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EXCEL - IDEA: XBRL DOCUMENT - ACME PACKET INCFinancial_Report.xls
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EX-99.4 - FORM OF RESTRICTED STOCK UNIT AGREEMENT FOR THE 2006 EQUITY INCENTIVE PLAN - ACME PACKET INCd311161dex994.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - ACME PACKET INCd311161dex312.htm
EX-99.3 - FORM OF NON-STATUTORY STOCK OPTION AGREEMENT FOR THE 2006 EQUITY INCENTIVE PLAN - ACME PACKET INCd311161dex993.htm
EX-99.1 - FORM OF INCENTIVE STOCK OPTION AGREEMENT FOR THE 2006 EQUITY INCENTIVE PLAN - ACME PACKET INCd311161dex991.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - ACME PACKET INCd311161dex311.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - ACME PACKET INCd311161dex321.htm
EX-99.2 - FORM OF NON-STATUTORY STOCK OPTION AGREEMENT FOR THE 2006 EQUITY INCENTIVE PLAN - ACME PACKET INCd311161dex992.htm
Table of Contents

 

 

 

LOGO

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

or

 

¨ 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   04-3526641

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

100 Crosby Drive

Bedford, MA 01730

(Address of principal executive offices) (zip code)

(781) 328-4400

(Registrant’s 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.     x  Yes     ¨  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).     x  Yes     ¨  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   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

The number of shares outstanding of each of the issuer’s classes of common stock, as of April 27, 2012: 68,357,725

 

 

 


Table of Contents

ACME PACKET, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

Table of Contents

 

Item

       Page
No.
 

PART I. FINANCIAL INFORMATION

     3   
Item 1.  

Financial Statements:

     3   
 

Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 (unaudited)

     3   
 

Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March  31, 2012 and 2011 (unaudited)

     4   
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March  31, 2012 and 2011 (unaudited)

     5   
 

Notes to Condensed Consolidated Financial Statements

     6   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operation

     11   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     20   
Item 4.  

Controls and Procedures

     20   
PART II. OTHER INFORMATION      21   
Item 1.  

Legal Proceedings

     21   
Item 1A.  

Risk Factors

     21   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     23   
Item 3.  

Defaults Upon Senior Securities

     23   
Item 4.  

Mine Safety Disclosures

     23   
Item 5.  

Other Information

     23   
Item 6.  

Exhibits

     24   

 

2


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)

 

     March 31,
2012
    December 31,
2011
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 128,151      $ 160,403   

Short-term investments

     247,713        191,672   

Accounts receivable, net of allowance of $1,768 and $1,571, respectively

     60,568        59,739   

Inventory

     11,003        10,246   

Deferred product costs

     864        1,515   

Deferred tax asset, net

     4,809        4,809   

Income taxes receivable

     4,634        4,341   

Other current assets

     5,183        4,385   
  

 

 

   

 

 

 

Total current assets

     462,925        437,110   

Long-term investments

     25,451        20,096   

Property and equipment, net

     27,530        26,252   

Intangible assets, net

     8,078        8,569   

Goodwill

     3,778        3,778   

Deferred tax asset, net

     18,371        18,371   

Other assets

     239        230   
  

 

 

   

 

 

 

Total assets

   $ 546,372      $ 514,406   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 7,125      $ 10,318   

Accrued expenses and other current liabilities

     13,238        12,715   

Deferred revenue

     34,822        22,261   
  

 

 

   

 

 

 

Total current liabilities

     55,185        45,294   
  

 

 

   

 

 

 

Deferred rent

     4,495        4,533   
  

 

 

   

 

 

 

Deferred revenue, net of current portion

     2,304        2,049   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 10)

    

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 75,110,020 and 74,386,524 shares, respectively

     75        74   

Additional paid-in capital

     383,191        363,769   

Treasury stock, at cost — 6,780,061 shares

     (37,522     (37,522

Accumulated other comprehensive income

     7        1   

Retained earnings

     138,637        136,208   
  

 

 

   

 

 

 

Total stockholders’ equity

     484,388        462,530   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 546,372      $ 514,406   
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

ACME PACKET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(unaudited)

(in thousands, except share and per share data)

 

     Three Months Ended
March  31,
 
     2012     2011  

Revenue:

    

Product

   $ 53,464      $ 59,742   

Maintenance, support and service

     17,366        14,225   
  

 

 

   

 

 

 

Total revenue

     70,830        73,967   
  

 

 

   

 

 

 

Cost of revenue (1):

    

Product

     9,978        9,945   

Maintenance, support and service

     3,958        3,006   
  

 

 

   

 

 

 

Total cost of revenue

     13,936        12,951   
  

 

 

   

 

 

 

Gross profit

     56,894        61,016   
  

 

 

   

 

 

 

Operating expenses (1):

    

Sales and marketing

     31,002        23,703   

Research and development

     15,097        11,294   

General and administrative

     6,438        4,577   

Merger and integration-related costs

     37        180   
  

 

 

   

 

 

 

Total operating expenses

     52,574        39,754   
  

 

 

   

 

 

 

Income from operations

     4,320        21,262   
  

 

 

   

 

 

 

Other income (expense):

    

Interest income

     115        210   

Other expense

     (21     (108
  

 

 

   

 

 

 

Total other income, net

     94        102   
  

 

 

   

 

 

 

Income before provision for income taxes

     4,414        21,364   

Provision for income taxes

     1,985        7,655   
  

 

 

   

 

 

 

Net income

   $ 2,429      $ 13,709   
  

 

 

   

 

 

 

Net income per share (Note 8):

    

Basic

   $ 0.04      $ 0.21   

Diluted

   $ 0.03      $ 0.19   

Weighted average number of common shares used in the calculation of net income per share:

    

Basic

     67,953,550        65,076,303   

Diluted

     70,858,871        70,476,973   

Comprehensive income

   $ 2,436      $ 13,751   

 

