Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - ACME PACKET INC | Financial_Report.xls |
EX-32.1 - EX-32.1 - ACME PACKET INC | b87179exv32w1.htm |
EX-31.1 - EX-31.1 - ACME PACKET INC | b87179exv31w1.htm |
EX-31.2 - EX-31.2 - ACME PACKET INC | b87179exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q/A
(Amendment
No. 2)
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-33041
ACME PACKET, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
04-3526641 (I.R.S. Employer Identification No.) |
100 Crosby Drive
Bedford, MA 01730
(Address of principal executive offices) (zip code)
Bedford, MA 01730
(Address of principal executive offices) (zip code)
(781) 328-4400
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
The number of shares outstanding of each of the issuers classes of common stock, as of April
22, 2011: 65,853,002
Table of Contents
Acme Packet, Inc.
Amendment No. 2 to Quarterly Report on Form 10-Q
Amendment No. 2 to Quarterly Report on Form 10-Q
EXPLANATION
OF AMENDMENT
The sole purpose of this Amendment No. 2 to our Quarterly Report on Form 10-Q (the Original
Report) for the period ended March 31, 2011, as filed with the Securities Exchange Commission
on April 26, 2011 and amended by Amendment No. 1 thereto, filed on May 23, 2011 (as so amended, the
Form 10-Q), is to correct an error in the number of shares of Common Stock outstanding as
of April 22, 2011. The error appeared in the last paragraph of the cover page of the Form 10-Q.
The correct number of shares of the Registrants Common Stock that were outstanding as of April 22,
2011 was 65,853,002, or a difference of 6,780,061 shares, or less
than 10%, from the number of shares
reported.
Except for the item described above and the Amendment No. 1 to the Original Report, which was filed
solely to comply with Rule 405 of Regulation S-T, none of the information contained in the Original
Report has been updated, modified or revised. The remainder of the Original Report is included
herein for the convenience of the reader.
This Amendment No. 2 does not reflect subsequent events occurring after the original filing date of
the Original Report or modify or update in any way disclosures made in the Original Report.
Accordingly, this Amendment No. 2 should be read in conjunction with the Original Report previously
filed, Amendment No. 1 to the Original Report and the Companys other filings with the Securities
and Exchange Commission. This Amendment No. 2 also contains currently dated certifications as
Exhibits 31.1, 31.2 and 32.1.
ACME PACKET, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
Table of Contents
Item | Page No. | |||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
13 | ||||||||
23 | ||||||||
23 | ||||||||
24 | ||||||||
24 | ||||||||
25 | ||||||||
25 | ||||||||
25 | ||||||||
25 | ||||||||
26 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
ACME PACKET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share data)
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share data)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 118,924 | $ | 91,669 | ||||
Short-term investments |
169,907 | 179,024 | ||||||
Accounts receivable, net of allowance of $1,593 and $1,463, respectively |
43,275 | 34,797 | ||||||
Inventory |
7,069 | 6,662 | ||||||
Deferred product costs |
1,690 | 3,572 | ||||||
Deferred tax asset, net |
3,814 | 3,814 | ||||||
Income taxes receivable |
13,787 | 9,979 | ||||||
Other current assets |
4,873 | 3,231 | ||||||
Total current assets |
363,339 | 332,748 | ||||||
Long-term investments |
9,238 | 5,030 | ||||||
Property and equipment, net |
19,891 | 17,156 | ||||||
Intangible assets, net of accumulated amortization of $2,895 and $2,466, respectively |
10,279 | 9,468 | ||||||
Goodwill |
3,259 | | ||||||
Deferred tax asset, net |
14,802 | 14,802 | ||||||
Other assets |
888 | 940 | ||||||
Total assets |
$ | 421,696 | $ | 380,144 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 8,625 | $ | 7,161 | ||||
Accrued expenses and other current liabilities |
7,920 | 14,629 | ||||||
Deferred revenue |
37,850 | 31,998 | ||||||
Total current liabilities |
54,395 | 53,788 | ||||||
Deferred rent, net of current portion |
4,053 | 4,265 | ||||||
Deferred revenue, net of current portion |
2,213 | 1,546 | ||||||
Contingencies (Note 11) |
||||||||
Stockholders equity: |
||||||||
Undesignated preferred stock, $0.001 par value: |
||||||||
Authorized 5,000,000 shares;
Issued and outstanding 0 shares |
| | ||||||
Common stock, $0.001 par value: |
||||||||
Authorized 150,000,000 shares; Issued 72,587,063 and 71,157,422 shares, respectively |
72 | 71 | ||||||
Additional paid-in capital |
292,886 | 266,114 | ||||||
Treasury stock, at cost 6,780,061 and 6,756,693 shares, respectively |
(37,522 | ) | (37,522 | ) | ||||
Accumulated other comprehensive income |
42 | 34 | ||||||
Retained earnings |
105,557 | 91,848 | ||||||
Total stockholders equity |
361,035 | 320,545 | ||||||
Total liabilities and stockholders equity |
$ | 421,696 | $ | 380,144 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
2
Table of Contents
ACME PACKET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except share and per share data)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except share and per share data)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Revenue: |
||||||||
Product |
$59,742 | $42,093 | ||||||
Maintenance, support and service |
14,225 | 8,957 | ||||||
Total revenue |
73,967 | 51,050 | ||||||
Cost of revenue (1): |
||||||||
Product |
9,945 | 7,549 | ||||||
Maintenance, support and service |
3,006 | 2,268 | ||||||
Total cost of revenue |
12,951 | 9,817 | ||||||
Gross profit |
61,016 | 41,233 | ||||||
Operating expenses (1): |
||||||||
Sales and marketing |
23,703 | 16,427 | ||||||
Research and development |
11,294 | 8,693 | ||||||
General and administrative |
4,577 | 3,284 | ||||||
Merger and integration-related costs |
180 | | ||||||
Total operating expenses |
39,754 | 28,404 | ||||||
Income from operations |
21,262 | 12,829 | ||||||
Other income (expense): |
||||||||
Interest income |
210 | 105 | ||||||
Other expense |
(108 | ) | (116 | ) | ||||
Total other income (expense), net |
102 | (11 | ) | |||||
Income before provision for income taxes |
21,364 | 12,818 | ||||||
Provision for income taxes |
7,655 | 4,485 | ||||||
Net income |
$13,709 | $8,333 | ||||||
Net income per share (Note 9): |
||||||||
Basic |
$0.21 | $0.14 | ||||||
Diluted |
$0.19 | $0.13 | ||||||
Weighted average number of common shares used in the calculation of net income per share: |
||||||||
Basic |
65,076,303 | 59,821,379 | ||||||
Diluted |
70,476,973 | 64,982,898 |
(1) | Amounts include stock-based compensation expense, as follows: |
Cost of product revenue |
$224 | $168 | ||||||
Cost of maintenance, support and service revenue |
395 | 228 | ||||||
Sales and marketing |
3,298 | 1,556 | ||||||
Research and development |
1,971 | 1,148 | ||||||
General and administrative |
898 | 421 |
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Table of Contents
ACME PACKET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Operating activities |
||||||||
Net income |
$ | 13,709 | $ | 8,333 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
1,929 | 1,418 | ||||||
Amortization of intangible assets |
429 | 435 | ||||||
Provision for bad debts |
130 | 181 | ||||||
Amortization of premium/discount on investments |
361 | 378 | ||||||
Stock-based compensation expense |
6,786 | 3,521 | ||||||
Excess tax benefit related to exercise of stock options |
(11,687 | ) | (2,404 | ) | ||||
Change in operating assets and liabilities, net of acquisition: |
||||||||
Accounts receivable |
(8,536 | ) | (4,117 | ) | ||||
Inventory |
(407 | ) | (804 | ) | ||||
Deferred product costs |
1,882 | 1,122 | ||||||
Other assets |
(1,620 | ) | (1,299 | ) | ||||
Accounts payable |
1,449 | (411 | ) | |||||
Accrued expenses, other current liabilities and deferred rent |
655 | 1,608 | ||||||
Deferred revenue |
6,461 | 12 | ||||||
Net cash provided by operating activities |
11,541 | 7,973 | ||||||
Investing activities |
||||||||
Purchases of property and equipment |
(4,644 | ) | (2,767 | ) | ||||
Purchases of marketable securities |
(149,106 | ) | (46,370 | ) | ||||
Proceeds from sale and maturities of marketable securities |
153,662 | 22,496 | ||||||
Cash paid for acquisition, net |
(4,185 | ) | | |||||
Net cash used in investing activities |
(4,273 | ) | (26,641 | ) | ||||
Financing activities |
||||||||
Proceeds from exercise of stock options |
8,300 | 6,363 | ||||||
Tax benefit related to exercise of stock options |
11,687 | 2,404 | ||||||
Net cash provided by financing activities |
19,987 | 8,767 | ||||||
Net increase (decrease) in cash and cash equivalents |
27,255 | (9,901 | ) | |||||
Cash and cash equivalents at beginning of period |
91,669 | 90,471 | ||||||
Cash and cash equivalents at end of period |
$ | 118,924 | $ | 80,570 | ||||
Supplemental disclosure of cash flow related to acquisition (Note 2): |
||||||||
In connection with the acquisition of Newfound Communications, Inc. on January 20,
2011, the following transactions occurred: |
||||||||
Fair value assets acquired |
$ | 4,774 | $ | | ||||
Liabilities assumed related to acquisition |
(423 | ) | | |||||
Total purchase price |
4,351 | | ||||||
Less cash and cash equivalents acquired |
(166 | ) | | |||||
Cash paid for acquisition, net of cash acquired |
$ | 4,185 | $ | | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
Table of Contents
ACME PACKET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share data)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share data)
1. Business Description and Basis of Presentation
Business Description
Acme Packet, Inc. (the Company) is the leader in session delivery network solutions which
enable the delivery of trusted, first-class interactive communicationsvoice, video and multimedia
sessionsand data services across internet protocol (IP) network borders.
Session
delivery network is an
architecture encompassing many different
product categories. The Companys Net-Net product family of session border controllers, session
aware load balancers, session routing proxies and multiservice security gateways supports multiple
applications in enterprise networks and fixed line, mobile, over-the-top and application service
provider networks.
These applications range from voice over IP (VoIP) trunking to hosted enterprise and
residential services to fixed-mobile convergence. The Companys products satisfy critical security,
service assurance and regulatory requirements in these networks and support multiple protocols and
multiple border points, including service provider access and interconnect and enterprise access
trunking.
Basis of Presentation
The accompanying interim condensed consolidated financial statements are unaudited. These
financial statements and notes should be read in conjunction with the audited consolidated
financial statements and related notes, together with Managements Discussion and Analysis of
Financial Condition and Results of Operations, contained in the Companys Annual Report on Form
10-K for the year ended December 31, 2010.
