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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 November 3, 2003, 42,736,122 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
SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements 3
Unaudited Condensed Consolidated Balance Sheets at
September 30, 2003 and December 31, 2002 3
Unaudited Condensed Consolidated Statements of
Operations for the three and nine months ended
September 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of
Cash Flows for the nine months ended September
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 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
Exhibit Index 31
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WEBEX COMMUNICATIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
September 30, December 31,
2003 2002
------------ ------------
Current assets:
Cash and cash equivalents $ 64,662 $ 32,597
Short-term investments 50,082 36,355
Accounts receivable, net of allowances of
$7,351 and $7,332, respectively 20,300 19,465
Prepaid expenses and other current assets 3,205 2,694
------------ ------------
Total current assets 138,249 91,111
Property and equipment, net 19,374 21,563
Other non-current assets 2,242 1,650
------------ ------------
Total assets $159,865 $114,324
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,827 $ 5,923
Accrued liabilities 19,719 11,058
Deferred revenue 10,056 8,734
Current portion of capital lease obligation -- 489
------------ ------------
Total liabilities 35,602 26,204
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock 42 41
Additional paid-in capital 207,840 197,115
Deferred equity-based compensation (136) (1,092)
Accumulated other comprehensive income (loss) (99) 781
Accumulated deficit (83,384) (108,725)
------------ ------------
Total stockholders' equity 124,263 88,120
------------ ------------
Total liabilities and stockholders' equity $159,865 $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 amounts)
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2003 2002 2003 2002
------- ------- ------- -------
Net revenues $48,764 $36,757 $135,481 $99,568
Cost of revenues 8,180 6,303 23,037 18,243
------- ------- ------- -------
Gross profit 40,584 30,454 112,444 81,325
------- ------- ------- -------
Operating expenses:
Sales and marketing 17,889 14,658 55,336 42,118
Research and development 5,992 5,622 18,148 16,471
General and administrative 3,671 3,819 9,461 10,622
Equity-based compensation* 406 1,225 1,302 2,459
------- ------- ------- -------
Total operating expenses 27,958 25,324 84,247 71,670
------- ------- ------- -------
Operating income 12,626 5,130 28,197 9,655
Interest and other income, net 237 83 931 100
------- ------- ------- -------
Income before income tax 12,863 5,213 29,128 9,755
Provision for income tax (1,672) (164) (3,787) (300)
------- ------- ------- -------
Net income $11,191 $ 5,049 $25,341 $ 9,455
======= ======= ======= =======
Net income per share:
Basic $ 0.27 $ 0.13 $ 0.61 $ 0.24
Diluted 0.25 0.12 0.59 0.22
Shares used in per share calculations:
Basic 41,788 39,857 41,268 39,453
Diluted 44,275 42,100 42,979 42,278
*Equity-based compensation:
Sales and marketing $ 67 $ 830 $ 307 $ 1,038
Research and development 81 176 307 462
General and administrative 258 219 688 959
------- ------- ------- -------
$ 406 $ 1,225 $ 1,302 $ 2,459
======= ======= ======= =======
See accompanying notes to unaudited condensed consolidated financial
statements.
WEBEX COMMUNICATIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
Sept 30, Sept 30,
2003 2002
------- -------
Cash flows from operating activities:
Net income $25,341 $ 9,455
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for doubtful accounts and sales allowance 9,039 11,219
Depreciation and amortization 9,219 9,299
Other than temporary declines in equity investments -- 250
Equity-based compensation 1,302 2,459
Changes in operating assets and liabilities net of
asset acquisitions:
Accounts receivable (9,874) (11,018)
Prepaid expenses and other current assets (470) (539)
Other non-current assets (8) (107)
Accounts payable (96) (1,212)
Accrued liabilities 8,354 2,320
Deferred revenue 1,322 281
Other (880) 121
------- -------
Net cash provided by operating activities 43,249 22,528
------- -------
Cash flows from investing activities:
Payments from related party 0 1,100
Payments of security deposits 4 (235)
Net short - term investments activity (13,727) (28,062)
Purchases of property and equipment (6,665) (7,157)
Business and asset acquisitions (686) --
------- -------
Net cash used in investing activities (21,074) (34,354)
------- -------
Cash flows from financing activities:
Net proceeds from issuances of common stock 10,401 5,064
Repurchase of restricted stock (22) (69)
Principal payments on capital lease obligations (489) (1,212)
Borrowings under debt agreement -- 10,500
Repayments under debt agreement -- (16,000)
------- -------
Net cash provided by (used in) financing activities 9,890 (1,717)
------- -------
Net change in cash and cash equivalents 32,065 (13,543)
Cash and cash equivalents at beginning of the period 32,597 42,146
------- -------
Cash and cash equivalents at end of the period $64,662 $28,603
======= =======
Supplemental disclosures of non-cash investing and
financing activities:
Decrease in deferred equity-based compensation $ (223) $(2,545)
Unrealized gain on investments $ 68 $ 162
Liabilities recorded in conjunction with asset
Acquisition $ 208 --
See accompanying notes to unaudited condensed consolidated financial
statements.
