|
ARUBA NETWORKS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
In addition to historical information, this report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements include,
among other things, statements concerning our expectations:
• that revenues from our indirect channels will continue to constitute a
significant majority of our future revenues;
• that our product offerings will enable broader networking initiatives by both
our current and potential customers;
• that international revenues will increase in absolute dollars and remain consistent or increase as a percentage of total revenues in fiscal 2012
compared to fiscal 2011;
• that we will continue to hire employees throughout the company;
• that we will continue to invest significantly in our research and development
efforts;
• that research and development expenses for fiscal 2012 will increase on an
absolute dollar basis and decrease as a percentage of revenue compared to
fiscal 2011;
• regarding continued momentum in our rightsizing initiative;
• that sales and marketing expenses for fiscal 2012 will continue to be our most significant operating expense and will increase on an absolute dollar
basis and decrease as a percentage of revenue compared to fiscal 2011;
• that general and administrative expenses for fiscal 2012 will increase on an
absolute dollar basis and decrease as a percentage of revenue compared to
fiscal 2011;
• that ratable product and related professional services and support revenues
will decrease in absolute dollars and as a percentage of total revenues in
future periods;
• that, as we expand internationally, we may incur additional costs to conform
our products to comply with local laws and product specifications, and we
plan to continue to hire additional personnel to support our growing
international customer base;
• regarding the sufficiency of our existing cash, cash equivalents, short-term
investments and cash generated from operations; and
• that we will increase our market penetration and extend our geographic reach
through our network of channel partners,
as well as other statements regarding our future operations, financial
condition, prospects and business strategies. These forward-looking statements
are subject to certain risks and uncertainties that could cause our actual
results to differ materially from those reflected in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in this report, and in particular, the
risks discussed under the heading "Risk Factors" in Part II, Item 1A of this
report and those discussed in other documents we file with the Securities and
Exchange Commission. We undertake no obligation to revise or publicly release
the results of any revision to these forward-looking statements. Given these
risks and uncertainties, readers are cautioned not to place undue reliance on
such forward-looking statements.
The following discussion and analysis of our financial condition and results of
operations should be read together with our Consolidated Financial Statements
and related notes included elsewhere in this report.
Overview
We are a global leader in distributed enterprise networks that securely connect
local and remote users to corporate IT resources. Our award-winning portfolio of
campus, branch office, teleworker, and mobile solutions simplify operations and
provide secure access to all corporate applications and services - regardless of
a user's device, location, or network. The result is improved productivity and
lower capital and operating costs.
Our product portfolio encompasses: industry-leading high-speed 802.11a/b/g/n
WLANs, Virtual Branching Networking solutions for branch offices and
teleworkers, network operations tools, including spectrum analyzers, wireless
intrusion prevention systems, and the AirWave Wireless Management Suite for
managing wired, wireless, and mobile device networks. Our MOVE architecture
integrates wireless, wired and remote silos into one cohesive access solution
enabled by cloud based mobility services. Access privileges are context aware,
meaning they are based on user, device, application and location, and this
dictates the type of network resources each person is entitled to access. These
products are key to our network rightsizing initiative which allows companies to
move toward a low-cost IT infrastructure solution by funding wireless projects
rather than wired LANs.
18
--------------------------------------------------------------------------------
Our products have been sold to over 19,000 customers worldwide (not including
customers of Alcatel-Lucent), including some of the largest and most complex
global organizations. We have implemented a two-tier distribution model in most
areas of the world, including the United States, with value added distributors
("VADs") and original equipment manufacturers ("OEM's") selling our portfolio of
products, including a variety of our support services, to a diverse number of
value added resellers ("VARs"). Our focus continues to be management of our
channel including selection and growth of high prospect partners, activation of
our VARs and VADs through active training and field collaboration, and evolution
of our channel programs in consultation with our partners.
Major Trends Affecting Our Financial Results
Worldwide Economic Conditions
Our business depends on the overall demand for IT spending and on the economic
health and general willingness of our current and prospective customers to make
capital commitments. If the conditions in the U.S. and global economic
environment remain uncertain or continue to be volatile, or if they deteriorate
further, our business, operating results, and financial condition may be
materially adversely affected. Economic weakness, customer financial
difficulties and constrained spending on IT initiatives have resulted, and may
in the future result, in challenging and delayed sales cycles and could
negatively impact our ability to forecast future periods. In particular, we
cannot be assured of the level of IT spending, the deterioration of which could
have a material adverse effect on our results of operations and growth rates.
