|
PROCERA NETWORKS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. We use words such as "may," "will," "expect," "anticipate,"
"estimate," "intend," "plan," "predict," "potential," "believe," "should" and
similar expressions to identify forward-looking statements. These statements
appearing throughout our Annual Report on Form 10-K are statements regarding our
intent, belief, or current expectations, primarily regarding our operations. You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this Annual Report on Form 10-K. Our actual results could
differ materially from those anticipated in these forward-looking statements for
many reasons, including those set forth under "Business," "Risk Factors" and
elsewhere in this Annual Report on Form 10-K.
Overview
We are a leading provider of Intelligent Policy Enforcement ("IPE") solutions
that enable mobile and broadband network operators and entities managing private
networks including higher education institutions, businesses and government
entities (collectively referred to as network operators) to gain enhanced
visibility into, and control of, their networks. Our solutions provide granular
network intelligence intended to enable network operators to improve the quality
and longevity of their networks, better monetize their network infrastructure
investments, control security hazards and create and deploy new services for
their users. The intelligence we provide about users and their usage enables
qualified business decisions. Our network operator customers include mobile
service providers, broadband service providers, cable multiple system operators
("MSOs"), Internet Service Providers ("ISPs"), educational institutions,
enterprises and government agencies.
Our IPE products are part of the market for mobile packet and broadband core
products. According to Infonetics Research, the market for IPE products is
expected to grow from $249 million in 2009 to $2.1 billion in 2015, a compound
annual growth rate of 43%. Our bundled products deliver a solution that is a key
element of the mobile packet and broadband core ecosystems. Our solutions are
often integrated with additional elements in the mobile packet and broadband
core including Policy Management and Charging functions and are compliant with
the widely adopted 3rd Generation Partnership Program ("3GPP") standard. In
order to respond to rapidly increasing demand for network capacity due to
increasing subscribers and usage, network operators are seeking higher degrees
of intelligence, optimization, network management, service creation and delivery
in order to differentiate their offerings and deliver a high quality of
experience to their subscribers. We believe the need to create more intelligent
and innovative mobile and broadband networks will continue to drive demand for
our products.
Our products are marketed under the PacketLogic brand name. We have a broad
spectrum of products delivering IPE at the access, edge and core layers of the
network. Our products are designed to offer maximum flexibility to our customers
and enable differentiated services and revenue-enhancing applications, all while
delivering a high quality of service for subscribers.
We face competition from suppliers of standalone IPE and deep packet inspection
("DPI") products including Allot Communications Ltd., Arbor Networks (acquired
by Tektronix), Blue Coat Systems, Brocade Communications Systems, Cisco Systems,
Inc., Cloudshield Technologies (acquired by SAIC), Ericsson, Huawei Technologies
Company, Juniper Networks and Sandvine Corporation. Some of our competitors
supply platform products with different degrees of DPI functionality, such as
switch/routers, routers, session border controllers and VoIP switches.
Most of our competitors are larger and more established enterprises with
substantially greater financial and other resources. Some competitors may be
willing to reduce prices and accept lower profit margins to compete with us. As
a result of such competition, we could lose market share and sales, or be forced
to reduce our prices to meet competition. However, we do not believe there is a
dominant supplier in our market. Based on our belief in the superiority of our
technology, we believe that we have an opportunity to capture meaningful market
share and benefit from what we believe will be growth in the DPI market.
We were incorporated in 2002 and became a public company in October 2003
following our merger with Zowcom, Inc., a publicly-traded Nevada corporation. In
2006, we completed acquisitions of the Netintact entities. Our Company is
headquartered in Fremont, California and we have regional headquarters in
Varberg, Sweden and Singapore. We sell our products through our direct sales
force, resellers, distributors and systems integrators in the Americas, Asia
Pacific and Europe.
29--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon financial statements which have been prepared in accordance with
Generally Accepted Accounting Principles in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses and
related disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate these estimates. We base our estimates on historical experience and on
assumptions that are believed to be reasonable. These estimates and assumptions
provide a basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions, and these
differences may be material. Our significant accounting policies are summarized
in Note 2 of our Notes to Financial Statements.
In accordance with Securities and Exchange Commission guidance, those material
accounting policies that we believe are the most critical to an investor's
understanding of our financial results and condition are discussed below.
Revenue Recognition
In October 2009, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2009-13, "Multiple-Deliverable Revenue
Arrangements" and ASU No. 2009-14, "Certain Revenue Arrangements that Include
Software Elements." We adopted the new guidance on a prospective basis for new
or materially modified revenue arrangements as of January 1, 2011. The adoption
of this guidance did not have a material impact on our financial statements and
is not expected to have a material impact in the future.