(1)    Amounts include stock-based compensation expense, as follows:

    

Cost of product revenue

   $ 422      $ 224   

Cost of maintenance, support and service revenue

     690        395   

Sales and marketing

     6,292        3,298   

Research and development

     4,229        1,971   

General and administrative

     2,052        898   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

ACME PACKET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

Operating activities

    

Net income

   $ 2,429      $ 13,709   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     2,467        1,929   

Amortization of intangible assets

     491        429   

Provision for accounts receivable allowances

     216        130   

Amortization of premium/discount on investments

     337        361   

Stock-based compensation expense

     13,685        6,786   

Provision for excess and obsolete inventory

     —          348   

Excess tax benefit related to exercise of stock options

     (1,986     (11,687

Change in operating assets and liabilities, net of acquisition:

    

Accounts receivable

     (1,045 )     (8,536 )

Inventory

     (757     (755

Deferred product costs

     651        1,882   

Other assets

     (1,100     (1,620

Accounts payable

     (3,193     1,449   

Accrued expenses, other current liabilities and deferred rent

     1,684        655   

Deferred revenue

     12,816        6,461   
  

 

 

   

 

 

 

Net cash provided by operating activities

     26,695        11,541   
  

 

 

   

 

 

 

Investing activities

    

Purchases of property and equipment

     (3,745     (4,644

Purchases of marketable securities

     (214,536     (149,106

Proceeds from sale and maturities of marketable securities

     152,809        153,662   

Cash paid for acquisition, net

     —          (4,185
  

 

 

   

 

 

 

Net cash used in investing activities

     (65,472 )     (4,273
  

 

 

   

 

 

 

Financing activities

    

Proceeds from exercise of stock options

     4,539        8,300   

Excess tax benefit related to exercise of stock options

     1,986        11,687   
  

 

 

   

 

 

 

Net cash provided by financing activities

     6,525        19,987   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (32,252 )     27,255   

Cash and cash equivalents at beginning of period

     160,403        91,669   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 128,151      $ 118,924   
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

ACME PACKET, INC.

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 trusted, first class delivery of next-generation voice, video, data and unified communications services and applications across Internet Protocol (IP) networks.

The Company’s Net-Net product family fulfills demanding security, service assurance and regulatory requirements in service provider, enterprise and contact center networks. Based in Bedford, Massachusetts, the Company designs and manufactures its products in the United States (U.S.).

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited. These condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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 U.S. 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 Company’s Annual Report on Form 10-K, and include all adjustments (consisting of normal, recurring adjustments) necessary for the fair presentation of the Company’s financial position at March 31, 2012 and statements of income and comprehensive income and cash flows for the three months ended March 31, 2012 and 2011. The interim periods are not necessarily indicative of the results to be expected for any other interim period or the full year.

As of March 31, 2012, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, have not changed.

Subsequent Events

On April 25, 2012, the Company acquired privately held IPTEGO GmbH (Iptego), an IP communications network management software company for approximately $21,000 in cash. Based in Berlin, Germany, Iptego is a rapidly growing provider of software solutions that offer real-time, end-to-end communications network intelligence, voice and video operations monitoring, customer experience management and fraud prevention and detection. This acquisition and Iptego’s operations prior to the acquisition are not material to the Company’s financial statements. In connection with the acquisition of Iptego, the Company incurred $37 of merger and integration-related costs during 2012, which the Company recorded as an expense in its condensed consolidated statement of income and comprehensive income for the three months ended March 31, 2012.

2. Cash, Cash Equivalents, Short and Long-Term Investments

Cash, cash equivalents, short and long-term investments as of March 31, 2012 and December 31, 2011 consist of the following:

 

     As of March 31, 2012  
     Contracted
Maturity
   Amortized
Cost
     Fair
Market
Value
     Carrying
Value
 

Cash

   Demand    $ 83,367       $ 83,367       $ 83,367   

Money market funds

   Demand      5,004         5,004         5,004   

U.S. agency notes—available-for-sale

   33 – 45 days      6,006         6,028         6,028   

U.S. agency notes—held-to-maturity

   4 – 61 days      33,752         33,750         33,752   
     

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

      $ 128,129       $ 128,149       $ 128,151   
     

 

 

    

 

 

    

 

 

 

U.S. agency notes—available-for-sale

   2 – 420 days    $ 87,945       $ 87,951       $ 87,951   

U.S. agency notes—held-to-maturity

   25 – 334 days      159,762         159,752         159,762   
     

 

 

    

 

 

    

 

 

 

Total short-term marketable securities

      $ 247,707       $ 247,703       $ 247,713   
     

 

 

    

 

 

    

 

 

 

U.S. agency notes—held-to-maturity

   380 – 438 days    $ 25,451       $ 25,447       $ 25,451   
     

 

 

    

 

 

    

 

 

 

Total long-term marketable securities

      $ 25,451       $ 25,447       $ 25,451   
     

 

 

    

 

 

    

 

 

 

 

6


Table of Contents
     As of December 31, 2011  
     Contracted
Maturity
   Amortized
Cost
     Fair
Market
Value
     Carrying
Value
 

Cash

   Demand    $ 112,735       $ 112,735       $ 112,735   

Money market funds

   Demand      5,938         5,938         5,938   

U.S. agency notes—available-for-sale

   20 – 88 days      10,000         9,999         9,999   

U.S. agency notes—held-to-maturity

   25 – 65 days      31,731         31,728         31,731   
     

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

      $ 160,404       $ 160,400       $ 160,403   
     

 

 

    

 

 

    

 

 

 

U.S. agency notes—available-for-sale

   15 – 426 days    $ 89,954       $ 89,242       $ 89,242   

U.S. agency notes—held-to-maturity

   32 – 352 days      102,430         102,442         102,430   
     

 

 

    

 

 

    

 

 

 

Total short-term marketable securities

      $ 192,384       $ 191,684       $ 191,672   
     

 

 

    

 

 

    

 

 

 

U.S. agency notes—held-to-maturity

   374 – 439 days    $ 20,096       $ 20,097       $ 20,096   
     

 

 

    

 

 

    

 

 

 

Total long-term marketable securities

      $ 20,096       $ 20,097       $ 20,096   
     

 

 

    

 

 

    

 

 

 

To date, realized gains and losses from the sales of cash equivalents or short or long-term investments have been immaterial.