Revenues
Our ability to increase our product revenues will depend significantly on
continued growth in the market for enterprise mobility and remote networking
solutions, continued acceptance of our products in the marketplace, our ability
to continue to attract new customers, our ability to compete, the willingness of
customers to displace wired networks with wireless LANs, and our ability to
continue to sell into our installed base of existing customers. Our growth in
support revenues is dependent upon increasing the number of products under
support contracts, which is dependent on both growing our installed base of
customers and renewing existing support contracts. Our future profitability and
rate of growth, if any, will also be directly affected by the timing and size of
orders, product and channel mix, average selling prices, costs of our products,
our ability to effectively implement and generate incremental business from our
two-tier distribution model, general economic conditions, and the extent to
which we invest in our sales and marketing, research and development, and
general and administrative resources.
The revenue growth that we have experienced has been driven primarily by an
expansion of our customer base coupled with increased purchases from existing
customers. We believe the growth we have experienced is the result of business
enterprises and other organizations needing to provide secure mobility to their
users in a manner that we believe is more cost effective than the traditional
approach of using port-centric networks. We believe that our product offerings
will enable broader networking initiatives by both our current and potential
customers in the future. Each quarter, our ability to meet our product revenue
expectations is dependent upon (1) new orders received, shipped, and recognized
in a given quarter, (2) the amount of orders booked but not shipped in prior
quarters that are shipped and revenue recognized in the current quarter, and
(3) the amount of deferred revenue entering a given quarter that can be
recognized as revenue in that quarter. Our product deferred revenue is comprised
of:
• product orders that have shipped but where the terms of the agreement,
typically with our large customers, contain acceptance terms and
conditions or other terms that require that the revenue be deferred until
all revenue recognition criteria are met; and
• product orders shipped to our VADs and OEMs for which we have not yet received persuasive evidence from the VADs or OEMs of a sale to an end
customer.
We typically ship products within a reasonable time period after the receipt of
an order.
Costs and Expenses
Operating expenses consist of research and development, sales and marketing, and
general and administrative expenses. Personnel-related costs are the most
significant component of each these categories. Personnel-related costs consist
of salaries, benefits and incentive compensation for our employees, including
commissions for sales personnel and stock-based compensation for all employees.
Our total headcount increased to 1,193 at January 31, 2012 from 1,137 at
October 31, 2011 and 1,057 at July 31, 2011. The increase in employees was the
most significant driver behind the increase in costs and operating expenses in
the second quarter and first six months of fiscal 2012. Going forward, we expect
to continue to hire employees throughout the company to support our growth.
Acquisition of Avenda Systems
On November 30, 2011, we completed our acquisition of Avenda Systems ("Avenda").
The total purchase price was $33.1 million, net of cash acquired. The purchase
price includes $20.5 million in cash, $12.0 million in common stock and an
additional $3.0 million in incremental cash payments made after the close date
to Avenda's former employees who became Aruba's employees. As part of the
acquisition, we recorded $13.1 million of intangible assets and $23.6 million of
goodwill.
19
--------------------------------------------------------------------------------
Revenues, Cost of Revenues and Operating Expenses
Revenues
We derive our revenues from sales of our ArubaOS operating system, controllers,
wireless access points, switches, application software modules, multi-vendor
management solution software, and professional services and support.
Professional services revenues consist of consulting and training services.
Consulting services primarily consist of installation support services. Training
services are instructor led courses on the use of our products. Support services
typically consist of software updates, on a when-and-if available basis,
telephone and internet access to technical support personnel and hardware
support. We provide customers with rights to unspecified software product
upgrades and to maintenance releases and patches released during the term of the
support period.
We sell our products directly through our sales force and indirectly through
VADs, VARs, and OEMs. We expect revenues from indirect channels to continue to
constitute a significant majority of our future revenues.
We sell our products to channel partners and end customers located in the
Americas, Europe, the Middle East, Africa and Asia Pacific. We continue to
expand into international locations and introduce our products in new markets,
and we expect international revenues to increase in absolute dollars and remain
consistent or increase as a percentage of total revenues in fiscal 2012 compared
to fiscal 2011. For more information about our international revenues, see Note
12 of the Notes to Consolidated Financial Statements.
Cost of Revenues
Cost of product revenues consists primarily of manufacturing costs for our
products, shipping and logistics costs, and expenses for inventory obsolescence
and warranty obligations. We utilize third parties to manufacture our products
and perform shipping logistics. We have outsourced the substantial majority of
our manufacturing, repair and supply chain operations. Accordingly, the
substantial majority of our cost of revenues consists of payments to our
contract manufacturers. Our contractor manufacturers produce our products in
China and Singapore using quality assurance programs and standards that we
jointly established. Manufacturing, engineering and documentation controls are
conducted at our facilities in Sunnyvale, California, Bangalore, India and
Beijing, China. Cost of product revenues also includes amortization expense from
our purchased intangible assets.