Our most common sale involves the integration of software and a hardware
appliance, where the hardware and software work together to deliver the
essential functionality of the product. We recognize product revenue when all
of the following have occurred: (1) we have entered into a legally binding
arrangement with a customer resulting in the existence of persuasive evidence of
an arrangement; (2) delivery has occurred, evidenced when product title
transfers to the customer; (3) customer payment is deemed fixed or determinable
and free of contingencies and significant uncertainties; and (4) collection is
probable.
Product revenue consists of revenue from sales of appliances and software
licenses. Product sales include a perpetual license to our software that is
essential to the functionality of the hardware, and on occasion include licenses
to additional software. Shipping charges billed to customers are included in
product revenue and the related shipping costs are included in cost of product
revenue. Virtually all sales include post-contract support ("PCS") services
(included in support revenue) which consist of software updates and customer
support. Software updates provide customers access to a constantly growing
library of electronic Internet traffic identifiers (signatures) and rights to
non-specific software product upgrades, maintenance releases and patches
released during the term of the support period. Support includes Internet access
to technical content, telephone and Internet access to technical support
personnel and hardware support.
Receipt of a customer purchase order is the primary method of determining that
persuasive evidence of an arrangement exists.
Delivery generally occurs when a product is delivered to a common carrier F.O.B.
shipping point. However, product revenue based on channel partner purchase
orders is recorded based on sell-through to the end user customers until such
time as we have established significant experience with the channel partner's
ability to complete the sales process. Additionally, when we introduce new
products for which there is no historical evidence of acceptance history,
revenue is recognized on the basis of end-user acceptance until such history has
been established.
Fees are typically considered to be fixed or determinable at the inception of an
arrangement, generally based on specific products and quantities to be
delivered. Substantially all of our contracts do not include rights of return or
acceptance provisions. To the extent that agreements contain such terms, we
recognize revenue once the acceptance provisions or right of return lapses.
Payment terms to customers generally range from net 30 to 90 days. In the event
payment terms are provided that differ from standard business practices, the
fees are deemed to not be fixed or determinable and revenue is recognized when
the payments become due, provided the remaining criteria for revenue recognition
have been met.
We assess the ability to collect from our customers based on a number of
factors, including credit worthiness of the customer and past transaction
history of the customer. If the customer is not deemed credit worthy, we defer
all of the revenue from the arrangement until payment is received and all other
revenue recognition criteria have been met.
Customer orders normally contain multiple items. The initial product delivery
consists of the hardware and software elements and these elements have
standalone value to the customer. Through the year ended December 31, 2011, in
virtually all of our contracts, the only elements that remained undelivered at
the time of product delivery were PCS services. Prior to January 1, 2011, the
majority of our transactions were within the scope of the software revenue
recognition guidance. We accordingly recognized revenue for delivered items
using the residual method, after allocating revenue to PCS services based on
vendor specific objective evidence of fair value ("VSOE").
30--------------------------------------------------------------------------------
Table of Contents
Under the new guidance, we allocate revenue to each element in an arrangement
based on relative selling price using a selling price hierarchy. The selling
price for a deliverable is based on its VSOE if available, third party evidence
("TPE") if VSOE is not available, or our best estimate of selling price ("ESP")
if neither VSOE nor TPE is available. The maximum revenue recognized on a
delivered element is limited to the amount that is not contingent upon the
delivery of additional items. In arrangements that include non-essential
software ("software deliverables"), revenue is allocated to each separate unit
of accounting for the non-software deliverables and to the software deliverables
as a group using the relative selling prices of each of the deliverables in the
arrangement. Revenue allocated to the software deliverables as a group is then
allocated first to the PCS services based on VSOE, and then to the software,
using the residual method under the software revenue recognition guidance.
We determine VSOE for PCS based on the rate charged to customers based upon
renewal pricing for PCS. Each contract or purchase order entered into includes a
stated rate for PCS. The renewal rate is generally equal to the stated rate in
the original contract. We have a history of such renewals, the vast majority of
which are at the stated renewal rate on a customer by customer basis. PCS
revenue is recognized under a proportional performance method, ratably over the
life of the contract. A small portion of service revenue is derived from
providing training on products and we use the completed-contract method to
recognize such revenue.
As our hardware and software products are rarely sold separately, we generally
do not have VSOE for these products, and TPE is not available. We determine the
ESP for hardware and software deliverables considering internal factors such as
discounting and pricing policies and external factors such as market conditions
in different geographies and competitive positioning.
In certain contracts, billing terms may be agreed upon based on performance
milestones such as the execution of a measurement test, a partial delivery or
the completion of a specified service. Payments received before the
unconditional acceptance of a specific set of deliverables are recorded as
deferred revenue until the conditional acceptance has been waived.
