===============================================================================
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 June 30, 2003
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 No.: 0-30849
WEBEX COMMUNICATIONS, INC
(Exact name of registrant as specified in its charter)
Delaware 77-0548319
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
307 West Tasman Drive
San Jose, California 95134
(Address of principal executive offices)
Telephone: (408) 435-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (l) 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 at least the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
On August 1, 2003, 41,778,858 shares of Registrant's Common Stock, $0.001 par
value, were outstanding.
WEBEX COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
JUNE 30, 2003
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Unaudited Condensed Consolidated Balance Sheets at June 30,
2003 and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
Exhibit Index 30
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WEBEX COMMUNICATIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
June 30, December 31,
2003 2002
---------- ------------
Current assets:
Cash and cash equivalents $ 44,663 $ 32,597
Short-term investments 51,049 36,355
Accounts receivable, net of allowances of
$7,934 and $7,332, respectively 19,402 19,465
Prepaid expenses and other current assets 2,980 2,694
---------- ------------
Total current assets 118,094 91,111
Property and equipment, net 19,246 21,563
Other non-current assets 2,249 1,650
---------- ------------
Total assets $139,589 $114,324
========== ============
LIABILITES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,683 $ 7,879
Accrued liabilities 12,820 9,102
Deferred revenue 9,916 8,734
Current portion of capital lease obligation -- 489
---------- ------------
Total liabilities 32,419 26,204
---------- ------------
Commitments and contingencies
Stockholders' equity:
Common stock 41 41
Additional paid-in capital 201,132 197,115
Deferred equity-based compensation (331) (1,092)
Accumulated other comprehensive income 903 781
Accumulated deficit (94,575) (108,725)
---------- ------------
Total stockholders' equity 107,170 88,120
---------- ------------
Total liabilities and stockholders' equity $139,589 $114,324
========== ============
See accompanying notes to unaudited condensed consolidated
financial statements.
WEBEX COMMUNICATIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Six Months Ended
------------------ ------------------
June 30, June 30, June 30, June 30,
-------- -------- -------- --------
Net revenues $44,909 $33,242 $86,717 $62,811
Cost of revenues 7,451 5,926 14,857 11,940
-------- -------- -------- --------
Gross profit 37,458 27,316 71,860 50,871
-------- -------- -------- --------
Operating expenses:
Sales and marketing 19,051 14,224 37,447 27,460
Research and development 6,098 5,625 12,156 10,849
General and administrative 2,988 3,497 5,790 6,803
Equity-based compensation* 577 612 896 1,234
-------- -------- -------- --------
Total operating expenses 28,714 23,958 56,289 46,346
-------- -------- -------- --------
Operating income 8,744 3,358 15,571 4,525
Interest and other income, net 298 19 694 17
-------- -------- -------- --------
Net income before income tax 9,042 3,377 16,265 4,542
Provision for income tax (1,175) (101) (2,115) (136)
-------- -------- -------- --------
Net income $ 7,867 $ 3,276 $14,150 $ 4,406
======== ======== ======== ========
Net income per share:
Basic $ 0.19 $ 0.08 $ 0.35 $ 0.11
Diluted 0.19 0.08 0.33 0.10
Shares used in per share calculations:
Basic 41,208 39,511 41,004 39,244
Diluted 42,415 42,389 42,331 42,520
*Equity-based compensation:
Sales and marketing $ 141 $ 11 $ 240 $ 209
Research and development 119 161 226 286
General and administrative 317 440 430 739
-------- -------- -------- --------
$ 577 $ 612 $ 896 $ 1,234
======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated
financial statements.
WEBEX COMMUNICATIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
----------------------------
June 30, 2003 June 30, 2002
------------- -------------
Cash flows from operating activities:
Net income $14,150 $ 4,406
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for doubtful accounts and
sales allowance 6,018 8,551
Depreciation and amortization 6,315 5,938
Other than temporary declines in
equity investments -- 250
Equity-based compensation 871 1,234
Changes in operating assets and liabilities
net of asset acquisitions:
Accounts receivable (5,955) (9,832)
Prepaid expenses and other current assets (245) 782
Other non-current assets 43 (19)
Accounts payable 1,804 856
Accrued liabilities 3,411 596
Deferred revenue 1,182 208
Other 122 91
------------- -------------
Net cash provided by operating activities 27,716 13,061
------------- -------------
Cash flows from investing activities:
Payments from related party 45 1,100
Payments of security deposits 4 (233)
Net short-term investments activity (14,694) (9,572)
Purchases of property and equipment (3,691) (6,166)
Business and asset acquisitions (686) --
------------- -------------
Net cash used in investing activities (19,022) (14,871)
------------- -------------
Cash flows from financing activities:
Net proceeds from issuances of common stock 3,880 4,187
Repurchase of restricted stock (19) (66)
Principal payments on capital lease obligations (489) (840)
Borrowings under debt agreement -- 10,500
Repayments under debt agreement -- (11,000)
------------- -------------
Net cash provided by financing activities 3,372 2,781
------------- -------------
Net change in cash and cash equivalents 12,066 971
Cash and cash equivalents at beginning of the period 32,597 42,146
------------- -------------
Cash and cash equivalents at end of the period $44,663 $43,117
============= =============
Supplemental disclosures of non-cash investing
and financing activities:
Decrease in deferred equity-based compensation $ (121) $(2,310)
============= =============
Unrealized gain on investments $ 129 --
============= =============
Liabilities recorded in conjunction with the
business acquisition $ 208 --
============= =============
Cash paid for:
Interest $ 11 $ 44
============= =============
See accompanying notes to unaudited condensed consolidated
financial statements.
WEBEX COMMUNICATIONS, INC.
June 30, 2003 and 2002
NONTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share amounts)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by WebEx Communications, Inc. (the "Company" or "WebEx") in
accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted in accordance
with such rules and regulations. In the opinion of management, the accompanying
unaudited financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position of the Company, and its results of operations and cash flows. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto as of and for the year
ended December 31, 2002, included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 27, 2003.
The results of operations for the three and six months ended June 30, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003 or any other future period, and the Company makes no
representations related thereto.
The consolidated financial statements include the accounts of WebEx and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
2. Revenue Recognition
Revenue is derived from the sale of web communication services. Web
communication services revenue is generated through a variety of contractual
arrangements directly with customers and with distribution partners, who in
turn sell the services to customers. The Company sells web communication
services directly to customers through service subscriptions and pay-per-use
arrangements. Under these arrangements, customers access the application
hosted on WebEx servers using a standard web browser. Subscription
arrangements include monthly subscriber user fees and user set-up fees. The
subscription arrangements are considered service arrangements in accordance
with EITF Issue No. 00-3, Application of AICPA Statement of Position 97-2,
Software Revenue Recognition, to Arrangements That Include the Right to Use
Software Stored on Another Entity's Hardware, and, accordingly, revenue is
recognized ratably over the service period provided that evidence of the
arrangement exists, the fee is fixed or determinable and collectibility is
reasonably assured. Initial set up fees received in connection with these
arrangements are recognized ratably over the initial term of the contract.
During the initial term, the company provides training services, web-page
design and set-up services. In addition to subscription services revenue,
WebEx derives revenue from pay-per-use services, overage and telephony charges
that are recognized as the related services are provided. An estimate of
revenue is recognized for overage and telephony for the last month of each
quarter based on actual usage incurred but not billed in that month.
The Company also enters into reselling arrangements with distribution partners,
which purchase and resell the Company's services on a revenue sharing,
discounted or pay-per-use basis. Revenue under these arrangements is derived
from hosted services provided to end-users and is recognized over the service
period provided that evidence of the arrangement exists, the fee is fixed or
determinable and collectibility is reasonably assured. Initial set up fees
received in connection with these arrangements are recognized ratably over the
initial term of the contract. During the initial term, the Company provides
training services, web-page design and set-up services. Service fees are
recognized as the services are provided for pay-per-use service arrangements
and ratably over the service period for services provided on a subscription
basis through the reseller. The Company's reseller arrangements may require
guaranteed minimum revenue commitments that are billed in advance to the
reseller. Recognition of revenue for advance payments received from
distribution partners are deferred until the related services are provided or
until otherwise earned by WebEx. WebEx contracts directly with the
distribution partner, and the amount of revenue to be recognized is based on
the contract price charged to the distribution partner.
Persuasive evidence for each arrangement is represented by a signed contract.
The fee is considered fixed or determinable if it is not subject to refund or
adjustment. Collectibility of guaranteed minimum revenue commitments by
resellers is not reasonably assured; thus revenue from guaranteed minimum
commitments is deferred until services are sold by the reseller to an end-user
customer or until the end of the commitment period and the fees are paid by the
reseller.
Deferred revenue includes amounts billed to customers for which revenue has not
been recognized that generally results from the following: (1) unearned portion
of monthly billed subscription service fees; (2) deferred subscription and
distribution partner set-up fees; and (3) advances received from distribution
partners under revenue sharing arrangements.
3. Sales Reserves and Allowance for Doubtful Accounts
WebEx records a sales reserve for estimated losses on receivables resulting
from customer credits, cancellations and terminations as a reduction in revenue
at the time of sale. The sales reserve is estimated based on an analysis of the
historical rate of credits, cancellations and terminations. Increases to sales
reserve are charged to revenue, reducing the revenue otherwise reportable. The
accuracy of the estimate is dependent on the rate of future credits,
cancellations and terminations being consistent with the historical rate.
WebEx records an allowance for doubtful accounts to provide for losses on
receivables due to customer credit risk. Increases to the allowance for
doubtful accounts are charged to general and administrative expense as bad debt
expense. Losses on accounts receivable resulting from customers' financial
distress or failure are charged to the allowance for doubtful accounts. The
allowance is estimated based on an analysis of the historical rate of credit
losses in the last six quarters. The accuracy of the estimate is dependent on
the future rate of credit losses being consistent with the historical rate.