Cost of professional services and support revenues is primarily comprised of
personnel costs, including stock-based compensation, of providing technical
support, including personnel costs associated with our internal support
organization. In addition, we engage a third-party support vendor to complement
our internal support resources, the costs of which are included within costs of
professional services and support revenues.
Gross Margin
Our gross margin has been, and will continue to be, affected by a variety of
factors, including:
• the proportion of our products that are sold through direct versus
indirect channels;
• product mix and average selling prices, in particular the mix between our
software solutions, access points and mobility controllers;
• new product introductions, such as our MOVE architecture and our outdoor mesh network products, and product enhancements made by us as well as
those made by our competitors;
• pressure to discount our products in response to our competitor's
discounting practices;
• mix of revenue attributed to various geographic regions;
• demand for our products and services;
• our ability to attain volume manufacturing pricing from our contract
manufacturers and our component suppliers;
• losses associated with excess and obsolete inventory;
• growth in our headcount and other related costs incurred in our customer
support organization;
• costs associated with manufacturing overhead;
• our ability to manage freight costs; and
• amortization expense from our purchased intangible assets.
20
--------------------------------------------------------------------------------
Due to higher net effective discounts for products sold through our indirect
channel, our overall gross margins for indirect channel sales are typically
lower than those associated with direct sales. We expect product revenues from
our indirect channel to continue to constitute a significant majority of our
total revenues, which, by itself, negatively impacts our gross margins.
Research and Development Expenses
Research and development expenses primarily consist of personnel costs and
facilities costs. We expense research and development expenses as incurred. We
are devoting substantial resources to the continued development of additional
functionality for existing products and the development of new products. We
intend to continue to invest significantly in our research and development
efforts because we believe it is essential to maintaining our competitive
position. For fiscal 2012, we expect research and development expenses to
increase on an absolute dollar basis and decrease as a percentage of revenue
compared to fiscal 2011.
Sales and Marketing Expenses
Sales and marketing expenses represent the largest component of our operating
expenses and primarily consist of personnel costs, sales commissions, marketing
programs and facilities costs. A portion of our amortization expense related to
our purchased intangible assets is also included in sales and marketing
expenses. Marketing programs are intended to generate revenue from new and
existing customers and are expensed as incurred. We plan to continue to invest
strategically in sales and marketing with the intent to add new customers and
increase penetration within our existing customer base, expand our domestic and
international sales and marketing activities, build brand awareness and sponsor
additional marketing events. We expect future sales and marketing expenses to
continue to be our most significant operating expense. Generally, sales
personnel are not immediately productive, and thus, the increase in sales and
marketing expenses that we experience as we hire additional sales personnel is
not expected to immediately result in increased revenues. As a result, these
expenses will reduce our operating margins until such sales personnel become
productive and generate revenue. Accordingly, the timing of sales personnel
hiring and the rate at which they become productive will affect our future
performance. For fiscal 2012, we expect sales and marketing expenses to increase
on an absolute dollar basis and decrease as a percentage of revenue compared to
fiscal 2011.
General and Administrative Expenses
General and administrative expenses primarily consist of personnel and
facilities costs related to our executive, finance, human resource, information
technology and legal organizations, as well as insurance, investor relations,
and IT infrastructure costs related to our enterprise resource planning ("ERP")
system. Further, our general and administrative expenses include professional
services consisting of outside legal, audit, Sarbanes-Oxley and IT consulting
costs. We have incurred in the past, and may continue to incur, significant
legal costs defending ourselves against claims made by third parties. These
expenses are expected to continue as part of our ongoing operations and
depending on the timing and outcome of lawsuits and the legal process, could
have a significant impact on our financial statements. For fiscal 2012, we
expect general and administrative expenses to increase on an absolute dollar
basis and decrease as a percentage of revenue compared to fiscal 2011.
Other Income (Expense), net
Other income (expense), net includes interest income on cash balances, accretion
of discount or amortization of premium on short-term investments, losses or
gains on remeasurement of non-U.S. dollar transactions into U.S. dollars, and in
connection with our acquisition of Azalea Networks ("Azalea") in September 2010,
changes in the fair value of our contingent rights liability.
Critical Accounting Policies
Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP.
These accounting principles require us to make estimates and judgments that
affect the reported amounts of assets and liabilities as of the date of the
Consolidated Financial Statements, as well as the reported amounts of revenues
and expenses during the periods presented. We believe that the estimates and
judgments upon which we rely are reasonable based on information available to us
at the time that these estimates and judgments are made. To the extent there are
material differences between these estimates and actual results, our
Consolidated Financial Statements will be affected. The accounting policies that
reflect our more significant estimates and judgments and which we believe are
the most critical to aid in fully understanding and evaluating our reported
financial results include revenue recognition, stock-based compensation,
inventory valuation, allowances for doubtful accounts, income taxes, and
goodwill and purchased intangible assets. Our critical accounting policies are
disclosed in our Form 10-K for the year ended July 31, 2011. There were no
material changes to our critical accounting policies during the second quarter
of fiscal 2012.
