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SHORETEL INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and related notes included elsewhere in this document. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
below. Factors that could cause or contribute to such differences include, but
are not limited to, those identified below, and those discussed in the section
entitled "Risk Factors."
Overview
We are a leading provider of brilliantly simple business communication
solutions, comprised of integrated voice, video, data and mobile applications
based on Internet Protocol ("IP") technologies. We provide customers with a
choice to operate our solution in their own premise-based data centers, or to
subscribe to our cloud-based hosted communication service which we refer to as
ShoreTel Sky. Our distributed IP architecture enables multi-site enterprises to
be served by a single integrated communication system. These solutions enable a
single point of management, easy installation and a high degree of scalability
and reliability. They also provide end-users with a consistent, full suite of
features across the enterprise, regardless of location, which helps IT
management meet growing demands for powerful communication capabilities. As a
result, we believe our solutions enable enhanced end-user productivity and
provide lower total cost of ownership and higher customer satisfaction than
alternative systems.
We were founded in September 1996 and shipped our first system in 1998. Since
that time, we have continued to develop and enhance our product line. Our
acquisition of M5 Networks, Inc. ("M5"), a leader in providing hosted unified
communication solutions on March 23, 2012, expanded our products and service
offerings to now include hosted solutions. Our acquisition of Agito Networks,
Inc. ("Agito"), a provider of platform-agnostic enterprise mobility, in the
second quarter of fiscal 2011, expanded our existing mobile solution with the
vision of allowing users to communicate on any device, such as a desk phone,
mobile phone, or computer, at any location using any cellular or Wi-Fi
network simply and cost effectively.
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We sell our solutions through our extensive network of over 1,000 authorized
resellers served either by national distributors or by ShoreTel directly.
ShoreTel solutions are also sold by strategic partners under their brand names,
such as AT&T and HP for our mobility services.
Our solutions are available for businesses to operate in their own premise data
centers or on a hosted, cloud-based platform. Solutions within our premise
segment are comprised of our switches, IP phones and software application which
work with our unique IP architecture to provide an integrated communication
system. The hosted solutions business acquired from M5 is now a part of our
hosted segment which we also refer to as the "Cloud Division". The products and
services of the hosted segment are now branded and sold as "ShoreTel Sky". Our
ShoreTel Sky solutions are comprised of our unique software delivered to the
customer using our routers and IP phones.
We sell our premise products primarily through channel partners that market and
sell our systems to enterprises across all industries, including small, medium
and large companies and public institutions. Our channel partners include
resellers as well as value-added distributors who in turn sell to the resellers.
We believe our channel strategy allows us to reach a larger number of
prospective enterprise customers more effectively than if we were to sell
directly. As of December 31, 2012, we worked with over 1,000 channel partners to
sell our products. Our internal sales and marketing personnel support these
channel partners in their selling efforts. In some circumstances, the enterprise
customer will purchase products directly from us, but in these situations we
typically compensate the channel partner for its sales efforts. At the request
of the channel partner, we often ship our products directly to the enterprise
customer.
Most channel partners perform installation and implementation services for the
enterprises that use our systems. Generally, our channel partners provide the
post-contractual support to the enterprise customer by providing first-level
support services and purchasing additional services from us under a
post-contractual support contract. For channel partners without support
capabilities or that do not desire to provide support, we offer full support
contracts to provide all of the support to enterprise customers. Our channel
partners may provide managed services offerings to the enterprise customer under
which the channel partner may purchase our products and services and, in turn,
charge the enterprise customer a monthly subscription fee to access those
products and services.
Our phone and switch products are manufactured by contract manufacturers located
in the United States and in China. Our contract manufacturers provide us with a
range of operational and manufacturing services, including component
procurement, final testing and assembly of our products, which allows us to
scale our business without the significant capital investment and on-going
expenses required to establish and maintain a manufacturing operation.
We sell our products using both single-tier and two-tier distribution channels
to enterprises across all industries, including small, medium and large
companies and public institutions. Our single-tier distribution channel consists
of resellers that usually sell our products to end customers. Resellers usually
do not stock our products and do not have rights of return. During the second
quarter of fiscal 2011, we entered into arrangements with two major value-added
distributors to distribute our comprehensive line of premise business
communication solutions to resellers within the United States in what we refer
to as a "two-tier" distribution model. During fiscal 2012, we expanded our
two-tier network and added more value-added distributors to the network. We
believe that the two-tier distribution model allows us to better serve our
existing channel partners, to reach a larger number of prospective enterprise
customers more effectively and to position us to continue to build momentum and
capture increased market share in the IP telephony, mobility and UC
markets. Furthermore, the two-tier distribution model allows us to scale our
business operations without making significant investments in product
distribution facilities, thus allowing us to better manage our cost
structure. Our two-tier distribution channel consists of value-added
distributors that stock and sell our products to other resellers or to end
customers. The value-added distributors have limited rights of return. We refer
to our resellers and value-added distributors collectively as "channel
partners".