The following presents the detail of the changes in the sales reserve and
allowance for doubtful accounts for the quarter ended June 30, 2003 and 2002:
June 30,
------------------------
2003 2002
----------- -----------
Balance at beginning of quarter $7,286 $6,845
Sales reserve
Balance at beginning of quarter 3,710 4,883
Deducted from revenue 3,585 2,784
Amounts written off (2,429) (2,329)
----------- -----------
Change 1,156 455
----------- -----------
Balance at end of quarter 4,866 5,338
Allowance for doubtful accounts
Balance at beginning of quarter 3,576 1,962
Charged to bad debt expense 122 1,500
Amounts written off (630) (1,890)
----------- -----------
Change (508) (390)
----------- -----------
Balance at end of quarter 3,068 1,572
Balance at end of quarter $7,934 $6,910
=========== ===========
4. Net Income Per Share
Basic net income per common share is computed using the weighted-average number
of common shares outstanding for the period excluding restricted common shares
subject to repurchase. Diluted net income per common share reflects the
dilution of restricted common stock subject to repurchase and incremental
shares of common stock issuable upon the exercise of stock options computed
using the treasury stock method.
The following table sets forth the computation of basic and diluted net income
per common share for the three and six months ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended
------------------ ------------------
June 30, June 30, June 30, June 30,
-------- -------- -------- --------
Numerator:
Net income $7,867 $3,276 $14,150 $4,406
-------- -------- -------- --------
Denominator:
Denominator for basic net income
per common share 41,208 39,511 41,004 39,244
Effect of dilutive securities:
Restricted common shares subject
to repurchase 145 932 197 981
Stock options outstanding 1,062 1,946 1,130 2,295
-------- -------- -------- --------
Denominator for diluted net income
per common share 42,415 42,389 42,331 42,520
======== ======== ======== ========
Basic net income per common share $ 0.19 $ 0.08 $ 0.35 $ 0.11
======== ======== ======== ========
Diluted net income per common share $ 0.19 $ 0.08 $ 0.33 $ 0.10
======== ======== ======== ========
The following potential common shares have been excluded from the computation
of diluted net income per share because their inclusion would have been
antidilutive:
June 30,
------------------------
2003 2002
----------- -----------
Shares issuable under stock options 6,878 2,295
The exercise price of antidilutive stock options outstanding as of June 30,
2003 range from $11.50 to $55.38 and as of June 30, 2002 the range was from
$17.15 to $55.38.
5. Comprehensive Income
Comprehensive income includes net income, unrealized gain on investments and
foreign currency translation adjustments as follows:
Six Months Ended
----------------------------
June 30, 2003 June 30, 2002
------------- -------------
Net income $14,150 $ 4,406
Unrealized gain on investments 129 --
Foreign currency translation adjustments (7) 90
------------- -------------
$14,272 $ 4,496
6. Related Party Transactions
WebEx historically contracted for engineering services with three companies in
China owned by our President and Chief Technical Officer, who is also a major
stockholder, and his spouse. WebEx contracted with these companies to perform
development projects, assign ownership of the work performed to WebEx, and
invoice WebEx for services rendered based on a monthly fee per employee working
on WebEx projects. These companies provided a significant amount of quality
assurance testing and software development activities for WebEx. Research and
development expenses for engineering services pursuant to these arrangements
for three month period ending June 30, 2003 and 2002 was $0 and $750,
respectively and for the six-month period ending June 30, 2003 and 2002 were
$300 and $1,500, respectively.
In February 2003, WebEx completed the purchase of substantially all the assets
of these companies, consisting primarily of computers and equipment for cash of
$199. The purchase price of the assets was based on the fair value of the
assets as determined by an independent appraisal. In addition, WebEx hired a
majority of the employees and contractors of these affiliates to continue to
provide engineering services as employees of WebEx. The purchase price was
allocated to the tangible assets acquired.
7. Equity-Based Compensation
The Company accounts for stock awards to employees and directors in accordance
with the intrinsic value method of Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock Issued to Employees, and related
interpretations. Under this method, compensation expense for fixed plan stock
options is recorded on the date of the grant only if the current fair value of
the underlying stock exceeds the exercise price. Deferred stock-based
compensation is amortized over the vesting period using the method described in
FASB Interpretation No. 28 (FIN 28).
The Company accounts for stock awards to non-employees in accordance with the
provisions of SFAS 123, Accounting for Stock-Based Compensation, and Emerging
Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services. The equity-based compensation expense for options
granted to non-employees is re-measured for changes in their fair value until
the underlying options vest.
Had all awards been accounted for under the fair value method of SFAS 123,
reported net income would have been adjusted to the pro-forma net income (loss)
amounts appearing below.
Three Months Ended Six Months Ended
------------------ ------------------
June 30, June 30, June 30, June 30,
-------- -------- -------- --------
Net income as reported $7,867 $3,276 $14,150 $4,406
Add Back: Stock-based compensation
included in determination of net income 577 612 896 1,234
Deduct: Stock-based compensation
including employees determined under
the fair-value based method (7,391) (8,504) (15,476) (16,859)
-------- -------- -------- --------
Pro-forma net income (loss) as if the
fair value based method had been
applied to all awards $1,053 ($4,616) ($ 430) ($11,219)
======== ======== ======== ========
Pro-forma net income (loss) per share
as if the fair value based method had
been applied to all awards:
Basic $ 0.03 ($ 0.12) ($ 0.01) ($0.29)
Diluted $ 0.02 ($ 0.11) ($ 0.01) ($0.26)
8. Commitments and Contingencies
At June 30, 2003, WebEx has material purchase commitments, including usage of
telecommunication lines and data services, equipment and software purchases and
construction of leasehold improvements at new leased facilities, of $6,068.
The majority of the purchase commitments are expected to be settled in cash
within 12 months with the longest commitment expiring August 2007.
WebEx leases office facilities under various operating leases that expire
through 2008. Total future minimum lease payments under these leases amount to
approximately $16,594.
In April 2003, a preference claim in the amount of approximately $687 was filed
against us by the trustee of MarchFIRST, Inc. in a bankruptcy action pending in
the Northern District of Illinois. MarchFIRST subleased certain real property
to us in San Jose, California. The claim involves a payment for tenant
improvements made to WebEx by the landlord through MarchFIRST. The Company
does not believe the resolution of this action will have a material effect on
the financial position, results of operations or cash flows.
9. Significant Customer Information and Segment Reporting
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, establishes standards for the reporting by business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within WebEx
for making operational decisions and assessments of financial performance.
WebEx's chief operating decision-maker is considered to be the chief executive
officer (CEO). The CEO reviews financial information presented on a
consolidated basis for purposes of making operating decisions and assessing
financial performance. WebEx has determined that it operates in a single
operating segment, specifically, web communication services.
10. Recent Accounting Pronouncements
In August 2001, Statement of Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations ("SFAS 143") was issued. SFAS No. 143
addresses financial accounting and reporting for obligations associated with
retirement of tangible long-lived assets and the associated retirement costs.
SFAS 143 is effective for the Company beginning in 2003 and the adoption of
this statement did not have a material effect on the Company's financial
position, results of operations or cash flows. .
In June 2002, Statement of Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities, ("SFAS 146") was
issued. This statement provides guidance on the recognition and measurement of
liabilities associated with disposal activities and was effective on January 1,
2003. Under SFAS 146, companies will record the fair value of exit or disposal
costs when they are incurred rather than at the date of a commitment to an exit
or disposal plan. The Company adopted SFAS 146 on January 1, 2003, and the
adoption did not have a material effect on the Company's financial position,
results of operations or cash flows.
In December 2002, Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation -Transition and Disclosure, ("SFAS
148") was issued. SFAS 148 amends Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, ("SFAS 123") to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on the reported results. The provisions of SFAS 148 are effective for
financial statements for fiscal years ending after December 15, 2002 and
interim periods beginning after December 15, 2002. The adoption of the
disclosure requirements of this statement did not impact the Company's
financial position, results of operations or cash flows.
In December 2002, the Emerging Issues Task Force reached a consensus on Issue
No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (EITF
Issue 00-21). EITF Issue 00-21 mandates how to identify whether goods or
services or both that are to be delivered separately in a bundled sales
arrangement should be accounted for as separate units of accounting. The
consensus is effective prospectively for the Company's third quarter of 2003.
EITF 00-21 will be applicable to the Company's service agreements. Under EITF
00-21, professional services provided to customers for development of
specialized features, advanced capabilities and training services would be
treated as separate units of accounting. Currently, they are included in the
category of set-up fees, which are not distinguished from service fees. Because
professional service fees do not represent a significant portion of the
Company's revenues and fees applicable to training will continue to be
recognized over the initial term, the adoption of EITF 00-21 is not expected to
have a material impact on revenue recognition.
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51 ("FIN 46"). The interpretation provides guidance for determining when a
primary beneficiary should consolidate a variable interest entity or equivalent
structure, that functions to support the activities of the primary beneficiary.
The interpretation is effective as of the beginning of the first interim or
annual reporting period beginning after June 15, 2003 for variable interest
entities created before February 1, 2003. The adoption of this statement is not
expected to impact the Company's financial position, results of operations or
cash flows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which provides
guidance for classification and measurement of certain financial instruments
with characteristics of both liabilities and equity. SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this statement will not have an impact on
the Company's financial position, results of operations or cash flows.
