our software and as customer-specific services.

        The education group within our professional services organization provides education and training services to our customers and partners. The education group works closely with each customer or partner to design and deliver a training curriculum to match its needs. We deliver courses through lectures, written materials and e-learning modules. We also offer a "train-the-trainer" program for customers with extensive or ongoing training requirements.

Science and Technology

Science

        Our software not only incorporates the typical workflow and business process management capabilities offered by many enterprise software companies, but also is science-based and applies advanced statistical analytics in the following areas:

        Demand Modeling.    Our software uses complex econometric models designed to predict accurately the sales volume of products under varying merchandising conditions and at various prices, which enables customers to determine the factors that influence consumer demand for a given product and location, and to what extent. Our proprietary demand models quantify consumer response to different merchandising and marketing activities, environmental factors and elements of consumer behavior across various consumer segments. Since our models are non-linear, they are able to capture the complex underlying relationships between consumer demand and the factors that influence that demand.

        Shopper Segmentation and Shopper Insights.    Individual shoppers and particular shopper segments respond differently to price changes for different items. By applying various data mining and statistical techniques to analyze sales data and combining the results with additional data such as demographics, buying histories and item affinities, our software enables our customers to understand consumer and product segmentation more fully, to determine more effective product assortments, and to design more individualized promotion offers.

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        Forecasting and Simulation.    Our forecasting software enables our customers to determine the likely revenue, profit and sales volumes for specific product categories, brands or promoted groups at the store/item level for a given set of prices and merchandising conditions. Our software does this by incorporating and analyzing factors such as product distribution, assortment and complementarity, cannibalization, incrementality, transferable demand, stockpiling by consumers, equivalent volumes and discrete events such as holidays and localized merchandising categories. Our software also quantifies and forecasts the store/item level margin impact caused by varying supply chain costs.

        Optimization and Rules Enforcement.    While demand modeling is a powerful tool that can provide quantifiable benefits, achieving those benefits would be difficult if our software relied solely upon modeling, because of the large number of possibilities that our models generate. Our optimization science uses a combination of complex algorithms to help customers determine prices, promotions and markdowns that best accomplish their objectives, while complying with their business rules. These algorithms are designed to ensure accurate results and incorporate rule relaxation that automatically resolves conflicts in business rules according to the customer's preferences.

Technology

        Data Processing.    We receive and process multiple terabytes of customer data, including transaction-log/loyalty data. This information is provided by retailers, CP companies and syndicated data providers on a daily or weekly basis. We process data through our proprietary software platform, which integrates, validates and cleanses multiple data types and enhances data quality by identifying and correcting common data problems.

        Grid Computing.    The implementation of our advanced mathematical software requires substantial computing resources. To address this challenge, we distribute our software across a scalable grid of servers. This approach allows us to automatically partition large computational problems into smaller computations and to execute those computations in parallel across the grid. We design our grid architecture to ensure that optimizations are completed reliably and that computing resources are allocated dynamically to our various customers.

        Enterprise Application Technology.    With the exception of customers who licensed Connect3 and AIS software prior to their replatformings by DemandTec, our customers access our software through a web browser and no software is installed on our customers' premises. Our portal technology allows us to incorporate content from other sources and allows our content to be shown in other applications and portals. Customers can configure the user interface, customer-specific fields, customer-specific workflow behavior and portal layout and content. Our scalable architecture allows us to add new customers without requiring us to make substantial incremental investments in IT infrastructure.

        Enterprise Integration.    We provide multiple integration points with our customers' IT systems. Large incoming and outgoing data feeds use data-level integration to transfer bulk files on an automated basis. We use industry-standard web services protocols to communicate with customer systems and to process customer system requests. Our portal technology enables user interface-layer integration between our system and our customers' systems, allowing us to display content served by customer or partner systems and to serve content to customer systems using industry-standard protocols.

SaaS Operations

        Our operations organization is responsible for delivering our software-as-a-service to our customers, which includes quality assurance, release deployment, database management and software tuning, systems monitoring and proactive problem detection and prevention, application availability and customer support.

        Under our SaaS model, we currently release a new software version approximately every quarter, each one containing significant new functionality. Releases are deployed simultaneously to our customers. Prior

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to deployment, each release undergoes multi-stage testing and substantial quality assurance, including build acceptance tests, regression test cases, customer integration tests and final system verification tests.

        Our software is hosted in three data centers located in San Jose, California, Sacramento, California, and Mesa, Arizona. Each of these facilities includes advanced security, power redundancy, and disaster mediation safeguards and procedures such as biometric access control, onsite power generation and earthquake hardening.

        We have implemented a comprehensive information security management program. As part of this program, our processes and procedures include: logical access controls such as certificate authentication, role-based authorization and detailed system logging; vulnerability management assessment and remediation; network security measures including encryption, firewalls and monitoring; strict data and software back-up procedures with regular rotations to a secure, offsite storage location; and network and system redundancy to provide software resiliency.

        In February 2011, an independent accounting and auditing firm completed an audit of our controls over information technology and processes in accordance with Statement on Auditing Standards No. 70, or SAS 70. This firm issued a SAS 70 Type II report confirming that suitably-designed controls were in place and operating effectively.

        Superior customer support is critical to customer satisfaction and to retaining and expanding our customer base. By leveraging our relationship with Sonata Services Limited in Shanghai, China, discussed below in "Research and Development," we are able to provide customer support 24 hours a day, seven days a week through our support web portal and by telephone. Since we manage our software for our customers, we often are able to detect and resolve delivery problems or processing capacity needs well in advance of when a customer might actually notice the problem.

Our Customers

        Today, our software-as-a-service is used by approximately 355 customers worldwide in the retail and CP industries. Retailers together accounted for approximately 81% of our revenue in fiscal 2011 and CP companies accounted for approximately 19% of our revenue in fiscal 2011. Target Corporation, our largest customer in fiscal 2011, and Wal-Mart Stores, Inc. accounted for approximately 21% and 11%, respectively, of our revenue in fiscal 2011.

Sales and Marketing

        We sell our solutions through our direct sales organization, often in cooperation with entities such as systems integration firms, strategy consultants and syndicated data providers. Our field organization, comprising sales and services, is divided into two distinct teams, one serving retailers and one serving CP companies. We assign our sales directors to specific named target accounts. Solution consultants assist our sales directors in providing detailed technical and business expertise. After the first year of a customer's agreement term, we assign a strategic account executive who is responsible for managing the customer's satisfaction, agreement renewals and sales of additional software and services. Outside the United States, we have a sales presence in the United Kingdom, France, and Latin America.