Valuation of Long-Lived Assets and Goodwill
We review our long-lived assets including property and equipment and purchased
intangible for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Such events or circumstances
that could trigger an impairment review include a significant disposal of a
portion of such assets, an adverse change in the market involving the business
employing the related asset, a significant decrease in the benefits realized
from an acquired business, difficulties or delays in integrating the business or
a significant change in the operations of an acquired business.
An impairment test involves a comparison of undiscounted cash flows from the use
of the asset to the carrying value of the asset. Measurement of an impairment
loss is based on the amount that the carrying value of the asset exceeds its
fair value. No impairment losses were incurred in the periods presented.
As a result of the acquisition of Netintact AB and Netintact PTY in 2006, we
have goodwill of $960,209 on our consolidated balance sheet as of December 31,
2011. This goodwill was measured as the excess of the cost of the acquisition
over the amount assigned to tangible and identifiable intangible assets acquired
less liabilities assumed. We review our goodwill for impairment annually during
the fourth quarter of the year or more frequently if an event or circumstance
indicates that an impairment loss has occurred. The identification and
measurement of goodwill impairment involves the estimation of fair value at a
reporting unit level. We operate in one segment, which is considered to be the
sole reporting unit and therefore, we tested our goodwill at the enterprise
level.
Goodwill impairment is determined using a two-step process. The first step of
the goodwill impairment test is used to identify potential impairment by
comparing the fair value of a reporting unit with its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not impaired and the second step of
the impairment test is unnecessary. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill impairment test is
performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value
of the reporting unit's goodwill with the carrying amount of that goodwill. If
the carrying amount of the reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. The implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination. That is, the
fair value of the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible assets) as if
the reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the purchase price paid to acquire the reporting
unit.
31--------------------------------------------------------------------------------
Table of Contents
As of December 31, 2011, we completed the first step of our annual impairment
test which did not indicate impairment. Therefore, the second step of the
impairment test was not necessary.
Allowance for Doubtful Accounts
The allowance for doubtful accounts reduces trade receivables to the amount that
is ultimately believed to be collectible. When evaluating the adequacy of the
allowance for doubtful accounts, we consider factors such as historical
experience, credit quality, age of the accounts receivable balances, geographic
or country-specific risks and economic conditions that may affect a customer's
ability to pay. The allowance for doubtful accounts is reviewed regularly and
adjusted if necessary based on our assessment of a customer's ability to pay.
Stock-Based Compensation
We apply the provisions of ASC 718 which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and non-employee directors based on estimated fair values. Under the
fair value recognition provisions of this statement, our stock-based
compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense on a straight-line basis over the requisite
service period, which is the vesting period. We calculate the fair value of
stock options using the Black-Scholes option-pricing model. The determination of
the fair value of stock-based payment awards using an option-pricing model is
affected by our stock price as well as assumptions regarding a number of complex
and subjective variables. These variables include our expected stock price
volatility over the term of the awards, actual and projected employee stock
option exercise behaviors, risk-free interest rate and expected dividends.
We estimate the expected volatility of our common stock-based on its historical
volatility over a period equivalent to the expected term of the option. We
estimate the expected term of stock options using historical exercise data. We
use the exact number of days between the grant and the exercise dates to
calculate a weighted average of the holding periods for all awards (i.e., the
average interval between the grant and exercise or post-vesting cancellation
dates) adjusted as appropriate. We determine the risk-free interest rate for a
period equivalent to the expected term of the option by extrapolating from the
U.S. Treasury yield curve in effect at the time of the grant. We have never paid
cash dividends and do not anticipate paying cash dividends in the foreseeable
future. We estimate forfeitures based on our historical experience.
Accounting for Income Taxes
We record a tax provision for the anticipated tax consequences of the reported
results of operations. In accordance with ASC 740, the provision for income
taxes is computed using the asset and liability method, under which deferred tax
assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the financial reporting and tax bases of assets
and liabilities, and for the operating losses and tax credit carryforwards.
Deferred tax assets and liabilities are measured using the currently enacted tax
rates that apply to taxable income in effect for the years in which those assets
are expected to be realized or settled. We record a valuation allowance to
reduce deferred tax assets to the amount that is believed more likely than not
to be realized. Management believes that sufficient uncertainty exists regarding
the future realization of deferred tax assets and, accordingly, a full valuation
allowance has been provided against net deferred tax assets. Tax expense has
taken into account any change in the valuation allowance for deferred tax assets
where the realization of various deferred tax assets is subject to uncertainty.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurement (Topic
820): Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and International Financial Reporting Standards
("IFRS")." The amendments in this ASU generally represent clarification of Topic
820, but also include instances where a particular principle or requirement for
measuring fair value or disclosing information about fair value measurements has
changed. This update results in common principles and requirements for measuring
fair value and for disclosing information about fair value measurements in
accordance with GAAP and IFRS. The amendments are effective for interim and
annual periods beginning after December 15, 2011 and are to be applied
prospectively. Early application is not permitted. We do not expect that the
adoption of ASU 2011-04 will have a material impact on our consolidated
financial statements.
