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EX-31.1 - EX-31.1 - ACME PACKET INC | b80507exv31w1.htm |
EX-32.1 - EX-32.1 - ACME PACKET INC | b80507exv32w1.htm |
EX-31.2 - EX-31.2 - ACME PACKET INC | b80507exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-33041
ACME PACKET, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
04-3526641 (I.R.S. Employer Identification No.) |
71 Third Avenue
Burlington, MA 01803
(Address of principal executive offices) (zip code)
Burlington, MA 01803
(Address of principal executive offices) (zip code)
(781) 328-4400
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes
o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). o Yes
o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). oYes þ No
The number of shares outstanding of each of the issuers classes of common stock, as of April
26, 2010: 60,718,465
ACME PACKET, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010
Table of Contents
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Table of Contents
PART I Financial Information
Item 1 Condensed Consolidated Financial Statements (unaudited)
ACME PACKET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share data)
(unaudited)
(in thousands, except share and per share data)
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 80,570 | $ | 90,471 | ||||
Short-term investments |
108,000 | 39,990 | ||||||
Accounts receivable, net of allowance of $1,337 and $1,311, respectively |
29,540 | 25,604 | ||||||
Inventory |
5,176 | 4,372 | ||||||
Deferred product costs |
2,278 | 3,400 | ||||||
Deferred tax asset |
1,567 | 1,567 | ||||||
Other current assets |
4,015 | 2,710 | ||||||
Total current assets |
231,146 | 168,114 | ||||||
Long-term investments |
| 44,526 | ||||||
Property and equipment, net |
7,786 | 6,437 | ||||||
Acquired intangible assets, net of accumulated amortization of $1,141 and $706, respectively |
10,793 | 11,228 | ||||||
Restricted cash |
755 | 755 | ||||||
Deferred tax asset, net |
15,622 | 15,622 | ||||||
Other assets |
38 | 44 | ||||||
Total assets |
$ | 266,140 | $ | 246,726 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 3,484 | $ | 3,895 | ||||
Accrued expenses and other current liabilities |
8,465 | 9,261 | ||||||
Deferred revenue, current portion |
31,737 | 31,506 | ||||||
Total current liabilities |
43,686 | 44,662 | ||||||
Deferred revenue, net of current portion |
1,622 | 1,841 | ||||||
Contingencies (Note 15) |
||||||||
Stockholders equity: |
||||||||
Undesignated preferred stock, $0.001 par value: |
||||||||
Authorized 5,000,000 shares; Issued and outstanding - 0 shares |
| | ||||||
Common stock, $0.001 par value: |
||||||||
Authorized 150,000,000 shares; Issued 67,464,527 and 65,459,593 shares, respectively |
67 | 65 | ||||||
Additional paid-in capital |
201,157 | 188,871 | ||||||
Treasury stock, at cost 6,756,687 shares |
(37,522 | ) | (37,522 | ) | ||||
Accumulated other comprehensive loss |
(14 | ) | (2 | ) | ||||
Retained earnings |
57,144 | 48,811 | ||||||
Total stockholders equity |
220,832 | 200,223 | ||||||
Total liabilities and stockholders equity |
$ | 266,140 | $ | 246,726 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of Contents
ACME PACKET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except share and per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Revenue: |
||||||||
Product |
$ 42,093 | $ 23,051 | ||||||
Maintenance, support and service |
8,957 | 7,936 | ||||||
Total revenue |
51,050 | 30,987 | ||||||
Cost of revenue (1): |
||||||||
Product |
7,549 | 5,232 | ||||||
Maintenance, support and service |
2,268 | 923 | ||||||
Total cost of revenue |
9,817 | 6,155 | ||||||
Gross profit |
41,233 | 24,832 | ||||||
Operating expenses (1): |
||||||||
Sales and marketing |
16,427 | 11,336 | ||||||
Research and development |
8,693 | 6,164 | ||||||
General and administrative |
3,284 | 3,133 | ||||||
Total operating expenses |
28,404 | 20,633 | ||||||
Income from operations |
12,829 | 4,199 | ||||||
Other income (expense): |
||||||||
Interest income |
105 | 115 | ||||||
Other expense |
(116 | ) | (49 | ) | ||||
Total other (expense) income, net |
(11 | ) | 66 | |||||
Income before provision for income taxes |
12,818 | 4,265 | ||||||
Provision for income taxes |
4,485 | 1,507 | ||||||
Net income |
$ 8,333 | $ 2,758 | ||||||
Net income per share (Note 13): |
||||||||
Basic |
$ 0.14 | $ 0.05 | ||||||
Diluted |
$ 0.13 | $ 0.05 | ||||||
Weighted average number of common shares used in the calculation of net income per share: |
||||||||
Basic |
59,821,379 | 54,744,550 | ||||||
Diluted |
64,982,898 | 58,403,618 |
(1) | Amounts include stock-based compensation expense, as follows: |
Cost of product revenue |
$ | 168 | $ | 126 | ||||
Cost of maintenance, support and service revenue |
228 | 121 | ||||||
Sales and marketing |
1,556 | 1,086 | ||||||
Research and development |
1,148 | 718 | ||||||
General and administrative |
421 | 258 |
See accompanying Notes to Condensed Consolidated Financial Statements.
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ACME PACKET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Operating activities |
||||||||
Net income |
$ 8,333 | $ | 2,758 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
1,418 | 927 | ||||||
Amortization of intangible assets |
435 | | ||||||
Provision for bad debts |
181 | 322 | ||||||
Amortization of premium/discount on investments |
378 | | ||||||
Stock-based compensation expense |
3,521 | 2,309 | ||||||
Excess tax benefit related to exercise of stock options |
(2,404 | ) | (147 | ) | ||||
Change in operating assets and liabilities, net of acquisition: |
||||||||
Accounts receivable |
(4,117 | ) | 2,962 | |||||
Inventory |
(804 | ) | 25 | |||||
Deferred product costs |
1,122 | (570 | ) | |||||
Other assets |
(1,299 | ) | 209 | |||||
Accounts payable |
(411 | ) | (250 | ) | ||||
Accrued expenses and other current liabilities |
1,608 | (852 | ) | |||||
Deferred revenue |
12 | 3,326 | ||||||
Net cash provided by operating activities |
7,973 | 11,019 | ||||||
Investing activities |
||||||||
Purchases of property and equipment |
(2,767 | ) | (1,109 | ) | ||||
Purchases of marketable securities |
(46,370 | ) | | |||||
Proceeds from sale and maturities of marketable securities |
22,496 | | ||||||
Net cash used in investing activities |
(26,641 | ) | (1,109 | ) | ||||
Financing activities |
||||||||
Proceeds from exercise of stock options |
6,363 | 127 | ||||||
Excess tax benefit related to exercise of stock options |
2,404 | 147 | ||||||
Net cash provided by financing activities |
8,767 | 274 | ||||||
Net (decrease) increase in cash and cash equivalents |
(9,901 | ) | 10,184 | |||||
Cash and cash equivalents at beginning of period |
90,471 | 125,723 | ||||||
Cash and cash equivalents at end of period |
$80,570 | $ | 135,907 | |||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of Contents
ACME PACKET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share, restricted stock unit and per share data)
(in thousands, except share, restricted stock unit and per share data)
1. Business Description and Basis of Presentation
Business Description
Acme Packet, Inc., or the Company, was incorporated in the State of Delaware on August 3,
2000. The Company provides session border controllers, or SBCs, that enable service providers,
enterprises, government agencies and contact centers to deliver secure and high quality interactive
communicationsvoice, video and other real-time multimedia sessionsacross internet protocol, or
IP, network borders. The Company is headquartered in Burlington, Massachusetts and has offices
there, as well as in Europe and Asia.
On April 30, 2009, the Company acquired Covergence Inc., or Covergence, a privately held
company located in Maynard, Massachusetts, which provides software-based SBCs for the delivery of
voice over internet protocol, or VOIP, telephone, unified communications and service orientated
architecture applications, for approximately $22,788 in stock and cash. See Note 3 for further
discussion on the acquisition of Covergence.
Basis of Presentation
The accompanying interim condensed consolidated financial statements are unaudited. These
financial statements and notes should be read in conjunction with the audited consolidated
financial statements and related notes, together with managements discussion and analysis of
financial condition and results of operations, contained in the Companys Annual Report on Form
10-K for the year ended December 31, 2009.
The accompanying unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with United States generally accepted accounting principles, or U.S. GAAP, have been
condensed or omitted pursuant to such SEC rules and regulations. In the opinion of management, the
unaudited condensed consolidated financial statements and notes have been prepared on the same
basis as the audited consolidated financial statements contained in the Companys Annual Report on
Form 10-K, and include all adjustments (consisting of normal, recurring adjustments) necessary for
the fair presentation of the Companys financial position at March 31, 2010 and statements of
income and cash flows for the three months ended March 31, 2010 and 2009. The interim periods are
not necessarily indicative of the results to be expected for any other interim period or the full
year. The Company has evaluated all subsequent events and determined that there are no material
recognized or unrecognized subsequent events requiring disclosure.
As of March 31, 2010, the Companys significant accounting policies and estimates, which are
detailed in the Companys Annual Report on Form 10-K for the year ended December 31, 2009, have not
changed.
2. Significant Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reported period.
Significant estimates and judgments relied upon by management in preparing these financial
statements include revenue recognition, allowances for doubtful accounts, reserves for excess and
obsolete inventory, the expensing and capitalization of research and development costs for
software, intangible asset valuations, amortization periods, expected future cash flows used to
evaluate the recoverability of long-lived assets, estimated fair values of long-lived assets used
to assess potential impairments related to intangible assets, stock-based compensation expense,
warranty allowances, and the recoverability of the Companys net deferred tax assets.
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 may differ
from managements estimates if these results differ from historical experience or other assumptions
prove not to be substantially accurate, even if such assumptions are reasonable when made.
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, rapid technological changes, competition from
substitute products and services from larger companies, limited number of suppliers, customer
concentration, government regulations, management of international activities, protection of
proprietary rights, patent litigation, and dependence on key individuals.
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Table of Contents
3. Business Combination
On April 30, 2009, the Company acquired Covergence, an emerging, innovative provider of
software-based session border
controllers for delivering VoIP/IP telephony, unified communications and service-orientated
architecture applications within global 1000 enterprises. The aggregate purchase price was $22,846,
consisting of 2,874,383 shares of the Companys common stock, valued at approximately $22,248, $20
in cash payments to the stockholders of Covergence and the payment of withholding taxes due for the
former Chief Executive Officer of Covergence, of approximately $578. The Company incurred $58 of
issuance costs associated with the registration of the common stock issued, which has been recorded
as a reduction to the purchase price.