        Our marketing group assists our direct sales, partner, and professional services organizations by providing sales tools, programs, and training. Our outbound marketing programs are designed to develop awareness of DemandTec and generate demand for our products and to build our brand through participation in a variety of industry events, public relations, web-based seminar campaigns, and other activities targeted at key executives, decision-makers, and influencers in the industries we serve.

        Our industry marketing and product management teams also engage in inbound marketing efforts by collaborating on market research to analyze new market and product opportunities, assess and predict industry trends, and work directly with our customers to identify, prioritize, and plan new solutions and

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new product enhancements. In addition, every year we host DemandBetter, a three-day conference for our customers that brings together executives from retailers and CP companies to share strategies and best practices. The conference features in-depth product, science, and customer case study sessions.

Strategic Relationships

        We continually seek to develop and foster alliances with third parties whose products, technologies and services complement our offerings. We work with industry leaders that assist in joint sales activities, software implementation, and related strategy engagements. These relationships vary in complexity and scope and range from formal global alliances to informal regional relationships. Four firms with which we collaborate globally include The Nielsen Company, International Business Machines Corporation, or IBM, Accenture LLP, and Bain & Company. We have had success working with these companies, and we believe that we can continue to work together to provide complementary solutions.

•

Nielsen is a leading marketing information provider. In 2009, we extended our exclusive 2005 agreement with Nielsen to continue to deliver consumer-centric merchandising solutions to fast moving consumer goods (FMCG) retailers around the globe. Retailers utilizing both our and Nielsen's offerings can access a combination of consumer and market information, demand-modeling science and optimization software to generate merchandising plans.



•

The Global Business Services division of IBM provides business process outsourcing, systems integration and general consulting services. IBM has pre-existing relationships with many of our retail customers and prospects. We have worked with IBM to jointly sell and implement our solutions in multiple geographies.



•

Accenture has strong retail and CP industry practices that include expertise and solutions focused on precision pricing and trade optimization. We have successfully collaborated with Accenture on joint sales and implementation efforts for a number of retail and consumer goods manufacturer customers around the globe.



•

Bain & Company serves the retail and CP industries with strategic consulting services that are complementary with DemandTec's software and analytical services and we have collaborated on providing a total solution for strategy, planning, and execution for our joint customers.

Research and Development

        Under our SaaS model, we maintain and support only one version of our software. This enables us to focus our research and development expenditures on researching new methodologies for understanding and predicting consumer demand and developing new features and functionality. We concentrate our research and development efforts on:

•

improving our statistical modeling capabilities and advanced optimization techniques to enhance our understanding of consumer demand and customer segmentation;



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enhancing existing software services and developing new software services that leverage our software platform to address a broader set of business requirements;



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enhancing our existing analytical services and developing new analytics and solutions; and



•

expanding the collaborative and community-oriented capabilities that connect our software services, our analytics services, and all of our users in a single online collaborative optimization network.

        We have assembled an experienced science and modeling organization comprising experts in econometrics and advanced mathematics, as well as a core group of engineers with experience working with massive amounts of data and backgrounds in scientific engineering. Our engineering design team is predominantly located in San Mateo, California, but we also utilize engineering teams in India and Russia

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as well as a group of software engineers employed by Sonata IT Services Limited ("Sonata") in Shanghai, China. Sonata provides dedicated engineers for software development, sustaining engineering, quality assurance and testing, operations, and customer support. We pay a negotiated, fixed monthly fee for each dedicated individual. Fees are paid monthly in arrears in U.S. dollars. The term of the agreement runs through the end of April 2012, and there can be no assurance that we will be able to renew this agreement on acceptable terms or at all. We may terminate this agreement at any time upon written notice, subject to certain scale-down restrictions. We have an option to acquire the operations of Sonata that relate to our business at any time at a pre-negotiated formula.

        As of February 28, 2011, we had 130 employees in our research and development located in the U.S. and India, an additional 76 Sonata engineers in China, and eight engineers in Moscow dedicated to our projects. Our research and development expenses were approximately $32.3 million, $32.3 million, and $26.8 million in fiscal 2011, 2010, and 2009, respectively.

Competition

        The market for consumer demand software varies greatly by industry and business application, is rapidly evolving and fragmented, and is subject to shifting customer needs and changing technology. We compete primarily with vendors of packaged software, whose software is installed by customers on their own premises and with consulting organizations. For some software services, we compete to some degree with internally-developed solutions. Our current principal competitors include:

•

enterprise software application vendors such as SAP AG and Oracle Corporation;



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niche retail software vendors, such as KSS Group (acquired by dunnhumby USA) and Revionics, Inc.;



•

statistical tool vendors such as SAS, Inc.;



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marketing information providers for the CP industry such as The Nielsen Company and Information Resources, Inc.; and



•

strategy and business consulting firms such as McKinsey & Company, Inc., Deloitte & Touche LLP and Accenture LLP.

        Many of our current and potential competitors have a larger installed base of users, longer operating histories, greater brand recognition and substantially greater financial, technical, marketing, service, and other resources than we have. Competitors with greater financial resources may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. In addition, niche retail software vendors may compete with us on price to attract smaller retailers. Further, larger retailers and CP companies historically have tended to invest in in-house applications and advanced analytics provided by business consulting firms, marketing information providers and statistical tools vendors.

        We believe the principal competitive factors in our markets include the following:

•

demonstrated customer successes and the attendant retail and CP domain expertise in both domestic and foreign markets;



•

the quality, scalability, and comprehensiveness of science and technology to manage large data sets, model consumer demand accurately, and optimize pricing and other merchandising and marketing decisions, and provide collaboration opportunities for both sides of the industry;



•

the ability to offer a network-based solution that is accessed by both retailers and CP companies;



•

the ability to drive predictable revenue, profitability, sales volume and customer loyalty improvements;



•

the ease and speed of software implementation and use;

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•

the ability to enhance science and technology rapidly to meet a broader set of consumer behavior dynamics;



•

the performance, scalability and flexibility of the software;



•

the interoperability of the software with the customer's legacy systems;



•

the cost of the software and the related implementation process; and



•

the vendor's reputation.

        We believe that we compete favorably with our competitors on the basis of these factors, when evaluated in totality. Enterprise software application vendors offer applications that require implementation of highly-customized, static software code at each customer's site. These providers market multiple applications to the same customer, advertising a more uniform and interoperable IT environment. Our software is provided through a SaaS delivery model that is designed to allow quick access to more dynamic software with significantly less costly and time-consuming on-site implementation. Our SaaS model also reduces dependence upon a customer's internal IT resources and therefore decreases the costs associated with interoperability with legacy systems. We believe that we may not compete as favorably for retail customers with annual sales below $500 million, who may not consider their potential return from incremental changes in revenue or profitability sufficiently compelling to purchase a higher cost, higher value solution. These retailers may instead choose less expensive, less feature rich solutions offered by niche retail software vendors, statistical tools companies or business consulting firms.

