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EX-31.1 - EXHIBIT 31.1 - AIRVANA INC | c91829exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - AIRVANA INC | c91829exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - AIRVANA INC | c91829exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - AIRVANA INC | c91829exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 27, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33576
Airvana, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
04-3507654 (I.R.S. Employer Identification Number) |
19 Alpha Road
Chelmsford, Massachusetts 01824
(Address of Principal Executive Offices including Zip Code)
Chelmsford, Massachusetts 01824
(Address of Principal Executive Offices including Zip Code)
(978) 250-3000
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares of the registrants common stock, par value $0.001, outstanding as
of October 30, 2009 was 62,583,295.
AIRVANA, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 27, 2009
Table of Contents
FOR THE QUARTERLY PERIOD ENDED September 27, 2009
Table of Contents
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
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PART I. Financial Information
Item 1. | Condensed Consolidated Financial Statements (unaudited) |
AIRVANA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
December 28, | September 27, | |||||||
2008 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 30,425 | $ | 12,819 | ||||
Investments |
197,941 | 163,484 | ||||||
Restricted investments |
| 210 | ||||||
Accounts receivable |
3,354 | 18,436 | ||||||
Deferred product cost, current |
1,913 | 3,017 | ||||||
Prepaid taxes |
| 11,664 | ||||||
Deferred tax assets, current, net |
2,168 | 17,245 | ||||||
Prepaid expenses and other current assets |
2,758 | 3,861 | ||||||
Total current assets |
238,559 | 230,736 | ||||||
Property and equipment |
14,425 | 17,822 | ||||||
Less: accumulated depreciation and amortization |
9,603 | 12,039 | ||||||
4,822 | 5,783 | |||||||
Investments, long-term |
| 29,023 | ||||||
Prepaid tax, long-term |
| 3,408 | ||||||
Deferred service cost |
1,300 | 4,865 | ||||||
Deferred tax assets, long term, net |
956 | 350 | ||||||
Restricted investments |
193 | 193 | ||||||
Goodwill and intangible assets, net |
11,096 | 10,295 | ||||||
Other assets |
410 | 877 | ||||||
Total assets |
$ | 257,336 | $ | 285,530 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 4,455 | $ | 3,159 | ||||
Accrued expenses and other current liabilities |
14,365 | 12,074 | ||||||
Accrued income taxes |
1,897 | 954 | ||||||
Deferred revenue, current |
61,310 | 124,260 | ||||||
Total current liabilities |
82,027 | 140,447 | ||||||
Deferred revenue, long-term |
5,550 | 14,447 | ||||||
Accrued income taxes, long-term |
5,703 | 6,025 | ||||||
Other liabilities |
1,174 | 783 | ||||||
Total long-term liabilities |
12,427 | 21,255 | ||||||
Commitments and Contingencies (Note 8) |
| | ||||||
Stockholders equity: |
||||||||
Preferred stock, $0.001 par value per share: 10,000,000 shares authorized, no shares issued |
| | ||||||
Common stock, $0.001 par value per share: 350,000,000 shares authorized, 62,931,171 and
62,554,501 shares issued and outstanding at December 28, 2008 and September 27, 2009,
respectively (Note 9) |
63 | 63 | ||||||
Additional paid-in capital |
186,824 | 185,861 | ||||||
Accumulated deficit |
(24,005 | ) | (62,096 | ) | ||||
Total stockholders equity |
162,882 | 123,828 | ||||||
Total liabilities and stockholders equity |
$ | 257,336 | $ | 285,530 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements
3
Table of Contents
AIRVANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 28, | September 27, | September 28, | September 27, | |||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Revenue: |
||||||||||||||||
Product |
$ | 5,362 | $ | 242 | $ | 65,679 | $ | 8,518 | ||||||||
Service |
2,885 | 2,484 | 9,225 | 8,351 | ||||||||||||
Total revenue |
8,247 | 2,726 | 74,904 | 16,869 | ||||||||||||
Cost of revenue: |
||||||||||||||||
Product |
426 | 359 | 1,860 | 1,227 | ||||||||||||
Service |
2,226 | 2,541 | 6,032 | 7,622 | ||||||||||||
Total cost of revenue |
2,652 | 2,900 | 7,892 | 8,849 | ||||||||||||
Gross profit (loss) |
5,595 | (174 | ) | 67,012 | 8,020 | |||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
18,859 | 18,443 | 56,209 | 54,202 | ||||||||||||
Selling and marketing |
3,809 | 4,245 | 11,212 | 12,345 | ||||||||||||
General and administrative |
2,281 | 3,438 | 6,675 | 8,311 | ||||||||||||
Total operating expenses |
24,949 | 26,126 | 74,096 | 74,858 | ||||||||||||
Operating loss |
(19,354 | ) | (26,300 | ) | (7,084 | ) | (66,838 | ) | ||||||||
Interest and other income, net |
1,505 | 426 | 5,882 | 3,092 | ||||||||||||
Loss before income taxes |
(17,849 | ) | (25,874 | ) | (1,202 | ) | (63,746 | ) | ||||||||
Income tax (benefit) expense |
(5,404 | ) | (9,019 | ) | 2,354 | (25,655 | ) | |||||||||
Net loss |
$ | (12,445 | ) | $ | (16,855 | ) | $ | (3,556 | ) | $ | (38,091 | ) | ||||
Net loss per share: |
||||||||||||||||
Basic |
$ | (0.19 | ) | $ | (0.27 | ) | $ | (0.06 | ) | $ | (0.61 | ) | ||||
Diluted |
$ | (0.19 | ) | $ | (0.27 | ) | $ | (0.06 | ) | $ | (0.61 | ) | ||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
64,965 | 62,341 | 64,487 | 62,417 | ||||||||||||
Diluted |
64,965 | 62,341 | 64,487 | 62,417 |
The accompanying notes are an integral part of these condensed consolidated financial statements
4
Table of Contents
AIRVANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 28, | September 27, | September 28, | September 27, | |||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Operating activities |
||||||||||||||||
Net loss |
$ | (12,445 | ) | $ | (16,855 | ) | $ | (3,556 | ) | $ | (38,091 | ) | ||||
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
||||||||||||||||
Depreciation |
814 | 832 | 2,435 | 2,410 | ||||||||||||
Amortization of intangible assets |
267 | 267 | 801 | 801 | ||||||||||||
Stock-based compensation |
1,278 | 1,687 | 3,542 | 4,500 | ||||||||||||
Deferred tax provision (benefit) |
(5,404 | ) | (14,823 | ) | 2,354 | (14,365 | ) | |||||||||
Excess tax benefit related to exercise of stock options |
(481 | ) | (892 | ) | (1,978 | ) | (1,792 | ) | ||||||||
Amortization of investments |
(971 | ) | 477 | (3,381 | ) | 5 | ||||||||||
Amortization of leasehold incentive |
(130 | ) | (131 | ) | (391 | ) | (391 | ) | ||||||||
Unrealized gain (loss) on forward foreign currency
exchange contracts |
| 513 | | (188 | ) | |||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Accounts receivable |
152 | (8,943 | ) | 6,078 | (15,082 | ) | ||||||||||
Deferred product and service costs |
(1,043 | ) | (1,390 | ) | (1,347 | ) | (4,669 | ) | ||||||||
Prepaid taxes |
(8,877 | ) | 5,170 | (8,762 | ) | (13,386 | ) | |||||||||
Prepaid expenses and other current assets |
(960 | ) | 121 | (177 | ) | (915 | ) | |||||||||
Accounts payable |
1,027 | 413 | (1,187 | ) | (1,296 | ) | ||||||||||
Accrued expenses and other current liabilities |
4,535 | (734 | ) | 2,624 | (2,286 | ) | ||||||||||
Accrued income taxes |
(125 | ) | 415 | (15,901 | ) | (621 | ) | |||||||||
Deferred revenue |
34,738 | 28,522 | 32,156 | 71,847 | ||||||||||||
Net cash provided by (used in) operating activities |
12,071 | (5,351 | ) | 13,310 | (13,519 | ) | ||||||||||
Investing activities |
||||||||||||||||
Purchases of property and equipment |
(534 | ) | (784 | ) | (1,567 | ) | (3,371 | ) | ||||||||
Purchases of investments |
(72,834 | ) | (53,793 | ) | (248,627 | ) | (192,861 | ) | ||||||||
Maturities of investments |
83,490 | 52,500 | 231,299 | 198,290 | ||||||||||||
Proceeds from sale of investments |
| | 16,631 | | ||||||||||||
Decrease (increase) in other assets and restricted investments |
32 | (456 | ) | 51 | (677 | ) | ||||||||||
Net cash provided by (used in) by investing activities |
10,154 | (2,533 | ) | (2,213 | ) | 1,381 | ||||||||||
Financing activities |
||||||||||||||||
Payments on long-term debt |
(7 | ) | | (119 | ) | | ||||||||||
Payments of cash dividend |
(21 | ) | | (71 | ) | (5 | ) | |||||||||
Purchase of treasury stock |
(3,547 | ) | (369 | ) | (3,547 | ) | (9,291 | ) | ||||||||
Excess tax benefit related to exercise of stock options |
481 | 892 | 1,978 | 1,792 | ||||||||||||
Proceeds from exercise of stock options |
733 | 870 | 2,219 | 2,036 | ||||||||||||
Net cash (used in) provided by financing activities |
(2,361 | ) | 1,393 | 460 | (5,648 | ) | ||||||||||
Effect of exchange rate changes on cash and cash equivalents |
144 | | 216 | | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
20,008 | (6,491 | ) | 11,773 | (17,606 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
35,312 | 19,310 | 43,547 | 30,425 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 55,320 | $ | 12,819 | $ | 55,320 | $ | 12,819 | ||||||||
Supplemental Disclosure of Cash Flow Information |
||||||||||||||||
Cash paid for income taxes |
$ | 9,025 | $ | 217 | $ | 24,603 | $ | 2,430 |
The accompanying notes are an integral part of these condensed consolidated financial statements
5
Table of Contents
AIRVANA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except share and per share amounts)
1. Operations
Business Description
Airvana, Inc. (the Company) is a leading provider of network infrastructure
products used by wireless operators to provide mobile broadband services. The Companys
high-performance technology and products, from emerging comprehensive femtocell solutions
to core mobile network infrastructure, enable operators to deliver compelling and
consistent broadband services to mobile subscribers, wherever they are. These services
include Internet access, e-mail, music downloads, video, IP-TV, gaming, push-to-talk and
voice-over-IP (VOIP). The Companys products are deployed in over 70 commercial
networks on six continents. The Company is headquartered in Chelmsford, Massachusetts and
has offices worldwide, including development centers in Bangalore, India and Cambridge,
United Kingdom.
On January 14, 2009 (the filing date), Nortel Networks Corporation announced that
it, Nortel Networks Limited, and certain of its other Canadian subsidiaries filed for
creditor protection under the Companies Creditors Arrangement Act in Canada. Also, on
January 14, 2009, some of Nortel Networks Corporations U.S. subsidiaries, including
Nortel Networks Inc. (Nortel Networks), filed Chapter 11 voluntary petitions in the
State of Delaware. On July 28, 2009, United States and Canadian bankruptcy courts
approved a bid by Telefon AB L.M. Ericsson (Ericsson) to purchase Nortel Networks CDMA
business, subject to satisfaction of regulatory and other conditions. Substantially all
of the Companys current billings and revenue are derived from Nortel Networks. Refer to
Note 13 for a discussion of the impact of these actions on the Company.
2. Summary of Significant Accounting Policies
The accompanying condensed consolidated financial statements reflect the application
of certain accounting policies as described in this note and elsewhere in the
accompanying condensed consolidated financial statements. The Company believes that a
significant accounting policy is one that is both important to the portrayal of the
Companys financial condition and results of operations and requires managements most
difficult, subjective or complex judgments, often as the result of the need to make
estimates about the effect of matters that are inherently uncertain.
These condensed consolidated financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) in the United States applicable to
interim periods, and in the opinion of management, include all normal and recurring
adjustments that are necessary to present fairly the results of operations for the
reported periods. These financial statements and notes should be read in conjunction with
the audited consolidated financial statements and related notes, together with
managements discussion and analysis of financial condition and results of operations,
contained in the Companys Annual Report on Form 10-K for the year ended December 28,
2008, which was filed with the Securities and Exchange Commission (the SEC) on
February 24, 2009.
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the SEC. Certain information and
footnote disclosures normally included in financial statements have been condensed or
omitted pursuant to such SEC rules and regulations. In the opinion of management, the
unaudited condensed consolidated financial statements and notes have been prepared on the
same basis as the audited consolidated financial statements and include all adjustments
(consisting of normal, recurring adjustments) necessary for the fair presentation of the
Companys financial position at September 27, 2009 and results of operations and cash
flows for the three and nine months ended September 28, 2008 and September 27, 2009. The
interim results are not necessarily indicative of the results that may be expected for
any other interim period or the full year.
Any material subsequent events have been considered for disclosure and recognition
through November 4, 2009, the filing date of this Form 10-Q.
Use of Estimates
The preparation of financial statements in conformity with GAAP in the United States
requires management to make significant estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Significant estimates and assumptions by
management affect the Companys timing of revenue recognition for multiple element
arrangements, expensing or capitalizing research and development costs for software,
expected future cash flows used to
evaluate the recoverability of long-lived assets and goodwill, estimated fair values
of intangible assets and goodwill, amortization methods and periods, certain accrued
expenses, stock-based compensation, contingent liabilities, the assessment of uncertain
tax positions and the related tax reserves and recoverability of the Companys net
deferred tax assets and related valuation allowance.
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Although the Company regularly assesses these estimates, actual results could
differ materially from these estimates. Changes in estimates are recorded in the period
in which they become known. The Company bases its estimates on historical experience and
various other assumptions that it believes to be reasonable under the circumstances.
Actual results could differ from managements estimates if past experience or other
assumptions do not turn out to be substantially accurate predictors.
The Company is subject to a number of risks similar to those of other companies of
similar size in its industry, including, but not limited to: a highly concentrated
customer base, sales volatility, dependency on particular air interface standards, rapid
technological changes, competition from substitute products and services from larger
companies, limited number of suppliers, the current crisis affecting world financial
markets, future sales or issuances of its common stock, government regulations,
management of international activities, protection of proprietary rights, patent
litigation, and dependence on key individuals.
Fiscal Year
The Companys fiscal year ends on the Sunday nearest to December 31. The Companys
fiscal quarters end on the Sunday nearest to the last day of the third calendar month of
the quarter.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments with maturities of three
months or less at the date of purchase. Cash equivalents are carried at cost, which
approximates their fair market value. See Note 5 for further discussion of cash
equivalents.
Investments and Restricted Investments
The Company determines the appropriate categorization of investments in securities
at the time of purchase. As of December 28, 2008 and September 27, 2009, the Companys
investments were categorized as held-to-maturity and are presented at their amortized
cost. See Note 3. The Company classifies securities on its balance sheet as short-term or
long-term based on the date it reasonably expects the securities to mature or liquidate.
As of December 28, 2008, the Company had classified $193 as long-term restricted
investments on its condensed consolidated balance sheets. As of September 27, 2009, the
Company had classified $210 as short-term restricted investments and $193 as long-term
restricted investments on its condensed consolidated balance sheets. Refer to Note 5 for
a discussion of these restricted investments.
Deferred Product and Service Cost
When the Companys products have been delivered, but the product revenue associated
with the arrangement has been deferred as a result of not meeting the revenue recognition
criteria in Accounting Standards Codification (ASC) 985-605, Software Revenue
Recognition (ASC 985-605), the Company also defers the related inventory costs for the
delivered items in accordance with ASC 330-10, Inventory (ASC 330-10), which primarily
relates to third party royalties. For development costs incurred in connection with
specified upgrades, the Company expenses these costs as incurred.
When the Company performs development services that are essential to the
functionality of the initial delivery of a new product where the associated revenues have
been deferred due to the fact that they do not qualify as units of accounting separate
from the delivery of software, the Company defers direct and incremental development
costs in accordance with ASC 310-20, Accounting for Nonrefundable Fees and Costs
Associated With Originating or Acquiring Loans and Initial Direct Costs of Leases (ASC
310-20). The costs deferred consist of employee compensation and benefits for those
employees directly involved with performing the development, as well as other direct and
incremental costs. All costs incurred in excess of the related revenues are expensed as
incurred. During the three months ended September 28, 2008 and September 27, 2009, the
Company deferred $377 and $783, respectively, of direct costs incurred. During the nine
months ended September 28, 2008 and September 27, 2009, the
Company deferred $874 and
$3,377, respectively, of direct costs incurred. Direct costs included in long-term
deferred service cost in the accompanying condensed consolidated balance sheets were
$1,223 and $4,621 at December 28, 2008 and September 27, 2009, respectively.
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Property and Equipment
Property and equipment are recorded at cost. The Company provides for depreciation
by charges to operations on a straight-line basis in amounts estimated to allocate the
cost of the assets over their estimated useful lives. Depreciation expense was $814 and
$832 for the three months ended September 28, 2008 and September 27, 2009, respectively,
and $2,435 and $2,410 for the nine months ended September 28, 2008 and September 27,
2009, respectively. Expenditures for repairs and maintenance are expensed as incurred.
Property and equipment consisted of the following:
As of | ||||||||||||
Estimated Useful | December 28, | September 27, | ||||||||||
Life | 2008 | 2009 | ||||||||||
Computer equipment and purchased software |
1.5 3 years | $ | 2,513 | $ | 2,545 | |||||||
Test and lab equipment |
3 years | 4,510 | 7,869 | |||||||||
Leasehold improvements |
Shorter of original contractual life of the lease or 5 years | 6,546 | 6,559 | |||||||||
Office furniture and equipment |
3 5 years | 856 | 849 | |||||||||
Total property and equipment |
14,425 | 17,822 | ||||||||||
Less: Accumulated depreciation and amortization |
(9,603 | ) | (12,039 | ) | ||||||||
$ | 4,822 | $ | 5,783 | |||||||||
Revenue Recognition
The Company derives revenue from the licensing of software products and software
upgrades; the sale of hardware products, maintenance and support services; and the sale
of professional services, including training. The Companys products incorporate software
that is more than incidental to the related hardware. Accordingly, the Company recognizes
revenue in accordance with ASC 985-605.
Under multiple-element arrangements where several different products or services are
sold together, the Company allocates revenue to each element based on vendor specific
objective evidence (VSOE) of fair value. It uses the residual method when fair value
does not exist for one or more of the delivered elements in a multiple-element
arrangement. Under the residual method, the fair value of the undelivered elements is
deferred and subsequently recognized when earned. For a delivered item to be considered a
separate element, the undelivered items must not be essential to the functionality of the
delivered item and there must be VSOE of fair value for the undelivered items in the
arrangement. Fair value is generally limited to the price charged when the Company sells
the same or similar element separately or, when applicable, the stated substantive
renewal rate. If evidence of the fair value of one or more undelivered elements does not
exist, all revenue is deferred and recognized after delivery of those elements occurs or
when fair value can be established. For example, in situations where the Company sells a
product during a period when it has a commitment for the delivery or sale of a future
specified software upgrade, the Company defers revenue recognition until the specified
software upgrade is delivered.
Significant judgments in applying accounting rules and regulations to the
Companys business practices principally relate to the timing and amount of revenue
recognition given its current concentration of revenues with one customer and its
inability to establish VSOE of fair value for specified software upgrades.
The Company sells its products primarily through original equipment manufacturer
(OEM) arrangements with telecommunications infrastructure vendors such as Nortel
Networks. The Company collaborates with its OEM customers on a best efforts basis to
develop initial product features and subsequent enhancements for the products that are
sold by that particular OEM to its wireless operator customers. For each OEM customer,
the Company expects to continue to develop products based on its core technology that are
configured for the requirements of the OEMs base stations and its operator customers.
This business practice is common in the telecommunications equipment industry and is
necessitated by the long planning cycles associated with wireless network deployments,
coupled with rapid changes in technology. Large and complex wireless networks support
tens of millions of subscribers and it is critical that any changes or upgrades be
planned well in advance to ensure that there are no service disruptions. The evolution of
the Companys infrastructure technology therefore must be planned, implemented and
integrated with the wireless operators plans for deploying new applications and services
and any equipment or technology provided by other vendors.
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Table of Contents
Given the nature of the Companys business, the majority of its sales are generated
through multiple-element arrangements comprised of a combination of products, maintenance
and support services, specified product upgrades and in some cases, upfront licensing and
development fees. The Company has established a business practice of negotiating with
OEMs the pricing for future purchases of new product releases and specified software
upgrades. For example, for Nortel Networks, the Company expects that it will release one
or more optional specified upgrades annually. To determine whether these optional future
purchases are elements of current purchase transactions, the Company assesses whether
such new products or specified upgrades will be offered to the OEM customer at a price
that represents a significant and incremental discount to current purchases. Because the
Company sells uniquely configured products through each OEM customer, it does not
maintain a list price for its products and specified software upgrades. Additionally, as
it does not sell these products and upgrades to more than one customer, the Company is
unable to establish VSOE of fair value for these products and upgrades. Consequently, the
Company is unable to determine if the license fees it charges for the optional specified
upgrades include a significant and incremental discount. As such, the Company defers all
revenue related to current product sales, software-only license fees, maintenance and
support services and professional services until all specified upgrades committed at the
time of shipment have been delivered. For example, the Company recognizes deferred
revenue from sales to an OEM customer only after it delivers a specified upgrade to which
it had previously committed. However, when it commits to an additional upgrade before it
has delivered a previously committed upgrade, the Company defers all revenue from product
sales after the date of such commitment until it delivers the additional upgrade. Any
revenue that the Company had deferred prior to the additional commitment is recognized
after the previously committed upgrade is delivered.
If there are no commitments outstanding for specified upgrades, the Company
recognizes revenue when all of the following have occurred: (1) delivery (FOB origin),
provided that there are no uncertainties regarding customer acceptance; (2) there is
persuasive evidence of an arrangement; (3) the fee is fixed or determinable; and
(4) collection of the related receivable is reasonably assured, as long as all other
revenue recognition criteria have been met. If there are uncertainties regarding customer
acceptance, the Company recognizes revenue and related cost of revenue when those
uncertainties are resolved. Any adjustments to software license fees are recognized when
reported to the Company by an OEM customer.
For arrangements where the Company receives initial licensing fees or customization
fees for new products under development, the Company defers recognition of these fees
until the final product has been delivered and accepted, and then recognizes the fees
over the expected customer relationship period. Revenue from pre-production units is
deferred and recognized once the final product has been delivered and accepted and the
other criteria for revenue recognition are met, including but not limited to VSOE of fair
value for post-contract customer support (PCS). If VSOE of fair value does not exist
for undelivered elements, the Company defers all revenues until VSOE of fair value exists
or the undelivered element is delivered. If the only remaining undelivered element is
PCS, the Company recognizes revenue ratably over the contractual PCS period.
For arrangements that include annual volume commitments and pricing levels, where
the associated discounts represent significant and incremental discounts and where the
maximum discount to be provided can not be quantified prior to the expiration of the
arrangement, the Company recognizes revenue, provided that delivery and acceptance has
occurred and no other commitments such as specified upgrades are outstanding, based on
the lowest pricing level stated in the arrangement. Any amounts invoiced in excess of the
lowest pricing level are deferred and recognized ratably over the remaining discount
period, which typically represents the greater of the PCS period or the remaining
contractual period.
For its direct sales to end user customers, which have not been material to date,
the Company recognizes product revenue upon delivery, provided that all other revenue
recognition criteria have been met.
The Companys support and maintenance services consist of the repair or replacement
of defective hardware, around-the-clock help desk support, technical support and the
correction of bugs in its software. The Companys annual support and maintenance fees are
based on a percentage of the initial sales or list price of the applicable hardware and
software products and may include a fixed amount for help desk services. Included in the
price of the product, the Company provides maintenance and support during the product
warranty period, which is typically one year. As discussed above, the Company defers all
revenue, including revenue related to PCS, until all specified upgrades outstanding at
the time of shipment have been delivered. In connection with an amendment to the
Companys OEM arrangement with Nortel Networks dated September 28, 2007, the Company can
no longer assert VSOE of fair value for PCS to Nortel Networks. When VSOE of fair value
for PCS can not be established, all revenue related to product sales and software-only
license fees, including bundled PCS, is deferred until all specified software upgrades
outstanding at the time of shipment are delivered. At the time of the delivery of all
such upgrades, the Company recognizes a proportionate amount of all such revenue
previously deferred based on the portion of the applicable warranty period that has
elapsed as of the time of such delivery. The unearned revenue is recognized ratably over
the remainder of the applicable warranty period. When VSOE of fair value for PCS can be
established, the Company allocates a portion of the initial product revenue and
software-only license fees to the bundled PCS based on the fees the Company charges for
annual PCS when sold separately. When all specified software upgrades outstanding at the
time of shipment are delivered, under the residual method, the Company recognizes the
previously deferred product revenue and software-only license fees, as well as the earned
PCS revenue, based on the portion of the applicable warranty period that has elapsed. The
unearned PCS revenue is recognized ratably over the remainder the applicable warranty
period. Notwithstanding the Companys inability to establish VSOE of fair
value of PCS to Nortel Networks for revenue recognition purposes, the Company
presents product revenue and service revenue separately on its consolidated statements of
income based on historical maintenance and support services renewal rates at the time of
sale.
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For PCS renewals, the Company recognizes revenue for such services ratably over the
service period as services are delivered.
The Company provides professional services for deployment optimization, network
engineering and radio frequency deployment planning, and provides training for network
planners and engineers. The Company generally recognizes revenue for these services as
the services are performed as it has deemed such services not essential to the
functionality of its products.
In addition, certain contracts contain other mutually agreed upon specifications or
service level requirements. Certain of the Companys product specifications include an
uptime guarantee and guarantees regarding failure rates. Historically, the Company has
not incurred substantial costs relating to these guarantees and the Company currently
expenses such costs as they are incurred. The Company reviews these costs on a regular
basis as actual experience and other information becomes available; and should they
become more substantial, the Company would accrue an estimated exposure and consider the
potential related effects of the timing of recording revenue on its sales arrangements.
The Company has not accrued any costs related to these warranties in the accompanying
consolidated financial statements.
In accordance with ASC 605-45, Principal Agent Considerations (ASC 605-45), the
Company classifies the reimbursement by customers of shipping and handling costs as
revenue and the associated cost as cost of revenue. The Company records reimbursable
out-of-pocket expenses in both product and services revenues and as a direct cost of
product and services. For the first three quarters of fiscal 2008 and 2009, shipping and
handling and reimbursable out-of-pocket expenses were not material.