The accompanying unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with United States generally accepted accounting principles (U.S. GAAP) have been
condensed or omitted pursuant to such SEC rules and regulations. In the opinion of management, the
unaudited condensed consolidated financial statements and notes have been prepared on the same
basis as the audited consolidated financial statements contained in the Companys Annual Report on
Form 10-K, and include all adjustments (consisting of normal, recurring adjustments) necessary for
the fair presentation of the Companys financial position at March 31, 2011 and statements of
income and cash flows for the three months ended March 31, 2011 and 2010. The interim periods are
not necessarily indicative of the results to be expected for any other interim period or the full
year.
The Company has evaluated all subsequent events and determined that there are no material
recognized or unrecognized subsequent events requiring disclosure.
As of March 31, 2011, except as described below, the Companys significant accounting policies
and estimates, which are detailed in the Companys Annual Report on Form 10-K for the year ended
December 31, 2010, have not changed.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the consideration is fixed and determinable, and collection of the related accounts
receivable is deemed probable. In making these judgments, management evaluates these criteria as
follows:
| Persuasive evidence of an arrangement exists. The Company considers a non-cancelable agreement signed by the customer and the Company to be representative of persuasive evidence of an arrangement. | ||
| Delivery has occurred. The Company considers delivery to have occurred when product has been delivered to the customer and no significant post delivery obligations exist. In instances where customer acceptance is required, delivery is deemed to have occurred when customer acceptance has been achieved. Certain of the Companys agreements contain products that might not conform to published specifications or contain a requirement to deliver additional elements which are essential to the functionality of the delivered elements. Revenue associated with these agreements is recognized when the customer specifications have been met or delivery of the additional elements has occurred. | ||
| Consideration is fixed or determinable. The Company considers the consideration to be fixed or determinable unless the consideration is subject to refund or adjustment or is not payable within normal payment terms. If the consideration is subject to refund or adjustment, the Company recognizes revenue when the right to a refund or adjustment lapses. If offered payment terms exceed |
5
Table of Contents
the Companys normal terms, then revenue is recognized as the amounts become due and payable or upon the receipt of cash. |
| Collection is deemed probable. The Company conducts a credit review for all transactions at the inception of an arrangement to determine the creditworthiness of the customer. Collection is deemed probable if, based upon the Companys evaluation, the Company expects that the customer will be able to pay amounts under the arrangement as payments become due. If the Company determines that collection is not probable, revenue is deferred and recognized upon the receipt of cash. |
The Companys revenue arrangements regularly include the sale of hardware, software,
maintenance, professional services and training. Revenue arrangements may include one of these
single elements, or may incorporate one or more elements in a single transaction or combination of
related transactions. During the first quarter of 2011, the Company prospectively adopted the
guidance of Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements, (ASU No. 2009-13) and ASU No. 2009-14, Software (Topic
985): Certain Revenue Arrangements That Include Software Elements (ASU No. 2009-14), which were
ratified by the Financial Accounting Standards Board (FASB) Emerging Issues Task Force on September
23, 2009. ASU No. 2009-13 affects accounting and reporting for all multiple-deliverable
arrangements. It also applies to companies that are affected by the amendments of ASU No. 2009-14.
The amendments in ASU No. 2009-14 provide that tangible products containing software
components and non-software components that function together to deliver the tangible products
essential functionality are no longer within the scope of the software revenue guidance in
Accounting Standards Codification Topic 985-605, Software Revenue Recognition, (ASC 985-605) and
should follow the guidance in ASU 2009-13 for multiple-element arrangements. All non-essential and
standalone software components will continue to be accounted for under the guidance of ASC 985-605.
ASU No. 2009-13 establishes a selling price hierarchy for determining the selling price of a
deliverable in a sale arrangement. The selling price for each deliverable is based on
vendor-specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not
available, or the Companys best estimated selling price
(BESP) if neither VSOE nor TPE are
available. The amendments in ASU No. 2009-13 eliminate the residual method of allocation and
require that arrangement consideration be allocated at the inception of the arrangement to all
deliverables using the relative selling price allocation method. The relative selling price method
allocates any discount in the arrangement proportionately to each deliverable on the basis of the
deliverables estimated fair value.
For all transactions entered into
prior to the first quarter of 2011 and for sales of
non-essential and stand-alone software after January 1, 2011, the Company allocates revenue for
arrangements with multiple elements based on the software revenue recognition guidance. Under this
guidance, when arrangements include multiple elements,
the Company allocates the total fee among the various elements using the residual method.
Under the residual method, revenue is recognized when VSOE of fair value exists for all of the
undelivered elements of the arrangement, but does not exist for one or more of the delivered
elements of the arrangement. Each arrangement requires the Company to analyze the individual
elements in the transaction and to estimate the fair value of each undelivered element, which
typically represents maintenance and services. Revenue is allocated to each of the undelivered
elements based on its respective fair value, with the fair value determined by the price charged
when that element is sold separately. If VSOE of fair value for any undelivered element does not
exist, revenue from the entire arrangement is deferred and recognized at the earlier of (a)
delivery of those elements for which VSOE of fair value does not exist or (b) when VSOE is
established. However, in instances where maintenance services are the only undelivered element
without VSOE of fair value, the entire arrangement is recognized ratably as a single unit of
accounting over the contractual service period.
For transactions entered into subsequent to the adoption of ASU No. 2009-13 that include
multiple elements, arrangement consideration is allocated to each element based on the relative
selling prices of all of the elements in the arrangement using the fair value hierarchy as required
by ASU No. 2009-13. The Company limits the amount of revenue recognition for delivered elements
to the amount that is not contingent on the future delivery of products or services, future
performance obligation, or subject to customer-specific return or refund privileges.
Consistent with the methodology used under the previous accounting guidance, the Company
establishes VSOE for its training services, post-sale customer support and installation services based
on the sales price charged for each element when sold separately. Because the Company generally
does not sell any of its products on a standalone basis, it has yet to establish VSOE for these
offerings.
The Company is typically not able to determine TPE for its products or certain of its
services. TPE is determined based on competitor prices for similar elements when sold separately.
Generally, the Companys offerings contain a significant level of differentiation such that the
comparable pricing of products with similar functionality cannot be obtained. Furthermore, the
Company is unable to reliably determine the selling prices on a stand-alone basis of similar
products offered by its competitors.
When the Company is unable to establish fair value of its products or certain services using
VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of
BESP is to determine the price at which the Company would transact a sale if the product or service
were sold on a stand-alone basis. The Company determines BESP for a product or service by
considering multiple factors including, but not limited to, pricing practices, geographies,
customer classes and distribution channels.
6
Table of Contents
The Company plans to analyze the selling prices used in its allocation of arrangement
consideration, at a minimum, on an annual basis. Selling prices will be analyzed on a more frequent
basis if a significant change in the Companys business necessitates a more timely analysis or if
the Company experiences significant variances in its selling prices.
The following tables present the effects to the Companys previously reported Condensed
Consolidated Statements of Income for the three months ended March 31, 2010 as if the Company had
adopted the standards effective January 1, 2010 (in thousands):
As Reported | Adjustments | As Amended | ||||||||||
Total Revenue |
$ | 51,050 | $ | 495 | $ | 51,545 | ||||||
Gross Profit |
41,233 | 426 | 41,659 | |||||||||
Net Income |
8,333 | 426 | 8,759 | |||||||||
Net income
per share: |
||||||||||||
Basic |
$ | 0.14 | $ | 0.01 | $ | 0.15 | ||||||
Diluted |
$ | 0.13 | $ | | $ | 0.13 |
The following tables present the effects to the Companys previously reported Condensed
Consolidated
Balance Sheet as of March 31, 2010 as if the Company had adopted the standards effective
January 1, 2010 (in thousands):
As Reported | Adjustments | As Amended | ||||||||||
Deferred Product Costs |
$ | 3,572 | $ | (69 | ) | $ | 3,503 | |||||
Deferred Revenue |
31,998 | (495 | ) | 31,503 |
2. Business Combination
On January 20, 2011, the Company acquired Newfound Communications, Inc. (Newfound
Communications), an emerging, innovative provider of call recording solutions for the
telecommunications industry. The aggregate purchase price was $4,185 in cash payments to the
stockholders of Newfound Communications. In allocating the total preliminary purchase price for
Newfound Communications based on estimated fair values, the Company
recorded $3,259 of
goodwill, $1,240 of identifiable intangible assets and $423 of net tangible liabilities.
In connection with the acquisition of Newfound Communications, the Company incurred $180 of
merger and integration related costs during 2011, which the Company recorded as an expense in the
condensed consolidated statement of income for the three months ended
March 31, 2011 and $223
during 2010 which the Company recorded as an expense in the consolidated statement of income for
the three months ended December 31, 2010.
The transaction was accounted for under the acquisition method of accounting. Accordingly, the
results of operations of Newfound Communications have been included
in the accompanying condensed
consolidated financial statements since the date of acquisition and
were immaterial to the Companys condensed consolidated
financial statements. All of the assets acquired and
liabilities assumed in the transaction have been recognized at their
acquisition date fair values,
which remain preliminary at March 31, 2011. The Company is in the process of completing its
valuation of certain intangible assets and deferred revenue. The final allocations of the purchase
price to intangible assets, goodwill, if any, and the deferred tax asset and liability may differ
materially from the information presented in these unaudited condensed consolidated financial
statements.
3. Cash, Cash Equivalents, Short and Long-Term Investments and Restricted Cash
Cash, Cash Equivalents, Short and Long-term Investments
Cash, cash equivalents, short and long-term investments as of March 31, 2011 and December 31,
2010 consist of the following:
As of March 31, 2011 | ||||||||||||||||
Contracted | Amortized | Fair Market | Carrying | |||||||||||||
Maturity | Cost | Value | Value | |||||||||||||
Cash |
Demand | $ | 21,483 | $ | 21,483 | $ | 21,483 | |||||||||
Money market funds |
Demand | 87,124 | 87,124 | 87,124 | ||||||||||||
U.S. agency notesheld-to-maturity |
14 days | 10,317 | 10,317 | 10,317 | ||||||||||||
Total cash and cash equivalents |
$ | 118,924 | $ | 118,924 | $ | 118,924 | ||||||||||
U.S. agency notesavailable-for-sale |
54 - 390 days | $ | 69,282 | $ | 69,322 | $ | 69,322 | |||||||||
U.S. agency notesheld-to-maturity |
30 - 353 days | 100,585 | 100,548 | 100,585 | ||||||||||||
Total short-term marketable securities |
$ | 169,867 | $ | 169,870 | $ | 169,907 | ||||||||||
U.S. agency notesheld-to-maturity |
408 days | $ | 9,238 | $ | 9,231 | $ | 9,238 | |||||||||
Total long-term marketable securities |
$ | 9,238 | $ | 9,231 | $ | 9,238 | ||||||||||
7
Table of Contents
As of December 31, 2010 | ||||||||||||||||
Contracted | Amortized | Fair Market | Carrying | |||||||||||||
Maturity | Cost | Value | Value | |||||||||||||
Cash |
Demand | $ | 35,580 | $ | 35,580 | $ | 35,580 | |||||||||
Money market funds |
Demand | 56,089 | 56,089 | 56,089 | ||||||||||||
Total cash and cash equivalents |
$ | 91,669 | $ | 91,669 | $ | 91,669 | ||||||||||
U.S. agency notesavailable-for-sale |
4-419 days | $ | 69,575 | $ | 69,606 | $ | 69,606 | |||||||||
U.S. agency notesheld-to-maturity |
15-329 days | 109,418 | 114,451 | 109,418 | ||||||||||||
Total short-term marketable securities |
$ | 179,489 | $ | 184,292 | $ | 179,024 | ||||||||||
U.S. agency notesheld-to-maturity |
419 days | $ | 5,030 | $ | 5,029 | $ | 5,030 | |||||||||
Total long-term marketable securities |
$ | 5,030 | $ | 5,029 | $ | 5,030 | ||||||||||
To date, realized gains and losses from the sales of cash equivalents or short or
long-term investments have been immaterial.