        If we are not able to compete successfully against our current or future competitors, it will be difficult to acquire and retain customers, and our business, financial condition and operating results will be harmed.

Intellectual Property

        We believe that our proprietary mathematical algorithms, statistical models and techniques and unique software architecture differentiate us from other consumer demand companies, as they enable us to help our customers understand and forecast consumer behavior more completely. Our success depends on our ability to continue to innovate in science and engineering and to protect our core intellectual property. Our intellectual property strategy relies on a combination of trade secrets, patents, copyrights, trademarks and contractual confidentiality agreements.

        We currently have 24 issued patents and 21 patent applications in the United States, and 6 issued patents and 6 patent applications internationally. The expiration dates of our issued patents range from 2020 to 2023. We focus our patent efforts in the United States, but from time to time we will file corresponding foreign patent applications in strategic areas such as Europe and Asia. Our patent strategy balances strategic importance, competitive assessment and the need to maintain costs at a reasonable level, and we do not depend on any specific patent or set of patents to conduct our business operations. We may not receive competitive advantages from any rights granted under our existing patents. We do not know whether any of our patent applications will result in the issuance of any further patents or whether the examination process will require us to narrow the scope of our claims. To the extent any of our applications proceeds to issuance as a patent, the future patent may be opposed, contested, circumvented, designed around by a third party, or found to be unenforceable or invalidated. In addition, our future patent applications may not be issued with the scope of the claims sought by us, if at all, or the scope of claims we are seeking may not be sufficiently broad to protect our proprietary technologies. Others may develop technologies that are similar or superior to our proprietary technologies, duplicate our proprietary technologies or design around patents owned or licensed by us. If our products, patents or patent applications are found to conflict with any patent held by third parties, we could be prevented from selling our products, our patents could be declared invalid or our patent applications might not result in issued patents.

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        We have registered the trademark DemandTec in the United States, China, Japan, the European Union, Colombia and certain other countries. We have also registered the DemandTec logo in the United States and the European Union. We have filed other trademark applications in the United States and certain other countries.

        In addition to filing patent applications and registering trademarks, we also rely in part on United States and international copyright laws to protect our software. Furthermore, we control access to and use of our proprietary software and other confidential information through the use of internal and external controls, including signing non-disclosure agreements with contractors, customers and partners. In addition, all of our employees and consultants are required to execute proprietary information and invention assignment agreements in connection with their employment and consulting relationships with us, pursuant to which they agree to maintain the confidentiality of our proprietary information and they grant us ownership rights in all inventions they reduce to practice in the scope of performing their employment or consulting services. However, we cannot provide any assurance that employees and consultants will abide by these agreements.

        Despite our efforts to protect our trade secrets and proprietary rights through patents, licenses and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our software and technology. In addition, we intend to expand our international operations, and effective patent, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries. If we fail to protect our intellectual property and other proprietary rights, our business could be harmed.

Employees

        As of February 28, 2011, we employed 340 full-time employees, including 130 in research and development, 75 in professional services, 56 in sales and marketing, 48 in general and administration, and 31 in operations and support. We have never had a work stoppage, and none of our employees is represented by a labor organization or under any collective-bargaining arrangements. We consider our employee relations to be good.

Available Information

        Our Internet website address is www.demandtec.com. We provide free access to various reports that we file with or furnish to the Securities and Exchange Commission, or SEC, through our website, as soon as reasonably practicable after they have been filed or furnished. These reports include, but are not limited to, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports. Our SEC reports can be accessed through the investor relations section of our website, or through www.sec.gov. Information on our website does not constitute part of this Annual Report on Form 10-K or any other report we file or furnish with the SEC. Stockholders may request copies of these documents from:

DemandTec, Inc.
One Franklin Parkway, Building 910
San Mateo, California 94403
Attention: Investor Relations

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Item 1A.    Risk Factors

        Set forth below and elsewhere in this Annual Report on Form 10-K, and in other documents we file with the Securities and Exchange Commission, or SEC, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K and in other written and oral communications from time to time. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods.

Risks Related to Our Business and Industry

We may experience significant quarterly fluctuations in our operating results due to a number of factors, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations.

        Our quarterly operating results may fluctuate significantly due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. If our operating results fall below the expectations of investors or securities analysts or below the guidance, if any, we provide to the market, the price of our common stock could decline substantially.

        Factors that may affect our operating results include:

•

our ability to increase sales to existing customers and to renew agreements with our existing customers at comparable prices, particularly larger retail customers;



•

our ability to attract new customers, particularly larger retail and consumer products customers in both domestic and foreign markets;



•

changes in our pricing policies or those of our competitors, or pricing pressure on our software services;



•

periodic fluctuations in demand for our software and services;



•

volatility in the sales of our solutions on a quarterly basis and timing of the execution of new and renewal agreements within such quarterly periods;



•

reductions in customers' budgets for information technology purchases and/or delays in their purchasing cycles;



•

our ability to develop and implement in a timely manner new software and enhancements that meet customer requirements, including our ability to develop certain substantial and customer-specific functionality as required under certain customer engagements;



•

our ability to hire, train and retain key personnel;



•

our success in broadening the range of our offerings, including our ability to develop and sell solutions to apparel retailers and to incorporate shopper segmentation and analytics into our offerings;



•

the short-term and long-term impacts of acquisitions of businesses or technologies, including the expenses associated with integrating the acquired businesses or technologies into our operations or solutions and our ability to achieve sales growth and margin improvement;



•

any significant changes in the competitive dynamics of our market, including new entrants, new product introductions, or substantial discounting of products;



•

our ability to control costs, including our operating expenses;

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•

any significant change in our facilities-related costs;



•

the timing of hiring personnel and of large expenses such as those for trade shows and third-party professional services;



•

our ability to appropriately resolve any disputes with customers;



•

outages and capacity constraints with our hosting partners; and



•

the impact of global economic conditions on our business and the retail and CP industries, including any future customer insolvencies or bankruptcies.

        We have in the past experienced, and we may continue to experience, significant variations in our level of sales on a quarterly basis, and we have at times failed to meet our internal periodic bookings plans. In the past, several of our customers have delayed or failed to renew their agreements with us upon expiration, or have renewed at lower prices. Such variations in our sales, or delays in signing or a failure to sign or renew significant customer agreements, have led to significant fluctuations in our cash flows and deferred revenue on a quarterly and annual basis. For example, we used approximately $6.8 million of net cash in operations in fiscal 2010, primarily due to the use of $10.5 million of net cash in operations in the third quarter, while we generated approximately $9.2 million and $13.8 million of net cash from operations in fiscal 2011 and 2009, respectively.