WEBEX COMMUNICATIONS, INC.
September 30, 2003 and 2002
NOTES 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 nine months ended September 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, that 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 is 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 is
recognized based on the contract price charged to the distribution partner.
Persuasive evidence for each arrangement is represented by a signed or
otherwise legally enforceable contract. The fee is considered fixed or
determinable if it is not subject to refund or adjustment. Collectibility of
guaranteed minimum revenue or other contractual 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.
WebEx recently began recognizing revenue from a WebEx reseller based in
China. Due to certain legal restrictions in China relating to the ability of
WebEx to sell directly to customers in China, WebEx entered into the reseller
arrangement. Under this arrangement, WebEx licenses its communication
service offerings to the reseller for resale in China, and in consideration
WebEx receives licensing royalty revenue. Royalty revenue due to WebEx is
based on the level of revenue reported by the reseller and is recognized on a
cash-received basis from 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, which reduces the revenue
otherwise reportable. The accuracy of the estimate is dependent upon 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. 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 quarters ended September 30, 2003 and
2002:
Three Months Ended September 30,
-------------------------------
2003 2002
-------------- --------------
Balance at beginning of quarter $ 7,934 $ 6,910
Sales reserve
Balance at beginning of quarter 4,866 5,338
Deducted from revenue 2,657 867
Amounts written off (2,905) (1,744)
-------------- --------------
Change (248) (877)
-------------- --------------
Balance at end of quarter 4,618 4,461
Allowance for doubtful accounts
Balance at beginning of quarter 3,068 1,572
Charged to bad debt expense 364 1,801
Amounts written off (699) (923)
-------------- --------------
Change (335) 878
-------------- --------------
Balance at end of quarter 2,733 2,450
Balance at end of quarter $ 7,351 $ 6,911
============== ==============
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 nine months ended September 30,
2003 and 2002, respectively:
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2003 2002 2003 2002
------- ------- ------- -------
Numerator:
Net income $11,191 $ 5,049 $25,341 $ 9,455
------- ------- ------- -------
Denominator:
Denominator for basic net
income per common share 41,788 39,857 41,268 39,453
Effect of dilutive
securities:
Restricted common shares
subject to repurchase 71 658 155 740
Stock options outstanding 2,416 1,585 1,556 2,085
------- ------- ------- -------
Denominator for diluted net
income per common share 44,275 42,100 42,979 42,278
======= ======= ======= =======
Basic net income per common
Share $ 0.27 $ 0.13 $ 0.61 $ 0.24
======= ======= ======= =======
Diluted net income per
common share $ 0.25 $ 0.12 $ 0.59 $ 0.22
======= ======= ======= =======
The following potential common shares have been excluded from the computation
of diluted net income per share because their inclusion would have been
antidilutive:
September 30,
2003 2002
------- -------
Shares issuable under stock options 2,720 4,938
The exercise price of antidilutive stock options outstanding as of September
30, 2003 ranges from $17.60 to $55.38, and as of September 30, 2002 the range
was from $13.44 to $55.38.
