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SOUNDBITE COMMUNICATIONS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
Investors should read the following discussion in conjunction with our financial
statements and related notes appearing elsewhere in this report. In addition to
historical information, this discussion contains forward-looking statements that
involve risks, uncertainties and assumptions that could cause our actual results
to differ materially from our expectations. Factors that could cause differences
from our expectations include those described in Part II, Item 1A. "Risk
Factors" below and elsewhere in this report.
Overview
We provide cloud-based, multi-channel services that enable businesses to design,
execute and measure customer communication campaigns for a variety of marketing,
customer care, payment and collection processes. Clients use our platforms,
including SoundBite Engage and SoundBite Insight, to communicate proactively
with their customers through automated voice messaging, predictive dialing,
emails, text messaging and web communications that are relevant, timely,
personalized and engaging.
Our services are provided using a multi-tenant, cloud-based architecture that
enables us to serve all of our clients cost-effectively. "Cloud-based" refers to
the delivery of technology services through the Internet, which includes
delivery of software as a service or SaaS. Because our services are cloud-based,
businesses using our services do not need to invest in or maintain new hardware
or to hire and manage additional dedicated information technology staff. In
addition, we are able to implement new features on our platforms that become
part of our services automatically and can benefit all clients immediately. Our
secure platforms are designed to serve increasing numbers of clients and growing
demand from existing clients, enabling the platforms to scale reliably and
cost-effectively.
We serve two global markets: hosted contact centers and mobile marketing. Our
hosted contact center services are used primarily by companies in the accounts
receivable management (or collections), energy and utilities, financial
services, retail, and telecommunications and media industries. Our mobile
marketing client base consists principally of companies in the consumer package
goods, retail, and telecommunications and media industries.
We derive, and expect to continue to derive for the foreseeable future, a
substantial majority of our revenues from the hosted contact center market. Our
strategy for achieving long-term, sustained growth in our revenues and net
income is focused on building upon our leadership position in the hosted contact
center market and executing on our key initiatives. For example, one of our
strategic initiatives is targeted on the high growth area of mobile marketing,
which leverages our text capabilities. In line with this strategy, in February
2012, we acquired 2ergo Americas, the U.S. operations of 2ergo Group plc. 2ergo
Americas is a mobile business and marketing solutions company located in
Arlington, Virginia.
Key Components of Results of Operations
Revenues
We currently derive a substantial portion of our revenues by providing our
services for use by clients in communicating with their customers through voice,
text and email messages. These revenues are seasonal in nature and typically are
stronger during the second half of the year due to the increased demand from
clients in the retail industry. We provide our services under a combination of
usage and subscription-based models. Under our usage-based model, prices are
calculated on a per-message or per-minute basis in accordance with the terms of
pricing agreements with clients. We primarily invoice our clients on a monthly
basis.
Our pricing agreements with a substantial majority of our clients either do not
require any minimum usage or payments, or require only an immaterial level of
usage or payments. Each executed message represents a transaction from which we
derive revenues, and we therefore recognize revenue based on actual usage within
a calendar month. We do not recognize revenue until we can determine that
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and we deem collection to be probable.
Cost of Revenues
Cost of revenues consist primarily of telephony and text message charges,
compensation expense for our operations personnel, depreciation and maintenance
expense for our platforms, amortization of acquired technology and lease costs
for our data center facilities. As we continue to grow our business and add
features to our platforms, we expect cost of revenues will continue to increase
on an absolute dollar basis. Our annual gross margin was 59.1% in 2011, 59.6% in
2010 and 60.4% in 2009. We currently are targeting a gross margin of 59% to 61%
for the foreseeable future. Our gross margin may vary significantly from our
target range for a number of reasons, including revenue levels, the mix of types
of messaging campaigns executed, as well as the extent to which we build our
infrastructure through, for example, significant acquisitions of hardware or
material increases in leased data center facilities.
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Operating Expenses
Research and Development. Research and development expenses consist primarily of
compensation expenses and depreciation expense of certain equipment related to
the development of our services. We have historically focused our research and
development efforts on improving and enhancing our platforms, as well as
developing new features and offerings.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation for our sales and marketing personnel, including sales commissions,
as well as the costs of our marketing programs. We expect to further invest in
developing our marketing strategy and activities to extend brand awareness and
generate additional leads for our sales staff.