We have a history of losses and we may not achieve or sustain profitability in the future.

        We have a history of losses and have not achieved profitability in any fiscal year. We had net losses of $13.7 million, $11.8 million and $5.0 million in fiscal 2011, 2010 and 2009, respectively. At February 28, 2011, we had an accumulated deficit of $102.9 million. We expect to continue to incur net losses in fiscal 2012 and perhaps beyond. In addition, our cost of revenue and operating expenses may increase in future periods as we implement initiatives to continue to grow our business, or if we need to procure additional capital equipment, software, or data center space to handle increased customer data. If we are unable to increase our revenue to offset these expected increases in our fixed costs and expenses, our losses will increase. Accordingly, we cannot provide assurance that we will be able to achieve or maintain profitability in the future.

We depend on a small number of customers, which are primarily large retailers, and, to a lesser extent, large consumer products companies, and our growth, if any, depends upon our ability to add new and retain existing large customers.

        We derive a significant percentage of our revenue from a relatively small number of customers, which are primarily large retailers, and, to a lesser extent, large consumer products companies. The loss of any one or more of those customers could decrease our revenue and harm our current and future operating results. Our retail customers accounted for 81% of our revenue in fiscal 2011. Two customers accounted for approximately 21% and 11%, respectively, of our revenue in fiscal 2011 and one customer accounted for 14% of our revenue in fiscal 2010. In June 2010, we signed a multi-year agreement with Target for substantially all of our current and certain potential future software services. Revenue from Target represented approximately 21% of our revenue in fiscal 2011. Although our largest customers may vary from period to period, we anticipate that we will continue to depend on revenue from a relatively small number of our large retail customers. Further, our ability to grow revenue depends on our ability to increase sales to existing customers, to renew agreements with our existing customers and to attract new customers. In fiscal 2010, we did not add any significant large new retail customers and in fiscal 2011, we added a limited number of large retail customers. If we are unable to add new and retain existing large customers, this will adversely affect our revenue and results of operations.

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The effects of adverse global economic conditions may adversely impact our business, operating results or financial condition.

        Commencing in fiscal 2009, adverse global economic conditions caused a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and economic contraction. The retail and consumer products industries were and may continue to be especially hard hit by these economic developments, which in recent periods has resulted in some customers or potential customers delaying or not entering into new agreements or renewing their existing agreements with us. If global economic conditions have a material negative impact on our sales or prospects, our business, operating results or financial condition will be adversely impacted.

Our business depends substantially on customers renewing their agreements for our software. Any decline in our customer renewals would harm our operating results.

        To maintain and grow our revenue, we must achieve and maintain high levels of customer renewals. We sell our software pursuant to agreements with initial terms that are generally from one to three years in length. Our customers have no obligation to renew their agreements after the expiration of their term. The fees we charge for our solutions vary based on a number of factors, including the software, service and hosting components provided, the size of the customer, and the duration of the agreement term. Our initial agreements with customers may include fees for software, services or hosting components that may not be needed upon renewal. As a consequence, if we renew these agreements, we may receive lower total fees. In addition, if an agreement is renewed for a term longer than the preceding term, we may receive total fees in excess of total fees received in the initial agreement but a smaller average annual fee because we generally charge lower annual fees in connection with agreements with longer terms. In any of these situations, we would need to sell additional software, services or hosting in order to maintain the same level of annual fees from that customer. There can be no assurance that we will be able to renew these agreements in a timely manner, on favorable terms, or at all, or to sell additional software or services or sell to new customers. In the past, certain of our customers have elected not to renew their agreements with us or have renewed on less favorable terms. Our customer renewal rates may decline or fluctuate as a result of a number of factors, including our customers' satisfaction or dissatisfaction with our software, the price of our software, the prices of competing products and services, consolidation within our customer base, customer bankruptcies, or reductions in our customers' information technology spending levels. If our customers do not renew their agreements for our software for any reason, or if they renew on less favorable terms, our revenue will decline and our cash flow will be negatively impacted.

Because we generally recognize revenue ratably over the terms of our customer agreements, the lack of renewals or the failure to enter into new agreements may not immediately be reflected in our statement of operations in any significant manner but may negatively affect revenue in future quarters.

        We generally recognize revenue ratably over the terms of our customer agreements and invoice our customers in advance for annual use of our software and certain implementation services on a fixed fee basis. As a result, most of our quarterly revenue results from agreements entered into during previous quarters. Consequently, a decline in new or renewed agreements in a particular quarter, as well as any renewals at reduced annual dollar amounts, will not be reflected in any significant manner in our revenue for that quarter, but it will negatively affect revenue in future quarters. For example, in fiscal 2009 and fiscal 2010 the global economic environment deteriorated compared to prior periods. This resulted in delays in the execution of new and some renewal customer contracts, with some customers or potential customers electing not to enter into new or renewal contracts, and some other customers renewing at lower prices. Accordingly, our revenue growth slowed and revenue even declined in each of the quarters ended February 28, 2010 and May 31, 2010, respectively, compared to the immediately prior quarter.

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We may expand through acquisitions of and/or partnerships with other companies, which may divert our management's attention and result in unexpected operating and technology integration difficulties, increased costs and dilution to our stockholders.

        Our business strategy incorporates the acquisition of complementary software, technologies, or businesses. For instance, we recently acquired M-Factor, Inc. ("M-Factor") and substantially all of the assets of Applied Intelligence Solutions LLC ("AIS"). Acquisitions may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties in assimilating or integrating the businesses, technologies, services, products, personnel, or operations of the acquired companies, especially if the key personnel of the acquired company choose not to work for us, and we may have difficulty retaining the existing customers or signing new customers of any acquired business or migrating them to a software-as-a-service model. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our current business. The successful integration of acquired businesses may be further complicated by our need to simultaneously support ongoing, complicated development efforts, such as our current efforts to integrate shopper segmentation and analytics into our offerings. We also may be required to use a substantial amount of our cash or issue equity securities to complete an acquisition, which could deplete our cash reserves and dilute our existing stockholders and could adversely affect the market price of our common stock. For example, we had cash outflows of approximately $9.0 million and $2.7 million in connection with our acquisitions of M-Factor and AIS in March 2011 and December 2010, respectively. Moreover, we cannot assure you that the anticipated benefits of any acquisition, including our revenue or return on investment assumptions, would be realized or that we would not be exposed to unknown liabilities.