3. Inventory

Inventory is stated at the lower of cost, determined on a first in, first out basis, or market, and consists primarily of raw material and finished products. Inventory is comprised of the following as of:

 

     March 31,
2012
     December 31,
2011
 

Raw materials

   $ 3,652       $ 3,181   

Finished goods

     7,351         7,065   
  

 

 

    

 

 

 

Total inventory

   $ 11,003       $ 10,246   
  

 

 

    

 

 

 

4. Concentrations of Credit Risk and Off-Balance Sheet Risk

The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, as follows:

 

     Three Months Ended
March 31,
 
     2012     2011  

Customer A

     16      *   

Customer B

     *        11 

 

* Less than 10% of total revenue.

The Company had certain customers whose accounts receivable balances individually represented 10% or more of the Company’s accounts receivable, as of:

 

     March 31,
2012
    December 31,
2011
 

Customer C

         28 

 

* Less than 10% of total accounts receivable.

5. Product Warranties

The following is a summary of changes in the amount reserved for warranty costs for the three months ended March 31, 2012:

 

Balance at December 31, 2011

   $ 98   

Provision for warranty costs

     242   

Uses/reductions

     (175
  

 

 

 

Balance at March 31, 2012

   $ 165   
  

 

 

 

 

7


Table of Contents

6. Stock-Based Compensation

The weighted-average assumptions utilized to determine the fair value of stock options granted and shares issued under the Company’s Employee Stock Purchase Plan was estimated at the date of grant using the following assumptions:

 

         Three Months Ended    
March  31,
 
     2012     2011  

Employee Stock Options

    

Risk-free interest rate

     0.76 %     2.18 %

Expected volatility

     79.50 %     59.75 %

Expected life in years

     3.99        4.75   

Dividend yield

     —          —     

 

       Three Months Ended  
March 31,
 
     2012     2011  

Purchase Plan

    

Risk-free interest rate

     0.05 %     —  

Expected volatility

     82.36 %     —  

Expected life in years

     0.50        —     

Dividend yield

     —          —     

The Company recorded stock-based compensation expense of $13,685 and $6,786 for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, there was $118,987 of unrecognized stock-based compensation expense related to stock-based awards that is expected to be recognized over a weighted-average period of 2.75 years. Of the $13,685 recorded in the three months ended March 31, 2012, $787 relates to the Company’s first quarter 2012 bonus, which will be paid out as stock in the second quarter of 2012 and has been accrued for as bonus expense in the March 31, 2012 financial statements.

The following is a summary of the status of the Company’s stock options as of March 31, 2012 and the stock option activity for all stock option plans during the three months ended March 31, 2012:

 

     Number of
Shares
    Exercise Price
Per Share
     Weighted-
Average
Exercise
Price Per
Share
     Weighted-
Average
Remaining
Contractual
Life (Years)
     Aggregate
Intrinsic
Value(1)
 

Outstanding at December 31, 2011

     9,344,681      $ 0.20 – 82.02       $ 24.18         

Granted

     3,065,314        27.26 – 34.29         34.22         

Canceled

     (140,533     4.35 – 82.02         39.13         

Exercised

     (556,899     0.20 – 28.44         8.15          $ 17,609   
  

 

 

            

 

 

 

Outstanding at March 31, 2012

     11,712,563        0.20 – 82.02         27.39         5.21       $ 107,978   
  

 

 

            

 

 

 

Exercisable at March 31, 2012

     3,837,183        0.20 – 82.02         16.70         4.18       $ 61,961   
  

 

 

            

 

 

 

Vested or expected to vest at March 31, 2012 (2)

     11,105,722        0.20 – 82.02         26.79         5.15       $ 107,142   
  

 

 

            

 

 

 

 

(1) The aggregate intrinsic value was calculated based on the positive difference between the fair value of the Company’s common stock on March 30, 2012 of $27.52, 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, 2012 plus the number of unvested options expected to vest as of March 31, 2012 based on the unvested options outstanding at March 31, 2012, adjusted for the estimated forfeiture rate.

The following is a summary of the Company’s unvested RSUs outstanding at March 31, 2012 and the changes during the three months then ended:

 

     Number
of shares
    Weighted-
Average
Grant
Date Fair
Value
 

Unvested at December 31, 2011

     346,732      $ 21.91   

Granted

     23,000        34.29   

Vested

     (166,597     16.62   

Forfeited

     (1,666     13.04   
  

 

 

   

Unvested at March 31, 2012

     201,469        27.77   
  

 

 

   

 

8


Table of Contents

7. 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, and relates to unrealized gains on available-for-sale securities in the three months ended March 31, 2012 and 2011.

Comprehensive income for the periods indicated is as follows:

 

     Three Months Ended
March 31,
 
     2012      2011  

Net income

   $ 2,429       $ 13,709   

Unrealized gain on available-for-sale securities

     7         42   
  

 

 

    

 

 

 

Comprehensive income

   $ 2,436       $ 13,751   
  

 

 

    

 

 

 

8. 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,
 
     2012      2011  

Weighted-average number of common shares used in calculating basic net income per share

     67,953,550         65,076,303   

Weighted-average number of common shares issuable upon exercise of outstanding stock options, based on the treasury stock method

     2,819,308         5,219,048   

Weighted-average number of common shares issuable upon vesting of outstanding restricted stock units

     86,013         181,622   
  

 

 

    

 

 

 

Weighted-average number of common shares used in computing diluted net income per share

     70,858,871         70,476,973   
  

 

 

    

 

 

 

In the computation of the diluted weighted-average number of common shares outstanding, 4,882,020 and 980,692 weighted-average common share equivalents underlying outstanding stock options have been excluded from the computation as of March 31, 2012 and 2011, respectively, as their effect would have been antidilutive.