The Company has not issued and does not anticipate issuing any refunds for products
sold. As such, no provisions have been recorded against deferred revenue, revenue or any
related receivables for potential refunds.
The Company anticipates that the revenue recognition related to the Companys
fixed-mobile convergence products will be complex, given that a number of the Companys
current arrangements for the development and supply of these products contain significant
customization services, volume discounts, specified upgrades and multiple elements for
new service offerings for which vendor-specific evidence of fair value does not currently
exist. To date, there have been no material revenues recognized with respect to these
products.
Concentrations of Credit Risk and Significant Customers
Financial instruments that subject the Company to credit risk consist of cash and
cash equivalents, short-term and long-term restricted investments, short-term and
long-term investments, accounts receivable and forward foreign currency exchange
contracts. The Company maintains its cash and cash equivalents and investment accounts
with two major financial institutions. The Companys cash equivalents and investments are
invested in securities with high credit ratings.
The Companys customers are principally located in the United States, Canada, Europe
and Japan. The Company performs ongoing credit evaluations of the financial condition of
its customers and generally does not require collateral. Although the Company is directly
affected by the overall financial condition of the telecommunications industry as well as
global economic conditions, management does not believe significant credit risk exists as
of September 27, 2009 beyond the risks discussed below related to Nortel Networks
bankruptcy filing and the anticipated sale of Nortel Networks CDMA business to Ericsson.
The Company generally has not experienced any material losses related to receivables from
individual customers or groups of customers in the telecommunications industry. Except as
described below with respect to Nortel Networks, the Company believes that all of its
accounts receivable are collectible and, therefore, has not provided any reserve for
doubtful accounts as of December 28, 2008 or September 27, 2009.
At December 28, 2008, Nortel Networks accounted for $500 of accounts receivable that
was paid in the ordinary course prior to Nortel Networks bankruptcy filing. In addition,
at December 28, 2008, the Company had $21,818 of outstanding invoices due from Nortel
Networks that it has accounted for on the cash basis; see Note 13 for further discussion.
At December 28, 2008, the Company had four customers that accounted for 49%, 15%, 11% and
11% of accounts receivable. At September 27, 2009, the Company had one customer, Nortel
Networks, that accounted for 81% of accounts receivable. Nortel Networks accounted for
93% and 88% of revenues for the three months ended September 28, 2008 and September 27,
2009, respectively. Nortel Networks accounted for 98% and 86% of revenues for the nine
months ended September 28, 2008 and September 27, 2009, respectively.
On January 14, 2009, Nortel Networks Corporation announced that it, Nortel Networks
Limited, and certain of its other Canadian subsidiaries filed for creditor protection
under the Companies Creditors Arrangement Act in Canada. Some of Nortel Networks
Corporations U.S. subsidiaries, including Nortel Networks, filed Chapter 11 voluntary
petitions in the State of Delaware. On June 19, 2009, Nortel Networks Corporation
announced the proposed stalking horse asset sale of Nortel
Networks CDMA business. On July 28, United States and Canadian bankruptcy courts
approved a bid by Ericsson to purchase Nortel Networks CDMA business, subject to
satisfaction of regulatory and other conditions. See Note 13 for further discussion.
The Company is subject to credit risk under its forward foreign currency exchange
contracts; see Note 6.
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Segment and Geographic Information
ASC 280-10, Segment Reporting (ASC 280-10), establishes standards for reporting
information about operating segments in annual financial statements and requires selected
information of these segments be presented in interim financial reports to stockholders.
Operating segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief operating
decision maker, or decision making group, in making decisions on how to allocate
resources and assess performance. The Companys chief operating decision making group, as
defined under ASC 280-10, consists of the Companys chief executive officer, chief
financial officer and executive vice presidents. As of September 27, 2009, the Company
views its operations and manages its business as one operating segment. The Company
continues to evaluate its current and new products for their impact on reporting
segments.
Export sales from the United States to unaffiliated customers are primarily to
Canada, and accounted for 93% and 88% of revenues individually for the three months ended
September 28, 2008 and September 27, 2009, respectively. Export sales from the United
States to unaffiliated customers are primarily to Canada, and accounted for 98% and 86%
of revenues individually for the nine months ended September 28, 2008 and September 27,
2009, respectively.
In the first quarter of fiscal 2009, the Company completed the sale of intellectual
property and goodwill from its U.K. subsidiary to the U.S. parent. Transfers between the
Company and its subsidiaries are generally recorded at amounts similar to the prices paid
by unaffiliated foreign dealers. All intercompany profit is eliminated in consolidation.
The Companys identifiable long-lived assets by geographic region as of December 28,
2008 and September 27, 2009 were as follows:
December 28, | September 27, | |||||||
2008 | 2009 | |||||||
United States |
$ | 5,501 | $ | 52,975 | ||||
United Kingdom |
12,178 | 958 | ||||||
Other foreign locations |
1,098 | 861 | ||||||
$ | 18,777 | $ | 54,794 | |||||
Stock-Based Compensation
As of September 27, 2009, the Company had two stock-based employee compensation
plans which are more fully described in Note 9.
Comprehensive Income (Loss)
ASC 220-10, Comprehensive Income, establishes standards for reporting and displaying
comprehensive income and its components in financial statements. Comprehensive income
(loss) is defined as the change in stockholders equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources.
Comprehensive income (loss) for all periods presented is equal to the reported net income
(loss).
Net Income (Loss) Per Share
The Company calculates net income per share in accordance with ASC 260-10, Earnings
Per Share. Basic net income (loss) per share is computed by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted net income
(loss) per share is computed using the weighted average number of common shares
outstanding and, when dilutive, potential common shares from options, warrants and
unvested common stock using the treasury stock method. Diluted weighted average shares
outstanding do not include options to purchase common stock and unvested restricted
shares outstanding totaling 10,024,575 and 12,017,188 for the three months ended
September 28, 2008 and September 27, 2009, respectively, as their effect would have been
anti-dilutive. Diluted weighted average shares outstanding do not include options to
purchase common stock and unvested restricted shares outstanding totaling 10,181,349 and
11,582,556 for the nine months ended September 28, 2008 and September 27, 2009,
respectively, as their effect would have been anti-dilutive.
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Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes
(ASC 740-10), which is the asset and liability method for accounting and reporting
income taxes. Under ASC 740-10, deferred tax assets and liabilities are recognized based
on temporary differences between the financial reporting and income tax bases of assets
and liabilities using statutory rates. In addition, ASC 740-10 requires a valuation
allowance against net deferred tax assets if, based upon the available evidence, it is
more likely than not that some or all of the deferred tax assets will not be realized.
ASC 740-10 also provides criteria for the recognition, measurement, presentation and
disclosures of uncertain tax positions. A tax benefit from an uncertain tax position may
be recognized if it is more likely than not that the position is sustainable based
solely on its technical merits. As of December 28, 2008 and September 27, 2009, the
Company had $5,703 and $6,025, respectively, including interest, of unrecognized tax
benefits.
Fair Value of Financial Instruments
Financial instruments consist principally of cash and cash equivalents, short-term
and long-term investments, short-term and long-term restricted investments, accounts
receivable, forward foreign currency exchange contracts and accounts payable. The fair value of a financial instrument is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The carrying values of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximate their
respective fair values due to their short-term maturities. Forward foreign currency
exchange contracts are carried at fair value based on quoted market prices for financial
instruments with similar characteristics. The Companys short-term and long-term
investments are classified as held-to-maturity and are reported at amortized cost, which
approximates fair market value. Refer to Notes 3 and 5 for further discussion of fair
value of investments.
Recently Issued Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued ASC
805-10, Business Combinations (ASC 805-10). ASC 805-10 applies to all transactions in
which an entity obtains control of one or more businesses and establishes principles and
requirements for how the acquirer:
a. Recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at
their acquisition-date fair values;
b. Recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and
c. Determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination.
While
prior FASB guidance permitted deferred recognition of pre-acquisition
contingencies until the contingency was resolved and consideration was issued or
issuable, ASC 805-10 requires an acquirer to recognize assets acquired and liabilities
assumed arising from contractual contingencies as of the acquisition date, measured at
their acquisition-date fair values. Acquisition costs, such as legal, accounting and
other professional and consulting fees, are to be expensed in the periods in which the
costs are incurred and the services are received, except for costs to issue debt or
equity securities. ASC 805-10 was effective for the Company for business combinations for
which the acquisition date is on or after January 1, 2009. The Company has not had any
business combinations after this date.
In September 2006, the FASB issued ASC 820-10, Fair Value Measurements and
Disclosures (ASC 820-10). ASC 820-10 defines fair value, establishes a framework for
measuring fair value and expands disclosure requirements about fair value measurements.
ASC 820-10 was effective on January 1, 2008. However, in February 2008, the FASB delayed
the effective date of ASC 820-10 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The adoption of ASC 820-10 for the
Companys financial assets and liabilities did not have a material impact on its
consolidated financial statements. The adoption of ASC 820-10 for the Companys
non-financial assets and liabilities did not have a material impact on its financial
position or results from operations.
In December 2007, the FASB issued ASC 810-10-65, Noncontrolling Interests in
Consolidated Financial Statements (ASC 810-10-65). ASC 810-10-65 amends ASC 810-10-10
to establish accounting and reporting standards for the noncontrolling (i.e. minority)
interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810-65 will
require, among other things, that a minority interest shall be clearly identified and
presented within the equity section of a consolidated balance sheet and that the amount
of consolidated net income attributable to the parent and to the noncontrolling interest
be clearly identified and presented on the face of a consolidated statement of income.
ASC 810-10-65 was effective for fiscal years
beginning after December 15, 2008. The adoption of ASC 810-10-65 did not have a
material effect on the Companys consolidated financial statements.
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In April 2008, the Financial Accounting Standards Board, (FASB) issued ASC 350-30,
General Intangibles Other Than Goodwill (ASC 350-30), which amends the factors that
must be considered in developing renewal or extension assumptions used to determine the
useful life over which to amortize the cost of a recognized intangible asset under ASC
350-10, Intangibles Goodwill and Other (ASC 350-10). ASC 350-30 requires an entity to
consider its own assumptions about renewal or extension of the term of the arrangement,
consistent with its expected use of the asset.
ASC 350-30 also requires the following incremental disclosures for renewable
intangible assets:
| The weighted-average period prior to the next renewal or extension
(whether explicit and implicit) for each major intangible asset class; |
||
| The entitys accounting policy for the treatment of costs
incurred to renew or extend the term of a recognized
intangible asset; and |
||
| For intangible asset renewed or extended during the period: |
| For entities that capitalize renewal or extension costs, the costs
incurred to review or extend the asset, for each major intangible
asset class and |
||
| The weighted-average period prior to the next renewal or extension
(whether explicit and implicit) for each major intangible asset class. |
ASC 350-30 is effective for financial statements for fiscal years beginning after
December 15, 2008. The guidance for determining the useful life of a recognized
intangible asset must be applied prospectively to intangible assets acquired after the
effective date. Early adoption is prohibited. Accordingly, ASC 350-30 would not serve as
a basis to change the useful life of an intangible asset that was acquired prior to the
effective date (January 1, 2009 for a calendar year company). However, the incremental
disclosure requirements described above would apply to all intangible assets, including
those recognized in periods prior to the effective date of ASC 350-30. The adoption of
ASC 350-30 did not have a material impact on the Companys financial position or results
of operations.
During the first quarter of 2009, the Company adopted ASC 815-10, Derivative and
Hedging, which requires additional disclosures about the Companys objectives and
strategies for using derivative instruments, how the derivative instruments and related
hedged items are accounted for under ASC 815-10, and related interpretations, and how the
derivative instruments and related hedged items affect the financial statements. The
adoption of ASC 815-10 had no financial impact on the Companys Condensed Consolidated
Financial Statements. Refer to Note 6, Derivative Instruments and Hedging Activities
for additional information on the Companys hedging activities.
In April 2009, the FASB issued ASC 825-10, Financial Instruments, (ASC 825-10).
ASC 825-10 requires disclosures about fair value of financial instruments in interim as
well as in annual financial statements. ASC 825-10 also requires fair value disclosures
in all interim financial statements. ASC 825-10 was effective for the Company as of the
second fiscal quarter of 2009 and did not have a material impact on the Companys
financial position, results of operations or cash flows.
In May 2009, the FASB issued ASC 855-10, Subsequent Events (ASC 855-10). ASC
855-10 establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or are
available to be issued. ASC 855-10 is effective for interim or annual financial periods
ending after June 15, 2009, the quarter ending June 28, 2009 for the Company. The
implementation of this standard did not have a significant impact on the financial
statements of the Company. Subsequent events through the filing date of this Form 10-Q
have been evaluated for disclosure and recognition.
In June 2009, the FASB issued the FASB Accounting
Standards Codification (the Codification) as the single source of authoritative U.S.
GAAP. The Codification supersedes all existing non-SEC accounting and reporting
standards. As a result, upon adoption, all references to accounting literature in the
Companys SEC filings will be required to conform to the appropriate reference within the
Codification. The Company is required to adopt this standard for its third quarter ending
September 27, 2009. The adoption of this standard did not have an impact on its financial
position or results of operations.
In September 2009, the FASB ratified the final consensuses reached by the Emerging
Issues Task Force regarding revenue arrangements with multiple deliverables and software
revenue recognition. The consensus reached on arrangements with multiple deliverables
addresses how consideration should be allocated to different units of accounting and
removes the previous criterion that entities must use objective and reliable evidence of
fair value in separately accounting for deliverables. The consensus reached on software
revenue recognition will exclude products containing both software and non-software
components that function together to deliver the products essential functionality
from the scope of current revenue recognition guidance for software products. Although
these consensuses are effective for the Company as of January 1, 2011, early adoption is
permitted with expanded disclosures and retrospective adjustment to the beginning of the
fiscal year of adoption. The Company is currently assessing the timing of adoption.
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3. Investments
In accordance with ASC 320-10, Investments Debt and Equity Securities, the Company
has classified its investment securities as held-to-maturity. These securities are
reported at amortized cost, which approximates fair market value.
The amortized cost and estimated fair value of the Companys investment securities
was as follows:
December 28, 2008 | September 27, 2009 | |||||||||||||||
Fair | Fair | |||||||||||||||
Amortized | Market | Amortized | Market | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Certificate of deposits |
$ | | $ | | $ | 1,694 | $ | 1,694 | ||||||||
Corporate debt securities |
86,140 | 86,674 | 34,651 | 34,713 | ||||||||||||
Debt securities of U.S. government agencies |
111,801 | 112,709 | 156,162 | 156,305 | ||||||||||||
$ | 197,941 | $ | 199,383 | $ | 192,507 | $ | 192,712 | |||||||||
All held-to-maturity investment securities had maturities of less than one year
as of December 28, 2008. Held-to-maturity investment securities of $163,484 and $29,023
are expected to mature in less than one year and between one to two years, respectively,
as of September 27, 2009.
During the quarter ended March 30, 2008, the Company sold certain credit card asset
backed securities which were classified as held-to-maturity due to a deterioration of
creditworthiness of the underlying trusts that issued the securities. The Company
routinely monitors all of its investments, and for the securities that were sold, certain
liquidity and cash flow metrics tracked by the Company had recently deteriorated. The
Company believed that it was prudent to liquidate these investments prior to any
potential downgrades by credit analysts. The Company sold a total of eight securities
having a total amortized cost of $16,630 and realized a gain on sale of these investments
of $83.
The Company intends to hold all of the securities it held as of September 27, 2009
to maturity, but will continue to monitor the creditworthiness of all securities.
As of September 27, 2009, the Company held 12 securities in an unrealized loss
position totaling $33. The unrealized losses on individual securities was less than 1% of
amortized cost and represented less than 1% of total amortized cost of all investments.
Given the nominal amount of the unrealized loss and the creditworthiness of the issuers
of the securities that were in an unrealized loss position at September 27, 2009, the
Company concluded there was no other-than-temporary impairment on any of its investments.
The Company noted no material declines in fair value subsequent to September 27, 2009.
As of December 28, 2008 and September 27, 2009, the Company had gross unrealized
gains in its securities held of $1,442 and $238, respectively.
4. Goodwill and Intangible Assets
As of December 28, 2008 and September 27, 2009, the Companys goodwill and acquired
intangible assets consisted of the following:
December 28, 2008 | ||||||||||||
Gross | Accumulated | Net | ||||||||||
Intangible | Amortization | Intangible | ||||||||||
Goodwill |
$ | 7,998 | $ | | $ | 7,998 | ||||||
Developed technology |
3,340 | 1,113 | 2,227 | |||||||||
Customer relationships |
1,350 | 563 | 787 | |||||||||
Non-compete agreements |
190 | 106 | 84 | |||||||||
Total goodwill and intangible assets |
$ | 12,878 | $ | 1,782 | $ | 11,096 | ||||||
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September 27, 2009 | ||||||||||||
Gross | Accumulated | Net | ||||||||||
Intangible | Amortization | Intangible | ||||||||||
Goodwill |
$ | 7,998 | $ | | $ | 7,998 | ||||||
Developed technology |
3,340 | 1,614 | 1,726 | |||||||||
Customer relationships |
1,350 | 816 | 534 | |||||||||
Non-compete agreements |
190 | 153 | 37 | |||||||||
Total goodwill and intangible assets |
$ | 12,878 | $ | 2,583 | $ | 10,295 | ||||||
Amortization expense on intangible assets was $267 for the three months ended
September 28, 2008 and September 27, 2009. Amortization expense on intangible assets was
$801 for the nine months ended September 28, 2008 and September 27, 2009. The Company
records amortization expense related to developed technology as a component of cost of
product revenue in the accompanying consolidated statements of operations. Expected
future amortization of intangible assets for fiscal periods indicated is as follows:
Fiscal year: |
||||
Remainder of 2009 |
$ | 267 | ||
2010 |
1,027 | |||
2011 |
780 | |||
2012 |
223 | |||
$ | 2,297 | |||
In accordance with ASC 360-10-35-21, When to Test a Long-Lived Asset for
Recoverability (ASC 360-10-35-21), the Company considered whether there were any
indicators of impairment for its long-lived and intangible assets as of September 27,
2009 and determined there were none.
As it did in fiscal 2008, the Company will conduct its annual goodwill impairment
test in the fourth quarter of fiscal 2009 in accordance with ASC 350-10, Intangibles Goodwill and Other (ASC 350-10). In accordance with ASC 350-10, the Company considered
whether there were any indicators of impairment as of September 27, 2009 and determined
there were none.
5. Fair Value Measurements
Effective January 1, 2008, the Company adopted ASC 820-10, Fair Value Measurements
and Disclosures (ASC 820-10), which defines fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date. ASC 820-10 establishes a three-level fair
value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy
requires entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair value are as
follows:
| Level 1 Quoted prices
in active markets for identical assets or liabilities. |
||
| Level 2 Observable inputs other than quoted prices included in Level
1, such as quoted prices for similar assets and liabilities in active
markets; quoted prices for identical or similar assets and liabilities
in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data. |
||
| Level 3 Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities. This includes certain pricing models,
discounted cash flow methodologies and similar techniques that use
significant unobservable inputs. |
The Companys adoption of ASC 820-10 did not have a material impact on its
consolidated financial statements. As of December 28, 2008 and September 27, 2009, the
Company had investments of $0 and $1,694, respectively, in certificates of deposit
disclosed in Note 3 that were valued using Level 1 inputs (quoted market prices for
identical assets). As of December 28, 2008 and September 27, 2009, the Company had
investments disclosed in Note 3 that were valued using Level 2 inputs (significant and
observable assumptions) as follows:
December 28, | September 27, | |||||||
2008 | 2009 | |||||||
Corporate debt securities |
$ | 86,674 | $ | 34,713 | ||||
Government sponsored entities |
112,709 | 156,305 | ||||||
$ | 199,383 | $ | 191,018 | |||||
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As of December 28, 2008, the Company had cash equivalents in corporate debt
securities and government sponsored entities that were valued using Level 2 inputs
(significant and observable assumptions) and had cash equivalents in money market mutual
funds that were valued using Level 1 inputs (quoted market prices for identical assets)
as follows:
Level 1 | Level 2 | |||||||||||
Inputs | Inputs | Totals | ||||||||||
Corporate debt securities |
$ | | $ | 3,099 | $ | 3,099 | ||||||
Government sponsored entities |
| 1,500 | 1,500 | |||||||||
Money market mutual funds |
20,665 | | 20,665 | |||||||||
$ | 20,665 | $ | 4,599 | $ | 25,264 | |||||||
As of September 27, 2009, the Company had $6,141 in cash equivalents in money
market mutual funds that were valued using Level 1 inputs (quoted market prices for
identical assets).
As of December 28, 2008, the Company had $193 of restricted investments which
represented certificates of deposit that collateralize outstanding letters of credit
related to certain of the Companys facility leases. As of September 27, 2009, the
Company had $403 of restricted investments which represented certificates of deposit that
collateralize outstanding letters of credit related to certain of the Companys facility
leases as well as the Companys foreign currency hedging program. The Company believes
that carrying value approximates fair value based on the market rate of interest for a
comparable instrument as of December 28, 2008 and September 27, 2009.
The Company recognizes all derivative financial instruments in its consolidated
financial statements at fair value in accordance with ASC 815-10, Derivatives and Hedging
(ASC 815-10). The Company determines the fair value of these instruments using the
framework prescribed by ASC 815-10, by considering the estimated amount it would receive
to sell or transfer these agreements at the reporting date and by taking into account
current interest rates, current currency exchange rates, the creditworthiness of the
counterparty for assets, and its creditworthiness for liabilities. In certain instances,
the Company may utilize financial models to measure fair value. Generally, the Company
uses inputs that include quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in markets that are
not active; other observable inputs for the asset or liability; and inputs derived
principally from, or corroborated by, observable market data by correlation or other
means. The Company has classified its derivative assets and liabilities within Level 2 of
the fair value hierarchy because these observable inputs are available for substantially
the full term of its derivative instruments. As of September 27, 2009, the Company had
$2,311 in currency exchange contracts valued using Level 2 inputs.
On December 29, 2008, the Company adopted ASC 820-10 for all nonfinancial assets and
nonfinancial liabilities not recognized or disclosed at fair value in the financial
statements on a recurring basis. The adoption of ASC 820-10 for those assets and
liabilities did not have a material impact on the Companys financial position, results
of operations or liquidity. The Company did not have any nonfinancial assets or
nonfinancial liabilities that would be recognized or disclosed at fair value on a
recurring basis as of September 27, 2009.
6. Derivative Instruments and Hedging Activities
The Company operates internationally and, in the normal course of business, is
exposed to fluctuations in foreign exchange rates. These fluctuations can increase the
costs of financing, investing and operating the business. During fiscal 2009, the Company
began entering into derivative instruments for risk management purposes only. The Company
does not enter into derivative instruments for speculative purposes. The Companys
current derivative program does not qualify for hedge accounting treatment under ASC
815-10.
Beginning in fiscal 2009, the Company has used forward foreign currency exchange
contracts to hedge its exposure to forecasted foreign currency denominated transactions
based in the United Kingdom. These forward contracts are not designated as cash flow,
fair value or net investment hedges under ASC 815-10; are marked-to-market with changes
in fair value recorded to earnings; and are entered into for periods consistent with
currency transaction exposures, generally less than one year. These derivative
instruments do not subject its earnings or cash flows to material risk since gains and
losses on these derivatives generally offset losses and gains on the expenses and
transactions being hedged. However, changes in currency exchange rates related to any
unhedged transactions may impact the Companys earnings and cash flows.
The success of the Companys hedging program depends, in part, on forecasts of
transaction activity in various currencies (primarily British pound sterling and Indian
rupee). The Company may experience unanticipated currency exchange gains or losses to the
extent that there are differences between forecasted and actual activity during periods
of currency volatility.
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Table of Contents
The following table summarizes the outstanding forward foreign exchange contracts
held by the Company at September 27, 2009.
September 27, 2009 | ||||||||||||
Local | Approximate | |||||||||||
Currency | U.S. Dollar | |||||||||||
Hedge Type | Amount | Equivalent | ||||||||||
British pound |
Sale | 475 | 757 | |||||||||
British pound |
Sale | 475 | 757 | |||||||||
British pound |
Sale | 500 | 797 | |||||||||
1,450 | $ | 2,311 | ||||||||||
As of September 27, 2009, the Companys forward foreign exchange contracts are
classified as short-term with maturities between one and three months.
Realized and unrealized foreign currency gains (losses), net of hedging are
accounted for in other income (expense). The Company had no forward foreign exchange
contracts outstanding during the three or nine months ended September 28, 2008. During
the three months ended September 27, 2009, the Company recorded a foreign exchange loss
of $94 in interest and other income, net. During the nine months ended September 27,
2009, the Company recorded a foreign exchange gain of $721 in interest and other income,
net. As of September 27, 2009, $204 of the then fair value of the Companys outstanding
forward foreign exchange contracts was included in prepaid expenses and other current
assets, representing the unrealized gains on those contracts in the accompanying
condensed consolidated balance sheet. The Company settles forward foreign exchange
contracts in cash.
The Company does not have significant concentrations of credit risk arising from its
derivative financial instruments, whether from an individual counterparty or group of
counterparties. The Company reduces its concentration of counterparty credit risk on its
derivative instruments by limiting acceptable counterparties to major financial
institutions with investment grade credit ratings, and by actively monitoring credit
ratings and outstanding positions on an ongoing basis. Furthermore, none of the Companys
derivative transactions are subject to collateral or other security arrangements or
contain provisions that are dependent on its credit ratings from any credit rating
agency.
7. Income Taxes
The Company recorded an income tax benefit of $9,019 for the three months ended
September 27, 2009, inclusive of discrete items. This tax benefit relates principally to
losses incurred from operations in the United States expected to be recovered from both
income generated in the United States during the remainder of 2009 and the carryback of
any excess loss to offset taxable profits reported in prior years. The Company recorded
an income tax benefit of $25,655 for the nine months ended September 27, 2009, inclusive
of discrete items. This tax benefit relates principally to losses incurred from
operations in the United States expected to be recovered from both income generated in
the United States during the remainder of 2009 and the carryback of any excess loss to
offset taxable profits reported in prior years and the impact of the reduction of a
valuation allowance against the Companys U.K. net operating loss carryforwards as a
result of profit realized on the sale of intellectual property and goodwill to the U.S.
parent. The Company has eliminated the impact of this inter-company sale in the financial
statements in accordance with the provisions of ASC 810-10, Consolidation . The effect of
discrete items for the three months ended September 27, 2009 was a net tax expense of
$250 resulting from a reduction of tax credits and interest recorded for unrecognized tax
benefits partially offset by benefits from the exercise of stock options. The effect of
discrete items for the nine months ended September 27, 2009 was a net tax benefit of
$3,015 consisting of the benefit associated with the release of the valuation allowance
on U.K. net operating losses as a result of the sale of intellectual property and
goodwill noted above partially offset by net discrete tax expense from interest recorded
for unrecognized tax benefits, a reduction of tax credits and the exercise of stock
options.
