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TANGOE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this quarterly report. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report, including information with respect to our plans and strategy for our business and related financing, include forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" and "Forward-Looking Statements" sections of this quarterly report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview Tangoe is a leading global provider of communications lifecycle management, or CLM, software and services to a wide range of large and medium-sized commercial enterprises and governmental agencies. CLM encompasses the entire lifecycle of an enterprise's communications assets and services, including planning and sourcing, procurement and provisioning, inventory and usage management, mobile device management, real-time telecommunications expense management, invoice processing, expense allocation and accounting, and asset decommissioning and disposal. Our on-demand Communications Management Platform is a suite of software designed to manage and optimize the complex processes and expenses associated with this lifecycle for both fixed and mobile communications assets and services. Our customers can engage us through our client services group to manage their communications assets and services using our Communications Management Platform. Our solution can provide a significant return on investment by enabling an enterprise to identify and resolve billing errors, to optimize communications service plans for its usage patterns and needs, and to manage used and unused communications assets and services. Our solution allows enterprises to improve the productivity of their employees by automating the provisioning of communications assets and services, and to reduce costs by controlling and allocating communications expenses. It also allows enterprises to enforce regulatory requirements and internal policies governing the use of communications assets and services. We designed our business model to sell recurring technology and services leveraging our Communications Management Platform. We review four key business metrics to help us monitor the performance of our business model and to identify trends affecting our business. The measures that we believe are the primary indicators of our quarterly and annual performance are as follows: Adjusted EBITDA. We define Adjusted EBITDA as net income plus interest expense, income tax provision, depreciation and amortization, amortization of marketing agreement intangible assets, stock-based compensation expense and restructuring charge; less amortization of leasehold interest, other income and interest income and also include in Adjusted EBITDA adjustments for other non-cash and non-recurring items applicable for the periods presented. Our management uses Adjusted EBITDA to measure our operating performance because it does not include the impact of items not directly resulting from our core business and certain non-cash expenses such as depreciation and amortization and stock-based compensation. We believe that this measure provides us with additional useful information to measure and understand our performance on a consistent basis, particularly with respect to changes in performance from period to period. We use Adjusted EBITDA in the preparation of our annual operating budgets and to measure and evaluate the effectiveness of our business strategies. Adjusted EBITDA is not calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP, and is not a substitute for or superior to financial measures determined in accordance with GAAP. Other companies in our industry may calculate Adjusted EBITDA in a manner differently from us, which reduces its usefulness as a comparative measure. Our Adjusted EBITDA has increased annually for each fiscal year since 2007 and we expect it to continue to increase in our fiscal year ending December 31, 2013. Recurring technology and services revenue growth. In 2006, we began a strategic initiative to transition our business model from selling transactional software licenses to providing recurring technology-enabled services leveraging both our technology and communications industry experience. We further implemented this initiative with the acquisition of Traq Wireless, Inc., or Traq, as discussed below. Traq's revenue base was primarily recurring, which substantially increased our 2007 recurring revenue. We regularly review our recurring revenue growth to measure our success. We intend to continue to focus our sales and marketing efforts on increasing our recurring technology and services-related customer base, and we expect that our recurring technology and services revenue will increase in absolute dollars and as a percentage of total revenue over the next 12 months due to our expectation that we will be able to: † retain a high percentage of the revenue we currently derive from our existing customers; † sell additional product and service offerings to our existing customers; and 26 -------------------------------------------------------------------------------- Table of Contents † add a significant number of new customers. We believe that we will be able to retain a high percentage of our existing recurring technology and services revenue due to our revenue retention rates, and the current levels of customer usage of our products and services, which we review on a monthly basis to provide an indication of impending increases or decreases in billed revenue for future periods. We believe that we will be able to sell additional product and service offerings to our existing customers in the next year