Although we have historically sold our systems primarily to small and medium
sized enterprises, in recent years, we have been expanding our sales and
marketing activities to increase our focus on larger enterprise customers,
including the creation of a major accounts program whereby our sales personnel
assist our channel partners to sell to large enterprise customers. As of
December 31, 2012, we had sold our products to approximately 27,000 enterprise
customers. To the extent we continue to successfully acquire larger enterprise
customers in the United States and worldwide, we expect our sales cycle to
increase, and the demands on our sales and support infrastructure to increase.
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We are headquartered in Sunnyvale, California and have sales, customer support,
general and administrative and engineering functions in Texas. Following the
acquisition of M5, our ShoreTel Sky related functions are performed from our
offices in New York and Illinois. The majority of our personnel work at these
locations. Sales, engineering, and support personnel are also located throughout
the United States and, to a lesser extent, in Canada, the United Kingdom,
Ireland, Germany, Spain, Hong Kong, Singapore, Philippines, India and Australia.
While most of our customers are located in the United States, we have remained
fairly consistent in revenue from international sales, which accounted for
approximately 10% and 12% of our total revenue for the three months ended
December 31, 2012 and 2011, respectively and were 11% and 12% for the six months
ended December 31, 2012 and 2011, respectively. We expect sales to customers in
the United States will continue to comprise the majority of our sales in the
foreseeable future.
Key Business Metrics
We monitor a number of key metrics to help forecast growth, establish budgets,
measure the effectiveness of sales and marketing efforts and measure operational
effectiveness.
Initial and repeat sales orders. Our goal is to attract a significant number of
new enterprise customers and to encourage existing enterprise customers to
purchase additional products and support. Many enterprise customers make an
initial purchase and deploy additional sites at a later date, and also buy
additional products and support as their businesses expand. As our installed
enterprise customer base has grown we have experienced an increase in revenue
attributable to existing enterprise customers, which currently represents a
significant portion of our premise revenue.
Deferred revenue. Deferred revenue relates to the timing of revenue recognition
for specific transactions based on delivery of service, support, specific
commitments, product and services delivered to our value-added distributors that
have not been delivered or sold through to resellers, and other factors.
Deferred revenue primarily consists of billings or payments received in advance
of revenue recognition from our transactions and are recognized as the revenue
recognition criteria are met. Nearly all of our premise system sales include the
purchase of post-contractual support contracts with terms of up to five years,
and our renewal rates on these contracts have been high historically. We
recognize support revenue on a ratable basis over the term of the support
contract. Since we receive payment for support in advance of recognizing the
related revenue, we carry a deferred revenue balance on our consolidated balance
sheet. This deferred revenue helps provide predictability to our future support
and services revenue. Almost all of our hosted services are billed a month in
advance. Billings that are collected before the service is delivered are
included in the deferred revenue balance on our consolidated balance sheet.
These amounts are recognized as revenue as the services are delivered. Deferred
revenue for our hosted segment represents amounts paid by customers for future
services to be provided. Our deferred revenue balance at December 31, 2012 was
$51.9 million, of which $37.5 million is expected to be recognized within one
year.
Gross margin. Our gross margin for premise segment products is primarily
affected by our ability to reduce hardware costs faster than the decline in
average overall system sales prices. We strive to increase our product gross
margin by reducing hardware costs through product redesign and volume discount
pricing from our suppliers. In general, product gross margin on our switches is
greater than product gross margin on our IP phones. As the prices and costs of
our hardware components have decreased over time, our software components, which
have lower costs than our hardware components, have represented a greater
percentage of our overall margin on system sales. We consider our ability to
monitor and manage these factors to be a key aspect of maintaining product gross
margins and increasing our profitability.
Gross margin for premise segment support and services is impacted primarily by
labor-related expenses. The primary goal of our support and services function is
to ensure a high level of customer satisfaction and our investments in support
personnel and infrastructure are made with this goal in mind. We expect that as
our installed enterprise customer base grows, we may be able to slightly improve
gross margin for support and services through economies of scale. However, the
timing of additional investments in our support and services infrastructure
could materially affect our cost of support and services revenue, both in
absolute dollars and as a percentage of support and services revenue and total
revenue, in any particular period.
Gross margin for the hosted segment services is lower than the gross margins for
the premise segment and is impacted primarily by the reselling of broadband
costs to customers, employee-related expense, data communication cost, carrier
cost, telecom taxes, and intangible asset amortization expense. We expect that
with the growth in the hosted customer base, the gross margins for our hosted
business may improve over time.
Operating expenses. Our operating expenses are comprised primarily of
compensation and benefits for our employees. Accordingly, increases in operating
expenses historically have been primarily related to increases in our headcount.
We intend to expand our workforce to support our anticipated growth, and
therefore, our ability to forecast revenue is critical to managing our operating
expenses.
Average revenue per user. We calculate the monthly average service revenue per
user (ARPU) for our hosted segment as the average monthly recurring revenue per
customer divided by the average number of seats per customer. The average
monthly recurring revenue per customer is calculated as the monthly recurring
service revenue from customers in the period, divided by the simple average
number of business customers during the period. Our ARPU includes
telecommunication Internet circuits that we resell that could, as a percentage
of our business, decline over time as our average customer size increases and
therefore they are more likely to have their own networks already established.
Our monthly ARPU for the three month period ended December 31, 2012 was
approximately $60.