4. Inventory
Inventory is stated at the lower of cost, determined on a first in, first out basis, or
market, and consists primarily of finished products.
5. Concentrations of Credit Risk and Off-Balance Sheet Risk
The Company has no significant off-balance-sheet risk such as foreign exchange contracts,
option contracts, or other international hedging arrangements. Financial instruments that
potentially expose the Company to concentrations of credit risk consist mainly of cash, cash
equivalents, short and long-term investments and accounts receivable. The Company maintains
its cash, cash equivalents, short and long-term investments principally in accredited financial
institutions of high credit standing. The Company assesses the credit worthiness of its customers
both at the inception of the business relationship and then routinely on an ongoing basis. The
Company generally does not require collateral from its customers. Due to these factors, no additional credit
risk beyond amounts provided for collection losses is believed by management to be probable in the
Companys accounts receivable.
The Company had certain customers whose revenue individually represented 10% or more of the
Companys total revenue, as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Customer A |
11 | % | * | |||||
Customer B |
* | 25 | % | |||||
Customer C |
* | 18 |
* | Less than 10% of total revenue. |
The Company had certain customers whose accounts receivable balances individually represented
10% or more of the Companys accounts receivable, as follows:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Customer B |
12 | % | 10 | % | ||||
Customer C |
15 | * | ||||||
Customer D |
* | 20 |
* | Less than 10% of total accounts receivable. |
6. Product Warranties
Substantially all of the Companys products are covered by a standard warranty of ninety days
for software
and one year for hardware. In the event of a failure of hardware product or software covered
by this warranty, the Company must repair or replace such hardware product or software or, if those
remedies are insufficient, and at the discretion of the Company, provide a refund. The Companys
customers typically purchase maintenance and support contracts, which supersede its warranty
obligations. The Companys warranty reserve reflects estimated material and labor costs for
potential or actual product issues in its installed base that are not covered under maintenance
contracts but for which the Company expects to incur an obligation. The Companys estimates of
anticipated rates of warranty claims and costs are primarily based on historical information and
future forecasts. The Company assesses the adequacy of the warranty allowance
on a quarterly basis
and
adjusts the amount as necessary. If the historical data used to calculate the adequacy of the
warranty allowance are not indicative of future requirements, additional or reduced warranty
reserves may be required.
8
Table of Contents
The following is a summary of changes in the amount reserved for warranty costs for the three
months ended March 31, 2011:
Balance at December 31, 2010 |
$ | 89 | ||
Provision for warranty costs |
100 | |||
Uses/Reductions |
(107 | ) | ||
Balance at March 31, 2011 |
$ | 82 | ||
7. Stock-Based Compensation
The Company recorded stock-based compensation expense of $6,786 and $3,521 for the three
months ended March 31, 2011 and 2010, respectively. As of March 31, 2011, there was $81,966 of
unrecognized stock-based compensation expense related to stock-based awards that is expected to be
recognized over a weighted average period of 2.69 years.
The following is a summary of the status of the Companys stock options as of March 31, 2011
and the stock option activity for all stock option plans during the three months ended March 31,
2011:
Weighted | Weighted | |||||||||||||||||||
Average | Average | |||||||||||||||||||
Exercise | Remaining | Aggregate | ||||||||||||||||||
Number of | Exercise Price | Price Per | Contractual | Intrinsic | ||||||||||||||||
Shares | Per Share | Share | Life (Years) | Value(1) | ||||||||||||||||
Outstanding at December 31, 2010 |
10,211,040 | $ | 0.20 53.45 | $10.47 | ||||||||||||||||
Granted |
1,572,048 | 66.55 70.69 | 66.90 | |||||||||||||||||
Canceled |
(40,625 | ) | 4.35 66.55 | 32.97 | ||||||||||||||||
Exercised |
(1,246,774 | ) | 0.20 27.45 | 6.89 | $ | 89,026 | ||||||||||||||
Outstanding at March 31, 2011 |
10,495,689 | 0.20 70.69 | 19.26 | 5.41 | $ | 542,630 | ||||||||||||||
Exercisable at March 31, 2011 |
2,944,910 | 0.20 27.45 | 6.47 | 4.63 | $ | 189,903 | ||||||||||||||
Vested or expected to vest at March
31, 2011 (2) |
9,964,633 | 0.20 70.69 | 18.36 | 5.37 | $ | 524,112 | ||||||||||||||
(1) | The aggregate intrinsic value was calculated based on the positive difference between the fair value of the Companys common stock on March 31, 2011 of $70.96, or the date of exercise, as appropriate, and the exercise price of the underlying options. | |
(2) | This represents the number of vested options as of March 31, 2011 plus the number of unvested options expected to vest as of March 31, 2011 based on the unvested options outstanding at March 31, 2011, adjusted for the estimated forfeiture rate. |
The
Company has entered into restricted stock unit (RSU) agreements with
certain of its employees relating to RSUs granted to those employees to its employees
pursuant to the Acme Packet, Inc. 2006 Equity Incentive Plan. Vesting occurs periodically at
specified time intervals, ranging from one to
three years, and in specified percentages. Upon vesting, the holder will receive one share of
the Companys common stock for each unit vested. A summary of the Companys unvested RSUs
outstanding at March 31, 2011 and the changes during the three months then ended, is presented
below:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
RSUs | Fair Value | |||||||
Unvested at December 31, 2010 |
412,833 | $ | 6.22 | |||||
Granted |
70,250 | 66.55 | ||||||
Vested |
(186,851 | ) | 8.71 | |||||
Forfeited |
| | ||||||
Unvested at March 31, 2011 |
296,232 | 18.96 | ||||||
8. Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources. Accumulated
other comprehensive income is presented separately on the balance
sheet as required.
9
Table of Contents
The following table displays the computation of comprehensive income:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 13,709 | $ | 8,333 | ||||
Unrealized gain (loss) on marketable securities |
42 | (14 | ) | |||||
Comprehensive income |
$ | 13,751 | $ | 8,319 | ||||
Other comprehensive income consists entirely of unrealized gains and losses on
available-for-sale securities at March 31, 2011 and 2010, respectively.
9. Net Income Per Share
A reconciliation of the number of shares used in the calculation of basic and diluted net
income per share is as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Weighted average number of common shares used in calculating basic net income per share |
65,076,303 | 59,821,379 | ||||||
Weighted average number of common shares issuable upon exercise of outstanding stock
options, based on treasury stock method |
5,219,048 | 4,982,474 | ||||||
Weighted average number of common shares issuable upon vesting of outstanding restricted
stock units |
181,622 | 179,045 | ||||||
Weighted average number of common shares used in computing diluted net income per share |
70,476,973 | 64,982,898 | ||||||
In the computation of the diluted weighted average number of common shares outstanding,
980,692 and 2,591,277 weighted average common share equivalents underlying outstanding stock
options have been excluded
from the computation as of March 31, 2011 and 2010, respectively, as their effect would have
been antidilutive.
10. Income Taxes
For the three months ended March 31, 2011 and 2010, the Companys effective income tax rate
was approximately 36% and 35%, respectively. As of March 31, 2011, the Company expects to realize
recorded net deferred tax assets of $18,616. The Companys conclusion that these assets will be
recovered is based upon its expectation that current and future earnings will provide sufficient
taxable income to realize the recorded tax asset. The realization of the Companys net deferred tax
asset cannot be assured, and to the extent that future taxable income against which these tax
assets may be applied is not sufficient, some or all of the Companys recorded net deferred tax
assets would not be realizable. Approximately $10,588 of the deferred tax asset recorded as of
March 31, 2011 was attributable to benefits associated with stock-based compensation charges. In
accordance with the provision of Accounting Standards Codification (ASC) 718, Compensation-Stock
Compensation, no valuation allowance has been recorded against this amount. However, in the future,
if the underlying amounts expire with an intrinsic value less than the fair value of the awards on
the date of grant, some or all of the benefits may not be realizable.
11. Contingencies
Litigation
From time to time and in the ordinary course of business, the Company may be subject to
various claims, charges and litigation. At March 31, 2011 and 2010, the Company did not have any
pending claims, charges or litigation that it expects would have a material adverse effect on its
condensed consolidated financial position, results of operations or cash flows.
On January 5, 2011, Nortel Networks, Inc. (Nortel) a customer of the Company, filed a complaint
against Covergence Inc. (Covergence) in the United States Bankruptcy Court in the District of Delaware. The
complaint alleges that prior to the acquisition of Covergence in April 2009,
Covergence received a preferential payment of approximately $1,200 prior to Nortels bankruptcy
petition in January 2009. Based on the early stage of this litigation, the Company is unable to
reasonably estimate the outcome of this claim.
Other
Certain of the Companys arrangements with customers include clauses whereby the Company may
be subject to penalties for failure to meet certain performance obligations. The Company has not
incurred any such penalties to date.
10
Table of Contents
12. Segment Information
Geographic Data
Total revenue to unaffiliated customers by geographic area was as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
United States and Canada |
$ | 44,602 | $ | 29,317 | ||||
International |
29,365 | 21,733 | ||||||
Total |
$ | 73,967 | $ | 51,050 | ||||
During the three months ended March 31, 2011 and 2010, no one international country
contributed more than 10% of the Companys total revenue.
As of March 31, 2011 and 2010, property and equipment at locations outside the United States
was not material.