21
--------------------------------------------------------------------------------
Results of Operations
The following table presents our historical operating results as a percentage of
revenues for the periods indicated:
September 30, September 30, September 30, September 30,
Three months ended January 31, Six months ended January 31,
2012 2011 2012 2011
Revenues:
Product 83.9% 84.3% 84.3% 83.8%
Professional services and support 15.9% 15.5% 15.6% 16.0%
Ratable product and related professional
services and support 0.2% 0.2% 0.1% 0.2%
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues:
Product 24.1% 25.7% 25.5% 26.1%
Professional services and support 4.0% 3.8% 3.9% 3.7%
Ratable product and related professional
services and support 0.0% 0.0% 0.0% 0.0%
Gross margin 71.9% 70.5% 70.6% 70.2%
Operating expenses:
Research and development 22.1% 23.0% 21.3% 21.9%
Sales and marketing 39.4% 39.4% 38.8% 39.7%
General and administrative 10.0% 10.9% 9.7% 9.8%
Total operating expenses 71.5% 73.3% 69.8% 71.4%
Operating margin 0.4% (2.8%) 0.8% (1.2%)
Other income (expense), net
Interest income 0.2% 0.3% 0.2% 0.3%
Other income (expense), net 2.2% (0.1%) 1.5% 0.9%
Income (loss) before provision for income
taxes 2.8% (2.6%) 2.5% 0.0%
Provision for income taxes 11.8% 0.4% 7.3% 0.4%
Net loss (9.0%) (3.0%) (4.8%) (0.4%)
22
--------------------------------------------------------------------------------
Revenues
The following table presents our revenues, by revenue source, for the periods
presented:
Three months ended January 31, Six months ended January 31,
2012 2011 2012 2011
(dollars in thousands) (dollars in thousands)Total revenues $ 126,275 $ 93,858 $ 245,627 $ 177,005
Type of revenues:
Product $ 105,970 $ 79,100 $ 207,101 $ 148,304
Professional services and support 20,091 14,602 38,175 28,402
Ratable product and related
professional services and support 214 156 351 299
Total revenues $ 126,275 $ 93,858 $ 245,627 $ 177,005
% revenues by type:
Product 83.9 % 84.3 % 84.3 % 83.8 %
Professional services and support 15.9 % 15.5 % 15.6 % 16.0 %
Ratable product and related
professional services and support 0.2 % 0.2 % 0.1 % 0.2 %
Revenues by geography:
United States $ 76,728 $ 60,387 $ 157,647 $ 112,139
Europe, the Middle East and Africa 24,550 15,704 42,649 28,857
Asia Pacific 21,116 15,168 38,716 29,674
Rest of World 3,881 2,599 6,615 6,335
Total revenues $ 126,275 $ 93,858 $ 245,627 $ 177,005
% revenues by geography:
United States 60.8 % 64.3 % 64.2 % 63.3 %
Europe, the Middle East and Africa 19.4 % 16.7 % 17.4 % 16.3 %
Asia Pacific 16.7 % 16.2 % 15.7 % 16.8 %
Rest of World 3.1 % 2.8 % 2.7 % 3.6 %
Total revenues by sales channel:
Indirect $ 111,290 $ 87,598 $ 226,444 $ 162,110
Direct 14,985 6,260 19,183 14,895
Total revenues $ 126,275 $ 93,858 $ 245,627 $ 177,005
% revenues by sales channel:
Indirect 88.1 % 93.3 % 92.2 % 91.6 %
Direct 11.9 % 6.7 % 7.8 % 8.4 %
During the second quarter of fiscal 2012, total revenues increased
$32.4 million, or 34.5%, over the second quarter of fiscal 2011. An increase in
product revenues of 34.0% during the second quarter of fiscal 2012 compared to
the second quarter of fiscal 2011 drove the overall increase in total revenues.
During the first six months of fiscal 2012, total revenues increased $68.6
million compared to the first six months of fiscal 2011, also driven by an
increase in product revenues of $58.8 million over the same period.
The rapid proliferation of Wi-Fi enabled mobile devices, the increase in demand
for multimedia-rich mobility applications, and the rise of both server and
desktop virtualization is driving the increase in demand for our products. Our
network rightsizing and MOVE architecture initiatives continue to gain momentum
as companies move toward a new access network. Revenues in our key verticals
increased, especially in our general enterprise business. Further our AirWave
and Amigopod software solutions contributed to the increase in revenues. We
added over 1,500 new customers during the second quarter of fiscal 2012 and over
3,000 during the first six months of fiscal 2012. Our cumulative customer total
is over 19,000.