Revenue churn. Revenue churn for our hosted segment is calculated by dividing
the monthly recurring revenue from customers that have terminated during a
period by the simple average of the total monthly recurring revenue from all
customers in a given period. The effective management of the revenue churn is
critical to our ability to maximize revenue growth and to maintain and improve
margins. Our annualized revenue churn as of December 31, 2012 was approximately
4%.
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Basis of Presentation
Revenue. We derive our revenue from sales of our premise IP telecommunications
systems and related support and services as well as hosted services.
Premise Revenue. Our typical system includes a combination of IP phones,
switches and software applications primarily for our premise business. We sell
our products through channel partners that include resellers and value-added
distributors. Prices to a given channel partner for hardware and software
products depend on that channel partner's volume and customer satisfaction
levels, as well as our own strategic considerations. In circumstances where we
sell directly to the enterprise customer in transactions that have been assisted
by channel partners, we report our revenue net of any associated payment to the
channel partners that assisted in such sales. This results in recognized revenue
from a direct sale approximating the revenue that would have been recognized
from a sale of a comparable system through a channel partner. Product revenue
has accounted for 59% and 80% of our total revenue for the three months ended
December 31, 2012 and 2011, respectively and 60% and 79% of our total revenue
for the six months ended December 31, 2012 and 2011, respectively. These
sequential decreases in premise revenue as a percent of our total revenue relate
to the total revenue base for the three and six months ended December 31, 2012
including hosted revenue resulting from our acquisition of M5 on March 23, 2012
with no corresponding revenue included in the total revenue for the three and
six months ended December 31, 2011.
Premise support and services revenue primarily consists of post-contractual
support, and to a lesser extent revenue from training services, professional
services and installations that we perform. Post-contractual support includes
software updates which grant rights to unspecified software license upgrades and
maintenance releases issued during the support period. Post-contractual support
also includes both Internet- and phone-based technical support. Revenue from
post-contractual support is recognized ratably over the contractual service
period. Premise support and services revenues accounted for 18% and 20% of our
total revenue for the three months ended December 31, 2012 and 2011,
respectively, and 18% and 21% of our total revenue for the six months ended
December 31, 2012 and 2011, respectively.
Hosted Revenue. Hosted services and solutions consist primarily of our
proprietary hosted VoIP Unified Communications system as well as other services
such as foreign and domestic calling plans, certain UC applications, internet
service provisioning, training and other professional services. Additionally, we
offer our customers the ability to purchase phone systems from us directly or
rent such systems as part of their service agreements. Our hosted services are
sold through indirect channel resellers and a direct sales force. Our customers
typically enter into 12 month service agreements whereby they are billed for
such services on a monthly basis. Revenue from our hosted services is recognized
on a monthly basis as services are delivered. Revenue associated with various
calling plans and internet services are recognized as such services are
provided. Hosted revenues accounted for 23% and 22% of our total revenues for
the three and six months ended December 31, 2012, respectively. There was no
hosted or related services revenue in the three and six months ended December
31, 2011.
Cost of revenue. Cost of premise product revenue consists primarily of hardware
costs, royalties and license fees for third-party software included in our
systems, salary and related overhead costs of operations personnel, freight,
warranty costs and provision for excess inventory. The majority of these costs
vary with the unit volumes of products sold. Cost of premise support and
services revenue consists of salary and related overhead costs of personnel
engaged in support and service activities. Cost of hosted services revenue
consists of personnel and related costs of the hosted operation, data center
costs, data communication cost, carrier cost and amortization of intangible
assets.
Research and development expenses. Research and development expenses primarily
include personnel costs, outside engineering costs, professional services,
prototype costs, test equipment, software usage fees and facilities expenses.
Research and development expenses are recognized when incurred on a project
basis. We capitalize development costs incurred from determination of
technological feasibility through general release of the product to customers.
We are devoting substantial resources to the development of additional
functionality for existing products and the development of new products and
related software applications. We intend to continue to make investments in our
research and development efforts because we believe they are essential to
maintaining and improving our competitive position. Accordingly, we expect
research and development expenses to continue to increase in absolute dollars.
Sales and marketing expenses. Sales and marketing expenses primarily include
personnel costs, sales commissions, travel, marketing promotional and lead
generation programs, branding and advertising, trade shows, sales demonstration
equipment, professional services fees, amortization of intangible assets, and
facilities expenses. We plan to continue to invest in development of our
distribution channel by increasing the size of our field sales force to enable
us to expand into new geographies and further increase our sales to large
enterprise customers. We plan to continue investing in our domestic and
international marketing activities to help build brand awareness and create
sales leads for our channel partners. We expect that sales and marketing
expenses will increase in absolute dollars and remain our largest operating
expense category.
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General and administrative expenses. General and administrative expenses
primarily relate to our executive, finance, human resources, legal and
information technology organizations. General and administrative expenses
primarily consist of personnel costs, professional fees for legal, accounting,
tax, compliance and information systems, travel, recruiting expense, software
amortization costs, sales and telecom taxes, depreciation expense and facilities
expenses. As we expand our business, we expect general and administrative
expenses to increase in absolute dollars.
Other income (expense). Other income (expense) primarily consists of interest
earned on cash, cash equivalents and short-term investments, gains and losses on
foreign currency translations and transactions, interest expense on our debt as
well as other miscellaneous items affecting our operating results.