General and Administrative. General and administrative expenses consist of
compensation expenses for executive, finance, accounting, administrative and
management information systems personnel, accounting and legal professional fees
and other corporate expenses.
Recent Developments
2ergo Americas Acquisition. In February 2012, we acquired 2ergo Americas, the
U.S. operations of 2ergo Group plc, for a cash purchase price of $3.8 million
(subject to post closing adjustment). 2ergo Americas is a mobile business and
marketing solutions company located in Arlington, Virginia and has a current
annualized revenue run rate of approximately $3.5 million. Revenues generated
from clients acquired as part of the 2ergo Americas acquisition during the three
and nine months ended September 30, 2012 were $816,000 and $1.9 million,
respectively. Operating loss for the three and nine months ended September 30,
2012 was $449,000 and $1.0 million, respectively.
SmartReply Asset Acquisition. In June 2011 we acquired key assets of SmartReply.
During the three and nine months ended September 30, 2012, revenues generated
from clients acquired as part of the acquisition were $1.4 million and $3.9
million, respectively.
Additional Key Measures of Financial Performance
We present information below with respect to free cash flow and certain revenue
metrics. None of these metrics should be considered as an alternative to any
measure of financial performance calculated in accordance with U.S. generally
accepted accounting principles, or GAAP. Management believes the following
financial measures are useful to investors because they permit investors to view
our performance using the same tools that management uses to gauge progress in
achieving our goals.
Free Cash Flow
Free cash flow is a measure of financial performance calculated as cash flow
from operating activities less payments of contingent purchase price and
purchases of property and equipment. Management uses this metric to track
business performance. Due to the current economic environment, management
decisions are based in part on a goal of maintaining positive cash flow from
operating activities and free cash flow. We believe this metric is a useful
measure of the performance of our business because, in contrast to statement of
operations metrics that rely principally on revenue and profitability, cash flow
from operating activities and free cash flow capture the changes in operating
assets and liabilities during the year and the effect of noncash items such as
depreciation and stock-based compensation. We believe that, for similar reasons,
this metric is often used by security analysts, investors and other interested
parties in the evaluation of companies offering cloud-based or other software
solutions.
The term "free cash flow" is not defined under GAAP and is not a measure of
operating income, operating performance or liquidity presented in accordance
with GAAP. All or a portion of free cash flow may be unavailable for
discretionary expenditures. Free cash flow has limitations as an analytical tool
and when assessing our operating performance, you should not consider free cash
flow in isolation from or as a substitute for data, such as net income (loss),
derived from financial statements prepared in accordance with GAAP.
Nine Months Ended September 30,
2012 2011
(in thousands)Cash generated from (used in) operating activities $ 1,255
$ (2,192 )
Contingent purchase price payments to Mobile Collect (498 ) (476 )
Contingent purchase price payments to SmartReply (211 ) -
Purchases of property and equipment (1,014 ) (695 )
Free cash flow (non-GAAP) $ (468 ) $ (3,363 )
Our operating activities provided net cash in the amount of $1.3 million for the
nine months ended September 30, 2012 reflecting a net loss of $2.3 million,
which was offset by non-cash charges and changes in working capital of $3.6
million consisting primarily of (a) depreciation and amortization expense of
$2.4 million, (b) an increase in account payable and accrued expenses of $1.5
million, and (c) stock-based compensation expense of $746,000. These increases
were partially offset by a deferred income tax benefit (non-cash) of $927,000.
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Free cash flow in each of the periods presented reflects, in addition to the
factors driving cash flows from operating activities, our purchases of property
and equipment, which consists primarily of computer equipment and software, and
our payments of contingent purchase price in connection with our acquisition of
SmartReply in 2011 and our acquisition of the assets of Mobile Collect in 2008.