13. Fair Value Measurements
Fair value is defined as an exit price, representing the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants
based on the highest and best use of the asset or liability. As such, fair value is a market based
measurement that should be determined based on assumptions that market participants would use in
pricing an asset or liability. The Company uses valuation techniques to measure fair value that
maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are
prioritized as follows:
| Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets; | ||
| Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market corroborated inputs; and | ||
| Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities. |
The valuation techniques that may be used to measure fair value are as follows:
| Market approachUses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; | ||
| Income approachUses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option pricing models and excess earnings method; and | ||
| Cost approachBased on the amount that currently would be required to replace the service capacity of an asset (replacement cost). |
The following table sets forth the Companys financial instruments carried at fair value
within the accounting standard hierarchy and using the lowest level of input as of March 31, 2011:
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Items | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$87,124 | $ | | $ | | $ | 87,124 | |||||||||
U.S. agency notes |
| 10,317 | | 10,317 | ||||||||||||
Restricted cash |
837 | | | 837 | ||||||||||||
Total cash equivalents and restricted cash |
87,961 | 10,317 | | 98,278 | ||||||||||||
Short-term U.S. agency notes |
| 169,907 | | 169,907 | ||||||||||||
Long-term U.S. agency notes |
| 9,238 | | 9,238 | ||||||||||||
Total investments |
| 179,145 | | 179,145 | ||||||||||||
Total assets |
$87,961 | $ | 189,462 | $ | | $ | 277,423 | |||||||||
Realized gains and losses from sales of the Companys investments are included in Other
income (expense) and unrealized gains and losses from available-for-sale securities are included as
a separate component of equity unless the loss is determined to be other-than-temporary.
11
Table of Contents
The Company measures eligible assets and liabilities at fair value with changes in value
recognized in earnings. Fair value treatment may be elected either upon initial recognition of an
eligible asset or liability or, for an existing asset or liability, if an event triggers a new
basis of accounting. The Company did not elect to remeasure any of its existing financial assets or
liabilities, and did not elect the fair value option for any financial assets and liabilities
transacted in the three months ended March 31, 2011.
12
Table of Contents
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement
This Quarterly Report on Form 10-Q, including the information incorporated by reference
herein, contains, in addition to historical information, forward-looking statements. We may, in
some cases, use words such as project, believe, anticipate, plan, expect, estimate,
intend, continue, should, would, could, potentially, will, may or similar words and
expressions that convey uncertainty of future events or outcomes to identify these forward-looking
statements. Forward-looking statements in this Quarterly Report on Form 10-Q may include statements
about:
| our ability to attract and retain customers; | ||
| our ability to retain and hire necessary employees and appropriately staff our operations; | ||
| our financial performance; | ||
| our expectations regarding our revenue, cost of revenue and our related gross profit and gross margin; | ||
| our development activities, expansion of our product offerings and the emerging opportunities for our solutions; | ||
| our position in the session delivery network solutions market; | ||
| the effect of the worldwide economy on purchases of our products; | ||
| the expectations about our growth and acquisitions of new technologies; | ||
| the demand for and the growth of worldwide revenues for session delivery network solutions; | ||
| the benefit of our products, services, or programs; | ||
| our ability to establish and maintain relationships with key partners and contract manufacturers; | ||
| potential natural disasters in locations where we, our customers, or our suppliers operate; | ||
| the advantages of our technology as compared to that of our competitors; | ||
| our expectations regarding the realization of recorded deferred tax assets; and | ||
| our cash needs. |
The outcome of the events described in these forward-looking statements is subject to known
and unknown risks, uncertainties and other factors that could cause actual results to differ
materially from the results anticipated by these forward-looking statements. These important
factors include our financial performance, our ability to attract and retain customers, our
development activities and those factors we discuss in this Quarterly Report on Form 10-Q and in
our Annual Report on Form 10-K under the caption Risk Factors. You should read these factors and
the other cautionary statements made in this Quarterly Report on Form 10-Q as being applicable to
all related forward-looking statements wherever they appear in this Quarterly Report on Form 10-Q.
These risk factors are not exhaustive and other sections of this Quarterly Report on Form 10-Q may
include additional factors which could adversely impact our business and financial performance.
Overview
Acme Packet, Inc. is the leading provider in session delivery network solutions which enable
the delivery of trusted, first-class interactive communications voice, video and multimedia
sessionsand data services across internet protocol, or IP, network borders. Session
delivery network is an
architecture encompassing many different product categories. Our
Net-Net product family of session border controllers, or SBCs, session aware load balancers, or
SLBs, session routing proxies, or SRPs, and multiservice security gateways, or MSGs, supports
multiple applications in enterprise networks and fixed line, mobile, over-the-top and application
service provider networks. These applications range from voice over IP, or VoIP, trunking to hosted
enterprise and residential services to fixed-mobile convergence. Our products satisfy critical
security, service assurance and regulatory requirements in these networks. As of March 31, 2011,
more than 1,350 end user customers in 105 countries have deployed our products. We sell or
license our products and support services through our direct sales force and 143 distribution
partners, including many of the largest networking and telecommunications equipment vendors
throughout the world.
Our headquarters are located in Bedford, Massachusetts. We maintain sales offices in Madrid,
Spain; Seoul, South Korea; Tokyo, Japan; and Ipswich, United Kingdom. We also have sales and
support personnel in Argentina, Australia, Belgium, Brazil, Canada, China, Columbia, Croatia, Czech
Republic, France, Germany, Hong Kong, India, Indonesia, Italy, Malaysia, Mexico, the Netherlands,
Peru, Poland, Russia, Singapore, South Africa, Sweden, Taiwan, Thailand, United Arab Emirates and
throughout the United States. We expect to selectively add personnel to provide additional
geographic sales and technical support coverage.
Industry Background
Service providers traditionally have delivered voice and data services over two separate
networks: the public switched telephone network, or PSTN, and the internet. The PSTN provides high
reliability and security but is costly to operate and is limited in its ability to support high
13
Table of Contents
bandwidth video and other interactive multimedia services. The internet is
capable of cost effectively transmitting any form of traffic that is IP based, including
interactive voice, video and data, but it transmits traffic only on a best efforts basis, because
all forms of traffic have the same priority. Therefore, the internet attempts to deliver all
traffic without distinction, which can result in significantly varying degrees of service quality
for the same or similar types of traffic transmissions. Internet based services are also subject to
disruptive and fraudulent behavior, including identity theft, viruses, unwanted and excessively
large input data, known as SPAM, and the unauthorized use and attempts to circumvent or bypass
security mechanisms associated with those services, known as hacking.
Service providers are migrating to a single IP network architecture to serve as the
foundation for their next generation voice, video, multimedia and data service offerings. Recently,
an increasing number of enterprises, including contact centers and government agencies have begun
to migrate to a single IP network architecture as well. In order to provide secure and high quality
interactive communications on a converged IP network, service providers and enterprises must be
able to control the communications flows that comprise communication sessions.
Evolution to a Converged IP Network
IP networks can be designed and operated more cost effectively than the PSTN. In
addition, IP networks are capable of delivering converged voice, video and data service packages to
businesses and consumers. Service providers are seeking to provide these next-generation services
to enhance their profitability by generating incremental revenue and by reducing subscriber
turnover. Enterprises are searching for ways to unify their communications by seamlessly
integrating voice, video, instant messaging and collaboration while reducing costs. Managing two
distinct networksthe PSTN and an IP networkis not a viable economic alternative. As a result,
service providers and enterprises have begun to migrate to a single IP network architecture to
serve as the foundation for their next-generation services and applications. In order to
successfully transition to a single IP network, however, they must maintain the same reliability,
quality and security that have for decades exemplified their delivery of voice services.
Challenges of IP Networks in Delivering Session Based Communications
IP networks were designed initially to provide reliable delivery of data services such as
file downloads and website traffic that are not sensitive to latency or time delay. If data packets
are lost or misdirected, an IP network exhibits tremendous resiliency in re-transmitting and
eventually executing the desired user request, which generally is an acceptable result for these
types of data services. However, IP networks historically have not been capable of guaranteeing
real time, secure delivery of high quality sessions based communications such as interactive voice
and video.
14
Table of Contents
A session is a communications interaction that has a defined beginning and end, and is
effective only when transmitted in real time without latency or delays. In order to enable a
session based communication, control of the session from its origination point to its defined end
point is required. No single IP network extends far enough to enable that level of control,
however, the internet lacks the fundamental quality of service and security mechanisms necessary to
consistently deliver the security and quality of real time multimedia communications that consumers
and businesses require. In order to gain the trust of users, service providers and enterprises must
be able to assure secure and high quality interactive communications across multiple networks.