Provision from income taxes. Provision for income taxes includes federal, state
and foreign tax on our income as well as any adjustments made to our valuation
allowance for deferred tax assets. Since our inception, we have accumulated
substantial net operating loss and tax credit carryforwards. We account for
income taxes under an asset and liability approach. Deferred income taxes
reflect the impact of temporary differences between assets and liabilities
recognized for financial reporting purposes and such amounts recognized for
income tax reporting purposes, net operating loss carryforwards and other tax
credits measured by applying current enacted tax laws. Valuation allowances are
provided when necessary to reduce deferred tax assets to an amount that is more
likely than not to be realized.
Critical Accounting Policies and Estimates
The preparation of our financial statements and related disclosures in
conformity with generally accepted accounting principles in the United States of
America, or GAAP, requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. These estimates
and assumptions are based on historical experience and various other factors
that we believe are reasonable under the circumstances. We consider our
accounting policies related to revenue recognition, stock-based compensation,
goodwill and purchased-intangible assets and accounting for income taxes to be
critical accounting policies. A number of significant estimates, assumptions,
and judgments are inherent in our determination of when to recognize revenue,
how to estimate the best evidence of selling price for revenue recognition, the
calculation of stock-based compensation expense, evaluation of the potential
impairment of goodwill and purchased-intangible assets and the income tax
related balances. We base our estimates and judgments on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances. Actual results could differ materially from these estimates.
Management believes there have been no significant changes during the six months
ended December 31, 2012 to the items that we disclosed as our critical
accounting policies and estimates in Management's Discussion and Analysis of
Financial Condition and Results of Operations in our 2012 Annual Report on Form
10-K filed with the Securities and Exchange Commission. For a description of
those accounting policies, please refer to our 2012 Annual Report on Form 10-K.
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Results of Operations
The following table sets forth unaudited selected condensed consolidated
statements of operations data for the three and six months ended December 31,
2012 and 2011 (in thousands, except per share amounts).
Three Months Ended Six Months Ended
December 31, December 31,
2012 2011 2012 2011
Revenue:
Product $ 43,769 $ 46,277 $ 89,603 $ 88,461
Hosted and related services 17,087 - 32,749 -
Support and services 13,780 11,735 27,268 23,409
Total revenue 74,636 58,012 149,620 111,870
Cost of revenue:
Product (1) 15,069 16,103 30,856 30,558
Hosted and related services (1) 11,400 - 20,542 -
Support and services (1) 4,279 3,969 8,468 7,884
Total cost of revenue 30,748 20,072 59,866 38,442
Gross profit 43,888 37,940 89,754 73,428
Gross profit % 58.8 % 65.4 % 60.0 % 65.6 %
Operating expenses:
Research and development (1) 12,195 12,240 26,148 24,053
Sales and marketing (1) 31,739 21,596 62,495 42,818
General and administrative (1) 9,292 6,349 17,887 12,978
Total operating expenses 53,226 40,185 106,530 79,849
Loss from operations (9,338 ) (2,245 ) (16,776 ) (6,421 )
Other income (expense), net (926 ) (196 ) (1,328 ) (595 )
Loss before provision for tax (10,264 ) (2,441 ) (18,104 ) (7,016 )
Provision for income tax 90 97 287 164
Net loss $ (10,354 ) $ (2,538 ) $ (18,391 ) $ (7,180 )
Net loss per share - basic and
diluted (2) $ (0.18 ) $ (0.05 ) $ (0.32 ) $ (0.15 )
Shares used in computing net loss per
share - basic and diluted (2) (2) 58,566 47,946 58,376 47,666
(1) Includes stock-based compensation
expense as follows:
Cost of product revenue $ 34 $ 33 $ 84 $ 74
Cost of hosted and related service
revenue 40 - 78 -
Cost of support and services revenue 239 209 446 408
Research and development 919 911 1,978 1,923
Sales and marketing 1,073 1,053 1,935 2,067
General and administrative 1,194 1,066 2,331 2,050
Total stock-based compensation expense $ 3,499 $ 3,272 $ 6,852 $ 6,522
(2) Potentially dilutive securities were not included in the compilation of
diluited net loss per share for the periods which had a net loss because to do
so would have been anti-dilutive.
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The following table sets forth selected condensed consolidated statements of
operations data as a percentage of total revenue for each of the periods
indicated.