Revenue Metrics
Management tracks revenues by mobile, voice and other in order to review and
evaluate our delivery channels. Mobile revenues are generated from any form of
consumer interaction through a mobile device, excluding any of the voice
channels. Voice revenues are generated from automated voice messaging and our
hosted dialer. Other revenues include revenue attributable to email,
professional services and access fees. For the three months ended September 30,
2012, voice revenues were $7.6 million, mobile revenues were $4.0 million and
other revenues were $600,000, or 63%, 32% and 5% of total revenues,
respectively. For the three months ended September 30, 2011, voice revenues were
$7.9 million, mobile revenues were $2.2 million and other revenues were
$900,000, or 72%, 20% and 8% of total revenues, respectively. Total mobile
revenues increased 83% over the comparable quarter of 2011. The dollar and
percentage increases in mobile revenues reflected both (a) growth in our
existing business, which increased by 46% on a dollar basis, and (b) additional
revenue from our acquisition of 2ergo Americas in February 2012. We expect
mobile revenues to continue to increase, both in dollars and as a percentage of
total revenues, for the foreseeable future.
Management also tracks revenues by certain quarterly client metrics:
• Management evaluates client concentration in part by monitoring the
aggregate percentage of total revenue generated in a quarter from our 20
largest clients (by revenue) in that quarter. Our 20 largest clients for
the three months ended September 30, 2012 accounted for 68% of total
revenues, compared to 70% in the three months ended September 30, 2011.
• Management evaluates client retention in part by reviewing the aggregate
percentage of total revenue generated in a quarter from the 50 largest
clients in the previous quarter. Our 50 largest clients in the three
months ended June 30, 2012 generated 90% of our total revenues in the
three months ended September 30, 2012. In comparison, our 50 largest clients in the three months ended June 30, 2011 generated 86% of our total
revenues in the three months ended September 30, 2011.
• Management evaluates client momentum in part by tracking the number of clients that generated greater than $250,000 of revenue in a quarter.
Fifteen clients, four of which were legacy clients of SmartReply and 2ergo
Americas, generated more than $250,000 in revenue for the three months
ended September 30, 2012, as compared to eleven in the comparable period
of 2011.
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Results of Operations
The following table sets forth selected statements of operations data for the
three and nine months ended September 30, 2012 and 2011 indicated as percentages
of revenues.
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 2012 2011
Statement of Operations Data:
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues 39.0 41.4 40.5 41.7
Gross margin 61.0 58.6 59.5 58.3
Operating expenses:
Research and development 15.5 14.1 15.6 15.3
Sales and marketing 35.2 31.9 35.8 34.7
General and administrative 15.0 14.3 17.7 17.7
Total operating expenses 65.7 60.3 69.1 67.7
Operating loss (4.7 ) (1.7 ) (9.6 ) (9.4 )
Interest and other income
(expense), net 0.2 (0.1 ) 0.2 (0.0 )
Loss before income tax benefit (4.5 ) (1.8 ) (9.4 ) (9.4 )
Income tax benefit 0.3 - 2.7 3.0
Net loss (4.2 )% (1.8 )% (6.7 )% (6.4 )%
Comparison of Three Months Ended September 30, 2012 and 2011
Revenues
Three Months Ended September 30, Quarter-to-
2012 2011 Quarter Change
Percentage of Percentage of Percentage
Amount Revenues Amount Revenues Amount Change
(dollars in thousands)
Revenues $ 12,160 100.0 % $ 10,956 100.0 % $ 1,204 11.0 %
The $1.2 million increase in revenues for the three months ended September 30,
2012 as compared to the same period in 2011 was mainly due to the acquisition of
2ergo Americas in February 2012. Revenues from legacy clients of 2ergo Americas
accounted for $816,000 of the increase, in addition to an increase of $388,000
in organic revenue. Overall, mobile revenues increased $1.8 million, voice
revenues decreased $375,000, and other revenues decreased $203,000 for the three
months ended September 30, 2012 as compared to the same period in 2011. Voice,
mobile and other revenues as a percentage of total revenues were 63%, 32% and 5%
in the third quarter of 2012, respectively, compared to 72%, 20% and 8% in the
same period in 2011, respectively. We expect mobile revenues to continue to
increase, both in dollars and as a percentage of total revenues, for the
foreseeable future.