11. Business Combination
In June 2003, WebEx completed the acquisition of the net assets of Presenter,
Inc., a provider of software for authorizing, managing and delivering
multimedia web presentations. The acquisition of the assets of Presenter, Inc.
will enable WebEx to enhance the features of its services. The total purchase
price for assets acquired was $695 ($487 paid in cash and $208 accrued
liability) and was allocated as follows:
Estimated
Amount life (years)
------ ------------
Net tangible assets $126
Developed technology 214 3
Patents 235 5
Customer relationships 84 3
Backlog 36 0.5
------
$695
======
Pro-forma financial information for this acquisition is not presented because
the results of operations of Presenter, Inc. are not material to the results of
operations of WebEx prior to the date of acquisition.
12. Subsequent Event
In July 2003, the Company's former bank revolving credit line of $7.5 million
expired and the Company entered into a new revolving credit line that provides
available borrowings of up to $2.5 million. Amounts borrowed under the new
revolving credit line bear interest at the prime rate and may be repaid and
reborrowed at any time prior to the maturity date. The new credit agreement
expires on July 15, 2004. The new credit agreement is unsecured and is subject
to compliance with covenants, including a minimum quick ratio and minimum
profitability.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
When used in this Report, the words "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions are intended
to identify forward-looking statements. These are statements that relate to
future periods and include, but are not limited to, statements as to our
ability to achieve profitable operations in 2003, our ability to meet the more-
likely-than-not criteria for recognition of deferred tax assets and reduce the
deferred tax valuation allowance, our belief regarding the amount of income tax
benefit to be recorded in the fourth quarter of 2003, expected expenses
including those related to sales and marketing, research and development and
general and administrative, the effectiveness of our pricing policies, expected
increases in headcount, the adequacy of liquidity and capital resources, the
sufficiency of our cash reserves to meet our capital requirements, our ability
to realize positive cash flow from operations, the ability of cash generated
from operations to satisfy our liquidity requirements, our ability to realize
net earnings, and the effect of recent accounting pronouncements. Forward-
looking statements are subject to risks and uncertainties that could cause
actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, our dependence on key products
and/or services, demand for our products and services, our ability to attract
and retain customers and distribution partners for existing and new services,
our ability to expand our operations internationally, our ability to expand our
infrastructure to meet the demand for our services, our ability to control our
expenses, our ability to recruit and retain employees particularly in the areas
of sales, engineering, support and hosting services, the ability of
distribution partners to successfully resell our services, the economy, the
strength of competitive offerings, the prices being charged by those
competitors, the risks discussed below and the risks discussed in "Factors that
May Affect Results" below. These forward-looking statements speak only as of
the date hereof. We expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read together with our Condensed Consolidated Financial
Statements and notes thereto included elsewhere in this report.
Overview
We develop and market services that allow end-users to conduct meetings and
share software applications, documents, presentations and other content on the
Internet using a standard web browser. Integrated telephony and web-based audio
and video services are also available using standard devices such as
telephones, computer web-cameras and microphones.
We commenced operations under the name Silver Computing, Inc. in February 1995.
We changed our name to Stellar Computing Corporation in June 1997, ActiveTouch
Systems, Inc. in December 1997, ActiveTouch, Inc. in May 1998, and WebEx, Inc.
in December 1999. In July 2000, we reincorporated in Delaware under the name
WebEx Communications, Inc. We released interactive communications software
built on our technology in early 1998, and our business at that time was
focused on licensing software to end-users. We began offering WebEx Meeting
Center, our first real-time, interactive multimedia communications service, in
February 1999 and began selling the service to customers and distribution
partners. With WebEx Meeting Center, our business focus became providing
customers and distribution partners access to our hosted services under
subscription and other service arrangements, and we discontinued licensing
software to end-users. We also made available a subset of our service for free
at www.webex.com.
Since February 1999, our activities have been focused on continuing to enhance
and market our WebEx Interactive Services and our WebEx Multimedia Switching
Platform, developing and deploying new services, expanding our sales and
marketing organizations, and deploying our global WebEx Media Tone Network. We
currently sell the following services: WebEx Meeting Center, WebEx Meeting
Center Pro, WebEx Training Center, WebEx Support Center, WebEx Event Center (an
enhanced version of the service formerly known as WebEx OnStage) and WebEx
Enterprise Edition. In addition, we currently provide to existing customers,
though no longer offer for sale generally, a service called WebEx Business
Exchange.
In the second quarter of 2003, we purchased certain assets of Presenter, Inc.
and assumed certain existing customer and reseller agreements of Presenter. We
also began offering for sale certain Presenter services as additions to our mix
of web communications service offerings, although sale of these Presenter
services did not have a material effect on reported revenues in the quarter.
Critical Accounting Policies
We believe that there are a number of accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management's judgments and estimates. These significant accounting policies
relate to revenue recognition, sales reserves, and the allowance for doubtful
accounts. The policies, and our procedures related to these policies, are
described in detail below.
Revenue Recognition. Revenue is derived from web communication services. Web
communication services revenue is generated through a variety of contractual
arrangements directly with customers and with distribution partners, who in
turn sell the services to customers. We sell web communication services
directly to customers through service subscriptions and pay-per-use
arrangements. Under these arrangements, customers access the application hosted
on WebEx servers using a standard web browser. Subscription arrangements
include monthly subscriber user fees and user set-up fees. The subscription
arrangements are considered service arrangements in accordance with EITF Issue
No. 00-3, Application of AICPA Statement of Position 97-2, Software Revenue
Recognition, to Arrangements That Include the Right to Use Software Stored on
Another Entity's Hardware. Accordingly, revenue is recognized ratably over the
service period provided that evidence of the arrangement exists, the fee is
fixed or determinable and collectibility is reasonably assured. Initial set up
fees received in connection with these arrangements are recognized ratably over
the initial term of the contract. During the initial term, we provide training
services, web-page design and set-up services. In addition to the subscription
services revenue, we derive revenue from pay-per-use services and telephony
charges that are recognized as the related services are provided. An estimate
of revenue is recognized for overage and telephony for the last month of each
quarter based on actual usage incurred but not billed in that month.
We also enter into reselling arrangements with distribution partners, which
purchase and resell our services on a revenue sharing, discounted or pay-per-
use basis. Revenue under these arrangements is derived from hosted services
provided to end-users and is recognized over the service period provided that
evidence of the arrangement exists, the fee is fixed or determinable and
collectibility is reasonably assured. Initial set up fees received in
connection with these arrangements are recognized ratably over the initial term
of the contract. During the initial term, we provide training services, web-
page design and set-up services. Service fees are recognized as the services
are provided for pay-per-use service arrangements and ratably over the service
period for services provided on a subscription basis through the reseller. Our
reseller arrangements may require guaranteed minimum revenue commitments that
are billed in advance to the reseller. Advance payments received from
distribution partners are deferred until the related services are provided or
until otherwise earned by us. We contract directly with the distribution
partner, and revenue is recognized based on net amounts charged to the
distribution partner.
Persuasive evidence for all of our arrangements is represented by a signed
contract. The fee is considered fixed or determinable if it is not subject to
refund or adjustment. Collectibility of guaranteed minimum revenue commitments
by resellers is not reasonably assured; thus revenue from guaranteed minimum
commitments is deferred until services are sold by the reseller to an end-user
customer or until the end of the commitment period and forfeited by the
reseller.
Sales Reserve and Allowance for Doubtful Accounts. The sales reserve is an
estimate for losses on receivables resulting from customer credits,
cancellations and terminations and is recorded as a reduction in revenue at the
time of the sale. Increases to sales reserve are charged to revenue, reducing
the revenue otherwise reportable. The sales reserve is estimated based on an
analysis of the historical rate of credits, cancellations and terminations. The
accuracy of the estimate is dependent on the rate of future credits,
cancellations and terminations being consistent with the historical rate. If
the rate of actual credits, cancellations and terminations is different than
the historical rate, revenue would be different from what was reported.
We record an allowance for doubtful accounts to provide for losses on
accounts receivable due to customer credit risk. Increases to the allowance for
doubtful accounts are charged to general and administrative expense as bad debt
expense. Losses on accounts receivable due to financial distress or failure of
the customer are charged to the allowance for doubtful accounts. The allowance
is estimated based on an analysis of the historical rate of credit losses for
the last six quarters. The accuracy of the estimate is dependent on the future
rate of credit losses being consistent with the historical rate. If the rate of
future credit losses were different than the historical rate, bad debt expense
would be different from what was reported in general and administrative
expenses.
The following presents the detail of the changes in the sales reserve and
allowance for doubtful accounts for the last six quarters ended June 30, 2003:
Quarter Ended
Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31,
2003 2003 2002 2002 2002 2002
------- ------- ------- ------- ------- -------
Balance at beginning of quarter $7,286 $7,332 $6,911 $6,910 $6,845 $6,825
Sales reserve
Balance at beginning of quarter 3,710 3,948 4,461 5,338 4,883 5,082
Deducted from revenue 3,585 1,679 1,092 867 2,784 2,867
Amounts written off (2,429) (1,917) (1,605) (1,744) (2,329) (3,066)
------- ------- ------- ------- ------- -------
Change 1,156 (238) (513) (877) 455 (199)
------- ------- ------- ------- ------- -------
Balance at end of quarter 4,866 3,710 3,948 4,461 5,338 4,883
Allowance for doubtful accounts
Balance at beginning of quarter 3,576 3,384 2,450 1,572 1,962 1,743
Charged to bad debt expense 122 632 1,392 1,801 1,500 1,400
Amounts written off (630) (440) (458) (923) (1,890) (1,181)
------- ------- ------- ------- ------- -------
Change (508) 192 934 878 (390) 219
------- ------- ------- ------- ------- -------
Balance at end of quarter 3,068 3,576 3,384 2,450 1,572 1,962
Balance at end of quarter $7,934 $7,286 $7,332 $6,911 $6,910 $6,845
======= ======= ======= ======= ======= =======
Results of Operations
The following table sets forth, for the periods indicated, the statements of
operations data as a percentage of net revenues.