The Company recorded an income tax benefit of $5,404 for the three months ended
September 28, 2008, inclusive of discrete items. This tax benefit relates principally to
losses incurred from operations in the United States, partially offset by losses from
foreign operations for which no tax benefit can be recognized. The Company recorded
income tax expense of $2,354 for the nine months ended September 28, 2008, inclusive of
discrete items. This expense relates to profits from United States operations for this
period and the effect of losses from foreign operations for which no tax benefit can be
recognized. The effect of discrete items for the three and nine months ended September
28, 2008 was a tax benefit of $238 and $172 respectively. The discrete items result from
tax benefits from stock options, interest expense recorded for unrecognized tax benefits
and realization of additional tax credits.
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Table of Contents
The Company reviews all available evidence to evaluate the recovery of deferred tax
assets, including the recent history of accumulated losses in all tax jurisdictions over
the last three years as well as its ability to generate income in future periods. At
September 27, 2009, the Company had $24,597 in gross deferred tax assets against which
$7,002 in valuation allowances have been recorded related to state tax credits for which
it is more likely than not that these assets will not be realized given the nature of the
assets and the likelihood of future realization.
At September 27, 2009, the Company had $5,685 of unrecognized tax benefits, the
benefit of which, if recognized, would reduce the Companys effective tax rate. The
Company does not anticipate a material change to the amount of its unrecognized tax
benefits over the next twelve months.
The Company recognizes interest and penalties related to uncertain tax positions in
income tax expense. At September 27, 2009, the Company had $340 of interest accrued on
its unrecognized tax benefits.
The Company files income tax returns in the U.S. federal tax jurisdiction, various
state jurisdictions and various foreign jurisdictions. The statute of limitations for
federal and state tax authorities is closed for years prior to the year ended January 1,
2006 although carryforward attributes that were generated prior to 2004 may still be
subject to examination if they either have been or will be utilized to offset taxable
income in tax years 2004 and forward. During fiscal 2008, The Commonwealth of
Massachusetts completed an audit of the Companys Massachusetts excise tax returns for
the tax years ended January 2, 2005, January 1, 2006 and December 31, 2006. There was no
change made to the Companys tax liability, however, certain tax benefit carryovers were
adjusted.
During the first quarter of 2009, the Internal Revenue Service (IRS) began an
examination of the Companys U.S. federal income tax returns for the tax years ended
December 31, 2006 and December 30, 2007. No adjustments have been proposed to date by
the IRS.
The statute of limitations in the United Kingdom is closed for tax years prior to
December 31, 2003. The statute of limitations in India is closed for years prior to 2005.
The Emergency Economic Stabilization Act of 2008 was enacted into law on October 3,
2008. A provision of this law extended the federal research and experimental credit for
expenses incurred from January 1, 2008 through December 31, 2009. The Company recognized
a benefit of approximately $560 and $1,321 from the federal research credit for the three
and nine months ended September 27, 2009 respectively, compared with no benefit for the
three and nine months ended September 28, 2008.
The Companys subsidiary in India has operated under a tax holiday granted to
certain software companies that resulted in tax savings of $1,469 through September 27,
2009. The tax holiday is scheduled to expire in March 2011.
8. Commitments and Contingencies
The Company conducts its operations in leased facilities, and rent expense charged
to operations for the three months ended September 28, 2008 and September 27, 2009 was
$388 and $385, respectively. Rent expense charged to operations for the nine months ended
September 28, 2008 and September 27, 2009 was $1,095 and $1,190, respectively.
In connection with a lease incentive arrangement entered into as part of the
Companys headquarters lease, the Company recorded a lease incentive obligation and is
amortizing that obligation as a reduction to rent expense over the term of the lease. As
of December 28, 2008 and September 27, 2009, the unamortized amount was $1,696 and
$1,305, respectively. During the three months ended September 28, 2008 and September 27,
2009, the Company amortized the lease incentive obligation by approximately $130 and
$131, respectively. During the nine months ended September 28, 2008 and September 27,
2009, the Company amortized the lease incentive obligation by approximately $391 and
$391, respectively. The remaining lease incentive amounts are classified either as
components of accrued expenses and other current liabilities or other liabilities based
on the future timing of amortization against rent expense.
In addition, certain of the Companys facilities operating leases contain escalating
rent payments and as a result, the Company has straight-lined the rent expense associated
with these leases in accordance with ASC 840-10, Leases.
Future minimum commitments as of September 27, 2009, under all of the Companys
leases, are as follows:
Fiscal year: |
||||
Remainder of 2009 |
$ | 400 | ||
2010 |
1,587 | |||
2011 |
1,491 | |||
2012 |
492 | |||
2013 |
10 | |||
$ | 3,980 | |||
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The Company has contractual commitments that require the Company to purchase
certain minimum quantities of products as of September 27, 2009.
Future minimum commitments as of September 27, 2009 are as follows:
Fiscal year: |
||||
Remainder of 2009 |
$ | 2,618 | ||
2010 |
897 | |||
2011 |
213 | |||
$ | 3,728 | |||
Indemnification
The Company includes indemnification provisions in software license agreements with
its OEM customers. These indemnification provisions include provisions indemnifying the
customer against losses, expenses, and liabilities from damages that could be awarded
against the customer in the event that the Companys software is found to infringe upon a
patent or copyright of a third party. The scope of remedies available under these
indemnification obligations is limited by the OEM agreements. The Company believes that
its internal business practices and policies and the ownership of information limits the
Companys risk in paying out any claims under these indemnification provisions. To date,
the Company has not been subject to any litigation and has not had to reimburse any
customers for any losses associated with these indemnification provisions.
9. Stock Plans
Stock Options
As there was no public market for the Companys common stock prior to July 19, 2007,
the date of the Companys IPO, the Company determined the volatility percentage used in
calculating the fair value of stock options it granted based on an analysis of the
historical stock price data for a peer group of companies that issued options with
substantially similar terms. The expected volatility percentage used in determining the
fair value of stock options granted in the nine months ended September 28, 2008 was 58%
and in the nine months ended September 27, 2009 was 51%. The expected life of options has
been determined utilizing the simplified method as prescribed by the SECs Staff
Accounting Bulletin No. 107. The expected life of options granted during the nine months
ended September 28, 2008 and September 27, 2009 was 6.25 years. For the nine months ended
September 28, 2008 and September 27, 2009, the weighted-average risk free interest rate
used was 3.22% and 2.41%, respectively. The risk-free interest rate is based on a
weighted average of a 7-year treasury instrument whose term is consistent with the
expected life of the stock options. Although the Company paid a one-time special cash
dividend in April 2007, the expected dividend yield is assumed to be zero as the Company
does not currently anticipate paying cash dividends on its shares of common stock in the
future. ASC 718-10, Stock Compensation, requires companies to utilize an estimated
forfeiture rate when calculating the expense for the period, whereas previous guidance
permitted companies to record forfeitures based on actual forfeitures, which was the
Companys historical policy under such previous guidance. As a result, the Company
applied an estimated forfeiture rate between 4% and 5% for the nine months ended
September 28, 2008 and 6% for the nine months ended September 27, 2009 in determining the
expense recorded in its consolidated statement of operations. These rates were derived by
review of the Companys historical forfeitures since 2000.
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Table of Contents
Stock option activity under the 2007 Plan for the nine months ended September 27,
2009 is summarized as follows:
Weighted | ||||||||||||||||||||||||
Weighted | Average | |||||||||||||||||||||||
Average | Remaining | Weighted | ||||||||||||||||||||||
Range of | Exercise | Contractual | Aggregate | Average | ||||||||||||||||||||
Number of | Exercise | Price | Term in | Intrinsic | Fair Value | |||||||||||||||||||
Shares | Prices | per Share | Years | Value | per Share | |||||||||||||||||||
Outstanding at
December 28, 2008 |
12,729,531 | $ | 0.0017.89 | $ | 2.94 | 6.68 | $ | 37,866 | ||||||||||||||||
Granted |
2,963,822 | $ | 5.225.99 | $ | 5.46 | $ | 5.46 | |||||||||||||||||
Exercised |
(1,293,863 | ) | 0.116.44 | 1.57 | $ | 5,454 | ||||||||||||||||||
Cancelled |
(408,051 | ) | $ | 1.517.44 | 5.36 | |||||||||||||||||||
Outstanding at
September 27, 2009 |
13,991,439 | $ | 0.0017.89 | $ | 3.53 | 6.79 | $ | 46,314 | ||||||||||||||||
Exercisable at
September 27, 2009 |
7,609,158 | $ | 0.0017.89 | $ | 2.30 | 5.37 | $ | 34,496 | ||||||||||||||||
Options vested
or expected to vest
at September 27,
2009 (1) |
13,572,675 | $ | 0.0017.89 | $ | 3.47 | 6.72 | $ | 45,692 | ||||||||||||||||
Available for
grant at September
27, 2009 |
14,358,782 | |||||||||||||||||||||||
1. | This represents the number of vested stock options as of September
27, 2009 plus the unvested outstanding options at September 27,
2009 expected to vest in the future, adjusted for estimated
forfeitures. |
For the three months ended September 28, 2008 and September 27, 2009, the Company
recorded expense of $1,278 and $1,687, respectively, in connection with share-based
awards and related tax benefit of approximately $193 and $333 for the three months ended
September 28, 2008 and September 27, 2009, respectively. For the nine months ended
September 28, 2008 and September 27, 2009, the Company recorded expense of $3,542 and
$4,500, respectively, in connection with share-based awards and related tax benefit of
approximately $504 and $873 for the nine months ended September 28, 2008 and September
27, 2009, respectively. As of September 27, 2009, future expense for non-vested stock
options of $17,004 was expected to be recognized over a weighted-average period of
2.68 years.
The following table summarizes stock-based compensation expense related to employee
and director stock options, employee stock purchases, and restricted stock grants for the
three and nine months ended September 28, 2008 and September 27, 2009, which were
allocated as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 28, | September 27, | September 28, | September 27, | |||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Cost of service revenue |
$ | 70 | $ | 104 | $ | 181 | $ | 292 | ||||||||
Research and development |
757 | 984 | 2,112 | 2,620 | ||||||||||||
Selling and marketing |
266 | 342 | 763 | 875 | ||||||||||||
General and administrative |
185 | 257 | 486 | 713 | ||||||||||||
Total stock-based compensation |
$ | 1,278 | $ | 1,687 | $ | 3,542 | $ | 4,500 | ||||||||
Common Stock Repurchase Plans
In July 2008, the Companys board of directors authorized the repurchase of up to
$20,000 of the Companys common stock over the following 12 months. This initial stock
repurchase program was scheduled to terminate on July 29, 2009 or earlier if the Company
had so elected. The purchases of common stock were executed periodically on the open
market, as market conditions warranted, under a Rule 10b5-1 plan, which the Company
entered into in August 2008 and which permitted shares to be repurchased when the Company
might otherwise have been precluded from doing so under insider trading laws. The Company
completed its initial stock repurchase program in April 2009.
In February 2009, the Companys board of directors authorized a second stock
repurchase program authorizing the Company to purchase up to an additional $20,000 of the
Companys common stock following the completion of the initial stock repurchase program.
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Table of Contents
The following table summarizes the Companys repurchases under the initial stock
repurchase program for the nine months ended September 27, 2009.
Approximate | ||||||||||||||||
Dollar Value | ||||||||||||||||
Total | of | |||||||||||||||
Number of | Shares That | |||||||||||||||
Shares | May | |||||||||||||||
Purchased | Yet Be | |||||||||||||||
Total | Average | as Part of | Purchased | |||||||||||||
Number | Price | Publicly | Under the | |||||||||||||
of Shares | Paid per | Announced | Announced | |||||||||||||
Period | Purchased | Share | Program | Program | ||||||||||||
Through December 28, 2008 |
$ | 6,673 | ||||||||||||||
December 29, 2008 January 25, 2009 |
318,400 | $ | 5.43 | 318,400 | $ | 4,944 | ||||||||||
January 26, 2009 February 22, 2009 |
329,400 | $ | 5.34 | 329,400 | $ | 3,185 | ||||||||||
February 23, 2009 March 29, 2009 |
299,730 | $ | 5.65 | 299,730 | $ | 1,492 | ||||||||||
March 30, 2009 April 26, 2009 |
206,918 | $ | 5.80 | 206,918 | $ | 292 | ||||||||||
April 27, 2009 May 24, 2009 |
51,061 | $ | 5.69 | 51,061 | $ | | ||||||||||
Total |
1,205,509 | $ | 5.54 | 1,205,509 | $ | | ||||||||||
The following table summarizes the Companys repurchases under the second stock
repurchase program for the nine months ended September 27, 2009.
Approximate | ||||||||||||||||
Dollar Value | ||||||||||||||||
Total | of | |||||||||||||||
Number of | Shares That | |||||||||||||||
Shares | May | |||||||||||||||
Purchased | Yet Be | |||||||||||||||
Total | Average | as Part of | Purchased | |||||||||||||
Number | Price | Publicly | Under the | |||||||||||||
of Shares | Paid per | Announced | Announced | |||||||||||||
Period | Purchased | Share | Program | Program | ||||||||||||
$ | 20,000 | |||||||||||||||
December 29, 2008 January 25, 2009 |
| $ | | | $ | 20,000 | ||||||||||
January 26, 2009 February 22, 2009 |
| $ | | | $ | 20,000 | ||||||||||
February 23, 2009 March 29, 2009 |
| $ | | | $ | 20,000 | ||||||||||
March 30, 2009 April 26, 2009 |
| $ | | | $ | 20,000 | ||||||||||
April 27, 2009 May 24, 2009 |
188,482 | $ | 5.33 | 188,482 | $ | 18,995 | ||||||||||
May 25, 2009 June 28, 2009 |
215,266 | $ | 5.77 | 215,266 | $ | 17,753 | ||||||||||
June 29, 2009 July 26, 2009 |
| $ | | | $ | 17,753 | ||||||||||
July 27, 2009 August 23, 2009 |
61,276 | $ | 6.03 | 61,276 | $ | 17,384 | ||||||||||
August 24, 2009 September 27, 2009 |
| $ | | | $ | 17,384 | ||||||||||
Total |
465,024 | $ | 5.63 | 465,024 | $ | 17,384 | ||||||||||
10. Deferred Revenue and Deferred Product and Service Costs
Under the Companys revenue recognition policy, as described above in Note 2
Summary of Significant Accounting Policies, the Company recognizes revenue from sales
to an OEM customer only when it delivers a specified upgrade to which it has previously
committed. When the Company commits to an additional upgrade before it has delivered a
previously committed upgrade, it defers all revenue from product sales after the date of
such commitment until it delivers the additional upgrade.
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Table of Contents
The Company committed to a specified future software upgrade in April 2005, which
the Company refers to as its April 2005 specified upgrade. The Company delivered the
April 2005 specified upgrade in April 2007. The Company committed to a subsequent
specified upgrade in September 2006, which the Company refers to as its September 2006
specified upgrade. The
Company delivered the September 2006 specified upgrade in November 2007. The Company
committed to a specified upgrade in June 2007, which the Company refers as its June 2007
specified upgrade. The Company delivered the June 2007 specified upgrade in June 2008.
The Company committed to an additional subsequent specified upgrade in December 2007,
which the Company refers to as its December 2007 specified upgrade. The Company delivered
the December 2007 specified upgrade in the fourth quarter of fiscal 2008. The Company has
outstanding commitments for additional specified upgrades committed to in July 2008,
October 2008 and May 2009, which the Company refers to as its July 2008 specified
upgrade, its October 2008 specified upgrade and its May 2009 specified upgrade,
respectively. The Company expects to deliver the July 2008 specified upgrade in fiscal
2009 and the October 2008 and May 2009 specified upgrades in the first half of fiscal
2010.
At December 28, 2008 and September 27, 2009, other deferred revenue primarily
related to sales and development services for the Companys new fixed-mobile convergence
related products.
Deferred revenue and deferred product and service costs at December 28, 2008
consisted of the following:
Current | Long-Term | Total | ||||||||||
Deferred revenue related to December 2007 specified upgrade |
$ | 7,397 | $ | | $ | 7,397 | ||||||
Deferred revenue related to July 2008 specified upgrade |
37,775 | | 37,775 | |||||||||
Deferred revenue related to October 2008 specified upgrade |
13,663 | | 13,663 | |||||||||
Other deferred revenue |
2,475 | 5,550 | 8,025 | |||||||||
Total deferred revenue |
$ | 61,310 | $ | 5,550 | $ | 66,860 | ||||||
Deferred product cost related to December 2007 specified upgrade |
$ | 79 | $ | | $ | 79 | ||||||
Deferred product cost related to July 2008 specified upgrade |
742 | | 742 | |||||||||
Deferred product cost related to October 2008 specified upgrade |
566 | | 566 | |||||||||
Other deferred product and service costs |
526 | 1,300 | 1,826 | |||||||||
Total deferred product and service costs |
$ | 1,913 | $ | 1,300 | $ | 3,213 | ||||||
Deferred revenue and deferred product and service costs at September 27, 2009
consisted of the following:
Current | Long-Term | Total | ||||||||||
Deferred revenue related to July 2008 specified upgrade |
$ | 37,775 | $ | | $ | 37,775 | ||||||
Deferred revenue related to October 2008 specified upgrade |
47,359 | | 47,359 | |||||||||
Deferred revenue related to May 2009 specified upgrade |
37,987 | | 37,987 | |||||||||
Other deferred revenue |
1,139 | 14,447 | 15,586 | |||||||||
Total deferred revenue |
$ | 124,260 | $ | 14,447 | $ | 138,707 | ||||||
Deferred product cost related to July 2008 specified upgrade |
$ | 742 | $ | | $ | 742 | ||||||
Deferred product cost related to October 2008 specified upgrade |
1,248 | | 1,248 | |||||||||
Deferred product cost related to May 2009 specified upgrade |
720 | | 720 | |||||||||
Other deferred product and service costs |
307 | 4,865 | 5,172 | |||||||||
Total deferred product and service costs |
$ | 3,017 | $ | 4,865 | $ | 7,882 | ||||||
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
December 28, | September 27, | |||||||
2008 | 2009 | |||||||
Payroll and payroll-related accruals |
$ | 9,497 | $ | 6,872 | ||||
Accrued rent expense |
603 | 595 | ||||||
Accrued legal fees |
161 | 464 | ||||||
Accrued audit and tax |
722 | 401 | ||||||
Accrued royalties |
1,644 | 1,811 | ||||||
Other accruals |
1,738 | 1,931 | ||||||
$ | 14,365 | $ | 12,074 | |||||
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12. | Related Party Transactions |
The Company has an agreement with Qualcomm Incorporated (Qualcomm) under which it
licenses software for use in the development of infrastructure equipment. The Company
also has a supply and distribution agreement with Qualcomm relating to the Companys
ipBTS products. The Company paid Qualcomm approximately $161 during the three months
ended September 28, 2008 and $538 during the three months ended September 27, 2009 in
upfront license payments, royalties and component purchases under its license and supply
agreements with Qualcomm. The Company paid Qualcomm approximately $1,086 during the nine
months ended September 28, 2008 and $1,390 during the nine months ended September 27,
2009 in upfront license payments, royalties and component purchases under its license and
supply agreements with Qualcomm. During each of the three months ended September 28, 2008
and September 27, 2009, Qualcomm paid the Company $2,000 for development services. During
the nine months ended September 28, 2008 and September 27, 2009, Qualcomm paid the
Company $2,406 and $3,030, respectively, for prototype purchases and development
services. Amounts due to Qualcomm of $909 and $1,070 were included in accrued expenses
and other current liabilities as of December 28, 2008 and September 27, 2009,
respectively.
In January 2009, the Company formalized a development agreement with Qualcomm to
develop and commercialize certain EV-DO software products. The fees paid by Qualcomm
under this agreement are potentially subject to refund as royalties on future sales of
this developed product, if and when development and commercialization occur. During
fiscal 2008 and the first three quarters of fiscal 2009, total development fees under
this arrangement were $6,500 and were classified as long-term deferred revenue as of
September 27, 2009. The Company received a letter from Qualcomm dated September 24, 2009
which gave the Company a 30 day written notice of Qualcomms intent to terminate the
development agreement. The Company intends to renegotiate its contract with Qualcomm.
Should the termination become effective in the fourth quarter of fiscal 2009, the Company
would recognize $6,500 of revenue.
As of December 28, 2008, Qualcomm owned 9% of the Companys outstanding common
stock. As of September 27, 2009, Qualcomm owned approximately 6% of the Companys
outstanding common stock.
Some of the technology that the Company incorporates into its EV-DO products and
sells to Nortel Networks is licensed from Qualcomm. In the fourth quarter of fiscal 2008
and the first quarter of fiscal 2009, Qualcomm undertook an audit of the royalties that
were paid in respect of the EV-DO products that the Company sold between 2003 and 2007.
Qualcomm determined that the Company does not owe any additional royalties beyond the
amounts accrued.
13. Nortel Networks Bankruptcy
On January 14, 2009, Nortel Networks Corporation announced that it, Nortel Networks
Limited, and certain of its other Canadian subsidiaries filed for creditor protection
under the Companies Creditors Arrangement Act in Canada. Also on January 14, 2009, some
of Nortel Networks Corporations U.S. subsidiaries, including Nortel Networks Inc., filed
Chapter 11 voluntary petitions in the State of Delaware (the bankruptcy filing).
In connection with the announcement, Nortel Networks informed the Company that it
will continue to purchase goods and services from the Company and that the Company is a
long term partner and a key supplier to Nortel Networks. Purchases subsequent to the
bankruptcy filing have been under the terms of Nortel Networks current agreement with the
Company and the Company has been collecting receivables from Nortel Networks in the
ordinary course related to products and services purchased since Nortel Networks
bankruptcy filing.
Substantially all of the Companys current billings and revenue are derived from
Nortel Networks. Pre-bankruptcy filing outstanding invoices to Nortel Networks as of
December 28, 2008 and September 27, 2009 totaled $21,818 and $36,442, respectively.
Collection of these invoices will be subject to Nortel Networks bankruptcy proceedings,
and the Company is not able to estimate how much, if any, of these invoices will be
collected. As such, the Company has elected to treat these invoices on a cash basis.
Invoices outstanding as of the bankruptcy filing date are not reflected in the Companys
Balance Sheets as of December 28, 2008 and September 27, 2009.
The Company has been working with Nortel Networks to have its agreement assumed, as
it has been told by Nortel that it is a long term partner and key supplier to Nortel. If
Nortel Networks agreement with the Company is assumed, Nortel Networks would be required
to become current in all of its outstanding obligations to the Company, including
obligations outstanding prior to the filing. If the agreement is not assumed, all
outstanding obligations will be subject to discharge and the Company likely would not be
able to collect these receivables in full, if at all. Transactions after the filing are
subject to normal terms as stated in the contract and obligations are required to be paid
in due course.
On January 22, 2009, the United States Trustee appointed the Company to the Official
Committee of Unsecured Creditors in the Nortel Networks bankruptcy cases. There are four
other members of such Committee. The Committee has been and will represent the interests
of all unsecured creditors and attempt to maximize recovery for all unsecured creditors
in its negotiations with the debtor and other parties in the case.
On June 19, 2009, Nortel Networks Corporation announced the proposed stalking
horse asset sale of Nortel Networks CDMA business to Nokia Siemens Networks B.V.
(Nokia), a global wireless network infrastructure provider. Two additional
entities were qualified by Nortel Networks Corporation to bid with Nokia in an
auction to purchase the CDMA business. The auction was held on July 24, 2009. On July 28,
2009, the United States and Canadian bankruptcy courts approved a bid for Nortel
Networks CDMA business by Ericsson, another global wireless network infrastructure
provider, subject to satisfaction of regulatory and other conditions, which the Company
now expects to be completed in November 2009.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of
Operations |
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties, as well as assumptions that, if they never materialize
or prove incorrect, could cause our results to differ materially from those expressed or
implied by such forward-looking statements. The statements contained in this Quarterly
Report on Form 10-Q that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities
Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Such forward-looking statements include any expectation of earnings, revenues,
billings or other financial items; development of femtocell alliances and shipments;
statements related to our relationship with Nortel Networks, Inc., or Nortel Networks,
the effect of Nortel Networks bankruptcy or the anticipated sale of Nortel Networks
CDMA business to Ericsson; any statements of the plans, strategies and objectives of
management for future operations; factors that may affect our operating results;
statements concerning new products or services; statements related to future capital
expenditures; statements related to future economic conditions or performance; statements
as to industry trends and other matters that do not relate strictly to historical facts
or statements of assumptions underlying any of the foregoing. These statements are often
identified by the use of words such as, but not limited to, anticipate, believe,
continue, could, estimate, expect, intend, may, will, plan, target,
continue, and similar expressions or variations intended to identify forward-looking
statements. These statements are based on the beliefs and assumptions of our management
based on information currently available to management. Such forward-looking statements
are subject to risks, uncertainties and other important factors that could cause actual
results and the timing of certain events to differ materially from future results
expressed or implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those identified below,
and those discussed in the section titled Risk Factors included elsewhere in this
Quarterly Report on Form 10-Q and in our other filings with the SEC. Furthermore, such
forward-looking statements speak only as of the date of this report. We undertake no
obligation to update any forward-looking statements to reflect events or circumstances
after the date of such statements.
Overview
We are a leading provider of network infrastructure products used by wireless
operators to provide mobile broadband services. We specialize in helping operators
transform the mobile experience of users worldwide. Our high performance technology and
products, from emerging comprehensive femtocell solutions to core mobile network
infrastructure, enable operators to deliver broadband services to mobile subscribers,
wherever they are.
Most of our current products are based on a wireless communications standard known
as CDMA2000 1xEV-DO, or EV-DO. In 2002, we began delivering commercial infrastructure
products based on the first generation EV-DO standard known as Rev 0. The second
generation EV-DO standard is known as Rev A and supports push-to-talk, Voice-over-IP, or
VoIP, and faster Internet services. We delivered our first Rev A software release in
April 2007. Prior to 2008, most of our EV-DO sales were driven by operator deployments
focused on coverage with operators extending their broadband services across larger
portions of their subscriber geographies. Data traffic and service revenue growth
continues to outpace voice growth at many major wireless operators around the world. Our
EV-DO sales in 2008 and the first three quarters of 2009 were driven by capacity growth
as operators looked to expand their capacity to accommodate increased data traffic fueled
by greater consumer use of handheld devices, web browsing and 3G multimedia applications,
although operators in some markets continue to deploy our products to expand coverage.