        In addition, an acquisition may negatively impact our results of operations because we may incur additional expenses relating to one-time charges, write-downs, amortization of intangible assets, or tax-related expenses. For example, our acquisition of TradePoint in November 2006 resulted in approximately $1.1 million, $911,000, and $967,000 of amortization of purchased intangible assets in fiscal 2011, 2010, and 2009, and will result in amortization of approximately $540,000 in fiscal 2012 with declining amounts in fiscal 2013 and 2014. Our acquisition of Connect3 in February 2009 resulted in approximately $1.8 million and $2.2 million of amortization of purchased intangible assets in fiscal 2011 and 2010, respectively, and a $150,000 of write-off of in-process research and development costs in fiscal 2009. The remaining carrying amount of approximately $626,000 associated with the Connect3 acquisition will be fully amortized in fiscal 2012. We anticipate a significant increase in amortization expenses in fiscal 2012 and 2013 as a result of the M-Factor and AIS acquisitions.

We might require additional capital to support our business growth, and this capital might not be available on acceptable terms, or at all.

        We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges and opportunities, including continued economic concerns as well as the need to develop new software or enhance our existing software, enhance our operating infrastructure and acquire complementary businesses and technologies. We have a loan agreement with a financial institution that has a maturity date of May 7, 2012 under which we have a $20.0 million revolving line of credit. However, we may need to engage in equity or debt financings or enter into additional credit agreements to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we secure in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters that make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms

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favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

Our sales cycles are long and unpredictable, and our sales efforts require considerable time and expense.

        We market our software to large retailers and CP companies, and sales to these customers are complex efforts that involve educating our customers about the use and benefits of our software, including its technical capabilities. Customers typically undertake a significant evaluation process that can result in a lengthy sales cycle, in some cases over 12 months. We spend substantial time, effort, and money in our sales efforts without any assurance that our efforts will generate long-term agreements or any revenue. In addition, customer sales decisions are frequently influenced by macroeconomic factors, budget constraints, multiple approvals, changes in key customer personnel, and unplanned administrative, processing and other delays. If sales expected from a specific customer are not realized, our revenue and, thus, our future operating results could be adversely impacted.

Our business will be adversely affected if the retail and CP industries do not widely adopt technology solutions incorporating scientific techniques to understand and predict consumer demand to make pricing and other merchandising decisions, as well as our related collaborative network strategy.

        Our software addresses the new and emerging market of applying econometric modeling and optimization techniques through software to enable retailers and CP companies to understand and predict consumer demand in order to improve their pricing, promotion, and other merchandising and marketing decisions. These decisions are fundamental to retailers and CP companies. Accordingly, our target customers may be hesitant to accept the risk inherent in applying and relying on new technologies or methodologies to supplant traditional methods. Our business model also relies on these retailers and CP companies adopting and embracing the full features and functionality available on our network for inter- and intra-company collaborative interaction. Our business will not be successful if retailers and CP companies do not embrace the use of software to enable more strategic pricing and other merchandising decisions, or otherwise embrace our collaborative network strategy.

If we are unable to continue to enhance our current software, which is becoming increasingly complex, or to develop or acquire new software to address changing business requirements, we may not be able to attract or retain customers.

        Our ability to attract new customers, renew agreements with existing customers and maintain or increase revenue from existing customers will depend in large part on our ability to anticipate the changing needs of the retail and CP industries, to enhance our increasingly complex existing software and to introduce new software that meet those needs. Certain of our implementation and integration engagements, particularly with respect to initial deployment with larger customers, have become increasingly complex. Further, certain of our engagements require, and other future engagements may require, us to develop certain substantial and customer-specific functionality. Such engagements can be significantly more time-consuming and complicated than our other customer engagements. Any new software may not be introduced in a timely or cost-effective manner and may not achieve market acceptance, meet customer expectations or contractual commitments, or generate revenue sufficient to recoup the cost of development or acquisition of such software. For example, we have not yet completed development or achieved market acceptance of certain components of our solutions with respect to which we have made certain commitments to engage in development efforts on a commercially reasonable basis. In addition, we have recently made certain investments in assets and technology related to apparel retailing. If we are unable to successfully develop or acquire new software and enhance our existing applications to meet customer requirements, we may not be able to attract or retain customers.

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Understanding and predicting consumer behavior is dependent upon the continued availability of accurate and relevant data from retailers and third-party data aggregators. If we are unable to obtain access to relevant data, or if we do not enhance our core science and econometric modeling methodologies to adjust for changing consumer behavior, our software may become less competitive or obsolete.

        The ability of our econometric models to forecast consumer demand depends upon the assumptions we make in designing the models and in the quality of the data we use to build them. Our models rely on point of sale (POS), transaction log or loyalty program data provided to us directly by our retail customers and by third-party data aggregators. Consumer behavior is affected by many factors, including evolving consumer needs and preferences, new competitive product offerings, more targeted merchandising and marketing, emerging industry standards, and changing technology. Data adequately representing all of these factors may not be readily available in certain geographies or in certain markets. In addition, the relative importance of the variables that influence demand will change over time, particularly with the continued growth of the Internet as a viable retail alternative and the emergence of non-traditional marketing channels. If we are unable to obtain POS, transaction log or loyalty program data from our retail customers or from third-party data aggregators, or if we fail to enhance our core science and modeling methodologies to adjust for changes in consumer behavior, customers may delay or decide against purchases or renewals of our software.

We rely on our management team and will need additional personnel to grow our business, and the loss of one or more key employees or our inability to attract and retain qualified personnel could harm our business.

        Our success depends to a significant degree on our ability to attract, retain and motivate our management team and our other key personnel. Our professional services organization and other customer-facing groups, in particular, play an instrumental role in ensuring our customers' satisfaction. In addition, our science, engineering, and modeling team requires experts in econometrics and advanced mathematics, and there are a limited number of individuals with the education and training necessary to fill these roles should we experience employee departures. All of our employees work for us on an at-will basis, and there is no assurance that any employee will remain with us. Our competitors may be successful in recruiting and hiring members of our executive management team or other key employees, and it may be difficult for us to find suitable replacements on a timely basis. Many of the members of our management team and key employees are substantially vested in their shares of our common stock or options to purchase shares of our common stock, and therefore retention of these employees may be difficult in the highly competitive market and geography in which we operate our business.

We have derived most of our revenue from sales to our retail customers. If our software is not widely accepted by CP companies, and our collaborative network strategy is not fully realized, our ability to grow our revenue and achieve our strategic objectives will be harmed.

        To date, we have derived most of our revenue from retail customers. In fiscal 2011, we generated approximately 81% of our revenue from sales to retail customers, while we generated approximately 19% of our revenue from sales to CP companies. In fiscal 2010, we generated approximately 82% of our revenue from sales to retail customers while we generated approximately 18% of our revenue from sales to CP companies. In order to grow our revenue and to achieve our long-term strategic objectives, including growth of our retail and CP customer network, it is important for us to expand our sales to derive a more significant portion of our revenue from new and existing CP customers (including through our recent acquisition of M-Factor), and for those companies to actively participate in our collaborative network strategy. If CP companies do not widely accept our software, our revenue growth and business will be harmed.