Three Months Ended Six Months Ended
------------------ ------------------
June 30, June 30, June 30, June 30,
-------- -------- -------- --------
Net revenues 100% 100% 100% 100%
Cost of revenues 17 18 17 19
-------- -------- -------- --------
Gross profit 83 82 83 81
Operating expenses:
Sales and marketing 42 43 43 44
Research and development 14 17 14 17
General and administrative 7 10 7 11
Equity-based compensation 1 2 1 2
-------- -------- -------- --------
Total operating expenses 64 72 65 74
-------- -------- -------- --------
Operating income 19 10 18 7
Interest and other income, net 1 0 1 0
Provision for income tax 2 0 3 0
-------- -------- -------- --------
Net income 18% 10% 16% 7%
======== ======== ======== ========
Net revenues. Net revenues increased $11.7 million to $44.9 million for the
three months ended June 30, 2003 from $33.2 million for the three months ended
June 30, 2002, representing a 35% increase from 2002 to 2003. Net revenues
increased $23.9 million to $86.7 million for the six months ended June 30, 2003
from $62.8 million for the six months ended June 30, 2002, representing a 38%
increase from 2002 to 2003. The increases for the three and six months ended
June 30, 2003 were primarily due to increased usage by existing customers,
growth in our direct subscribing customer base, and increased usage by the
customers of our distribution partners.
Cost of revenues. Our cost of revenues consists of costs related to user set-
up, network and data center operations, technical support and training
activities, including Internet access and telephony communication costs,
personnel, licensed software and equipment costs and depreciation. Cost of
revenues increased $1.6 million to $7.5 million for the three months ended June
30, 2003 from $5.9 million for the three months ended June 30, 2002. As a
percent of revenue, cost of revenues decreased from 18% for the three months
ended June 30, 2002 to 17% for the three months ended June 30, 2003. Cost of
revenues increased $3.0 million to $14.9 million for the six months ended June
30, 2003 from $11.9 million for the six months ended June 30, 2002. As a
percentage of revenue, cost of revenues decreased from 19% for the six months
ended June 30, 2002 to 17% for the six months ended June 30, 2003. The
increases in absolute dollars for the three and six months ended June 30, 2003
were primarily due to increases in the costs for delivering our services to
more customers and increased usage by existing customers, additional technical
staff to support our growing installed base of customers, and expanding and
improving our worldwide network. The decreases in the cost of revenue as a
percentage of revenue were primarily due to cost efficiency gained as a result
of spreading existing cost over incremental customers, increased usage of our
services, and lower costs of network equipment and circuits.
Sales and marketing. Our sales and marketing expense consists of personnel
costs, including commissions, as well as costs of public relations,
advertising, marketing programs, lead generation, travel and trade shows. Sales
and marketing expense increased $4.9 million to $19.1 million for the three
months ended June 30, 2003 from $14.2 million for the three months ended June
30, 2002. Sales and marketing expense increased $9.9 million to $37.4 million
for the six months ended June 30, 2003 from $27.5 million for the six months
ended June 30, 2002. The increases for the three and six months ended June 30,
2003 were primarily due to increases in spending on marketing related programs
to generate leads for our sales force, spending on incremental sales and
support personnel and commission expenses associated with our increased
revenue.
Research and development. Our research and development expense consists
primarily of salaries and other personnel-related expenses, depreciation of
equipment, and supplies. Research and development expense increased $0.5
million to $6.1 million for the three months ended June 30, 2003 from $5.6
million for the three months ended June 30, 2002. Research and development
expense increased $1.4 million to $12.2 million for the six months ended June
30, 2003 from $10.8 million for the six months ended June 30, 2002. The
increases for the three and six months ended June 30, 2003 were primarily
related to personnel and equipment related expenses resulting from an increase
in headcount to develop and support new and existing services and enhance ease
of use and reliability.
General and administrative. Our general and administrative expense consists
primarily of personnel costs for finance, human resources, legal and general
management, bad debt expense and professional services, such as legal and
accounting. General and administrative expense decreased $0.5 million to $3.0
million for the three months ended June 30, 2003 from $3.5 million for the
three months ended June 30, 2002. General and administrative expense decreased
$1.0 million to $5.8 million for the six months ended June 30, 2003 from $6.8
million for the six months ended June 30, 2002. The decreases for the three and
six months ended June 30, 2003 were primarily due to the decrease in bad debt
expenses offset by increases in administrative personnel expense to support our
corporate growth. Bad debt expense decreased $1.4 million to $0.1 million in
the three months ended June 30, 2003 from $1.5 million in the three months
ended June 30, 2002. Bad debt expense decreased $2.2 million to $0.8 million
in the six months ended June 30, 2003 from $3.0 million in the six months ended
June 30, 2002. These decreases were due to reduced losses over a historical
period.
Equity-based compensation. Our equity-based compensation expense represents the
amortization of deferred equity-based compensation over the vesting period of
options granted to employees and options to non-employees. Deferred equity-
based compensation represents the difference between the exercise price of the
stock options granted to employees and the fair value of common stock at the
time of those grants. Equity-based compensation expense remained flat at $0.6
million for the three months ended June 30, 2003 and 2002. Equity-based
compensation expense decreased $0.3 million to $0.9 million for the six months
ended June 30, 2003 from $1.2 million for the six months ended June 30, 2002.
The decrease for the six months ended June 30, 2003 was due to the vesting of
options granted, forfeitures of unvested options by terminated employees and
the effects of the fluctuations in our stock price on the recognition of
expense on options granted to non-employees. Equity-based compensation expense
related to the unvested portion of non-employee options is impacted by changes
in our stock price and will fluctuate accordingly. In connection with the
calculation of equity-based compensation expense, members of our Board of
Directors are treated the same as employees of WebEx and no expense is
recognized.
Interest and other income, net. Interest and other income, net is comprised of
net investment income, interest income and expense, and other expenses.
Interest and other income, net increased $0.3 million to $0.3 million for the
three months ended June 30, 2003 from $0.0 million for the three months ended
June 30, 2002. Interest and other income, net increased $0.7 million to $0.7
million for the six months ended June 30, 2003 from $0.0 million for the six
months ended June 30, 2002. The increases for the three and six months ended
June 30, 2003 were primarily due to interest earned on a higher cash balance in
2003 and the recognition of a $0.1 million impairment loss in 2002.
Provision for income taxes. We realized net operating income in the three and
six months ended June 30, 2003 and 2002. We recorded a provision for income
taxes of $1.2 million for the three months ended June 30, 2003 and $2.1 million
for the six months ended June 30, 2003 based on our estimated effective tax
rate for full year 2003 of 13%, which primarily reflects expected state and
foreign income tax expense. Our effective tax rate does not include a
component for U.S. federal tax because we have net operating loss carryforwards
available to offset U.S. taxable income. The net operating loss carryforwards
and other deferred tax assets as of June 30, 2003 are fully reserved by a
valuation allowance. If we continue to achieve profitable operations in 2003,
we believe we will meet the more likely-than-not criteria for recognition of
deferred tax assets and reduce the valuation allowance in the fourth quarter of
2003, which will complete eight consecutive quarters of profitability. We
believe that a reduction in the valuation allowance at that time will result in
an income tax benefit recorded in the fourth quarter of 2003 of approximately
$15 to 20 million, excluding income tax expense on income for the period.
Net income. Net income increased $4.6 million to $7.9 million in the three
months ended June 30, 2003 from $3.3 million in the three months ended June 30,
2002. Net income increased $9.8 million to $14.2 million in the six months
ended June 30, 2003 from $4.4 million in the six months ended June 30, 2002.
Liquidity and Capital Resources
As of June 30, 2003, cash, cash equivalents and short-term investments were
$95.7 million, an increase of $26.7 million compared with cash and cash
equivalents of $69.0 million as of December 31, 2002.
Net cash provided by operating activities was $27.7 million for the six months
ended June 30, 2003, as compared to net cash provided in operating activities
of $13.1 million for the six months ended June 30, 2002. The increase in net
cash provided by operating activities was primarily the result of net income
adjusted for non-cash components and increases in accounts payable, accrued
liabilities and deferred revenue.
Net cash used in investing activities was $19.0 million for the six months
ended June 30, 2003, as compared to $14.9 million for the six months ended June
30, 2002. The decrease in net cash used in investing activities related
primarily to the purchase of short-term investments combined with capital
expenditures for equipment, hardware and software used in our MediaTone
network, and the purchase of certain assets of Presenter, Inc. and the purchase
of substantially all of the assets of the three companies in China.
Net cash provided by financing activities was $3.4 million for the six months
ended June 30, 2003, as compared to $2.8 million for the six months ended June
30, 2002. The increase in net cash provided by financing activities were
primarily the result lower principal payments on lease obligations and lower
net borrowing under our debt agreement offset by lower proceeds from the
issuance of common stock.
At June 30, 2003, we had material purchase commitments, including usage of
telecommunication lines and data services, equipment and software purchases and
construction of leasehold improvements at new leased facilities, of $6.1
million. The majority of the purchase commitments are expected to be settled
in cash within 12 months with the longest commitment expiring August 2007.
We lease office facilities under various operating leases that expire through
2008. Total future minimum lease payments, under these leases amount to
approximately $16.6 million.
In July 2003, our former bank revolving credit line of $7.5 million expired and
we entered into a new revolving credit line that provides available borrowings
of up to $2.5 million. Amounts borrowed under the new revolving credit line
bear interest at the prime rate and may be repaid and reborrowed at any time
prior to the maturity date. The new credit agreement expires on July 15, 2004.