Over the longer term, we expect our EV-DO sales to continue to be driven by capacity
growth as operators acquire more broadband subscribers that consume more broadband data.
We have developed a special business model to serve mobile operators and our
original equipment manufacturer, or OEM customers with embedded software products. Our
software is deployed in an OEMs installed base of wireless networks. These networks are
designed to deliver high quality wireless services to millions of consumers and are built
and regularly upgraded over long periods of time, often 10 to 15 years. A key element of
our strategy is to deliver significant increases in performance and functionality to both
our OEM customers and to operators through software upgrades to these networks. In 2007,
we delivered two major EV-DO software releases that provide for deployment of
high-performance multi-media applications by enabling faster downlink and uplink speeds,
supporting push-to-talk services, and adding new proprietary clustering features that
are designed to dramatically improve network scalability. In 2008 we delivered two
additional EV-DO software releases which enable mobile operators to more efficiently
increase capacity and accelerate the roll-out of next-generation multimedia services.
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We are also investing significantly in fixed mobile convergence, or FMC, products
that transform the experience of using mobile devices indoors, providing benefits such as
better coverage, better quality and performance of broadband applications, and lower
costs for both users and operators. Our FMC products enable operators to take advantage
of wireline broadband connections such as cable, DSL and fiber that already exist in most
offices and homes to connect mobile devices to an operators
services. There are two ways to accomplish this. The first is to use Wi-Fi and the
second is to place a personal base station, or what the industry refers to as a femtocell
access point, in the home or office. To address both of these market opportunities, we
have developed our universal access gateway, or UAG, product to manage security and
hand-offs when connecting a Wi-Fi phone or a femtocell product to an operators network.
Currently, there is significant operator interest in our FMC products, especially our
femtocells, as they work with existing handsets. Our FMC products include versions to
support CDMA and UMTS networks. Our FMC products are an important component of our growth
and diversification strategy. Users also utilize our mobile broadband technology and
products to create private mobile networks.
We were founded in March 2000 and sold our first product in the second quarter of
fiscal 2002. Our growth has been driven primarily by sales through our OEM customers to
wireless operators already using our EV-DO products as they increase the capacity and
geographic coverage of their networks, and by an increase in the number of wireless
operators that decide to deploy our EV-DO products on their networks. We have sold over
60,000 channel card licenses for use by over 70 operators worldwide.
In April 2007, we acquired 3Way Networks, a United Kingdom-based provider of
femtocell products and solutions for UMTS networks, for an aggregate purchase price of
approximately $11.0 million in cash and 441,845 shares of common stock. The acquisition
furthered our strategy to address the UMTS market and to deliver FMC and in-building
mobile broadband solutions.
In July 2007, we completed our IPO, in which we sold and issued 8.3 million shares
of our common stock at an issue price of $7.00 per share. We raised a total of
$58.1 million in gross proceeds from our IPO, or $50.8 million in net proceeds after
deducting underwriting discounts and commissions of $4.1 million and other offering costs
of approximately $3.2 million.
In August 2007, we entered into an agreement with Nokia Siemens Networks to certify
interoperability of our UMTS femtocell product with Nokia Siemens Networks femtocell
gateway product. We and Nokia Siemens Networks plan to provide a joint solution to
operators, and cooperate in joint marketing, sales and support programs. The agreement is
non-exclusive and sets forth the terms under which we may use their proprietary interface
specifications of their products.
In September 2007, we entered into an agreement with Nortel Networks, amending
certain provisions of the Development and Purchase and Sale Agreement for CDMA High Data
Rate (1xEV-DO) Products, dated as of October 1, 2001, between us and Nortel Networks, in
which we agreed to pricing for our products and services, including pricing for software
products and upgrades that were under development at the time and were subsequently
delivered in June 2008.
In January 2008, we entered into a global sourcing agreement with Thomson to supply
our UMTS femtocell technology. Pursuant to the agreement, Thomson may use our femtocell
products in conjunction with its own residential gateway offerings. The agreement is
non-exclusive and sets forth the terms and conditions under which Thomson may purchase
our femtocell products. The term of the agreement extends through January 2011, with
automatic annual renewals. Either party may terminate the agreement with 90 days notice.
In February 2008, we entered into a global OEM agreement with Motorola to provide
our CDMA femtocell solution products. The agreement is non-exclusive and sets forth the
terms and conditions under which Motorola may purchase our femtocell and UAG products.
The initial term of the agreement extends through May 2010, with automatic annual
renewals. Following the initial term, Motorola may terminate the agreement with 180 days
notice.
In June 2008, we entered into an agreement with Alcatel-Lucent to develop an
integrated IP Multimedia Subsystem, or IMS, femtocell solution for CDMA network operators
that combines Airvanas femtocell access point and femtocell network gateway with
Alcatel-Lucents IMS core network infrastructure. The development agreement was
terminated by Alcatel-Lucent in the second quarter of fiscal 2009.
In July 2008, we entered into an agreement with Hitachi to develop a joint CDMA
femtocell solution that integrates our femtocell products with Hitachis core radio
access network infrastructure that Hitachi offers in Japan.
In September 2008, we entered into a supply agreement with Hitachi under which
Hitachi will provide marketing, sales and support activities for our femtocell products.
The initial term of the supply agreement extends through June 2014 and provides for
automatic annual renewals, unless either party gives 180 days notice of its intent not to
renew.
In November 2008, we entered into another agreement with Nortel Networks amending
certain provisions of the Development and Purchase and Sale Agreement for CDMA High Data
Rate (1xEV-DO) Products, dated as of October 1, 2001, between us and Nortel Networks, in
which we agreed to pricing for software products and upgrades that were under development
at the time.
In December 2008, we entered into a sourcing agreement with Pirelli Broadband
Solutions to add wireless broadband connectivity to Pirellis portfolio of consumer
broadband devices by using our UMTS femtocell technology. The agreement is non-exclusive
and sets forth the terms and conditions under which Pirelli may purchase our femtocell
products. The initial term
of the agreement extends through November 2010, with automatic annual renewals,
unless either party gives 90 days notice of its intent not to renew.
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In June 2009, we entered into a global reseller agreement with a multinational
infrastructure provider to supply and support our femtocell service manager and UAG
products. The agreement is non-exclusive and sets forth the terms and conditions under
which the customer may purchase our FMC products. The initial term of the agreement
extends through May 2012.
In June 2009, we entered into an agreement with a multinational infrastructure
provider for the licensing and support of our femtocell service manager. The agreement is
non-exclusive and sets forth the terms and conditions under which the customer may
purchase our product. The initial term of the agreement extends through June 2014, with
automatic annual renewals, unless either party gives 90 days notice of its intent not to
renew.
In June 2009, we entered into a master purchase agreement with Sprint/United
Management Company, or (Sprint) to supply and support femtocell products. Under the
agreement, we will provide our HubBub CDMA femtocell for Sprints commercial 3G femtocell
service offerings. The agreement is non-exclusive and sets forth the terms and conditions
under which Sprint may purchase our femtocell product and services. The term of the
agreement extends through December 2014.
In September 2009,
we entered into a supply and licensing agreement with a multinational
infrastructure provider to to supply our UMTS and CDMA 2000 Femtocell technology for
integration into its products such as stand alone femtocell access points or
residential gateways, and resale of such products to its customers. The agreement
is non-exclusive and sets forth the terms and conditions under which
it may purchase
our femtocell products and services. The term of the agreement extends through September
2012.
Our Development and Purchase Agreement for CDMA High Data Rate (1xEV-DO) Products
with Nortel Networks is subject to rejection and discharge in Nortel Networks
bankruptcy. United States and Canadian bankruptcy courts recently approved a bid by
Telefon AB L.M. Ericsson, or Ericsson, to purchase Nortel Networks CDMA business. We
intend to work to have our agreement with Nortel Networks assumed by Ericsson, but we may
not be successful in having our agreement assumed without concession, or at all.
Our OEM Business Model
We operate in the highly consolidated and competitive market for mobile broadband
equipment. To compete in this market, we have developed OEM channels, unique products and
a business approach that targets the needs of large equipment vendors and their end
customers, wireless operators. Wireless operators invest significantly in building out
large-scale wireless networks, which are very costly to replace. Equipment vendors
compete aggressively to win market share and they retain their market position by
upgrading their installed systems regularly, thereby enabling their wireless operator
customers to deliver new services to their subscribers. These vendors develop detailed
product roadmaps and look to us to design and deliver software upgrades that are
consistent with their roadmaps.
We collaborate with our OEM customers to develop specific features for products that
they sell to their wireless operator customers. We expect to continue to develop, for
each OEM customer, products based on our core technology that are configured specifically
to meet the requirements of each OEM and its customers. We also offer our OEM customers
the option to purchase and make available to their wireless operator customers new
products and specified upgrades at prices that we set typically several months prior to
the new product or specified upgrade release. We expect that we will release one or more
specified upgrades per year.
Our OEM customers typically are also potential competitors of ours in the markets
that they serve. We face the competitive risk that our OEM customers might develop
internally alternative solutions or purchase alternative products from our competitors.
Our future success depends on our ability to continue to develop products that offer
advantages over alternative solutions that our OEM customers might develop or purchase
from others.
Our typical sales arrangements involve multiple elements, including: perpetual
licenses for our software products and specified software upgrades; the sale of hardware,
maintenance and support services; and the sale of professional services, including
training. Software is more than incidental to all of our products and, as a result, we
recognize revenue in accordance with Accounting Standards Codification, or ASC 985-605,
Software Revenue Recognition, or ASC 985-065.
Impact of ASC 985-605, Software Revenue Recognition
To recognize revenue from current product shipments, we must establish vendor
specific objective evidence, or VSOE, of fair value for all undelivered elements of our
sales arrangements, including our specified software upgrades. The best objective
evidence of fair value would be to sell these specified software upgrades separately to
multiple customers for the same price. However, because of our OEM business model, the
features and functionality delivered in our software upgrades are defined in
collaboration with our OEMs based on each OEMs particular requirements. As a result, it
is highly unlikely that we will ever be
able to sell the same standalone software upgrade to a different OEM customer and
thus establish VSOE of fair value for such upgrade.
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As a result, we defer all revenue from sales to OEMs until all elements without VSOE
of fair value have been delivered. This deferral is required because there is no basis to
allocate revenue between the delivered and undelivered elements of the arrangement
without VSOE of fair value. The revenue deferral is necessary even though (1) our
specified software upgrades are not essential to the standalone functionality of any
product currently deployed, (2) the purchase of our upgrades are based on separate
decisions by our OEM customers and generally require separate payment at the time of
delivery and (3) there is no refund liability for payments received on any previously
shipped and installed product in the event we are not able to deliver the specified
upgrade.
We recognize deferred revenue from sales to an OEM customer only when we deliver a
specified upgrade that we have previously committed. When we commit to an additional
upgrade before we have delivered a previously committed upgrade, we defer all revenue
from product sales after the date of such commitment until we deliver the additional
upgrade. Any revenue that we had deferred prior to the additional commitment is
recognized when the previously committed upgrade is delivered.
We anticipate that the revenue recognition related to the our fixed-mobile
convergence products will be complex given that a number of our current arrangements for
the development and supply of these products contain significant customization services,
volume discounts, specified upgrades and multiple elements for new service offerings for
which VSOE of fair value does not currently exist. To date, there have been no material
revenues recognized with respect to these products.
The following diagram presents a hypothetical example of how software product
releases and commitments to specified upgrades affect the relationship between product
billings, product revenue and deferred product revenue under a business model similar to
our current EV-DO OEM business model. The diagram does not reflect the actual timing of
any of our software releases, the actual level of our product and service billings,
revenue or deferred revenue in any period, the actual timing of recognition of our
product and service revenues, or the deferral of product revenue that can result from the
inability to establish VSOE of fair value for maintenance and support services.
| Software release A is delivered and related
product and service billings are recognized as
revenue because there are no outstanding
commitments for upgrades. |
| Software upgrade B is committed in Period 1 and,
therefore, product and service billings for
shipments of software release A after that point
cannot be recognized as revenue before software
upgrade B is delivered. |
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| Before software upgrade B is delivered, software
upgrade C is committed in Period 2 and,
therefore, product and service billings for
shipments of software release A after that point
cannot be recognized before software upgrade C is
delivered. |
|
| When software upgrade B is delivered in Period 3,
all deferred revenue, which consists of deferred
revenue from billings of software release A, from
the time of the commitment of software upgrade B
until the time of the commitment of software
upgrade C is recognized, subject to being able to
establish VSOE of fair value for maintenance and
support services. |
|
When software upgrade C is delivered in Period 4,
all remaining deferred revenue from the time of
the commitment of software upgrade C, which
consists of deferred revenue from billings of
software release A and software upgrade B, is
recognized because no commitments are
outstanding, subject to being able to establish
VSOE of fair value for maintenance and support
services. |
As illustrated in this example, we begin to recognize our revenue in periods during
which we deliver specified upgrades. When we have such revenue recognition events, we
begin to recognize revenue from sales invoiced during multiple prior periods. As a
result, we believe that our revenue, taken in isolation, provides limited insight into
the performance of our business. We evaluate our performance by also assessing: product
and service billings, which reflects our sales activity in a period; cost related to
product and service billings, which reflects the cost associated with our product and
service billings; deferred revenue at the end of the period, which reflects the
cumulative billings that we were unable to recognize under our revenue recognition
policy; deferred product cost at the end of a period, which reflects the cumulative costs
that we were unable to recognize under our revenue recognition policy associated with our
deferred product revenue; and cash flow from operating activities. We expect this pattern
of commitments and delivery of future specified upgrades and the resulting impact on the
timing of revenue
recognition to continue with respect to our OEM business. As we introduce new
products, the variability of the total revenue recognized in any fiscal period may
moderate, provided that we are able to establish VSOE of fair value for these new
products or upgrades to these new products, and as sales of these new products represent
a larger percentage of our overall business.
Key Elements of Financial Performance
Revenue
Our revenue consists of product revenue and service revenue from sales through our
OEM customers and directly to our end customers.
Product Revenue. Our product revenue is principally currently derived from the sale
of our EV-DO mobile network products that are used by wireless operators to provide
mobile broadband services. These products include four major components: base stations or
OEM base station channel cards; radio network controllers; network management systems;
and software upgrades to the OEMs installed base. We have sold OEM base station channel
cards both as hardware/software combinations and as software licenses when the OEM
customer chooses to have the hardware manufactured for it by a third party. Radio network
controllers, or RNCs, and network management systems are usually sold as software
licenses as the OEM customer procures off-the-shelf hardware from third party suppliers.
Almost all of our revenue and product and service billings to date have been derived from
sales of our EV-DO products through our OEM agreement with Nortel Networks. Revenue from
our FMC products have not been material to date.
We first derived revenue and product and service billings in fiscal 2002 from the
sale of first generation EV-DO mobile network products based on the Rev 0 version of the
standard. Prior to the third quarter of fiscal 2006, we sold Rev 0-based base station
channel cards, which were manufactured for us by a third party, and licensed Rev 0
software for these OEM base station channel cards, as well as for RNCs and network
management systems. In connection with the transition to products based on the Rev A
version of the standard, Nortel Networks exercised its right to license our hardware
design in order to manufacture the OEM base station channel cards that support Rev A
instead of purchasing this hardware from us. As a result, since the third quarter of
fiscal 2006, our product sales to Nortel Networks have been derived solely from the
license of software, specifically Rev 0 and Rev A software, RNCs and network management
systems, as well as Rev A software for OEM base station channel cards and system
upgrades.
Under our revenue recognition policy, as described above, we begin to recognize
revenue from sales to an OEM customer only after we deliver a specified upgrade that we
have previously committed. When we commit to an additional upgrade before we have
delivered a previously committed upgrade, we defer all revenue from product sales after
the date of such commitment until we deliver the additional upgrade.
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Our product revenue in fiscal 2006 consisted primarily of software license fees
and hardware shipments to our primary OEM customer from fiscal 2002 through the first
quarter of fiscal 2005, which is when we made an additional commitment for a specified
future software upgrade. We refer to that software upgrade as our April 2005 specified
upgrade or software version 4.0. In the first quarter of fiscal 2007, we delivered
software version 4.0. As a result, we recognized product revenue of $141.5 million that
consisted primarily of software license fees and hardware shipments to our primary OEM
customer from April 2005 through September 2006, which is when we made another commitment
for a specified future software upgrade. We refer to that software upgrade as our
September 2006 specified upgrade or software version 5.0. In the fourth quarter of fiscal
2007, we delivered software version 5.0. As a result, we recognized product revenue of
$137.4 million that consisted primarily of software license fees and hardware shipments
to our primary OEM customer from September 2006 through June 2007, which is when we made
another commitment for a specified future software upgrade. We refer to that software
upgrade as the June 2007 specified upgrade or software version 6.0. In the second quarter
of fiscal 2008, we delivered software version 6.0. As a result, we recognized product
revenue of $59.0 million that consisted primarily of billings from software license fees
to our primary OEM customer from June 2007 through December 2007, when we made another
commitment for a specified future software upgrade. We refer to that software upgrade as
the December 2007 specified upgrade or software version 7.0. In the fourth quarter of
fiscal 2008, we delivered software version 7.0. As a result, we recognized product
revenue of $57.1 million that consisted primarily of billings from software license fees
to our primary OEM customer from December 2007 through July 2008, when we made another
commitment for a specified future software upgrade. We refer to that software upgrade as
the July 2008 specified upgrade or software version 8.0. In October 2008, we made another
commitment for a specified software upgrade, which we refer to as the October 2008
specified upgrade or software version 8.1. In May 2009, we made another commitment for a
specified software upgrade, which we refer to as the May 2009 specified upgrade or
software version 8.2. As of September 27, 2009, there were three specified software
upgrades that we had not yet delivered, software versions 8.0, 8.1 and 8.2. We expect to
deliver software version 8.0 in the fourth quarter of fiscal 2009, subsequent to the sale
of Nortels CDMA business to Ericsson. We expect to deliver software versions 8.1 and 8.2
in the first half of fiscal 2010.
Service Revenue. Our service revenue is derived from support and maintenance
services, which we refer to as post-contract customer support, or PCS, for our EV-DO
products and other professional services, including training. Our support and maintenance
services consist of the repair or replacement of defective hardware, around-the-clock
help desk support, technical support and the correction of bugs in our software. Our
annual support and maintenance fees are based on a fixed-dollar amount associated with,
or a percentage of the initial sales price for, the applicable hardware and software
products. Included in the price for the product, we provide maintenance and support
during our product warranty period, which is two years for our base station channel cards
and one year for our software products.
As discussed above, we defer all revenue, including revenue related to maintenance
and support services, until all specified upgrades outstanding at the time of shipment
have been delivered. When VSOE of fair value for PCS does not exist, all revenue related
to product sales and software-only license fees, including bundled PCS, is deferred until
all specified software upgrades outstanding at the time of shipment are delivered. At the
time of the delivery of all such upgrades, we recognize a proportionate amount of all
such revenue previously deferred based on the portion of the applicable warranty period
that has elapsed at the time of such delivery. The unearned revenue is recognized ratably
over the remainder of the applicable warranty period. When VSOE of fair value for PCS
exists, we allocate a portion of the initial product revenue and software-only license
fees to the bundled PCS based on the fees we charge for annual PCS when sold separately.
When all specified software upgrades outstanding at the time of shipment are delivered,
under the residual method, we recognize the previously deferred product revenue and
software-only license fees, as well as the earned PCS revenue, based on the portion of
the applicable warranty period that has elapsed. The unearned PCS revenue is recognized
ratably over the remainder the applicable warranty period. Notwithstanding our inability
to establish VSOE of fair value of maintenance and support services to Nortel Networks
under ASC 985-605 for revenue recognition purposes, we are permitted to present product
revenue and service revenue separately on our consolidated statements of operations based
on historical maintenance and support services renewal rates at the time of sale.
Our support and maintenance arrangements for our EV-DO products are typically
renewable for one-year periods. We invoice our support and maintenance fees in advance of
the applicable maintenance period, and we recognize revenue from maintenance and support
services ratably over the term of the applicable maintenance and support period as
services are delivered.
We also offer professional services such as deployment optimization, network
engineering and radio frequency deployment planning, and provide training for network
planners and engineers. We generally recognize revenue for these services as the services
are performed.
Product and Service Billings
Product and service billings, which is a non-GAAP measure, represents the amount
invoiced for products and services that are delivered and services that are to be
delivered to our end customers directly or through our OEM channels for which we expect
payment will be made in accordance with normal payment terms. Software-only product sales
under our OEM agreements are invoiced monthly upon notification of sale by the OEM
customer. We present the product and service billings metric because we believe it
provides a consistent basis for understanding our sales activity and our OEM channel
sales from period to period. We use product and service billings as a measure to assess
our business performance and as a key factor in our incentive compensation program.
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Wireless operators generally purchase communications equipment in stages driven
first by coverage and later by capacity. The initial stage involves deploying new
services in selected parts of their networks, often those geographic regions with the
highest concentration of customers. Wireless operators then typically expand coverage
throughout their network. Later purchases are driven by a desire to expand capacity as
the usage of new services grows. Initial purchases usually occur around the time that we
and our OEM customers offer products that substantially improve the performance of the
network. Subsequent purchases to expand the geographic coverage and capacity of an
operators wireless network are difficult to predict because they are typically related
to consumer demand for mobile broadband services. As a result, our product and service
billings have fluctuated significantly from period to period and we expect them to
continue to fluctuate significantly from period to period for the foreseeable future.
On January 14, 2009, Nortel Networks announced that it had filed for bankruptcy
protection. At the time of that filing, we had outstanding invoices to Nortel Networks in
the amount of $21.8 million and during the first quarter of fiscal 2009 we invoiced an
additional $14.6 million to Nortel Networks related to royalties earned and services
performed through January 13, 2009. The collection of these amounts is subject to Nortel
Networks bankruptcy proceedings. As a result, we excluded from billings and accounts
receivable pre-bankruptcy filing outstanding invoices to Nortel Networks of $21.8 million
from the quarter and year ended December 28, 2008 and $14.6 million for the quarter ended
March 29, 2009. Outstanding invoices as of the date of the Nortel Networks filing will be
accounted for on a cash basis as collected.
Our product and service billings were $43.0 million in the third quarter of fiscal
2008 and $107.1 million in the first three quarters of fiscal 2008 and $31.2 million in
the third quarter of fiscal 2009 and $88.7 million in the first three quarters of fiscal
2009. Product and service billings to Nortel Networks comprised 93% of billings in the
third quarter of fiscal 2008, 95% of billings in the first three quarters of fiscal 2008,
87% of billings in the third quarter of fiscal 2009 and 89% of billings in the first
three quarters of fiscal 2009.
The following table reconciles revenue to product and service billings:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 28, | September 27, | September 28, | September 27, | |||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Revenue |
$ | 8,247 | $ | 2,726 | $ | 74,904 | $ | 16,869 | ||||||||
Deferred revenue, at end of period |
112,134 | 138,707 | 112,134 | 138,707 | ||||||||||||
Less: deferred revenue, at beginning of period |
(77,396 | ) | (110,185 | ) | (79,978 | ) | (66,860 | ) | ||||||||
Product and service billings |
$ | 42,985 | $ | 31,248 | $ | 107,060 | $ | 88,716 | ||||||||
Deferred Revenue
Product and service billings for invoiced shipments and software license fees, and
related maintenance services, as well as non-recurring engineering and other development
services for which revenue is not recognized in the current period are recorded as
deferred revenue. Deferred revenue increases each fiscal period by the amount of product
and service billings that are deferred in the period and decreases by the amount of
revenue recognized in the period. We classify deferred revenue that we expect to
recognize during the next twelve months as current deferred revenue on our balance sheet
and the remainder as long-term deferred revenue.
Under our revenue recognition policy as described above, we recognize revenue from
sales to an OEM customer only when we deliver a specified upgrade to which we had
previously committed. When we commit to an additional upgrade before we have delivered a
previously committed upgrade, we defer all revenue from product sales after the date of
such commitment until we deliver the additional upgrade.
We committed to a specified future software upgrade in April 2005, which we refer to
as our April 2005 specified upgrade. We delivered the April 2005 specified upgrade in
April 2007. We committed to a subsequent specified upgrade in September 2006, which we
refer to as our September 2006 specified upgrade. We delivered the September 2006
specified upgrade in November 2007. We committed to a specified upgrade in June 2007,
which we refer to as our June 2007 specified upgrade. We delivered the June 2007
specified upgrade in June 2008. We committed to a subsequent specified upgrade in
December 2007, which we refer to as our December 2007 specified upgrade. We delivered the
December 2007 specified upgrade in the fourth quarter of fiscal 2008. We have outstanding
commitments for additional specified upgrades committed to in July 2008, October 2008 and
May 2009, which we refer to as our July 2008 specified upgrade, its October 2008
specified upgrade and our May 2009 specified upgrades. We expect to deliver the July 2008
specified upgrade in the fourth quarter of fiscal 2009, subsequent to the expected
closing of Ericssons acquisition of Nortels CDMA business. We expect to deliver the
October 2008 and May 2009 specified upgrades in the first half of fiscal 2010.
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Deferred revenue at December 28, 2008 consisted of the following:
Current | Long-Term | Total | ||||||||||
Deferred revenue related to December 2007 specified upgrade |
$ | 7,397 | $ | | $ | 7,397 | ||||||
Deferred revenue related to July 2008 specified upgrade |
37,775 | | 37,775 | |||||||||
Deferred revenue related to October 2008 specified upgrade |
13,663 | | 13,663 | |||||||||
Other deferred revenue |
2,475 | 5,550 | 8,025 | |||||||||
Total deferred revenue |
$ | 61,310 | $ | 5,550 | $ | 66,860 | ||||||
Deferred revenue at September 27, 2009 consisted of the following: |
Current | Long-Term | Total | ||||||||||
Deferred revenue related to July 2008 specified upgrade |
$ | 37,775 | $ | | $ | 37,775 | ||||||
Deferred revenue related to October 2008 specified upgrade |
47,359 | | 47,359 | |||||||||
Deferred revenue related to May 2009 specified upgrade |
37,987 | | 37,987 | |||||||||
Other deferred revenue |
1,139 | 14,447 | 15,586 | |||||||||
Total deferred revenue |
$ | 124,260 | $ | 14,447 | $ | 138,707 | ||||||
We expect Ericssons acquisition of Nortels CDMA business to close in the
fourth quarter of 2009, and we expect to collect our outstanding pre-bankruptcy filing
invoices to Nortel of $36.4 million. If we collect this amount, approximately $0.5
million would be immediately recorded to revenue and the remaining amount of $35.9
million would be recorded as deferred revenue related to our October 2008 specified
upgrade.