In June 2011, the FASB issued ASU 2011-05, "Comprehensive Income (Topic 220):
Presentation of Comprehensive Income." Specifically, the new guidance allows an
entity to present components of net income or other comprehensive income in one
continuous statement, referred to as the statement of comprehensive income, or
in two separate, but consecutive statements. The new guidance eliminates the
current option to report other comprehensive income and its components in the
statement of changes in equity. While the new guidance changes the presentation
of comprehensive income, there are no changes to the components that are
recognized in net income or other comprehensive income under current accounting
guidance. The new guidance is effective for fiscal years and interim periods
beginning after December 15, 2011 and is to be applied retrospectively. We do
not expect that the adoption of ASU 2011-05 will have a material impact on our
consolidated financial statements.
32--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Revenue--
Year Ended December 31, Year Ended December 31,
Increase Increase
2011 2010 (Decrease) 2010 2009 (Decrease)
($ in thousands) ($ in thousands)
Net product revenue $ 37,450 $ 15,825 $ 21,625 137 % $ 15,825 $ 17,009 $ (1,184 ) (7) %
Net support revenue 6,954 4,498 2,456 55 % 4,498 3,119 1,379 44 %
Total revenue $ 44,404 $ 20,323 $ 24,081 118 % $ 20,323 $ 20,129 $ 194 1 %
Our revenue is derived from two sources: product revenue, which includes sales
of our hardware appliances bundled with software licenses, and service revenue,
which consists primarily of software maintenance and customer support revenue.
Maintenance and customer support revenue is recognized over the support period,
which is typically twelve months.
Total revenue in 2011 was $44.4 million, an increase of 118% compared with $20.3
million in 2010, and reflected a 137% increase in product revenue and a 55%
increase in support revenue. The increase in product revenue in 2011 compared to
2010 reflected revenue from new service provider relationships and substantial
follow-on orders from existing customers. During the year, we added several new
large service provider customers in the categories of fixed/mobile and cable,
and we also continued to add new higher education customers. Product revenue
continued to reflect increased sales of our mid-range PL8000 series and high-end
PL10000 series products. The increase in support revenue in 2011 reflected the
continued expansion of the installed base of our product to which we have sold
ongoing support services. In 2011, sales to two customers, Shaw Communications,
Inc. and Jet Infosystems, represented 27% and 12% of net revenues, respectively.
Total revenue in 2010 increased to $20.3 million from $20.1 million in 2009. The
increase reflected a 7% decrease in product revenue and a 44% increase in
support revenue. The decrease in product revenue reflected smaller order amounts
and a mix shift toward the mid-range PL 8000 series products. While the quantity
of new customer relationships increased in 2010 compared with 2009, order
amounts in 2010 decreased from 2009. The impact of the smaller purchase orders
was partially offset by follow-on orders from existing customers. A majority of
our sales in 2010 and 2009 were to large communications carriers. The increase
in support revenue in 2010 reflected the new product sales and expansion of our
customer base as well as support renewals. Sales to one customer, Cox
Communication, Inc., accounted for 11% of sales in 2010 compared to 44% of sales
in 2009.
Sales to customers located in the United States as a percentage of total
revenues were 51%, 59% and 62% for the years ended December 31, 2011, 2010 and
2009, respectively.
33
--------------------------------------------------------------------------------
Table of Contents
Cost of Sales
Cost of sales includes: (i) direct labor and material costs for products sold,
(ii) costs expected to be incurred for warranty, (iii) adjustments to inventory
values, including the write-down of slow moving or obsolete inventory and (iv)
costs for support personnel.
The following table presents the breakdown of cost of sales by category:
Year Ended December 31, Year Ended December 31,
Increase Increase
2011 2010 (Decrease) 2010 2009 (Decrease)
($ in thousands) ($in thousands)
Materials and
per-use licenses $ 15,128 $ 6,759 $ 8,369 $ 6,759 $ 7,768 $ (1,009 )
Percent of net
product revenue 40 % 43 % (3) % 43 % 46 % (3) %
Applied labor
and overhead 1,401 1,080 321 1,080 1,585 (505 )
Percent of net
product revenue 4 % 7 % (3) % 7 % 9 % (2) %
Other indirect
costs 829 474 355 474 1,060 (586 )
Percent of net
product revenue 2 % 3 % (1) % 3 % 6 % (3) %
Product Costs 17,358 8,313 9,045 8,313 10,413 (2,100 )
Percent of net
product revenue 46 % 53 % (7) % 53 % 61 % (8) %
Support costs 723 500 223 500 515 (15 )
Percent of net
support revenue 10 % 11 % (1) % 11 % 16 % (5) %
Amortization of
acquired assets --- --- --- --- 1,017 (1,017 )
Percent of net
total revenue 0 % 0 % 0 % 0 % 5 % (5) %
Total costs of
sales $ 18,081 $ 8,813 $ 9,268 $ 8,813 $ 11,945 $ (3,132 )
Percent of net
total revenue 41 % 43 % (2) % 43 % 59 % (16) %
2011 compared to 2010. Total cost of sales in 2011 increased by $9.3 million
compared to 2010, and decreased as a percentage of revenue by 2 percentage
points. The increase in cost of sales in 2011 primarily reflected higher
material costs associated with increased product sales. The decrease in cost of
sales as a percentage of revenue primary reflected increased sales of our PL8000
series products, which have lower material costs compared with our other
products.