The new credit agreement is unsecured and is subject to compliance with
covenants, including a minimum quick ratio and minimum profitability. As of
June 30, 2003, we have no outstanding borrowings under the new credit line.
We expect that existing cash resources will be sufficient to fund our
anticipated working capital and capital expenditure needs for at least the next
12 months. We generated positive cash flow from operations in the first two
quarters of 2003 and each quarter of 2002. We anticipate that we will continue
to generate positive cash flow from operations for at least the next 12 months
and that existing cash reserves will therefore be sufficient to meet our
capital requirements during this period. We base our expense levels in part on
our expectations of future revenue levels. If our revenue for a particular
period is lower than we expect, we may take steps to reduce our operating
expenses accordingly. If cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional public or
private equity securities or obtain additional debt financing. There can be no
assurance that additional financing will be available at all or, if available,
will be obtainable on terms favorable to us. If we are unable to obtain
additional financing, we may be required to reduce the scope of our planned
technology and product development and sales and marketing efforts, which could
harm our business, financial condition and operating results. Additional
financing may also be dilutive to our existing stockholders.
Factors That May Affect Results
The risks and uncertainties described below are not the only ones we face. If
an adverse outcome of any of the following risks actually occurs, our business,
financial condition or results of operations could suffer.
Although we realized net earnings for each of the six consecutive quarters
ending June 30, 2003, we incurred net losses in 1998, 1999, 2000 and 2001, and
there is no assurance that we will be able to achieve comparable results in the
future, and we may experience net losses in future quarters.
Although we realized net earnings in each of the six consecutive quarters
ending June 30, 2003, we incurred net losses of approximately $27.6 million for
the year ended December 31, 2001 and $80.4 million for the year ended December
31, 2000. We may experience net losses in future quarters if the web
communications market softens significantly, or if existing or future
competitors reduce our current market share in the web communications market.
If we incur net losses in the future, we may not be able to maintain or
increase the number of our employees, our investment in expanding our services
and network, or our sales, marketing and research and development programs in
accordance with our present plans, each of which is critical to our long-term
success. As of June 30, 2003, we had an accumulated deficit of approximately
$94.6 million.
Because our quarterly results vary and are difficult to predict, we may fail to
meet quarterly financial expectations, which may cause our stock price to
decline.
We offer several real-time, interactive, multimedia web communications
services. Because of our relatively limited operating history of providing such
services and other factors, our quarterly revenue and operating results are
difficult to predict. In addition, because of the emerging nature of the
market for web communications services, our quarterly revenue and operating
results may fluctuate from quarter to quarter. Finally, because we have been
using an alternative pricing model with our newest web communications service
and in certain of our distribution channels, our quarterly revenue and
operating results may be less predictable.
Prior to 2003, pricing of most of our services was based on a "maximum-number-
of-concurrent-users" monthly subscription model. For example, a customer would
subscribe to ten concurrent-user "ports" per month and would pay a fixed
monthly dollar amount per port. Overage charges would apply if, in the above
example, more than ten concurrent users used the service. This concurrent-user
subscription model results in reasonably predictable quarterly-revenue to the
extent that overage charges comprise a fairly small percentage of revenue per
customer.
In early 2003, we began offering a new service called Enterprise Edition, a
service that integrates all of our real-time web communications service
offerings. Pricing for this service is based on a per-minute, or pay-per-use,
model subject to a "minimum-minutes" purchase commitment. This minimum-
minutes pricing model can result in somewhat less predictable overall revenue
than the concurrent-user subscription model in that overage usage, which is the
unpredictable element of revenue projection, has tended to be higher with the
minimum-minutes pricing model as compared to the concurrent-user subscription
model. To the extent that a greater percentage of our customers purchase
Enterprise Edition, with its minimum-minutes pricing, than our other web
communications service offerings, which have concurrent-user subscription
pricing, our overall quarterly revenue and operating results may be more
difficult to predict than in the past.
In addition, to the extent customers increasingly purchase telephony services
offered on a pay-per-use basis under all of our service offerings, our revenue
will be somewhat more difficult to predict. Telephone services are optional to
our customers and consist of WebEx setting up the conference call and
conducting, through leased telephony circuits or through the Internet (called
"voice-over-IP"), the audio portion of a web conference session. Also,
certain telecommunications providers are resellers of our Meeting Center
service on a pay-per-use basis, and if an increasing percentage of our revenue
comes from these resellers, our quarterly revenue and operating results may be
more difficult to predict.
A number of other factors could also cause fluctuations in our operating
results.
Factors outside our control include:
- - our distribution partners' degree of success in distributing our services to
end-users;
- - the announcement, introduction and market acceptance of new or enhanced
services or products by our competitors;
- - changes in offerings or pricing policies of our competitors and our
distributors;
- - the growth rate of the market for web communications services; and
- - diminution in pricing power associated with the technology sector and the
telecommunications industry.
Factors within our control include:
- - our ability to develop, enhance and maintain our web communications network
in a timely manner;
- - the mix of services we offer;
- - our ability to attract and retain customers;
- - the amount and timing of operating costs and capital expenditures relating
to expansion of our business and network infrastructure;
- - the announcement, introduction and market acceptance of new or enhanced
services or products by us; and
- - changes in our pricing policies or the introduction of new pricing models
such as our recent introduction of a minimum minutes/pay-per-use pricing model
for our new Enterprise Edition offering.
If any of these factors impact our business in an unplanned way in a particular
period, our operating results may be below market expectations, in which case
the market price of our common stock would likely decline. Also, factors such
as the growth rate of the market for our services, our ability to maintain and
enhance our network services and platform, and our competitors' success could
impact our longer-term financial performance by reducing demand for our
services.
We expect that our operating expenses will continue to increase, and if our
revenue does not correspondingly increase, our business and operating results
will suffer.
We expect to continue to spend substantial financial and other resources on
developing and introducing new services, and on expanding our sales and
marketing organization and our network infrastructure. We base our expense
levels in part on our expectations of future revenue levels. If our revenue for
a particular quarter is lower than we expect, we may be unable to reduce
proportionately our operating expenses for that quarter, in which case our
operating results for that quarter would suffer.
Our customers do not have long-term obligations to purchase our services;
therefore, our revenue and operating results could decline if our customers do
not continue to use our services.
Our customers do not have long-term obligations to purchase services from us.
Most of our subscription agreements have an initial term of three months.
Although automatically renewed unless terminated, our contracts can be
terminated on 30 days notice at the end of the initial term or any renewal
term. Over 95% of our customers have agreements with initial terms of three to
12 months. For the quarter ended June 30, 2003, approximately 95% of the
contracts entered into in the quarter ended March 31, 2002 were renewed beyond
their initial term. We terminate customers who fail to pay for our services. In
2002, we terminated approximately 250 customers who had failed to pay for our
services on a timely basis. We anticipate that termination of non-paying
customers will continue for the foreseeable future. In addition, some customers
may voluntarily discontinue use of our services for a variety of reasons
including the failure of the customer's employees to learn about and use our
services, the failure of the services to meet the customer's expectations or
requirements, financial difficulties experienced by the customer, or the
customer's decision to use services or products offered by a competitor. We may
not obtain a sufficient amount of business to compensate for any customers that
we may lose. The loss of existing customers or our failure to obtain additional
customers would harm our business and operating results.
Our business and operating results may suffer if we fail to establish
distribution relationships or if our distribution partners do not successfully
market and sell our services.
As of June 30, 2003, we had distribution agreements in place with approximately
125 distribution partners. For the quarter ended June 30, 2003, we generated
less than 10% of our revenue from our distribution partners, which revenue
consisted of initial set-up fees, commitment payments, and service fees. The
majority of the payments received from our distribution partners have been
initially recorded as deferred revenue because we defer revenue related to
initial set-up fees received at the beginning of the relationship and record
revenue from subscription services over the course of the service period as the
distribution partner resells our services. We also do not recognize commitment
fees as revenue until the commitment fee is fully earned at the end of the
commitment period and paid. We cannot anticipate the amount of revenue we will
derive from these relationships in the future. We must continue to establish
and extend these distribution partnerships. Establishing these distribution
relationships can take as long as several months or more. It typically takes
several months before our distribution arrangements generate significant
revenue. Our distribution partners are not prohibited from offering and
reselling the products and services of our competitors and may choose to devote
insufficient resources to marketing and supporting our services or to devote
greater resources to marketing and supporting the products and services of
other companies. If we fail to establish new distribution relationships in a
timely manner, if our distribution partners do not successfully distribute our
services or if we lose existing distribution partners for whatever reason, our
ability to achieve market acceptance of our web communications services will
suffer and our business and operating results will be harmed.
Our total revenue may suffer if we are unable to successfully manage our
distribution relationships to prevent the undercutting of our direct sales
efforts.
We sell our services directly to customers and also indirectly through our
distribution partners. We enter into distribution relationships so that we can
increase total revenue by acquiring customers through distribution partners
that we could not acquire through our direct sales efforts. Under our
agreements with our distribution partners, either WebEx or the distribution
partner bills the end-user customers. When WebEx bills the end-user, a
percentage of the proceeds generated from the distribution partner's sale of
WebEx services is paid to the distribution partner and the remainder is
retained by WebEx. When the distribution partner bills the end-user, WebEx
sells the services on a discounted basis to the distribution partner, which in
turn marks up the price and sells the services to the end-user. In either
case, WebEx does not benefit as much financially, for the same volume of WebEx
service sold, than it would if the sale were made by WebEx directly, without
the contribution of the distribution partner, due to the revenue sharing
arrangement or purchase discount given to the distribution partner. To the
extent that sales of our services by our distribution partners are sales that,
absent the existence of the distribution arrangement, would be made by our
direct sales force, our sales revenue may decrease. Also, to the extent our
existing customers discontinue direct agreements with WebEx in order to
purchase our services from distribution partners, our revenue may decrease.