Key Financial Highlights
Some of our key financial highlights for the first quarter of 2011, as compared to the same
metric for the first quarter of 2010, include the following:
| Total revenue was $74.0 million compared to $51.1 million in the same period of 2010. | ||
| Net income was $13.7 million compared to $8.3 million in the same period of 2010. | ||
| Earnings per share was $0.19 per share on a diluted basis compared to $0.13 per share on a diluted basis in the same period of 2010. | ||
| Cash provided by operating activities was $11.5 million compared to $8.0 million in the same period of 2010. | ||
| Cash provided by financing activities was $20.0 million compared to $8.8 million in the same period of 2010. |
The Acme Packet Strategy
Principal elements of our strategy include:
| Continuing to satisfy the evolving border requirements of enterprises and fixed-line, mobile and over-the-top service providers. Our product deployments position us to gain valuable knowledge that we can use to expand and enhance our products features and functionality. We may develop new products organically or through selective acquisitions. | ||
| Implementing new technologies to enhance product performance and scalability. We will seek to leverage new technologies as they become available to increase the performance, capacity and functionality of our product family, as well as to reduce our costs. | ||
| Investing in quality and responsive support. As we broaden our product platform and increase our product capabilities, we will continue to provide comprehensive service and support targeted at maximizing customer satisfaction and retention. | ||
| Facilitating and promoting service interconnects and federations among our customers. We intend to drive increased demand for our products by helping our customers to extend the reach of their services and applications and, consequently, to increase the value of their services to their customers. | ||
| Leveraging distribution partnerships to enhance market penetration. We will continue to invest in training and tools for our distribution partners sales, systems engineering and support organizations, in order to improve the overall efficiency and effectiveness of these partnerships. | ||
| Actively contributing to architecture and standards definition processes. We will utilize our breadth and depth of experience with SBC deployments to contribute significantly to organizations developing standards and architectures for next generation IP networks. |
Factors That May Affect Future Performance
| Global Macroeconomic Conditions. We believe that the capital budgets and spending initiatives of some of our core customersservice providers, enterprises, government agencies and contact centersmay be affected by current worldwide economic conditions. Our ability to generate revenue from these core customers is dependent on the status of such budgets and initiatives. | ||
| Gross Margin. Our gross margin has been, and will continue to be, affected by many factors, including (a) the demand for our products and services, (b) the average selling price of our products, which in turn depends, in part, on the mix of product and product configurations sold, (c) the level of software license upgrades, (d) new product introductions, (e) the mix of sales channels through which our products are sold, and (f) the costs of manufacturing our hardware products and providing our related support services. Customers license our software in various configurations depending on each customers requirements for session capacity, feature groups and protocols. The product software configuration mix will have a direct impact on the average selling price of the system sold. Systems with higher software content (higher session capacity, support for higher number of security protocols and a larger number of feature groups) will generally have a higher average selling price than those systems sold with lower software content. If customers begin to purchase systems with lower software content, this may have a negative impact on our revenue and gross margins. |
15
Table of Contents
| Competition. Competition in our product categories is strong and constantly evolving. While we believe we are currently the market leader in the service provider and enterprise markets for session border controller solutions, we expect competition to persist and intensify in the future as the market grows. Our primary competitors for session border controller solutions generally consist of specialty vendors, such as GENBAND Inc., and more established network and component companies such as Cisco Systems, Inc. and Huawei Technologies Co., Ltd. We also compete with some of the companies with which we have distribution partnerships, such as Alcatel-Lucent, Nokia Siemens Networks, Sonus Networks Inc. and Telefonaktiebolaget LM Ericsson. We believe we compete successfully with all of these companies based upon our experience in interactive communications networks, the breadth of our applications and standards support, the depth of our border control features, the demonstrated ability of our products to interoperate with key communications infrastructure elements and our comprehensive service and support. We also believe our products are priced competitively with our competitors offerings. As the session border control market opportunity grows, we expect competition from additional networking and IP communications equipment suppliers, including our distribution partners. | ||
| Evolution of the Session Delivery Network Market. The market for our products is in its early stages and is still evolving, and it is uncertain whether these products will continue to achieve and sustain high levels of demand and market acceptance. Our success will depend, to a substantial extent, on the willingness of interactive communications service providers and enterprises to continue to implement our solutions. | ||
| Research and Development. To continue to achieve market acceptance for our products, we must effectively anticipate and adapt, in a timely manner, to customer requirements and must offer products that meet changing customer demands. Prospective customers may require product features and capabilities that our current products do not have. The market for session delivery network solutions is characterized by rapid technological change, frequent new product introductions, and evolving industry requirements. We intend to continue to invest in our research and development efforts, which we believe are essential to maintaining our competitive position. | ||
| Managing Growth. We significantly expanded our operations in 2010 and the first three months of 2011. During the period from January 1, 2010 through March 31, 2011 we increased the number of our employees and full time independent contractors by 42%, from 450 to 641. We anticipate that further expansion of our infrastructure and headcount will be required to achieve planned expansion of our product offerings, projected increases in our customer base and anticipated growth in the number of product deployments. In the future, we expect to continue to carefully manage the increase of our operating expenses based on our ability to expand our revenues, the expansion of which could occur organically or through future acquisitions. |
Revenue
We derive product revenue from the sale of our Net-Net hardware and the licensing of our
Net-Net software. We generally recognize product revenue at the time of product delivery, provided
all other revenue recognition criteria have been met. For arrangements that include customer
acceptance or other material non-standard terms, we defer revenue recognition until after delivery,
assuming all other criteria for revenue recognition have been met.
We generate maintenance, support and service revenue from (a) maintenance associated with
software licenses, (b) technical support services for our software product, (c) hardware repair and
maintenance services, (d) implementation, training and consulting services and (e) reimbursable
travel and other out-of-pocket expenses.
We offer our products and services indirectly through distribution partners and directly
through our sales force. Our distribution partners include networking and telecommunications
equipment vendors throughout the world. Our distribution partners generally purchase our products
after they have received a purchase order from their customers and, generally, do not maintain an
inventory of our products in anticipation of sales to their customers. Generally, the pricing
offered to our distribution partners will be lower than to our direct customers.
The product configuration, which reflects the mix of session capacity, signaling protocol
support and requested features, determines the price for each product sold. Customers can purchase
our products in either a standalone or high availability configuration and can license our software
in various configurations, depending on the customers
requirements for session capacity, feature groups and protocols. The product software configuration
mix will have a direct impact on the average selling price of the system sold. As the market
continues to develop and grow, we expect to experience increased price pressure on our products and
services.
We believe that our revenue and results of operations may vary significantly from quarter to
quarter as a result of long sales and deployment cycles, variations in customer ordering patterns,
and the application of complex revenue recognition rules to certain transactions. Some of our
arrangements with customers include clauses under which we may be subject to penalties for failure
to meet specified performance obligations. We have not incurred any such penalties to date.
Cost of Revenue
Cost of product revenue consists primarily of (a) third party manufacturers fees for
purchased materials and services, combined with our expenses for (b) salaries, wages and related
benefits for our manufacturing personnel, (c) related overhead, (d) provision for inventory
obsolescence, (e) amortization of intangible assets and (f) stock-based compensation. Amortization
of intangible assets represents the amortization of developed technologies from our acquisition of
Covergence.
Cost of maintenance, support and service revenue consists primarily of (a) salaries,
wages and related benefits for our support and service personnel, (b) related overhead, (c)
billable and non-billable travel, lodging, and other out-of-pocket expenses, (d) material costs
consumed in the provision of services and (e) stock-based compensation.
Gross Profit
Our gross profit has been, and will be, affected by many factors, including (a) the demand for
our products and services, (b) the average selling price of our products, which in turn depends, in
part, on the mix of product and product configurations sold, (c) the mix between product and
service revenue, (d) new product introductions, (e) the mix of sales channels through which our
products are sold, (f) the volume and costs of manufacturing our hardware products and (g)
personnel and related costs for manufacturing, support and services.
Operating Expenses
Operating
expenses consist of sales and marketing, research and development, general and
administrative and merger and integration related expenses. Personnel related costs are the most
significant component of each of these expense categories. During the period from January 1, 2010
through March 31, 2011, we increased the number of our employees and full time independent
contractors, related to our operating activities, by 44%, from 381 to 547. We expect to continue
to hire new employees to support our expected growth.
Sales and marketing expense consists primarily of (a) salaries and related personnel costs,
(b) commissions and bonuses, (c) travel, lodging and other out-of-pocket expenses, (d) marketing
programs such as trade shows, (e) stock-based compensation and (f) other related overhead.
Commissions are recorded as expense when earned by the employee. We expect sales and marketing
expense to increase in absolute dollars as we expand our sales force to continue to increase our
revenue and market share. We anticipate that sales and marketing expense will remain relatively
consistent as a percentage of total revenue in the future.
16
Table of Contents
Research and development expense consists primarily of (a) salaries and related personnel
costs, (b) payments to suppliers for design and consulting services, (c) prototype and equipment
costs relating to the design and development of new products and enhancement of
existing products, (d) quality assurance and testing, (e) stock-based compensation and (f)
other related overhead. To date, all of the costs related to our research and development efforts
have been expensed as incurred as technological feasibility is determined at the same time as
release. We intend to continue to invest in our research and development efforts, which we believe
are essential to maintaining our competitive position. We expect research and development expense
to increase in absolute dollars. However, we anticipate that research and development expense will
modestly increase as a percentage of total revenue in the future.
General and administrative expense consists primarily of (a) salaries, wages and
personnel costs related to our executive, finance, human resource and information technology
organizations, (b) accounting and legal professional fees, (c) expenses associated with
uncollectible accounts, (d) stock-based compensation and (e) other related overhead. We expect
general and administrative expense to increase in absolute dollars as we invest in infrastructure
to support continued growth and incur ongoing expenses related to being a publicly-traded company.
However, we anticipate that general and administrative expense will remain relatively consistent as
a percentage of total revenue in the future.
Merger
and integration related costs primarily consist of transaction expenses.
Stock-Based Compensation
Cost of revenue and operating expenses include stock-based compensation expense. We expense
stock-based payment awards with compensation cost for share-based payment transactions measured at
fair value. For the three months ended March 31, 2011 and 2010, we recorded expense of $6.8 million
and $3.5 million, respectively, in connection with share-based payment awards. Based on share-based
awards granted from 2006 through 2010, a future expense of non-vested options of $81.9 million is
expected to be recognized over a weighted-average period of 2.69 years.
Other Income (Expense)
Other income (expense) consists primarily of interest income earned on cash, cash equivalents
and investments. We have invested cash in high quality securities and are not materially affected
by fluctuations in interest rates. Other income (expense) also includes gains (losses) from foreign
currency translation adjustments of our international activities. The functional currency of our
international operations in Europe and Asia is the United States, or U.S., dollar. Accordingly, all
assets and liabilities of these international subsidiaries are re-measured into U.S. dollars using
the exchange rates in effect at the balance sheet date, or historical rate, as appropriate. Revenue
and expenses of these international subsidiaries are re-measured into U.S. dollars at the average
rates in effect during the period. Any differences resulting from the re-measurement of assets,
liabilities and operations of the European and Asian subsidiaries are recorded within other income
(expense).
Application of Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with accounting principles generally
accepted in the U.S. The preparation of these financial statements requires that we make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting periods. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the
circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results
may differ significantly from these estimates under different assumptions or conditions. There have
been no material changes to these estimates for the periods presented in this Quarterly Report on
Form 10-Q. For a detailed explanation of the judgments made in these areas, refer to Managements
Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on
Form 10-K for the year ended December 31, 2010, which we filed with the Securities and Exchange
Commission, or SEC, on February 18, 2011.
We believe that our significant accounting policies, which are described in the notes to our
unaudited condensed consolidated financial statements included in this Quarterly Report on Form
10-Q, have not materially changed from those described in the notes to our audited consolidated
financial statements included in our Annual Report on Form 10-K for the year ended December 31,
2010, except as described below.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred,
the consideration is fixed and determinable, and collection of the related accounts receivable is
deemed probable. In making these judgments, management evaluates these criteria as follows:
| Persuasive evidence of an arrangement exists. We consider a non-cancelable agreement signed by the customer and us to be representative of persuasive evidence of an arrangement. | ||
| Delivery has occurred. We consider delivery to have occurred when product has been delivered to the customer and no significant post delivery obligations exist. In instances where customer acceptance is required, delivery is deemed to have occurred when customer acceptance has been achieved. Certain of our agreements contain products that might not |
17
Table of Contents
conform to published specifications or contain a requirement to deliver additional elements which are essential to the functionality of the delivered elements. Revenue associated with these agreements is recognized when the customer specifications have been met or delivery of the additional elements has occurred. | |||
| Consideration is fixed or determinable. We consider the consideration to be fixed or determinable unless the consideration is subject to refund or adjustment or is not payable within normal payment terms. If the consideration is subject to refund or adjustment, we recognize revenue when the right to a refund or adjustment lapses. If offered payment terms exceed our normal terms, then revenue is recognized as the amounts become due and payable or upon the receipt of cash. | ||
| Collection is deemed probable. We conduct a credit review for all transactions at the inception of an arrangement to determine the creditworthiness of the customer. Collection is deemed probable if, based upon our evaluation, we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not probable, revenue is deferred and recognized upon the receipt of cash. |
Our revenue arrangements regularly include the sale of hardware, software, maintenance,
professional services and training. Revenue arrangements may include one of these single elements,
or may incorporate one or more elements in a single transaction or combination of related
transactions. During the first quarter of 2011, we prospectively adopted the guidance of
Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements, (ASU No. 2009-13) and ASU No. 2009-14, Software (Topic
985): Certain Revenue Arrangements That Include Software Elements (ASU No. 2009-14), which were
ratified by the Financial Accounting Standards Board (FASB) Emerging Issues Task Force on September
23, 2009. ASU No. 2009-13 affects accounting and reporting for all multiple-deliverable
arrangements. It also applies to companies that are affected by the amendments of ASU No. 2009-14.