Pro Forma Financial Information
The following table shows unaudited pro forma results of operations as if the Company had
acquired Covergence on January 1, 2009:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Total revenue |
$ | 51,050 | $ | 37,298 | ||||
Gross profit |
41,233 | 29,790 | ||||||
Income from operations |
12,829 | 5,720 | ||||||
Net income |
8,333 | 3,746 | ||||||
Net income per share: |
||||||||
Basic |
0.14 | 0.06 | ||||||
Diluted |
0.13 | 0.06 |
4. Intangible Assets
Intangible assets that have finite lives are amortized over their useful lives and are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. During this review, the Company reevaluates the
significant assumptions used in determining the original cost and estimated lives of long-lived
assets. Although the assumptions may vary from asset to asset, they generally include operating
results, changes in the use of the asset, cash flows and other indicators of value. Management then
determines whether the remaining useful life continues to be appropriate or whether there has been
an impairment of long-lived assets based primarily upon whether expected future undiscounted cash
flows are sufficient to support the assets recovery. If impairment exists, the Company would
adjust the carrying value of the asset to fair value, generally determined by a discounted cash
flow analysis.
Finite-lived intangible assets consist of the following:
Estimated | Gross | |||||||||||||||
Useful Life | Carrying | Accumulated Amortization as of | ||||||||||||||
Description | (in years) | Value | March 31, 2010 | December 31, 2009 | ||||||||||||
Developed technology |
7.7 | $7,089 | $ 964 | $585 | ||||||||||||
Patents |
15.7 | 850 | 38 | 23 | ||||||||||||
Customer relationships |
9.7 | 798 | 76 | 55 | ||||||||||||
Trademarks and trade names |
14.7 | 461 | 22 | 13 | ||||||||||||
Internal use software |
3.0 | 119 | 41 | 30 | ||||||||||||
Total |
$9,317 | $1,141 | $706 | |||||||||||||
Amortization expense related to intangible assets for the three months ended March 31,
2010 was $435. As the acquisition of Covergence occurred subsequent to March 31, 2009, there was
no amortization expense related to intangible assts for the three months ended March 31, 2009.
The estimated remaining amortization expense for the remainder of 2010 and for each of the
five succeeding years is as follows:
Year ended December 31, | Amount | |||
2010 |
$1,301 | |||
2011 |
1,461 | |||
2012 |
1,404 | |||
2013 |
1,099 | |||
2014 |
930 | |||
2015 and thereafter |
1,981 | |||
Total |
$8,176 | |||
In connection with the acquisition of Covergence, $2,617 of the intangible assets
acquired relate to in-process research and development assets. These in-process research and
development assets primarily represent ongoing development work associated with enhancements to
existing products, as well as the development of next generation session border controllers and
session managers.
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The Company periodically evaluates these in-process research and development
assets to determine if any projects have been
competed. If a project is completed, the carrying value of the related intangible asset will
be amortized over the remaining estimated life of the asset beginning in the period in which the
project is completed. If a project becomes impaired or is abandoned, the carrying value of the
related intangible asset will be written down to its fair value and an impairment charge will be
taken in the period in which the impairment occurs. These intangible assets will be tested for
impairment on an annual basis, or earlier if impairment indicators are present. To date, no
projects have been completed and no projects have been impaired.
5. Revenue Recognition
The Company recognizes revenue in accordance with software revenue recognition accounting
standards, as the Company has determined that the software element of its product is more than
incidental to its products as a whole.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collection of the related accounts receivable is
deemed probable. In making these judgments, management evaluates these criteria as follows:
| Persuasive evidence of an arrangement exists. The Company considers a non-cancelable agreement signed by the customer and the Company to be representative of persuasive evidence of an arrangement. | ||
| Delivery has occurred. The Company considers delivery to have occurred when product has been delivered to the customer and no significant post-delivery obligations exist. In instances where customer acceptance is required, delivery is deemed to have occurred when customer acceptance has been achieved. Certain of the Companys agreements contain products that might not conform to published specifications or contain a requirement to deliver additional elements which are essential to the functionality of the delivered elements. Revenue associated with these agreements is recognized when the customer specifications have been met or delivery of the additional elements has occurred. | ||
| Fees are fixed or determinable. The Company considers the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within normal payment terms. If the fee is subject to refund or adjustment, the Company recognizes revenue when the right to a refund or adjustment lapses. If offered payment terms significantly exceed the Companys normal terms, then revenue is recognized as the amounts become due and payable or upon the receipt of cash. | ||
| Collection is deemed probable. The Company conducts a credit review for all transactions at the inception of an arrangement to determine the creditworthiness of the customer. Collection is deemed probable if, based upon the Companys evaluation, the Company expects that the customer will be able to pay amounts under the arrangement as payments become due. If the Company determines that collection is not probable, revenue is deferred and recognized upon the receipt of cash. |
A substantial amount of the Companys sales arrangements involve multiple elements, such
as products, maintenance, professional services, and training. When arrangements include multiple
elements, the Company allocates the total fee among the various elements using the residual method.
Under the residual method, revenue is recognized when vendor specific objective evidence, or VSOE,
of fair value exists for all of the undelivered elements of the arrangement, but does not exist for
one or more of the delivered elements of the arrangement. Each arrangement requires the Company to
analyze the individual elements in the transaction and to estimate the fair value of each
undelivered element, which typically represents maintenance and services. Revenue is allocated to
each of the undelivered elements based on its respective fair value, with the fair value determined
by the price charged when that element is sold separately. If VSOE of fair value for any
undelivered element does not exist, revenue from the entire arrangement is deferred and recognized
at the earlier of (a) delivery of those elements for which VSOE of fair value does not exist or (b)
when VSOE is established. However, in instances where maintenance services are the only undelivered
element without VSOE of fair value, the entire arrangement is recognized ratably as a single unit
of accounting over the contractual service period.
Maintenance, support and service revenue include sales of maintenance and other services,
including professional services, training, and reimbursable travel.
Maintenance and support services include telephone support, return and repair services,
and unspecified rights to product upgrades and enhancements, and are recognized ratably over the
term of the service period, which is generally twelve months. Maintenance and support revenue is
generally deferred until the related product has been accepted and all other revenue recognition
criteria have been met.
Professional services and training revenue is recognized when the related service has
been performed.
The Companys products and services are sold indirectly by its distribution partners and
directly by the Companys sales force. Revenue generated through arrangements with distribution
partners is recognized when the above criteria are met and when the distribution partner has an
order from an end user customer. The Company generally does not offer contractual rights of return,
stock balancing or price protection to its distribution partners, and actual product returns from
them have been insignificant to date. As a result, the Company does not maintain reserves for
product returns and related allowances.
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The Company classifies the reimbursement by customers of shipping and handling costs as
revenue and the associated cost as
cost of revenue. Reimbursed shipping and handling costs, included in service revenue and costs
of service revenue were not material for the three months ended March 31, 2010 and 2009,
respectively.
The Company included approximately $143 and $159 of out-of-pocket expenses in service revenue
and cost of service revenue in the three months ended March 31, 2010 and 2009, respectively.
6. Cash, Cash Equivalents, Short-Term and Long-Term Investments and Restricted Cash
Cash, Cash Equivalents, Short-term and Long-term Investments
Securities that the Company has the intent and ability to hold to maturity are reported at
amortized cost, which approximates market value, and are classified as held-to-maturity. Securities
for which it is not the Companys intent to hold to maturity are classified as either
available-for-sale or trading securities. Available-for-sale securities are reported at fair value,
with temporary unrealized gains or losses excluded from earnings and reported in a separate
component of stockholders equity, while other than temporary gains or losses are included in
earnings. Trading securities are reported at fair value, with unrealized gains or losses included
in earnings. The Company considers all highly liquid investments with original maturities of ninety
days or less at the time of purchase to be cash equivalents and investments with original
maturities of between ninety-one days and one year to be short-term investments. Investments with
original maturities in excess of one year from the balance sheet date are classified as long-term.
All securities are classified as held-to-maturity or available-for-sale securities as of March 31,
2010 and December 31, 2009.
Cash, cash equivalents, short-term and long-term investments as of March 31, 2010 and
December 31, 2009 consist of the following:
As of March 31, 2010 | ||||||||||||||||
Contracted | Amortized | Fair Market | Carrying | |||||||||||||
Maturity | Cost | Value | Value | |||||||||||||
Cash |
Demand |
$ | 8,278 | $ | 8,278 | $ | 8,278 | |||||||||
Money market funds |
Demand |
52,295 | 52,295 | 52,295 | ||||||||||||
U.S. agency notes |
42 - 44 days | 19,997 | 19,994 | 19,997 | ||||||||||||
Total cash and cash equivalents |
$ | 80,570 | $ | 80,567 | $ | 80,570 | ||||||||||
U.S. agency notesavailable-for-sale |
139 - 390 days | $ | 48,742 | $ | 48,728 | $ | 48,728 | |||||||||
U.S. agency notesheld-to-maturity |
241 - 345 days | 59,272 | 59,873 | 59,272 | ||||||||||||
Total short-term marketable securities |
$ | 108,014 | $ | 108,601 | $ | 108,000 | ||||||||||
As of December 31, 2009 | ||||||||||||||||
Contracted | Amortized | Fair Market | Carrying | |||||||||||||
Maturity | Cost | Value | Value | |||||||||||||
Cash |
Demand | $ | 8,789 | $ | 8,789 | $ | 8,789 | |||||||||
Money market funds |
Demand | 81,682 | 81,682 | 81,682 | ||||||||||||
Total cash and cash equivalents |
$ | 90,471 | $ | 90,471 | $ | 90,471 | ||||||||||
U.S. agency notesavailable-for-sale |
263-346 days | $ | 4,985 | $ | 4,983 | $ | 4,983 | |||||||||
U.S. agency notesheld-to-maturity |
42-346 days | 35,007 | 35,028 | 35,007 | ||||||||||||
Total short-term marketable securities |
$ | 39,992 | $ | 40,011 | $ | 39,990 | ||||||||||
U.S. agency notesheld-to-maturity |
375-435 days | $ | 44,526 | $ | 44,385 | $ | 44,526 | |||||||||
Total long-term marketable securities |
$ | 44,526 | $ | 44,385 | $ | 44,526 | ||||||||||
To date, realized gains or losses from the sale of cash equivalents or short-term or
long-term investments have been immaterial.
Restricted Cash
As of March 31, 2010 and December 31, 2009, the Company had restricted cash in the amount of
$1,088 as collateral related to its facility leases. The Companys restrictions with respect to
$250 expires in July 2010 for the Burlington, Massachusetts leases, $235 expires in July 2011 for
the Madrid, Spain lease, and $603 expires in November 2016 for the Bedford, Massachusetts lease.