Three Months Ended Six Months Ended
December 31, December 31,
2012 2011 2012 2011
Revenue:
Product 59 % 80 % 60 % 79 %
Hosted and related services 23 % - 22 % -
Support and services 18 % 20 % 18 % 21 %
Total revenue 100 % 100 % 100 % 100 %
Cost of revenue:
Product 20 % 28 % 20 % 27 %
Hosted and related services 15 % - 14 % -
Support and services 6 % 7 % 6 % 7 %
Total cost of revenue 41 % 35 % 40 % 34 %
Gross profit 59 % 65 % 60 % 66 %
Operating expenses:
Research and development 16 % 21 % 17 % 22 %
Sales and marketing 43 % 37 % 42 % 38 %
General and administrative 12 % 11 % 12 % 12 %
Total operating expenses 71 % 69 % 71 % 72 %
Loss from operations (12 %) (4 %) (11 %) (6 %)
Other income (expense), net (1 %) - (1 %) -
Loss before provision for income tax (13 %) (4 %) (12 %) (6 %)
Provision for income tax - - - -
Net loss (13 %) (4 %) (12 %) (6 %)
Use of Non-GAAP Financial Measures
We believe that evaluating our ongoing operating results may limit the reader's
understanding if limited to reviewing only generally accepted accounting
principles (GAAP) financial measures. Many investors and analysts have requested
that, in addition to reporting financial information in accordance with GAAP
that we also disclose certain non-GAAP information because it is useful in
understanding our performance as it excludes non-cash and other non-recurring
charges or credits that many investors and management feel may obscure our true
operating performance. Likewise, we use these non-GAAP financial measures to
manage and assess the profitability of the business and determine a portion of
our employee compensation. We do not consider stock-based compensation charges,
amortization of purchased intangibles, severance charges, interest charge from
change in fair value of contingent consideration and related tax adjustments
(non-GAAP adjustments) in managing the core operations. These non-GAAP measures
are not based on any standardized methodology prescribed by GAAP and are not
necessarily comparable to similar measures presented by other companies.
Non-GAAP net income (loss) is calculated by adjusting GAAP net income (loss) for
non-GAAP adjustments. Non-GAAP net income (loss) per share is calculated by
dividing non-GAAP net income (loss) by the weighted average number of basic and
diluted shares outstanding for the period. These measures should not be
considered in isolation or as a substitute for measures prepared in accordance
with GAAP, and because these amounts are not determined in accordance with GAAP,
they should not be used exclusively in evaluating our business and operations.
We have provided a reconciliation of non-GAAP financial measures in the
following tables:
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RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
December 31, 2012 December 31, 2012
GAAP Excludes Non-GAAP GAAP Excludes Non-GAAP
Revenue:
Product $ 43,769 $ - $ 43,769 $ 89,603 $ - $ 89,603
Hosted and related
services 17,087 - 17,087 32,749 - 32,749
Support and services 13,780 - 13,780 27,268 - 27,268
Total revenues 74,636 - 74,636 149,620 - 149,620
Cost of revenue
Product 15,069 (294 ) (a),(b) $ 14,775 30,856 (604 ) (a),(b) $ 30,252
Hosted and related
services 11,400 (1,716 ) (a),(b),(e) 9,684 20,542 (2,511 ) (a),(b),(c),(e)
18,031
Support and services 4,279 (239 ) (a) 4,040 8,468 (448 ) (a),(c) 8,020
Total cost of revenue 30,748 (2,249 ) 28,499 59,866 (3,563 ) 56,303
Gross profit 43,888 2,249 46,137 89,754 3,563 93,317
Gross profit % 58.8 % 61.8 % 60.0 % 62.4 %
Operating expenses:
Research and development 12,195 (919 ) (a) $ 11,276 26,148 (2,077 ) (a),(c) $ 24,071
Sales and marketing 31,739 (1,924 ) (a),(b) 29,815 62,495 (3,872 ) (a),(b),(c) 58,623
General and
administrative 9,292 (2,180 ) (a),(b),(e) 7,112 17,887 (3,393 ) (a),(b),(c),(e) 14,494
Total operating expenses 53,226 (5,023 ) 48,203 106,530 (9,342 ) 97,188
Loss from operations (9,338 ) 7,272 (2,066 ) (16,776 ) 12,905 (3,871 )
Other income (expense) -
net (926 ) 465 (d) (461 ) (1,328 ) 653 (d) (675 )
Loss before provision
for income tax (10,264 ) 7,737 (2,527 ) (18,104 ) 13,558 (4,546 )
Provision for income tax 90 (2 ) (f) 88 287 (145 ) (f) 142
Net loss $ (10,354 ) $ 7,739 $ (2,615 ) $ (18,391 ) $ 13,703 $ (4,688 )
Net loss per share:
Basic and diluted (g) $ (0.18 ) $ 0.14 $ (0.04 ) $ (0.32 ) $ 0.24 $ (0.08 )
Shares used in computing
net loss per share:
Basic and diluted (g) 58,566 58,566 58,376 58,376
(a) Excludes stock-based compensation included in:
Cost of product revenue $ 34 $ 84
Cost of hosted and
related service revenue 40 78
Cost of support and
services revenue 239 446
Research and development 919 1,978
Sales and marketing 1,073 1,935
General and
administrative 1,194 2,331
$ 3,499 $ 6,852
(b) Excludes amortization of acquisition-related intangibles included in:
Cost of product revenue $ 260 $ 520
Cost of hosted and
related services 749 1,498
Sales and marketing 851 1,702
General and
administrative 38 76
$ 1,898 $ 3,796
(c) Excludes severance
included in:
Cost of hosted and
related service revenue $ - $ 8
Cost of support and
services revenue - 2
Research and development - 99
Sales and marketing - 235
General and
administrative - 38
$ - $ 382
(d) Excludes interest charge from change in fair value of contingent consideration included in:
Other expense
$ 465 $ 653
(e) Excludes prior quarter charge for change in estimate of sales, use and telecommunications tax recognized in the current
quarter:
Cost of hosted and
related service revenue $ 927 $ 927
General and
administrative 948 948
$ 1,875 $ 1,875
(f) Excludes the deferred tax benefit arising
from acquisition and tax impact of the items
which are excluded in (a) to (e) above.