2010 compared to 2009. Total cost of sales in 2010 decreased by $3.1 million in
2010 compared to 2009, and decreased as a percentage of revenue by 16 percentage
points. The decrease in cost of sales in 2010 reflected lower material costs and
the lack of acquisition-related intangible asset amortization in 2010 because
the corresponding intangible assets became fully amortized in 2009. Total cost
of sales in 2009 included $1.0 million of acquisition-related intangible asset
amortization. The remaining decrease in cost of sales primarily resulted from
lower material and related costs, reflecting a sales mix shift toward the
lower-cost, mid-range PL 8000 series product that was introduced in
mid-2010. The PL 8000 series product is an appliance type product, which is less
expensive and requires less materials and overhead to produce as compared with
the high-end PL10000 series product that comprised a majority of sales in
2009. The decrease in cost of sales as a percentage of revenue also reflected
flat costs for support while support revenue increased.
Gross Profit
Year Ended December 31, Year Ended December 31,
Increase Increase
2011 2010 (Decrease) 2010 2009 (Decrease)
($ in thousands) ($in thousands)
Gross profit $ 26,323 $ 11,510 $ 14,813 129 % $ 11,510 $ 8,184 $ 3,326 41 %
Percent of total
net revenue 59 % 57 % 57 % 41 %
2011 compared to 2010. Our gross profit margin for 2011 increased by 2
percentage points to 59% from 57% in 2010. The improvement resulted from the
continued increase in sales of our PL8000 series products, first introduced in
2010, which have a higher margin compared with our other products.
34--------------------------------------------------------------------------------
Table of Contents
2010 compared to 2009. Our gross profit margin for 2010 increased by 16
percentage points to 57% from 41% in 2009. This improvement resulted from an
increase in margins related to greater support sales because support sales
increased while related support costs remained flat; the margin impact of having
fully amortized acquisition-related intangible assets in 2009; and higher
margins on product sales. Gross profit in 2009 was impacted by $1.0 million of
acquisition-related intangible asset amortization, or 5 percentage points. Of
the remaining 11 percentage point increase in the gross margin rate in 2010, 7
percentage points resulted from the increase in support sales and the remaining
4 percentage point increase resulted from improved margin on product sales.
Operating Expenses
Year Ended December 31, Year Ended December 31,
Increase Increase
2011 2010 (Decrease) 2010 2009 (Decrease)
($ in thousands) ($ in thousands)
Research and
development $ 4,647 $ 3,305 $ 1,342 41 % $ 3,305 $ 2,608 $ 697 27 %
Sales and
marketing 12,026 6,855 5,171 75 % 6,855 6,821 34 0 %
General and
administrative 5,707 4,087 1,620 40 % 4,087 4,993 (906 ) (18) %
Total $ 22,380 $ 14,247 $ 8,133 57 % $ 14,247 $ 14,421 $ (174 ) (1) %
Research and Development
Research and development expenses include costs associated with personnel
focused on the development or improvement of our products, prototype materials,
initial product certifications and equipment costs. Research and development
costs include sustaining and enhancement efforts for products already released
and development costs associated with planned new products.
Year Ended December 31, Year Ended December 31,
Increase Increase
2011 2010 (Decrease) 2010 2009 (Decrease)
($ in thousands) ($ in thousands)
Research and
development $ 4,647 $ 3,305 $ 1,342 41 % $ 3,305 $ 2,608 $ 697 27 %
As a percentage
of net revenue 10 % 16 % 16 % 13 %
2011 compared to 2010. Research and development expenses for 2011 increased by
$1.3 million compared to 2010 as a result of increased research and development
personnel hired during 2010 and the corresponding additional employee
compensation costs. Additional personnel are expected to allow us to enhance our
core product features and functionality in order to support new sales and to
achieve follow-on sales to our current customers. Stock-based compensation
recorded to research and development expenses was $126,990 in 2011 compared to
$34,448 in 2010.