Cost of Revenue
Cost of product revenue consists primarily of:
| cost for channel card hardware provided by contract manufacturers; |
||
| cost of hardware for our RNCs and network management systems; |
||
| license fees for third-party software and other intellectual property used in our products; and |
||
| other related overhead costs. |
Cost of service revenue consists primarily of salaries, benefits and stock-based
compensation for employees that provide support services to customers and manage the
supply chain.
Some of the technology that we incorporate into our EV-DO products and sell to
Nortel Networks is licensed from Qualcomm. In the fourth quarter of fiscal 2008 and the
first quarter of fiscal 2009, Qualcomm undertook an audit of the royalties that we paid
to Qualcomm in respect of the EV-DO products that we sold between 2003 and 2007. Qualcomm
determined that we do not owe them any additional royalties beyond the amounts we had
accrued.
Cost Related to Product and Service Billings
Cost related to product and service billings, which is a non-GAAP measure, includes
the cost of products delivered and invoiced to our customers, the cost directly
attributable to the sale of software-only products by our OEM partners and the cost of
services in the current period. Cost related to product billings is recorded as deferred
product and service cost until such time as the related deferred revenue is recognized as
revenue. At the time of revenue recognition, we expense the related deferred product and
service costs in our income statement as cost of revenue.
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Deferred Product and Service Costs
Cost related to product billings for invoiced shipments and software-only license
fees for which revenue is not recognized in the current period is recorded as deferred
product cost. In addition, when we perform development services that are essential to the
functionality of the initial delivery of a new product where the associated revenues have
been deferred due to the fact that they do not qualify as units of accounting separate
from the delivery of the software, we defer direct and incremental development costs. The
costs deferred consist of employee compensation and benefits for those employees directly
involved with performing the development, as well as other direct and incremental costs.
All costs incurred in excess of the related revenues are expensed as incurred. Deferred
product and service costs increases each fiscal period by the amount of product and
service costs associated with product and service billings that are deferred in the
period and decreases by the amount of product and service costs associated with revenue
recognized in the period. We classify deferred product cost that we expect to recognize
during the next twelve months as current deferred product and service costs on our
balance sheet. As of September 27, 2009, $3.0 million of deferred product cost was
included in current assets and $4.9 million of deferred service cost was included in
long-term assets.
Gross Profit
Our gross profit represents revenue recognized during the period less related cost
and is primarily attributable to OEM product shipments and software license fees. Our
gross profit varies from period to period according to the mix of our revenue from
hardware products, software products and services.
Gross Profit on Billings
Our gross profit on billings, a non-GAAP measure, represents product and service
billings during the period less cost related to product and service billings and is
primarily attributable to OEM product shipments and software license fees. Our gross
profit on billings varies from period to period according to our mix of billings from
hardware products, software products and services.
Due to Nortel Networks bankruptcy filing on January 14, 2009, we excluded $14.6
million of pre-bankruptcy filing outstanding invoices to Nortel Networks from billings
for the nine months ended September 27, 2009. As a result, our gross profit on billings
was reduced by the same amount for the nine months ended September 27, 2009.
Operating Expenses
Research and Development. Research and development expense consists primarily of:
| salaries, benefits and stock-based compensation related to our engineers; |
||
| cost of prototypes and test equipment relating to the development of
new products and the enhancement of existing products; |
||
| payments to suppliers for design and consulting services; and |
||
| other related overhead costs. |
We expense all research and development cost as it is incurred. Our research and
development is performed by our engineering personnel in the United States, India and the
United Kingdom. We intend to continue to invest significantly in our research and
development efforts, which we believe are essential to maintaining our competitive
position and the development of new products for new markets. Accordingly, we expect
research and development expense to remain relatively flat through the remainder of
fiscal 2009.
Sales and Marketing. Sales and marketing expense consists primarily of:
| salaries, benefits and stock-based compensation related to our sales, marketing and customer support personnel; |
||
| commissions payable to our sales personnel; |
||
| travel, lodging and other out-of-pocket expenses; |
||
| marketing program expenses; and |
||
| other related overhead costs. |
We expense sales commissions at the time they are earned, which typically is when
the associated product and service billings are recorded or when a customer agreement is
executed. We expect sales and marketing expense to increase in amount
and as a percentage of product and service billings for the foreseeable future as we
continue to increase the number of sales, marketing and customer service employees to
expand our international presence and support our new femtocell products.
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General and Administrative. General and administrative expense consists primarily
of:
| salaries, benefits and stock-based compensation related to
our executive, finance, legal, human resource and
administrative personnel; |
||
| professional services costs; and |
||
| other related overhead costs. |
We expect general and administrative expense to decrease slightly in the fourth
quarter of 2009.
Stock-Based Compensation Expense
We adopted the requirements of ASC 718-10, Stock Compensation , or ASC 718-10, in
the first quarter of fiscal 2006. ASC 718-10 addresses all forms of shared-based payment
awards, including shares issued under employee stock purchase plans, stock options,
restricted stock and stock appreciation rights. ASC 718-10 requires us to expense
share-based payment awards with compensation cost for share-based payment transactions
measured at fair value.
Based on current stock option grants, we expect to recognize a future expense for
non-vested options of $17.0 million over a weighted-average period of 2.68 years as of
September 27, 2009. We expect stock-based compensation expense will increase for the
foreseeable future as we expect to continue to grant stock-based incentives to our
employees.
Operating Income on Billings
Operating income on billings, which is a non-GAAP measure, varies from period to
period according to the amount of gross profit on billings less operating expenses for
the period.
Interest Income, Net
Interest income, net, primarily relates to interest earned on our cash, cash
equivalents and investments.
Cash Flow from Operating Activities
Customer collections and, consequently, cash flow from operating activities are
driven by sales transactions and related product and service billings, rather than
recognized revenues. We believe cash flow from operating activities is a useful measure
of the performance of our business because, in contrast to income statement profitability
metrics that rely principally on revenue, cash flow from operating activities captures
the contribution of changes in deferred revenue and deferred charges. We present cash
flow from operating activities because it is a metric that management uses to track
business performance and, as such, is a key factor in our incentive compensation program.
In addition, management believes this metric is frequently used by securities analysts,
investors and other interested parties in the evaluation of software companies with
significant deferred revenue balances.
Due to the Nortel Networks bankruptcy filing on January 14, 2009, we excluded $36.4
million of pre-bankruptcy filing outstanding invoices to Nortel Networks from accounts
receivable as of September 27, 2009. The collection of these amounts is subject to Nortel
Networks bankruptcy proceedings, and as a result, we cannot determine when we may
collect these amounts, if at all. These amounts will be treated on a cash basis, if and
when collected. Cash flows for the first quarter of 2009 were negatively impacted by
$28.2 million, and cash flows for the second quarter of fiscal 2009 were negatively
impacted by $8.2 million as a result of Nortel Networks bankruptcy filing.
Cash and Investments
We had unrestricted cash and cash equivalents and investments totaling $228.4
million as of December 28, 2008 and $205.3 million as of September 27, 2009. Our existing
cash and cash equivalents and investments are invested primarily in money market funds,
high grade government sponsored enterprises (AAA/A1+), high-grade commercial paper
(A1+/P1), and high grade corporate notes (A1/A+). We do not invest in any types of asset
backed securities such as those backed by mortgages or auto loans. None of our
investments have incurred defaults or have been downgraded. We do not hold auction rate
securities. We hold unrestricted cash and cash equivalents for working capital purposes.
We do not enter into investments for trading or speculative purposes. We have an
investment policy that guides our investing activities. Among other things, our
investment policy limits the concentration of our investments in any one issuer (with the
exception of investments in U.S. Treasury and U.S. agency debt
obligations and SEC-registered money market funds) to no more than 10% of the book
value of our investment portfolio at the time of purchase. The primary objectives of our
investment activities are to preserve principal, maintain proper liquidity to meet
operating needs, maximize yields and maintain proper fiduciary control over our
investments.
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We enter into derivative instruments for risk management purposes only and we do not
enter into derivative instruments for speculative purposes. Our derivative program does
not qualify for hedge accounting treatment. We operate internationally and, in the normal
course of business, are exposed to fluctuations in foreign exchange rates. These
fluctuations can increase the costs of financing, investing and operating the business.
To limit further our exposure to currency exchange rate fluctuations, we also
occasionally exchange U.S. Dollars for other currencies in which we incur expenses
significantly in advance of our need to make payments in those currencies.
We use forward foreign currency exchange contracts to hedge our exposure to
forecasted foreign currency denominated transactions based in the United Kingdom. These
forward contracts are not designated as cash flow, fair value or net investment hedges;
are marked-to-market with changes in fair value recorded to earnings; and are entered
into for periods consistent with currency transaction exposures, generally less than one
year. These derivative instruments do not subject our earnings or cash flows to material
risk since gains and losses on these derivatives generally offset losses and gains on the
expenses and transactions being hedged. In addition, changes in currency exchange rates
related to any unhedged transactions may impact our earnings and cash flows. As of
September 27, 2009, we had $2.3 million in currency exchange contracts. Gains and losses
on the changes in fair value recorded to earnings are classified as other income and
amounted to a $94,000 loss for the three months ended September 27, 2009, and a $721,000
gain for the nine months ended September 27, 2009.
Fiscal Year
Our fiscal year ends on the Sunday closest to December 31. Our fiscal quarters end
on the Sunday that falls closest to the last day of the third calendar month of the
quarter.
Critical Accounting Policies and Estimates
This managements discussion and analysis of financial condition and results of
operations is based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of
these financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On an ongoing basis, management
evaluates its estimates and judgments, including those related to revenue recognition.
Management bases its estimates and judgments on historical experience and on various
other factors that it believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
We regard an accounting estimate or assumption underlying our financial statements
as a critical accounting estimate where (i) the nature of the estimate or assumption is
material due to the level of subjectivity and judgment necessary to account for highly
uncertain matters or the susceptibility of such matters to change; and (ii) the impact of
the estimates and assumptions on financial condition or operating performance is
material.
Revenue Recognition
We derive revenue from the licensing of software products and software upgrades; the
sale of hardware products, maintenance and support services; and the sale of professional
services, including training. Our products incorporate software that is more than
incidental to the related hardware. Accordingly, we recognize revenue in accordance with
ASC 985-605.
Under multiple-element arrangements where several different products or services are
sold together, we allocate revenue to each element based on VSOE of fair value. We use
the residual method when fair value does not exist for one or more of the delivered
elements in a multiple-element arrangement. Under the residual method, the fair value of
the undelivered elements are deferred and subsequently recognized when earned. For a
delivered item to be considered a separate element, the undelivered items must not be
essential to the functionality of the delivered item and there must be VSOE of fair value
for the undelivered items in the arrangement. Fair value is generally limited to the
price charged when we sell the same or similar element separately or, when applicable,
the stated substantive renewal rate. If evidence of the fair value of one or more
undelivered elements does not exist, all revenue is deferred and recognized when delivery
of those elements occurs or when fair value can be established. For example, in
situations where we sell a product during a period when we have a commitment for the
delivery or sale of a future specified software upgrade, we defer revenue recognition
until the specified software upgrade is delivered.
Significant judgments in applying the accounting rules and regulations to our
business practices principally relate to the timing and amount of revenue recognition
given our current concentration of revenues with one customer and our inability to
establish VSOE of fair value for specified software upgrades.
We sell our products primarily through OEM arrangements with telecommunications
infrastructure vendors such as Nortel Networks. We have collaborated with our OEM
customers on a best efforts basis to develop initial product features and subsequent
enhancements for the products that are sold by a particular OEM to its wireless operator
customers. For each OEM customer, we expect to continue to develop products based on our
core technology that are configured for the requirements of the OEMs base stations and
its operator customers.
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This business practice is common in the telecommunications equipment industry and is
necessitated by the long planning cycles associated with wireless network deployments
coupled with rapid changes in technology. Large and complex wireless networks support
tens of millions of subscribers and it is critical that any changes or upgrades be
planned well in advance to ensure that there are no service disruptions. The evolution of
our infrastructure technology therefore must be planned, implemented and integrated with
the wireless operators plans for deploying new applications and services and any
equipment or technology provided by other vendors.
Given the nature of our business, the majority of our sales are generated through
multiple-element arrangements comprised of a combination of products, maintenance and
support services and, importantly, specified product upgrades. We have established a
business practice of negotiating with OEMs the pricing for future purchases of new
product releases and specified software upgrades. We expect that we will release one or
more optional specified upgrades annually. To determine whether these optional future
purchases are elements of current purchase transactions, we assess whether such new
products or specified upgrades will be offered to the OEM customer at a price that
represents a significant and incremental discount to current purchases. Because we sell
uniquely configured products through each OEM customer, we do not maintain a list price
for our products and specified software upgrades. Additionally, as we do not sell these
products and upgrades to more than one customer, we are unable to establish VSOE of fair
value for these products and upgrades. Consequently, we are unable to determine if the
license fees we charge for the optional specified upgrades include a significant and
incremental discount. As such, we defer all revenue related to current product sales,
software-only license fees, maintenance and support services and professional services
until all specified upgrades committed at the time of shipment have been delivered. For
example, we recognize deferred revenue from sales to an OEM customer only when we deliver
a specified upgrade that we had previously committed. However, when we commit to an
additional upgrade before we have delivered a previously committed upgrade, we defer all
revenue from product sales after the date of such commitment until we deliver the
additional upgrade. Any revenue that we have deferred prior to the additional commitment
is recognized after the previously committed upgrade is delivered.
If there are no commitments outstanding for specified upgrades, we recognize revenue
when all of the following have occurred: (1) delivery (FOB origin), provided that there
are no uncertainties regarding customer acceptance; (2) there is persuasive evidence of
an arrangement; (3) the fee is fixed or determinable; and (4) collection of the related
receivable is reasonably assured, as long as all other revenue recognition criteria have
been met. If there are uncertainties regarding customer acceptance, we recognize revenue
and related cost of revenue when those uncertainties are resolved. Any adjustments to
software license fees are recognized when reported to us by an OEM customer.
For arrangements where we receive initial licensing fees or customization fees for
new products under development, we defer recognition of these fees until the final
product has been delivered and accepted, and then we recognize the fees over the expected
customer relationship period. Revenue from pre-production units is deferred and
recognized once the final product has been delivered and accepted, provided that the
other criteria for revenue recognition are met, including but not limited to the
establishment of VSOE of fair value for post-contract support. If VSOE of fair value
cannot be established for undelivered elements, we defer all revenues until VSOE of fair
value can be established or the undelivered element is delivered. If the only remaining
undelivered element is post-contract support, we recognize revenue ratably over the
contractual post-contract support period.
For arrangements that include annual volume commitments and pricing levels, where
such discounts are significant and incremental and where the maximum discount to be
provided cannot be quantified prior to the expiration of the arrangement, we recognize
revenue, provided that delivery and acceptance has occurred and provided that no other
commitments such as specified upgrades are outstanding, based on the lowest pricing level
stated in the arrangement. Any amounts invoiced in excess of the lowest pricing level are
deferred and recognized ratably over the remaining discount period, which typically
represents the greater of the PCS period or the remaining contractual period.
For our direct sales to end user customers, which have not been material to date, we
recognize product revenue upon delivery provided that all other revenue recognition
criteria have been met.
Our support and maintenance services consist of the repair or replacement of
defective hardware, around-the-clock help desk support, technical support and the
correction of bugs in our software. Our annual support and maintenance fees are based on
a percentage of the initial sales or list price of the applicable hardware and software
products and may include a fixed amount for help desk services. Included in the price of
the product, we provide maintenance and support during the product warranty period, which
is typically one year. As discussed above, we defer all revenue, including revenue
related to maintenance and support services (post-contract customer support or PCS),
until all specified upgrades outstanding at the time of shipment have been delivered. In
connection with an amendment to our OEM arrangement with Nortel Networks in 2007, we can
no longer assert VSOE of fair value for PCS to Nortel Networks. When VSOE of fair value
for PCS cannot be established, all revenue related to
product sales and software-only license fees, including bundled PCS, is deferred
until all specified software upgrades outstanding at the time of shipment are delivered.
At the time of the delivery of all such upgrades, we recognize a proportionate amount of
all such revenue previously deferred based on the portion of the applicable warranty
period that has elapsed as of the time of such delivery. The unearned revenue is
recognized ratably over the remainder of the applicable warranty period. When VSOE of
fair value for PCS can be established, we allocate a portion of the initial product
revenue and software-only license fees to the bundled PCS based on the fees we charge for
annual PCS when sold separately. When all specified software upgrades outstanding at the
time of shipment are delivered, under the residual method, we recognize the previously
deferred product revenue and software-only license fees, as well as the earned PCS
revenue, based on the portion of the applicable warranty period that has elapsed. The
unearned PCS revenue is recognized ratably over the remainder the applicable warranty
period. Notwithstanding our inability to establish VSOE of fair value of maintenance and
support services to Nortel Networks for revenue recognition purposes, we present product
revenue and service revenue separately on our consolidated statements of income based on
historical maintenance and support services renewal rates at the time of sale.
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For maintenance and service renewals, we recognize revenue for such services ratably
over the service period as services are delivered.
We provide professional services for deployment optimization, network engineering
and radio frequency deployment planning, and provides training for network planners and
engineers. We generally recognize revenue for these services as the services are
performed as we have deemed such services not essential to the functionality of our
products. We have not issued any refunds on products sold. As such, no provisions have
been recorded against revenue or related receivables for potential refunds.
In addition, certain of our contracts include guarantees regarding failure rates.
Historically, we have not incurred substantial costs relating to these guarantees and we
currently expense such costs as they are incurred. We review these costs on a regular
basis as actual experience and other information becomes available; and should they
become more substantial, we would accrue an estimated exposure and consider the potential
related effects of the timing of recording revenue on our license arrangements. We have
not accrued any costs related to these warranties in the accompanying consolidated
financial statements.
In accordance with ASC 605-45, Principal Agent Considerations, or ASC 605-45, we
classify the reimbursement by customers of shipping and handling costs as revenue and the
associated cost as cost of revenue. We record reimbursable out-of-pocket expenses in both
product and services revenues and as a direct cost of product and services. For fiscal
2008 and the first three quarters of fiscal 2009, shipping and handling and reimbursable
out-of-pocket expense were not material.
We have neither issued nor do we anticipate issuing any refunds on products sold. As
such, no provisions have been recorded against deferred revenues, revenue or any related
receivables for potential refunds.
We anticipate that the revenue recognition related to the our fixed-mobile
convergence products will be complex given that a number of our current arrangements for
the development and supply of these products contain significant customization services,
volume discounts, specified upgrades and multiple elements for new service offerings for
which vendor-specific evidence of fair value does not currently exist. To date, there
have been no material revenues recognized with respect to these products.
During the three months ended June 28, 2009, we recognized $1.2 million of
previously deferred revenues as a result of the termination of a customer arrangement and
cancellation of all of our remaining obligations under that arrangement.
Investments and Restricted Investments
We determine the appropriate categorization of investments in securities at the time
of purchase. As of December 28, 2008 and September 27, 2009, our investments were
categorized as held-to-maturity and are presented at their amortized cost. We classify
securities on our balance sheet as short-term or long-term based on the date we
reasonably expect the securities to mature or liquidate.
As of September 27, 2009, we held 12 securities in an unrealized loss position
totaling approximately $33,000. The unrealized losses on these individual securities were
less than 1% of amortized cost and represented less than 1% of total amortized cost of
all investments. Given the creditworthiness of the issuers of the securities that are in
an unrealized loss position at September 27, 2009, we concluded there is no
other-than-temporary impairment on any of these investments. We noted no material
declines in fair value subsequent to September 27, 2009.
Stock-Based Compensation
Through the year ended January 1, 2006, we accounted for our stock-based awards to
employees using the intrinsic value method and elected the disclosure-only requirements.
Under the intrinsic value method, compensation expense is measured on the date of the
grant as the difference between the deemed fair value of our common stock and the
exercise or purchase price
multiplied by the number of stock options or restricted stock awards granted. We
followed the provisions of ASC 505-50, Equity Based Payments to Non-Employees, to account
for grants made to non-employees.
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ASC 718-10 requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their estimated
fair values. In accordance with ASC 718-10, we recognize the compensation cost of
share-based awards on a straight-line basis over the vesting period of the award, which
is generally four to five years, and have elected to use the Black-Scholes option pricing
model to determine fair value. ASC 718-10 eliminated the alternative of applying the
intrinsic value method to stock compensation awards. We adopted the accounting standards
of ASC 718-10 on the first day of fiscal 2006 using the prospective-transition method. As
such, we will continue to apply the intrinsic value method in future periods to equity
awards granted prior to the adoption of ASC 718-10.
As there was no public market for our common stock prior to July 19, 2007, the date
of our IPO, we determined the volatility percentage used in calculating the fair value of
stock options it granted based on an analysis of the historical stock price data for a
peer group of companies that issued options with substantially similar terms. The
expected volatility percentage used in determining the fair value of stock options
granted in the nine months ended September 28, 2008 was 58% and in the nine months ended
September 27, 2009 was 51%. The expected life of options was determined utilizing the
simplified method as prescribed by the SECs Staff Accounting Bulletin No. 107. The
expected life of options granted during the nine months ended September 28, 2008 and
September 27, 2009 was 6.25 years. For the nine months ended September 28, 2008 the
weighted-average risk free interest rates used was 3.22% and for the nine months ended
September 27, 2009 the weighted-average risk free interest rates used was 2.41%. The
risk-free interest rate is based on a 7-year treasury instrument whose term is consistent
with the expected life of the stock options. Although we paid a one-time special cash
dividend in April 2007, the expected dividend yield is assumed to be zero as we do not
currently anticipate paying cash dividends on our common stock in the future. In
addition, ASC 718-10 requires companies to utilize an estimated forfeiture rate when
calculating the expense for the period, whereas prior FASB accounting guidance permitted
companies to record forfeitures based on actual forfeitures, which was our historical
policy. As a result, we applied an estimated forfeiture rate between 4% and 5% for the
nine months ended September 28, 2008 and 6% for the nine months ended September 27, 2009
in determining the expense recorded in our consolidated statements of operations. These
rates were derived by review of our historical forfeitures since 2000.
For the third quarter of fiscal 2008 we recorded an expense of $1.3 million for
share-based awards and a related tax benefit of approximately $193,000. For the third
quarter of fiscal 2009 we recorded an expense of $1.7 million for share-based awards and
a related tax benefit of approximately $333,000. For the first three quarters of fiscal
2008 we recorded an expense of $3.5 million for share-based awards and a related tax
benefit of approximately $504,000. For the first three quarters of fiscal 2009 we
recorded an expense of $4.5 million for share-based awards and a related tax benefit of
approximately $873,000. As of September 27, 2009, future expense for non-vested stock
options of $17.0 million was expected to be recognized over a weighted-average period of
2.68 years.
Income Taxes
We are subject to income taxes in both the United States and foreign jurisdictions,
and we use estimates in determining our provision for income taxes. We account for income
taxes under the provisions of ASC 740-10, Income Taxes (ASC 740-10), which requires the
recognition of deferred income tax assets and liabilities for expected future tax
consequences of events that have been recognized in our financial statements or tax
returns. Under ASC 740-10, we determine the deferred tax assets and liabilities based
upon the difference between the financial statements and the tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse. We must then periodically assess the likelihood that our deferred
tax assets will be recovered from our future taxable income, and, to the extent we
believe that it is more likely than not our deferred tax assets will not be recovered, we
must establish a valuation allowance against our deferred tax assets.
In July 2006, the FASB issued accounting guidance which creates a single model to
address uncertainty in tax positions and clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements in accordance with ASC
740-10 by prescribing the minimum threshold a tax position is required to meet before
being recognized in an enterprises financial statements. We
adopted this guidance on
January 1, 2007. We did not recognize any liability for unrecognized tax benefits as a
result of adopting this guidance as of January 1, 2007. Our liability, including
interest, was $5.7 million at December 28, 2008 and $6.0 million at September 27, 2009.
During the nine months ended September 28, 2008, we recognized interest on uncertain tax
liabilities of $142,000. During the nine months ended September 27, 2009, we recognized
interest on uncertain tax liabilities of $156,000.
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Results of Operations
Comparison of Three Months Ended September 28, 2008 and September 27, 2009
Revenue and Product and Service Billings
Three Months Ended | ||||||||||||
September 28, | September 27, | Period-to-Period | ||||||||||
2008 | 2009 | Change | ||||||||||
(dollars in thousands) | ||||||||||||
Revenue |
$ | 8,247 | $ | 2,726 | $ | (5,521 | ) | |||||
Deferred revenue, end of period |
112,134 | 138,707 | ||||||||||
Less: deferred revenue, beginning of period |
(77,396 | ) | (110,185 | ) | ||||||||
Product and service billings |
$ | 42,985 | $ | 31,248 | $ | (11,737 | ) | |||||
Our revenue for the third quarter of fiscal 2009 was derived principally from
maintenance and support services performed during the quarter. Our revenue for the third
quarter of fiscal 2008 was derived principally from the ratable recognition of software
license revenue related to the delivery of our June 2007 specified upgrade to Nortel
Networks in the second quarter of fiscal 2008. As we are not able to assert VSOE of fair
value on our maintenance services, we recognize Nortel Networks-related software revenue
ratably over the warranty period, provided that there are no other outstanding
commitments or upgrades. Our revenue for the third quarter of fiscal 2008 was also
derived from maintenance and support services performed during the quarter.
The decrease in our product and service billings for the third quarter of fiscal
2009, as compared to the third quarter of fiscal 2008, was due primarily to delays in the
delivery and acceptance of our software version 8.0 upgrade due to the timing of the
expected purchase by Ericsson of Nortels CDMA business. We estimate that approximately
$5 million to $7 million of upgrade billings shifted out of
the third quarter 2009 due
to this delay.
Cost of Revenue and Cost Related to Product and Service Billings
Three Months Ended | ||||||||||||
September 28, | September 27, | Period-to-Period | ||||||||||
2008 | 2009 | Change | ||||||||||
(dollars in thousands) | ||||||||||||
Cost of revenue |
$ | 2,652 | $ | 2,900 | $ | 248 | ||||||
Deferred product and service cost, end of period |
2,397 | 7,882 | ||||||||||
Less: deferred product and service cost, beginning of period |
(1,354 | ) | (6,492 | ) | ||||||||
Cost related to product and service billings |
$ | 3,695 | $ | 4,290 | $ | 595 | ||||||
Cost of revenue in the third quarter of fiscal 2009 increased slightly as
compared to the third quarter of fiscal 2008 due primarily to an increase in cost of
service revenue of $0.3 million associated with an increase in customer service headcount
to support a larger installed base of product.