(g) Potentially dilutive securities were not included in the calculation of diluted net loss per share for the periods which had a net loss because to do so
would have been anti-dilutive.
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RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
December 31, 2011 December 31, 2011
GAAP Excludes Non-GAAP GAAP Excludes Non-GAAP
Revenue:
Product $ 46,277 $ - $ 46,277 $ 88,461 $ - $ 88,461
Support and services 11,735 - 11,735 23,409 - 23,409
Total revenues 58,012 - 58,012 111,870 - 111,870
Cost of revenue
Product 16,103 (218 ) (a), (b) 15,885 30,558 (444 ) (a), (b) 30,114
Support and services 3,969 (209 ) (a) 3,760 7,884 (408 ) (a) 7,476
Total cost of revenue 20,072 (427 ) 19,645 38,442 (852 ) 37,590
Gross profit 37,940 427 38,367 73,428 852 74,280
Gross profit % 65.4 % 66.1 % 65.6 % 66.4 %
Operating expenses:
Research and
development 12,240 (911 ) (a) 11,329 24,053 (1,923 ) (a) 22,130
Sales and marketing 21,596 (1,083 ) (a), (b) 20,513
42,818 (2,127 ) (a), (b) 40,691
General and
administrative 6,349 (1,566 ) (a), (c) 4,783 12,978 (2,550 ) (a), (c) 10,428
Total operating
expenses 40,185 (3,560 ) 36,625 79,849 (6,600 ) 73,249
Loss from operations (2,245 ) 3,987 1,742 (6,421 ) 7,452 1,031
Other income
(expense), net (196 ) - (196 ) (595 ) - (595 )
Loss before provision
for income tax (2,441 ) 3,987 1,546 (7,016 ) 7,452 436
Provision for income
tax 97 12 (d) 109 164 12 (d) 176
Net loss $ (2,538 ) $ 3,975 $ 1,437 $ (7,180 ) $ 7,440 $ 260
Net loss per share:
Basic $ (0.05 ) $ 0.08 $ 0.03 $ (0.15 ) $ 0.16 $ 0.01
Diluted $ (0.05 ) $ 0.08 $ 0.03 $ (0.15 ) $ 0.16 $ 0.01
Shares used in
computing net loss
per share:
Basic 47,946 47,946 47,666 47,666
Diluted 47,946 49,228 47,666 49,202
(a) Excludes stock-based compensation as follows:
Cost of product
revenue $ 33 $ 74
Cost of support and
services revenue 209 408
Research and
development 911 1,923
Sales and marketing 1,053 2,067
General and
administrative 1,066 2,050
$ 3,272 $ 6,522
(b) Excludes
amortization of
acquisition-related
intangibles:
Cost of product
revenue $ 185 $ 370
Sales and marketing 30 60
$ 215 $ 430
(c) Excludes litigaiton settlement included in:
General and
administrative $ 500 $ 500
(d) Excludes the tax impact of the items which are excluded in (a) to (c) above.
Comparison of the three months ended December 31, 2012 and December 31, 2011
Revenue.
Three Months Ended
December 31,
2012 2011 Change $ Change %
(in thousands, except percentages)
Revenue $ 74,636 $ 58,012 $ 16,624 29 %
Total revenue increased by $16.6 million or 29% in the three months ended
December 31, 2012 as compared to the three months ended December 31, 2011. The
increase in the overall revenue is due primarily to $17.1 million of additional
revenue associated with our hosted business following our acquisition of M5 on
March 23, 2012 partially offset by a $0.5 million decline in premise revenue.
28--------------------------------------------------------------------------------
Index
Premise Revenue
Premise product revenue decreased by $2.5 million or 5% in the three months
ended December 31, 2012 as compared to the three months ended December 31, 2011,
primarily due to lower sales volumes from our larger regional partners. Our
international revenue represented 13% of our premise revenue in the three months
ended December 31, 2012 as compared to 12% in three months ended December 31,
2011. Premise support and services revenue increased by $2.0 million or 17% in
three months ended December 31, 2012 as compared to three months ended December
31, 2011. The increase in support and services revenue was primarily due to
additional sales to existing customers resulting in higher post-contractual
support revenues as well as the continued expansion of our customer base
resulting from sales to new customers.
Hosted Revenue
Hosted and related service revenue contributed $17.1 million of revenue for the
three months ended December 31, 2012 as a result of our acquisition of M5 on
March 23, 2012. There were no such revenues in the three months ended December
31, 2011
Cost of revenue and gross profit.
Three Months Ended
December 31,
2012 2011 Change $ Change %
(in thousands, except percentages)
Cost of revenue $ 30,748 $ 20,072 $ 10,676 53 %
Gross profit 43,888 37,940 5,948 16 %
Gross margin 59 % 65 % n/a (6 %)
Gross margin decreased to 59% in the three months ended December 31, 2012 as
compared to 65% in the three months ended December, 2011. The decrease in the
overall gross margins is mostly due to the change in the revenue mix resulting
from the addition of the hosted business which has lower margins than our
premise-based business.