2010 compared to 2009. Research and development expenses for 2010 increased by
$0.7 million compared to 2009 as a result of increased hires of research and
development personnel and the corresponding additional employee compensation
costs. Stock-based compensation recorded to research and development expense was
$34,448 in 2010 compared to $33,022 in 2009.
Sales and Marketing
Sales and marketing expenses primarily include personnel costs, sales
commissions and marketing expenses, such as trade shows, channel development and
literature.
Year Ended December 31, Year Ended December 31,
Increase Increase
2011 2010 (Decrease) 2010 2009 (Decrease)
($ in thousands) ($ in thousands)
Sales and
marketing $ 12,026 $ 6,855 $ 5,171 75 % $ 6,855 $ 6,821 $ 34 0 %
As a percentage
of net revenue 27 % 34 % 34 % 34 %
2011 compared to 2010. Sales and marketing expenses for 2011 increased by $5.2
million compared to 2010. The increase reflected the addition of sales personnel
in 2011 and the corresponding higher compensation costs and higher commission
costs as a result of the increase in revenue. Stock-based compensation recorded
to sales and marketing expense was $0.5 million in 2011 compared to $0.3 million
in 2010.
35--------------------------------------------------------------------------------
Table of Contents
2010 compared to 2009. Sales and marketing expenses for 2010 were flat compared
to 2009, reflecting increased contractor costs and headcount and related
employee compensation costs, offset by the impact of having fully amortized
acquisition-related intangibles assets in 2009. Acquisition-related intangible
amortization expense recorded to sales and marketing expense in 2009 was $1.0
million. Stock-based compensation recorded to sales and marketing expense was
$0.3 million in 2010, flat with $0.3 million in 2009.
General and Administrative
General and administrative expenses consist primarily of personnel and
facilities costs related to our executive, finance functions, service fees for
professional services and amortization of intangible assets. Professional
services include costs for legal advice and services, independent auditors and
investor relations.
Year Ended December 31, Year Ended December 31,
Increase Increase
2011 2010 (Decrease) 2010 2009 (Decrease)
($ in thousands) ($ in thousands)
General and
administrative $ 5,707 $ 4,087 $ 1,620 40 % $ 4,087 $ 4,993 $ (906 ) (18) %
As a percentage
of net revenue 13 % 20 % 20 % 25 %
2011 compared to 2010. General and administrative expenses for 2011 increased
by $1.6 million compared to 2010, reflecting higher bonus costs associated with
exceeding revenue targets that were established for 2011, as well as higher
legal and audit fees, and increased use of contractors. Stock-based compensation
recorded to general and administrative expense was $1.0 million in 2011, flat
with $1.0 million in 2010.
2010 compared to 2009. General and administrative expenses for 2010 decreased by
$0.9 million compared to 2009, reflecting the impact of having fully amortized
acquisition-related intangibles assets in 2009, reduced headcount and related
employee compensation costs due to reductions that took effect in the second
quarter of 2009, as well as decreases in investor relations costs that took
effect in the second half of 2009. Acquisition-related intangible amortization
expense recorded to general and administrative expense in 2009 was $0.5
million. Our acquisition intangibles became fully amortized in the third quarter
of 2009. Stock-based compensation recorded to general and administrative expense
was $1.0 million in 2010, compared with $0.8 million in 2009.
Interest and Other Expense
Year Ended December 31, Year Ended December 31,
Increase Increase
2011 2010 (Decrease) 2010 2009 (Decrease)
($ in thousands) ($ in thousands)
Interest income $ 73 18 $ 55 306 % $ 18 4 $ 14 350 %
Interest expense
and other (216 ) (165 ) 51 31 % (165 ) (1,843 ) (1,678 ) (91) %
Total interest
and other income
(expense), net $ (143 ) $ (147 ) $ 4 3 % $ (147 ) $ (1,839 ) $ 1,692 92 %
Interest income increased in 2011 compared to 2010 due to higher cash balances
associated with our registered offering of common stock in the second quarter of
2011, for which we received net proceeds of approximately $26.5 million.
Interest expense and other increased in 2011 compared with 2010, reflecting
foreign currency transaction losses of $78,000 in 2011, partially offset by
reduced interest costs of $27,000 associated with reduced borrowings against our
line of credit.
Interest expense in 2010 decreased from 2009 as a result of $1.7 million
recorded to interest expense in 2009 related to the conversion option embedded
in the convertible promissory notes that were issued and then converted into
471,305 shares of common stock in the quarter ended June 30, 2009. This interest
expense was calculated based on the intrinsic value of the embedded option on
the date that each convertible promissory note was executed. The intrinsic value
was based on the difference between the $4.00 embedded option exercise price and
the approximately $7.50 average price of our common stock on the issuance date
of the promissory notes. The calculated interest (or discount) is amortized over
the life of the promissory notes. Therefore, because the notes were converted to
common stock in the same quarter that they were issued, all of the interest
related to the embedded option was recorded (or fully amortized) during the
quarter ended June 30, 2009.