based on our analysis of revenue on a per-customer basis for the last 12 months, which indicates that our customers on an aggregate basis have generally increased their usage of our solution on a quarterly basis. We believe that we will be able to add a significant number of new customers over the next 12 months as we continue to expand internationally and increase our share of the domestic market. Deferred revenue. Our deferred revenue consists of the amounts that have been invoiced but that have not yet been recognized as revenue, including advanced billed and undelivered portions of our Communication Management Platform subscriptions and related services, maintenance on our software licenses and implementation fees. We invoice our services to many of our customers in advance, with the intervals ranging from 1 to 12 months. We monitor our deferred revenue balance as this balance represents revenue to be recognized over the next 12 months except for a portion of implementation and software subscription fees. Implementation fees are recognized ratably over twice the term of the contract, which we estimate to be the expected life of the customer relationship. Software subscription fees are recognized ratably over the service period. As of March 31, 2013, implementation fees and software subscription fees represented $2.0 million and $0.3 million, respectively, of the $10.8 million deferred revenue balance. Revenue retention rates. In addition, we consider our revenue retention rates. Since we began to fully realize the benefits of our recurring revenue model in 2009, our revenue retention rates have been higher than 90%. We measure revenue retention rates by assessing on a dollar basis the recurring technology and services revenue we retain for the same customer and product set in a given period versus the prior year period. We cannot predict our revenue retention rates in future periods. Our use of a revenue retention rate has limitations as an analytical tool, and you should not consider it in isolation. Other companies in our industry may calculate revenue retention rates differently, which reduces its usefulness as a comparative measure. We also review a number of other quantitative and qualitative trends in monitoring our performance, including our share of the CLM market, our customer satisfaction rates, our ability to attract, hire and retain a sufficient number of talented employees to staff our growing business and the development and performance of our solutions. Our review of these factors can affect aspects of our business and operations on an on-going basis, including potential acquisition strategies and investment in specific areas of product development or service support. Certain Trends and Uncertainties The following represents a summary of certain trends and uncertainties, which could have a significant impact on our financial condition and results of operations. This summary is not intended to be a complete list of potential trends and uncertainties that could impact our business in the long or short term. This summary, however, should be considered along with the factors identified in the "Risk Factors" section of this Quarterly Report on Form 10-Q. † The CLM market is characterized by rapid technological change and frequent new product and service introductions, including frequent introductions of new technologies and devices. To achieve and maintain market acceptance for our solution, we must effectively anticipate these changes and offer software products and services that respond to them in a timely manner. If we fail to develop software products and services that satisfy customer preferences in a timely and cost-effective manner, our ability to renew our agreements with existing customers and our ability to create or increase demand for our solution will be harmed. † We believe that competition will continue to increase. Increased competition could result from existing competitors or new competitors that enter the market because of the potential opportunity. We will continue to closely monitor competitive activity and respond accordingly. Increased competition could have an adverse effect on our financial condition and results of operations. † We continue to closely monitor current economic conditions, as any decline in the general economic environment that negatively affects the financial condition of our customers could have an adverse effect on our financial condition and results of operations. For example, during the most recent economic downturn, our customer cancellation rate during the first quarter of 2009 increased to a quarterly rate of over three times the average of the prior four quarters, partly as a result of customer bankruptcies. Although economic conditions have generally improved, there has not been a full recovery to the levels that generally existed prior to the downturn. If economic conditions in the United States and other countries do not continue to improve, we may face greater risks in operating our business. 27 -------------------------------------------------------------------------------- Table of Contents Acquisitions On January 10, 2012, we acquired all of the outstanding equity of Anomalous Networks Inc., or Anomalous, a provider of real-time telecommunications expense management solutions. The aggregate purchase price was approximately $9.0 million, which consisted of approximately $3.5 million in cash paid at the closing, approximately $1.0 million in cash payable on the first anniversary of the closing, 165,775 unregistered shares of our common stock and 132,617 unvested and unregistered shares of our common stock with vesting based on achievement of revenue targets relating to sales of Anomalous products and services for periods through January 31, 2013. We paid the full $1.0 million of deferred cash consideration in January 2013. In March 2013, we cancelled and retired the 132,617 unvested and unregistered shares of our common stock. The transaction costs were immaterial and were expensed as incurred. On February 21, 2012, we acquired all of the issued share capital of ttMobiles Limited, or ttMobiles, a provider of mobile communications management solutions and services based in the United Kingdom. The purchase price was £5.5 million, which consisted of £4.0 million in cash paid at the closing and £1.5 million in cash payable on the first anniversary of the closing. We paid the full £1.5 million of deferred cash consideration in February 2013. The transaction costs were immaterial and were expensed as incurred. On August 8, 2012, we acquired substantially all of the assets of the telecommunications expense management division of Symphony Teleca Services, Inc., or Symphony, pursuant to an asset purchase agreement, or the Symphony Purchase Agreement. On the same date, a newly formed subsidiary of ours, Tangoe India Softek Services Private Limited, an Indian private limited company, or Tangoe India, entered into a business purchase agreement, or the Indian Purchase Agreement, with Symphony Services Corporation (India) Private Limited, or Symphony India, with respect to the purchase of certain assets and employees of the acquired business located in India. The net purchase price was $40.2 million, which consisted of $29.2 million in cash paid at the closing, approximately $4.4 million in cash payable on the six-month anniversary of the closing, and approximately $6.4 million in cash payable on the one-year anniversary of the closing. In addition, the acquisition consideration included an earn-out payable in the amount of up to $4.0 million based on achievement of revenue targets for the acquired business for periods through June 30, 2013. We made the six-month anniversary payment of $4.4 million in February 2013. The full installment due on August 8, 2013 of approximately $6.4 million, and amounts that potentially become payable under the earn-out are subject to set-off rights that we have with respect to indemnities given by Symphony under the Symphony Purchase Agreement. Among other things, these indemnity obligations relate to representations and warranties given by Symphony under the Symphony Purchase Agreement and by Symphony India under the Indian Purchase Agreement. Certain of the indemnities are subject to limitations, including a threshold and deductible, certain caps and limited survival periods. During a post-closing transition period that lasted through February 2013, Symphony and Symphony India provided to us certain transition services, pending completion of the opening of certain Tangoe India facilities, the procurement of certain Indian tax registrations and the subsequent transfer to Tangoe India of the Indian assets and employees being hired. These services included making available to us on a continuing basis the services previously provided by Symphony India to Symphony. The transaction costs were immaterial and were expensed as incurred. We continue to migrate to our platforms the customers of several of the businesses that we acquired during 2011 and 2012. We have completed the migration of the Telwares customers, and the migrations of the HCL-EMS, ProfitLine and Symphony customers are in various stages of completion. While to date we have successfully migrated a number of these customers, there can be no assurance that we will complete these migrations in a timely manner or at all and the cost of these migrations may be more significant than we have estimated. We may pursue additional acquisitions of, or investments in, businesses, services and technologies that will expand the functionality of our solution, provide access to new markets or customers, or otherwise complement our existing operations. Sources of Revenue Recurring technology and services revenue. We derive our recurring technology and services revenue primarily from subscriptions and services related to our Communications Management Platform. We recognize revenue for software and related services when all of the following conditions are met: (a) there is persuasive evidence of an arrangement; (b) the service has been provided to the customer; (c) the collection of the contracted fee is probable; and (d) the amount of the fees to be paid by the customer is fixed and determinable. These services include help desk, asset procurement and provisioning, and carrier dispute resolution. The recurring technology and services revenue is recognized ratably over the contract term. In 2006, we began a strategic initiative to transition our business model from selling non-recurring transactional software licenses to providing recurring technology and services leveraging both our technology and communications industry experience. We license our on-demand software and sell related services primarily on a subscription basis under agreements that typically have terms ranging from 24 to 60 months. Our recurring technology and services revenue is driven primarily by the amount of communications spend that we manage for fixed line contracts and by the number of mobile devices that we manage for mobile device contracts. Our customers are typically subject to a minimum charge for up to a specified threshold amount of communications spend or number of mobile devices under management and additional charges to the extent those specified thresholds are exceeded. Prior to 2010, as a result of limited history regarding customer renewals, implementation fees related to subscription agreements for our Communications Management Platform 28 -------------------------------------------------------------------------------- Table of Contents with terms equal to or less than 36 months were recognized over 36 months and implementation fees related to subscription agreements with terms exceeding 36 months were recognized over the life of the agreement. In 2010, due to having greater evidence regarding customer renewals, we believed it was appropriate to extend the estimated expected life of the customer relationship to be equal to twice the contract life calculated on a per-customer basis and to recognize implementation fees ratably over this period. This change did not have a material impact on our consolidated financial statements. Many of our subscription contracts are non-cancelable, although customers have the right to terminate for cause if we materially fail to perform. In 2010, we began to amortize the value of a warrant to purchase common stock issued to IBM as part of a strategic relationship agreement. This related charge will be recorded as contra-revenue in proportion to total expected revenue from the agreement. We recorded $31,505 and $55,358 of amortization as a contra-revenue charge during the three months ended March 31, 2012 and 2013, respectively. Strategic consulting, software licenses and other revenue. In addition to our subscription fees, revenue is generated to a lesser extent by strategic consulting, software licenses, mobile device activation fees and sales of telecommunication accessories. Strategic consulting consists primarily of fees charged for contract negotiations and bill audits. Contract negotiation fees include both fixed project fees and incentive fees driven by the amount of savings that we are able to generate over the customer's existing communications rates. These fees are recognized when fixed and determinable, usually when the customer and carrier execute the contract. Bill audit fees are driven by the amount of savings that we are able to generate by reviewing current and prior communications invoices against the customer's existing contracts. These fees are recognized when fixed and determinable, usually when the carrier agrees to issue a credit or refund to our customer. On occasion, we license our Communications Management Platform to our customers on a perpetual basis. If we are able to derive vendor-specific objective evidence on the undelivered elements, the software portion is recognized when the revenue recognition criteria is met; otherwise the contract is recognized ratably over the contract life. Other professional services are recognized as the services are performed. We have an agreement with a carrier whereby we receive an activation fee for procuring a mobile device. The activation revenue is recognized upon confirmation from the carrier that the device has been procured. The revenue related to the sale of telecommunication accessories is recognized upon shipment of the accessories to the customer. We expect our strategic consulting, software licenses and other revenue to remain relatively constant in absolute dollars, but to decrease as a percentage of total revenue, as we continue to focus our sales and marketing efforts on our recurring technology and services revenue model. We historically have derived substantially all of our revenue from United States-based customers. We intend to build our international sales operations by increasing our direct sales force abroad. We expect our international revenue to increase in absolute dollars and as a percentage of total revenue. Cost of Revenue and Gross Profit Cost of recurring technology and services revenue. Cost of recurring technology and services revenue consists primarily of costs associated with our data center operations, customer product support centers and our client services group. This includes personnel-related costs such as salary, stock-based compensation and other compensation-related costs, subcontractor fees, hosting fees, communications costs and royalties related to third-party software included in our solution when our solution is licensed on a non-perpetual basis. Cost of strategic consulting, software licenses and other revenue. Cost of strategic consulting, software licenses and other revenue consists primarily of personnel-related costs, including salary, stock-based compensation and other compensation-related costs and subcontractor fees directly related to delivering the service and to a lesser extent, the cost of the telecommunications accessories sold. As our customer base continues to grow, we expect our cost of revenue to increase in absolute dollars as we expand our data center and customer support operations to support our continued growth. Our cost of revenue could fluctuate as a percentage of revenue on a quarterly basis but remain relatively stable on an annual basis based on the mix of software and services sold and average contractual selling price. Gross profit. Gross profit as a percentage of revenue is affected by two main factors-the mix of software and services sold and the average contractual selling price. We expect our gross profit in absolute dollars to increase, but that our gross profit as a percentage of revenue will be affected as we integrate the businesses of our recent acquisitions, which have historically operated with lower margins than our business. We believe that over time we will achieve improvements in those margins as we integrate the acquired operations and capture the operating efficiencies of the overall business. 29 -------------------------------------------------------------------------------- Table of Contents Operating Expense Operating expense consists of sales and marketing, general and administrative, research and development and depreciation and amortization. Other than for depreciation and amortization expense, personnel-related costs are the most significant component of all of these operating expenses. We expect to continue to hire a significant number of new employees in order to support our overall growth. In any particular period, the timing of additional hires could materially affect our operating results, both in absolute dollars and as a percentage of revenue. Sales and marketing. Sales and marketing expense consists primarily of personnel-related costs, including salary, stock-based compensation and other compensation-related costs for our sales, marketing and business development employees, the cost of marketing programs such as on-line lead generation, promotional events, such as trade shows, user conferences, seminars and webinars, the cost of business development programs, travel related costs and sales commissions. Sales commission rates are calculated at the time a contract is signed. The sales commission rate is applied to the contract's first year of revenue to calculate sales commission expense. Sales commission expense is accrued and expensed at the time we invoice the customer and is paid to the salesperson when the invoice is collected. Generally, new sales personnel require time to become familiar with our software and services and do not begin to generate sales immediately, which can result in increased sales and marketing expense without any immediate increase in revenue. We expect sales and marketing expense to increase in absolute dollars, but remain relatively constant as a percentage of revenue in the near term, with potential increases in the long term as a percentage of revenue as we continue to hire sales and marketing personnel in the United States and internationally to expand our solution globally. General and administrative. General and administrative expense consists of personnel-related costs, including salary, stock-based compensation and other compensation-related costs for finance and accounting, executive, human resources, legal and information technology personnel, rent and facility costs, legal and other professional fees, and other corporate expenses. We are incurring and will continue to incur costs associated with being a public company, including corporate insurance costs as well as certain personnel costs and professional fees, including legal and accounting fees as they relate to financial reporting and maintaining compliance with Section 404 of the Sarbanes-Oxley Act. We expect general and administrative expense to remain at approximately its current level in the near term and to decrease as a percentage of revenue. Research and development. Research and development expense primarily consists of personnel-related costs, including salary, stock-based compensation and other compensation-related costs for development personnel, and fees to our outside contract development vendors. We anticipate that our research and development team will continue to focus on expanding our software and services and increasing the functionality of our current offerings. We expect research and development expense to increase in absolute dollars, but that the investment will likely be lower than the rate of growth in our revenue in the near term. Depreciation and amortization. Depreciation and amortization expense primarily consists of the non-cash write-down of tangible and intangible assets over their expected economic lives. We expect this expense to continue to grow in absolute dollars and potentially as a percentage of revenue as we continue to grow and incur capital expenditures to improve our technological infrastructure and acquire assets through potential future acquisitions. Other Income (Expense), Net Other income (expense), net consists primarily of interest expense on our short and long-term debt, interest income on our cash and cash equivalents balance. We have historically invested our cash in money market investments. We expect our interest income to vary in each reporting period depending on our average cash balances and interest rates. Income Tax Provision Income tax provision consists of federal and state corporate income taxes resulting from our operations in the United States, as well as operations in various foreign jurisdictions. We expect income tax expense to vary each reporting period depending upon taxable income fluctuations and the availability of tax benefits from net loss carryforwards. As of December 31, 2012, we had U.S. federal net operating loss carryforwards of approximately $98.0 million, which, if unused, expire from 2020 to 2032, and U.S. federal research and development tax credit carryforwards of approximately $3.0 million, which expire through 2029. We have engaged in several transactions since our inception that have resulted in a change in control as defined by Section 382 of the Internal Revenue Code, which limits our ability to utilize these net operating loss and tax credit carryforwards in the future. As of December 31, 2012, $33.0 million of our net operating loss and tax credit carryforwards were so limited. At December 31, 2012, we recorded a valuation allowance against the full amount of our deferred tax assets, as our management believes it is uncertain that they will be fully realized. If we determine in the future that we will be able to realize all or a portion of our net operating loss or tax credit carryforwards, an adjustment to our net operating loss or tax credit carryforwards would increase net income in the period in which we make such a determination. 30 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies Our financial statements are prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. Our most critical accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2012 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission, or the SEC, on March 18, 2013, which we refer to as the 2012 Form 10-K. Since the date of those financial statements, there have been no material changes to our significant accounting policies. 31 -------------------------------------------------------------------------------- Table of Contents Results of Operations for the Three Month Periods Ended March 31, 2012 and 2013 The following table presents selected statements of operations data for the periods indicated. These consolidated results of operations are not necessarily indicative of the consolidated results of operations that will be achieved in any future period. Three Months Ended March 31, (in thousands, except percentages) 2012 % of revenue 2013 % of revenue Revenue: Recurring technology and services $ 30,756 90% $ 40,048 89% Strategic consulting, software licenses and other 3,391 10% 4,812 11% Total revenue 34,147 100% 44,860 100% Cost of revenue: Recurring technology and services 14,316 42% 18,755 42% Strategic consulting, software licenses and other 1,458 4% 2,061 5% Total cost of revenue(1) 15,774 46% 20,816 46% Gross profit 18,373 54% 24,044 54% Operating expense: Sales and marketing (1) 5,544 16% 7,392 16% General and administrative (1) 6,701 20% 8,127 18% Research and development(1) 3,689 11% 4,945 11% Depreciation and amortization 1,875 5% 2,489 6% Restructuring charge - - 155 0% Income from operations 564 2% 936 2% Other income (expense), net Interest expense (235 ) (1)% (162 ) 0% Interest income 17 0% 19 0% Other income - - 563 1% Income before income tax provision 346 1% 1,356 3% Income tax provision 154 0% 231 1% Net income $ 192 1% $ 1,125 3% -------------------------------------------------------------------------------- (1) Amounts in table above include stock-based compensation expense, as follows: Cost of revenue $ 250 $ 554 Sales and marketing 366 813 General and administrative 915 1,472 Research and development 93 260 $ 1,624 $ 3,099 Revenue The following table presents our components of revenue for the periods presented: Three Months Ended March 31, Increase (in thousands, except percentages) 2012 2013 $ % Recurring technology and services $ 30,756 $ 40,048 $ 9,292 30% Strategic consulting, software licenses and other 3,391 4,812 1,421 42% Total revenue $ 34,147 $ 44,860 $ 10,713 31% Our recurring technology and services revenue increased $9.3 million, or 30%, for the three months ended March 31, 2013 as compared to the same period of 2012, primarily due to an increase in the volume of fixed and mobile communications assets and service offerings being managed or provided through our on-demand communication management platform for current existing and new customers, combined with revenue attributable to customers acquired through our ttMobiles and Symphony strategic acquisitions. 32 -------------------------------------------------------------------------------- Table of Contents Our strategic consulting, software licenses and other revenue increased $1.4 million, or 42%, for the three months ended March 31, 2013 as compared to the same period of 2012, primarily due to increases in strategic consulting revenue of $1.7 million and telecommunication accessories sales revenue of $0.4 million. These increases were partially offset by decreases of $0.4 million in software license revenue and $0.3 million in activation revenue. Costs and Expenses Cost of Revenue The following table presents our cost of revenue: Three Months Ended March 31, Increase (in thousands, except percentages) 2012 2013 $ % Recurring technology and services $ 14,316 $ 18,755 $ 4,439 31% Strategic consulting, software licenses and other 1,458 2,061 603 41% Total cost of revenue $ 15,774 $ 20,816 $ 5,042 32% Gross profit $ 18,373 $ 24,044 $ 5,671 31% Gross margin 54% 54% Our recurring technology and services cost of revenue increased $4.4 million for the three months ended March 31, 2013 as compared to the same period in 2012. This increase is primarily due to an increase in personnel-related costs, including an increase in salary and other compensation-related costs, of $4.2 million, an increase in outside contractor costs of $0.7 million and an increase in travel-related expenses and other infrastructure costs of $0.2 million. The increases in personnel-related costs, outside contractor costs and travel-related expenses and other infrastructure costs were primarily attributable to providing support for customer growth in our recurring technology and services business. Our strategic consulting, software licenses and other cost of revenue increased $0.6 million for the three months ended March 31, 2013 as compared to the same period in 2012, primarily as a result of a $0.3 million increase in the costs associated with our sales of telecommunication accessories related to our mobile business and a $0.3 million increase in salary and other compensation-related costs. The increases were related to higher telecommunication accessories and strategic consulting revenues, respectively. As a percentage of revenue, gross profit was 54% for each of the three months ended March 31, 2012 and 2013. The $5.7 million increase in gross profit in absolute dollars was primarily due to increased revenue. Operating Expense The following table presents our components of operating expense for the periods presented: Three Months Ended March 31, 2012 2013 % of % of Change (in thousands, except percentages) Amount Revenue Amount Revenue $ % Sales and marketing $ 5,544 16% $ 7,392 16% $ 1,848 33% General and administrative 6,701 20% 8,127 18% 1,426 21% Research and development 3,689 11% 4,945 11% 1,256 34% Depreciation and amortization 1,875 5% 2,489 6% 614 33% Restructuring charge - - 155 0% 155 * Total operating expense $ 17,809 52% $ 23,108 52% $ 5,299 30% -------------------------------------------------------------------------------- * = Not meaningful Sales and marketing expense. Our sales and marketing expense increased $1.8 million for the three months ended March 31, 2013 as compared to the same period of 2012, primarily due to an increase in personnel-related costs, including salary and other compensation-related costs, of $1.7 million, as we increased the number of global direct and indirect sales force employees to accommodate growth in sales opportunities, and an increase in travel expense of $0.1 million as a result of the increased headcount. 33 -------------------------------------------------------------------------------- Table of Contents General and administrative expense. Our general and administrative expenses increased $1.4 million for the three months ended March 31, 2013 as compared to the same period of 2012, primarily as a result of increases in personnel-related costs, including salary and other compensation-related costs, of $1.0 million, including increased employee compensation and benefits of $0.5 million as a result of increased headcount, facility and overhead costs of $0.6 million, primarily attributable to the overhead costs associated with additional facilities, and stock-based compensation expense of $0.5 million as a result of the increased value of annual stock-based equity awards. These increases were partially offset by a favorable foreign currency conversion adjustment of $0.1 million. Research and development expense. Our research and development expenses increased $1.3 million for the three months ended March 31, 2013 as compared to the same period of 2012, primarily due to increased personnel-related costs, including salary and other compensation-related costs, of $0.8 million primarily arising from increased headcount. In addition, we incurred a $0.4 million increase in third-party consultant expenses. The higher costs were primarily the result of an initiative to enhance the functionality of our products and improve our ability to scale for increased demand. Depreciation and amortization expense. Depreciation and amortization expenses increased $0.6 million for the three months ended March 31, 2013 as compared to the same period of 2012, primarily due to an increase in amortization expense of $0.6 million. The increase in amortization expense was result of higher intangible assets as result of the Anomalous, ttMobiles and Symphony acquisitions. Depreciation expense of $0.5 million was comparable for the respective three-month periods ended March 31, 2013 and 2012. Restructuring charge. The restructuring charge recorded in the three months ended March 31, 2013 was a result of our inability to sublease the office space in the time period originally expected. Although we continue to attempt to sublet the office space, we do not know how long it will take to locate a subtenant or to come to terms on a sublease agreement or the terms on which we may be able to sublease the office space, which might not be favorable to us. Any differences between the estimated sublease income and the actual agreement will be recorded monthly over the life of the original lease. The charge will be approximately $0.1 million per quarter if we are unable to sublease the office space. Other Income (Expense), Net The following table presents our components of other income (expense), net for the periods presented: Three Months Ended March 31, Change (in thousands) 2012 2013 $ Interest expense $ (235 ) $ (162 ) 73 Interest income 17 19 2 Other income - 563 563 Interest Expense. Interest expense was comparable for the respective three-month periods ended March 31, 2013 and 2012. Interest Income. Interest income was comparable for the respective three-month periods ended March 31, 2013 and 2012. Other income. Other income for the three months ended March 31, 2013 primarily consisted of the $0.4 million reduction in the Telwares deferred cash consideration as a result of not achieving certain recurring revenue targets and the $0.2 million adjustment of the HCL-EMS year two earn-out estimate to actual. Income Tax Provision Income Tax Provision. Our income tax provision was comparable for the respective three-month periods ended March 31, 2013 and 2012. Liquidity and Capital Resources Sources of Liquidity Since our inception, we have funded our operations primarily from cash from operations, private placements of preferred stock, subordinated notes, term loans, revolving credit facilities and public offerings of equity. As of March 31, 2013, we had cash and cash 34 -------------------------------------------------------------------------------- Table of Contents equivalents of $43.6 million and accounts receivable of $37.8 million and amounts due under various debts and credit facilities of $13.2 million. In April 2012, we raised $37.7 million in net proceeds through a follow-on public offering of our common stock. We intend to use the proceeds from this offering for working capital and other general corporate purposes, which may include financing our growth, developing new solutions and funding capital expenditures, acquisitions and investments. Our remaining outstanding debt relates to the deferred consideration for the HCL-EMS, ProfitLine, and Symphony acquisitions and capital lease obligations. We believe that our existing cash and cash equivalents and our cash flow from operating activities will be sufficient to meet our anticipated cash needs for at least the next twelve months. To the extent our cash and cash equivalents and cash flow from operating activities are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of, or investments in, businesses, services or technologies. If additional funding is required, we may not be able to obtain bank credit arrangements or to effect an equity or debt financing on terms acceptable to us or at all. The following table sets forth our cash and cash equivalents and the major sources and uses of cash for each of the periods set forth below: December 31, March 31, (in thousands) 2012 2013 Cash and cash equivalents $ 50,211 $ 43,554 Three Months Ended March 31, (in thousands) 2012 2013Net cash provided by operating activities $ 3,529 $ 5,842 Net cash used in investing activities (9,003 ) (9,062 ) Net cash used in financing activities (78 ) (3,236 ) Effect of exchange rate on cash 11 (201 ) Net decrease in cash and cash equivalents $ (5,541 ) $ (6,657 ) Cash Flows from Operating Activities Operating activities provided $5.8 million of net cash during the three months ended March 31, 2013, which resulted from our net income of $1.1 million for the three months ended March 31, 2013 principally supplemented by non-cash charges of stock-based compensation of $3.1 million, depreciation and amortization of $2.5 million and cash provided by a decrease in accounts receivable of $0.5 million. Cash provided by operating activities was adversely impacted by a $0.5 million decrease in accounts payable and accrued expenses, a $0.5 million decrease in fair value of contingent consideration and a $0.3 million decrease in deferred revenue during the three months ended March 31, 2013. Operating activities provided $3.5 million of net cash during the three months ended March 31, 2012, which resulted from our net income of $0.2 million for the three months ended March 31, 2012 principally supplemented by non-cash charges of depreciation and amortization of $1.9 million and stock-based compensation of $1.6 million and a $0.9 million increase in accounts payable. Cash provided by operating activities was adversely impacted by a $1.1 decrease in accrued expenses and a $0.4 million decrease in deferred revenue during the three months ended March 31, 2012. Cash Flows from Investing Activities Cash used in investing activities totaled $9.1 million during the three months ended March 31, 2013 and consisted of $8.8 million paid in connection with the Telwares, Anomalous, ttMobiles and Symphony acquisitions and capital expenditures of $0.3 million primarily related to the purchase of computer equipment and software. Cash used in investing activities totaled $9.0 million during the three months ended March 31, 2012 and consisted of $8.6 million paid in connection with the Telwares, Anomalous and ttMobiles acquisitions and capital expenditures of $0.4 million primarily related to the purchase of computer equipment and software. 35 -------------------------------------------------------------------------------- Table of Contents Cash Flows from Financing Activities Cash flows used in financing activities totaled $3.2 million during the three months ended March 31, 2013 primarily consisting of $3.2 million of cash used to repurchase our common stock, which includes $1.7 million of cash paid for shares repurchased in trades entered in 2012 which settled in 2013, and debt repayments of $0.3 million partially offset by $0.3 million of proceeds from the exercise of stock options and stock warrants. Cash flows used in financing activities totaled $0.1 million during the three months ended March 31, 2012 primarily consisting of debt repayments of $1.5 million partially offset by $1.4 million of proceeds from the exercise of stock options and stock warrants. Contractual Obligations The following table summarizes our material contractual obligations at March 31, 2013 and the effect such obligations are expected to have on our liquidity and cash flows in future periods. Payments due by period Less than More than (dollars in thousands) Total 1 year 1-3 years 3-5 years 5 years Operating lease obligations $ 21,089 $ 7,438 $ 12,609 $ 767 $ 275 Capital lease and other obligations 500 447 53 - - Interest on capital lease obligations 22 20 2 - - Symphony deferred purchase price 6,304 6,304 ProfitLine deferred purchase price 4,470 4,470 - - - HCL-EMS contingent consideration 1,891 1,891 - - - $ 34,276 $ 20,570 $ 12,664 $ 767 $ 275 † Operating lease obligations include minimum lease obligations with remaining terms in excess of one year primarily related to office space as well as certain equipment. † Capital lease and other obligations include minimum lease obligations with remaining terms in excess of one year related to computer hardware and software. † Symphony deferred purchase price consists of $6.4 million of deferred cash consideration payable on August 8, 2013. † ProfitLine deferred purchase price consists of $4.5 million of deferred cash consideration payable on June 19, 2013. † HCL-EMS contingent consideration consists of a payment payable following the second anniversary of the HCL-EMS closing date of January 25, 2011. Off-Balance Sheet Arrangements We do not engage in any off-balance sheet financing activities, nor do we have any interest in entities referred to as variable interest entities. Recent Accounting Pronouncements For information regarding recent accounting pronouncements, refer to Note 3 to our financial statements included in the 2012 Form 10-K. 36 -------------------------------------------------------------------------------- Table of Contents |