The amendments in ASU No. 2009-14 provide that tangible products containing software
components and non-software components that function together to deliver the tangible products
essential functionality are no longer within the scope of the software revenue guidance in
Accounting Standards Codification Topic 985-605, Software Revenue Recognition, (ASC 985-605) and
should follow the guidance in ASU 2009-13 for multiple-element arrangements. All non-essential and
standalone software components will continue to be accounted for under the guidance of ASC 985-605.
ASU No. 2009-13 establishes a selling price hierarchy for determining the selling price of a
deliverable in a sale arrangement. The selling price for each deliverable is based on
vendor-specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not
available, or our best estimated selling price (BESP) if neither
VSOE nor TPE are available. The
amendments in ASU No. 2009-13 eliminate the residual method of allocation and require that
arrangement consideration be allocated at the inception of the arrangement to all deliverables
using the relative selling price allocation method. The relative selling price method allocates
any discount in the arrangement proportionately to each deliverable on the basis of the
deliverables estimated fair value.
For
all transactions entered into prior to January 1, 2011 and for sales of
non-essential and stand-alone software after January 1, 2011, we allocate revenue for arrangements
with multiple elements based on the software revenue recognition guidance. Under this guidance,
when arrangements include multiple elements, we allocate the total fee among the various elements
using the residual method. Under the residual method, revenue is recognized when VSOE of fair value
exists for all of the undelivered elements of the arrangement, but does not exist for one or more
of the delivered elements of the arrangement. Each arrangement requires us to analyze the
individual elements in the transaction and to estimate the fair value of each undelivered element,
which typically represents maintenance and services. Revenue is allocated to each of the
undelivered elements based on its respective fair value, with the fair value determined by the
price charged when that element is sold separately. If VSOE of fair value for any undelivered
element does not exist, revenue from the entire arrangement is deferred and recognized at the
earlier of (a) delivery of those elements for which VSOE of fair value does not exist or (b) when
VSOE is established. However, in instances where maintenance services are the only undelivered
element without VSOE of fair value, the entire arrangement is recognized ratably as a single unit
of accounting over the contractual service period.
For transactions entered into subsequent to the adoption of ASU No. 2009-13 that include
multiple elements, arrangement consideration is allocated to each element based on the relative
selling prices of all of the elements in the arrangement using the fair value hierarchy as required
by ASU No. 2009-13. We limit the amount of revenue recognition for delivered elements to the
amount that is not contingent on the future delivery of products or services, future performance
obligation, or subject to customer-specific return or refund privileges.
Consistent with the methodology used under the previous accounting guidance, we establishe
VSOE for its training services, post-sale customer support and installation services based on the sales
price charged for each element when sold separately. Because we generally do not sell any of our
products on a standalone basis, we have yet to establish VSOE for these offerings.
We typically are not able to determine TPE for our products or certain of our services. TPE is
determined based on competitor
prices for similar elements when sold separately. Generally, our offerings contain a
significant level of differentiation such that the comparable pricing of products with similar
functionality cannot be obtained. Furthermore, we are unable to reliably determine the selling
prices on a stand-alone basis of similar products offered by our competitors.
18
Table of Contents
When we are unable to establish fair value of its products or certain services using VSOE or
TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to
determine the price at which we would transact a sale if the product or service were sold on a
stand-alone basis. We determine BESP for a product or service by considering multiple factors
including, but not limited to, pricing practices, geographies, customer classes and distribution
channels.
We
plan to analyze the selling prices used in our allocation of arrangement consideration, at a
minimum, on an annual basis. Selling prices will be analyzed on a more frequent basis if a
significant change in our business necessitates a more timely analysis or if we experience
significant variances in our selling prices.
Results of Operations
Comparison of Three Months Ended March 31, 2011 and 2010
Revenue
Three Months Ended March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenue by Type: |
||||||||||||||||||||||||
Product |
$ | 59,742 | 81 | % | $ | 42,093 | 82 | % | $ | 17,649 | 42 | % | ||||||||||||
Maintenance, support
and service |
14,225 | 19 | 8,957 | 18 | 5,268 | 59 | ||||||||||||||||||
Total revenue |
$ | 73,967 | 100 | % | $ | 51,050 | 100 | % | $ | 22,917 | 45 | |||||||||||||
Revenue by Geography: |
||||||||||||||||||||||||
United States and Canada |
$ | 44,602 | 60 | % | $ | 29,317 | 57 | % | $ | 15,285 | 52 | |||||||||||||
International |
29,365 | 40 | 21,733 | 43 | 7,632 | 35 | ||||||||||||||||||
Total revenue |
$ | 73,967 | 100 | % | $ | 51,050 | 100 | % | $ | 22,917 | 45 | |||||||||||||
Revenue by Sales
Channel: |
||||||||||||||||||||||||
Direct |
$ | 37,449 | 51 | % | $ | 25,779 | 50 | % | $ | 11,670 | 45 | |||||||||||||
Indirect |
36,518 | 49 | 25,271 | 50 | 11,247 | 45 | ||||||||||||||||||
Total revenue |
$ | 73,967 | 100 | % | $ | 51,050 | 100 | % | $ | 22,917 | 45 | |||||||||||||
The $17.6 million increase in product revenue was primarily due to an increase in the
number of systems recognized as revenue, reflecting an increase in our customer base and customer
demand. We also experienced an increase in the average selling price of our systems due to changes
in our product software configuration mix, including software upgrades, the mix of system platforms
purchased by our customers and the sales channels through which they are sold. The product
configuration, which reflects the mix of session capacity support for signaling protocols and
requested features, determines the prices for each system sold. Customers can license our software
in various configurations, depending on requirements for session capacity, feature groups and
protocols. The product software configuration mix has a direct impact on the average selling price
of a system sold. Systems with higher software content (higher session capacity support for higher
number of signaling protocols and a higher number of feature groups) will generally have a higher
average selling price than those systems sold with lower software content. The growth in product
revenue was primarily due to our direct sales channel and, to a lesser extent, our indirect sales
channel. Direct product revenues increased $9.5 million, primarily due to an increase of $8.0
million attributable to customers in the United States and Canada, as well as an increase of $1.5
million related to our international customers. Indirect product revenues increased $8.1 million
primarily due to a $4.3 million increase attributable to our customers in the United States and
Canada, as well as an increase of $3.8 million related to our international customers.
Maintenance, support and service revenue increased by $5.3 million primarily due to
increases in maintenance and support fees associated with the growth of our installed product base
and to a lesser extent, fees associated with training and installation services.
19
Table of Contents
Cost of Revenue and Gross Profit
Three Months Ended March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Related | of Related | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Cost of Revenue: |
||||||||||||||||||||||||
Product |
$ | 9,945 | 17 | % | $ | 7,549 | 18 | % | $ | 2,396 | 32 | % | ||||||||||||
Maintenance, support
and service |
3,006 | 21 | 2,268 | 25 | 738 | 33 | ||||||||||||||||||
Total cost of revenue |
$ | 12,951 | 18 | $ | 9,817 | 19 | $ | 3,134 | 32 | |||||||||||||||
Gross Profit: |
||||||||||||||||||||||||
Product |
$ | 49,797 | 83 | $ | 34,544 | 82 | $ | 15,253 | 44 | |||||||||||||||
Maintenance, support
and service |
11,219 | 79 | 6,689 | 75 | 4,530 | 68 | ||||||||||||||||||
Total gross profit |
$ | 61,016 | 82 | $ | 41,233 | 81 | $ | 19,783 | 48 | |||||||||||||||
The $2.4 million increase in cost of product revenue was primarily due to (a) a $2.4
million increase in direct product costs resulting from an increase in the number of systems
recognized as revenue, (b) a $96,000 increase in salaries, wages and related benefits, and (c) a
$56,000 increase in stock-based compensation expense. These increases were partially offset by a
decrease of $99,000 in manufacturing supplies. The balance was due to decreases in other
manufacturing related costs.
The $738,000 increase in cost of maintenance, support and service revenue was primarily
due to (a) a $426,000 increase in salaries and related benefits corresponding to a 30% increase in
employee headcount for our services organization to support our rapidly growing customer base, (b)
a $167,000 increase in stock-based compensation expense, and (c) a $58,000 increase in the reserve
for warranty repairs and product costs associated with performance of our maintenance obligations
due to the expansion of our customer installed base. The balance was due to increases in overhead
and other maintenance, support and service related costs.
Product gross margin increased 1 percentage point primarily due to an increase in the
number of units sold in the first quarter of 2011 compared to 2010, which resulted in fixed
manufacturing costs being absorbed by a higher product volume base. The platform product mix was
also a factor for the increase in the average selling price of systems sold in 2011.
Gross margin on maintenance, support and service revenue increased by 4 percentage
points, primarily due to an increase in maintenance revenues associated with the growth in our
installed product base, and the timing of maintenance renewal orders received in the three months
ended March 31, 2011, without a corresponding increase in related costs.
We expect cost of product revenue and cost of maintenance, support and service revenue
each to increase at approximately the same rate as the related revenue for the foreseeable future.
As a result, we expect that gross profit will increase, but that the related gross margin will
remain relatively consistent with historical rates for the foreseeable future.