5. Comprehensive Income
Comprehensive income includes net income, unrealized gain on investments and
foreign currency translation adjustments as follows:
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2003 2002 2003 2002
------- ------- ------- -------
Net income $11,191 $ 5,049 $25,341 $ 9,455
Unrealized gain (loss)
on investments (61) 162 68 162
Foreign currency translation
Adjustments (941) (131) (948) (41)
Comprehensive income $10,189 $5,080 $24,461 $9,576
======= ======= ======= =======
6. Related Party Transactions
WebEx historically contracted for engineering services with three companies
in China owned by the 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 the three month period ended September 30, 2003 and
2002 were $0 and $750, respectively, and for the nine-month periods ended
September 30, 2003 and 2002 were $300 and $2,250, 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 at least quarterly 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 Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2003 2002 2003 2002
------- ------- ------- -------
Net income as reported $11,191 $ 5,049 $25,341 $ 9,455
Add Back: Stock-based compensation
included in determination of net
income, net of tax 353 1,188 1,133 2,385
Deduct: Stock-based compensation
including employees determined
under the fair-value based
method, net of tax (7,073) (9,413) (22,432) (26,235)
------- ------- ------- -------
Pro-forma net income (loss)
as if the fair value based
method had been applied to
all awards $ 4,471 ($3,176) $ 4,042 ($14,395)
------- ------- ------- -------
Pro-forma net income (loss)
per share as if the fair value
based method had been applied
to all awards:
Basic $ 0.11 ($ 0.08) $ 0.10 ($0.37)
Diluted $ 0.11 ($ 0.08) $ 0.09 ($0.37)
8. Commitments and Contingencies
At September 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 $7,052. The majority of the purchase commitments are expected
to be settled in cash within 12 months, with the longest commitment expiring
in August 2007.
WebEx leases office facilities under various operating leases that expire
through 2008. Total future minimum lease payments, net of sublease rental
income, under these leases amount to approximately $14,733.
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. Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation.
11. Recent Accounting Pronouncements
In August 2001, Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations ("SFAS 143") was issued. SFAS
143 addresses financial accounting and reporting for obligations associated
with retirement of tangible long-lived assets and the associated retirement
costs. SFAS 143 was 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 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 is applicable to the Company's service agreements. Under EITF 00-
21, training services would be treated as separate units of accounting.
Currently, training services are included in the category of set-up fees.
Because fees applicable to training will continue to be recognized over the
initial term, the adoption of EITF 00-21 did not 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 did not 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 did not have an
impact on the Company's financial position, results of operations or cash
flows.
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, our beliefs
regarding critical accounting policies, 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 maintain and 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. To date, the sale of these
Presenter services has not had a material effect on our reported revenues.
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. Recognition of
revenue for advance payments received from distribution partners is 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 or
otherwise legally enforceable 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.
WebEx recently began recognizing revenue from a WebEx reseller based in
China. Due to certain legal restrictions in China relating to the ability of
WebEx to sell directly to customers in China, WebEx entered into the reseller
arrangement. Under this arrangement, WebEx licenses its communication
service offerings to the reseller for resale in China, and in consideration
WebEx receives licensing royalty revenue. Royalty revenue due to WebEx is
based on the level of revenue reported by the reseller and is recognized on a
cash-received basis from 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. 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 is 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 seven quarters ended September
30, 2003:
Quarter Ended
Sept 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31,
2003 2003 2003 2002 2002 2002 2002
------- ------- ------- ------- ------- ------- -------
Balance at beginning
of quarter $ 7,934 $ 7,286 $ 7,332 $ 6,911 $ 6,910 $ 6,845 $ 6,825
Sales reserve
Balance at
beginning
of quarter 4,866 3,710 3,948 4,461 5,338 4,883 5,082
Deducted from
Revenue 2,657 3,585 1,679 1,092 867 2,784 2,867
Amounts written
Off (2,905) (2,429) (1,917) (1,605) (1,744) (2,329) (3,066)
------- ------- ------- ------- ------- ------- -------
Change (248) 1,156 (238) (513) (877) 455 (199)
------- ------- ------- ------- ------- ------- -------
Balance at end of
quarter 4,618 4,866 3,710 3,948 4,461 5,338 4,883
Allowance for
doubtful accounts
Balance at beginning
of quarter 3,068 3,576 3,384 2,450 1,572 1,962 1,743
Charged to bad
debt expense 364 122 632 1,392 1,801 1,500 1,400
Amounts written
Off (699) (630) (440) (458) (923) (1,890) (1,181)
------- ------- ------- ------- ------- ------- -------
Change (335) (508) 192 934 878 (390) 219
------- ------- ------- ------- ------- ------- -------
Balance at end of
quarter 2,733 3,068 3,576 3,384 2,450 1,572 1,962
Balance at end of
Quarter $ 7,351 $ 7,934 $ 7,286 $ 7,332 $ 6,911 $ 6,910 $ 6,845
======= ======= ======= ======= ======= ======= =======
Gross accounts
Receivable $27,651 $27,336 $26,396 $26,797 $24,648 $26,129 $25,673
======= ======= ======= ======= ======= ======= =======
Reserve as a
percentage of
accounts receivable 26.6% 29.0% 27.6% 27.4% 28.0% 26.4% 26.7%
We assess the adequacy of the sales reserve account balance and the allowance
for doubtful accounts account balance based on historical experience. Any
adjustments to these accounts are reflected in the income statement for the
current period, as an adjustment to revenue in the case of the sales reserve
and as a general and administrative expense in the case of the allowance for
doubtful accounts.