Professional services and support revenues increased 37.6% during the second
quarter of fiscal 2012 compared to the same period in fiscal 2011, and 34.4%
during the first six months of fiscal 2012 compared to the same period in fiscal
2011. This increase is primarily a result of both increased product and first
year support sales, and the renewal of support contracts by existing customers
as our customer base continues to grow.
Ratable product and related professional services and support revenues relate
entirely to our acquisition of Azalea in fiscal year 2011. We expect ratable
product and related professional services and support revenues to continue to
decrease in absolute dollars and as a percentage of total revenues in future
periods.
23
--------------------------------------------------------------------------------
Revenues from our indirect sales channel increased during the second quarter of
fiscal 2012 compared to the second quarter of fiscal 2011 but decreased as a
percentage of revenue as we recognized revenue for a few large, direct customers
during this quarter which lowered the percentage of revenue attributed to
indirect customers as a percentage of total revenues. During the first six
months of fiscal 2012, the percentage of revenue from our indirect customers
increased slightly from the first six months of fiscal 2011 and was in our
normal range. Going forward, we expect to continue to derive a significant
majority of our total revenues from indirect channels as we continue to focus on
improving the efficiency of marketing and selling our products through these
channels.
Revenues from shipments to locations outside the United States increased during
the second quarter and first six months of fiscal 2012 compared to the same
periods of fiscal 2011 due to strong demand across most of our geographies. As a
percentage of total revenue, international revenues increased during the second
quarter of fiscal 2012 compared to the same period in fiscal 2011 primarily due
to strong growth in Europe. During the first six months of fiscal 2012,
international revenues as a percentage of total revenues decreased slightly as
revenues from the U.S. grew at a faster rate than international revenues. We
continue to expand into international locations and introduce our products in
new markets, and we expect international revenues to increase in absolute
dollars and remain consistent or increase as a percentage of total revenues in
fiscal 2012 compared to fiscal 2011.
Cost of Revenues and Gross Margin
Three months ended January 31, Six months ended January 31,
2012 2011 2012 2011
(dollars in thousands) (dollars in thousands)Total revenues $ 126,275 $ 93,858 $ 245,627 $ 177,005
Cost of product $ 30,452 $ 24,173 $ 62,521 $ 46,236
Cost of professional services and
support 5,030 3,542 9,576 6,448
Cost of ratable product and related
professional services and support - - - 9
Total cost of revenues 35,482 27,715 72,097 52,693
Gross profit $ 90,793 $ 66,143 $ 173,530 $ 124,312
Gross margin 71.9 % 70.5 % 70.6 % 70.2 %
During the second quarter and first six months of fiscal 2012, total cost of
revenues increased 28.0% and 36.8%, respectively, compared to the same periods
in fiscal 2011. These increases were primarily due to the corresponding increase
in our product revenue. The substantial majority of our cost of product revenues
consists of payments to our contract manufacturers.
Cost of professional services and support revenues increased 42.0% and 48.5%
during the second quarter and first six months of fiscal 2012, respectively,
compared to the same periods in fiscal 2011. These increases were primarily due
to an increase in headcount in our support and professional services
organization to meet the growing demand for these services.
As we expand internationally, we may incur additional costs to conform our
products to comply with local laws or local product specifications. In addition,
we plan to continue to hire additional personnel to support our growing
international customer base which would increase our cost of professional
services and support.
Gross margins increased 1.4% during the second quarter of fiscal 2012 compared
to the second quarter of fiscal 2011. This increase is primarily due to strong
software sales, improved access point gross margins, and our ratio of direct to
indirect sales. During the first six months of fiscal 2012, gross margin was
consistent with our results from the first six months of fiscal 2011.
Research and Development Expenses
Three months ended January 31, Six months ended January 31,
2012 2011 2012 2011
(dollars in thousands) (dollars in thousands)
Research and development expenses $ 27,926 $ 21,608 $ 52,393 $ 38,722
Percent of total revenues 22.1 % 23.0 % 21.3 % 21.9 %
During the second quarter of fiscal 2012, research and development expenses
increased 29.2% compared to the second quarter of fiscal 2011, primarily due to
an increase of $4.5 million in personnel and related costs, including an
increase in stock-based compensation and payroll taxes of $2.1 million. The
increase is directly related to an increase in headcount of 95 employees.
Facilities and IT-related expenses increased $0.6 million also primarily due to
the increase in headcount. Expenses for consulting and outside agency expenses
increased $0.5 million
24
--------------------------------------------------------------------------------
primarily due to costs associated with our product development effort.