7. Inventory and Deferred Product Costs
Inventory is stated at the lower of cost, determined on a first in, first out basis, or
market, and consists primarily of finished products.
The Company provides for inventory losses based on obsolescence and levels in excess of
forecasted demand. In these cases, inventory is reduced to estimated realizable value based on
historical usage and expected demand. Inherent in the Companys estimates of market value in
determining inventory valuation are estimates related to economic
trends, future demand for the Companys products, and technical obsolescence of products.
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Table of Contents
When products have been delivered, but the product revenue associated with the arrangement has
been deferred as a result of not meeting the required revenue recognition criteria, the Company
includes the costs of the delivered items in deferred product costs until recognition of the
related revenue occurs.
8. Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization is expensed using the
straight-line method over the estimated useful lives of the assets as follows:
Estimated Useful Life | ||
Computer hardware and software
|
3 years | |
Furniture and fixtures
|
3 years | |
Office and engineering equipment
|
3 years | |
Evaluation systems
|
2 years | |
Leasehold improvements
|
Shorter of assets useful life or remaining life of the lease |
Evaluation systems are carried at the lower of their depreciated value or their net realizable
value.
Property and equipment consists of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Computer hardware and software |
$ | 7,426 | $ 6,441 | |||||
Furniture and fixtures |
1,594 | 1,560 | ||||||
Office and engineering equipment |
9,228 | 8,687 | ||||||
Evaluation systems |
5,288 | 4,408 | ||||||
Leasehold improvements |
1,287 | 1,287 | ||||||
Construction in progress |
404 | 77 | ||||||
25,227 | 22,460 | |||||||
Less accumulated depreciation and amortization |
(17,441 | ) | (16,023 | ) | ||||
Property and equipment, net |
$ | 7,786 | $ 6,437 | |||||
Depreciation and amortization expense was $1,418 and $927 for the three months ended
March 31, 2010 and 2009, respectively.
Expenditures for maintenance and repairs are charged to expense as incurred, whereas major
betterments are capitalized as additions to property and equipment. The Company reviews its
property and equipment whenever events or changes in circumstances indicate that the carrying value
of certain assets might not be recoverable. In these instances, the Company recognizes an
impairment loss when it is probable that the estimated cash flows are less than the carrying value
of the asset. The Company did not recognize any impairment losses on its property and equipment
during the three months ended March 31, 2010 and 2009.
9. Concentrations of Credit Risk and Off-Balance-Sheet Risk
The Company has no significant off-balance-sheet risk such as foreign exchange contracts,
option contracts, or other international hedging arrangements. Financial instruments that
potentially expose the Company to concentrations of credit risk consist mainly of cash, cash
equivalents, short-term and long-term investments and accounts receivable. The Company maintains
its cash, cash equivalents, short-term and long-term investments principally in accredited
financial institutions of high credit standing. The Company routinely assesses the credit
worthiness of its customers. The Company does not require collateral from its customers. Due to
these factors, no additional credit risk beyond amounts provided for collection losses is believed
by management to be probable in the Companys accounts receivable.
The Company had certain customers whose revenue individually represented 10% or more of the
Companys total revenue, as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Customer A |
14 | % | * | |||||
Customer B |
* | 25 | % | |||||
Customer C |
* | 18 |
* | Less than 10% of total revenue. |
The Company had certain customers whose accounts receivable balances individually represented
10% or more of the Companys accounts receivable, as follows:
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March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Customer B |
17 | % | 16 | % | ||||
Customer D |
12 | * | ||||||
Customer C |
10 | 15 |
* | Less than 10% of total accounts receivable. |
10. Product Warranties
Substantially all of the Companys products are covered by a standard warranty of ninety days
for software and one year for hardware. In the event of a failure of product or software covered by
this warranty, the Company must repair or replace the software or product or, if those remedies are
insufficient, and at the discretion of the Company, provide a refund. The Companys customers
typically purchase maintenance and support contracts, which supersede its warranty obligations. The
Companys warranty reserve reflects estimated material and labor costs for potential or actual
product issues in its installed base that are not covered under maintenance contracts but for which
the Company expects to incur an obligation. The Companys estimates of anticipated rates of
warranty claims and costs are primarily based on historical information and future forecasts. The
Company periodically assesses the adequacy of the warranty allowance and adjusts the amount as
necessary. If the historical data used to calculate the adequacy of the warranty allowance are not
indicative of future requirements, additional or reduced warranty reserves may be required.
The following is a summary of changes in the amount reserved for warranty costs for the three
months ended March 31, 2010:
Balance at December 31, 2009 |
$ | 140 | ||
Provision for warranty costs |
301 | |||
Uses/Reductions |
(267 | ) | ||
Balance at March 31, 2010 |
$ | 174 | ||
11. Stock-Based Compensation
The Company recorded stock-based compensation expense of $3,521 and $2,309 for the three
months ended March 31, 2010 and 2009, respectively. As of March 31, 2010, there was $35,614 of
unrecognized stock-based compensation expense related to stock-based awards that is expected to be
recognized over a weighted average period of 3.05 years.
The following is a summary of the status of the Companys stock options as of March 31, 2010
and the stock option activity for all stock option plans during the three months ended March 31,
2010:
Weighted | Weighted | |||||||||||||||||||
Average | Average | |||||||||||||||||||
Exercise | Remaining | Aggregate | ||||||||||||||||||
Number of | Exercise Price | Price Per | Contractual | Intrinsic | ||||||||||||||||
Shares | Per Share | Share | Life (Years) | Value(1) | ||||||||||||||||
Outstanding at December 31, 2009 |
12,236,695 | $ | 0.20 - 16.86 | $ | 5.43 | |||||||||||||||
Granted |
2,546,500 | 13.04 - 17.39 | 13.24 | |||||||||||||||||
Canceled |
(27,750 | ) | 8.98 - 12.42 | 10.38 | ||||||||||||||||
Exercised |
(1,900,524 | ) | 0.20 - 12.42 | 3.35 | $ | 26,330 | ||||||||||||||
Outstanding at March 31, 2010 |
12,854,921 | 0.20 - 17.39 | 7.28 | 5.85 | $ | 154,283 | ||||||||||||||
Exercisable at March 31, 2010 |
4,840,578 | 0.20 - 16.86 | 4.27 | 5.39 | $ | 72,667 | ||||||||||||||
Vested or expected to vest at March
31, 2010 (2) |
11,566,734 | 0.20 - 17.39 | 7.10 | 5.83 | $ | 140,915 | ||||||||||||||
(1) | The aggregate intrinsic value was calculated based on the positive difference between the fair value of the Companys common stock on March 31, 2010 of $19.28, or the date of exercise, as appropriate, and the exercise price of the underlying options. | |
(2) | This represents the number of vested options as of March 31, 2010 plus the number of unvested options expected to vest as of March 31, 2010 based on the unvested options outstanding at March 31, 2010, adjusted for the estimated forfeiture rate. |
The Company has entered into restricted stock unit agreements with certain of its employees.
Under the terms of the agreements, the Company grants restricted stock units, or RSUs, to its
employees pursuant to the 2006 Equity Incentive Plan. Vesting occurs periodically at specified time
intervals, ranging from one to three years, and in specified percentages. Upon vesting, the holder
will receive one share of the Companys common stock for each unit vested. A summary of the
Companys unvested RSUs outstanding at March 31, 2010 and the changes during the three months then
ended, is presented below:
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Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
RSUs | Fair Value | |||||||
Unvested at December 31, 2009 |
385,818 | $ 6.00 | ||||||
Granted |
238,000 | 13.04 | ||||||
Vested |
(109,151 | ) | 5.57 | |||||
Forfeited |
(47,500 | ) | 7.58 | |||||
Unvested at March 31, 2010 |
467,167 | 9.53 | ||||||
12. Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources. Accumulated
other comprehensive loss is presented separately on the balance sheet as required, and relates to
unrealized losses on the Companys available-for-sale securities.
Comprehensive income for the periods indicated are as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Net income |
$8,333 | $2,758 | ||||||
Unrealized loss on available-for-sale securities |
(14 | ) | | |||||
Comprehensive income |
$8,319 | $2,758 | ||||||
13. Net Income Per Share
A reconciliation of the number of shares used in the calculation of basic and diluted net
income per share is as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Weighted average number of shares of common stock outstanding |
59,821,379 | 54,748,272 | ||||||
Less: Weighted average number of unvested restricted common shares outstanding |
| (3,722 | ) | |||||
Weighted average number of common shares used in calculating basic net income per share |
59,821,379 | 54,744,550 | ||||||
Weighted average number of common shares issuable upon exercise of outstanding stock options, based
on treasury stock method |
4,982,474 | 3,631,850 | ||||||
Weighted average number of unvested restricted common shares outstanding |
| 3,181 | ||||||
Weighted average number of common shares issuable upon vesting of outstanding restricted stock units |
179,045 | 24,037 | ||||||
Weighted average number of common shares used in computing diluted net income per share |
64,982,898 | 58,403,618 | ||||||
In the computation of the diluted weighted average number of common shares outstanding,
2,591,277 and 6,637,642 weighted average common share equivalents underlying outstanding stock
options have been excluded from the computation during the three months ended March 31, 2010 and
2009, respectively, as their effect would have been antidilutive.
14. Income Taxes
For each of the three months ended March 31, 2010 and 2009, the Companys effective income tax
rate was approximately 35%. As of March 31, 2010, the Company currently expects to realize
recorded net deferred tax assets of $17,189. The Companys conclusion that these assets will be
recovered is based upon its expectation that current and future earnings will provide sufficient
taxable income to realize the recorded tax asset. The realization of the Companys net deferred tax
asset cannot be assured, and to the extent that future taxable income against which these tax
assets may be applied is not sufficient, some or all of the Companys recorded net deferred tax
assets would not be realizable. Approximately $7,085 of the deferred tax asset recorded as of March
31, 2010 was attributable to benefits associated with stock-based compensation charges. In
accordance with the provision of ASC 718, Compensation-Stock Compensation, no valuation allowance
has been recorded against this amount. However, in the future, if the underlying amounts expire
with an intrinsic value less than the fair value of the awards on the date of grant, some or all of
the benefits may not be realizable.
15. Contingencies
Litigation
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From time to time and in the ordinary course of business, the Company may be subject to
various claims, charges, and
litigation. At March 31, 2010 and December 31, 2009, the Company did not have any pending
claims, charges, or litigation that it expects would have a material adverse effect on its
consolidated financial position, results of operations, or cash flows.
Other
Certain of the Companys arrangements with customers include clauses whereby the Company may
be subject to penalties for failure to meet certain performance obligations. The Company has not
incurred any such penalties to date.
16. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Accrued compensation and related benefits |
$4,927 | $6,080 | ||||||
Accrued sales and use taxes |
1,338 | 1,183 | ||||||
Accrued warranty |
174 | 140 | ||||||
Other accrued liabilities |
2,026 | 1,858 | ||||||
Total |
$8,465 | $9,261 | ||||||
17. Segment Information
Geographic Data
Total revenue to unaffiliated customers by geographic area was as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2008 | |||||||
United States and Canada |
$ | 29,317 | $ | 17,106 | ||||
International |
21,733 | 13,881 | ||||||
Total |
$ | 51,050 | $ | 30,987 | ||||
During the three months ended March 31, 2010 and 2009, no one international country
contributed more than 10% of the Companys total revenue.
As of March 31, 2010 and 2009, property and equipment at locations outside the United States
was not material.
18. Fair Value Measurements
Fair value is defined as an exit price, representing the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants
based on the highest and best use of the asset or liability. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would use in
pricing an asset or liability. The Company uses valuation techniques to measure fair value that
maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are
prioritized as follows:
| Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets; | ||
| Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market corroborated inputs; and | ||
| Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities. |
The valuation techniques that may be used to measure fair value are as follows:
| Market approachUses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; | ||
| Income approachUses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option pricing models and excess earnings method; and |
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| Cost approachBased on the amount that currently would be required to replace the service capacity of an asset (replacement cost). |
The following table sets forth the Companys financial instruments carried at fair value
within the accounting standard hierarchy and using the lowest level of input as of March 31, 2010:
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Items | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$52,295 | $ | | $ | $ | 52,295 | ||||||||||
U.S. agency notes |
| 19,997 | | 19,997 | ||||||||||||
Restricted cash |
1,088 | | | 1,088 | ||||||||||||
Total cash equivalents and restricted cash |
53,383 | 19,997 | | 73,380 | ||||||||||||
Short-term U.S. agency notes |
| 108,000 | | 108,000 | ||||||||||||
Total assets |
$53,383 | $ | 127,997 | $ | $ | 181,380 | ||||||||||
Realized gains and losses from sales of the Companys investments are included in Other
income and unrealized gains and losses from available-for-sale securities are included as a
separate component of equity unless the loss is determined to be other-than-temporary.
The Company measures eligible assets and liabilities at fair value with changes in value
recognized in earnings. Fair value treatment may be elected either upon initial recognition of an
eligible asset or liability or, for an existing asset or liability, if an event triggers a new
basis of accounting. The Company did not elect to remeasure any of its existing financial assets or
liabilities, and did not elect the fair value option for any financial assets and liabilities
transacted in the three months ended March 31, 2010.
19. Recent Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board, or FASB, ratified ASU
2009-13, Revenue Arrangements with Multiple Deliverables, which would modify the objective and
reliable evidence of fair value threshold as it relates to assigning value to specific deliverables
in a multiple element arrangement. This authoritative guidance would allow the use of an estimated
selling price for undelivered elements for purposes of separating elements included in multiple
element arrangements and allocating arrangement consideration when neither VSOE nor acceptable
third party evidence of the selling price of the undelivered element are available. Additionally,
the FASB ratified ASU 2009-14, Certain Revenue Arrangements that Include Software Elements, which
provides that tangible products containing software components and non-software components that
function together to deliver the products essential functionality should be considered
non-software deliverables, and therefore, will no longer be within the scope of the revenue
recognition guidance. Both FASB updates are required to be adopted in annual periods beginning
after June 15, 2010. The Company is currently evaluating the effect that the adoption of both
pieces of authoritative guidance may have on the Companys consolidated financial position and
results of operations.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement
This Quarterly Report on Form 10-Q, including the information incorporated by reference
herein, contains, in addition to historical information, forward-looking statements. We may, in
some cases, use words such as project, believe, anticipate, plan, expect, estimate,
intend, continue, should, would, could, potentially, will, may or similar words and
expressions that convey uncertainty of future events or outcomes to identify these forward-looking
statements. Forward-looking statements in this Quarterly Report on Form 10-Q may include statements
about:
| our ability to attract and retain customers; | ||
| our ability to retain and hire necessary employees and appropriately staff our operations; | ||
| our financial performance; | ||
| our expectations regarding our revenue, cost of revenue and our related gross profit and gross margin; | ||
| our development activities and the emerging opportunities for our solutions; | ||
| our position in the session border control market; | ||
| the effect of the worldwide markets and related economic crisis on purchases of our products; | ||
| the expectations about our growth and acquisitions of new technologies; | ||
| the demand for and the growth of worldwide revenues for session border controllers; | ||
| the benefit of our products, services, or programs; | ||
| our ability to establish and maintain relationships with key partners and contract manufacturers; | ||
| the advantages of our technology as compared to that of our competitors; | ||
| our expectations regarding the realization of recorded deferred tax assets; and | ||
| our cash needs. |
The outcome of the events described in these forward-looking statements is subject to known
and unknown risks, uncertainties and other factors that could cause actual results to differ
materially from the results anticipated by these forward-looking statements. These important
factors include our financial performance, our ability to attract and retain customers, our
development activities and those factors we discuss in this Quarterly Report on Form 10-Q and in
our Annual Report on Form 10-K under the caption Risk Factors. You should read these factors and
the other cautionary statements made in this Quarterly Report on Form 10-Q as being applicable to
all related forward-looking statements wherever they appear in this Quarterly Report on Form 10-Q.
These risk factors are not exhaustive and other sections of this Quarterly Report on Form 10-Q may
include additional factors which could adversely impact our business and financial performance.
Overview
Acme Packet, Inc. is the leading provider of session border controllers, or SBCs, that enable
service providers, enterprises, government agencies and contact centers to deliver secure and high
quality interactive communicationsvoice, video and other real-time multimedia sessionsacross
defined border points where internet protocol, or IP, networks connect, known as network borders.
Our products support multiple applications in service provider, enterprise, government agencies and
contact center networks; from voice over internet protocol, or VoIP, trunking to hosted enterprise
and residential services to fixed mobile convergence. Our products satisfy critical security,
service assurance and regulatory requirements in wireline, cable and wireless networks, and support
multiple protocols and multiple border points. As of March 31, 2010, approximately 1,040 end user
customers in 105 countries have deployed our products. We sell or license our products and support
services through our direct sales force and 109 distribution partners, including many of the
largest networking and telecommunications equipment vendors throughout the world.
Our headquarters are located in Burlington, Massachusetts. We plan to relocate our
headquarters to Bedford, Massachusetts in July 2010. We maintain sales offices in Madrid, Spain;
Seoul, Korea; Tokyo, Japan; and Ipswich, United Kingdom. We also have sales personnel in Argentina,
Australia, Belgium, Brazil, Canada, China, Croatia, Czech Republic, France, Germany, Hong Kong,
India, Italy, Malaysia, Mexico, the Netherlands, Peru, Poland, Russia, Singapore, South Africa,
Sweden, Taiwan, Thailand and throughout the United States. We expect to selectively add personnel
to provide additional geographic sales and technical support coverage.
Industry Background
Service providers traditionally have delivered voice and data services over two separate
networks: the public switched telephone network, or PSTN, and the internet. The PSTN provides high
reliability and security but is costly to operate and is limited in its ability to support high
bandwidth video and other interactive multimedia services. The internet is capable of cost
effectively transmitting any form of traffic that is IP-based, including interactive voice, video and
data, but it transmits only on a best efforts basis, because all forms of traffic have the same
priority. Therefore, the internet attempts to deliver all traffic without distinction, which can
result in significantly varying degrees of service quality for the same or similar types of traffic
transmissions. Internet based services are also subject to disruptive and fraudulent behavior,
including identity theft, viruses, unwanted and excessively large input data, known as SPAM, and
the unauthorized use and attempts to circumvent or bypass security mechanisms associated with those
services, known as hacking.
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Service providers are migrating to a single IP network architecture to serve as the foundation
for their next generation voice, video and data service offerings. Recently, an increasing number
of enterprises, contact centers and government agencies have begun to migrate to a single IP
network architecture as well. In order to provide secure and high quality interactive
communications on a converged IP network, service providers and enterprises must be able to manage
and integrate the communications flows that comprise communication sessions for applications such
as interactive video and VoIP, which allows the routing of voice conversations over the internet.
Prior to the advent of the SBC, IP network infrastructure equipment, such as softswitches,
routers and data firewalls, was able to initiate and route undifferentiated data but lacked the
ability to target specifically the management of interactive communication sessions. We believe
that there is significant demand for SBCs that can facilitate the delivery of secure and high
quality real-time interactive communications across all IP network borders. Infonetics Research, a
market research and consulting firm specializing in networking and IP communications, projects that
the cumulative worldwide addressable market opportunity for SBCs over the next 4 years from 2010 to
2013 will be $926 million and $742 million in the service provider market and enterprise markets,
respectively.
We see emerging opportunities for our solutions within large enterprises, contact centers,
government agencies and wireless service providers. We believe that enterprise IP telephony, or
IPT, is now mainstream, and that unified communications, or UC, or the integration of interactive
voice, video, messaging and collaboration applications over IP, will soon follow. Both are critical
components of enterprise information technology strategies to improve business agility, increase
employee efficiency and responsiveness, build customer satisfaction and loyalty, and reduce
overhead costs. We believe that these components are indispensable tools for success in a newly
competitive global marketplace. The full-scale deployment of enterprise IPT has revealed
deficiencies in network and security infrastructure originally deployed for data. Consequently, we
believe that enterprises will likely be adding further controls to their IPT/UC infrastructure to
improve its security, extend its application reach, meet service level commitments, optimize
capital and minimize operating costs, and comply with relevant commercial and government
regulations. Enterprises are deploying SBCs to successfully deliver network security, availability,
and performance as well as to achieve control over the four key borders within their IPT/UC
infrastructure, IP trunking, private network, internet, and hosted services interconnect borders.
We believe that the majority of large enterprises today having already deployed IP private branch
exchanges are about to rapidly embrace session initiation protocol, or SIP, trunking to reduce
costs and set the foundation for enabling end to end IP communication.
Within todays modern contact center, the migration of voice services from time division
multiplexing, or TDM, to IP is underway. This migration is essential to the contact centers
strategic goals: meeting customers growing service expectations, achieving increased performance
and quality metrics, improving agent retention rates, growing revenues and reducing capital and
operating costs. However, existing network and security infrastructure that was originally deployed
for TDM voice services and data applications have demonstrated deficiencies for IP interactive
communications. We believe that contact center strategists are deploying SBCs to assert control
over the four critical IP network borders found in most contact centers: its connections to IP
trunking service providers, to managed private IP networks, to the public internet, and to virtual
contact center locations. With SBCs to reinforce these borders in five key functional areas,
security, application reach, service level agreement assurance, cost optimization, and regulatory
compliance, contact centers can successfully and safely navigate the transition to an IP
infrastructure. Our early customers within this market have included the contact center operations
of our Tier 1 service providers throughout North America, Europe, as well as Central and Latin
America.