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 Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2003 2002 2003 2002
------- ------- ------- -------
Net revenues 100% 100% 100% 100%
Cost of revenues 17 17 17 18
------- ------- ------- -------
Gross profit 83 83 83 82
Operating expenses:
Sales and marketing 37 40 41 42
Research and development 12 15 13 17
General and administrative 7 11 7 11
Equity-based compensation 1 3 1 2
------- ------- ------- -------
Total operating expenses 57 69 62 72
------- ------- ------- -------
Operating income 26 14 21 10
Interest and other income,
Net 0 0 (1) 0
Provision for income tax 3 0 3 0
------- ------- ------- -------
Net income 23% 14% 19% 10%
======= ======= ======= =======
Net revenues. Net revenues increased $12.0 million to $48.8 million for the
three months ended September 30, 2003 from $36.8 million for the three months
ended September 30, 2002, representing a 33% increase from the third quarter
of 2002 to the third quarter of 2003. Net revenues increased $35.9 million
to $135.5 million for the nine months ended September 30, 2003 from $99.6
million for the nine months ended September 30, 2002, representing a 36%
increase from the nine months ended 2002 to the nine months ended 2003. The
increases for the three and nine months ended September 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 $1.9 million to $8.2 million for the three months ended
September 30, 2003 from $6.3 million for the three months ended September 30,
2002. As a percent of revenue, cost of revenues was 17% for the three months
ended September 30, 2002 and for the three months ended September 30, 2003.
Cost of revenues increased $4.8 million to $23.0 million for the nine months
ended September 30, 2003 from $18.2 million for the nine months ended
September 30, 2002. As a percentage of revenue, cost of revenues decreased
from 18% for the nine months ended September 30, 2002 to 17% for the nine
months ended September 30, 2003. The increases in absolute dollars for the
three and nine months ended September 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.
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 $3.2 million to $17.9 million for the
three months ended September 30, 2003 from $14.7 million for the three months
ended September 30, 2002. Sales and marketing expense increased $13.2
million to $55.3 million for the nine months ended September 30, 2003 from
$42.1 million for the nine months ended September 30, 2002. The increases
for the three and nine months ended September 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 $0.4
million to $6.0 million for the three months ended September 30, 2003 from
$5.6 million for the three months ended September 30, 2002. Research and
development expense increased $1.6 million to $18.1 million for the nine
months ended September 30, 2003 from $16.5 million for the nine months ended
September 30, 2002. The increases for the three and nine months ended
September 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.