The increase in cost related to product and service billings was due primarily to
direct development costs associated with our development arrangements with Hitachi.
Gross Profit and Gross Profit on Billings
Three Months Ended | ||||||||||||
September 28, | September 27, | Period-to-Period | ||||||||||
2008 | 2009 | Change | ||||||||||
(In thousands) | ||||||||||||
Gross profit |
$ | 5,595 | $ | (174 | ) | $ | (5,769 | ) | ||||
Deferred revenue, at end of period |
112,134 | 138,707 | ||||||||||
Less: Deferred revenue, at beginning of period |
(77,396 | ) | (110,185 | ) | ||||||||
Deferred product and service cost, at beginning of period |
1,354 | 6,492 | ||||||||||
Less: Deferred product and service cost, at end of period |
(2,397 | ) | (7,882 | ) | ||||||||
Gross profit on Billings |
$ | 39,290 | $ | 26,958 | $ | (12,332 | ) | |||||
The decrease in gross profit in the third quarter of fiscal 2009 as compared to
the third quarter of fiscal 2008 was due primarily to a decrease in revenue of $5.5
million to $2.7 million in the third quarter of fiscal 2009. We expect gross profit on
our revenue to continue to fluctuate significantly in the future due to the time period
between commitments for future software upgrades and the volume of sales in those time
intervals.
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Gross profit on Billings decreased primarily due to a decrease in product and
service billings of $11.7 million to $31.2 million in the third quarter of fiscal 2009,
partially offset by an increase in cost related to product and service billings of $0.6
million to $4.3 million in the third quarter of fiscal 2009.
Operating Expenses
Three Months Ended | Period-to-Period | |||||||||||||||
September 28, | September 27, | Change | ||||||||||||||
2008 | 2009 | Amount | Percentage | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Research and development |
$ | 18,859 | $ | 18,443 | $ | (416 | ) | (2.2 | )% | |||||||
Sales and marketing |
3,809 | 4,245 | 436 | 11.4 | % | |||||||||||
General and administrative |
2,281 | 3,438 | 1,157 | 50.7 | % | |||||||||||
Total operating expenses |
$ | 24,949 | $ | 26,126 | $ | 1,177 | 4.7 | % | ||||||||
Research and Development. Research and development expense decreased slightly
in the third quarter of fiscal 2009 as compared to the third quarter of fiscal 2008. The
decrease was primarily related to a decrease in development tools expense of $0.4
million, a decrease in outside service expense of $0.4 million as well as an increase in
direct costs recorded to long-term deferred service cost of $0.4 million, partially
offset by an increase in salary and benefit expense of $0.8 million associated with an
increase in the number of research and development employees. We expect research and
development expense to remain relatively flat through the remainder of fiscal 2009.
Sales and Marketing. The increase in sales and marketing expense was primarily due
to an increase in salary and benefit expense of $0.5 million associated with an increase
in the number of sales, marketing and customer service employees to expand our
international presence and support our new FMC products, which we expect to be sold to a
larger base of OEMs and operators than our EV-DO products.
General and Administrative. The increase in general and administrative expense in
the third quarter of fiscal 2009 as compared to the third quarter of fiscal 2008 was
primarily due to an increase in legal expense and outside service expense, some of which
is related to the expected sale of Nortels CDMA business to Ericsson. We expect general
and administrative expense to decrease slightly in the fourth quarter
of fiscal 2009.
Operating Loss and Operating Profit on Billings
Three Months Ended | ||||||||||||
September 28, | September 27, | Period-to-Period | ||||||||||
2008 | 2009 | Change | ||||||||||
(In thousands) | ||||||||||||
Operating loss |
$ | (19,354 | ) | $ | (26,300 | ) | $ | (6,946 | ) | |||
Deferred revenue, at end of period |
112,134 | 138,707 | ||||||||||
Less: Deferred revenue, at beginning of period |
(77,396 | ) | (110,185 | ) | ||||||||
Deferred product and service cost, at beginning of period |
1,354 | 6,492 | ||||||||||
Less: Deferred product and service cost, at end of period |
(2,397 | ) | (7,882 | ) | ||||||||
Operating profit on billings |
$ | 14,341 | $ | 832 | $ | (13,509 | ) | |||||
The increase in operating loss was due primarily to the decrease in our gross
profit, described above, coupled with the increase in our operating expenses, described
above.
The decrease in operating profit on Billings was due to the decrease in our gross
profit on Billings, described above, as well as the increase in our operating expenses,
described above.
Interest Income and Other Income, Net. Interest income and other income, net,
primarily consists of interest generated from the investment of our cash balances. The
decrease in interest income from $1.5 million in the third quarter of fiscal 2008 to $0.4
million in the third quarter of fiscal 2009 was due primarily to lower interest rates and
returns on investments coupled with lower average cash balances, as well as losses of
$94,000 relating to our hedging program.
Income Taxes. We recognized a tax benefit of $9.0 million in the third quarter of
fiscal 2009 primarily related to losses incurred from operations in the United States
expected to be recovered from both income generated in the United States during the
remainder of 2009 and the carryback of any excess loss to offset taxable profits reported
in prior years. We recorded an income tax benefit of $5.4 million in the third quarter of
fiscal 2008 relating principally to losses incurred in the United States taxed at the
federal and state statutory rates partially offset by the effect of losses from foreign
operations for which no tax benefit could be recognized.
When we begin to ship our FMC products in the United States in significant volumes,
our effective state tax rate may increase and we may realize benefits from our state tax
credit carryforwards.
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Table of Contents
Comparison of Nine Months Ended September 28, 2008 and September 27, 2009
Revenue and Product and Service Billings
Nine Months Ended | ||||||||||||
September 28, | September 27, | Period-to-Period | ||||||||||
2008 | 2009 | Change | ||||||||||
(dollars in thousands) | ||||||||||||
Revenue |
$ | 74,904 | $ | 16,869 | $ | (58,035 | ) | |||||
Deferred revenue, end of period |
112,134 | 138,707 | ||||||||||
Less: deferred revenue, beginning of period |
(79,978 | ) | (66,860 | ) | ||||||||
Product and service billings |
$ | 107,060 | $ | 88,716 | $ | (18,344 | ) | |||||
Our revenue for the first three quarters of fiscal 2009 was derived principally
from the ratable recognition of software license revenue related to the delivery of our
December 2007 specified upgrade to Nortel Networks in the fourth quarter of fiscal 2008.
As we are not able to assert VSOE of fair value on our maintenance services, we recognize
Nortel Networks-related software revenue ratably over the warranty period, provided that
there are no other outstanding commitments or upgrades outstanding at the time of
shipment. Our revenue for the first three quarters of fiscal 2009 also consists of
maintenance and support services performed during the period as well as recognition of
other service revenue associated with the termination of our development agreement with
Alcatel-Lucent. Our revenue for the first three quarters of fiscal 2008 was derived
principally from the ratable recognition of software license revenue related to the
delivery of our June 2007 specified upgrade to Nortel Networks in the second quarter of
fiscal 2008. Our revenue for the first three quarters of fiscal 2008 was also derived
from maintenance and support services performed during the period.
The decrease in our product and service billings for the first three quarters of
fiscal 2009 as compared to the first three quarters of fiscal 2008 was due primarily to
the exclusion of $14.6 million of pre-bankruptcy filing outstanding invoices to Nortel
Networks that are subject to Nortel Networks bankruptcy proceedings, delays of
approximately $5 million to $7 million of software upgrades due to the timing of the
closing of Nortels sale of its CDMA business to Ericsson and the resulting delay of the
delivery and acceptance of our software version 8.0 upgrade, offset by higher RNC sales
volumes in the first three quarters of fiscal 2009 due to new coverage deployments as
well as expansion of existing deployments by operators.
Cost of Revenue and Cost Related to Product and Service Billings
Nine Months Ended | ||||||||||||
September 28, | September 27, | Period-to-Period | ||||||||||
2008 | 2009 | Change | ||||||||||
(dollars in thousands) | ||||||||||||
Cost of revenue |
$ | 7,892 | $ | 8,849 | $ | 957 | ||||||
Deferred product and service cost, end of period |
2,397 | 7,882 | ||||||||||
Less: deferred product and service cost, beginning of period |
(1,050 | ) | (3,213 | ) | ||||||||
Cost related to product and service billings |
$ | 9,239 | $ | 13,518 | $ | 4,279 | ||||||
Cost of revenue in the first three quarters of fiscal 2009 increased as
compared to the first three quarters of fiscal 2008 due primarily to an increase in cost
of service revenue of $1.2 million associated with an increase in customer service
headcount to support a larger installed base of product as well as the recognition of
direct development costs of $0.5 million associated with the termination of our
development agreement with Alcatel-Lucent, partially offset by a decrease in royalty
costs of $0.9 million related to the decrease in software license revenue recognized in
the first three quarters of fiscal 2009 as compared to the first three quarters of fiscal
2008.
The increase in cost related to product and service billings was due primarily to
direct development costs associated with our development arrangements with Hitachi and
Alcatel-Lucent.
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Gross Profit and Gross Profit on Billings
Nine Months Ended | ||||||||||||
September 28, | September 27, | Period-to-Period | ||||||||||
2008 | 2009 | Change | ||||||||||
(In thousands) | ||||||||||||
Gross profit |
$ | 67,012 | $ | 8,020 | $ | (58,992 | ) | |||||
Deferred revenue, at end of period |
112,134 | 138,707 | ||||||||||
Less: Deferred revenue, at beginning of period |
(79,978 | ) | (66,860 | ) | ||||||||
Deferred product and service cost, at beginning of period |
1,050 | 3,213 | ||||||||||
Less: Deferred product and service cost, at end of period |
(2,397 | ) | (7,882 | ) | ||||||||
Gross profit on Billings |
$ | 97,821 | $ | 75,198 | $ | (22,623 | ) | |||||
The decrease in gross profit was due primarily to a decrease in revenue from
$74.9 million to $16.9 million in the first three quarters of fiscal 2009. We expect
gross profit on our revenue to continue to fluctuate significantly in the future due to
the time period between commitments for future software upgrades and the volume of sales
in those time intervals.
Gross profit on Billings decreased primarily due to a decrease in product and
service billings of $18.3 million to $88.7 million due primarily to the exclusion of
$14.6 million of pre-bankruptcy filing outstanding invoices to Nortel Networks that are
subject to Nortel Networks bankruptcy proceedings, coupled with an increase in cost
related to product and service billings of $4.3 million to $13.5 million in the first
three quarters of fiscal 2009.
Operating Expenses
Nine Months Ended | Period-to-Period | |||||||||||||||
September 28, | September 27, | Change | ||||||||||||||
2008 | 2009 | Amount | Percentage | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Research and development |
$ | 56,209 | $ | 54,202 | $ | (2,007 | ) | -3.5 | % | |||||||
Sales and marketing |
11,212 | 12,345 | 1,133 | 10.1 | % | |||||||||||
General and administrative |
6,675 | 8,311 | 1,636 | 24.5 | % | |||||||||||
Total operating expenses |
$ | 74,096 | $ | 74,858 | $ | 762 | 1.0 | % | ||||||||
Research and Development. The decrease in research and development expense in
the first three quarters of fiscal 2009 as compared to the same period in 2008 was due
primarily to deferral of $3.4 million of direct development costs associated with our
development arrangements with Hitachi and Alcatel-Lucent and to a lesser extent due to a
decrease in prototype expense of $0.7 million associated with lower EV-DO prototypes,
partially offset by an increase in consulting expense of $2.1 million to cover short term
project needs.
Sales and Marketing. The increase in sales and marketing expense was primarily due
to an increase in salary and benefit expense of $1.0 million associated with an increase
in the number of sales, marketing and customer service employees to expand our
international presence and support our new FMC products, which we expect to be sold to a
larger base of OEMs and operators than our EV-DO products.
General and Administrative. The increase in general and administrative expense in
the first three quarters of fiscal 2009 as compared to the first three quarters of fiscal
2008 was due to an increase in legal expense of $0.5 million and outside service expense
of $0.6 million, an increase in salaries and benefits of $0.3 million as a result of an
increase in the number of general and administrative employees to support our growth as
well as an increase in stock compensation expense of $0.2 million due to new grants of
stock options to employees during the first half of fiscal 2009.
Operating Loss and Operating Profit on Billings
Nine Months Ended | ||||||||||||
September 28, | September 27, | Period-to-Period | ||||||||||
2008 | 2009 | Change | ||||||||||
(In thousands) | ||||||||||||
Operating loss |
$ | (7,084 | ) | $ | (66,838 | ) | $ | (59,754 | ) | |||
Deferred revenue, at end of period |
112,134 | 138,707 | ||||||||||
Less: Deferred revenue, at beginning of period |
(79,978 | ) | (66,860 | ) | ||||||||
Deferred product and service cost, at beginning of period |
1,050 | 3,213 | ||||||||||
Less: Deferred product and service cost, at end of period |
(2,397 | ) | (7,882 | ) | ||||||||
Operating profit on Billings |
$ | 23,725 | $ | 340 | $ | (23,385 | ) | |||||
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The decrease in operating loss was due primarily to the decrease in our gross
profit, described above, coupled with the small increase in our operating expenses,
described above.
The decrease in operating profit on Billings was due to the decrease in our gross
profit on Billings, described above, coupled with the small increase in our operating
expenses, described above.
Interest Income, Net. Interest income, net, primarily consists of interest generated
from the investment of our cash balances. The decrease in interest income from $5.8
million in the first three quarters of fiscal 2008 to $3.1 million in the first three
quarters of fiscal 2009 was due primarily to lower interest rates and returns on
investments coupled with lower average cash balances, partially offset by $721,000 of
foreign exchange gains relating to our hedging program.
Income
Taxes. We recognized a tax benefit of $25.7 million for the nine months ended
September 27, 2009 primarily related to losses incurred from
operations in the United States and the impact of the reduction of valuation allowance against our U.K. net
operating loss carryforwards as a result of implementing a sale of intellectual property
from our U.K. subsidiary to the U.S. parent company. The benefit from the losses
in the United States is expected to be recovered from both income generated in the United
States during the remainder of 2009 and the carryback of any excess loss to offset
taxable profits reported in prior years. Approximately $3.0 million of the benefit
recognized during the nine months ended September 27, 2009 is discrete and
relates to implementation of our tax planning strategy. We recorded income tax
expense of $2.4 million for the nine months ended September 28, 2008 relating principally
to profits in the United States taxed at the federal and state statutory rates and the
effect of losses from foreign operations for which no tax benefit could be recognized.
When we begin to ship our FMC products in the United States in significant volumes,
our effective state tax rate may increase and we may realize benefits from our state tax
credit carryforwards.
Liquidity and Capital Resources
As of September 27, 2009, our principal sources of liquidity were cash, cash
equivalents and investments of $205.3 million. Our existing cash and cash equivalents and
investments are invested primarily in money market funds, high grade government sponsored
enterprises (AAA/A1+), high-grade commercial paper (A1+/P1) and high grade corporate
notes (A1/A+). We do not invest in any types of asset backed securities such as those
backed by mortgages or auto loans. None of our investments have incurred defaults or have
been downgraded. We do not hold auction rate securities. We hold unrestricted cash and
cash equivalents for working capital purposes. We do not enter into investments for
trading or speculative purposes. We have an investment policy that guides our investing
activities. Among other things, our investment policy limits the concentration of our
investments in any one issuer (with the exception of investments in U.S. Treasury and
U.S. agency debt obligations and SEC-registered money market funds) to no more than 10%
of the book value of our investment portfolio at the time of purchase. The primary
objectives of our investment activities are to preserve principal, maintain proper
liquidity to meet operating needs, maximize yields and maintain proper fiduciary control
over our investments.
As of September 27, 2009, we did not have any lines of credit or other similar
source of liquidity.
As of | As of | |||||||
December 30, | September 27, | |||||||
2008 | 2009 | |||||||
Cash and cash equivalents |
$ | 30,425 | $ | 12,819 | ||||
Investments, short-term |
197,941 | 163,484 | ||||||
Investments, long-term |
| 29,023 | ||||||
Accounts receivable, net |
3,354 | 18,436 | ||||||
Working capital |
156,532 | 90,289 |
Nine | Nine | |||||||
Months | Months | |||||||
Ended | Ended | |||||||
September 28, | September 27, | |||||||
2008 | 2009 | |||||||
Cash flow provided by (used in) operating activities |
$ | 13,310 | $ | (13,519 | ) | |||
Cash flow (used in) provided by investing activities |
(2,213 | ) | 1,381 | |||||
Cash flow provided by (used in) financing activities |
460 | (5,468 | ) |
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We enter into derivative instruments for risk management purposes only and we do not
enter into derivative instruments for speculative purposes. Our derivative program does
not qualify for hedge accounting treatment. We operate internationally and, in the normal
course of business, are exposed to fluctuations in foreign exchange rates. These
fluctuations can increase the costs of financing, investing and operating our business.
We use forward foreign currency exchange contracts to manage our exposure to
forecasted foreign currency denominated transactions based in the United Kingdom. These
forward contracts are not designated as cash flow, fair value or net investment hedges;
are marked-to-market with changes in fair value recorded to earnings; and are entered
into for periods consistent with currency transaction exposures, generally less than one
year. These derivative instruments do not subject our earnings or cash flows to material
risk since gains and losses on these derivatives generally offset losses and gains on the
expenses and transactions being hedged. In addition, changes in currency exchange rates
related to any unhedged transactions may impact our earnings and cash flows. As of
September 27, 2009, we had $2.3 million in currency exchange contracts. During the nine
months ended September 27, 2009, we recorded $0.7 million of foreign exchange gains in
interest and other income, net to the outstanding forward foreign exchange contracts. As
of September 27, 2009, the fair value of our forward foreign currency exchange contracts
of $0.2 million is included in prepaid expenses and other current assets in the
accompanying condensed consolidated balance sheet.
On January 14, 2009, Nortel Networks announced that it and certain of its affiliates
had filed for bankruptcy protection. At the time of that filing, we had outstanding
invoices to Nortel Networks in the amount of $21.8 million and during the first quarter
of fiscal 2009, we invoiced an additional $14.6 million related to royalties earned and
services performed through January 13, 2009. The collection of these amounts is subject
to Nortel Networks bankruptcy proceedings and it is likely that a portion or all of
these amounts will not be collected. Had Nortel Networks not filed for bankruptcy
protection, these amounts would likely have been paid in due course in the first quarter
of 2009. Cash flows for the first half of fiscal 2009 was negatively impacted by $36.4
million, representing the total amount of invoices due during the first half of fiscal
2009 from Nortel Networks, collection of which is subject to their bankruptcy
proceedings. In connection with the announcement, Nortel Networks informed us that it
will continue to purchase goods and services from us and that we are a long term partner
and a key supplier to Nortel Networks. Purchases subsequent to the bankruptcy filing are
under the terms of Nortel Networks current agreement with us. We have been collecting
receivables from Nortel Networks in the ordinary course related to products and services
purchased since Nortel Networks bankruptcy filing. We have been working with Nortel
Networks to assume its agreement with us. If Nortel Networks assumes its agreement with
us, Nortel Networks would be required to become current in all of its outstanding
obligations to us, including obligations outstanding prior to the bankruptcy filing date.
If the agreement is not assumed, all outstanding obligations will be subject to discharge
and we likely will not be able to collect these receivables in full. The current status
of Nortel Networks bankruptcy is described elsewhere in this Quarterly Report.
During the first three quarters of fiscal 2008 we funded our operations primarily
with cash flow from operating activities. During the first three quarters of fiscal 2009,
we funded our operations primarily from our cash reserves.
In the first three quarters of fiscal 2008, we generated $13.3 million in cash flow
from operating activities despite a net loss of $3.6 million. This was primarily a result
of an increase in deferred revenue of $32.2 million associated with billings and a
decrease in accounts receivable of $6.1 million associated with collections of billings.
These increases in cash flow were partially offset by accrued income tax payments of
$24.6 million. Our ability to generate cash flow from operations depends in large part on
the volume of our product and service billings, our ability to collect accounts
receivable, timing of tax payments, and the growth of our operating expenses.
In the first three quarters of fiscal 2009, cash used in operating activities
totaled $13.5 million, primarily due to a net loss of $38.1 million, an increase in
accounts receivable of $15.1 million and our inability to collect $36.4 million of
invoices due from Nortel Networks that are subject to Nortel Networks bankruptcy
proceedings, partially offset by an increase in deferred revenue of $71.8 million.
Cash flow from investing activities for the first half of fiscal 2008 and 2009
resulted primarily from the timing of purchases, maturities and sales of investments and
purchases of property and equipment.
Cash flow from financing activities in the first three quarters of fiscal 2008
consisted primarily of proceeds from the exercise of stock options as well as the tax
benefit associated with the exercise of stock options during the year, substantially
offset by repurchases of our common stock under our initial $20 million stock repurchase
program. Cash flow from financing activities in the first three quarters of fiscal 2009
consisted primarily of repurchases of our common stock under our stock repurchase
programs, partially offset by proceeds from the exercise of stock options.
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We believe our existing cash, cash equivalents and investments and our cash
flows from operating activities will be sufficient to meet our anticipated cash needs for
at least one operating cycle (12 months). Our future working capital requirements will
depend on many factors, including the collection of $36.4 million of outstanding invoices
to Nortel that are subject to Nortels bankruptcy filing, the rate of our product and
service billings growth, the introduction and market acceptance of new products, the
expansion of our sales and marketing and research and development activities, and the
timing of our revenue recognition and related income tax payments. To the extent that our
cash, cash equivalents and investments and cash from operating activities are
insufficient to fund our future activities, we may be required to raise additional funds
through bank credit arrangements or public or private equity or debt financings. We also
may need to raise additional funds in the event we determine in the future to effect one
or more acquisitions of businesses, technologies or products. In the event we require
additional cash resources, we may not be able to obtain bank credit arrangements or
effect any equity or debt financing on terms acceptable to us or at all.
During the first three quarters of fiscal 2009, we repurchased a total of 1.7
million shares of our common stock for approximately $9.3 million under our initial $20
million stock repurchase program, which was approved by our Board of Directors in July
2008 and completed in April 2009, and our second $20 million stock repurchase program,
which was approved by our Board of Directors in February 2009. As of September 27, 2009,
there was $17.4 million remaining under the second stock repurchase program, which
terminates on April 30, 2010 or earlier if we so elect.
During the first quarter of 2009, the Internal Revenue Service (IRS) began an
examination of the our U.S. federal income tax returns for the tax years ended December
31, 2006 and December 30, 2007. No adjustments have been proposed to date by the IRS.
In October of 2004, we entered into a seven-year lease agreement for our
headquarters facility. We are obligated to pay monthly rent through 2012.
Future minimum commitments as of September 27, 2009, under all of our operating
leases are as follows:
Fiscal year: | ||||
Remainder of 2009 |
$ | 400 | ||
2010 |
1,587 | |||
2011 |
1,491 | |||
2012 |
492 | |||
2013 |
10 | |||
$ | 3,980 | |||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Foreign Currency Exchange Risk
Our operating expenses and cash flows are subject to fluctuations due to changes in
foreign currency exchange rates, particularly changes in the British pound and Indian
rupee, the currencies in which our operating obligations in Cambridge, United Kingdom and
Bangalore, India, are paid. We use derivative instruments to limit our expense and cash
flow exposure to changes in currency exchange rates in the United Kingdom. We had
currency derivative instruments outstanding in the contract amount of $2.3 million at
September 27, 2009. We recorded $204,000 of other assets to recognize the change in fair
value of these derivative instruments at September 27, 2009. Should we discontinue using
derivative instruments to manage our earnings in the United Kingdom, fluctuations in
currency exchange rates could affect our business in the future. To limit further our
exposure to currency exchange rate fluctuations, we also occasionally exchange U.S.
Dollars for other currencies in which we incur expenses significantly in advance of our
need to make payments in those currencies. In the event of a hypothetical ten percent
adverse movement in foreign currency exchange rates, taking into account our hedges
described above, our losses of future earnings and assets as well as our loss of cash
flows would be immaterial; however, actual effects might differ materially from this
hypothetical analysis.
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Interest Rate Sensitivity
We had unrestricted cash and cash equivalents and investments totaling $228.4
million at December 28, 2008 and $205.3 million at September 27, 2009. Our existing cash
and cash equivalents and investments are invested primarily in money market funds, high
grade government sponsored enterprises (AAA/A1+), high-grade commercial paper (A1+/P1)
and high grade corporate notes (A1/A+). We do not invest in any types of asset backed
securities such as those backed by mortgages or auto loans. None of our investments have
incurred defaults or have been downgraded. We do not hold auction rate securities. We
hold unrestricted cash and cash equivalents for working capital purposes. We do not enter
into investments for trading or speculative purposes. We have an investment policy that
guides our investing activities. Among other things, our investment policy limits the
concentration of our investments in any one issuer (with the exception of investments in
U.S. Treasury and U.S. agency debt obligations and SEC-registered money market funds) to
no more than 10% of the book value of our investment portfolio at the time of purchase.
The primary objectives of our investment activities are to preserve principal, maintain
proper liquidity to meet operating needs, maximize yields and maintain proper fiduciary
control over our investments.
Although our investments are subject to credit risk, our investment policy specifies
credit quality standards for our investments and limits the amount of credit exposure
from any single issue, issuer or type of investments. We do not own derivative financial
investment instruments in our investment portfolio. In the event of a hypothetical ten
percent adverse movement in interest rates, our losses of future earnings and assets,
fair values of risk sensitive financial instruments, as well as our loss of cash flows
would be immaterial; however, actual effects might differ materially from this
hypothetical analysis.
Item 4. | Changes in Internal Controls over Financial Reporting and Procedures |
Our management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and procedures
as of September 27, 2009. The term disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures
of a company that are designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the SECs rules
and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of September 27, 2009, our chief executive officer
and chief financial officer concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting occurred during the
fiscal quarter ended September 27, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II. Other Information
Item 1A. | Risk Factors |
Our business is subject to numerous risks. We caution you that the following
important factors, among others, could cause our actual results to differ materially from
those expressed in forward-looking statements made by us or on our behalf in filings with
the SEC, press releases, communications with investors and oral statements. Any or all of
our forward-looking statements in this Quarterly Report on Form 10-Q and in any other
public statements we make may turn out to be wrong. They may be affected by inaccurate
assumptions we might make or by known or unknown risks and uncertainties. Many factors
mentioned in the discussion below will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future results may
vary materially from those anticipated in forward-looking statements. We undertake no
obligation to update any forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised, however, to consult any further
disclosure we make in our reports filed with the SEC.