Premise Gross Margin
Premise product gross margins increased slightly to 66% in three months ended
December 31, 2012 as compared to 65% in the three months ended December 31,
2011. Premise support and services gross margins increased to 69% in the three
months ended December 31, 2012 as compared to 66% in the three months ended
December 31, 2011. This increase was driven by synergies achieved by existing
headcount which allowed lower personnel costs to support a larger customer base
and generate a higher revenue amount from the same period in the prior year.
Hosted Gross Margin
Hosted and related service gross margin was 33% for the three months ended
December 31, 2012. Hosted and related service gross margins for the three months
ended December 31, 2012 included $0.9 million in costs related to the change in
estimate of regulatory telecommunications fees. There were no related costs in
the three months ended December 31, 2011. As the related hosted business
continues to expand and grow, we anticipate that we will realize improvements in
our gross margins as we achieve synergies and other cost reductions in our
service delivery platform.
Operating expenses.
Three Months Ended
December 31,
2012 2011 Change $ Change %
(in thousands, except percentages)
Research and development $ 12,195 $ 12,240 $ (45 ) 0 %
Sales and marketing 31,739 21,596 10,143 47 %
General and administration 9,292 6,349 2,943 46 %
Research and development. Research and development expenses remained relatively
consistent in both the three months ended December 31, 2012 and 2011, despite
growth in our overall business due to synergies achieved by existing headcount
which allowed lower personnel costs. Research and development expenses for the
three months ended December 31, 2012 would have included a total of $0.7 million
in software development costs, mainly personnel related and consulting costs,
had they not been capitalized during this period.
29--------------------------------------------------------------------------------
Index
Sales and marketing. Sales and marketing expenses increased by $10.1 million or
47% in the three months ended December 31, 2012 as compared to the three months
ended December 31, 2011. The increase in sales and marketing expenses from the
prior period is primarily due to an increase in personnel related costs
including, benefits, bonus and commissions of $4.6 million due to an increase in
headcount related primarily to the M5 acquisition in March 2012 as well as the
expansion of our sales force associated with our premise business, advertising
and promotional activities of $2.9 million, amortization expense of $0.8 million
related to addition of intangible assets as part of the M5 acquisition on March
23, 2012, consulting and outside services of $0.8 million and increased
facilities and office expenses of $0.4 million.
General and administrative. General and administrative expenses increased by
$2.9 million or 46% in the three months ended December 31, 2012 as compared to
the three months ended December 31, 2011. The increase in general and
administrative expenses from the prior period is primarily due to an increase in
personnel related costs including benefits and variable compensation of $1.1
million, a $0.7 million charge in the three months ended December 31, 2012
related to the change in estimate of sales, use and telecommunications taxes
with no corresponding charge during the three months ended December 31, 2011, an
increase in software license fees of $0.3 million, an increase in consulting and
outside service fees of $0.3 million, as well as an increase in audit and tax
service fees of $0.4 million. These increases are due to the increase in overall
expenses to support a growing business including the addition of facilities and
headcount resulting from the acquisition of M5 in March 2012.
Other income (expense), net.
Three Months Ended
December 31,
2012 2011 Change $ Change %
(in thousands, except percentages)
Other income (expense), net $ (926 ) $ (196 ) $ (730 ) 372 %
Other income (expense), net. Other expense increased to $0.7 million in the
three months ended December 31, 2012 as compared to the three months ended
December 31, 2011 as a result of an increase in interest expense of $0.7 million
due to additional interest expense associated with our Credit Facility and due
to interest expense recognized in connection with contingent purchase
consideration liabilities in the three months ended December 31, 2012 as
compared to the three months ended December 31, 2011.
Provision for income tax.
Three Months Ended
December 31,
2012 2011 Change $ Change %
(in thousands, except percentages)
Provision for income tax $ 90 $ 97 $ (7 ) (7 %)
Provision for income tax. The provision from income taxes remained relatively
consistent in both the three months ended December 31, 2012 and 2011.
Comparison of the six months ended December 31, 2012 and December 31, 2011
Revenue.
Six Months Ended
December 31,
2012 2011 Change $ Change %
(in thousands, except percentages)
Revenue $ 149,620 $ 111,870 $ 37,750 34 %
Total revenue increased by $37.8 million or 34% in the six months ended December
31, 2012 as compared to the six months ended December 31, 2011. The increase in
the overall revenue is due primarily to due to $32.8 million additional revenue
associated with our hosted business following our acquisition of M5 on March 23,
2012 and to $5.0 million increase in premise revenue resulting from the
continued growth and expansion of our premise solution business as a result of
greater market acceptance of our products and services.
30--------------------------------------------------------------------------------
Index
Premise Revenue
Premise product revenue increased by $1.1 million or 1% in the six months ended
December 31, 2012 as compared to the six months ended December 31, 2011,
primarily due to slightly higher sales volumes. Our international revenue
represented 13% of our premise revenue in the six months ended December 31, 2012
as compared to 12% in six months ended December 31, 2011. Premise support and
services revenue increased by $3.9 million or 16% in six months ended December
31, 2012 as compared to six months ended December 31, 2011. The increase in
support and services revenue was primarily due to additional sales to the
existing customers resulting in higher post-contractual support revenues as well
as the growth in sales to new customers.