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 $0.1 million to $3.7
million for the three months ended September 30, 2003 from $3.8 million for
the three months ended September 30, 2002. General and administrative
expense decreased $1.1 million to $9.5 million for the nine months ended
September 30, 2003 from $10.6 million for the nine months ended September 30,
2002. The decreases for the three and nine months ended September 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 $0.4 million in the three months ended
September 30, 2003 from $1.8 million in the three months ended September 30,
2002. Bad debt expense decreased $3.6 million to $1.1 million in the nine
months ended September 30, 2003 from $4.7 million in the nine months ended
September 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 which were primarily employee
grants made prior to the Company's initial public offering. Equity-based
compensation expense decreased $0.8 million to $0.4 million for the three
months ended September 30, 2003 from $1.2 million for the three months ended
September 30, 2002. Equity-based compensation expense decreased $1.2 million
to $1.3 million for the nine months ended September 30, 2003 from $2.5
million for the nine months ended September 30, 2002. The decreases for the
three and nine months ended September 30, 2003 were due to the vesting of
options granted and forfeitures of unvested options by terminated 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, stock options granted to members of our Board of Directors are
treated the same as those granted to 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 $0.1 million to $0.2 million for the
three months ended September 30, 2003 from $0.1 million for the three months
ended September 30, 2002. Interest and other income, net increased $0.8
million to $0.9 million for the nine months ended September 30, 2003 from
$0.1 million for the nine months ended September 30, 2002. The increases for
the three and nine months ended September 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
nine months ended September 30, 2003 and 2002. We recorded a provision for
income taxes of $1.7 million for the three months ended September 30, 2003
and $3.8 million for the nine months ended September 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 provision 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
September 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 would
represent our eighth consecutive quarter 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, calculated after taking into account the projected application
of available net operating loss carryforwards to reduce the income tax
expense on anticipated income in the fourth quarter of 2003.
Net income. Net income increased $6.2 million to $11.2 million in the three
months ended September 30, 2003 from $5.0 million in the three months ended
September 30, 2002. Net income increased $15.8 million to $25.3 million in
the nine months ended September 30, 2003 from $9.5 million in the nine months
ended September 30, 2002. A portion of these net income amounts consists of
a litigation recovery of approximately $0.6 million credited to operating
expenses during the third quarter of 2003 relating to delinquent rent due
from a subtenant.
Liquidity and Capital Resources
As of September 30, 2003, cash, cash equivalents and short-term investments
were $114.8 million, an increase of $45.8 million compared with cash, cash
equivalents and short term investments of $69.0 million as of December 31,
2002.
Net cash provided by operating activities was $43.2 million for the nine
months ended September 30, 2003, as compared to net cash provided in
operating activities of $22.5 million for the nine months ended September 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 accrued liabilities and deferred revenue.
Net cash used in investing activities was $21.1 million for the nine months
ended September 30, 2003, as compared to $34.4 million for the nine months
ended September 30, 2002. The decrease in net cash used in investing
activities related primarily to the reduced purchase of short-term
investments combined with reduced capital expenditures for equipment,
hardware and software used in our MediaTone network, offset by the purchase
of certain assets of Presenter, Inc. and the purchase in February 2003 of
substantially all of the assets of three companies in China owned by WebEx's
President and Chief Technical Officer and his spouse.
Net cash provided by financing activities was $9.9 million for the nine
months ended September 30, 2003, as compared to $1.7 million used by
financing activities for the nine months ended September 30, 2002. The
increase in net cash provided by financing activities were primarily the
result of lower principal payments on lease obligations and lower net
borrowing under our debt agreement and increased proceeds from the issuance
of common stock.
At September 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 $7.1 million. The majority of the purchase commitments are
expected to be settled in cash within 12 months with the longest commitment
expiring in August 2007.
We lease office facilities under various operating leases that expire through
2008. Total future minimum lease payments under these leases, net of
sublease rental income, amount to approximately $14.7 million.
We have a revolving credit line with a bank that provides available
borrowings of up to $2.5 million. Amounts borrowed under the revolving
credit line bear interest at the prime rate and may be repaid and reborrowed
at any time prior to the maturity date. The credit agreement expires on July
15, 2004. The credit agreement is unsecured and is subject to compliance with
covenants, including a minimum quick ratio and minimum profitability. As of
September 30, 2003, we had no outstanding borrowings under the 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 net positive cash flow from operations in the
first three quarters of 2003 and each quarter of 2002. We anticipate that we
will continue to generate net 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 seven consecutive quarters
ending September 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 seven consecutive quarters
ending September 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 September 30, 2003, we had an accumulated
deficit of approximately $83.4 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 the emerging nature of the market for web communications
services, and because of the uncertain impact of competitors, our quarterly
revenue and operating results may fluctuate from quarter to quarter and may
vary from public-announced quarterly or annual financial guidance. In
addition, because we have two different pricing models and the less
predictable of the two is becoming a larger component of our revenue, our
revenue and operating results will be somewhat less predictable.