9. Income Taxes

For the three months ended March 31, 2012 and 2011, the Company’s effective income tax rate was approximately 45% and 36%, respectively. As of March 31, 2012, the Company expects to realize recorded net deferred tax assets of $23,180. The Company’s 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 net deferred tax asset. The realization of the Company’s net deferred tax assets 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 Company’s recorded net deferred tax assets would not be realizable. Approximately $17,839 of the deferred tax assets recorded as of March 31, 2012 was attributable to benefits associated with stock-based compensation charges. In accordance with the provision of 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.

10. Commitments and 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, 2012 the Company did not have any pending claims, charges or litigation that it expects would have a material adverse effect on its consolidated financial position, results of operations or cash flows that have not been disclosed.

Other

Certain of the Company’s 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.

 

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11. Segment Information

Geographic Data

Total revenue to unaffiliated customers by geographic area was as follows:

 

     Three Months Ended
March 31,
 
     2012      2011  

United States and Canada

   $ 43,815       $ 44,602   

International

     27,015         29,365   
  

 

 

    

 

 

 

Total

   $ 70,830       $ 73,967   
  

 

 

    

 

 

 

During the three months ended March 31, 2012 and 2011, no one international country contributed more than 10% of the Company’s total revenue.

As of March 31, 2012 and 2011, property and equipment at locations outside the U.S. were not material.

12. Fair Value Measurements

The following table sets forth the Company’s financial instruments carried at fair value within the accounting standard hierarchy and using the lowest level of input as of March 31, 2012:

 

     Quoted
Prices in
Active
Markets
for
Identical
Items
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  

Assets:

           

Money market funds

   $ 5,004       $ —         $ —         $ 5,004   

U.S. agency notes

     —           39,778         —           39,778   

Restricted cash

     69         —           —           69   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash equivalents and restricted cash

     5,073         39,778         —           44,851   
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term U.S. agency notes

     —           247,703         —           247,703   

Long-term U.S. agency notes

     —           25,447         —           25,447   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     —           273,150         —           273,150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 5,073       $ 312,928       $ —         $ 318,001   
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized gains and losses from sales of the Company’s investments are included in other income and unrealized gains and losses from available-for-sale securities are included as a separate component of stockholders’ equity unless the loss is determined to be other-than-temporary. The Company has not incurred any other-than-temporary losses to date.

The Company measures eligible assets and liabilities at fair value with changes in fair 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, 2012.

 

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Item 2. Management’s 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 and our competitors;

 

   

the effect of the worldwide economy on the demand 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 leader in session delivery network solutions which enable the trusted, first class delivery of next-generation voice, video, data and unified communications services and applications across Internet Protocol, or IP, networks.

A session delivery network helps individuals and organizations overcome the limitations inherent in using the Internet, or other best-efforts, unsecured IP networks, for session-based voice, video, data, unified communications and collaboration. A session delivery network “layers” complementary intelligence and controls “over” an IP transport network composed of IP routers and Ethernet switches. With the IP transport network providing basic packet routing and delivery services, the “overlay” session delivery network provides critical session border control and session management functions that ensure prioritized, secure and trusted delivery of a broad range of services and applications encompassing voice, video, data, and unified communications and collaboration.

Session delivery networks are comprised of several different product categories that work together to deliver trusted, first class services and applications. Acme Packet is the world’s leading provider of session border controllers, or SBCs, that are the cornerstones of session delivery networks. SBCs control session delivery across defined border points where IP networks connect, known as network borders. SBCs are deployed at network borders between two service providers or between a service provider and its enterprise, residential or mobile customers.

In addition to SBCs, session delivery networks need additional products to perform critical roles:

 

   

Session manager, or SM, manages user access and interface application servers;

 

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Multiservice security gateway, or MSG, secures session delivery of data and voice services over untrusted Internet and wireless fidelity, or WiFi, access networks;

 

   

Diameter signaling controller, or DSC, controls diameter signaling within long-term evolution, or LTE, networks and enable LTE data and voice session roaming;

 

   

Session-aware load balancer, or SLB, scales border control for SBC, MSG and DSC deployments;

 

   

Session routing proxy, or SRP, routes sessions to and from access and interconnect borders;

 

   

Application session controller, or ASC, enables Web 2.0 server applications to initiate and control sessions; and

 

   

Session recorder, or SR, performs session recording for the session delivery network.

Acme Packet’s session delivery network solutions are used by over 1,600 Acme Packet customers in 108 countries. Our customers include fixed line, cable, mobile, transit and over-the-top, or OTT, communication service providers, as well as enterprises, contact centers and government organizations.

We sell our products and support services through over 230 distribution partners and through our direct sales force. Our distribution partners include many of the largest networking and IP communications equipment vendors throughout the world.

Our headquarters are located in Bedford, Massachusetts. We maintain sales offices in Beijing, China; Ipswich, United Kingdom; Madrid, Spain; Moscow, Russia; Seoul, South Korea and Tokyo, Japan. We also have sales and support personnel in Argentina, Australia, Belgium, Brazil, Canada, Columbia, Croatia, Czech Republic, France, Germany, Hong Kong, India, Indonesia, Israel, Italy, Malaysia, Mexico, the Netherlands, New Zealand, Peru, Poland, Saudi Arabia, Singapore, South Africa, Sweden, Taiwan, Thailand, United Arab Emirates and throughout the U.S. 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. Similarly, enterprises have traditionally used the PSTN for voice services and the Internet for data applications. The PSTN provides high reliability and security but is costly to operate and is limited in its ability to support high 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.