Hosted Revenue
Hosted and related service revenue contributed $32.8 million of revenue for the
six months ended December 31, 2012 as a result of our acquisition of M5 during
March 2012. There were no such revenues in the six months ended December 31,
2011.
Cost of revenue and gross profit.
Six Months Ended
December 31,
2012 2011 Change $ Change %
(in thousands, except percentages)
Cost of revenue $ 59,866 $ 38,442 $ 21,424 56 %
Gross profit 89,754 73,428 16,326 22 %
Gross margin 60 % 66 % n/a (6 %)
Gross margin decreased to 60% in the six months ended December 31, 2012 as
compared to 66% in the six months ended December, 2011. The decrease in the
overall gross margins is mostly due to the change in the revenue mix resulting
from the addition of the hosted business which has lower margins than our
premise-based business.
Premise Gross Margin
Premise product gross margins remained consistent during the period at 66% for
both the six months ended December 31, 2012 and 2011. Premise support and
services gross margins increased to 69% in the six months ended December 31,
2012 as compared to 66% in the six months ended December 31, 2011. This increase
was driven by synergies achieved by existing headcount which allowed lower
personnel costs to support a larger customer base and generate a higher revenue
amount from the same period in the prior year.
Hosted Gross Margin
Hosted and related service gross margins were 37% for the six months ended
December 31, 2012. Hosted and related service gross margins for the six months
ended December 31, 2012 included $0.9 million in costs related to the change in
estimate of regulatory telecommunications fees. There were no related costs in
the six months ended December 31, 2011.
Operating expenses.
Six Months Ended
December 31,
2012 2011 Change $ Change %
(in thousands, except percentages)
Research and development $ 26,148 $ 24,053 $ 2,095 9 %
Sales and marketing 62,495 42,818 19,677 46 %
General and administration 17,887 12,978 4,909 38 %
Research and development. Research and development expenses increased by $2.1
million or 9% in the six months ended December 31, 2012 as compared to the six
months ended December 31, 2011. The increase in research and development
expenses from the prior period is primarily due to higher personnel costs,
including benefits and bonus of $2.1 million due to an increase in headcount
primarily attributable to the M5 acquisition on March 23, 2012. Research and
development expenses for the six months ended December 31, 2012 would have
included a total of $1.2 million in software development costs, mainly personnel
related and consulting costs, had they not have been capitalized during this
period.
31--------------------------------------------------------------------------------
Index
Sales and marketing. Sales and marketing expenses increased by $19.7 million or
46% in the six months ended December 31, 2012 as compared to the six months
ended December 31, 2011. The increase in sales and marketing expenses from the
prior period is primarily due to an increase in personnel related costs
including, benefits, bonus and commissions of $10.1 million due to an increase
in headcount related to the M5 acquisition in March 2012 as well as the
expansion of our sales force associated with our premise business, advertising
and promotional activities of $4.8 million, amortization expense of $1.6 million
related to addition of intangible assets as part of the M5 acquisition in March
2012, consulting and outside services of $1.2 million and increased facilities
and office expenses of $0.6 million.
General and administrative. General and administrative expenses increased by
$4.9 million or 38% in the six months ended December 31, 2012 as compared to the
six months ended December 31, 2011. The increase in general and administrative
expenses from the prior period is primarily due to an increase in personnel
related costs including benefits and bonus of $2.6 million, an increase in audit
and tax service fees of $0.8 million, a $0.7 million charge in the six months
ended December 31, 2012 related to the change in estimate of sales, use and
telecommunications taxes with no corresponding charge during the six months
ended December 31, 2011 and an increase in software license fees of $0.5
million. These increases are due to the increase in overall expenses to support
a growing business including the addition of facilities and headcount resulting
from the acquisition of M5 in March 2012.
Other income (expense), net.
Six Months Ended
December 31,
2012 2011 Change $ Change %
(in thousands, except percentages)
Other income (expense), net $ (1,328 ) $ (595 ) $ (733 ) 123 %
Other income (expense), net. Other expense increased by $0.7 million in the six
months ended December 31, 2012 as compared to the six months ended December 31,
2011 as a result of an increase in interest expense of $1.0 million due to
interest expense associated with our Credit Facility and due to interest expense
recognized in connection with contingent purchase consideration liabilities in
the six months ended December 31, 2012 as compared to the six months ended
December 31, 2011, offset by a decrease in foreign exchange loss of $0.4 million
due to a more moderate strengthening of the U.S. dollar against foreign
currencies.
Provision for income tax.
Six Months Ended
December 31,
2012 2011 Change $ Change %
(in thousands, except percentages)
Provision for income tax $ 287 $ 164 $ 123 75 %
Provision for income tax. The provision for income taxes increased by $0.1
million in the six months ended December 31, 2012 as compared to the six months
ended December 31, 2011. This increase in the income tax provision for the six
months ended December 31, 2012 compared to the six months ended December 31,
2011 is due to a $0.1 million increase in the valuation allowance recorded
against deferred tax assets established upon the acquisition of M5 during the
six months ended December 31, 2012.
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