Key Financial Highlights
Some of our key financial highlights for the first quarter of 2010 include the following:
| Total revenue was $51.1 million compared to $31.0 million in the same period of 2009. | ||
| Net income was $8.3 million compared to $2.8 million in the same period of 2009. | ||
| Earnings per share was $0.13 per share on a diluted basis compared to $0.05 per share on a diluted basis in the same period of 2009. | ||
| Cash provided by operating activities was $8.0 million compared to $11.0 million in the same period of 2009. |
The Acme Packet Strategy
Principal elements of our strategy include:
| Continuing to satisfy the evolving border requirements of service providers, enterprises, government agencies and contact centers. Our SBC deployments in the fixed line, cable, mobile and over the top service providers, as well as in enterprises and contact centers, position us to gain valuable knowledge that we can use to expand and enhance our products features and functionality. |
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| Implementing new technologies to enhance product performance and scalability. We will seek to leverage new technologies as they become available to increase the performance, capacity and functionality of our product family, as well as to reduce our costs. We may acquire these new technologies through organic growth or through selective acquisitions. | ||
| Investing in quality and responsive support. As we broaden our product platform and increase our product capabilities, we will continue to provide comprehensive service and support targeted at maximizing customer satisfaction and retention. | ||
| Facilitating and promoting service interconnects among our customers. We intend to drive increased demand for our products by helping our customers to extend the reach of their services and, consequently, to increase the value of their services to their customers. | ||
| Leveraging distribution partnerships to enhance market penetration. We will continue to invest in training and tools for our distribution partners sales, systems engineering and support organizations, in order to improve the overall efficiency and effectiveness of these partnerships. | ||
| Actively contributing to architecture and standards definition processes. We will utilize our breadth and depth of experience with SBC deployments to contribute significantly to organizations developing standards and architectures for next generation IP networks. |
Factors That May Affect Future Performance
| Global Macroeconomic Conditions. We believe that the capital budgets and spending initiatives of some of our core customers: service providers, enterprises, government agencies and contact centers, may be affected by current worldwide economic conditions. Our ability to generate revenue from these core customers is dependent on the status of such capital budgets. | ||
| Gross Margin. Our gross margin has been, and will continue to be, affected by many factors, including (a) the demand for our products and services, (b) the average selling price of our products, which in turn depends, in part, on the mix of product and product configurations sold, (c) the level of software license upgrades, (d) new product introductions, (e) the mix of sales channels through which our products are sold, and (f) the costs of manufacturing our hardware products and providing our related support services. Customers license our software in various configurations depending on each customers requirements for session capacity, feature groups and protocols. The product software configuration mix will have a direct impact on the average selling price of the system sold. Systems with higher software content (higher session capacity and a larger number of feature groups) will generally have a higher average selling price than those systems sold with lower software content. If customers begin to purchase and license systems with lower software content, this may have a negative impact on our revenue and gross margins. | ||
| Competition. The market for SBCs is competitive and constantly evolving. While we believe we are currently the market leader in the service provider and enterprise markets, we expect competition to persist and intensify in the future as the SBC market grows. Our primary competitors generally consist of start-up vendors, such as Genband Inc., and more established network and component companies such as Cisco Systems, Inc. and Huawei Technologies Co., Ltd. We also compete with some of the companies with which we have distribution partnerships, such as Sonus Networks Inc., Telefonaktiebolaget LM Ericsson and Alcatel-Lucent. We believe we compete successfully with all of these companies based upon our experience in interactive communications networks, the breadth of our applications and standards support, the depth of our border control features, the demonstrated ability of our products to interoperate with key communications infrastructure elements, and our comprehensive service and support. We also believe our products are priced competitively with our competitors offerings. As the SBC market opportunity grows, we expect competition from additional networking and IP communications equipment suppliers, including our distribution partners. | ||
| Evolution of the SBC Market. The market for SBCs is in its early stages and is still evolving, and it is uncertain whether these products will continue to achieve and sustain high levels of demand and market acceptance. Our success will depend, to a substantial extent, on the willingness of interactive communications service providers and enterprises to continue to implement SBCs. | ||
| Research and Development. To continue to achieve market acceptance for our products, we must effectively anticipate and adapt, in a timely manner, to customer requirements and must offer products that meet changing customer demands. Prospective customers may require product features and capabilities that our current products do not have. The market for SBCs is characterized by rapid technological change, frequent new product introductions, and evolving industry requirements. We intend to continue to invest in our research and development efforts, which we believe are essential to maintaining our competitive position. | ||
| Managing Growth. We significantly expanded our operations in 2009 and the first three months of 2010. From January 1, 2009 through March 31, 2010, we increased the number of our employees and full time independent contractors by 24%, from 381 to 474. In connection with the acquisition of Covergence Inc., or Covergence, in April 2009, we added 39 employees. We anticipate that further expansion of our infrastructure and headcount will be required to achieve planned expansion of our product offerings, projected increases in our customer base and anticipated growth in the number of product deployments. In the future, we expect to continue to carefully manage the increase of our operating expenses based on our ability to expand our revenues, the expansion of which could occur organically or through future acquisitions. |
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Revenue
We derive product revenue from the sale of our Net-Net hardware and the licensing of our
Net-Net software. We generally recognize product revenue at the time of product delivery, provided
all other revenue recognition criteria have been met. For arrangements that include customer
acceptance or other material non-standard terms, we defer revenue recognition until after delivery,
assuming all other criteria for revenue recognition have been met.
We generate maintenance, support and service revenue from (a) maintenance associated with
software licenses, (b) technical support services for our software product, (c) hardware repair and
maintenance services, (d) implementation, training and consulting services and (e) reimbursable
travel and other out-of-pocket expenses.
We offer our products and services indirectly through distribution partners and directly
through our sales force. Our distribution partners include networking and telecommunications
equipment vendors throughout the world. Our distribution partners generally purchase our products
after they have received a purchase order from their customers and, generally, do not maintain an
inventory of our products in anticipation of sales to their customers. Generally, the pricing
offered to our distribution partners will be lower than to our direct customers.
The product configuration, which reflects the mix of session capacity and requested features,
determines the price for each SBC sold. Customers can purchase our SBCs in either a standalone or
high availability configuration and can license our software in various configurations, depending
on the customers requirements for session capacity, feature groups and protocols. The product
software configuration mix will have a direct impact on the average selling price of the system
sold. As the market continues to develop and grow, we expect to experience increased price pressure
on our products and services.
We believe that our revenue and results of operations may vary significantly from quarter to
quarter as a result of long sales and deployment cycles, variations in customer ordering patterns,
and the application of complex revenue recognition rules to certain transactions. Some of our
arrangements with customers include clauses under which we may be subject to penalties for failure
to meet specified performance obligations. We have not incurred any such penalties to date.
Cost of Revenue
Cost of product revenue consists primarily of (a) third party manufacturers fees for
purchased materials and services, combined with our expenses for (b) salaries, wages and related
benefits for our manufacturing personnel, (c) related overhead, (d) provision for inventory
obsolescence, (e) amortization of intangible assets and (f) stock-based compensation. Amortization
of intangible assets represents the amortization of developed technologies from our acquisition of
Covergence.
Cost of maintenance, support and service revenue consists primarily of (a) salaries, wages and
related benefits for our support and service personnel (b) related overhead, (c) billable and
non-billable travel, lodging, and other out-of-pocket expenses, (d) material costs consumed in the
provision of services and (e) stock-based compensation.
Gross Profit
Our gross profit has been, and will be, affected by many factors, including (a) the demand for
our products and services, (b) the average selling price of our products, which in turn depends, in
part, on the mix of product and product configurations sold, (c) the mix between product and
service revenue, (d) new product introductions, (e) the mix of sales channels through which our
products are sold, (f) the volume and costs of manufacturing our hardware products and (g)
personnel and related costs for manufacturing, support and services.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, and general and
administrative expenses. Personnel related costs are the most significant component of each of
these expense categories. During the period from March 31, 2009 through March 31, 2010, we
increased the number of our employees and full time independent contractors by 23%, from 384 to
474, including the 39 employees we added through the acquisition of Covergence in April 2009. We
expect to continue to hire new employees to support our expected growth.
Sales and marketing expense consists primarily of (a) salaries and related personnel costs,
(b) commissions, (c) travel, lodging and other out-of-pocket expenses, (d) marketing programs such
as trade shows, (e) stock-based compensation and (f) other related overhead. Commissions are
recorded as expense when earned by the employee. We expect sales and marketing expense to increase
in absolute dollars as we expand our sales force to continue to increase our revenue and market
share. However, we anticipate that sales and marketing expense will moderately increase as a
percentage of total revenue in the future.
Research and development expense consists primarily of (a) salaries and related personnel
costs, (b) payments to suppliers for design and consulting services, (c) prototype and equipment
costs relating to the design and development of new products and enhancement of existing products, (d) quality assurance and testing (e) stock-based compensation
and (f) other related overhead. To date, all of the costs related to our research and development
efforts have been expensed as incurred. We intend to continue to invest in our research and
development efforts, which we believe are essential to maintaining our competitive position. We
expect research and development expense to increase in absolute dollars. However, we anticipate
that research and development expense will remain relatively consistent as a percentage of total
revenue in the future.
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General and administrative expense consists primarily of (a) salaries, wages and personnel
costs related to our executive, finance, human resource and information technology organizations,
(b) accounting and legal professional fees, (c) expenses associated with uncollectible accounts,
(d) stock-based compensation and (e) other related overhead. We expect general and administrative
expense to increase in absolute dollars as we invest in infrastructure to support continued growth
and incur ongoing expenses related to being a publicly traded company, including increased audit
and legal fees, costs of compliance with securities and other regulations, investor relations
expense, and higher insurance premiums. However, we anticipate that general and administrative
expense will decrease as a percentage of total revenue in the future.