Both service providers and enterprises are migrating to a single IP network architecture to serve as the foundation for their next generation voice, video, multimedia and data services and applications. In order to provide trusted, 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 services and applications. 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 networks, the PSTN and an IP network, is 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.

 

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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 and 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 one or more networks.

Key Financial Statistics

Some of our key financial statistics for the first quarter of 2012, as compared to the same metric for the first quarter of 2011, include the following:

 

   

Total revenue was $70.8 million compared to $74.0 million,

 

   

Net income was $2.4 million compared to $13.7 million,

 

   

Earnings per share was $0.03 per share on a diluted basis compared to $0.19 per share on a diluted basis,

 

   

Cash provided by operating activities was $26.7 million compared to $11.5 million, and

 

   

Cash provided by financing activities was $6.5 million compared to $20.0 million.

The Acme Packet Strategy

Principal elements of our strategy include:

 

   

Continuing to satisfy the evolving session delivery network requirements of enterprises and fixed-line, mobile and OTT service providers. Our network deployments position us to gain valuable knowledge that we can use to expand our product portfolio 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 their costs.

 

   

Investing in quality and responsive support. As we broaden our product family and increase the capabilities of our session delivery network solution, 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 users.

 

   

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 session delivery network 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 customers — service providers, enterprises, government agencies and contact centers — may be affected by ongoing 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) the cost of acquiring our products for sale, (e) new product introductions, (f) the mix of sales channels through which our products are sold, and (g) the costs of manufacturing our hardware products and providing our related support services. Customers license our software in various configurations depending on each customer’s 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 and licensed 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.

 

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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 delivery network solutions, we expect competition to persist and intensify in the future as the market grows. Our competitors vary by market segment and product category. In the service provider market, our primary competitors include GENBAND Inc., Telefonaktiebolaget LM Ericsson, Huawei Technologies Co., Ltd., Metaswitch Networks Ltd. and Sonus Networks Inc. In the enterprise market segment, our primary competitor is Cisco Systems, Inc. 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 delivery network solutions market opportunity grows, we expect competition from additional networking and IP communications equipment suppliers, including distribution partners.

 

   

Evolution of the Session Delivery Network Solutions Market. The market for our products 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. Demand is also dependent upon the respective geographic regions where our customers are located. For example, in 2011, we experienced a level of demand that was lower than we had expected from our service provider customers in North America, which had an adverse effect on our operations.

 

   

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 2011 and the first three months of 2012. During the period from January 1, 2011 through March 31, 2012 we increased the number of our employees and full time independent contractors by 34%, from 570 to 764. 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 recognize revenue after acceptance or when the non-standard terms are resolved, 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 customer 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 and licensed. 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, functionality 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.

 

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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 acquisitions of Covergence Inc. and Newfound Communications, Inc., or Newfound Communications.

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 (e) stock-based compensation and (f) warranty costs.

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 or licensed, (c) the mix between product and service revenue, (d) the cost of acquiring our products, (e) new product introductions, (f) the mix of sales channels through which our products are sold, (g) the volume and costs of manufacturing our hardware products, (h) the costs associated with fulfilling our maintenance and warranty obligations, and (i) 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 our operating expenses. During the period from January 1, 2011 through March 31, 2012, we increased the number of our employees and full time independent contractors by 36%, from 486 to 660. We expect to continue to hire new employees to support our anticipated 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 anticipate that sales and marketing expense will remain relatively consistent as a percentage of revenue in the future.

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 expenses consist of transaction expenses related to business acquisitions and consist of costs related to professional service fees related to the acquisition.

Stock-Based Compensation

Cost of revenue and operating expenses include stock-based compensation expense. We expense share-based payment awards with compensation cost for share-based payment transactions measured at fair value. For the three months ended March 31, 2012 and 2011, we recorded expense of $13.7 million and $6.8 million, respectively, in connection with share-based payment awards. Based on share-based awards granted from 2007 through 2012, a future expense of non-vested options of $119.0 million is expected to be recognized over a weighted-average period of 2.75 years.

Other Income (Expense)

        Other income consists primarily of gains or losses from foreign currency translation adjustments of our international activities. The functional currency of our international operations in Europe and Asia is the 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. Other income also includes 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.

 

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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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2011, which we filed with the Securities and Exchange Commission, or SEC, on February 17, 2012.

We believe that our significant accounting policies, which are more fully 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, 2011.

Results of Operations

Comparison of Three Months Ended March 31, 2012 and 2011

Revenue

 

     Three Months Ended March 31,        
     2012     2011        
            Percentage
of Total
           Percentage
of Total
    Period-to-Period
Change
 
     Amount      Revenue     Amount      Revenue     Amount     Percentage  
     (dollars in thousands)  

Revenue by Type:

              

Product

   $ 53,464         75   $ 59,742         81   $ (6,278     (11 )% 

Maintenance, support and service

     17,366         25        14,225         19        3,141        22   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total revenue

   $ 70,830         100   $ 73,967         100   $ (3,137     (4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Revenue by Geography:

              

United States and Canada

   $ 43,815         62   $ 44,602         60   $ (787     (2

International

     27,015         38        29,365         40        (2,350     (8 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total revenue

   $ 70,830         100   $ 73,967         100   $ (3,137     (4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Revenue by Sales Channel:

              

Direct

   $ 39,769         56   $ 37,449         51   $ 2,320        6   

Indirect

     31,061         44        36,518         49        (5,457     (15 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total revenue

   $ 70,830         100   $ 73,967         100   $ (3,137     (4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

The $6.3 million decrease in product revenue was primarily due to a decrease 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 (driven by higher session capacity support, higher number of signaling protocols or a higher number of feature groups) will generally have a higher average selling price than those systems sold with lower software content. This decrease was partially offset by a slight increase in the number of systems sold. The decline in product revenue was primarily due to our indirect sales channel, partially offset by an increase in our direct sales channel. Indirect product revenues decreased $7.6 million, due to a $4.7 million decrease attributable to our customers in the U.S. and Canada as well as a decrease of $2.8 million related to our international customers. Direct product revenues increased $1.3 million, primarily due to an increase of $1.9 million attributable to customers in the U.S. and Canada partially offset by a decrease of $616,000 related to our international customers.