Depreciation expenses increased $0.2 million as we continue to purchase tooling
and equipment to support our research and development efforts. Amortization
expense increased $0.3 million primarily as a result of our acquisition of
Avenda in November 2011.
During the first six months of fiscal 2012, research and development expenses
increased 35.3% compared to the first six months of fiscal 2011. As the result
of the increase in headcount, personnel and related costs increased $11.7
million, including an increase in stock-based compensation and payroll taxes of
$5.7 million. Facilities and IT-related expenses increased $1.3 million also
primarily due to the increase in headcount. Depreciation expense increased $0.4
million while amortization expense increased $0.3 million due to our acquisition
of Avenda. Costs related to internal equipment testing increased $0.2 million to
support our research and development efforts. These increases were partially
offset by a decrease in consulting and outside agency expenses of $0.4 million
primarily due to design and compliance work related to our 11n access points and
controllers that we incurred in the first six months of fiscal 2011 but did not
repeat in the first six months of fiscal 2012.
Sales and Marketing Expenses
Three months ended January 31, Six months ended January 31,
2012 2011 2012 2011
(dollars in thousands) (dollars in thousands)Sales and marketing expenses $ 49,720 $ 36,936 $ 95,335 $ 70,350
Percent of total revenues 39.4 % 39.4 % 38.8 % 39.7 %
During the second quarter of fiscal 2012, sales and marketing expenses increased
34.6% compared to the second quarter of fiscal 2011. Personnel and related costs
increased $8.3 million primarily due to an increase in headcount of 121
employees. An increase in stock-based compensation and payroll taxes of
$3.8 million contributed to the increase in personnel and related costs.
Facilities and IT-related expenses increased $0.7 million primarily due to the
increase in headcount. Commission expense increased $2.7 million corresponding
to the increase in revenue. Marketing expenses increased $0.7 million due to
field marketing efforts and product launches. Finally, amortization expense
increased $0.4 million primarily as a result of our acquisition of Avenda.
During the first six months of fiscal 2012, sales and marketing expenses
increased 35.5% compare to the first six months of fiscal 2011 primarily due to
an increase in headcount. Personnel and related costs increased $15.6 million,
including an increase of $6.7 million in stock-based compensation and payroll
taxes. The increase in headcount also drove the increase in facilities and
IT-related expenses of $1.4 million. Commission expense increased $5.5 million
primarily due to our increase in revenues, and marketing expenses increased $2.0
million primarily due to product launches Amortization expense increased $0.5
million as a result of our acquisition of Avenda.
General and Administrative Expenses
Three months ended January 31, Six months ended January 31,
2012 2011 2012 2011
(dollars in thousands) (dollars in thousands)
General and administrative expenses $ 12,698 $ 10,183 $ 23,798 $ 17,371
Percent of total revenues 10.0 % 10.9 % 9.7 % 9.8 %
General and administrative expenses during the second quarter of fiscal 2012
increased 24.7% compared to the second quarter of fiscal 2011. Personnel
expenses increased $0.7 million primarily due to the increase in headcount of 32
employees. Facilities and IT-related expenses increased $0.3 million also
primarily due to the increase in headcount. Legal fees increased $1.0 million
and operating costs related to our foreign operations increased $0.2 million as
we expanded internationally. Fees for outside services increased $0.3 million
due to an increase in training costs and other compliance-related costs.
General and administrative expenses during the first six months of fiscal 2012
increased 37.0% compared to the first six months of fiscal 2011. Personnel
expenses increased $3.1 million primarily due to the increase in headcount and
an increase in stock-based compensation and payroll taxes of $0.4 million. Legal
fees increased $1.6 million while operating costs related to our foreign
operations increased $0.4 million as we expanded internationally. Depreciation
expense increased $0.6 million and insurance costs increased $0.3 million. Fees
for outside services increased $0.7 million due to an increase in training costs
and other compliance-related costs. These increases were partially offset by a
decrease in facilities and IT-related expenses of $0.5 million as we began
allocating these expenses based on headcount in some of our international
subsidiaries.
25
--------------------------------------------------------------------------------
Other Income (Expense), Net
Three months ended January 31, Six months ended January 31,
2012 2011 2012 2011
(in thousands) (in thousands)Interest income $ 299 $ 240 $ 575 $ 474
Other income (expense), net 2,731 (61 ) 3,558 1,583
Total other income (expense), net $ 3,030 $ 179 $ 4,133 $ 2,057
Interest income increased slightly during the second quarter and first six
months of fiscal 2012 compared to the second quarter and first six months of
fiscal 2011. The increase is primarily due to higher cash and investment
balances in interest-earning accounts. Our average interest-earning cash and
investment balance for the second quarter of fiscal 2012 was $220.2 million
compared to $143.4 million for the second quarter of fiscal 2011. Our average
interest-earning cash and investment balance for the first six months of fiscal
2012 was $200.1 million compared to $141.8 million for the first six months of
fiscal 2011.