Stock-Based Compensation
Cost of revenue and operating expenses include stock-based compensation expense. We expense
stock-based payment awards with compensation cost for stock-based payment transactions measured at
fair value. For the three months ended March 31, 2010 and 2009, we recorded expense of $3.5 million
and $2.3 million, respectively, in connection with stock-based payment awards. Based on stock-based
awards granted from 2006 through 2010, a future expense of non-vested options of $35.6 million is
expected to be recognized over a weighted average period of 3.05 years.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income earned on cash, cash
equivalents and investments. We historically have invested cash in high quality securities of a
short duration and are not materially affect by fluctuations in interest rates. Other income
(expense) also includes (losses) gains from foreign currency translation adjustments of our
international activities. The functional currency of our international operations in Europe and
Asia is the United States, or U.S., dollar. Accordingly, all assets and liabilities of these
international subsidiaries are re-measured into U.S. dollars using the exchange rates in effect at
the balance sheet date, or historical rate, as appropriate. Revenue and expenses of these
international subsidiaries are re-measured into U.S. dollars at the average rates in effect during
the period. Any differences resulting from the re-measurement of assets, liabilities and operations
of the European and Asian subsidiaries are recorded within other income (expense).
Application of Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with United States generally accepted
accounting principles, or U.S. GAAP. The preparation of these financial statements requires that we
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting periods. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the
circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results
may differ significantly from these estimates under different assumptions or conditions. There have
been no material changes to these estimates for the periods presented in this Quarterly Report on
Form 10-Q. For a detailed explanation of the judgments made in these areas, refer to Managements
Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on
Form 10-K for the year ended December 31, 2009, which we filed with the Securities and Exchange
Commission, or SEC, on March 9, 2010.
Results of Operations
Comparison of Three Months Ended March 31, 2010 and 2009
Revenue
Three Months Ended March 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenue by Type: |
||||||||||||||||||||||||
Product |
$ | 42,093 | 82 | % | $ | 23,051 | 74 | % | $ | 19,042 | 83 | % | ||||||||||||
Maintenance, support
and service |
8,957 | 18 | 7,936 | 26 | 1,021 | 13 | ||||||||||||||||||
Total revenue |
$ | 51,050 | 100 | % | $ | 30,987 | 100 | % | $ | 20,063 | 65 | % | ||||||||||||
Revenue by Geography: |
||||||||||||||||||||||||
United States and Canada |
$ | 29,317 | 57 | % | $ | 17,106 | 55 | % | $ | 12,211 | 71 | % | ||||||||||||
International |
21,733 | 43 | 13,881 | 45 | 7,852 | 57 | ||||||||||||||||||
Total revenue |
$ | 51,050 | 100 | % | $ | 30,987 | 100 | % | $ | 20,063 | 65 | % | ||||||||||||
Revenue by Sales
Channel: |
||||||||||||||||||||||||
Direct |
$ | 25,779 | 50 | % | $ | 10,229 | 33 | % | $ | 15,550 | 152 | % | ||||||||||||
Indirect |
25,271 | 50 | 20,758 | 67 | 4,513 | 22 | ||||||||||||||||||
Total revenue |
$ | 51,050 | 100 | % | $ | 30,987 | 100 | % | $ | 20,063 | 65 | % | ||||||||||||
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The $19.0 million increase in product revenue was primarily due to an increase in the
number of systems revenue in the three months ended March 31, 2010 as compared to same period in
2009, reflecting a significant increase in our customer base, coupled with an increase in the
average selling price of our systems due to changes in both our product software configuration mix,
including software upgrades, and the mix of system platforms purchased by our customers. The
product configuration, which reflects the mix of session capacity and requested features,
determines the prices for each system sold. Customers can license our software in various
configurations, depending on requirements for session capacity, feature groups and protocols. The
product software configuration mix has a direct impact on the average selling price of a system
sold. Systems with higher software content (higher session capacity and a higher number of feature
groups) will generally have a higher average selling price than those systems sold with lower
software content. The growth in product revenue was primarily due to our direct sales channel;
however our indirect sales channel contributed as well. This growth reflects the continued
migration to a single IP network architecture. Direct product revenues increased $15.3 million,
primarily due to a $14.1 million increase attributable to customers in the United States and
Canada, and to a lesser extent, an increase of $1.2 million in direct product revenues generated by
our international customers. Indirect product revenues increased $3.7 million primarily due to a
$6.3 million increase attributable to our international customers, partially offset by a decrease
of $2.6 million in indirect product revenues related to our customers in the United States and
Canada.
Maintenance, support and service revenue increased by $1.0 million primarily due to increases
in maintenance and support fees associated with the growth in our installed product base.
Cost of Revenue and Gross Profit
Three Months Ended March 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Related | of Related | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Cost of Revenue: |
||||||||||||||||||||||||
Product |
$ | 7,549 | 18 | % | $ | 5,232 | 23 | % | $ | 2,317 | 44 | % | ||||||||||||
Maintenance, support
and service |
2,268 | 25 | 923 | 12 | 1,345 | 146 | ||||||||||||||||||
Total cost of revenue |
$ | 9,817 | 19 | % | $ | 6,155 | 20 | % | $ | 3,662 | 60 | % | ||||||||||||
Gross Profit: |
||||||||||||||||||||||||
Product |
$ | 34,544 | 82 | % | $ | 17,819 | 77 | % | $ | 16,725 | 94 | % | ||||||||||||
Maintenance, support
and service |
6,689 | 75 | 7,013 | 88 | (324 | ) | (5 | ) | ||||||||||||||||
Total gross profit |
$ | 41,233 | 81 | % | $ | 24,832 | 80 | % | $ | 16,401 | 66 | % | ||||||||||||
The $2.3 million increase in cost of product revenue was primarily due to (a) a $1.5
million increase in direct product costs resulting from an increase in the number of systems sold
in the three months ended March 31, 2010 as compared to the three months ended March 31, 2009, (b)
a $379,000 increase in amortization of developed technology acquired in the acquisition of
Covergence (c) a $142,000 increase in salaries, wages and related benefits, (d) a $99,000 increase
in manufacturing supplies, (e) a $92,000 increase in depreciation expense, (f) a $66,000 increase
in freight costs and (g) a $42,000 increase in stock-based compensation expense. These increases
were partially offset by a $38,000 decrease in costs associated with amounts reserved against
inventory deemed to be obsolete. The balance was primarily due to increased overhead and other
manufacturing related costs.
The $1.3 million increase in cost of maintenance, support and service revenue was primarily
due to (a) a $574,000 increase in the reserve for warranty repairs and product costs associated
with performance of our maintenance obligations, (b) a $534,000 increase in salaries and related
benefits corresponding to a 67% increase in employee headcount for our support and services
organization to support our rapidly growing customer base, (c) a $137,000 increase in third party
services, (d) a $107,000 increase in stock-based compensation expense and (e) a $77,000 increase in
travel expense.
Product gross margin increased 5 percent primarily due to an increase in the number of units
sold in the three months ended March 31, 2010 compared to the three months ended March 31, 2009,
which resulted in fixed manufacturing costs being absorbed by a higher product volume base. An increase in the average selling price of systems sold
and a decrease in the average cost per unit in the three months ended March 31, 2010 due to product
platform mix was also a factor.
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Gross margin on maintenance, support and service revenue decreased 13 percent, due primarily
to an increase in salaries and related benefits corresponding to a 67% increase in employee
headcount for our support and services organization to support our rapidly growing customer base
without a corresponding increase in maintenance, support and service revenue, which resulted in
maintenance, support and service costs being absorbed by a lower revenue base. The increase in
reserve for warranty repairs and product costs associated with performance of our maintenance
obligations was also a factor.
We expect cost of product revenue and cost of maintenance, support and service revenue each to
increase at approximately the same rate as the related revenue for the foreseeable future. As a
result, we expect that gross profit will increase, but that the related gross margin will remain
relatively consistent for the foreseeable future.
Operating Expenses
Three Months Ended March 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Sales and marketing |
$ | 16,427 | 32 | % | $ | 11,336 | 37 | % | $5,091 | 45 | % | |||||||||||||
Research and development |
8,693 | 17 | 6,164 | 20 | 2,529 | 41 | ||||||||||||||||||
General and administrative |
3,284 | 7 | 3,133 | 10 | 151 | 5 | ||||||||||||||||||
Total operating expenses |
$ | 28,404 | 56 | % | $ | 20,633 | 67 | % | $7,771 | 38 | % | |||||||||||||
The $5.1 million increase in sales and marketing expense was primarily due to (a) a $3.5
million increase in salaries, bonuses and other benefits associated with a 19% increase in the
number of sales and marketing personnel, the majority of which resulted from the acquisition of
Covergence in April 2009, as well as an increase in commission expense related to the significant
increase in revenue in the first quarter of 2010, (b) a $470,000 increase in stock-based
compensation expense, (c) a $373,000 increase in depreciation
and amortization expense due to
capital expenditures for evaluation systems, (d) a $186,000 increase in facility costs related
to a larger sales office in Madrid, Spain, (e) a $127,000 increase in travel expenses, (f) a
$96,000 increase in expenditures associated with marketing programs, including trade shows, and (g)
a $47,000 increase in outside consulting services. The balance was primarily due to increased
overhead associated with increases in sales and marketing personnel. We expect sales and marketing
expense to continue to increase in absolute dollars for the foreseeable future as we expand our
sales force to continue to increase our revenue and market share. We anticipate that sales
and marketing expense will modestly increase as a percentage of total revenue for the foreseeable
future.
The $2.5 million increase in research and development expense was primarily due to (a) a $1.6
million increase in salaries, bonuses and other benefits associated with a 26% increase in the
number of employees working on the design and development of new products and enhancement of
existing products, quality assurance and testing, the majority of which were associated with the
acquisition of Covergence in April 2009, (b) a $430,000 increase in stock-based compensation
expense, (c) a $186,000 increase in outside consulting services, (d) a $163,000 increased facility
costs and (e) a $84,000 increase in depreciation and
amortization expense due to capital
expenditures for lab and other engineering equipment. The balance was primarily due to increased
overhead associated with increases in research and development personnel. The addition of
personnel and our continued investment in research and development were driven by our strategy of
maintaining our competitive position by expanding our product offerings and enhancing our existing
products to meet the requirements of our customers and market. We expect research and development
expense to increase in absolute dollars for the foreseeable future. However, we anticipate that
research and development expense will remain relatively consistent as a percentage of total revenue
for the foreseeable future.
The $151,000 increase in general and administrative expense was primarily due to (a) a
$261,000 increase in salaries, bonuses and other benefits associated with an 11% increase in the
number of employees and increased bonuses resulting from our overall financial performance in the
first quarter of 2010, (b) a $163,000 increase in stock-based compensation expense, (c) a $46,000
increase in computer supplies and software costs, (d) a $32,000 increase in travel expenses and (e)
a $28,000 increase in facility costs. These increases were partially offset by (a) a $202,000
decrease in legal, accounting and professional fees, (b) a $141,000 decrease in bad debt expense
and (c) a $60,000 decrease in third party consulting services. The remainder of the difference was
related to a net increase in other miscellaneous general and administrative expenses. We expect
general and administrative expense to continue to increase in absolute dollars as we invest in
infrastructure to support continued growth and incur expenses related to being a publicly traded
company, including increased audit and legal fees, costs of compliance with securities and other
regulations and investor relations expense. However, we expect general and administrative expense
will decrease as a percentage of total revenue for the foreseeable future.