Cost of Revenues and Gross Profit
Three Months Ended September 30, Quarter-to-
2012 2011 Quarter Change
Percentage of Percentage of Percentage
Amount Revenues Amount Revenues Amount Change
(dollars in thousands)
Cost of revenues $ 4,747 39.0 % $4,532 41.4 % $ 215 4.7 %
Gross profit 7,413 61.0 6,424 58.6 989 15.4
The $215,000 increase in cost of revenues for the three months ended
September 30, 2012 as compared to the same period in 2011 reflected a $195,000
increase in text message costs due to higher client usage, a $69,000 increase in
co-location costs due to the
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additional data center from the acquisition of 2ergo Americas, and a $49,000
increase in amortization expense for acquired technology, partially offset by a
decrease in client management allocation costs of $93,000 as a result of lower
billable projects. The increase in gross margin for the three months ended
September 30, 2012 as compared to the same period in 2011 reflected increased
revenue levels and changes in our client and service mix.
Operating Expenses
Three Months Ended September 30, Quarter-to-
2012 2011 Quarter Change
Percentage of Percentage of Percentage
Amount Revenues Amount Revenues Amount Change
(dollars in thousands)
Research and development $ 1,881 15.5 % $ 1,547 14.1 % $ 334 21.6 %
Sales and marketing 4,284 35.2 3,501 31.9 783 22.4
General and administrative 1,828 15.0 1,562 14.3 266 17.0
Total operating expenses $ 7,993 65.7 % $ 6,610 60.3 % $ 1,383 20.9 %
Research and Development. The $334,000 increase in research and development
expenses for the three months ended September 30, 2012 as compared to the same
period in 2011 was primarily attributable to a $357,000 increase in personnel
related costs due to an increase in headcount. Of the $357,000 increase in
personnel related costs, $155,000 consisted of expenses attributable to the
recent acquisition of 2ergo Americas.
Sales and Marketing. The $783,000 increase in sales and marketing expenses for
the three months ended September 30, 2012 as compared to the same period in 2011
resulted primarily from a $713,000 increase in personnel related costs due to an
increase in headcount, a $37,000 increase in facility overhead costs, and a
$28,000 net increase in amortization expense related to acquisitions. Of the
$713,000 increase in personnel related costs, $492,000 consisted of expenses
attributable to the recent acquisition of 2ergo Americas.
General and Administrative. The $266,000 increase in general and administrative
expenses for the three months ended September 30, 2012 as compared to the same
period in 2011 resulted primarily from a $175,000 increase in personnel related
costs, a $155,000 increase in costs related to the litigation described in Note
5 to our consolidated financial statements, a $137,000 increase in legal fees, a
$51,000 increase in accounting service fees, a $48,000 increase in consulting
fees for various administrative projects, and a $37,000 increase in professional
service fees. These increases were partially offset by a $365,000 reimbursement
from the insurer under our existing liability insurance policy, as well as from
escrow funds, for certain legal fees related to ongoing litigation.
Operating Loss and Interest and Other Income (Expense)
Three Months Ended September 30, Quarter-to-
2012 2011 Quarter Change
Percentage of Percentage of Percentage
Amount Revenues Amount Revenues Amount Change
(dollars in thousands)
Operating loss $ (580 ) (4.7 )% $ (186 ) (1.7 )% $ (394 ) (211.8 )%
Interest and other income
(expense), net 27 0.2 (10 ) (0.1 ) 37 370.0
Loss before income tax benefit $ (553 ) (4.5 )% $ (196 ) (1.8 )% $ (357 ) (182.1 )%
The $37,000 increase in interest and other income (expense), net for the three
months ended September 30, 2012 as compared to the same period in 2011 resulted
from higher interest income earned on our investments, as well as a foreign
currency gain resulting from the revaluation of accounts receivable and accounts
payable balances denominated in foreign currencies.
Income Tax Benefit and Net Loss
We recognized a net loss of $513,000 for the three months ended September 30,
2012 as compared to a net loss of $196,000 for the same period in 2011. This
difference principally reflects an increase in our operating loss for the three
months ended September 30, 2012 and an income tax benefit of $40,000 recorded
during the period ended September 30, 2012 related to the deferred tax impact of
the acquisition of intangibles from 2ergo Americas in February 2012.