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We face intense competition that could prevent us from increasing our revenue and prevent us from becoming profitable.

        The market for our software is highly competitive and we expect competition to intensify in the future. Competitors vary in size and in the scope and breadth of the products and services they offer. Currently, we face competition from traditional enterprise software application vendors such as Oracle Corporation and SAP AG, niche retail software vendors such as KSS Group (recently acquired by dunnhumby USA) and Revionics, Inc., and statistical tool vendors such as SAS, Inc. To a lesser extent, we also compete or potentially compete with marketing information providers for the CP industry such as The Nielsen Company and Information Resources, Inc., as well as business consulting firms such as McKinsey & Company, Inc., Deloitte & Touche LLP and Accenture LLP, which offer merchandising consulting services and analyses. Because the market for our solutions is relatively new, we expect to face additional competition from other established and emerging companies and, potentially, from internally-developed applications. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and a failure to increase, or the loss of, market share.

        Competitive offerings may have better performance, lower prices and broader acceptance than our software. Many of our current or potential competitors have longer operating histories, greater brand recognition, larger customer bases and significantly greater financial, technical, sales, research and development, marketing and other resources than we have. Competitors with greater financial resources may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. As a result, our competition may be able to offer more effective software or may opt to include software competitive to our software as part of broader, enterprise software solutions at little or no charge.

        We may not be able to maintain or improve our competitive position against our current or future competitors, and our failure to do so could seriously harm our business.

We rely on three third-party service providers to host our software, and any interruptions or delays in services from these third parties could impair the delivery of our software as a service or harm our reputation.

        We deliver our software to customers over the Internet. The software is hosted in three third-party data centers located in San Jose and Sacramento, California, and Mesa, Arizona. We do not control the operation of any of these facilities, and we rely on these service providers to provide all power, connectivity and physical security. These facilities could be vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They are also subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The occurrence of a natural disaster or intentional misconduct, a decision to close these facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our services. Additionally, because we currently rely upon disk and tape bond back-up procedures, but do not operate or maintain a fully-redundant back-up site, there is an increased risk of service interruption.

If our security measures are breached and unauthorized access is obtained to our customers' data, our operations may be perceived as not being secure, customers may curtail or stop using our software and we may incur significant liabilities.

        Our operations involve the storage and transmission of our customers' confidential information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to our customers' data, our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of

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the effectiveness of our security measures could be harmed and we could lose potential sales and existing customers.

If we fail to respond to rapidly changing technological developments or evolving industry standards, our software may become less competitive or obsolete.

        Because our software is designed to operate on a variety of network, hardware and software platforms using standard Internet tools and protocols, we will need to modify and enhance our software continuously to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses. If we are unable to respond in a timely manner to these rapid technological developments, our software may become less marketable and less competitive or obsolete.

Our use of open source software and third-party technology could impose limitations on our ability to commercialize our software.

        We incorporate open source software into our software. Although we monitor our use of open source software closely, the terms of many open source licenses have not been interpreted by United States courts, and there is a risk that these licenses could be construed in a manner that imposes unanticipated conditions, costs, or restrictions on our ability to commercialize our software. In that event, we could be required to seek licenses from third parties in order to continue offering our software, to re-engineer our technology or to discontinue offering our software in the event re-engineering cannot be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition. We also incorporate certain third-party technologies, including software programs and algorithms, into our software and may desire to incorporate additional third-party technologies in the future. Licenses to new third-party technologies may not be available to us on commercially reasonable terms, or at all.

If we are unable to protect our intellectual property rights, our competitive position could be harmed and we could be required to incur significant expenses in order to enforce our rights.

        To protect our proprietary technology, including our core statistical and mathematic models and our software, we rely on trade secret, patent, copyright, service mark, trademark and other proprietary rights laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. Despite our efforts, the steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police that misappropriation or infringement is uncertain, particularly in countries outside of the United States, including China, Russia, and India, where we conduct (or third parties conduct on our behalf) a portion of our development activity. Further, we do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims. Our current patents and any future patents that may be issued may be contested, circumvented or invalidated. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages, and, as with any technology, competitors may be able to develop technologies similar or superior to our own now or in the future.

        Protecting against the unauthorized use of our trade secrets, patents, copyrights, service marks, trademarks and other proprietary rights is expensive, difficult and not always possible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation could be costly and divert management resources, either of which could harm our business, operating results and financial condition. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforcing their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

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        We cannot be certain that the steps we have taken will prevent the unauthorized use or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. The enforcement of our intellectual property rights also depends on our legal actions against these infringers being successful, but we cannot be sure these actions will be successful, even when our rights have been infringed. Furthermore, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are available or where we have development work performed. In addition, the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving.

Material defects or errors in our software or any failure to meet service level agreements with our customers could harm our reputation, result in significant expense to us and impair our ability to sell our software.

        Our software is inherently complex and may contain material defects or errors that may cause it to fail to perform in accordance with customer expectations. Any defects that cause interruptions to the availability of our software could result in lost or delayed market acceptance and sales, require us to provide sales credits or issue refunds to our customers, cause existing customers not to renew their agreements and prospective customers not to purchase our software, divert development resources, hurt our reputation and expose us to claims for liability. After the release of our software, defects or errors may also be identified from time to time by our internal team and by our customers. In addition, we have entered into service level agreements with some of our customers warranting defined levels of uptime reliability and software performance and permitting those customers to receive service credits or discounted future services, or to terminate their agreements in the event that we fail to meet those levels. The costs incurred in correcting any material defects or errors in our software or in failing to meet any such service levels may be substantial.

Because our long-term success depends, in part, on our ability to operate and to expand sales of our software to customers located outside of the United States, our business may be increasingly susceptible to risks associated with international operations.

        We have limited experience operating in international jurisdictions. In fiscal 2011 and 2010, approximately 13% and 14%, respectively, of our revenue was attributable to sales to companies located outside the United States. Our limited experience in operating our business outside of the United States increases the risk that any international expansion efforts that we may undertake will not be successful. In addition, conducting international operations subjects us to new risks that we have not generally faced in the United States. These include:

•

fluctuations in currency exchange rates;



•

unexpected changes in foreign regulatory requirements, including with respect to the enforcement of the Foreign Corrupt Practices Act or the recently-adopted U.K. Bribery Act;



•

localization of our software, including translation of the interface of our software into foreign languages and creation of localized agreements;



•

longer accounts receivable payment cycles and difficulties in collecting accounts receivable;



•

tariffs and trade barriers and other regulatory or contractual limitations on our ability to sell or develop our software in certain international markets;



•

difficulties in managing and staffing international operations;



•

potentially adverse tax consequences, including the complexities of international value added tax systems and restrictions on the repatriation of earnings;

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•

the burdens of complying with a wide variety of international laws and different legal standards, including local data privacy laws and local consumer protection laws that could regulate retailers' permitted pricing and promotion practices;



•

potential interruption of internet access by foreign governments;



•

political, social and economic instability abroad, terrorist attacks and security concerns in general; and



•

reduced or varied protection of intellectual property rights in some countries, in particular China and Russia.