Risks Relating to Our Business
We depend on a single OEM customer that recently filed for bankruptcy protection, Nortel
Networks, for almost all of our revenue and billings, and a significant shortfall in
sales to Nortel Networks or the successor to its CDMA business would significantly harm
our business and operating results; Nortel Networks CDMA business may soon be sold.
We derived almost all of our revenue and billings in each of the last several years
from sales to a single OEM customer, Nortel Networks. Nortel Networks accounted for 86%
of our revenue and 89% of our billings in the first three quarters of fiscal 2009, 99% of
our revenue and 93% of our billings in fiscal 2008, 99% of our revenue and 98% of our
billings in fiscal 2007 and 95% of our revenue and 94% of our billings in fiscal 2006. On
January 14, 2009, Nortel Networks announced that it and certain of its affiliates had
filed for bankruptcy protection. At the time of that filing, we had $21.8 million in
outstanding invoices to Nortel Networks and we billed an additional $14.6 million during
the first quarter of fiscal 2009 related to royalties earned and services provided
through January 13, 2009. The collection of these amounts is subject to Nortel Networks
bankruptcy
proceedings and it is likely that a portion or all of these amounts will not be
collected. As a result, we have excluded the $36.4 million of pre-bankruptcy filing
outstanding invoices to Nortel Networks from accounts receivable and $36.3 million from
deferred revenue as of September 27, 2009, $21.8 million from billings for the quarter
and year ended December 28, 2008, and $14.6 million from billings for the quarter ended
March 29, 2009.
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On July 28, 2009, U.S. and Canadian bankruptcy courts approved a bid by Telefon AB
L.M. Ericsson, or Ericsson, a global provider of technology and services to telecom
operators, to acquire Nortel Networks CDMA business, subject to satisfaction of
regulatory and other conditions. Since the date of Nortel Networks bankruptcy filing, we
and Nortel Networks have continued to deliver products and services to Nortel Networks
CDMA EV-DO wireless operators under the terms of Nortel Networks existing agreement with
us. We are continuing to incur costs related to the research and development of future
software releases for Nortel Networks. Although we intend to work with Nortel Networks
and Ericsson to have our agreement assumed, there can be no assurance that our agreement
with Nortel Networks will be assumed or that we will recover our costs. Even if our
agreement with Nortel Networks is assumed there are no assurances that we will be able to
collect all of Nortel Networks outstanding obligations to us, including obligations
outstanding prior to January 14, 2009. If our agreement is not assumed, all outstanding
obligations will be subject to discharge and we likely will not be able to collect these
receivables in full. Should our agreement with Nortel Networks not be assumed, we would
cease to do business with the purchaser of Nortel Networks CDMA business unless we could
agree on the terms for a new agreement. Any new terms agreed to could be less favorable
to us than our current agreement.
In addition, because of Nortel Networks bankruptcy filing, operators may continue
to slow or discontinue their purchases of infrastructure solutions from Nortel Networks,
especially new customers that have not yet established a long-term relationship with
Nortel Networks, which would harm our business. In the fourth quarter of fiscal 2008,
Nortel Networks announced new EV-DO business with China Telecom. The first phase
deployments at China Telecom were completed in the first half of fiscal 2009. We believe
any further expansion is unlikely. Furthermore, we anticipate that we will continue incur
some costs related to working with Nortel Networks and Ericsson to assume our contract
and collect our outstanding invoices. This process could continue to be time consuming
and could divert managements attention and resources away from our business.
Even if our contract is assumed, Ericsson, as successor to Nortel Networks CDMA
business, could terminate that contract at any time and, in any event, the contract does
not contain commitments for future purchases of our products. The rate at which Nortel
Networks CDMA business purchases products from us depends on its success in selling to
operators its own EV-DO infrastructure solutions that include our products. There can be
no assurance that Nortel Networks or Ericsson, as successor to Nortel Networks CDMA
business, will continue to devote and invest significant resources and capital to its
wireless infrastructure business or that it will be successful in the future in such
business. Nortel Networks or Ericsson, as successor to Nortel Networks CDMA business,
may experience disruptions in its supply chain as a result of uncertainty related to
their bankruptcy filing and proposed sale. In addition, Nortel Networks may seek to
develop an alternative solution by utilizing technology that has been developed by LG
Electronics, with which Nortel Networks has a joint venture. Should Ericsson successfully
complete the acquisition of Nortel Networks CDMA business, it could seek to deploy
alternative solutions by utilizing technology that has been developed by it or slow its
participation in the CDMA infrastructure business, including EV-DO. Should the bankruptcy
proceedings and acquisition of Nortel Networks CDMA infrastructure business be delayed,
our ability to negotiate commercial terms of our planned software releases may be
hampered, operators may delay deployment of our releases, and our business and operating
results may be harmed. If Nortel Networks is not successful in carrying out its planned
sale of its CDMA business to Ericsson, Nortel Networks could have significant liquidity
issues and cease to operate. We expect to derive a substantial majority of our revenue,
billings and cash flow in fiscal 2009 and fiscal 2010 from Nortel Networks, and therefore
any adverse change in our relationship with Nortel Networks, or the successor to its CDMA
business, or a significant decline or shortfall in our sales to Nortel Networks, would
significantly harm our business and operating results.
Because our OEM business model requires us to defer the recognition of most of our
revenue from product and service sales until we deliver specified upgrades, and in some
cases to further defer a portion of our revenue until applicable warranty periods
expire, our revenue in any period is not likely to be indicative of the level of our
sales activity in that period.
We recognize revenue from the sale of products and services under our OEM agreements
only after we deliver specified upgrades to those products that were committed at the
time of sale. The period of development of these upgrades can range from 12 to 24 months
after the date of commitment. As a result, most of our revenue in any quarter typically
reflects license fees under our OEM agreements for products and services delivered and
invoiced to customers several quarters earlier. For these products and services, we
generally record the amount of the invoice as deferred revenue and then begin to
recognize such deferred revenue as revenue upon delivery of the committed software
upgrades. When we cannot establish vendor specific objective evidence, or VSOE, of fair
value for our maintenance and support services, we recognize a portion of the product and
services revenue based on the portion of the maintenance period that has elapsed when the
revenue first becomes recognizable, and we recognize the remaining portion of that
product and services revenue ratably over the remaining maintenance period. As a result,
our revenue is not likely to be indicative of the level of our sales activity in any
period. Due to our OEM business model, we expect that, for the foreseeable future, any
quarter in which we recognize a significant amount of deferred revenue as a result of our
delivery of a previously committed upgrade will be followed by one or more quarters of
insignificant revenue as we defer revenue while we develop additional upgrades. Investors
may encounter difficulties in tracking the performance of our business
because our revenue will not reflect the level of our billings in any period, and
these difficulties could adversely affect the trading price of our common stock.
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Our revenue and billings growth may be constrained by our product concentration and lack
of revenue diversification.
Almost all of our revenue and billings to date have been derived from sales of our
EV-DO products, and we expect EV-DO revenues to remain a major contributor to revenue for
the foreseeable future. Continued market acceptance of these products is critical to our
future success. The future demand for our EV-DO products depends, in large part, on the
continued expansion of the EV-DO-based wireless networks currently deployed by operators
and determinations by additional operators to deploy EV-DO-based wireless networks.
Demand for our EV-DO products also depends on our ability to continue to develop and
deliver on a timely basis product upgrades to enable operators to enhance the performance
of their networks and implement new mobile broadband services. Any decline in demand for
EV-DO products, or inability on our part to develop and deliver product upgrades that
meet the needs of operators, would adversely affect our business and operating results.
A majority of our current products are based exclusively on the CDMA2000 air interface
standard for wireless communications, and therefore any movement by existing or
prospective operator customers to a different standard could impair our business and
operating results.
There are multiple competing air interface standards for wireless communications
networks. A majority of our current products are based exclusively on the CDMA2000 air
interface standard, which handles a majority of wireless subscribers in the United
States. Other standards, such as GSM/UMTS, are currently the primary standards used by
wireless operators in mobile networks worldwide. Our EV-DO products do not operate in
networks using the GSM/UMTS standards.
We believe there are a limited number of operators that have not already chosen the
air interface standard to deploy in their 3G wireless networks. Our success will
therefore depend, to a significant degree, on whether operators that have currently
deployed CDMA2000-based networks expand and upgrade their networks and whether additional
operators that have not yet deployed 3G networks select CDMA2000 as their standard. Our
business will be harmed if operators currently utilizing the CDMA2000 standard transition
their networks to a competing standard and we have not at that time developed and begun
to offer competitive products that are compatible with that standard. Our business will
also be harmed if operators that have currently deployed both CDMA and GSM/UMTS networks
determine to focus more of their resources on their GSM/UMTS networks.
The introduction of fourth generation wireless technology could reduce spending on our
EV-DO products and therefore harm our operating results.
The standards for mobile broadband solutions are expected to evolve into a fourth
generation of wireless standards, known as 4G. Wireless operators have announced plans to
build networks based on the 4G standard. For example, Verizon Wireless, Bell Mobility and
TELUS have each announced its intent to build 4G networks using the Long Term Evolution,
or LTE, standard and Sprint Nextel has announced its intent to build a 4G network using
WiMAX technology. In addition, Bell Mobility and TELUS each recently announced that they
will overlay their CDMA networks with UMTS technology as they migrate to the LTE
standard. The market for our existing EV-DO products is likely to decline if and when
operators begin to delay expenditures for EV-DO products in anticipation of the
availability of new 4G-based products. Our primary OEM customer, Nortel Networks, has
publicly announced that it is developing 4G-based LTE products. We do not have an
agreement to supply Nortel Networks, any successor to Nortel Networks CDMA business, or
any other OEM with any 4G-based products. We believe that it is likely that Nortel
Networks, or any successor to Nortel Networks business, will choose to enter into
partnerships for 4G-based products with one or more of our competitors or choose to
develop these products internally.
Our future success will depend on our ability to develop and market new products
compatible with 4G standards and the acceptance of those products by operators. The
development and introduction of these products will be time consuming and expensive, and
we may not be able to correctly anticipate the market for 4G-compatible products and
related business trends. Any inability to develop successfully 4G-based products could
harm significantly our future business and operating results.
The variable sales and deployment cycles for our EV-DO products are likely to cause our
quarterly billings to fluctuate materially.
The deployment by operators of wireless infrastructure equipment that enables new
end-user services typically occurs in stages, and our quarterly billings will vary
significantly depending on the rate at which such deployments occur. Operators will
typically make significant initial investments for new equipment to assure that new
services facilitated by such equipment are available to end-users throughout the
operators network. Operators typically will defer significant additional purchases of
such equipment until end-user usage of the services offered through such equipment
creates demand for increased capacity. Our quarterly billings will typically increase
significantly when an operator either chooses initially to deploy an EV-DO network or
deploys a significant product upgrade introduced by us, and our quarterly billings will
decline in other quarters when those deployments have been completed.
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It is difficult to anticipate the rate at which operators will deploy our wireless
infrastructure products, the rate at which the use of new mobile broadband services will
create demand for additional capacity, and the rate at which operators will implement
significant product upgrades. For example, our product and service billings in fiscal
2006 reflected an increase in sales of software for OEM base station channel cards that
support Rev A as operators ramped up their deployments of EV-DO infrastructure. Our
product and service billings for each of the second half of fiscal 2007 and the first
half of fiscal 2008 were less than our product and service billings for the first half of
fiscal 2007. Our product and service billings for the second half of fiscal 2008 were
greater than they were for the first half of fiscal 2008. We believe that several large
operators completed their initial deployments of Rev A software in the first half of
fiscal 2007 and then moderated their deployments over the remainder of the year. We
believe that several large operators began their capacity deployments in the second half
of fiscal 2008. The staged deployments of wireless infrastructure equipment by customers
of both our existing and new OEMs are likely to continue to cause significant volatility
in our quarterly operating results.
If demand for mobile broadband services does not grow as quickly as we anticipate, or
develops in a manner that we do not anticipate, our revenue and billings may decline or
fail to grow, which would adversely affect our operating results.
We derive, and expect to continue to derive, a substantial portion of our revenue
and billings from sales of mobile broadband infrastructure products. We expect demand for
mobile broadband services to continue to be the primary driver for growth and expansion
of EV-DO networks. The market for mobile broadband services is relatively new and still
evolving, and it is uncertain whether these services will achieve and sustain high levels
of demand and market acceptance. The level of demand and continued market acceptance for
these services may be adversely affected by factors that limit or interrupt the supply of
mobile phones designed for EV-DO networks. In addition, the unavailability of EV-DO
versions of popular mobile devices, such as the Apple i-Phone that only work on UMTS
technology, could hamper the expansion of EV-DO networks. Another expected driver for the
growth of EV-DO networks is VoIP. The migration of voice traffic to EV-DO networks will
depend on many factors outside of our control. If the demand for VoIP and other mobile
broadband services does not grow, or grows more slowly than expected, the need for our
EV-DO products would be diminished and our operating results would be significantly
harmed.
Deployments of our EV-DO products by two large U.S. wireless operators account for a
substantial majority of our revenue and billings, and a decision by these operators to
reduce their use of our products would harm our business and operating results.
A substantial portion of our cumulative billings for fiscal 2006, 2007 and 2008 and
the first three quarters of fiscal 2009 were attributable to sales of our EV-DO products
by Nortel Networks to two large wireless operators in North America. Our sales of EV-DO
products currently depend to a significant extent on the rate at which these operators
expand and upgrade their CDMA networks. Our business and operating results would be
harmed if either of these operators were to select a wireless network solution offered by
a competitor or for any other reason were to discontinue or reduce the use of our
products or product upgrades in their networks.
If the market for our FMC products does not develop as we expect, or our FMC products do
not achieve sufficient market acceptance, our business will suffer.
We are investing significantly in the development of both our EV-DO based and UMTS
based FMC products so that operators may offer mobile broadband services using wireline
broadband connections and a combination of mobile and Wi-Fi networks. We do not expect to
have meaningful sales of our CDMA FMC products until the first half of fiscal 2010,
depending on operators deployment plans. However, it is possible that the market for our
FMC products will not develop as we expect. The market for our UMTS FMC products is
developing more slowly than the market for our CDMA products. It is uncertain whether our
FMC products will achieve and sustain high levels of demand, market acceptance and
profitability. Our ability to sell our FMC products will depend, in part, on factors
outside our control, such as the commercial availability and market acceptance of mobile
phones designed to support FMC applications and the market acceptance of femtocell access
point products. The market for our FMC products may be smaller than we expect, the market
may develop more slowly than we expect or our competitors may develop alternative
technologies that are more attractive to operators. Our FMC products are an important
component of our growth and diversification strategy and, therefore, if we are unable to
successfully execute on this strategy, our sales, billings and revenues could decrease
and our operating results could be harmed.
Our future sales will depend on our success in generating sales to a limited number of
OEM customers, and any failure to do so would have a significant detrimental effect on
our business.
There are a limited number of OEMs that offer EV-DO solutions, several of which have
developed their own EV-DO technology internally and, therefore, do not require solutions
from us. We currently have agreements with two OEM customers, one of whom is in
bankruptcy (Nortel Networks bankruptcy and its implications for us are discussed
elsewhere in this Quarterly Report). We do not expect to commence significant sales to
one of these OEM customers in the immediate future because the markets for the products
that we are developing for this customer are still developing. The market for our FMC
products is still developing. We currently have agreements with four OEM customers to
deliver our UMTS femtocell product solutions and agreements with four OEM customers and
one operator customer to deliver our CDMA femtocell product solutions, but have not yet
had any significant sales to these customers. Our operating results for the foreseeable
future will depend to a significant
extent on our ability to effect sales to our existing CDMA and UMTS OEM customers
and to establish new OEM relationships. Our OEM customers have substantial purchasing
power and leverage in negotiating pricing and other contractual terms with us. In
addition, further consolidation in the communications equipment market could adversely
affect our OEM customer relationships. If we fail to generate significant product and
service billings through our existing OEM relationships or if we fail to establish
significant new OEM relationships, we will not be able to achieve our anticipated level
of sales and our results of operations will suffer.
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The unpredictability of our future results may adversely affect the trading price of our
common stock.
Our operating results have varied significantly from period to period, and we expect
them to continue to vary significantly from period to period for the foreseeable future
due to a number of factors in addition to the unpredictable purchasing patterns of
operators. The following factors, among others, can contribute to the unpredictability of
our operating results:
| the effect of our OEM business model or changes to this model on our revenue recognition; |
||
| the timing of agreements or commitments with our OEM customers for new products or software upgrades; |
||
| the timing of our delivery of software upgrades; |
||
| the timing of our delivery of maintenance and support sold with products; |
||
| the ability of our customers to pay amounts owed to us as they
become due (or in the case of Nortel Networks, when they would
have become due, but for their filing for bankruptcy); |
||
| the unpredictable deployment and purchasing patterns of operators; |
||
| fluctuations in demand for products of our OEM customers that are
sold together with our products, and the timing and size of orders
for such products of our OEM customers; |
||
| new product introductions and enhancements by our competitors and us; |
||
| the timing and acceptance of software upgrades sold by our OEM customers to their installed base of operators; |
||
| changes in our pricing policies or the pricing policies of our competitors; |
||
| our ability to develop, introduce and deploy new products and product
upgrades that meet customer requirements in a timely manner; |
||
| adjustments in the reporting of royalties and product sales by our OEM
customers resulting from reviews and audits of such reports; |
||
| our and our OEM customers ability to obtain sufficient supplies of limited source components or materials; |
||
| our and our OEM customers ability to attain and maintain production
volumes and quality levels for our products; and |
||
| general economic conditions, as well as those specific to the
communications, networking, wireless and related industries. |
Our operating expenses are largely based on our anticipated organizational and
product and service billings growth, especially as we continue to invest significant
resources in the development of future products and expand our international presence.
Most of our expenses, such as employee compensation, are relatively fixed in the short
term. As a result, any shortfall in product and service billings in relation to our
expectations could cause significant changes in our operating results from period to
period and could result in negative cash flow from operations.
We believe that comparing our operating results on a period-to-period basis may not
be meaningful. You should not rely on our past results as an indication of our future
performance. It is likely that in some future periods, our revenue, product and service
billings, earnings, cash from operations or other operating results will be below the
expectations of securities analysts and investors. In that event, the price of our common
stock may decrease substantially.
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We may not be able to achieve profitability for any period in the future or sustain cash
flow from operating activities.
We began to recognize revenue in fiscal 2002, began to have positive cash flow from
operating activities in fiscal 2004 and achieved profitability in fiscal 2006. We have
only a limited operating history on which you can base your evaluation of our business,
including our ability to continue to grow our revenue and billings and to sustain cash
flow from operating activities and profitability. The amount and percentage of our
operating expenses that are fixed expenses have increased as we have grown our business.
As we continue to expand and develop our business, we will need to generate significant
billings to maintain positive cash flow from operating activities, and we might not
sustain positive cash flow from operating activities for any substantial period of time.
We do not expect to achieve profitability for any fiscal year unless we are able to
recognize significant revenue from our OEM arrangements in that fiscal year. If we are
unable to increase our billings and sustain cash flow from operating activities, the
market price of our common stock will likely fall.
On January 14, 2009, Nortel Networks announced that it and certain of its affiliates
had filed for bankruptcy protection. As of September 27, 2009, we had $36.4 million of
outstanding invoices to Nortel Networks related to royalties earned and services provided
through January 13, 2009. The collection of these amounts is subject to Nortel Networks
bankruptcy proceedings and a portion or all of these amounts may not be collected. Had
Nortel Networks not filed for bankruptcy protection, these amounts would likely have been
paid in due course in the first and second quarter of fiscal 2009. Our cash flows for the
first three quarters of fiscal 2009 were negatively impacted by $36.4 million,
representing the total billed amounts due from Nortel Networks at the time of the filing.
Claims by other parties that we infringe their proprietary technology could force us to
redesign our products or to incur significant costs.
Many companies in the wireless industry have significant patent portfolios. These
companies and other parties may claim that our products infringe their proprietary
rights. We may become involved in litigation as a result of allegations that we infringe
the intellectual property rights of others. Any party asserting that our products
infringe their proprietary rights would force us to defend ourselves, and possibly our
customers, against the alleged infringement. These claims and any resulting lawsuit, if
successful, could subject us to significant liability for damages and invalidation of our
proprietary rights. We also could be forced to do one or more of the following:
| stop selling, incorporating or using our products that use the challenged intellectual property; |
||
| obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on reasonable terms, or at all; |
||
| redesign those products that use any allegedly infringing technology, which may be costly and time-consuming; or |
||
| refund deposits and other amounts received for allegedly infringing technology or products. |
For example, in 2006, we received a letter from Wi-LAN Inc. asserting that some of
our EV-DO products infringe two issued United States patents and an issued Canadian
patent relating to wireless communication technologies. A majority of our revenue to date
has been derived from the allegedly infringing EV-DO products. We have evaluated various
matters relating to Wi-LANs assertion and we do not believe that such products infringe
any valid claim of the patents identified by Wi-LAN in that letter. In November 2007, we
received an additional letter from Wi-LAN asserting that some of our other products
infringe one of the previously identified United States patents and that the products
identified in the first letter and some of our other products infringe two other United
States patents. We have evaluated Wi-LANs claims related to the products and patents
identified in its November 2007 letter and we do not believe that our products infringe
any valid claim of the patents identified by Wi-LAN in that letter. Under certain
circumstances we may seek to obtain a license to use the relevant technology from Wi-LAN.
We cannot be certain that Wi-LAN would provide such a license or, if provided, what its
economic terms would be. If we were to seek to obtain such a license, and such license
were available from Wi-LAN, we could be required to make significant payments with
respect to past and/or future sales of our products, and such payments may adversely
affect our financial condition and operating results. If Wi-LAN determines to pursue
claims against us for patent infringement, we might not be able to successfully defend
against such claims.
Intellectual property litigation can be costly. Even if we prevail, the cost of such
litigation could deplete our financial resources. Litigation is also time consuming and
could divert managements attention and resources away from our business. Furthermore,
during the course of litigation, confidential information may be disclosed in the form of
documents or testimony in connection with discovery requests, depositions or trial
testimony. Disclosure of our confidential information and our involvement in intellectual
property litigation could materially adversely affect our business. Some of our
competitors may be able to sustain the costs of complex intellectual property litigation
more effectively than we can because they have substantially greater resources. In
addition, any uncertainties resulting from the initiation and continuation of any
litigation could significantly limit our ability to continue our operations.
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If we are not successful in obtaining from third parties licenses to intellectual
property that are required for CDMA and UMTS femtocell products that we are developing,
we may not be able to expand our business as expected and our business may suffer.
The CDMA and UMTS femtocell markets are characterized by the presence of many
patents held by third parties. We will need to obtain licenses from third parties for
intellectual property associated with our development of CDMA and UMTS femtocell
products. Any required license might not be available to us on acceptable terms, or at
all. If we succeed in obtaining these licenses, but the payments under these licenses are
higher than we anticipate, our costs for these products would increase and our operating
results would suffer. If we failed to obtain a required license, our ability to develop
CDMA and UMTS femtocell products would be impaired, we may not be able to expand our
business as expected and our business may suffer.
If we do not timely deliver new and enhanced products that respond to customer
requirements and technological changes, operators may not buy our products and our
revenue and product and service billings may decline significantly.
The market for our products is characterized by rapid technological change, frequent
new product introductions and evolving industry standards. To achieve market acceptance
for our products, we must effectively anticipate operator requirements, and we must offer
products that meet changing operator demands in a timely manner. Operators may require
product features and capabilities that our current products do not have. If we fail to
develop products that satisfy operator requirements, our ability to create or increase
demand for our products will be harmed.
In developing our wireless infrastructure products, we seek to identify the
long-term trends of wireless operators and their customers. The development cycle for our
products and technologies can take multiple years. The ultimate success of our new
products depends, in large part, on the accuracy of our assessments of the long-term
needs of the industry, and it is difficult to change quickly the design or function of a
planned new product if the market need does not develop as we anticipate.
We may experience difficulties with software development, industry standards,
hardware design, manufacturing or marketing that could delay or prevent our development,
introduction or implementation of new products and enhancements. The introduction of new
products by competitors, including some of our OEM customers, the emergence of new
industry standards or the development of entirely new technologies that replace existing
product offerings could render our existing or future products obsolete. If our products
become technologically obsolete, operators may purchase solutions offered by our
competitors and our ability to generate revenue and product and service billings may be
impaired.
Our revenue and product and service billings growth will be limited if our OEM customers
are unable to continue to sell our products to large wireless operators or if we have to
discount our products to support the selling efforts of our OEM customers.
Our future success depends in part on the ability of our OEM customers to sell our
products to large wireless operators operating complex networks that serve large numbers
of subscribers and transport high volumes of traffic. Our OEM customers operate in a
highly competitive environment and may need to reduce the prices they charge for our
products in order to maintain or expand their market share. We may reduce the prices we
charge our OEM customers for our products in order to support their selling efforts. If
our OEM customers incur shortfalls in their sales of mobile broadband solutions to their
existing customers or fail to expand their customer bases to include additional operators
that deploy our products in large-scale networks serving significant numbers of
subscribers or if we reduce the prices we charge our OEM customers for our products, our
operating results will suffer.
We depend on sole sources for certain components of our products and our business would
be harmed if supplies from our sole sources were disrupted.
We depend on sole sources for certain components of our products and also rely on
contract manufacturers for the production of our hardware products. We have not entered
into long-term agreements with any of our suppliers. We depend on several software
vendors for the operating system and other capabilities used in our products. In
addition, we and one of our OEM customers purchase from Qualcomm the cell site modem
chips used in any base station and base station channel cards. If these cell site modem
chips were to become unavailable to us or to our OEM customers, it would take us a
significant period of time to develop alternative solutions and it is likely that our
operating results would be significantly harmed.
The market for network infrastructure products is highly competitive and continually
evolving, and if we are not able to compete effectively, we may not be able to continue
to expand our business as expected and our business may suffer.
The market for network infrastructure products is highly competitive and rapidly
evolving. The market is subject to changing technology trends, shifting customer needs
and expectations and frequent introduction of new products.