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Comparison of Nine Months Ended September 30, 2012 and 2011
Revenues
Nine Months Ended September 30, Nine Month
2012 2011 Period Change
Percentage of Percentage of Percentage
Amount Revenues Amount Revenues Amount Change
(dollars in thousands)
Revenues $ 34,218 100.0 % $ 29,671 100.0 % $ 4,547 15.3 %
The $4.5 million increase in revenues for the nine months ended September 30,
2012 as compared to the same period in 2011 was due principally to the
acquisitions of SmartReply in June 2011 and 2ergo Americas in February 2012.
Revenues from legacy clients of SmartReply and 2ergo Americas accounted for $2.4
million and $1.9 million of the increase, respectively. Overall, mobile revenues
increased $4.5 million, voice revenues increased $73,000, and other revenues
decreased $73,000 for the nine months ended September 30, 2012 as compared to
the same period in 2011. Voice, mobile and other revenues as a percentage of
total revenues were 66%, 29% and 5% for the nine months ended September 30,
2012, respectively, compared to 76%, 18% and 6% in the same period in 2011,
respectively.
Cost of Revenues and Gross Profit
Nine Months Ended September 30, Nine Month
2012 2011 Period Change
Percentage of Percentage of Percentage
Amount Revenues Amount Revenues Amount Change
(dollars in thousands)
Cost of revenues $ 13,849 40.5 % $ 12,364 41.7 % $ 1,485 12.0 %
Gross profit 20,369 59.5 17,307 58.3 3,062 17.7
The $1.5 million increase in cost of revenues for the nine months ended
September 30, 2012 as compared to the same period in 2011 reflected a $904,000
increase in text message costs due to higher client usage, a $513,000 increase
in telephony expense due to higher delivery charges and client usage, a $115,000
increase in amortization expense for acquired technology, an $86,000 increase in
co-location costs due to the additional data center from the acquisition of
2ergo Americas, and an $85,000 increase in personnel costs due to an increase in
headcount. These increases were partially offset by a by a decrease in client
management allocation costs of $114,000 as a result of lower billable projects.
The increase in gross margin for the nine months ended September 30, 2012 as
compared to the same period in 2011 reflected increased revenue levels and
changes in our client and service mix, partially offset by higher telephony
delivery charges.
Operating Expenses
Nine Months Ended September 30, Nine Month-
2012 2011 Period Change
Percentage of Percentage of Percentage
Amount Revenues Amount Revenues Amount Change
(dollars in thousands)
Research and development $ 5,337 15.6 % $ 4,541 15.3 % $ 796 17.5 %
Sales and marketing 12,262 35.8 10,282 34.7 1,980 19.3
General and administrative 6,051 17.7 5,279 17.7 772 14.6
Total operating expenses $ 23,650 69.1 % $ 20,102 67.7 % $ 3,548 17.6 %
Research and Development. The $796,000 increase in research and development
expenses for the nine months ended September 30, 2012 as compared to the same
period in 2011 was primarily attributable to an $847,000 increase in personnel
related costs due to an increase in headcount, and a $59,000 increase in
facility overhead costs, partially offset by a $172,000 decrease in consulting
fees. Of the $847,000 increase in personnel related costs, $344,000 consisted of
expenses attributable to the recent acquisitions of SmartReply and 2ergo
Americas.
Sales and Marketing. The $2.0 million increase in sales and marketing expenses
for the nine months ended September 30, 2012 as compared to the same period in
2011 resulted primarily from a $1.1 million increase in personnel related costs
due to a net increase in headcount from recent acquisitions, a $697,000 increase
in amortization expense for customer lists and other intangibles related to
recent acquisitions, a $151,000 increase in facility overhead costs, and a
$66,000 increase in travel related costs.