Maintenance, support and service revenue increased by $3.1 million, primarily due to increases in maintenance and support fees associated with the growth of our installed product base. Indirect maintenance, support and service revenues increased $2.1 million, primarily due to an increase of $1.3 million related to our customers in the U.S. and Canada as well as an increase of $876,000 attributable to our international customers. Direct maintenance, support and service revenues increased $1.0 million primarily due to a $771,000 increase attributable to our customers in the U.S. and Canada as well as an increase of $235,000 attributable to our international customers.

 

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Cost of Revenue and Gross Profit

 

     Three Months Ended March 31,        
     2012     2011        
            Percentage
of Related
           Percentage
of Related
    Period-to-Period
Change
 
     Amount      Revenue     Amount      Revenue     Amount     Percentage  
     (dollars in thousands)  

Cost of Revenue:

              

Product

   $ 9,978         19   $ 9,945         17   $ 33        *

Maintenance, support and service

     3,958         23        3,006         21        952        32   
  

 

 

      

 

 

      

 

 

   

Total cost of revenue

   $ 13,936         20      $ 12,951         18      $ 985        8   
  

 

 

      

 

 

      

 

 

   

Gross Profit:

              

Product

   $ 43,486         81      $ 49,797         83      $ (6,311     (13

Maintenance, support and service

     13,408         77        11,219         79        2,189        20   
  

 

 

      

 

 

      

 

 

   

Total gross profit

   $ 56,894         80      $ 61,016         82      $ (4,122     (7
  

 

 

      

 

 

      

 

 

   

 

* Not meaningful

The $33,000 increase in cost of product revenue was primarily due to (a) a $198,000 increase in stock-based compensation expense, (b) a $113,000 increase in direct product costs resulting from a slight increase in the number of systems recognized as revenue as well as a slight decrease in the average cost per system, (c) a $90,000 increase in depreciation and amortization expense, and (d) an $84,000 increase in other taxes and fees. These increases were offset by a $413,000 decrease in other cost of goods sold related to changes in the Company’s inventory reserves.

The $952,000 increase in cost of maintenance, support and service revenue was primarily due to (a) a $295,000 increase in stock-based compensation expense, (b) a $269,000 increase in costs associated with performance of our maintenance and warranty obligations, (c) a $159,000 increase in salaries and related benefits corresponding to a 16% increase in employee headcount for our services organization to support our rapidly growing customer base, and (d) a $77,000 increase in facilities costs and related overhead.

Product gross margin decreased by two percentage points, primarily due to a decrease in the average selling price of our systems due to changes in our product software configuration mix, including software upgrades and the mix of system platforms purchased by our customers partially offset by a slight increase in the number of systems sold.

Gross margin on maintenance, support and service revenue decrease by two percentage points, primarily due an increase in costs associated with the performance of our maintenance obligations without a corresponding increase in maintenance, support and service revenue, which resulted in maintenance, support and service costs being absorbed by a lower revenue base.

We expect cost of product, 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,              
     2012     2011              
            Percentage
of Total
           Percentage
of Total
    Period-to-Period
Change
 
     Amount      Revenue     Amount      Revenue     Amount     Percentage  
     (dollars in thousands)  

Sales and marketing

   $ 31,002         44   $ 23,703         32   $ 7,299        31

Research and development

     15,097         21        11,294         16        3,803        34   

General and administrative

     6,438         9        4,577         6        1,861        41   

Merger and integration-related costs

     37         *        180         *        (143     (79
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total operating expenses

   $ 52,574         74   $ 39,754         54   $ 12,820        32   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

* Not meaningful

        The $7.3 million increase in sales and marketing expense was primarily due to (a) a $3.0 million increase in stock-based compensation expense, (b) a $2.0 million increase in salaries, commissions and other benefits associated with a 27% increase in the number of sales and marketing personnel, (c) a $689,000 increase in training costs, (d) a $474,000 increase in third party services, (e) a $458,000 increase in travel and entertainment expenses reflecting the aforementioned increase in related headcount, (f) a $301,000 increase in depreciation and amortization expense primarily due to capital expenditures for evaluation systems, (g) a $234,000 increase in facility costs, and (h) a $107,000 increase in expenditures associated with marketing programs including trade shows. 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 and will remain relatively consistent as a percentage of total revenue for the foreseeable future as we expand our sales force to continue to increase our revenue and market share.

 

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The $3.8 million increase in research and development expense was primarily due to (a) a $2.3 million increase in stock-based compensation expense, (b) a $715,000 increase in salaries and other benefits associated with a 10% increase in the number of employees working on the design and development of new products and enhancement of existing products, quality assurance and testing, (c) a $238,000 increase in spending on engineering supplies, (d) a $235,000 increase in depreciation and amortization expense, and (e) a $219,000 increase in third party services. 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 remain relatively consistent as a percentage of total revenue, with historical rates, for the foreseeable future.

The $1.9 million increase in general and administrative expense was primarily due to (a) a $1.2 million increase in stock-based compensation expense, (b) a $226,000 increase in legal fees, (c) a $234,000 increase in audit and tax fees, (c) a $164,000 increase in taxes and other fees, and (d) a $162,000 increase in bad debt expense. The balance was due to increased facility and overhead costs. 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, with historical rates, for the foreseeable future.