We expect competition to persist and intensify in the future as the market for
network infrastructure products grows and new and existing competitors devote
considerable resources to introducing and enhancing products. For our EV-DO products, we
face competition from several of the worlds largest telecommunications equipment
providers that provide either a directly
competitive product or a product based on alternative technologies, including
Alcatel-Lucent, Hitachi, Huawei, LG-Nortel and Samsung. In our sales to OEM customers, we
face the competitive risk that OEMs might seek to develop internally alternative
solutions to those currently purchased from us. Additionally, our OEM customers might
elect to purchase technology from our competitors. For our FMC products, our competition
includes several public companies, including Cisco and Ericsson, as well as several
private companies such as Huawei.
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Our current and potential competitors may have significantly greater financial,
technical, marketing and other resources than we do and may be able to devote greater
resources to the development, promotion, sale and support of their products. In addition,
many of our competitors have more extensive customer relationships than we do, and,
therefore, our competitors may be in a stronger position to respond quickly to new
technologies and may be able to market or sell their products more effectively. Moreover,
further consolidation in the communications equipment market could adversely affect our
OEM customer relationships and competitive position. Our products may not continue to
compete favorably. We may not be successful in the face of increasing competition from
new products and enhancements introduced by existing competitors or new companies
entering the markets in which we provide products. As a result, we may experience price
reductions for our products, order cancellations and increased expenses. Accordingly, our
business may not grow as expected and our business may suffer.
Our agreement with our largest OEM customer, Nortel Networks, provides Nortel Networks
with an option to license some of our intellectual property to develop internally
products competitive with the products it currently purchases from us.
Under our OEM agreement with Nortel Networks, Nortel Networks has the option to
purchase from us the specification for communications among base stations, radio network
controllers and network management systems. The specification would enable Nortel
Networks to develop EV-DO software to work with the base station channel card software
licensed from us and deployed in the networks of its wireless operator customers. If
Nortel Networks elects to exercise this option, Nortel Networks will pay us a fixed fee
as well as a significant royalty on sales of current and future products that incorporate
this specification. The royalty rate varies with annual volume but represents a portion
of the license fees we currently receive from our sales to Nortel Networks. If Nortel
Networks were to exercise the option, Nortel Networks would receive the current interface
specification at the time of option exercise, updated with an upgrade then under
development, plus one additional upgrade subject to a development agreement within a
limited time after the option exercise for an additional fee. If Nortel Networks were in
the future to develop its own EV-DO software, it could, by exercising this option, enable
its own software to communicate with the base station channel cards currently installed
in its customers networks. If our agreement with Nortel Networks is assumed, and
Ericsson purchases Nortel Networks CDMA business, Ericsson will succeed to the rights of
Nortel Networks described above.
Adverse conditions in the global economy and disruption of financial and credit markets
could negatively affect our customers, and therefore our performance.
A prolonged economic downturn in the business or geographic areas in which we sell
our products could reduce demand for our products and result in a decline in our revenue
and billings. Volatility and disruption of financial and credit markets could limit
customers ability to obtain adequate financing to maintain operations and invest in
network infrastructure and therefore also could reduce demand for our products and result
in a decline in our revenues and billings.
In addition, during economic downturns, customers may slow the rate at which they
pay their vendors or become unable to pay their debts as they become due. If any of our
significant customers do not pay amounts owed to us in a timely manner or becomes unable
to pay such amounts to us at a time when we have substantial amounts receivable from such
customers, our cash flow and results of operations may suffer. As of September 27, 2009,
Nortel Networks had outstanding invoices to us of $36.4 million subject to the bankruptcy
process. As a consequence of Nortel Networks bankruptcy, we were not be able to collect
on these invoices when they otherwise were due, and we may never be able to collect them
in full, or at all.
Additionally, disruptions of the credit markets and any limitations on the
availability of credit to our customers could impact their ability to invest in network
infrastructure and purchase our products.
Because our business depends on the continued strength of the communications industry,
our operating results will suffer if that industry experiences an economic downturn.
We derive most of our revenue and billings from purchases of our products by
customers in the communications industry. Our future success depends upon the continued
demand from wireless operators for communications equipment. The communications industry
is cyclical and reactive to general economic conditions. In the recent past, worldwide
economic downturns, pricing pressures, mergers and deregulation have led to
consolidations and reorganizations. These downturns, pricing pressures and restructurings
have caused delays and reductions in capital and operating expenditures by many wireless
operators. These delays and reductions, in turn, have reduced demand for communications
products such as ours. A continuation or recurrence of these industry patterns, as well
as general domestic and foreign economic conditions and other factors that reduce
spending by companies in the communications industry, could harm our operating results in
the future.
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The success of our business could be jeopardized if we are unable to protect our
intellectual property adequately.
Our success depends to a degree upon the protection of our software, hardware
designs and other proprietary technology. We rely on a combination of patent, copyright,
trademark and trade secret laws, and confidentiality provisions in agreements with
employees, contract manufacturers, consultants, customers and other third parties to
protect our intellectual property rights. Other parties may not comply with the terms of
their agreements with us, and we may not be able to enforce our rights adequately against
these parties. In addition, unauthorized parties may attempt to copy or otherwise obtain
and use our products or technology. Monitoring unauthorized use of our products is
difficult, and we cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where the laws may
not protect our proprietary rights as fully as in the United States. If competitors are
able to use our technology, our ability to compete effectively could be harmed. For
example, if a competitor were to gain use of certain of our proprietary technology, it
might be able to develop and manufacture similarly designed and equipped mobile broadband
solutions at a reduced cost, which could result in a decrease in demand for our products.
Furthermore, we have adopted a strategy of seeking limited patent protection both in the
United States and in foreign countries with respect to the technologies used in or
relating to our products. We do not know whether any of our pending patent applications
will result in the issuance of patents or whether the examination process will require us
to narrow our claims, and even if patents are issued, they may be contested, circumvented
or invalidated over the course of our business. Moreover, the rights granted under any
issued patents may not provide us with proprietary protection or competitive advantages,
and, as with any technology, competitors may be able to develop and obtain patents for
technologies that are similar to or superior to our technologies. If that happens, we may
need to license these technologies and we may not be able to obtain licenses on
reasonable terms, if at all, thereby causing great harm to our business. In addition, if
we resort to legal proceedings to enforce our intellectual property rights, the
proceedings could become burdensome and expensive, even if we were to prevail.
We may engage in future acquisitions that could disrupt our business, cause dilution to
our stockholders and harm our financial condition and operating results.
We intend to pursue acquisitions of companies or assets in order to enhance our
market position or expand our product portfolio. We may not be able to find suitable
acquisition candidates and we may not be able to complete acquisitions on favorable
terms, if at all. If we do complete acquisitions, we cannot be sure that they will
ultimately strengthen our competitive position or that they will not be viewed negatively
by customers, securities analysts or investors. In addition, any acquisitions that we
make could lead to difficulties in integrating personnel and operations from the acquired
businesses and in retaining and motivating key personnel from those businesses.
Acquisitions may disrupt our ongoing operations, divert management from day-to-day
responsibilities, increase our expenses and harm our operating results or financial
condition. Future acquisitions may reduce our cash available for operations and other
uses and could result in an increase in amortization expense related to identifiable
assets acquired, potentially dilutive issuances of equity securities or the incurrence of
debt, which could harm our business, financial condition and operating results.
The outcome of an ongoing IRS examination of our tax returns, future interpretations of
existing accounting standards or the application of new accounting standards could
adversely affect our cash balance and operating results.
During the first quarter of 2009, the IRS began an examination of the our U.S.
federal income tax returns for the tax years ended December 31, 2006 and December 30,
2007. No adjustments have been proposed to date by the IRS. However, the IRS has met
with us regarding our tax treatment of deferred revenue and is in the process of finalizing
its position which may differ from our position. We have elected to defer advance payments,
that are also deferred for GAAP financial reporting purposes, for up to one year under
IRS Revenue Procedure 2004-34 based on the fact that we have ongoing obligations with
respect to those advanced payments. Should the IRS challenge our position and prevail on
appeal, there would be no impact on tax expense, however the
inclusion of these advance payments in taxable income would be
accelerated by one year and we would be required to pay such taxes.
We would also be liable for interest on amounts deferred in prior
years.
GAAP is subject to interpretation by the Financial Accounting Standards Board, or
FASB, the American Institute of Certified Public Accountants, or AICPA, the SEC and
various other bodies formed to promulgate and interpret appropriate accounting
principles. A change in these principles or interpretations could have a significant
effect on our reported financial results, and they could affect the reporting of
transactions completed before the announcement of a change.
For example, we recognize substantially all of our revenue in accordance with ASC
985-605. The AICPA and its Software Revenue Recognition Task Force continue to issue
interpretations and guidance for applying the relevant accounting standards to a wide
range of sales contract terms and business arrangements that are prevalent in software
licensing arrangements and arrangements for the sale of hardware products that contain
more than an insignificant amount of software. We collaborate with our OEM customers to
develop and negotiate pricing for specific features for future product releases and
specified software upgrades. Because we do not sell the same products and upgrades to
more than one customer, we are unable to establish fair value for these products and
upgrades. As a result, under ASC 985-605, we are required to defer most of our revenue
from sales to our OEM customers until after we ship specified upgrades that were
committed to the OEM customer at the time of sale. Future interpretations of existing
accounting standards, including ASC 985-605, or changes in our business practices could
result in future changes in our revenue recognition accounting policies that have a
material adverse effect on our results of operations.
In August 2008, the SEC decided to seek public comments on the potential mandatory
adoption of International Financial Reporting Standards, or IFRS, by all U.S. issuers.
The proposed roadmap targets potential mandatory adoption of IFRS in the
United States beginning in 2014, but lays out several milestones that would need to be
achieved prior to the SEC mandating use of IFRS for all U.S. issuers. The
proposed rule would allow certain qualifying domestic issuers to use IFRS as early as
fiscal years ending on or after December 15, 2009. Should we be required to adopt IFRS,
our operating results for past, current, or future periods may be adversely affected. We
have not yet assessed the impact of potentially applying IFRS.
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In December 2008, the FASB and the International Accounting Standards Board issued a
discussion paper which detailed their preliminary views on a single, assets-and
liabilities-based revenue recognition model that they believe will improve financial
reporting. If and when a new revenue recognition model is finalized, it may change the
way in which we recognize and record revenue and could adversely affect our operating
results in current or future periods. We have not yet assessed the impact of this
preliminary revenue recognition model.
In September 2009, the Emerging Issues Task Force (EITF) finalized two revenue
recognition standards which reduced the number of transactions accounted for under ASC
985-605 and modified the scope of this standard. We have not yet fully completed our
analysis of the new pronouncements, which will be effective for new or materially
modified contracts in fiscal years beginning on or after June 15, 2010.
The loss of key personnel or an inability to attract and retain additional personnel may
impair our ability to grow our business.
We are highly dependent upon the continued service and performance of our senior
management team and key technical and sales personnel, including our President and Chief
Executive Officer, Chief Technical Officer, and Vice President, Femto Business and
Corporate Development. None of these officers is a party to an employment agreement with
us, and any of them therefore may terminate employment with us at any time with no
advance notice. The replacement of these officers likely would involve significant time
and costs, and the loss of these officers may significantly delay or prevent the
achievement of our business objectives.
We face intense competition for qualified individuals from numerous technology,
software and manufacturing companies. For example, our competitors may be able to attract
and retain a more qualified engineering team by offering more competitive compensation
packages. If we are unable to attract new engineers and retain our current engineers, we
may not be able to develop and service our products at the same levels as our competitors
and we may, therefore, lose potential customers and sales penetration in certain markets.
Our failure to attract and retain suitably qualified individuals could have an adverse
effect on our ability to implement our business plan and, as a result, our ability to
compete effectively in the mobile broadband solutions market could decrease, our
operating results could suffer and our revenues could decrease.
We have incurred, and will continue to incur, significant increased costs as a result of
operating as a public company as compared with our history as a private company, and our
management is required to devote substantial time to public company compliance
initiatives. If we are unable to absorb these increased costs or maintain management
focus on development and sales of our product offerings and services, we may not be able
to achieve our business plan.
As a public company, we have incurred, and will continue to incur, significant
legal, accounting and other expenses that we did not incur as a private company. In
addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC
and the NASDAQ Stock Market, have imposed a variety of requirements on public companies,
including requiring changes in corporate governance practices. Our management and other
personnel have and will continue to devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations have increased our legal
and financial compliance costs and have made some activities more time-consuming and
costly. For example, we believe these new rules and regulations have made it more
difficult and expensive for us to obtain director and officer liability insurance.
We are exposed to potential risks and will continue to incur significant costs as a
result of the internal control testing and evaluation process mandated by Section 404 of
the Sarbanes-Oxley Act of 2002.
We assessed the effectiveness of our internal control over financial reporting as of
December 28, 2008 and assessed all deficiencies on both an individual basis and in
combination to determine if, when aggregated, they constitute a material weakness. As a
result of this evaluation, no material weaknesses were identified.
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We expect to continue to incur significant costs, including increased accounting
fees and increased staffing levels, in order to maintain compliance with Section 404 of
the Sarbanes-Oxley Act. We continue to monitor our controls for any weaknesses or
deficiencies. No evaluation can provide complete assurance that our internal controls
will detect or uncover all failures of persons within our company to disclose material
information otherwise required to be reported. The effectiveness of our controls and
procedures could also be limited by simple errors or faulty judgments. In addition, as we
continue to expand globally, the challenges involved in implementing appropriate internal
controls will increase and will require that we continue to improve our internal controls
over financial reporting.
In the future, if we fail to complete our Sarbanes-Oxley 404 evaluation in a timely
manner, or if our independent registered public accounting firm cannot attest in a timely
manner to our evaluation, we could be subject to regulatory scrutiny and a loss of public
confidence in our internal controls which could adversely impact the market price of our
common stock. We or our independent registered public accounting firm may identify
material weaknesses in internal controls over financial reporting which may result in a
loss of public confidence in our internal controls and adversely impact the market price
of our common stock. In addition, any failure to implement required, new or improved
controls, or difficulties encountered in their implementation, could harm our operating
results or cause us to fail to meet our reporting obligations.
If we are unable to manage our growth and expand our operations successfully, our
business and operating results will be harmed and our reputation may be damaged.
We anticipate that further expansion of our infrastructure and headcount may be
required to achieve planned expansion of our product offerings and planned increases in
our customer base. Our growth has placed, and is expected to continue to place, a
significant strain on our administrative and operational infrastructure. Our ability to
manage our operations and growth will require us to continue to refine our operational,
financial and management controls, human resource policies, and reporting systems and
procedures.
We may not be able to implement improvements to our management information and
control systems in an efficient or timely manner and may discover deficiencies in
existing systems and controls. If we are unable to manage future expansion, our ability
to provide high quality products and services could be harmed, which would damage our
reputation and brand and substantially harm our business and results of operations.
We may need additional capital in the future, which may not be available to us, and if
it is available, may dilute our existing stockholders ownership of our common stock.
We may need to raise additional funds through public or private debt or equity
financings in order to:
| fund ongoing operations; |
||
| take advantage of opportunities, including more rapid
expansion of our business or the acquisition of
complementary products, technologies or businesses; |
||
| develop new products; or |
||
| respond to competitive pressures. |
Any additional capital raised through the sale of equity may dilute our current
stockholders percentage ownership of our common stock. Capital raised through debt
financing would require us to make periodic interest payments and may impose potentially
restrictive covenants on the conduct of our business. Furthermore, additional financings
may not be available on terms favorable to us, or at all, particularly in the current
economic environment. A failure to obtain additional funding could prevent us from making
expenditures that may be required to grow or maintain our operations.
Our ability to sell our products depends in part on the quality of our support and
services offerings, and our failure to offer high quality support and services would
have a material adverse effect on our sales and operating results.
Once our products are deployed within an operators network, the operator and our
OEM customer depend on our support organization to resolve issues relating to our
products. A high level of support is critical for the successful marketing and sale of
our products. If we do not effectively assist operators in deploying our products,
succeed in helping operators quickly resolve post-deployment issues, and provide
effective ongoing support it would adversely affect our ability to sell our products. As
a result, our failure to maintain high quality support and services would have a material
adverse effect on our business and operating results.
Our products are highly technical and may contain undetected software or hardware
errors, which could cause harm to our reputation and adversely affect our business.
Our products are highly technical and complex and are critical to the operation of
many networks. Our products have contained and are expected to continue to contain one or
more undetected errors, defects or security vulnerabilities. Some errors in our products
may only be discovered after a product has been installed and used by an operator. For
example, we have encountered errors in our software products that have caused operators
using our products to experience a temporary loss of certain network services. Any
errors, defects or security vulnerabilities discovered in our products after commercial
release could result in loss of revenue or delay in revenue recognition, loss of
customers and increased service and warranty cost, any of which could adversely affect
our business, results of operations and financial condition. In addition, we could face
claims for product liability, tort or breach of warranty, including claims related to
changes to our products made by our OEM customers. Our contracts for the sale of our
products contain provisions relating to warranty disclaimers and liability limitations,
which in certain cases may not be upheld. Defending a lawsuit, regardless of its merit,
is costly and may divert managements attention and adversely affect the markets
perception of us and our products. In addition, if our business liability insurance
coverage proves inadequate or future coverage is unavailable on acceptable terms or at
all, our financial condition could be harmed.
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Our international operations subject us to additional risks that can adversely affect
our operating results.
We have sales personnel in seven countries worldwide, approximately 180 engineers
and support staff in Bangalore, India and approximately 50 engineers and support staff in
Cambridge, United Kingdom. We expect to continue to add personnel in foreign countries,
especially at our Bangalore, India and Cambridge, United Kingdom facilities. Our
international operations subject us to a variety of risks, including:
| the difficulty of managing and staffing foreign offices and the
increased travel, infrastructure and legal compliance costs associated
with multiple international locations; |
||
| difficulties in enforcing contracts, collecting accounts receivable and longer
payment cycles, especially in emerging markets; |
||
| the need to localize our products and licensing programs for international customers; |
||
| tariffs and trade barriers and other regulatory or contractual
limitations on our ability to sell or develop our products in certain
foreign markets; |
||
| increased exposure to foreign currency exchange rate risk; and |
||
| reduced protection for intellectual property rights in some countries. |
As we continue to expand our business globally, our success will depend, in large
part, on our ability to anticipate and effectively manage these and other risks
associated with our international operations. Our foreign operations incur expenses in
local currencies. Because we incur a substantial portion of our operating expenses in
India and the United Kingdom, we are subject to currency exchange risks between the U.S.
Dollar on the one hand, and the Indian rupee and British pound, on the other. We may
derive some of our future revenue from customers in foreign countries that pay for our
products in the form of their local currency, which also would subject us to currency
exchange risks. Our failure to manage any of these risks successfully could harm our
international operations and reduce our international sales, adversely affecting our
business, operating results and financial condition.
If wireless devices pose safety risks, we may be subject to new regulations, and demand
for our products and those of our licensees and customers may decrease.
Concerns over the effects of radio frequency emissions, even if unfounded, may have
the effect of discouraging the use of wireless devices, which would decrease demand for
our products and those of our licensees and customers. In recent years, the FCC and
foreign regulatory agencies have updated the guidelines and methods they use for
evaluating radio frequency emissions from radio equipment, including wireless phones and
other wireless devices. In addition, interest groups have requested that the FCC
investigate claims that wireless communications technologies pose health concerns and
cause interference with airbags, hearing aids and other medical devices. Concerns have
also been expressed over the possibility of safety risks due to a lack of attention
associated with the use of wireless devices while driving. Any legislation that may be
adopted in response to these expressions of concern could reduce demand for our products
and those of our licensees and customers in the United States as well as foreign
countries.
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Risks Relating to Ownership of Our Common Stock
The market price of our common stock may be volatile.
Our common stock has a limited trading history. The trading prices of the securities
of technology companies have been highly volatile. Some of the factors that may cause the
market price of our common stock to fluctuate include:
| fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to
be similar to us; |
||
| fluctuations in our revenue as a result of our revenue recognition policy, even during periods of significant
sales activity; |
||
| changes in estimates of our financial results or recommendations by securities analysts; |
||
| failure of any of our products to achieve or maintain market acceptance; |
||
| any adverse change in our relationship with Nortel Networks, including as a result of Nortel Networks
bankruptcy filing; |
||
| any adverse resolution of the IRS examination of the our U.S. federal income tax returns for the tax years
ended December 31, 2006 and December 30, 2007; |
||
| changes in market valuations of similar companies; |
||
| success of competitive products; |
||
| the progress of the sale of Nortel Networks CDMA business, whether to Ericsson or another purchaser; |
||
| changes in our capital structure, such as future issuances of securities or the incurrence of debt; |
||
| announcements by us or our competitors of significant products, contracts, acquisitions or strategic alliances; |
||
| regulatory developments in the United States, foreign countries or both; |
||
| litigation involving our company, our general industry or both; |
||
| additions or departures of key personnel; |
||
| general perception of the future of CDMA technology; |
||
| investors general perception of us; and |
||
| changes in general economic, industry and market conditions. |
In addition, if the market for technology stocks or the stock market in general
experiences a loss of investor confidence, the trading price of our common stock could
decline for reasons unrelated to our business, financial condition or results of
operations. If any of the foregoing occurs, it could cause our stock price to fall and
may expose us to class action lawsuits that, even if unsuccessful, could be costly to
defend and a distraction to management.
If equity research analysts do not publish research or reports about our business or if
they issue unfavorable commentary or downgrade our common stock, the price of our common
stock could decline.
The trading market for our common stock will rely in part on the research and
reports that equity research analysts publish about us and our business. We do not
control these analysts. The price of our stock could decline if one or more equity
analysts downgrade our stock or if those analysts issue other unfavorable commentary or
cease publishing reports about us or our business.
A significant portion of our total outstanding shares may be sold into the public market
in the near future, which could cause the market price of our common stock to drop
significantly, even if our business is doing well.
If our existing stockholders sell a large number of shares of our common stock or
the public market perceives that existing stockholders might sell shares of common stock,
the market price of our common stock could decline significantly.
The holders of a majority of our common stock have rights, subject to some
conditions, to require us to file registration statements under the Securities Act or to
include their shares in registration statements that we may file in the future for
ourselves or other stockholders. If we register their shares of common stock, they could
sell those shares in the public market.
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Our directors and management will exercise significant control over our company.
Our directors and executive officers and their affiliates beneficially owned a
majority of our outstanding common stock as of September 27, 2009. As a result, these
stockholders, if they act together, are able to influence our management and affairs and
all matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership may have
the effect of delaying or preventing a change in control of our company and might affect
the market price of our common stock.
Provisions in our certificate of incorporation, our by-laws or Delaware law might
discourage, delay or prevent a change in control of our company or changes in our
management and, therefore, depress the trading price of our common stock.
Provisions of our certificate of incorporation, our by-laws or Delaware law may
discourage, delay or prevent a merger, acquisition or other change in control that
stockholders may consider favorable, including transactions in which our stockholders
might otherwise receive a premium for their shares of our common stock. These provisions
may also prevent or frustrate attempts by our stockholders to replace or remove our
management. These provisions include:
| limitations on the removal of directors; |
||
| a classified board of directors so that not all members of our board are elected at one time; |
||
| advance notice requirements for stockholder proposals and nominations; |
||
| the inability of stockholders to act by written consent or to call special meetings; |
||
| the ability of our board of directors to make, alter or repeal our by-laws; and |
||
| the ability of our board of directors to designate the terms of and
issue new series of preferred stock without stockholder approval,
which could be used to institute a rights plan, or a poison pill, that
would work to dilute the stock ownership of a potential hostile
acquirer, likely preventing acquisitions that have not been approved
by our board of directors. |
In addition, Section 203 of the Delaware General Corporation Law prohibits a
publicly-held Delaware corporation from engaging in a business combination with an
interested stockholder, generally a person which together with its affiliates owns, or
within the last three years has owned, 15% of our voting stock, for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The existence of the foregoing provisions and anti-takeover measures could limit the
price that investors might be willing to pay in the future for shares of our common
stock. They could also deter potential acquirers of our company, thereby reducing the
likelihood that stockholders could receive a premium for their common stock in an
acquisition.
We do not currently intend to pay dividends on our common stock and, consequently, the
ability to achieve a return on an investment in our common stock will depend on
appreciation in the price of our common stock.
Although we paid a special cash dividend on our capital stock in April 2007, we do
not intend to pay any cash dividends on our common stock for the foreseeable future. We
currently intend to invest our future earnings, if any, to fund our growth. Therefore,
stockholders are not likely to receive any dividends on shares of common stock for the
foreseeable future.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
During the third quarter of fiscal 2009, we repurchased shares of our common stock
under our second stock repurchase program as follows:
Approximate | ||||||||||||||||
Dollar Value | ||||||||||||||||
Total | of | |||||||||||||||
Number of | Shares That | |||||||||||||||
Shares | May | |||||||||||||||
Purchased | Yet Be | |||||||||||||||
Total | Average | as Part of | Purchased | |||||||||||||
Number | Price | Publicly | Under the | |||||||||||||
of Shares | Paid per | Announced | Announced | |||||||||||||
Period | Purchased | Share | Program | Program | ||||||||||||
Through June 28, 2009 |
$ | 17,753 | ||||||||||||||
June 29, 2009 July 26, 2009 |
| $ | | | $ | 17,753 | ||||||||||
July 27, 2009 August 23, 2009 |
61,267 | $ | 6.03 | 61,267 | $ | 17,384 | ||||||||||
August 24, 2009 September 27, 2009 |
| $ | | | $ | 17,384 | ||||||||||
Total |
61,267 | (1) | $ | 6.03 | 61,267 | $ | 17,384 | |||||||||
(1) | We repurchased 61,267 shares of our common stock in the third quarter of fiscal 2009 pursuant to our second share
repurchase program, which we publicly announced in February 2009. Our board of directors approved the repurchase by
us of shares of our common stock having a value of up to $20.0 million in the aggregate pursuant to the second stock
repurchase program. |
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Item 6. | Exhibits |
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, Rule 13a-14(a)/15d- 14(a), by Chief Executive Officer. |
|||
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, Rule 13a-14(a)/15d-14(a), by Chief Financial Officer. |
|||
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Chief Executive Officer. |
|||
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Chief Financial Officer. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AIRVANA, INC. | ||||
By: | /s/ Randall S. Battat | |||
Randall S. Battat | ||||
Date: November 4, 2009
|
President and Chief Executive Officer | |||
(Principal Executive Officer) | ||||
By: | /s/ Jeffrey D. Glidden | |||
Jeffrey D. Glidden | ||||
Date: November 4, 2009
|
Vice President, Chief Financial Officer | |||
(Principal Financial Officer) |
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, Rule 13a-14(a)/15d- 14(a), by Chief Executive
Officer. |
|||
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Financial
Officer. |
|||
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by Chief Executive Officer. |
|||
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by Chief Financial Officer. |
62