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General and Administrative. The $772,000 increase in general and administrative
expenses for the nine months ended September 30, 2012 as compared to the same
period in 2011 resulted primarily from a $665,000 increase in costs related to
the litigation described in Note 5 to our consolidated financial statements, a
$323,000 increase in temporary help and consulting fees for various
administrative projects, a $167,000 increase in legal fees, a $137,000 increase
in accounting service fees, a $137,000 increase in personnel related costs, and
a $121,000 increase in public company costs. These increases were partially
offset by a $365,000 reimbursement from the insurer under our existing liability
insurance policy, as well as from escrow funds, for certain legal fees related
to ongoing litigation, a $351,000 decrease in merger and acquisition related
costs, and a $178,000 fair value adjustment to the liability for contingent
consideration related to the acquisition of SmartReply.
Operating Loss and Other Income (Expense)
Nine Months Ended September 30, Nine Month
2012 2011 Period Change
Percentage of Percentage of Percentage
Amount Revenues Amount Revenues Amount Change
(dollars in thousands)
Operating loss $ (3,281 ) (9.6 )% $ (2,795 ) (9.4 )% $ (486 ) (17.4 )%
Interest and other income
(expense), net 62 0.2 (8 ) (0.0 ) 70 875.0
Loss before income tax benefit $ (3,219 ) (9.4 )% $ (2,803 ) (9.4 )% $ (416 ) (14.8 )%
The $70,000 increase in interest and other income (expense), net for the nine
months ended September 30, 2012, as compared to the same period in 2011 resulted
from higher interest income earned on our investments along with a foreign
currency gain resulting from the revaluation of accounts receivable and accounts
payable balances denominated in foreign currencies
Income Tax Benefit and Net Loss
We recognized a net loss of $2.3 million for the nine months ended September 30,
2012 as compared to a net loss of $1.9 million for the same period in 2011. This
difference principally reflects an increase in our operating loss for the nine
months ended September 30, 2012 and a $22,000 increase in income tax benefit for
the nine months ended September 30, 2012 as compared to the same period in 2011.
We recorded an income tax benefit of $927,000 during the nine months ended
September 30, 2012 related to the deferred tax impact of the acquisition of
intangibles from 2ergo Americas in February 2012 and an income tax benefit of
$905,000 during the nine months ended September 30, 2011 related to the
acquisition of intangibles from SmartReply in June 2011.
Liquidity and Capital Resources
Resources
Since our inception, we have funded our operations primarily with proceeds from
private placements of preferred stock and our initial public offering of common
stock, borrowings under credit facilities and, more recently, cash flow from
operations.
We believe our existing cash and cash equivalents, our projected cash flow from
operating activities, and our borrowings available under our existing credit
facility will be sufficient to meet our anticipated cash needs for at least the
next twelve months. Our future working capital requirements will depend on many
factors, including the rates of our revenue growth, our introduction of new
features for our on-demand service, and our expansion of research and
development and sales and marketing activities. To the extent our cash and cash
equivalents and cash flow from operating activities are insufficient to fund our
future activities, we may need to raise additional funds through bank credit
arrangements or public or private equity or debt financings. We also may need to
raise additional funds in the event we determine in the future to effect one or
more acquisitions of businesses, technologies and products. If additional
funding is required, we may not be able to obtain bank credit arrangements or to
effect an equity or debt financing on terms acceptable to us or at all.
Credit Facility Borrowings
On February 18, 2011 we renewed a credit facility with Silicon Valley Bank that
provides a working capital line of credit at an interest rate of 4.5% per annum
for up to the lesser of (a) $1.5 million or (b) 80% of eligible accounts
receivable, subject to specified adjustments. Accounts receivable serve as
collateral for any borrowings under the credit facility. There are certain
financial covenant requirements as part of the facility, including an adjusted
quick ratio and certain minimum quarterly revenue requirements, none of which
are restrictive to our overall operations. The credit facility will expire by
its terms on February 18, 2013 and any amounts outstanding must be repaid on
that date.
As of September 30, 2012, no amounts were outstanding under the existing credit
agreement. As of September 30, 2012, letters of credit totaling $426,000 had
been issued in connection with our facility leases.
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Operating Cash Flow
For a discussion of our cash flow from operating activities, see "- Additional
Key Measures of Financial Performance."