We expect to depend on sales of our WebEx Meeting Center service for the
majority of our revenue for the foreseeable future.
Our WebEx Meeting Center service accounted for more than 60% of our revenue for
the quarter ended June 30, 2003. Although we have recently experienced growth
in sales of our newer services, such as our Event Center (formerly OnStage),
Training Center and Support Center services, these newer services may not
provide significant revenue in the future. If we are not successful in
developing, deploying and selling new services, our operating results will
suffer.
If our services fail to function when used by large numbers of participants, we
may lose customers and our business and reputation may be harmed.
Our strategy requires that our services be able to accommodate large numbers of
meetings and users at any one time. Our network monitoring measures the
capacity of our services by bandwidth use, and during the second quarter of
2003 our average peak usage ran at less than 50% of our capacity. However, if
we fail to increase our capacity consistent with our growth in usage, our
network system performance could be adversely impacted. In addition, we may
encounter performance problems when making upgrades and modifications to our
network. If our services do not perform adequately, we may lose customers and
be unable to attract new customers and our operating results could suffer.
Our sales cycle makes it difficult to predict our quarterly operating results.
We sometimes have a long sales cycle because of the need to educate potential
customers regarding the benefits of web communications services. Our sales
cycle varies depending on the size and type of customer contemplating a
purchase. Potential customers frequently need to obtain approvals from multiple
decision makers within their organization and may evaluate competing products
and services prior to deciding to use our services. Our sales cycle, which can
range from several weeks to several months or more, makes it difficult to
predict the quarter in which use of our services may begin. This difficulty,
in turn, affects our ability to predict future quarterly operating results.
The existence of equity-based compensation, along with possible future
regulatory action or standard setting requiring the reporting of employee stock
options as an expense item, will negatively impact earnings.
As of June 30, 2003 we had approximately $0.3 million in deferred equity-based
compensation. This expense will generally be amortized over a two-year period
and will result in a decrease in earnings or an increase in losses. We expect
the amount of equity-based compensation expense to decrease over time as a
result of the vesting of options granted prior to our initial public offering.
However, the amount of future equity-based compensation expense related to the
unvested portion of option grants to non-employees or related to modification
of existing employee grants will fluctuate with our stock price, and,
accordingly, the amount of future equity-based compensation expense is
difficult to predict. In 1999 and 2000, we granted stock options at exercise
prices significantly lower than the deemed fair value, which has contributed to
our equity-based compensation expense. The FASB has changed the way stock
options will be reported by public companies, though the timing and reporting
methodology associated with these changes have not been determined at this
time. This change in accounting standards will require us to report stock
options for employees as an expense, and our net income will be negatively
impacted.
If our branding and marketing efforts are not successful, our business may be
harmed.
We believe that continued marketing and brand recognition efforts will be
critical to achieve widespread acceptance of our web communications services.
Our marketing and advertising campaigns or branding efforts may not be
successful or consumers may not find our marketing efforts compelling. If our
marketing efforts are not successful, our business and operating results will
be harmed.
We rely on our China subsidiary, which exposes us to risks of economic
instability in China and risks related to political tension between China and
the United States.
Prior to February 2003, a significant portion of our development and testing
activity was conducted by three companies in China, which are owned by our
President and Chief Technical Officer, Min Zhu, and his spouse. In February
2003, our subsidiary WebEx China purchased substantially all of the assets of
these three companies and hired from these companies a substantial percentage
of their employees. As of February 2003, we rely on WebEx China to conduct a
significant portion of our quality assurance testing and software development
activities, and also a number of other activities including lead research for
our sales personnel, creation of technical documentation, preparation of
marketing materials and the provisioning of customer web sites. There are four
WebEx China facilities, located in each of Hefei, HongZhou, Shanghai and
Suzhou. Our reliance on WebEx China for a significant portion of our quality
assurance, software development and other activities exposes us to a variety of
economic and political risks including, but not limited to, technology-
development restrictions, potentially costly and pro-employee labor laws and
regulations governing our employees in China, and travel restrictions.. The
loss of our WebEx China development, testing and other support activities may
cause our costs to increase. In addition, political and economic tensions
between the United States and China could harm our ability to conduct
operations in China, which could increase our operating costs and harm our
business and operations.
A significant recurrence of the current "SARS" outbreak in China could
adversely affect our subsidiary WebEx China's operational activities.
In the first quarter of 2003, the world became aware of the existence of a
highly contagious disease known as Severe Acute Respiratory Syndrome or "SARS".
According to reputable media reports, current medical knowledge about SARS is
that SARS has no cure or vaccine, can significantly debilitate its victims for
several days or weeks and is estimated to cause death in approximately five to
fifteen percent of cases. The SARS outbreak, which had its greatest impact in
China, appears to have been contained for the present. If SARS significantly
resurfaces in China, WebEx China's business operations could suffer and our
business could be harmed.
We could incur unexpected costs resulting from claims relating to use of our
services.
Many of the business interactions supported by our services are critical to our
customers' businesses. We generally do not make any warranties in our customer
agreements as to service "uptime", or the percentage of time that our network
will be operational and available for customer use. Nonetheless, any failure
in a customer's business interaction or other communications activity caused or
allegedly caused by our services could result in a claim for damages against
us, regardless of our responsibility for the failure, and cause us to incur
unexpected costs.
Our customers and end-users may use our services to share confidential and
sensitive information, and if our system security is breached, our reputation
could be harmed and we may lose customers.
Our customers and end-users may use our services to share confidential and
sensitive information, the security of which is critical to their business.
Third parties may attempt to breach our security or that of our customers. We
may be liable to our customers for any breach in security, and any breach could
harm our reputation and cause us to lose customers. In addition, computers are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions, which could lead to interruptions, delays or loss of data. We may
be required to expend significant capital and other resources to further
protect against security breaches or to resolve problems caused by any breach.
The software underlying our services is complex, and our business and
reputation could suffer if our services fail to perform properly due to
undetected errors or similar problems with our underlying software.
Complex software, such as the software underlying our services, often contains
undetected errors. We may be forced to delay commercial release of our services
until problems are corrected and, in some cases, may need to implement
enhancements to correct errors that we do not detect until after deployment of
our services. If we do detect an error in our software before we introduce new
versions of our services, we might have to limit our services for an extended
period of time while we resolve the problem. In addition, problems with the
software underlying our services could result in:
- - damage to our reputation;
- - damage to our efforts to build brand awareness;
- - loss of or delay in revenue;
- - delays in or loss of market acceptance of our services; and
- - unexpected expenses and diversion of resources to remedy errors.
If our services do not work with the many hardware and software platforms used
by our customers and end-users, our business may be harmed.
We currently serve customers and end-users that use a wide variety of
constantly changing hardware and software applications and platforms. If our
services are unable to support these platforms, they may fail to gain broad
market acceptance, which would cause our operating results to suffer. Our
success depends on our ability to deliver our services to multiple platforms
and existing, or legacy, systems and to modify our services and underlying
technology as new versions of applications are introduced. In addition, the
success of our services depends on our ability to anticipate and support new
standards, especially web standards.
We license third-party technologies, and if we cannot continue to license these
or alternate technologies in a timely manner and on commercially reasonable
terms, our business could suffer.
We intend to continue to license technologies from third parties, including
applications used in our research and development activities and technology,
which is integrated into our services. For example, we license database
software and font-rendering technology. These third-party technologies, and any
that we may utilize in the future, may not continue to be available to us on
commercially reasonable terms. In addition, we may fail to successfully
integrate any licensed technology into our services. This in turn could harm
our business and operating results.
Our recent growth has placed a strain on our infrastructure and resources, and
if we fail to manage our future growth to meet customer and distribution
partner requirements, both within the U.S. and internationally, our business
could suffer.
We have experienced a period of rapid expansion in our personnel, facilities,
and infrastructure that has placed a significant strain on our resources. For
example, our personnel outside of China increased from 571 employees at June
30, 2002 to 720 at June 30, 2003. Our WebEx China headcount has increased from
346 employees at March 31, 2003 to 393 employees at June 30, 2003. We expect
continued increases in our personnel during the remainder of 2003. Our
expansion has placed, and we expect that it will continue to place, a
significant strain on our management, operational and financial resources. In
addition, we are in the process of updating some of our information technology
infrastructure to meet increased requirements for capacity and flexibility
resulting from the growth of our business. In the event these updated systems
do not meet our requirements or are not deployed in a timely manner, our
business may suffer. Any failure by us to manage our growth effectively could
disrupt our operations or delay execution of our business plan and could
consequently harm our business.
If we lose the services of Subrah S. Iyar, our Chief Executive Officer, or Min
Zhu, our President and Chief Technical Officer, our business may be harmed.
Our success will depend on our senior executives. In particular, the loss of
the services of our Chief Executive Officer and co-founder, Subrah S. Iyar, or
our President, Chief Technical Officer and co-founder, Min Zhu, would harm our
business. We do not have long-term employment agreements with or life insurance
policies on any of our senior management.
If we are unable to attract, integrate and retain qualified personnel, our
business could suffer.