Historically, from a revenue standpoint, our dominant pricing model has been
a monthly, fixed-fee subscription model, such as "maximum-number-of-
concurrent-users" monthly subscriptions. For example, a customer would
subscribe to ten concurrent-user "ports" per month and would pay a fixed
monthly dollar amount per port. A different example of this monthly, fixed-
fee subscription model is the "minimum minutes" purchase commitment portion
of our newest service, Enterprise Edition, where the customer purchases a
fixed number of minutes per month which can be used on any of the suite of
WebEx services available with Enterprise Edition. This concurrent-user
subscription model results in reasonably predictable company quarterly-
revenue to the extent that it predominates our other, more-variable-revenue
pricing model as a source of overall revenue.
Our other pricing model is a "per minute", or usage-based, pricing model.
This pricing model comprises a small, but growing, percentage of our overall
revenue. In our business there are multiple situations where we use "per
minute" pricing - customer "overage" fees, telephony, telecommunications-
partner reseller arrangements and individual pay-per-use purchased directly
from our website. Overage fees come to us when a "ports" customer uses more
than the subscribed number of ports in a web conference session, or when a
"minimum minutes" customer uses more than the subscribed number of monthly
minutes. Per minute telephone revenue comes when a customer in a web
conference session elects to have WebEx set up and run the audio portion of
the conference, rather than the customer conducting its telephone usage
independently of WebEx. The vast majority of revenue received from our
telecommunications partner arrangements is usage, or per-minute, based.
Finally, where someone wants to use WebEx on a one-time basis by visiting our
website, purchasing the service and paying online by credit card, the pricing
is per-minute or usage based.
The various per-minute revenue sources are inherently more variable and
difficult to predict than our fixed-fee subscription revenue sources.
Accordingly, to the extent our fixed-fee based customers - either "concurrent
user" subscription customers or "minimum minutes" subscription customers--
increasingly experience overage, our revenue and operating results will be
somewhat more difficult to predict. Similarly, to the extent our customers
in their web conferences purchase telephony services from WebEx, rather than
purchase them independently of WebEx, our revenue and operating results will
be somewhat more difficult to predict. Finally, to the extent that our
telecommunications partners and certain other reseller partners from whom we
receive per minute usage revenue are more successful in selling our services,
and to the extent that more people purchase our services via credit card from
our website, our revenue and operating results will be somewhat 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;
- - market acceptance of our services;
- - the growth rate of the market for web communications services; and
- - a trend toward lower average prices in the telecommunications sector
generally.
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, and our introduction of new and enhanced
services;
- - 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; and
- - changes in our pricing policies or the introduction of new pricing models
such as our introduction in early 2003 of a minimum minutes/pay-per-use
pricing model.
If any of these factors impact our business in an unplanned negative 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.
Most of 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.
Almost all of our customer contracts have initial terms of three to 12
months. These contracts are typically automatically renewed except where
customers take action to cancel them prior to the end of an initial or
renewal term. Notice of cancellation generally requires only 30 days'
written notice prior to the end of the term of the customer's contract.
During the quarter ended September 30, 2003, approximately 4% of our total
"port" subscriptions, including in this total "port equivalent"
subscriptions, existing at the end of the quarter were cancelled by either
the customer or by us. "Port equivalents" is a measure we use for internal
business analysis purposes and consists of "per minute" commitments converted
into the approximate economically-equivalent number of port commitments. In
addition to cancellation, a customer may stop buying our services directly
from us and instead start purchasing our services from one of our resellers.
Or, a customer may change the number of ports or types of services that the
customer purchases directly from us. The reasons why a customer would cancel
use of our services have included 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 September 30, 2003, we had distribution agreements in place with
approximately 130 distribution partners, which include both
telecommunications partners and software vendors. For the quarter ended
September 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 also
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 September 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 business strategy requires that our services be able to accommodate large
numbers of meetings and users at any one time. Our data network monitoring
system measures the capacity of our data network by bandwidth use. Our plan
is to have each day's peak usage be less than 50% of our data network
capacity. From time to time daily peak usage exceeds 50% of data network
capacity. However, since mid-2002 we have been able to maintain average
daily peak usage at under 50% of our data network capacity by adding capacity
whenever there is a trend toward increased average daily peak usage. During
the quarter ended September 30, 2003, the average of our daily peak usages,
as a percentage of our data network capacity, was less than 50%. In addition
to our data network, we also maintain an integrated telephony network for
which capacity planning is necessary. If we fail to increase capacity in our
data and telephony networks consistent with the growth in usage of each, the
performance of these networks could be adversely impacted. In addition, we
may encounter performance problems when making upgrades and modifications to
either or both of these networks. If our services do not perform adequately
because of capacity-related problems with either or both of our data and
telephony networks, particularly our data network, 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 September 30, 2003 we had approximately $0.1 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 is expected to
change 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 marketing, branding and lead-generation efforts are not successful,
our business may be harmed.