Working Capital
The following table sets forth selected working capital information:
September 30, December 31,
2012 2011
(in thousands)
Cash and cash equivalents $ 16,270 $ 17,706
Short-term investments 7,790 10,976
Accounts receivable, net of allowance for
doubtful accounts 8,489 8,163
Working capital $ 27,574 $ 33,491
Our cash and cash equivalents at September 30, 2012 were unrestricted and held
for working capital purposes. These funds were invested primarily in money
market funds. We do not enter into investments for trading or speculative
purposes.
Our short-term investments are comprised of commercial paper, certificate of
deposits and U.S. government agency bonds with average term to maturity of less
than six months.
Our accounts receivable balance fluctuates from period to period, which affects
our cash flow from operating activities. Fluctuations vary depending on cash
collections, client mix and the volume of monthly usage of our services.
Requirements
Capital Expenditures
In recent years, we have made capital expenditures primarily to acquire computer
hardware and software and, to a lesser extent, furniture and leasehold
improvements to support the growth of our business. Our capital expenditures
totaled $1.0 million for the nine months ended September 30, 2012. We intend to
continue to invest in our infrastructure in an effort to ensure our continued
ability to enhance our platforms, introduce new features and maintain the
reliability of our network. We also intend to continue to make investments in
our computer equipment and systems. We expect our capital expenditures for these
purposes will approximate $400,000 for the last three months of 2012.
Stock Repurchase Program
On March 26, 2010, we announced that the board of directors had authorized the
repurchase of up to $2.5 million of common stock from time to time on the open
market or in privately negotiated transactions. We will determine the timing and
amount of any shares repurchased based on an evaluation of market conditions and
other factors. Repurchases may be made under a Rule 10b5-1 plan, which would
permit shares to be repurchased when we might otherwise be precluded from doing
so under insider trading laws. The repurchase program may be suspended or
discontinued at any time.
As of September 30, 2012, we had repurchased 265,047 shares of our common stock
at a cost of $678,000 under the program.
See "Item 2. Unregistered Sales of Equity Securities and Use of Proceeds" for
additional information regarding share repurchases under the program in the
three month period ended September 30, 2012.
Contractual Obligations and Requirements
In February 2008, we acquired substantially all of the assets of Mobile Collect,
a privately held company that provided text messaging and mobile communications
solutions. The acquisition price included cash payments of $500,000 upon closing
and requires contingent cash payments of up to $2.0 million payable quarterly
through 2013 in the event that certain established financial targets are
satisfied through the operation of the acquired assets. The final contingent
cash payment related to the acquisition of Mobile Collect was made in the second
quarter of 2012.
In June 2011, we acquired key assets and assumed certain liabilities of
SmartReply, a mobile marketing company located in Irvine, California. The
acquisition price included cash payments of $3.2 million upon closing and
requires contingent cash payments currently estimated at $1.4 million, but up to
a maximum of $8.9 million, in the form of an earn-out over a three year period.
The first earn-out period was completed as of June 30, 2012 and a payment of
$211,000 was made in the third quarter of 2012. Subsequent annual payments will
be determined over the next two years based upon year-over-year revenue growth
in our mobile marketing business.
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In February 2012, we assumed an equipment lease from the acquisition of 2ergo
Americas. This 36 month operating lease commenced in September 2011 and requires
quarterly cash payments of approximately $30,000 through August 2014.
Except for the contingent cash payments and equipment lease payments noted
above, our contractual obligations have remained substantially unchanged from
those reported in our Annual Report on Form 10-K for the year ended December 31,
2011.
Off-Balance-Sheet Arrangements
As of September 30, 2012, we did not have any significant off-balance-sheet
arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K of the SEC.
Critical Accounting Policies
We prepare our unaudited condensed consolidated financial statements in
conformity with GAAP. The preparation of these financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, costs and expenses and related disclosures. On an ongoing
basis, we evaluate our estimates and assumptions. Our actual results may differ
from these estimates under different assumptions or conditions. We reaffirm the
critical accounting policies and estimates as reported in our Annual Report on
Form 10-K for the year ended December 31, 2011.
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