Other income (expense), net increased during the second quarter and first six
months of fiscal 2012 compared to the second quarter and first six months of
fiscal 2011 primarily as a result of the change in the valuation of our
contingent rights liability related to the acquisition of Azalea. The change in
valuation resulted in $2.3 million and $3.2 million of other income for the
second quarter and first six months of fiscal 2012, respectively. The change in
valuation resulted in $0.3 million and $2.1 million of other income for the
second quarter and first six months of fiscal 2011, respectively. See Note 2 of
the Notes to Consolidated Financial Statements for further discussion.
Provision for Income Taxes
The provision for income taxes for the second quarter and first six months of
fiscal 2012 was $14.9 million and $18.0 million, respectively. Our income tax
provision consists of federal, foreign and state income taxes. Our effective tax
rate was 427.2% and 293.1% during those periods. During the second quarter and
first six months of fiscal 2011, we generated operating losses. We also
generated book and taxable income in U.S. and certain foreign jurisdictions for
the same periods, without consideration of windfall tax benefits. Our provision
for income taxes was $0.4 million and $0.6 million for the second quarter and
first six months of fiscal 2011, respectively.
Our effective tax rate differs from the federal statutory rate due to state
taxes and significant permanent differences primarily from taxes in foreign
jurisdictions with a tax rate different than the U.S. federal statutory rate,
stock-based compensation expense, R&D credits, certain acquisition related
items, the amortization of deferred tax charges related to our intercompany sale
of intellectual property rights. In addition, prior to the fourth quarter of
fiscal 2011 we maintained a full valuation allowance against our net deferred
tax assets. In the fourth quarter of fiscal 2011 we recorded a tax benefit of
$72.8 million which was largely attributed to the release of our valuation
allowances and the recording of the associated net deferred tax assets on our
Consolidated Balance Sheets. During the first six months of fiscal 2012, we
utilized a portion of our net operating loss ("NOL") carry forwards and R&D
credits and recorded the associated change in net deferred tax assets on our
Consolidated Balance Sheets.
We also recorded a deferred charge during the first and second quarters of
fiscal 2012 related to the deferral of income tax expense on intercompany
profits that resulted from the sale of our intellectual property rights outside
of North and South America to our Irish subsidiary. The deferred charge is
included in the prepaids and other current assets and the other assets lines of
the Consolidated Balance Sheets. As of January 31, 2012, the balance in the
prepaids and other current assets was $2.3 million, and $16.0 million in other
assets. The deferred charge will be amortized as a component of income tax
expense over the 3 to 5 year economic life of the intellectual property.
Our effective tax rate for the second quarter and first six months of fiscal
2012 is higher when compared to the same periods in fiscal 2011 primarily due to
material taxable income related to the intercompany sale of intellectual
property rights during fiscal 2012. The effective tax rate for the second
quarter of fiscal 2012 is higher than the effective tax rate for the first six
months of fiscal 2012 due to a consistently forecasted tax provision relative to
a reduced pre-tax income forecast compared to the first quarter of fiscal 2012.
Our effective tax rate in fiscal 2012 and in future periods may fluctuate on a
quarterly basis. The effective tax rate could be affected by such things as the
geographic distribution of our worldwide earnings or losses, our stock-based
compensation expense, changes in the valuation of our deferred tax assets,
changes in actual results versus our estimates, or changes in tax laws,
regulations, accounting principles, or interpretations thereof.
As of July 31, 2011, we had NOL carryforwards of $230.0 million and $156.1
million for federal and state income tax purposes, respectively. We also had
research and credit carryforwards of $17.4 million for federal and $18.2 million
for state income tax purposes as of July 31, 2011. During the second quarter and
first six months of fiscal 2012 we utilized federal income tax NOL carryforwards
of $8.3 million and $89.2 million, respectively. During the second quarter and
first six months of fiscal 2012 we utilized state income tax NOL carryforwards
of $1.9 million and $39.0, respectively. Realization of deferred tax assets is
dependent upon future earnings, if any, the timing and amount of which are
uncertain.
26
--------------------------------------------------------------------------------
If not utilized, the federal and state NOL and federal tax credit carryforwards
will begin to expire between 2013 and 2023. Utilization of these NOL and credit
carryforwards may be subject to an annual limitation due to provisions of the
Internal Revenue Code of 1986, as amended, that are applicable if we have
experienced an "ownership change" in the past, or if an ownership change occurs
in the future.