Operating Expenses
Three Months Ended March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Sales and marketing |
$ | 23,703 | 32 | % | $ | 16,427 | 32 | % | $ | 7,276 | 44 | % | ||||||||||||
Research and development |
11,294 | 16 | 8,693 | 17 | 2,601 | 30 | ||||||||||||||||||
General and administrative |
4,577 | 6 | 3,284 | 6 | 1,293 | 39 | ||||||||||||||||||
Merger and integration-related costs |
180 | * | | * | 180 | * | ||||||||||||||||||
Total operating expenses |
$ | 39,754 | 54 | % | $ | 28,404 | 56 | % | $ | 11,350 | 40 | |||||||||||||
* | Not meaningful |
The $7.3 million increase in sales and marketing expense was primarily due to (a) a $4.0
million increase in salaries, commissions, bonuses and other benefits associated with a 38%
increase in the number of sales and marketing personnel and our overall financial performance in
the first quarter of 2011, (b) a $1.7 million increase in stock-based compensation expense, (c) a
$631,000 increase in travel and entertainment expenses reflecting the afore-mentioned increase in
related headcount, (d) a $333,000 increase in expenditures associated with marketing programs,
including trade shows, (e) a $245,000 increase in facility costs as a result of our move to a
larger facility in the second half of 2010, (f) a $134,000 increase in depreciation and
amortization expense due to capital expenditures for evaluation systems, and (g) a $114,000
increase in third party services. The balance was due to increased overhead associated with
increases in sales and marketing personnel. We expect sales and marketing expense to continue to
increase in absolute dollars for the foreseeable future as we expand our sales force to continue to
increase our revenue and market share. We anticipate that sales and marketing expense will remain
relatively consistent as a percentage of total revenue for the foreseeable future.
The $2.6 million increase in research and development expense was primarily due to (a) a
$1.5 million increase in salaries, bonuses and other benefits associated with a 34% increase in the
number of employees working on the design and development of new products and the enhancement of
existing products, quality assurance and testing
(b) an $823,000 increase in
stock-based compensation expense, and (c) a
20
Table of Contents
$207,000 increase in facilities costs as a result of
our move to a larger facility in the second half of 2010. The addition of personnel and our
continued investment in research and development were driven by our strategy of maintaining our
competitive position by expanding our product offerings and enhancing our existing products to meet
the requirements of our customers and market. We expect research and development expense to
increase in absolute dollars and will modestly increase as a percentage of total revenue for the
foreseeable future.
The $1.5 million increase in general and administrative expense was primarily due to (a)
a $477,000 increase in stock-based compensation expense, (b) a $333,000 increase in
salaries, bonuses and other benefits associated with a 33% increase in the number of employees,
(c) a $218,000 increase in legal fees, (d) a $149,000 increase in software and other
maintenance fees, and (e) an $89,000 increase in insurance premiums. The balance was due to
increased facility and overhead costs as a result of our move to a larger facility in 2010. We
expect general and administrative expense to continue to increase in absolute dollars as we invest
in infrastructure to support continued growth and incur expenses related to being a publicly traded
company. However, we expect general and administrative expense will remain relatively consistent as
a percentage of total revenue for the foreseeable future.
During the first quarter of 2011, we incurred $180,000 of merger and integration-related
costs associated with our acquisition of Newfound Communications, Inc., or Newfound Communications,
which closed on January 20, 2011. Newfound Communications
operations were not material to our condensed consolidated financial
statements in the first quarter of 2011.
Other Income (Expense)
Three Months Ended March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest income |
$ | 210 | * | % | $ | 105 | * | % | $ | 105 | 100 | % | ||||||||||||
Other expense |
(108 | ) | * | (116 | ) | * | 8 | 7 | ||||||||||||||||
Total other income, net |
$ | 102 | * | % | $ | (11 | ) | * | % | $ | 113 | (1,027 | ) | |||||||||||
* | Not meaningful |
Interest income consisted of interest income generated from the investment of our cash
balances. The increase in interest income primarily reflected an increase in the average cash
balance, and to a lesser extent, higher average interest rates in the
three months ended March 31, 2011.
Other expense primarily consisted of foreign currency translation adjustments of our
international subsidiaries and sales consummated in foreign currencies. The decrease in expense
from 2010 to 2011 primarily reflects fluctuations in the value of the Euro and British Pound.
Provision for Income Taxes
Three Months Ended March 31, | |||||||||||||||||||||||||
2011 | 2010 | ||||||||||||||||||||||||
Percentage | Percentage | Period-to-Period | |||||||||||||||||||||||
of Total | of Total | Change | |||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||
Provision for income taxes |
$ | 7,655 | 10 | % | $ | 4,485 | 9 | % | $ | 3,170 | 71 | % |
For the three months ended March 31, 2011 and 2010, our effective tax rates were 36% and
35%, respectively. The lower effective tax rate in 2010 was primarily attributable to higher state
investment tax credits due to significant qualifying fixed asset additions associated with the
build out of our corporate headquarters.
Liquidity and Capital Resources
Resources
Since 2005, we have funded our operations primarily with the growth in our operating cash
flows and more recently, we have supplemented our cash flows from the exercise of stock options.
In October 2006, we completed an initial public offering, or IPO, and raised $83.2 million in net
proceeds after deducting underwriting discounts and commissions. To date we have not used nor
designated any of the proceeds from our IPO.
21
Table of Contents
Key measures of our liquidity are as follows:
As of and | ||||||||
As of and for | for the | |||||||
the Three | Year | |||||||
Months Ended | Ended | |||||||
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Cash and cash equivalents |
$ | 118,924 | $ | 91,669 | ||||
Short and long-term investments |
179,145 | 184,054 | ||||||
Accounts receivable, net |
43,275 | 34,797 | ||||||
Working capital |
308,944 | 278,960 | ||||||
Cash provided by operating activities |
11,541 | 55,119 | ||||||
Cash used in investing activities |
(4,273 | ) | (114,767 | ) | ||||
Cash provided by financing activities |
19,987 | 60,846 |
Cash, cash equivalents, short and long-term investments. Our cash and cash equivalents at
March 31, 2011 were invested primarily in high quality securities and are not materially affected
by fluctuations in interest rates. Our short and long-term investments consist of high quality
government treasuries and bonds. Cash and cash equivalents are held for working capital purposes.
We do not enter into investments for trading or speculative purposes. Restricted cash, which
totaled $837,000 at March 31, 2011 and December 31, 2010, is not included in cash and cash
equivalents, and was held in certificates of deposit as collateral for letters of credit related to
the lease agreements for our corporate headquarters in Bedford, Massachusetts and our sales office
in Madrid, Spain.
Accounts receivable, net. Our accounts receivable balance fluctuates from period to period,
which affects our cash flow from operating activities. The fluctuations vary depending on the
timing of our shipments and related invoicing activity, cash collections, and changes in our
allowance for doubtful accounts. In some situations we receive a cash payment from a customer prior
to the time we are able to recognize revenue on a transaction. We record these payments as deferred
revenue, which has a positive effect on our accounts receivable balances. We use days sales
outstanding, or DSO, calculated on a quarterly basis, as a measurement of the quality and status of
our receivables. We define DSO as (a) accounts receivable, net of allowance for doubtful accounts,
divided by (b) total revenue for the most recent quarter, multiplied by (c) 90 days. DSO was 53
days at March 31, 2011 and 45 days at December 31, 2010. The increase in DSO at March 31, 2011 was
primarily due to the timing of shipments and revenue recognition during the three months ended
March 31, 2011.
Operating activities. Cash provided by operating activities primarily consists of net income
adjusted for certain non-cash items including depreciation and amortization, impairment losses on
property and equipment, deferred income taxes, provision for bad debts, stock-based compensation
and the effect of changes in working capital and other activities. Cash provided by operating
activities in the three months ended March 31, 2011 was $11.5 million and consisted of (a) $13.7
million of net income, (b) non-cash deductions of
$2.1 million (consisting primarily of a deduction of $11.7
million related to the tax savings from the exercise, by employees, of stock options, partially
offset by $6.8 million of stock-based compensation, $2.4 million of depreciation and amortization,
$361,000 in amortization of premium/discount on investments, and $130,000 in provisions for bad
debts, and (c) $116,000 used in working capital and other activities. Cash used in working capital
and other activities primarily reflected uses associated with
increases of $8.5 million in
accounts receivable, $1.6 million in other assets and $407,000 in
inventory, partially offset by provisions associated with, a $6.5 million increase in deferred
revenues, a $1.9 million decrease in deferred product costs, a $1.4 million increase in accounts
payable and a $655,000 increase in accrued expenses and other liabilities.
Investing activities. Cash used in investing activities during the three months ended March
31, 2011 was $4.3 million, which included $149.1 million in purchases of marketable securities,
$4.6 million in purchases of property and equipment and $4.2 million in cash paid for the
acquisition of Newfound Communications, all partially offset by
proceeds of $153.7 million from
the maturities and sales of marketable securities.
Financing activities. Net cash provided by financing activities included proceeds from the
exercise of common stock options in the amount of $8.3 million during the three months ended March
31, 2010 and $11.7 million of excess tax benefits from the exercise of stock options.
Anticipated cash flows. We believe our existing cash, cash equivalents and short and long-term
investments and our cash flow from operating activities 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 rate of our revenue growth, our introduction of new products and
enhancements, and our expansion of sales, marketing and product development activities. To the
extent that our cash, cash equivalents, short and long-term investments 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 that will complement our existing
operations. In the event additional funding is required, and given the current condition of the
global financial markets, we may not be able to obtain bank credit arrangements or affect an equity
or debt financing on terms acceptable to us or at all.
Requirements
Capital expenditures. We have made capital expenditures primarily for equipment to support
product development, evaluation
systems for sales opportunities, improvements to our leased corporate headquarters in Bedford,
Massachusetts and other general purposes to support our growth. Our capital expenditures totaled
$4.6 million in the three months ended March 31, 2011. We estimate capital
expenditures of $12.0 -
$13.0 million in the remainder of 2011.
22
Table of Contents
Contractual obligations and requirements. Our only significant contractual obligations relate
to the lease of our corporate headquarters in Bedford, Massachusetts, to which we relocated in July
2010, and our office facilities in Madrid, Spain.
Off-Balance-Sheet Arrangements
As of March 31, 2011, we did not have any significant off-balance-sheet arrangements, as
defined in Item 303(a)(4)(ii) of Regulation S-K.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact our financial position due to adverse
changes in financial market prices and rates. Our market risk exposure is primarily a result of
fluctuations in foreign exchange rates and interest rates. We do not hold or issue financial
instruments for trading purposes.
Foreign Currency Exchange Risk
To date, substantially all of our international customer agreements have been denominated in
U.S. dollars. Accordingly, we have limited exposure to foreign currency exchange rates and do not
enter into foreign currency hedging transactions. The functional currency of our international
operations in Europe and Asia is the U.S. dollar. Accordingly, all operating assets and liabilities
of these international subsidiaries are remeasured into U.S. dollars using the exchange rates in
effect at the balance sheet date. Revenue and expenses of these international subsidiaries are
remeasured into U.S. dollars at the average rates in effect during the year. Any differences
resulting from the remeasurement of assets, liabilities and operations of the European and Asian
subsidiaries are recorded within other income in the consolidated statements of income. If the
foreign currency exchange rates fluctuated by 10% as of March 31, 2011, our foreign exchange
exposure would have fluctuated by approximately $280,000.