We believe that continued marketing, 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.
Similarly, securing the proper inroads, or leads, into large organizations
where there is the potential for significant use of our services is a key
component in our effort to build widespread, or standardized, acceptance of
our services. There is no assurance that we will identify, and if we
identify then secure, the number of strategic sales leads necessary to help
generate standardized marketplace acceptance of our services. If our
marketing, branding or lead-generation 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 "SARS" 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 recurs 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. Although it is not standard practice for us to do
so, in a small number of situations we do make 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. Accordingly, any failure
by us to fulfill such warranty obligation, or more generally any failure in a
customer's business interaction or other communications activity that is
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, including litigation-related expenses if we are sued.
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 607 employees at
September 30, 2002 to 739 at September 30, 2003. Our WebEx China headcount
has increased from 346 employees at March 31, 2003 to 452 employees at
September 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
September 30, 2003, we hired approximately 379 new employees worldwide,
including approximately 111 who have been hired by WebEx China since February
2003. We expect to continue to increase our personnel in the fourth quarter
of 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 the first nine 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.
Interrruption or malfunction of our internal business processing systems
could harm our business
Our business, with its over 8,000 customers and large number of daily
transactions, is substantially dependent on the continuous and error-free
functioning of our automated business processing systems covering such areas
as order-entry, billing, contract management and collection activities. Any
material interruption or malfunction of one or more such systems could cause
delays or errors in transaction processing, could negatively affect customer
relationships and could accordingly harm our business.
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 effective protection of patentable inventions as
important to our future opportunities. We currently have nine issued patents,
including five assigned to us by Presenter, Inc. in connection with our June
2003 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 34 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, including effective legal-enforcement
mechanisms against those who violate our patent-related assets, 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, including
effective legal-enforcement mechanisms against those who violate our
trademark, copyright or trade secret assets, 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, in June 2003 we acquired certain assets of Presenter,
Inc., a transaction which has not had 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 are 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 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), Macromedia (Breeze), Microsoft
(NetMeeting/OfficeLiveMeeting), Oracle (i-meeting) and Latitude
Communications, Inc., which on November 12, 2003 announced that it had signed
a definitive agreement to be acquired by Cisco Systems, Inc. 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. Our market share could also be reduced if, during this
time period where the market is still relatively new and competitors are
still emerging, we do not capitalize on our current market leadership by
timely developing and executing corporate strategies that will increase the
likelihood that our services will be accepted as the market standard in
preference to the offerings of our current and future competitors.
Microsoft may become a formidable competitor in the web communications
market.
In April 2003, Microsoft announced that it had completed its acquisition of
our competitor Placeware. Microsoft is currently offering the Placeware-
delivered web conferencing service under the name Microsoft Office Live
Meeting. In a September 15, 2003 press release, Microsoft announced that
Office Live Meeting would be a part of the new Microsoft Office System, which
includes a new version of the current Microsoft Office suite of software
products which according to the same press release was to be launched during
October 2003. As a result of its acquisition of Placeware and of its
marketing of the Office Live Meeting service, Microsoft could become a far
more active and significant competitor in the specific interactive
communications markets that we currently serve. Microsoft may devote greater
technical and marketing 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 Office Live Meeting
offering, could integrate Office Live Meeting within the Microsoft Office
software products, could extend the capability of its other products to
include capabilities more directly competitive with WebEx, or could develop
entirely new web communications technologies. In addition, Microsoft could
seek to leverage its dominant market position in the operating system 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. For
example, if Microsoft were to successfully integrate a web communications
capability into a future operating system software product, our revenues and
business could be significantly negatively affected. 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 and offering web communications as a service, 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. One such pending law, that will
go into effect in California in 2004, is an "anti-spam" law, which will
impose severe financial penalties on businesses that attempt to market their
goods or services in California by means of unsolicited e-mail, or spam.