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Operating and Other Income
Three Months Ended March 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Income from operations |
$ | 12,829 | 25 | % | $4,199 | 14 | % | $8,630 | 206 | % | ||||||||||||||
Interest income |
105 | | 115 | | (10 | ) | (9 | ) | ||||||||||||||||
Other expense |
(116 | ) | | (49 | ) | | (67 | ) | 137 | |||||||||||||||
Income before
provision for income taxes |
12,818 | 25 | 4,265 | 14 | 8,553 | 201 | ||||||||||||||||||
Provision for income taxes |
4,485 | 9 | 1,507 | 5 | 2,978 | 198 | ||||||||||||||||||
Net income |
$ | 8,333 | 16 | % | $2,758 | 9 | % | $5,575 | 202 | % | ||||||||||||||
Interest income consisted of interest income generated from the investment of our cash
balances. The decrease in interest income was primarily due to lower average interest rates
partially offset by an increase in the average cash balance in the three months ended March 31,
2010.
Other expense primarily consisted of foreign currency translation adjustments of our
international subsidiaries and sales consummated in foreign currencies. The increase in other
expense was primarily due to fluctuations in the value of the Euro and British Pound.
Our effective tax rate was approximately 35% for each of the three months ended March 31, 2010
and 2009. We currently expect to realize recorded net deferred tax assets as of March 31, 2010 of
$17.2 million. Our conclusion that these assets will be recovered is based upon the expectation
that our current and future earnings will provide sufficient taxable income to realize the recorded
tax assets. The realization of our net deferred tax assets cannot be assured, to the extent that
future taxable income against which these tax assets may be applied is not sufficient, some or all
of our recorded net deferred tax asset would not be realizable. Approximately $7.1 million of the
deferred tax assets recorded as of March 31, 2010 is attributable to benefits associated with
stock-based compensation charges. In accordance with the guidance in Accounting Standards
Codification, ASC, 718, Compensation-Stock Compensation, no valuation allowance has been recorded
against this amount. However, in the future, if the underlying amounts expire with an intrinsic
value less than the fair value of the awards on the date of grant, some or all of the benefits may
not be realizable.
Liquidity and Capital Resources
Resources
Since 2005, we have funded our operations primarily due to the growth in our operating cash
flows. In October 2006, we completed an initial public offering, or IPO, of our common stock in
which we sold and issued 9.7 million shares of our common stock, including 1.7 million shares sold
by us pursuant to the underwriters full exercise of their over-allotment option, at an issue price
of $9.50 per share. We raised a total of $92.4 million in gross proceeds from the IPO, or $83.2
million in net proceeds after deducting underwriting discounts and commissions of $6.5 million and
other offering costs of $2.7 million. To date we have not used nor designated any of the proceeds
from our IPO.
Key measures of our liquidity are as follows:
As of and | ||||||||
As of and for | for the | |||||||
the Three | Year | |||||||
Months Ended | Ended | |||||||
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Cash and cash equivalents |
$ 80,570 | $ 90,471 | ||||||
Short-term and long-term investments |
108,000 | 84,516 | ||||||
Accounts receivable, net |
29,540 | 25,604 | ||||||
Working capital |
187,460 | 123,452 | ||||||
Cash provided by operating activities |
7,973 | 45,146 | ||||||
Cash used in investing activities |
(26,641 | ) | (84,156 | ) | ||||
Cash provided by financing activities |
8,767 | 3,758 |
Cash, cash equivalents, short-term and long-term investments. Our cash and cash equivalents at
March 31, 2010 were invested primarily in high quality securities of a short duration and are not
materially affected by fluctuations in interest rates. Our short-term and long-term investments
consist of high quality government treasuries and bonds. The cash and cash equivalents are held
for working capital purposes. We do not enter into investments for trading or speculative
purposes. Restricted cash, which totaled $1.1 million at March 31, 2010 and December 31, 2009, is
not included in cash and cash equivalents, and was held in certificates of deposit as collateral
for letters of credit related to the lease agreements for our corporate headquarters in Burlington,
Massachusetts, our sales office in Madrid, Spain as well as our new corporate headquarters in
Bedford, Massachusetts to which we will relocate in July 2010.
Accounts receivable, net. Our accounts receivable balance fluctuates from period to period,
which affects our cash flow from operating activities. The fluctuations vary depending on the timing of our shipping and
billing activity, cash collections, and changes in our allowance for doubtful accounts. In some
situations we receive cash payment from a customer prior to the time we are able to recognize
revenue on a transaction. We record these payments as deferred revenue, which has a positive effect
on our accounts receivable balances. We use days sales outstanding, or DSO, calculated on a
quarterly basis, as a measurement of the quality and status of our receivables. We define DSO as
(a) accounts receivable, net of allowance for doubtful accounts, divided by (b) total revenue for
the most recent quarter, multiplied by (c) 90 days. DSO was 52 days at March 31, 2010 and 56 days
at December 31, 2009. The decrease in DSO at March 31, 2010 was primarily due to the receipt of
cash on product orders prior to their recognition as revenue during the three months ended March
31, 2010.
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Operating activities. Cash provided by operating activities primarily consists of net income
adjusted for certain non-cash items including depreciation and amortization, deferred income taxes,
provision for bad debts, stock-based compensation, and the effect of changes in working capital and
other activities. Cash provided by operating activities in the three months ended March 31, 2010
was $8.0 million and consisted of (a) $8.3 million of net income, (b) non-cash adjustments of $3.7
million (consisting primarily of $3.5 million of stock-based compensation expense, $1.9 million of
depreciation and amortization expense, $378,000 of amortization of the premium/discount on
investments and a $181,000 increase for the bad debts provision, partially offset by $2.4 million
related to the tax savings from the exercise, by employees, of stock options), and (c) $4.1 million
used in working capital and other activities. Cash used in working capital and other activities
primarily reflected increases of $4.1 million in accounts receivables, $1.3 million in other
assets, $804,000 in inventory and a $411,000 decrease in accounts payable, partially offset by a
decrease of $1.1 million in deferred product costs, an increase $1.6 million in accrued expenses
and other current liabilities and a $12,000 increase in deferred revenue.
Investing activities. Cash used in investing activities in the three months ended March 31,
2010 was $26.6 million, which included $46.4 million in purchases of marketable securities, $2.8
million in purchases of property and equipment, all of which were partially offset by the receipt
of $22.5 million in proceeds from sales and maturities of marketable securities.
Financing activities. Net cash provided by financing activities included proceeds from the
exercise of common stock options in the amount of $6.4 million during the three months ended March
31, 2010 and $2.4 million of excess tax benefits from the exercise of stock options.
Anticipated cash flows. We believe our existing cash, cash equivalents and short-term and
long-term investments and our cash flow from operating activities will be sufficient to meet our
anticipated cash needs for at least the next twelve months. Our future working capital requirements
will depend on many factors, including the rate of our revenue growth, our introduction of new
products and enhancements, and our expansion of sales and marketing and product development
activities. To the extent that our cash, cash equivalents, short-term and long-term investments and
cash flow from operating activities are insufficient to fund our future activities, we may need to
raise additional funds through bank credit arrangements or public or private equity or debt
financings. We also may need to raise additional funds in the event we determine in the future to
effect one or more acquisitions of businesses, technologies and products that will complement our
existing operations. In the event additional funding is required, and given the current condition
of the global financial markets, we may not be able to obtain bank credit arrangements or affect an
equity or debt financing on terms acceptable to us or at all.
Requirements
Capital expenditures. We have made capital expenditures primarily for equipment to support
product development, evaluation systems for sales opportunities, and other general purposes to
support our growth. Our capital expenditures totaled $2.8 million in the three months ended March
31, 2010. We expect to spend an additional $5.0 $6.0 million in capital expenditures in the
remainder of 2010, excluding any investment related to the relocation and expansion of our
headquarters in July 2010.
Contractual obligations and requirements. Our only significant contractual obligations relate
to the lease of our corporate headquarters in Burlington, Massachusetts which expires in July 2010,
our future facility in Bedford, Massachusetts which we will be relocating to in July 2010 and our
office facilities in Madrid, Spain.
On December 10, 2009 we entered into a lease dated as of November 23, 2009 with MSCP Crosby,
LLC to secure office space for our future corporate headquarters at 100 Crosby Drive, Bedford,
Massachusetts. The commencement date for occupancy under the lease is June 1, 2010. The lease for
our current corporate headquarters at 71 Third Ave., Burlington, Massachusetts expires on July 31,
2010.
The lease for our future corporate headquarters provides for the rental of 123,788 square
feet of space and has an initial term of six years and six months. We can, subject to certain
conditions, extend this term for an additional period of five years. We are not required to pay any
rent for the first six months of the initial lease term. Thereafter, the annual rent will be $2.4
million, or approximately $201,156 per month. The total base rent payable in the initial lease term
is $14.5 million.
In addition to base rent, the lease for our future corporate headquarters requires us to
pay our proportionate share of certain taxes and operating expenses, as further set forth in the
lease. We are receiving lease incentives, including free rent for the first six months of
occupancy, which totals approximately $1.2 million, and allowances for tenant improvements totaling
approximately $3.2 million. We will recognize the total base rent payable of $14.5 million ratably
over the initial lease term of the lease which is 78 months. The allowances for tenant improvements will be amortized on a straight-line basis over
the initial lease term as a reduction of rental expense.
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In connection with the signing of the lease for our future headquarters, we have
deposited with the landlord an unconditional, irrevocable letter of credit in the landlords favor
in the amount of approximately $603,000.
The following table sets forth our commitments to settle contractual obligations in cash after
March 31, 2010:
1 year or | More than 5 | |||||||||||||||||||
Total | less | 2-3 years | 4-5 years | years | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating leases |
$ | 15,069 | $ | 763 | $ | 4,852 | $ | 4,828 | $ | 4,626 |
Off-Balance-Sheet Arrangements
As of March 31, 2010, we did not have any significant off-balance-sheet arrangements, as
defined in Item 303(a)(4)(ii) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact our financial position due to adverse
changes in financial market prices and rates. Our market risk exposure is primarily a result of
fluctuations in foreign exchange rates and interest rates. We do not hold or issue financial
instruments for trading purposes.