During the first quarter of 2012, we incurred $37,000 of merger and integration-related costs associated with our acquisition of IPTEGO, GmbH, which closed on April 25, 2012. During the first quarter of 2011, we incurred $180,000 of merger and integration-related costs associated with our acquisition of Newfound Communications, which closed on January 20, 2011.

Other Income (Expense)

 

     Three Months Ended March 31,              
     20112     2011              
           Percentage
of Total
          Percentage
of Total
    Period-to-Period
Change
 
     Amount     Revenue     Amount     Revenue     Amount     Percentage  
     (dollars in thousands)  

Interest income

   $ 115        *   $ 210        *   $ (95     (45 )% 

Other expense

     (21     *        (108     *        87        (81
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total other income, net

   $ 94        *   $ 102        *   $ (8     (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

* Not meaningful

Interest income consisted of interest generated from the investment of our cash balances. The decrease in interest income was primarily due to a decrease in the average interest rate partially offset by an increase in the average cash balance in the three months ended March 31, 2012.

Other expense primarily consisted of foreign currency translation adjustments of our international subsidiaries and sales consummated in foreign currencies. The decrease in expense from 2011 to 2012 was primarily due to fluctuations in the value of the Euro and British Pound.

Provision for Income Taxes

 

     Three Months Ended March 31,     Period-to-Period  
     2012     2011     Change  
     Amount      Percentage
of Total
Revenue
    Amount      Percentage
of Total
Revenue
    Amount     Percentage  
     (dollars in thousands)  

Provision for income taxes

   $ 1,985         3   $ 7,655         10   $ (5,670 )     (74 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

For the three months ended March 31, 2012 and 2011, our effective tax rates were 45% and 36%, respectively. The higher effective tax rate in the three months ended March 31, 2012 was primarily related to the expiration of the federal research and development tax credit as of December 31, 2011, as well as the fact that income before provision for income taxes was significantly lower for the three months ended March 31, 2012 as compared to March 31, 2011, resulting in greater effects on the effective tax rate of reconciling items.

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 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.

 

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Key measures of our liquidity are as follows:

 

     As of and
for the
Three
Months
Ended
March 31,
2012
    As of and for
the Year
Ended
December 31,
2011
 
     (in thousands)  

Cash and cash equivalents

   $ 128,151      $ 160,403   

Short and long-term investments

     273,164        211,768   

Accounts receivable, net

     60,568        59,739   

Working capital

     407,740        391,816   

Cash provided by operating activities

     26,695        55,341   

Cash used in investing activities

     (65,472     (49,036

Cash provided by financing activities

     6,525        62,429   

Cash, cash equivalents, short and long-term investments. Our cash and cash equivalents at March 31, 2012 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. The 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 $69,000 at March 31, 2012 and December 31, 2011, 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 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 77 days at March 31, 2012 and 65 days at December 31, 2011. The increase in DSOs from the fourth quarter of 2011 to the first quarter of 2012 was primarily related to the continued aging of receivables. While we believe that all of these receivables remain collectible, we have recorded additional allowances for uncollectible accounts in accordance and consistent with our historic methodology.

Operating activities. Cash provided by operating activities primarily consists of net income adjusted for certain non-cash items including depreciation and amortization, impairment of intangible assets, deferred income taxes, provision for bad debts, stock-based compensation, offset by the associated excess tax benefit, and the effect of changes in working capital and other activities. Cash provided by operating activities in the three months ended March 31, 2012 was $26.7 million and consisted of (a) $2.4 million of net income, (b) non-cash deductions of $15.2 million consisting primarily of $13.7 million of stock-based compensation, $3.0 million of depreciation and amortization, $337,000 in amortization of premium/discount on investments and $216,000 in provisions for bad debts all of which were partially offset by a deduction of $2.0 million related to the tax savings from the exercise, by employees, of stock and (c) $9.1 million provided by working capital and other activities. Cash provided by working capital and other activities primarily reflected a $12.8 million increase in deferred revenue, a $1.7 million increase in accrued expenses and other liabilities and a $651,000 decrease in deferred product costs, partially offset by a decrease of $3.2 million in accounts payable, an increase of $1.0 million in accounts receivable, an increase of $1.1 million in other assets and a $757,000 increase in inventory.

Investing activities. Cash used in investing activities in the three months ended March 31, 2012 was $65.5 million, which included $214.5 million in purchases of marketable securities and $3.7 million in purchases of property and equipment all partially offset by $152.8 million from the maturities and sales of marketable securities.

Financing activities. Net cash provided by financing activities in the three months ended March 31, 2012 included proceeds from the exercise of common stock options in the amount of $4.5 million and $2.0 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 and 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.

 

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Table of Contents

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, development of a new enterprise resource planning system and other general purposes to support our growth. Our capital expenditures totaled $3.7 million in the three months ended March 31, 2012. We estimate capital expenditures of $16.0 - $18.0 million in the remainder of 2012.

Contractual obligations and requirements. Our only material contractual obligation relates to the lease of our corporate headquarters in Bedford, Massachusetts.

Off-Balance-Sheet Arrangements

As of March 31, 2012, 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 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, Asia and Canada 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 or historical rate, as appropriate. Revenue and expenses of these international subsidiaries are remeasured into U.S. dollars at the average rates in effect during the period. Any differences resulting from the remeasurement of assets, liabilities and operations of the European, Asian and Canadian 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, 2012, our foreign exchange exposure would have fluctuated by approximately $115,000.

Interest Rate Risk

At March 31, 2012, we had unrestricted cash, cash equivalents, short and long-term investments totaling $401.3 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, 2012. 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, or 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 SEC’s 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 company’s 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, 2012, 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, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER 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 11 of this Quarterly Report on Form 10-Q.

Risks Relating to Our Business

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 16% and 11% of our total revenue in the three months ended March 31, 2012 and 2011, respectively. 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 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.