Interest Rate Risk
At March 31, 2011, we had unrestricted cash, cash equivalents and short and long-term
investments totaling $298.1 million. These amounts were invested primarily in high quality
securities of a short duration and are not materially affected by fluctuations in interest rates.
The cash and cash equivalents are held for working capital purposes. We do not enter into
investments for trading or speculative purposes. Due to the short nature of our short-term
investments and low current market yields of our long-term investments, we believe that we do not
have any material exposure to changes in the fair value of our investment portfolio as a result of
changes in interest rates. Declines in interest rates, however, would reduce future interest
income.
ITEM 4. Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer (our principal executive officer and our principal financial officer), evaluated the
effectiveness of our disclosure controls and procedures as of March 31, 2011. The term disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of
1934, as amended (the Exchange Act), means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the companys management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31,
2011, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2011 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
23
Table of Contents
PART IIOTHER INFORMATION
ITEM 1. Legal Proceedings.
We are not currently a party to any material litigation, and we are not aware of any pending
or threatened litigation against us that could have a material adverse effect on our consolidated
financial position, results of operations or cash flows. The software and communications
infrastructure industries are characterized by frequent claims and litigation, including claims
regarding patent and other intellectual property rights, as well as improper hiring practices. As a
result, we may be involved in various legal proceedings from time to time.
ITEM 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report on Form 10-Q and the
risks discussed below, you should carefully consider the factors discussed under the heading, Risk
Factors in Item IA of Part I of our most recent Annual Report on Form 10-K, some of which are
updated below. These are risks and uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking statements contained in this
Quarterly Report on Form 10-Q. Because of the following factors, as well as other variables
affecting our operating results, past financial performance should not be considered as a reliable
indicator of future performance and investors should not use historical trends to anticipate
results or trends in future periods. These risks are not the only ones facing the Company. Please
also see Cautionary Statement on page 13 of this Quarterly Report on Form 10-Q.
Risks Relating to Our Business
We rely on many distribution partners to assist in selling our products, and if we do not develop
and manage these relationships effectively, our ability to generate revenue and control expenses
will be adversely affected.
As of March 31, 2011, we had 143 distribution partners. Our success is highly dependent
upon our ability to continue to establish and maintain successful relationships with these
distribution partners from whom, collectively, we derive a significant portion of our revenue, and
who may comprise a concentrated amount of our accounts receivable at any point in time. Revenue
derived through distribution partners accounted for 49% and 50% of our total revenue in the three
months ended March 31, 2011 and 2010, respectively. Two distribution partners accounted for 27%
and one for 10%, of our accounts receivable as of March 31, 2011 and December 31, 2010,
respectively. Given the current global economic conditions, there is a risk that one or more of our
distribution partners could cease operations. Although we have entered into contracts with each of
our distribution partners, our contractual arrangements are not exclusive and do not obligate our
distribution partners to order, purchase or distribute any fixed or minimum quantities of our
products. Accordingly, our distribution partners, at their sole discretion, may choose to purchase
solutions from our competitors rather than from us. Under our contracts with our distribution
partners, generally products are ordered from us by the submission of purchase orders that
describe, among other things, the type and quantities of our products desired, delivery date and
terms applicable to the ordered products. Accordingly, our ability to sell our products and
generate significant revenue through our distribution partners is highly dependent on the continued
desire and willingness of our distribution partners to purchase and distribute our products and on
the continued cooperation between us and our distribution partners. Some of our distribution
partners may develop competitive products in the future or may already have other product offerings
that they may choose to offer and support in lieu of our products. Divergence in strategy, change
in focus, competitive product offerings, potential contract defaults, and changes in ownership or
management of a distribution partner may interfere with our ability to market, license, implement
or support our products with that party, which in turn may have a material adverse effect on our
consolidated financial position, results of operations or cash flows. Some of our competitors may
have stronger relationships with our distribution partners than we do, and we have limited control,
if any, as to whether those partners implement our products rather than our competitors products
or whether they devote resources to market and support our competitors products rather than our
offerings.
Moreover, if we are unable to leverage our sales, support and services resources through
our distribution partner relationships, we may need to hire and train additional qualified sales,
support and services personnel. We cannot assure you, however, that we will be able to hire
additional qualified sales, support and services personnel in these circumstances and our failure
to do so may restrict our ability to generate revenue or release our products on a timely basis.
Even if we are successful in hiring additional qualified sales, support and services personnel, we
will incur additional costs and our operating results, including our gross margin, may have a
material adverse effect on our consolidated financial position, results of operations or cash
flows.
We depend on a limited number of customers for a substantial portion of our revenue in any period,
and the loss of, or a significant shortfall in orders from, key customers could significantly
reduce our revenue.
We derive a substantial portion of our total revenue in any period from a limited number of
customers as a result of the nature of our target market and the current stage of our development.
During any given period, a small number of customers may each account for 10% or more of our
revenue. For example one such customer accounted for 11% of our total revenue in the three months
ended March 31 2011 and two such customers accounted for 43% of our total revenue in the three
months ended March 31, 2010. Additionally, we do not enter into long term purchase contracts with
our customers, and we have no contractual arrangements to ensure future sales of our products to
our existing customers. Our inability to generate anticipated revenue from our key existing or
targeted customers, or a significant shortfall in sales
24
Table of Contents
to them could have a material adverse effect on our consolidated financial
position, results of operations or cash flows. Our operating results in the foreseeable future will
continue to depend on our ability to effect sales to existing and other large customers.
If we are unable to manage our growth and expand our operations successfully, our business and
operating results will be harmed and our reputation may be damaged.
We continued to expand our operations in 2010 and the first three months of 2011. For example,
during the period from December 31, 2009 through March 31, 2011, we increased the number of our
employees and full-time independent contractors by 42%, from 450 to 641. We have also increased the
number of our employees and full-time independent contractors located outside the United States in
multiple countries and as a result we are required to comply with varying local laws for each of
these new locations. In addition, our total operating expenses increased by 18% in 2008, 23% in
2009, 30% in 2010 and for the three months ended March 31, 2011 were 40% higher than for the three
months ended March 31, 2010. We anticipate that further expansion of our infrastructure and
headcount will be required to achieve planned expansion of our product offerings, projected
increases in our customer base and anticipated growth in the number of product deployments. Our
rapid growth has placed, and will continue to place, a significant strain on our administrative and
operational infrastructure. Our ability to manage our operations and growth, especially during the
present macroeconomic crisis, and across multiple countries, will require us to continue to refine
our operational, financial and management controls, human resource policies, and reporting systems
and processes.
We may not be able to implement improvements to our management information and control
systems in an efficient or timely manner and may discover deficiencies in existing systems and
controls. If we are unable to manage future expansion, our ability to provide high quality products
and services could be harmed, which would damage our reputation and brand and may have a material
adverse effect on our consolidated financial position, results of operations or cash flows.
Over the long term we intend to increase our investment in engineering, sales, marketing, service,
manufacturing and administration activities, and these investments may achieve delayed, or lower
than expected benefits, which could harm our operating results.
Over the long term, we intend to continue to add personnel and other resources to our
engineering, sales, marketing, service, manufacturing and administrative functions as we focus on
developing emerging technologies, the next wave of advanced technologies, capitalizing on our
emerging market opportunities, enhancing our evolving support model and increasing our market share
gains. We are likely to recognize the costs associated with these investments earlier than some of
the anticipated benefits and the return on these investments may be lower, or may develop more
slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if
the achievement of these benefits is delayed, our consolidated financial position, results of
operations or cash flows may be adversely affected.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Sales of Unregistered Securities
None.
(b) Use of Proceeds from Public Offering of Common Stock
In October 2006, we completed an initial public offering, or IPO, of our common stock pursuant
to a registration statement on Form S-1 (Registration No. 333-134683) which the Securities and
Exchange Commission, or SEC, declared effective on October 12, 2006. In connection with the IPO, we
sold and issued 9.7 million shares of our common stock, including 1.7 million shares sold by us
pursuant to the underwriters full exercise of their option, and another additional 3.5 million
shares of our common stock were sold by our selling stockholders. The offering did not terminate
until after the sale of all of the shares registered in the registration statement. All of the
shares of common stock registered pursuant to the registration statement, including the shares sold
by the selling shareholders, were sold at a price to the public of $9.50 per share. The managing
underwriters were Goldman, Sachs & Co., JPMorgan, Credit Suisse and Think Equity Partners LLC.
We raised a total of $92.4 million in gross proceeds from the IPO, or approximately $83.2
million in net proceeds after deducting underwriting discounts and commissions of $6.5 million and
other estimated offering costs of approximately $2.7 million. None of our net proceeds from the IPO
have been utilized to support business operations. Pending such application, we have invested the
remaining net proceeds in money market mutual funds and United States agency notes, in accordance
with our investment policy. None of the remaining net proceeds were paid, directly or indirectly,
to directors, officers, persons owning ten percent or more of our equity securities, or to any of
our other affiliates.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Removed and Reserved.
ITEM 5. Other Information.
25
Table of Contents
None.
ITEM 6. Exhibits.
The following is an index of the exhibits included in this report:
Exhibit No. | Description | |
2.1
|
Agreement and Plan of Merger dated as of April 29, 2009 by and among Acme Packet, Inc., PAIC Midco Corp., CIAP Merger Corp., Covergence, Inc. and the stockholder representative named therein (incorporated by reference to Exhibit 2.1 to the Registrants Current Report on Form 8-K filed on April 30, 2009 (Commission File No. 001-33041)).* | |
3.1
|
Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrants Registration Statement on Form S-1 (Commission File No. 333-134683)).* | |
3.2
|
Second Amended and Restated Bylaws of the Registrant (incorporated by reference to the Registrants Current Report of Form 8-K filed on December 11, 2007 (Commission File No. 001-33041)).* | |
31.1
|
Certification of Chief Executive Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Chief Financial Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101
|
The following materials from Acme Packet, Inc.s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Cash Flow, and (iv) Notes to Condensed Consolidated Financial Statements, are furnished herewith. | |
101.INS
|
XBRL Instance Document.** | |
101.SCH
|
XBRL Taxonomy Extension Schema Document.** | |
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document.** | |
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document.** | |
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document.** | |
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document.** |
* | Previously filed or incorporated by reference into Acme Packet, Inc.s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (filed on April 26, 2011). | |
** | Furnished with this Form 10-Q/A. |
26
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ACME PACKET, INC. (Registrant) |
||||
By: | /s/ Andrew D. Ory | |||
Date: July 12, 2011 | Andrew D. Ory | |||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: July 12, 2011 | By: | /s/ Peter J. Minihane | ||
Peter J. Minihane | ||||
Chief Financial Officer and Treasurer (Principal Financial Officer) |
||||
27