Foreign Currency Exchange Risk
To date, substantially all of our international customer agreements have been denominated in
U.S. dollars. Accordingly, we have limited exposure to foreign currency exchange rates and do not
enter into foreign currency hedging transactions. The functional currency of our international
operations in Europe and Asia is the U.S. dollar. Accordingly, all operating assets and liabilities
of these international subsidiaries are re-measured into U.S. dollars using the exchange rates in
effect at the balance sheet date. Revenue and expenses of these international subsidiaries are
re-measured into U.S. dollars at the average rates in effect during the period. Any differences
resulting from the re-measurement of assets, liabilities and operations of the European and Asian
subsidiaries are recorded within other income in the consolidated statements of income. If the
foreign currency exchange rates fluctuated by 10% as of March 31, 2010, our foreign exchange
exposure would have fluctuated by approximately $50,000.
Interest Rate Risk
At March 31, 2010, we had unrestricted cash, cash equivalents and short-term investments
totaling $188.6 million. These amounts were invested primarily in high quality securities of a
short duration and are not materially affected by fluctuations in interest rates. The cash and
cash equivalents are held for working capital requirements. We do not enter into investments for
trading or speculative purposes. Due to the short nature of our short-term investments, we believe
that we do not have any material exposure to changes in the fair value of our investment portfolio
as a result of changes in interest rates. Declines in interest rates, however, would reduce future
interest income.
Item 4. Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer (our principal executive officer and our principal financial officer), evaluated the
effectiveness of our disclosure controls and procedures as of March 31, 2010. The term disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of
1934, as amended (the Exchange Act), means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the companys management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31,
2010, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2010 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
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PART IIOTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently a party to any material litigation, and we are not aware of any pending
or threatened litigation against us that could have a material adverse effect on our consolidated
financial position, results of operations, or cash flows. The software and communications
infrastructure industries are characterized by frequent claims and litigation, including claims
regarding patent and other intellectual property rights, as well as improper hiring practices. As a
result, we may be involved in various legal proceedings from time to time.
Item 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report on Form 10-Q and the
risks discussed below, you should carefully consider the factors discussed under the heading, Risk
Factors in Item IA of Part I of our most recent Annual Report on Form 10-K, some of which are
updated below. These are risks and uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking statements contained in this
Quarterly Report on Form 10-Q. Because of the following factors, as well as other variables
affecting our operating results, past financial performance should not be considered as a reliable
indicator of future performance and investors should not use historical trends to anticipate
results or trends in future periods. These risks are not the only ones facing the Company. Please
also see Cautionary Statement on page 15 of this Quarterly Report on Form 10-Q.
Risks Relating to Our Business
We rely on many distribution partners to assist in selling our products, and if we do not develop
and manage these relationships effectively, our ability to generate revenue and control expenses
will be adversely affected.
As of March 31, 2010, we had 109 distribution partners. Our success is highly dependent upon
our ability to continue to establish and maintain successful relationships with these distribution
partners from whom, collectively, we derive a significant portion of our revenue, and who may
comprise a concentrated amount of our accounts receivable at any point in time. Revenue derived
through distribution partners accounted for 50% and 67% of our total revenue in the three months
ended March 31, 2010 and 2009, respectively, while three and two distribution partners accounted
for 39% and 31% of our total accounts receivable as of March 31, 2010 and December 31, 2009,
respectively. Given the current global economic conditions, there is a risk that one or more of our
distribution partners could cease operations. For example, one of our distribution partners entered
into bankruptcy proceedings in January 2009, which caused us to increase our allowance for doubtful
accounts as of December 31, 2008. Although we have entered into contracts with each of our
distribution partners, our contractual arrangements are not exclusive and do not obligate our
distribution partners to order, purchase or distribute any fixed or minimum quantities of our
products. Accordingly, our distribution partners, at their sole discretion, may choose to purchase
session border controllers, or SBCs, from our competitors rather than from us. Under our contracts
with our distribution partners, they generally order products from us by submitting purchase orders
that describe, among other things, the type and quantities of our products desired, delivery date
and terms applicable to the ordered products. Accordingly, our ability to sell our products and
generate significant revenue through our distribution partners is highly dependent on the continued
desire and willingness of our distribution partners to purchase and distribute our products and on
the continued cooperation between us and our distribution partners. Some of our distribution
partners may develop competitive products in the future or may already have other product offerings
that they may choose to offer and support in lieu of our products. Divergence in strategy, change
in focus, competitive product offerings, potential contract defaults, and changes in ownership or
management of a distribution partner may interfere with our ability to market, license, implement
or support our products with that party, which in turn may have a material adverse effect on our
consolidated financial position, results of operations, or cash flows. Some of our competitors may
have stronger relationships with our distribution partners than we do, and we have limited control,
if any, as to whether those partners implement our products rather than our competitors products
or whether they devote resources to market and support our competitors products rather than our
offerings.
Moreover, if we are unable to leverage our sales, support and services resources through our
distribution partner relationships, we may need to hire and train additional qualified sales,
support and services personnel. We cannot be assured, however, that we will be able to hire
additional qualified sales, support and services personnel in these circumstances and our failure
to do so may restrict our ability to generate revenue or implement our products on a timely basis.
Even if we are successful in hiring additional qualified sales, support and services personnel, we
will incur additional costs and our operating results, including our gross margin, which may have a
material adverse effect on our consolidated financial position, results of operations, or cash
flows.
We depend on a limited number of customers for a substantial portion of our revenue in any period,
and the loss of, or a significant shortfall in orders from, key customers could significantly
reduce our revenue.
We derive a substantial portion of our total revenue in any period from a limited number of
customers as a result of the nature of our target market and the current stage of our development.
During any given period, a small number of customers may each account for 10% or more of our
revenue. For example, one customer accounted for 14% of our total revenue in the three months ended
March 31, 2010, and two such customers accounted for 43% of our total revenue in the three months
ended March 31, 2009. Additionally, we do not enter into long-term purchase contracts with our
customers, and we have no contractual arrangements to ensure future sales of our products to our
existing customers. Our inability to generate anticipated revenue from our key existing or targeted customers, or a significant shortfall in sales to them could have a material adverse
effect on our consolidated financial position, results of operations, or cash flows. Our operating
results in the foreseeable future will continue to depend on our ability to effect sales to
existing and other large customers.
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If we are unable to manage our growth and expand our operations successfully, our business and
operating results will be harmed and our reputation may be damaged.
We continued to expand our operations in 2009 and the first three months of 2010. For example,
during the period from December 31, 2008 through March 31, 2010, we increased the number of our
employees and full-time independent contractors by 24%, from 381 to 474. We have also increased the
number of our employees and full-time independent contractors located outside the United States in
multiple countries and as a result we are required to comply with varying local employment and tax
laws for each of these new locations. In connection with the acquisition of Covergence, we added 39
employees in April 2009. In addition, our total operating expenses increased by 53% in 2007, 18% in
2008, 23% in 2009, and for the three months ended March 31, 2010 were 38% higher than for the three
months ended March 31, 2009. We anticipate that further expansion of our infrastructure and
headcount will be required to achieve planned expansion of our product offerings, projected
increases in our customer base and anticipated growth in the number of product deployments. Our
rapid growth has placed, and will continue to place, a significant strain on our administrative and
operational infrastructure. Our ability to manage our operations and growth, domestically and
across multiple countries, 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 may have a material adverse effect
on our consolidated financial position, results of operations, or cash flows.
Over the long term we intend to increase our investment in engineering, sales, service,
manufacturing and administration activities, and these investments may achieve delayed or lower
than expected benefits, which could harm our operating results.
While recently we have focused on managing our costs and expenses, over the long term, we
intend to continue to add personnel and other resources to our engineering, sales, service, and
manufacturing functions as we focus on developing emerging technologies, the next wave of advanced
technologies, capitalizing on our emerging market opportunities, enhancing our evolving support
model and increasing our market share gains. We are likely to recognize the costs associated with
these investments earlier than some of the anticipated benefits, and the return on these
investments may be lower, or may develop more slowly, than we expect. If we do not achieve the
benefits anticipated from these investments, or if the achievement of these benefits is delayed,
our consolidated financial position, results of operations, or cash flows may be adversely
affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Sales of Unregistered Securities
None.
(b) Use of Proceeds from Public Offering of Common Stock
In October 2006, we completed an initial public offering, or IPO, of common stock pursuant to
a registration statement on Form S-1 (Registration No. 333-134683) which the SEC declared effective
on October 12, 2006. Pursuant to the registration statement, we registered the offering and sale of
an aggregate of 9,721,179 shares of our common stock, and another 3,474,528 shares of our common
stock sold by selling stockholders. The offering did not terminate until after the sale of all of
the shares registered in the registration statement. We sold and issued 9,721,179 shares of our
common stock, including 1,721,179 shares sold by us pursuant to the underwriters full exercise of
their over-allotment option, at an issue price of $9.50 per share. The managing underwriters for
the offering were Goldman, Sachs & Co., Credit Suisse, JPMorgan and Think Equity Partners LLC.
We raised a total of $92.4 million in gross proceeds from the IPO, or approximately $83.2
million in net proceeds after deducting underwriting discounts and commissions of $6.5 million and
other estimated offering costs of approximately $2.7 million. None of our net proceeds from the IPO
have been utilized to support business operations. Pending such application, we have invested the
remaining net proceeds in money-market mutual funds and United States agency notes, in accordance
with our investment policy. None of the remaining net proceeds were paid, directly or indirectly,
to directors, officers, persons owning ten percent or more of our equity securities, or any of our
other affiliates.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Removed and Reserved.
Item 5. Other Information.
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None.
Item 6. Exhibits.
The following is an index of the exhibits included in this report:
Exhibit No. | Description | |
2.1
|
Agreement and Plan of Merger dated as of April 29, 2009 by and among Acme Packet, Inc., PAIC Midco Corp., CIAP Merger Corp., Covergence, Inc. and the stockholder representative named therein (incorporated by reference to Exhibit 2.1 to the Registrants Current Report on Form 8-K filed on April 30, 2009 (Commission File No. 001-33041)). | |
3.1
|
Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrants Registration Statement on Form S-1 (Commission File No. 333-134683)). | |
3.2
|
Second Amended and Restated Bylaws of the Registrant (incorporated by reference to the Registrants Current Report of Form 8-K filed on December 11, 2007 (Commission File No. 001-33041)). | |
10.1
|
Form of Non Statutory Stock Option Agreement for Executive Officers (incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on February 3, 2010 (Commission File No. 001-33041)) | |
31.1
|
Certification of Chief Executive Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Chief Financial Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ACME PACKET, INC. (Registrant) |
||||
Date: April 30, 2010 | By: | /s/ Andrew D. Ory | ||
Andrew D. Ory | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: April 30, 2010 | By: | /s/ Peter J. Minihane | ||
Peter J. Minihane | ||||
Chief Financial Officer and Treasurer (Principal Financial Officer) |
||||
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