        The occurrence of any of these risks could negatively affect our international business and, consequently, our results of operations.

Because portions of our software development, sustaining engineering, quality assurance and testing, operations and customer support are provided internationally, including by third parties in China and Russia, our business is susceptible to risks associated with having substantial operations overseas.

        Portions of our software development, sustaining engineering, quality assurance and testing, operations and customer support are provided by Sonata Services Limited, or Sonata, a third party located in Shanghai, China, as well as to a more limited extent by a third party located in Russia and internal development resources in India. As of February 28, 2011, in addition to our 172 employees in our operations, customer support, science, product management and engineering groups located in the United States, an additional 76 Sonata personnel were dedicated to our projects. Remotely coordinating resources in China, Russia, and India requires significant management attention and substantial resources, and there can be no assurance that we will be successful in coordinating these activities. Furthermore, if there is a disruption to these operations, it will require that substantial management attention and time be devoted to achieving resolution. If our international third-party contractors were to stop providing these services or if there was widespread departure of their trained personnel, this could cause a disruption in our product development process, quality assurance and product release cycles and customer support organizations and require us to incur additional costs to replace and train new personnel.

        Enforcement of intellectual property rights and contractual rights may be more difficult in China and Russia, and their laws and regulations may not be sufficient to cover all aspects of economic activities. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. Accordingly, the enforcement of our contractual arrangements with our international third-party contractors, our confidentiality agreements with each contractor dedicated to our work, and the interpretation of the laws governing this relationship are subject to uncertainty.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and investors' views of us.

        Ensuring that we have internal financial and accounting controls and procedures adequate to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we are required to perform annual system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In the future, our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to

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be material weaknesses. Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management time on compliance-related issues. Moreover, if we are not able to comply with the requirements of Section 404 in the future, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our common stock could decline and we could be subject to sanctions or investigations by the NASDAQ Stock Market, the Securities and Exchange Commission, or SEC, or other regulatory authorities, which would require additional financial and management resources.

        Furthermore, implementing any appropriate future changes to our internal control over financial reporting may entail substantial costs in order to modify our existing accounting systems, may take a significant period of time to complete and may distract our officers, directors and employees from the operation of our business. These changes, however, may not be effective in maintaining the adequacy of our internal control over financial reporting, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In addition, investors' perceptions that our internal control over financial reporting is inadequate or that we are unable to produce accurate financial statements may adversely affect our stock price. While neither we nor our independent registered public accounting firm has identified deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, there can be no assurance that material weaknesses will not be subsequently identified.

If one or more of our key strategic relationships were to become impaired or if these third parties were to align with our competitors, our business could be harmed.

        We have relationships with a number of third parties whose products, technologies and services complement our software. Many of these third parties also compete with us or work with our competitors. If we are unable to maintain our relationships with the key third parties that currently recommend our software or that provide consulting services on our software implementations or if these third parties were to begin to recommend our competitors' products and services, our business could be harmed.

Claims by others that we infringe their proprietary technology could harm our business.

        Third parties could claim that our software infringes their proprietary rights. In recent years, there has been significant litigation involving patents and other intellectual property rights, and we expect that infringement claims may increase as the number of products and competitors in our market increases and overlaps occur. In addition, to the extent that we gain greater visibility and market exposure as a public company, we will face a higher risk of being the subject of intellectual property infringement claims. Any claims of infringement by a third party, even those without merit, could cause us to incur substantial defense costs and could distract our management from our business. Furthermore, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from offering our software. In addition, we might be required to seek a license for the use of the infringed intellectual property, which may not be available on commercially reasonable terms or at all. Alternatively, we might be required to develop non-infringing technology, which could require significant effort and expense and might ultimately not be successful.

        Third parties may also assert infringement claims relating to our software against our customers. Any of these claims might require us to initiate or defend potentially protracted and costly litigation on their behalf, regardless of the merits of these claims, because in certain situations we agree to indemnify our customers from claims of infringement of proprietary rights of third parties. If any of these claims succeeds, we might be forced to pay damages on behalf of our customers, which could materially adversely affect our business.

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Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.

        A change in accounting standards or practices could have a significant effect on our reported results and might affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred in the past and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

We have expanded our operations in recent periods. If we fail to manage this expansion effectively, we may be unable to execute our business plan, maintain high levels of customer service or address competitive challenges adequately.

        We have expanded our overall business, headcount and operations in recent periods. For instance, our headcount grew from 198 employees at February 28, 2007 to 340 employees at February 28, 2011, and we added approximately 45 more employees in March 2011, as a result of our acquisition of M-Factor. Headcount in research and development increased from 99 employees at February 28, 2007 to 130 employees at February 28, 2011. We may need to continue to expand our operations in order to increase our customer base and to develop additional software. Increases in our customer base could create challenges in our ability to implement our software and support our customers. In addition, we will be required to continue to improve our operational, financial and management controls and our reporting procedures. As a result, we may be unable to manage our business effectively in the future, which may negatively impact our operating results.

Evolving regulation of the Internet may affect us adversely.

        As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. For example, we believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing, or use of personal or consumer information could affect our customers' ability to use and share data, potentially reducing demand for our software and restricting our ability to store and process data for our customers. In addition, taxation of software provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based software, which could harm our business, financial condition and operating results.

Third-party claims and litigation could seriously harm our business.

        We have from time to time become involved in legal matters that arise in the normal course of business and otherwise. There can be no assurance that third party claims and litigation that may arise in the future will not have a material adverse effect on our business, financial position, results of operations, or cash flows, including a loss of customers, or subject us to significant financial or other remedies.

We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance efforts.

        As a public company, we incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), and rules currently proposed or subsequently implemented by the SEC and the NASDAQ Global Market, impose additional requirements on public companies. The recently-adopted Dodd-Frank Act will subject us to significant additional executive compensation and corporate governance requirements, many of which have yet to be implemented by the SEC. Our management and other personnel need to devote a substantial amount of time to complying with these requirements. Moreover, these rules and regulations

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have increased our legal and financial compliance costs and make some activities more time-consuming and costly. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors and board committees or as executive officers and more expensive for us to obtain or maintain director and officer liability insurance.