Sales to the service provider market are especially volatile, and fluctuations in sales orders from this industry may harm our operating results and financial condition.

Sales to the service provider market have been characterized by large and sporadic purchases, in addition to long sales cycles. Sales activity in this industry depends upon the stage of completion of expanding network infrastructures; the availability of funding; and the extent to which service providers are affected by regulatory, economic, and business conditions in the country of operations. Weakness in orders from this industry, including as a result of any slowdown in capital expenditures by service providers (which may be more prevalent during a global economic downturn or periods of economic uncertainty), could have a material adverse effect on our business, consolidated financial position, results of operations, cash flows, and stock price. Orders from this industry could decline for many reasons other than the competitiveness of our products and services within their respective markets. Finally, service provider customers typically have long implementation cycles; require a broader range of services, including design services; demand that vendors take on a larger share of risks; often require acceptance provisions, which can lead to a delay in revenue recognition; and expect financing from vendors. Some of our current or prospective customers have and may in the future cancel or delay spending on the development or roll-out of capital and technology projects with us due to the continuing economic uncertainty and, consequently, our consolidated financial position, results of operations or cash flows may be adversely affected. In addition, the ongoing worldwide economic conditions and market instability make it increasingly difficult for us, our customers and our suppliers to accurately forecast future product demand, which could result in an inability to satisfy demand for our products and a loss of market share. All these factors can add further risk to business conducted with service providers.

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 may be adversely affected.

As of March 31, 2012, we had more than 230 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 44% and 49% of our total revenue in the three months ended March 31, 2012 and 2011, respectively. One distribution partner represented 28% of our accounts receivable as of December 31, 2011. Given the ongoing 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

 

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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. There can be no assurance 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.

U.S. and global political, credit and financial market conditions may negatively impact or impair the value of our current portfolio of cash and cash equivalents, including U.S. Treasury securities and U.S.-backed investment vehicles.

Our cash, cash equivalents and investments are held in a variety of interest bearing instruments, including U.S. treasury securities. As a result of the uncertain domestic and global political, credit and financial market conditions, investments in these types of financial instruments pose risks arising from liquidity and credit concerns. Given that future deterioration in the U.S. and global credit and financial markets is a possibility, no assurance can be made that losses or significant deterioration in the fair value of our cash, cash equivalents, or investments will not occur. For example, in August 2011, Standard and Poor’s downgraded the U.S.’s credit rating to account for the risk that U.S. lawmakers would fail to raise the debt ceiling and/or reduce its overall deficit. Such a downgrade could continue to impact the stability of future U.S. treasury auctions and affect the trading market for U.S. government securities. Uncertainty surrounding U.S. congressional action or inaction could impact the trading market for U.S. government securities or impair the U.S. government’s ability to satisfy its obligations under such treasury securities. These factors could impact the liquidity or valuation of our current portfolio of cash, cash equivalents, and investments, a substantial portion of which were invested in U.S. treasury securities as of March 31, 2012. If any such losses or significant deteriorations occur, it may negatively impact or impair our current portfolio of cash, cash equivalents, and investments, which may affect our ability to fund future obligations. Further, unless and until the current U.S. and global political, credit and financial market crisis has been sufficiently resolved, it may be difficult for us to liquidate our investments prior to their maturity without incurring a loss, which would have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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 2011 and the first three months of 2012. During the period from January 1, 2011 through March 31, 2012, we increased the number of our employees and full-time independent contractors by 34%, from 570 to 764. We have also increased the number of our employees and full-time independent contractors located outside the U.S. 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 30% in 2010, 45% in 2011 and for the three months ended March 31, 2012 were 32% higher than for the three months ended March 31, 2011. 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 ongoing 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.

 

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Man-made problems such as computer viruses or terrorism may disrupt our operations and harm our operating results.

Despite our implementation of network security measures, our network may be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. Any such event could have a material adverse effect on our business, operating results and financial condition. In addition, the effects of war or acts of terrorism could have a material adverse effect on our business, operating results and financial condition. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruption to the economy and create further uncertainties in the economy. Energy shortages, such as gas or electricity shortages, could have similar negative impacts. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders, or the manufacture or shipment of our products, our business, operating results and financial condition could be materially and 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 Chase & Co. group, Credit Suisse Group AG, 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 U.S. 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. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

 

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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 Registrant’s Current Report on Form 8-K filed on April 30, 2009 (Commission File No. 001-33041 09781345))
    2.2    Share Purchase and Assignment Agreement, by and between Acme Packet UK Ltd., IPTEGO GmbH and the Sellers listed therein (incorporated by reference to exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on May 1, 2012 (Commission File No. 001-33041-12801707).
    3.1    Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form S-1 (Commission File No. 333-134683 061103177))
    3.2    Second Amended and Restated Bylaws of the Registrant (incorporated by reference to the Registrant’s Current Report of Form 8-K filed on January 23, 2012 (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
  99.1    Form of Non-Statutory Stock Option Agreement for the 2006 Equity Incentive Plan for Directors
  99.2    Form of Non-Statutory Stock Option Agreement for the 2006 Equity Incentive Plan for Executives
  99.3    Form of Non-Statutory Stock Option Agreement for the 2006 Equity Incentive Plan for Employees and Consultants
  99.4    Form of Restricted Stock Unit Agreement for the 2006 Equity Incentive Plan for Executives
  99.5    Form of Restricted Stock Unit Agreement for the 2006 Equity Incentive Plan for Employees
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

 

* XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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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: May 3, 2012       Andrew D. Ory
     

President and Chief Executive Officer

(Principal Executive Officer)

Date: May 3, 2012     By:  

/s/     Peter J. Minihane        

      Peter J. Minihane
     

Chief Financial Officer and Treasurer

(Principal Financial Officer)

 

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