Our future success will depend on our ability to attract, train, retain and
motivate highly skilled engineering, technical, managerial, sales and marketing
and customer support personnel. During the 12 months ended June 30, 2003, we
hired approximately 325 new employees worldwide, including approximately 50 who
have been hired by WebEx China since February 2003. We expect to continue to
increase our personnel in 2003. In the past, we have had difficulty hiring
qualified personnel as quickly as we have desired. In particular, we have had
difficulty hiring a sufficient number of qualified technical, development and
support personnel. Although economic conditions in 2002 and in the first six
months of 2003 made hiring of personnel easier, we do not know what future
labor market conditions will be. If we encounter difficulty hiring, integrating
and retaining a sufficient number of qualified personnel in the future, the
quality of our web communications services and our ability to develop new
services, obtain new customers and provide a high level of customer service
could all suffer, and consequently the health of our overall business could
suffer. In addition, if we hire employees from our competitors, these
competitors may claim that we have engaged in unfair hiring practices. We could
incur substantial costs in defending ourselves against any of these claims,
regardless of their merits.
Interruptions in either our internal or outsourced computer and communications
systems could reduce our ability to provide our services and could harm our
business and reputation.
The success of our web communications services depends on the efficient and
uninterrupted operation of our internal and outsourced computer and
communications hardware and software systems. Any system failure that causes an
interruption in our web communications services or a decrease in their
performance could harm our relationships with our customers and distribution
partners. In this regard, some of our communications hardware and software are
hosted at third-party co-location facilities. These systems and operations are
vulnerable to damage or interruption from human error, telecommunications
failures, physical or remote break-ins, sabotage, computer viruses and
intentional acts of vandalism. In addition, third party co-location facilities
may discontinue their operations due to poor business performance. Because a
substantial part of our central computer and communications hardware and
network operations are located in the San Francisco Bay Area, an earthquake or
other natural disaster could impair the performance of our entire network. In
the event of damage to or interruption of our internal or outsourced systems,
if we are unable to implement our disaster recovery plans or our efforts to
restore our services to normal levels in a timely manner are not successful,
our business would suffer. In addition, business interruption insurance may not
adequately compensate us for losses that may occur.
We might have liability for content or information transmitted through our
communications services.
Claims may be asserted against us for defamation, negligence, copyright, patent
or trademark infringement and other legal theories based on the nature and
content of the materials transmitted through our web communications services.
Defending against such claims could be expensive, could be time-consuming and
could divert management's attention away from running our business. In
addition, any imposition of liability could harm our reputation and our
business and operating results, or could result in the imposition of criminal
penalties.
Our success depends upon the patent protection of our software and technology.
Our success and ability to compete depend to a significant degree upon the
protection of our underlying software and our proprietary technology through
patents. We regard the protection of patentable inventions as important to our
future opportunities. We currently have eight issued patents, including five
assigned to us by Presenter, Inc. in connection with our recent acquisition of
certain assets of Presenter. Our non-Presenter patents are in the areas of
peer-to-peer connections to facilitate conferencing, document annotation, and
optimizing data transfer, and our Presenter-acquired patents are in the areas
of animation, extracting photographic images from video, and graphical user
interface for extracting video presentations. We currently have 35 patent
applications pending in the United States including nine patent applications
assigned to us in the Presenter asset acquisition transaction. We may seek
additional patents in the future. Our current patent applications cover
different aspects of the technology used to deliver our services and are
important to our ability to compete. However, it is possible that:
- - any patents acquired by or issued to us may not be broad enough to protect
us;
- - any issued patent could be successfully challenged by one or more third
parties, which could result in our loss of the right to prevent others from
exploiting the inventions claimed in those patents;
- - current and future competitors may independently develop similar technology,
duplicate our services or design around any of our patents;
- - our pending patent applications may not result in the issuance of patents;
and
- - effective patent protection may not be available in every country in which
we do business.
We also rely upon trademarks, copyrights and trade secrets to protect our
technology, which may not be sufficient to protect our intellectual property.
We also rely on a combination of laws, such as copyright, trademark and trade
secret laws, and contractual restrictions, such as confidentiality agreements
and licenses, to establish and protect our technology. Our trademarks include:
ActiveTouch, WebEx (word and design), WebEx bifurcated ball design, WebEx power
button design, WebEx.com, MyWebEx, Bringing the Meeting to You, MediaTone,
Meeting Center, WebEx Meeting Center, WebEx sound mark, Meeting-Enable Your Web
Site, We've Got To Start Meeting Like This, Powering Real Time Business
Meetings, and One Button, Infinite Power. Federal trademark applications
acquired from Presenter consist of the trademarks iPresenter, iPresentation and
Instant Presentation. We also refer to trademarks of other corporations and
organizations in this document. Also, our software is automatically protected
by copyright law. These forms of intellectual property protection are
critically important to our ability to establish and maintain our competitive
position. However,
- - third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights;
- - laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or to deter others from developing similar
technologies;
- - effective trademark, copyright and trade secret protection may be
unavailable or limited in foreign countries;
- - other companies may claim common law trademark rights based upon state or
foreign laws that precede the federal registration of our marks; and
- - policing unauthorized use of our services and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the extent of
any unauthorized use.
Reverse engineering, unauthorized copying or other misappropriation of our
proprietary technology could enable third parties to benefit from our
technology without paying us for it, which would significantly harm our
business.
We may face intellectual property infringement claims that could be costly to
defend and result in our loss of significant rights.
We may be subject to legal proceedings and claims, including claims of alleged
infringement of the copyrights, trademarks and patents of third parties. Our
services may infringe issued patents. In addition, we may be unaware of filed
patent applications which have not yet been made public and which relate to our
services. From time to time we receive notices alleging that we infringe
intellectual property rights of third parties. In such cases, we typically
investigate and respond to the allegations. We are currently not aware of any
such allegations that we believe represent a risk of material liability to the
company. Intellectual property claims may be asserted against us in the future.
Intellectual property litigation is expensive and time-consuming and could
divert management's attention away from running our business. Intellectual
property litigation could also require us to develop non-infringing technology
or enter into royalty or license agreements. These royalty or license
agreements, if required, may not be available on acceptable terms, if at all,
in the event of a successful claim of infringement. Our failure or inability to
develop non-infringing technology or license proprietary rights on a timely
basis would harm our business.
We may engage in future acquisitions or investments that could dilute the
ownership of our existing stockholders, cause us to incur significant expenses,
fail to complement our existing revenue models or harm our operating results.
We may acquire or invest in complementary businesses, technologies or services.
For example, we acquired certain assets of Presenter, Inc., a transaction which
has been completed and which did not have a material impact on our financial
statements. Integrating any newly acquired businesses, employees, technologies
or services may be expensive and time-consuming. To finance any material
acquisitions, it may be necessary for us to raise additional funds through
public or private financings. Additional funds may not be available on terms
that are favorable to us and, in the case of equity financings, may result in
dilution to our stockholders. We may be unable to complete any acquisitions or
investments on commercially reasonable terms, if at all. Even if completed, we
may be unable to operate any acquired businesses profitably or successfully
integrate the employees, technology, products or services of any acquired
businesses into our existing business. In the case of the Presenter asset
acquisition transaction, we hired most of the Presenter employees and have
commenced offering certain Presenter services as add-ons to our current WebEx
service offerings. However, those sales may not prove financially significant,
and if we pursue alternative product-integration strategies with regard to the
acquired Presenter assets and technologies we may not experience significant
financial success. If we are unable to integrate any newly acquired entities
or technologies effectively, including those related to our recent Presenter
asset acquisition, our operating results could suffer. Future acquisitions by
us could also result in large and immediate write-downs, or incurrence of debt
and contingent liabilities, any of which would harm our operating results.
We must compete successfully in the web communications services market.
The market for web communications services is intensely competitive, subject to
rapid change and is significantly affected by new product and service
introductions and other market activities of industry participants. Although we
do not currently compete against any one entity with respect to all aspects of
our services, we do compete with various companies in regards to specific
elements of our web communications services. For example, we compete with
providers of traditional communications technologies such as teleconferencing
and videoconferencing, applications software and tools companies, and web
conferencing services such as Centra Software, Genesys, Raindance, IBM/Lotus
(SameTime), Microsoft (NetMeeting/OfficeLiveMeeting), and Oracle (i-meeting).
In April 2003, Microsoft announced that it had completed an acquisition of
Placeware, a competitor of WebEx. Microsoft is currently offering the
Placeware service under the name Microsoft Office Live Meeting. Other
companies could choose to extend their products and services to include
interactive communications in the future. Many of our current and potential
competitors have longer operating histories, significantly greater financial,
technical and other resources and greater name recognition than we do. Our
current and future competitors maybe able to respond more quickly to new or
emerging technologies and changes in customer requirements. In addition,
current and potential competitors have established, and may in the future
establish, cooperative relationships with third parties and with each other to
increase the availability of their products and services to the marketplace.
Competitive pressures could reduce our market share or require us to reduce the
price of our services, either of which could harm our business and operating
results.
Microsoft may become a formidable competitor in the web communications market
with its recent acquisition of Placeware.
In April 2003, Microsoft announced that it had completed its acquisition of our
competitor Placeware. Microsoft is currently offering the Placeware service
under the name Microsoft Office Live Meeting. As a result of its acquisition
of Placeware, Microsoft could become a far more active and significant
competitor in the specific interactive communications markets that we currently
serve. Microsoft's acquisition of Placeware could mean Microsoft will devote
greater resources to the web communications market than it has in the past. For
example, Microsoft could invest a significant amount of financial and technical
resources in improving the Microsoft Office Live Meeting offering, or Microsoft
could extend the capability of its other products to include capabilities more
directly competitive with WebEx, or Microsoft could develop entirely new web
communications technologies. Additionally, Microsoft could vastly increase the
marketing resources devoted to its competitive offerings. In addition,
Microsoft could seek to leverage its dominant market position in the operating
system, productivity application or browser market to expand its presence in
the web communications market, which may make it difficult for other vendors,
such as WebEx, to compete. While we believe that our current market leadership
in web conferencing is in part due to the technologies and strategies we have
employed in building our web communications network, we may not be able to
continue to maintain our market leadership in the web conferencing market if
Microsoft aggressively pursues this market. Microsoft's competitive activity in
the web communications market could have a significantly harmful effect on our
business.