Risks Related to Ownership of Our Common Stock

The trading price of our common stock has been volatile in the past, may continue to be volatile, and may decline.

        The trading price of our common stock has fluctuated widely in the past and may do so in the future. Further, our common stock has limited trading history. Factors affecting the trading price of our common stock, many of which are beyond our control, could include:

•

variations in our operating results, including any decline in our revenues or material changes in our cash flows;



•

announcements of technological innovations, new products and services, acquisitions, strategic alliances or significant agreements by us or by our competitors;



•

recruitment or departure of key personnel;



•

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;



•

changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;



•

potential dilution caused by future issuances of our stock, including through currently outstanding or future stock options or restricted stock units;



•

market conditions in our industry, the retail industry and the economy as a whole;



•

price and volume fluctuations in the overall stock market;



•

lawsuits threatened or filed against us or other disputes;



•

adoption or modification of regulations, policies, procedures or programs applicable to our business; and



•

the volume of trading in our common stock, including sales upon exercise of outstanding options.

        In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence as has happened in prior periods, the trading price of our common stock could decline for reasons unrelated to our business, operating results, or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. Some companies that have had volatile market prices for their securities have had securities class actions filed against them. A suit filed against us, regardless of its merits or outcome, could cause us to incur substantial costs and could divert management's attention.

Future sales of shares by existing stockholders, or the perception that such sales may occur, could cause our stock price to decline.

        If our existing stockholders, particularly our directors and executive officers and other significant stockholders, sell substantial amounts of our common stock in the public market, or are perceived by the public market as intending to sell, the trading price of our common stock could decline.

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If securities analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

        The trading market for our common stock depends in part on the research and reports that securities analysts publish about us or our business. We have limited research coverage by securities analysts. If we do not obtain further securities analyst coverage, or if one or more of the analysts who cover us downgrade our stock or publish unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Insiders and other significant stockholders have substantial control over us and will be able to influence corporate matters.

        At February 28, 2011, our directors, executive officers and holders of ten percent or more of our common stock beneficially owned, in the aggregate, approximately 21.9% of our outstanding common stock. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

        We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our restated certificate of incorporation and amended and restated bylaws:

•

authorize the issuance of "blank check" preferred stock that could be issued by our board of directors to thwart a takeover attempt;



•

establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;



•

require that directors only be removed from office for cause and only upon a majority stockholder vote;



•

provide that vacancies on our board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office;



•

limit who may call special meetings of stockholders;



•

prohibit stockholder action by written consent, thus requiring all actions to be taken at a meeting of the stockholders;



•

require supermajority stockholder voting to effect certain amendments to our restated certificate of incorporation and amended and restated bylaws; and



•

require advance notification of stockholder nominations and proposals.

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Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        Our corporate headquarters and our primary facilities occupy approximately 82,000 square feet in San Mateo, California under a lease that has a total lease term of eight years with an initial non-cancellable lease term of five years commencing December 1, 2009. In addition, we lease approximately 3,660 square feet in La Mirada, California and approximately 9,706 square feet in Minneapolis, Minnesota. We also lease small sales and marketing, and research offices in the United States, Europe and India. The size and location of these properties change from time to time on the basis of business requirements. We do not own any real property. We operate three data centers. Our primary data centers are located in Mesa, Arizona and San Jose, California. The hosting agreements for Mesa and San Jose expire in October 2012 and August 2011, respectively.

        We believe our facilities are adequate for our current needs and that suitable additional or substitute space will be available to accommodate any foreseeable expansion of our operations.

Item 3.    Legal Proceedings

        We have from time to time become involved in legal matters that arise in the normal course of business and otherwise. There can be no assurance that third party claims and litigation that may arise in the future will not have a material adverse effect on our business, financial position, results of operations, or cash flows, including a loss of customers, or subject us to significant financial or other remedies.

Item 4.    (Removed and Reserved)

        Not applicable.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Market Information.    Our common stock has been listed on the NASDAQ Global Market under the symbol "DMAN" since August 9, 2007. Prior to that time, there was no public market for our common stock. The following table sets forth for the indicated periods the high and low sales prices by quarter for our common stock as reported by the NASDAQ Global Market.

 

        Stockholders of Record.    As of February 28, 2011, we had approximately 90 stockholders of record of our common stock.

        Dividends.    We have never declared or paid any cash dividends on our common stock. We currently intend to retain earnings, if any, to finance future growth, and therefore do not expect to pay cash dividends on our common stock in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors and will be subject to compliance with certain covenants in our loan and security agreement with Silicon Valley Bank, which may restrict or limit our ability to pay dividends.

        Securities Authorized for Issuance Under Equity Compensation Plans.    For equity plan compensation information, please refer to Item 12 in Part III of this Annual Report on Form 10-K.

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Stock Performance Graph and Cumulative Total Return

        Notwithstanding any statement to the contrary in any of our previous or future filings with the Securities and Exchange Commission, or SEC, the following information relating to the price performance of our common stock shall not be deemed to be "filed" with the SEC or to be "soliciting material" under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and it shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.

        The graph below compares the cumulative total stockholder return of our common stock with that of the Nasdaq Composite Index and the Nasdaq Computer Index from August 9, 2007 (the date on which our common stock commenced trading on the NASDAQ Global Market) through February 28, 2011. The graph assumes that $100 was invested in shares of our common stock, the Nasdaq Composite Index and the Nasdaq Computer & Data Processing Index at the close of market on August 9, 2007, and that dividends, if any, were reinvested. The comparisons in this graph are based on historical data and are not intended to forecast or be indicative of future performance of our common stock.

Comparison of Cumulative Total Returns of DemandTec, Inc., Nasdaq Composite
Index and Nasdaq Computer & Data Processing Index

Unregistered Sales of Equity Securities

        None.

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Item 6.    Selected Financial Data

        The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and related notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operation, which are included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for fiscal 2011, 2010 and 2009, and the selected consolidated balance sheet data as of February 28, 2011 and 2010, are derived from, and are qualified by reference to, the audited consolidated financial statements that are included in this Annual Report on Form 10-K. The consolidated statements of operations data for fiscal 2008 and 2007 and the consolidated balance sheet data as of February 28, 2009, February 29, 2008, and February 28, 2007 are derived from audited consolidated financial statements which are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of results to be expected for any future period.

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(1)

We acquired AIS in December 2010, Connect3 in February 2009, and TradePoint in November 2006. See Overview in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2 of Notes to Consolidated Financial Statements.

(2)

Includes amortization of purchased intangible assets of (in thousands) $1,903, $1,862, $610, $608, and $203 in fiscal 2011, 2010, 2009, 2008, and 2007, respectively.

(3)

Includes stock-based compensation expense as follows: