|
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, in the third quarter of fiscal 2012 expanded our
products and service offerings to now include hosted solutions. Our acquisition
of Agito Networks, Inc. ("Agito"), a leader in 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.
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 a brilliantly 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.
19--------------------------------------------------------------------------------
Index
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 September 30, 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 single-tier or 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 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
September 30, 2012, we had sold our products to approximately 26,000 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.
We are headquartered in Sunnyvale, California and have sales, customer support,
general and administrative and engineering functions in Texas. After the
acquisition of M5, our ShoreTel Sky services are primarily provided 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 11% of our total revenue for the three months ended September 30,
2012 as compared with 12% in the three months ended September 30, 2011. 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.
20--------------------------------------------------------------------------------
Index
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 September 30, 2012 was
$50.2 million, of which $36.0 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 customer base, the gross margins may reflect improvement.
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 telco 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 September 30, 2012 was $61.
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 September 30, 2012 was 4%.
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.
21--------------------------------------------------------------------------------
Index
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 61% and 78% of our total revenue for the three months ended
September 30, 2012 and 2011, respectively.
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 22% of our
total revenue for the three months ended September 30, 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 21% of our total revenues for the three
months ended September 30, 2012. There was no hosted or related services revenue
in any of the fiscal years prior to 2012.
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 significant
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.
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, 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.
22--------------------------------------------------------------------------------
Index
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 three
months ended September 30, 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.
23--------------------------------------------------------------------------------
Index
Results of Operations
The following table sets forth unaudited selected condensed consolidated
statements of operations data for three months ended September 30, 2012 and 2011
(Amounts in thousands, except per share amounts).
Three Months Ended
September 30,
2012 2011
Revenue:
Product $ 45,834 $ 42,184
Hosted and related services 15,662 -
Support and services 13,488 11,674
Total revenue 74,984 53,858
Cost of revenue:
Product (1) 15,787 14,455
Hosted and related services (1) 9,142 -
Support and services (1) 4,189 3,915
Total cost of revenue 29,118 18,370
Gross profit 45,866 35,488
Gross profit % 61.2 % 65.9 %
Operating expenses:
Research and development (1) 13,953 11,813
Sales and marketing (1) 30,756 21,222
General and administrative (1) 8,595 6,629
Total operating expenses 53,304 39,664
Loss from operations (7,438 ) (4,176 )
Other income (expense), net (402 ) (399 )
Loss before provision for tax (7,840 ) (4,575 )
Provision for income tax 197 67
Net loss $ (8,037 ) $ (4,642 )
Net loss per share - basic and diluted (2) $ (0.14 ) $ (0.10 )
Shares used in computing net loss per share - basic
and diluted (2)
58,186 47,528
(1) Includes stock-based compensation expense as follows:
Cost of product revenue
$ 50 $ 41
Cost of hosted and related service revenue 38 -
Cost of support and services revenue 207 199
Research and development 1,059 1,012
Sales and marketing 862 1,014
General and administrative 1,137 984
Total stock-based compensation expense $ 3,353 $ 3,250
(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.
24--------------------------------------------------------------------------------
Index
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
September 30,
2012 2011
Revenue:
Product 61 % 78 %
Hosted and related services 21 % -
Support and services 18 % 22 %
Total revenue 100 % 100 %
Cost of revenue:
Product 21 % 27 %
Hosted and related services 12 % -
Support and services 6 % 7 %
Total cost of revenue 39 % 34 %
Gross profit 61 % 66 %
Operating expenses:
Research and development 19 % 22 %
Sales and marketing 41 % 40 %
General and administrative 11 % 12 %
Total operating expenses 71 % 74 %
Loss from operations (10 %) (8 %)
Other income (expense), net (1 %) (1 %)
Loss before provision for income tax (11 %) (9 %)
Provision for income tax - -
Net loss (11 %) (9 %)
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 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:
25--------------------------------------------------------------------------------
Index
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended
September 30, 2012
GAAP Excludes Non-GAAP
Revenue:
Product $ 45,834 $ - $ 45,834
Hosted and related services 15,662 - 15,662
Support and services 13,488 - 13,488
Total revenues 74,984 - 74,984
Cost of revenue
Product 15,787 (310 ) (a),(b) $ 15,477
Hosted and related services 9,142 (795 ) (a),(b),(c) 8,347
Support and services 4,189 (209 ) (a),(c) 3,980
Total cost of revenue 29,118 (1,314 ) 27,804
Gross profit 45,866 1,314 47,180
Gross profit % 61.2 % 62.9 %
Operating expenses:
Research and development 13,953 (1,158 ) (a),(c) $ 12,795
Sales and marketing 30,756 (1,948 ) (a),(b),(c) 28,808
General and administrative 8,595 (1,213 ) (a),(b),(c) 7,382
Total operating expenses 53,304 (4,319 ) 48,985
Loss from operations (7,438 ) 5,633 (1,805 )
Other income (expense) - net (402 ) 188 (d) (214 )
Loss before provision for
income tax (7,840 ) 5,821 (2,019 )
Provision for income tax 197 (143 ) (e) 54
Net loss $ (8,037 ) $ 5,964 $ (2,073 )
Net loss per share:
Basic and diluted (f) $ (0.14 ) $ 0.10 $ (0.04 )
Shares used in computing net
loss per share:
Basic and diluted (f) 58,186 58,186
(a) Excludes stock-based
compensation included in:
Cost of product revenue $ 50
Cost of hosted and related
service revenue 38
Cost of support and services
revenue 207
Research and development 1,059
Sales and marketing 862
General and administrative 1,137
$ 3,353
(b) Excludes amortization of acquisition-related intangibles included in:
Cost of product revenue $ 260
Cost of hosted and related
services 749
Sales and marketing 851
General and administrative 38
$ 1,898
(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
$ 188
(e) Excludes the deferred tax benefit arising from acquisition and tax impact of the items which are
excluded in (a) to (d) above.
(f) 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.
26
--------------------------------------------------------------------------------
Index
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended
September 30, 2011
GAAP Excludes Non-GAAP
Revenue:
Product $ 42,184 $ - $ 42,184
Support and services 11,674 - 11,674
Total revenues 53,858 - 53,858
Cost of revenue
Product 14,455 (226 ) (a), (b) 14,229
Support and services 3,915 (199 ) (a) 3,716
Total cost of revenue 18,370 (425 ) 17,945
Gross profit 35,488 425 35,913
Gross profit % 65.9 % 66.7 %
Operating expenses:
Research and development 11,813 (1,012 ) (a) 10,801
Sales and marketing 21,222 (1,044 ) (a), (b) 20,178
General and administrative 6,629 (984 ) (a) 5,645
Total operating expenses 39,664 (3,040 ) 36,624
Loss from operations (4,176 ) 3,465 (711 )
Other income (expense), net (399 ) - (399 )
Loss before provision for
income tax (4,575 ) 3,465 (1,110 )
Provision for income tax 67 - (c) 67
Net loss $ (4,642 ) $ 3,465 $ (1,177 )
Net loss per share:
Basic and diluted (d) $ (0.10 ) $ 0.08 $ (0.02 )
Shares used in computing net
loss per share:
Basic and diluted (d) 47,528 47,528
(a) Excludes stock-based
compensation as follows:
Cost of product revenue $ 41
Cost of support and services
revenue 199
Research and development 1,012
Sales and marketing 1,014
General and administrative 984
$ 3,250
(b) Excludes amortization of
acquisition-related
intangibles:
Cost of product revenue $ 185
Sales and marketing 30
$ 215(c) Excludes the tax impact of the items which are excluded in (a) and (b) above.
(d) 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.
27
--------------------------------------------------------------------------------
Index
Comparison of the three months ended September 30, 2012 and September 30, 2011
Revenue.
Three Months Ended
September 30,
2012 2011 Change $ Change %
(in thousands, except percentages)
Revenue $ 74,984 $ 53,858 $ 21,126 39 %
Total revenue increased by $21.1 million or 39% in the three months ended
September 30, 2012 as compared to the three months ended September 30, 2011. The
increase in the overall revenue is due primarily to the continued growth and
expansion of our premise solution business as a result of greater market
acceptance of our products and services and due to the additional revenue
associated with our hosted business following our acquisition of M5 on March 23,
2012.
Premise Revenue
Premise product revenue increased by $3.6 million or 9% in the three months
ended September 30, 2012 as compared to the three months ended September 30,
2011, primarily due to the higher sales volumes. Our international revenue was
14% of our premise revenue in the three months ended September 30, 2012 as
compared to 12% in three months ended September 30, 2011. Our higher sales
volume and expanded customer base are the result of our investment in the sales
and marketing efforts to expand our brand awareness. Premise support and
services revenue increased by $1.8 million or 16% in three months ended
September 30, 2012 as compared to three months ended September 30, 2011. The
increase in support and services revenue was primarily due to the growth is in
sales to new customers as well as additional sales to the existing customers
resulting in higher post-contractual support revenues.
Hosted Revenue
Hosted and related service revenue contributed $15.7 million of revenue for the
three months ended September 30, 2012 as a result of our acquisition of M5
during March 2012. There were no such revenues in the three months ended
September 30, 2011. As we continue to invest in the growth of our hosted
segment, we expect the revenue from hosted and related services to increase in
future periods.
Cost of revenue and gross profit.
Three Months Ended
September 30,
2012 2011 Change $ Change %
(in thousands, except percentages)
Cost of revenue $ 29,118 $ 18,370 $ 10,748 59 %
Gross profit 45,866 35,488 10,378 29 %
Gross margin 61 % 66 % n/a (5 %)
Gross margin decreased to 61% in the three months ended September 30, 2012 as
compared to 66% in the three months ended September 30, 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.
Premise Gross Margin
Premise product gross margins remained consistent during the period as it
remained at 66% for both the three months ended September 30, 2012 and 2011.
Premise support and services gross margins increased to 69% in the three months
ended September 30, 2012 as compared to 66% in the three months ended September
30, 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 compared to the same period in the prior year.
Hosted Gross Margin
Hosted and related service gross margins were 42% for the three months ended
September 30, 2012. There were no related costs in the three months ended
September 30, 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.
28--------------------------------------------------------------------------------
Index
Operating expenses.
Three Months Ended
September 30,
2012 2011 Change $ Change %
(in thousands, except percentages)
Research and development $ 13,953 $ 11,813 $ 2,140 18 %
Sales and marketing 30,756 21,222 9,534 45 %
General and administration 8,595 6,629 1,966 30 %
Research and development. Research and development expenses increased by $2.1
million or 18% in the three months ended September 30, 2012 as compared to the
three months ended September 30, 2011. The increase in research and development
expenses from the prior period is primarily due to higher personnel costs,
including benefits and bonus, of $1.6 million due to an increase in headcount
primarily attributable to the M5 acquisition in March 2012 and due to an
increase in consulting fees of $0.4 million to further support our product
development efforts.
Sales and marketing. Sales and marketing expenses increased by $9.5 million or
45% in the three months ended September 30, 2012 as compared to the three months
ended September 30, 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 $5.6 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 $1.8 million, amortization expense of $0.8 million
related to addition of intangible assets as part of the M5 acquisition in March
2012, consulting and outside services of $0.5 million and increased facilities
and office expenses of $0.4 million.
General and administrative. General and administrative expenses increased by
$1.9 million or 30% in the three months ended September 30, 2012 as compared to
the three months ended September 30, 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 $1.4 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
September 30,
2012 2011 Change $ Change %
(in thousands, except percentages)
Other income (expense), net $ (402 ) $ (399 ) $ (3 ) 1 %
Other income (expense), net. Other income remained steady quarter over quarter
due to an increase in interest expense by $0.4 million as a result of additional
interest expense associated with our Credit Facility and due to interest expense
recognized in connection with contingent consideration liabilities in the three
months ended September 30, 2012 as compared to the three months ended September
30, 2011, and a decrease in foreign exchange loss of $0.4 million due to the
strengthening of foreign currencies against the U.S. dollar.
Provision for income tax.
Three Months Ended
September 30,
2012 2011 Change $ Change %
(in thousands, except percentages)
Provision for income tax $ 197 $ 67 $ 130 194 %
Provision for income tax. The provision from income taxes increased by $0.1
million in three months ended September 30, 2012 as compared to three months
ended September 30, 2011. The income tax provision for the three months ended
September 30, 2012 includes a charge of approximately $135,000 relating to the
increase in valuation allowance for deferred tax assets. The valuation allowance
was increased based on the adjustments recorded for M5 acquisition.
29--------------------------------------------------------------------------------
Index
[ Back To asia.tmcnet.com's Homepage 's Homepage ]
|
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