We recognize in the Consolidated Financial Statements only those tax positions
determined to be more likely than not of being sustained. We recorded a net
increase to the liability for unrecognized tax benefits as long-term taxes
payable related to tax positions taken in the current period of $0.1 million and
$0.3 million for the second quarter and first six months of fiscal 2012,
respectively.
Liquidity and Capital Resources
January 31, July 31,
2012 2011
(in thousands)
Working capital $ 289,115 $ 269,900
Cash and cash equivalents 64,425 80,773
Short-term investments $ 211,398 $ 153,185
Six months ended January 31,
2012 2011
(in thousands) Cash provided by operating activities $ 42,384 $ 25,531
Cash used in investing activities (85,358 ) (23,898 )
Cash provided by financing activities $ 27,266 $ 16,369
As of January 31, 2012, our principal sources of liquidity were our cash, cash
equivalents and short-term investments. Cash and cash equivalents are primarily
comprised of cash, sweep funds and money market funds with an original maturity
of 90 days or less at the time of the purchase. Short-term investments include
corporate bonds, U.S. government agency securities, U.S. treasury bills,
commercial paper, and certificates of deposit. Cash, cash equivalents and
short-term investments increased $41.9 million during the second quarter of
fiscal 2012 to $275.8 million as of January 31, 2012.
Cash Flows from Operating Activities
Our cash flows from operating activities will continue to be affected
principally by our profitability, working capital requirements, the continued
growth in revenue and cash collections and the extent to which we increase
spending on personnel. The timing of hiring sales personnel in particular
affects cash flows as there is a lag between the hiring of sales personnel and
the generation of revenue and cash flows from sales personnel. Our largest
source of operating cash flows is cash collections from our customers. Our
primary uses of cash from operating activities are for personnel related
expenditures, purchases of inventory, and rent payments.
During the first six months of fiscal 2012, net cash provided by operating
activities increased $16.9 million compared to the first six months of fiscal
2011. This increase is primarily attributable to an increase of $11.4 million
from operations after adjusting for non-cash items, including changes in
deferred income taxes, and stock-based compensation and the related tax
benefits, and an increase of $5.4 million from the change in operating assets
and liabilities.
Cash Flows from Investing Activities
Cash used in investing activities during the first six months of fiscal 2012
increased $61.5 million compared to the first six months of fiscal 2011. We
continue to invest our excess cash balances in short-term investments. Some of
the proceeds from the sale and maturity of these investments were used to
purchase property and equipment of $5.3 million during the first six months of
fiscal 2012. Further, during the second quarter of fiscal 2012, we completed our
acquisition of Avenda. Cash paid for the acquisition, net of cash received was
$21.1 million. See Note 2 of the Notes to Consolidated Financial Statements for
more information.
Cash Flows from Financing Activities
Cash provided by financing activities increased $10.9 million during the first
six months of fiscal 2012 compared to the first six months of fiscal 2011.The
increase was primarily the result of the excess tax benefits associated with our
stock-based compensation.
Based on our current cash, cash equivalents and short-term investments we expect
that we will have sufficient resources to fund our operations for the next
12 months. However, we may need to raise additional capital or incur additional
indebtedness to continue to fund our operations in the future. Our future
capital requirements will depend on many factors, including our rate of revenue
growth, the expansion of our sales and marketing activities, the timing and
extent of expansion into new territories, the timing of introductions of new
products and enhancements to existing products, and the continuing market
acceptance of our products.
27
--------------------------------------------------------------------------------
Contractual Obligations
The following is a summary of our contractual obligations:
Less than More than
Total 1 year 1 - 3 years 3 - 5 years 5 years
(in thousands)
Operating leases $ 18,675 $ 5,092 $ 8,333 $ 5,250 $ -
Non-cancellable inventory purchase
commitments (1) 14,414 14,414 - - -
Total contractual obligations $ 33,089 $ 19,506 $ 8,333 $ 5,250 $ -
(1) We outsource the production of our hardware to third-party manufacturing
suppliers. We enter into various inventory related purchase agreements with
these suppliers. Under the agreement with our main contract manufacturer, 40%
of the order quantities can be rescheduled or are cancelable by giving notice
60 days prior to the expected shipment date, and 20% of the order quantities
can be rescheduled or are cancelable by giving notice 30 days prior to the
expected shipment date. Orders are not cancelable within 30 days prior to the
expected shipment date.
[ Back To Contact Center Solutions Homepage's Homepage ]
|
MetricNet Publishes 4 New Australian Benchmarks for IT Support, Contact Centres 
Part 1: Home Agents: The Big Game Changer [white paper]