These types of regulations could differ between countries and other political
and geographic divisions both inside and outside the United States. 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, though there are signs that at least in the U.S.
economic growth may be increasing at a modestly higher rate than in the
recent past. Nevertheless, it is still uncertain when economic conditions
will improve on a sustained basis. 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 continue to languish in an economic downturn more
pronounced than that of the broader U.S. and world economies. If economic
conditions 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 PG&E business practices or circumstances, or electrical system failures
whether accidentally or intentionally caused, which could disrupt our
operations and increase our expenses.
California has experienced, and could in the future experience, energy price
increases, energy shortages, and blackouts. The major Northern California
public utility that supplies electric power to our northern California
corporate and data center headquarters is Pacific Gas & Electric Company
("PG&E"). PG&E continues to operate under the protection of Chapter 11 of the
federal Bankruptcy Act. The resolution of this bankruptcy proceeding may
affect the future pricing policies of PG&E, including under what
circumstances and to what extent PG&E will be able to impose energy price
increases. In addition, as was made evident by the well-publicized August
2003 blackout which simultaneously affected several eastern U.S. states for a
period exceeding 24 hours, a similarly widespread, long-lasting power outage
could occur in northern California. As with the eastern U.S. power supply,
an important source of electrical power to northern California consists of a
multi-state "grid" situated in the western United States. An accidental
interruption of, or criminal disruption to, a key supply or distribution
component of the power grid could cause a significant power outage in
northern California. If power outages or energy price increases occur in the
future in northern 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 July 1, 2003 and September 30, 2003, our stock price has
traded as high as $22.05 on September 23, 2003, and as low as $13.90 on July
1, 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 5. Other Information.
Stockholder Proposals for 2004 Annual Meeting. To be considered for
inclusion in the Company's proxy statement and form of proxy for its 2004
Annual Meeting of Stockholders, a stockholder proposal must be received at
the principal executive offices of the Company not later than December 9,
2003.
A stockholder proposal not included in the Company's proxy statement for the
2004 Annual Meeting will be ineligible for presentation at the meeting unless
the stockholder gives timely notice of the proposal in writing to the
Secretary of the Company at the principal executive offices of the Company
and otherwise complies with the provisions of the Company's Bylaws. To be
timely, the Company's Bylaws provide that the Company must have received the
stockholder's notice not less than 50 days nor more than 75 days prior to the
scheduled date of such meeting. However, if notice or prior public
disclosure of the date of the annual meeting is given or made to stockholders
less than 65 days prior to the meeting date, the Company must receive the
stockholder's notice by the earlier of (i) the close of business on the 15th
day after the earlier of the day the Company mailed notice of the annual
meeting date or provided such public disclosure of the meeting date and (ii)
two days prior to the scheduled date of the annual meeting. For the
Company's 2004 Annual Meeting of Stockholders, which is scheduled to be held
on May 19, 2004, stockholders must submit written notice to the Secretary in
accordance with the foregoing Bylaw provisions no later than March 31, 2004
but not prior to March 6, 2004.
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
10.1 Registrant's 2000 Stock Incentive Plan (as amended on October 24,
2003)
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 Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes-
Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes-
Oxley Act of 2002
- ---------------------------
* 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 July 17, 2003 the Company filed a current report on Form 8-K furnishing
under Item 12 the Company's financial results for its second fiscal quarter
ended June 30, 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 November 13, 2003 By:/s/ MICHAEL T. EVERETT
-------------------------
Michael T. Everett
Chief Financial Officer
(Duly Authorized Officer,
Principal Financial
and Principal Accounting
Officer)
Exhibit
Number Description
- -------- ---------------------------
3.1* Amended and Restated Certificate of Incorporation
3.2** Amended and Restated Bylaws
4.1* Form of Common Stock Certificate
10.1 Registrant's 2000 Stock Incentive Plan (as amended on October 24,
2003)
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 Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes-
Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes-
Oxley Act of 2002
- ---------------------------
* 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.
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