36--------------------------------------------------------------------------------
Table of Contents
Provision for Income Taxes
Year Ended December 31, Year Ended December 31,
Increase Increase
2011 2010 (Decrease) 2010 2009 (Decrease)
($ in thousands) ($ in thousands)
Income tax
provision
(benefit) $ 45 $ 10 $ 35 350 % $ 10 $ (691 ) $ 701 101 %
We are subject to taxation primarily in the U.S., Australia, Singapore and
Sweden as well as in a number of states, including California. The increase in
income tax provision in 2011 compared to 2010 reflected higher state and foreign
taxes. During 2009, we recorded a tax benefit primarily from the amortization of
deferred tax liabilities associated with purchased intangible assets, which were
fully amortized during 2009.
We have established a valuation allowance for substantially all of our deferred
tax assets. We calculated the valuation allowance in accordance with the
provisions of ASC 740, which requires that a valuation allowance be established
or maintained when it is "more likely than not" that all or a portion of
deferred tax assets will not be realized. We will continue to reserve for
substantially all net deferred tax assets until there is sufficient evidence to
warrant reversal.
Liquidity and Capital Resources
Cash, Cash Equivalents and Short-term Investments
The following table summarizes the changes in our cash balance for the periods
indicated:
Year Ended December 31,
2011 2010 2009
(in thousands)
Net cash provided by (used in) operating
activities $ 4,591 $ (54 ) $ (4,136 )
Net cash used in investing activities (14,571 ) (714 ) (83 )
Net cash provided by financing activities 25,880 5,876 5,567
Effect of exchange rate changes on cash and cash
equivalents 124 (424 ) 122
Net increase in cash and cash equivalents $ 16,024 $ 4,684 $ 1,471
During 2011, we generated $4.6 million in cash from operating activities,
primarily consisting of our net income of $3.8 million and non-cash charges of
$2.7 million, partially offset by net working capital uses of cash of $1.8
million. Non-cash charges consisted primarily of stock-based compensation of
$1.7 million, depreciation expense of $0.4 million and inventory write-downs of
$0.4 million. Working capital uses of cash included an increase in inventories
of $5.5 million and an increase in accounts receivables of $0.3 million. The
increase in inventories resulted from material purchases before 2011 year end in
anticipation of 2012 sales. The increase in accounts receivables reflected a
small increase in the receivables balance associated with higher sales, while
aging improved year-over-year. Working capital sources of cash included an
increase in deferred revenues of $2.0 million, an increase in accrued
liabilities of $1.2 million and an increase in accounts payable of $0.9 million.
The increase in deferred revenue reflected ongoing support orders from our
growing customer base, as well as support purchased on new product shipments.
The increase in accounts payable reflected increased inventory purchases. The
increase in accrued liabilities reflected higher accrued bonuses and sales
commissions as a result of increased revenue, which exceeded established revenue
targets.
Net cash used in investing activities of $14.6 million in 2011 reflected net
purchases of short-term investments of $13.6 million with cash raised through
our equity offering in the second quarter of 2011, and purchases of lab and
testing equipment for use in research and development of $1.0 million. Net cash
provided by financing activities of $25.9 million included proceeds from the
issuance of common stock of $26.5 million, proceeds from the exercise of stock
options and warrants of $1.1 million, offset by the net repayment of the
borrowings against our line of credit of $1.7 million.
During 2010, we used $54,000 of cash in operating activities, primarily
consisting of our net loss of $2.9 million offset by non-cash charges of $2.3
million and net working capital sources of cash of $0.6 million. Non-cash
charges included stock-based compensation of $1.4 million, depreciation expense
of $0.5 million and inventory write-downs of $0.3 million. Working capital
sources of cash included an increase in deferred revenue of $2.2 million
resulting from ongoing support orders from our increasing customer base and an
increase in accounts payable of $0.9 million as a result of increased inventory
purchases. Working capital uses of cash included an increase in accounts
receivables of $2.1 million and an increase in inventory of $0.8 million. The
increase in accounts receivables reflected the timing of shipments as large
orders were shipped at year end. The increase in inventory reflected inventory
purchases in anticipation of 2011 shipments. Net cash used in investing
activities in 2010 consisted of purchases of testing equipment of $0.7 million.
Net cash provided by financing activities in 2010 included proceeds from the
issuance of common stock of $6.5 million, offset by the repayment of $0.5
million of notes and the net $0.2 million repayment of the borrowings against
our line of credit.