Our future success depends on the broad market adoption and acceptance of web
communications services.
The market for web communications services is relatively new and rapidly
evolving. Market demand for communications services over the Web is uncertain.
If the market for web communications services does not grow, our business and
operating results will be harmed. Factors that might influence market
acceptance of our services include the following, all of which are beyond our
control:
- - willingness of businesses and end-users to use web communications services
for websites;
- - the growth of the Web and commercial on-line services;
- - the willingness of our distribution partners to integrate web communications
services for websites in their service offerings; and
- - the ongoing level of security and reliability for conducting business over
the Web.
Our success depends on the continued growth of web usage and the continued
growth in reliability and capacity of the Internet.
Because customers access our network through the Web, our revenue growth
depends on the continued development and maintenance of the Internet
infrastructure. This continued development of the Web would include maintenance
of a reliable network with the necessary speed, data capacity and security, as
well as timely development of complementary products and services, including
high-speed modems and other high bandwidth communications technologies, for
providing reliable, high-performance Internet access and services. Because
global commerce on the Web and the on-line exchange of information is new and
evolving, we cannot predict whether the Web will continue to be a viable
commercial marketplace over the long term. The success of our business will
rely on the continued improvement of the Web as a convenient and reliable means
of customer interaction and commerce, as well as an efficient medium for the
delivery and distribution of information by businesses to their employees. If
increases in Web usage or the continued growth in reliability and capacity of
the Internet fail to materialize, our ability to deliver our services may be
adversely affected and our operating results could suffer.
We face risks associated with government regulation of the Internet, and
related legal uncertainties.
Currently, few existing laws or regulations specifically apply to the Internet,
other than laws generally applicable to businesses. Many Internet-related laws
and regulations, however, are pending and may be adopted in the United States,
in individual states and local jurisdictions and in other countries. These laws
may relate to many areas that impact our business, including encryption,
network and information security, the convergence of traditional communication
services, such as telephone services, with Internet communications, taxes and
wireless networks. These types of regulations could differ between countries
and other political and geographic divisions. Non-U.S. countries and political
organizations may impose, or favor, more and different regulation than that
which has been proposed in the United States, thus furthering the complexity of
regulation. In addition, state and local governments within the United States
may impose regulations in addition to, inconsistent with, or stricter than
federal regulations. The adoption of such laws or regulations, and
uncertainties associated with their validity, interpretation, applicability and
enforcement, may affect the available distribution channels for, and the costs
associated with, our products and services. The adoption of such laws and
regulations may harm our business.
Current and future economic and political conditions may adversely affect our
business.
Economic growth in the United States and throughout most of the world continues
to be slow, and it is uncertain when economic conditions may improve. In
addition, the residual effects of war in Iraq, uncertainty about Iraq's
political future and continuing tensions throughout the Middle East remain a
risk to the domestic economy and may impact the supply and price of petroleum
products, which may in turn negatively impact the world economy. Moreover, the
prospect of future terrorists attacks in the United States and elsewhere may
have a further negative impact on the economy. In particular, the technology
and telecommunications sectors appear to have been particularly affected by the
recent slowdown in the economy. If poor economic conditions continue or worsen
as a result of economic, political or social turmoil or military conflict, or
if there are further terrorist attacks in the United States or elsewhere, our
customers may not be able to pay for our services and our distribution partners
may cease operations, which may harm our operating results.
We may experience power blackouts and higher electricity prices as a result of
energy shortages or electrical system failures, which could disrupt our
operations and increase our expenses.
In 2001, California experienced increased energy prices, energy shortages, and
blackouts. We rely on the major Northern California public utility, Pacific Gas
& Electric Company ("PG&E") to supply electric power to our headquarters in
Northern California. PG&E has filed for protection under Chapter 11 of the
Bankruptcy Act. If power outages or energy price increases occur in the future
in California or other locations where we maintain operations, such events
could disrupt our operations, prevent us from providing our services, harm our
reputation, and result in a loss of revenue and increase in our expenses, all
of which could substantially harm our business and results of operations.
Our stock price has been and will likely continue to be volatile because of
stock market fluctuations that affect the prices of technology stocks. A
decline in our stock price could result in securities class action litigation
against us that could divert management's attention and harm our business.
Our stock price has been and is likely to continue to be highly volatile. For
example, between April 1, 2003 and June 30, 2003, our stock price has traded as
high as $15.06 on June 18, 2003, and as low as $8.18 on April 7, 2003. Our
stock price could fluctuate significantly due to a number of factors,
including:
- - variations in our actual or anticipated operating results;
- - sales of substantial amounts of our stock;
- - announcements by or about us or our competitors, including technological
innovation, new products, services or acquisitions;
- - litigation and other developments relating to our patents or other
proprietary rights or those of our competitors;
- - conditions in the Internet industry;
- - governmental regulation and legislation; and
- - changes in securities analysts' estimates of our performance, or our failure
to meet analysts' expectations.
Many of these factors are beyond our control. In addition, the stock markets in
general, and the Nasdaq National Market and the market for Internet technology
companies in particular, continue to experience significant price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. These broad market and
industry factors may decrease the market price of our common stock, regardless
of our actual operating performance. In the past, companies that have
experienced volatility in the market prices of their stock have been the
objects of securities class action litigation. If we were to be the object of
securities class action litigation, we could face substantial costs and a
diversion of management's attention and resources, which could harm our
business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk. A small, but growing, part of our business is conducted
outside the United States. These services are generally priced in the local
currency. As a result, our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in
foreign markets. When the amount of revenue obtained from sources outside the
United States becomes significant, we may engage in hedging activities or other
actions to decrease fluctuations in operating results due to changes in foreign
currency exchange rates.
Interest Rate Risk. We do not use derivative financial instruments or market
risk sensitive instruments. Instead, we invest in highly liquid investments
with short maturities. Accordingly, we do not expect any material loss from
these investments and believe that our potential interest rate exposure is not
material.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. We maintain "disclosure
controls and procedures," as such term is defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and
procedures, management recognized that disclosure controls and procedures, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the disclosure controls and
procedures are met. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Based on their evaluation as the end of the period covered by this Quarterly
Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer
have concluded that, subject to the limitations noted above, our disclosure
controls and procedures were effective to ensure that material information
relating to us, including our consolidated subsidiaries, is made known to them
by others within those entities, particularly during the period in which this
Quarterly Report on Form 10-Q was being prepared.
(b) Changes in internal control over financial reporting. There was no
significant change in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) identified in connection with the
evaluation described in Item 4(a) above that occurred during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 14, 2003, we held our annual stockholders' meeting at our headquarters,
307 West Tasman Drive, San Jose, CA 95134. At such meeting, the following
actions were voted upon:
a) To elect the following individuals to the board of directors to serve a
three year term expiring at WebEx's 2006 annual meeting of stockholders or
until their successors have been elected and qualified:
Director The Votes for The Votes Withheld from
each Director each Director
- ----------- -------------- -----------------------
Subrah Iyar 31,864,766 274,203
Min Zhu 31,071,039 67,930
b) To ratify the appointment of KPMG LLP as WebEx's independent public
accountants for the period ending December 31, 2003:
Votes For Votes Against Abstain
- ----------- ------------- -------
30,774,030 335,269 29,669
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit
Number Description
- ------- ---------------------
3.1* Amended and Restated Certificate of Incorporation
3.2** Amended and Restated Bylaws
4.1* Form of Common Stock Certificate
31.1 Certification of the Chief Executive Officer Pursuant to Rule 13a-
14(a)/15d-14(a)
31.2 Certification of the Chief Financial Officer Pursuant to Rule 13a-
14(a)/15d-14(a)
32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
- -----------------
* Incorporated by reference from Exhibits 3.3 and 4.1 of Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (File No. 333-33716) filed
with the Securities and Exchange Commission on June 21, 2000.
** Incorporated by reference from Exhibit 3.2 of Registrant's Annual Report
on Form 10-K (File No. 0-30849) for the fiscal year ended December 31, 2000
filed with the Securities and Exchange Commission on April 2, 2001.
(b) Reports on Form 8-K:
On April 3, 2003 the Company filed a current report on Form 8-K furnishing
under Item 12 its preliminary financial results for its first fiscal quarter
ended March 31, 2003.
On April 17, 2003 the Company filed a current report on Form 8-K: (i)
announcing under Item 5 the appointment of Michael Everett as the Company's
Chief Financial Officer, and (ii) furnishing under Item 12 the Company's
financial results for its first fiscal quarter ended March 31, 2003.
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.
WEBEX COMMUNICATIONS, INC.
Date: August 13, 2003 By:/s/ MICHAEL T. EVERETT
-----------------------
Michael T. Everett
Chief Financial Officer
(Duly Authorized Officer,
Principal Financial and
Principal Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
- ------- ---------------------
3.1* Amended and Restated Certificate of Incorporation
3.2** Amended and Restated Bylaws
4.1* Form of Common Stock Certificate
31.1 Certification of the Chief Executive Officer Pursuant to Rule 13a-
14(a)/15d-14(a)
31.2 Certification of the Chief Financial Officer Pursuant to Rule 13a-
14(a)/15d-14(a)
32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
- -----------------
* Incorporated by reference from Exhibits 3.3 and 4.1 of Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (File No. 333-33716) filed
with the Securities and Exchange Commission on June 21, 2000.
** Incorporated by reference from Exhibit 3.2 of Registrant's Annual Report
on Form 10-K (File No. 0-30849) for the fiscal year ended December 31, 2000
filed with the Securities and Exchange Commission on April 2, 2001.