37--------------------------------------------------------------------------------
Table of Contents
During 2009, we used $4.1 million of cash in operating activities, consisting of
our $7.4 million net loss, non-cash charges of $5.5 million and net working
capital uses of cash of $2.2 million. Non-cash charges primarily included a $1.7
million charge to interest expense related to the conversion option embedded in
convertible promissory notes that were issued and then converted into common
stock during 2009, $2.5 million in amortization of intangible assets and $1.2
million in stock-based compensation. Working capital uses of cash included an
increase in accounts receivable of $3.4 million and a decrease in accounts
payable of $1.5 million. The increase in accounts receivables reflected
increased revenue during 2009. The decrease in accounts payable reflected timing
of payments and amounts paid down during 2009. Working capital sources of cash
included a reduction of inventories reflecting better inventory management and
an increase in deferred revenue of $0.6 million reflecting support orders
associated with our increasing customer base. Net cash used in investing
activities of $83,000 reflected purchases of equipment. Net cash provided by
financing activities of $5.6 million included proceeds from the issuance of
common stock and bridge note of $3.5 million, a $1.9 million borrowing against
our line of credit, $500,000 of notes issued and proceeds from stock option
exercises of $0.2 million, partially offset by loan repayments of $550,000.
Our cash, cash equivalents and short-term investments at December 31, 2011
consisted of bank deposits with third party financial institutions, money market
funds, U.S. agency securities, certificates of deposit, commercial paper and
corporate bonds. Our investments are intended to establish a high-quality
portfolio that preserves principal, meets liquidity needs, avoids inappropriate
concentrations and delivers an appropriate yield in relationship to our
investment guidelines and market conditions. Cash equivalents consist of highly
liquid investments with remaining maturities of three months or less at the date
of purchase. Short-term investments have a remaining maturity of greater than
three months at the date of purchase and an effective maturity of less than one
year. All investments are classified as available for sale.
On December 10, 2009, we entered into a two-year loan and security agreement for
a secured credit facility of $2.0 million for short-term working capital
purposes with Silicon Valley Bank. Borrowings under the facility bore interest
at the prime rate plus 1%, but not less than 5% per annum. On February 3, 2012,
the agreement was amended and restated to increase the credit facility from $2.0
million to $10.0 million for an additional two-year period beginning on that
date. Borrowings under the amended facility bear interest at the prime rate plus
1%, but not less than 4.25% on an annual basis. At December 31, 2011, we had no
borrowings under this credit facility. At December 31, 2010, we had $1.7 million
outstanding under the credit facility.
Based on our current cash, cash equivalents and short-term investment balances
and anticipated cash flow from operations, we believe that our working capital
will be sufficient to meet the cash needs of our business for at least the next
twelve months. Our future capital requirements will depend on many factors,
including our rate of growth, the expansion of our sales and marketing
activities, development of additional channel partners and sales territories,
the infrastructure costs associated with supporting a growing business and
greater installed base of customers, introduction of new products, enhancement
of existing products, and the continued acceptance of our products. We may also
enter into arrangements that require investment such as complementary
businesses, service expansion, technology partnerships or acquisitions.
Off-Balance Sheet Arrangements
As of December 31, 2011, we had no off-balance sheet items as described by Item
303(a)(4) of Regulation S-K. We have not entered into any transactions with
unconsolidated entities whereby we have financial guarantees, subordinated
retained interests, derivative instruments or other contingent arrangements that
expose us to material continuing risks, contingent liabilities, or any other
obligations under a variable interest in an unconsolidated entity that provides
us with financing, liquidity, market risk or credit risk support.
Contractual Obligations
The following table summarizes the contractual obligations that we were
reasonably likely to incur as of December 31, 2011 and the effect that such
obligations are expected to have on our liquidity and cash flows in future
periods.
Payments Due by Period
Contractual Obligations Total < 1 Year 1-3 Years 3-5 Years > 5 Years
Operating leases $ 1,231,677 $ 294,552 $ 496,918 $ 440,207 $ -Unconditional purchase obligations 2,446,670 2,446,670
- - -
Total $ 3,678,347 $ 2,741,222 $ 496,918 $ 440,207 $ -
38--------------------------------------------------------------------------------
Table of Contents
We use third-party contract manufacturers to assemble and test our hardware
products. In order to reduce manufacturing lead-times and ensure an adequate
supply of inventories, our agreements with some of these manufacturers allow
them to procure long lead-time component inventory based on rolling production
forecasts provided by us. We may be contractually obligated to purchase long
lead-time component inventory procured by certain manufacturers in accordance
with our forecasts. In addition, we issue purchase orders to our third-party
manufacturers that may not be cancelable at any time. As of December 31, 2011,
we had open non-cancelable purchase orders amounting to approximately $2.4
million, primarily with our third-party contract manufacturers.
[ 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]
