Attached files
file | filename |
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EX-31.1 - EX-31.1 - ACME PACKET INC | b85353exv31w1.htm |
EX-32.1 - EX-32.1 - ACME PACKET INC | b85353exv32w1.htm |
EX-31.2 - EX-31.2 - ACME PACKET INC | b85353exv31w2.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 June 30, 2011
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.) |
100 Crosby Drive
Bedford, MA 01730
(Address of principal executive offices) (zip code)
Bedford, MA 01730
(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 website, 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). þ 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 þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
The number of shares outstanding
of each of the issuers classes of common stock, as of July 18, 2011: 66,514,194
ACME PACKET, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
Table of Contents
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Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
ACME PACKET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(unaudited)
(in thousands, except share and per share data)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 120,571 | $ | 91,669 | ||||
Short-term investments |
192,855 | 179,024 | ||||||
Accounts receivable, net of allowance of $1,839 and $1,463, respectively |
53,520 | 34,797 | ||||||
Inventory |
9,721 | 6,662 | ||||||
Deferred product costs |
1,048 | 3,572 | ||||||
Deferred tax asset, net |
3,814 | 3,814 | ||||||
Income taxes receivable |
14,131 | 9,979 | ||||||
Other current assets |
4,760 | 3,231 | ||||||
Total current assets |
400,420 | 332,748 | ||||||
Long-term investments |
5,000 | 5,030 | ||||||
Property and equipment, net |
21,282 | 17,156 | ||||||
Intangible assets, net of accumulated amortization of $3,582 and $2,466, respectively |
9,592 | 9,468 | ||||||
Goodwill |
3,269 | | ||||||
Deferred tax asset, net |
14,802 | 14,802 | ||||||
Other assets |
320 | 940 | ||||||
Total assets |
$ | 454,685 | $ | 380,144 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 8,372 | $ | 7,161 | ||||
Accrued expenses and other current liabilities |
9,591 | 14,629 | ||||||
Deferred revenue |
32,897 | 31,998 | ||||||
Total current liabilities |
50,860 | 53,788 | ||||||
Deferred rent, net of current portion |
4,584 | 4,265 | ||||||
Deferred revenue, net of current portion |
1,999 | 1,546 | ||||||
Commitments and contingencies (Note 12) |
||||||||
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 73,268,255 and 71,157,422 shares, respectively |
73 | 71 | ||||||
Additional paid-in capital |
315,094 | 266,114 | ||||||
Treasury stock, at cost 6,780,061 and 6,756,687 shares, respectively |
(37,522 | ) | (37,522 | ) | ||||
Accumulated other comprehensive income |
32 | 34 | ||||||
Retained earnings |
119,565 | 91,848 | ||||||
Total stockholders equity |
397,242 | 320,545 | ||||||
Total liabilities and stockholders equity |
$ | 454,685 | $ | 380,144 | ||||
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)
(unaudited)
(in thousands, except share and per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue: |
||||||||||||||||
Product |
$ | 64,688 | $ | 42,031 | $ | 124,430 | $ | 84,124 | ||||||||
Maintenance, support and service |
15,045 | 11,305 | 29,270 | 20,262 | ||||||||||||
Total revenue |
79,733 | 53,336 | 153,700 | 104,386 | ||||||||||||
Cost of revenue (1): |
||||||||||||||||
Product |
11,367 | 7,434 | 21,312 | 14,983 | ||||||||||||
Maintenance, support and service |
2,525 | 2,140 | 5,531 | 4,408 | ||||||||||||
Total cost of revenue |
13,892 | 9,574 | 26,843 | 19,391 | ||||||||||||
Gross profit |
65,841 | 43,762 | 126,857 | 84,995 | ||||||||||||
Operating expenses (1): |
||||||||||||||||
Sales and marketing |
24,736 | 16,623 | 48,439 | 33,050 | ||||||||||||
Research and development |
12,719 | 8,646 | 24,013 | 17,339 | ||||||||||||
General and administrative |
5,788 | 3,595 | 10,365 | 6,879 | ||||||||||||
Merger and integration-related costs |
| | 180 | | ||||||||||||
Total operating expenses |
43,243 | 28,864 | 82,997 | 57,268 | ||||||||||||
Income from operations |
22,598 | 14,898 | 43,860 | 27,727 | ||||||||||||
Other (expense) income: |
||||||||||||||||
Interest income |
103 | 135 | 313 | 240 | ||||||||||||
Other (expense) income |
(299 | ) | 41 | (407 | ) | (75 | ) | |||||||||
Total other (expense) income, net |
(196 | ) | 176 | (94 | ) | 165 | ||||||||||
Income before provision for income taxes |
22,402 | 15,074 | 43,766 | 27,892 | ||||||||||||
Provision for income taxes |
8,394 | 5,345 | 16,049 | 9,830 | ||||||||||||
Net income |
$ | 14,008 | $ | 9,729 | $ | 27,717 | $ | 18,062 | ||||||||
Net income per share (Note 10): |
||||||||||||||||
Basic |
$ | 0.21 | $ | 0.16 | $ | 0.42 | $ | 0.30 | ||||||||
Diluted |
$ | 0.20 | $ | 0.14 | $ | 0.39 | $ | 0.27 | ||||||||
Weighted average number of common
shares used in the calculation of net
income per share: |
||||||||||||||||
Basic |
66,141,163 | 61,488,059 | 65,623,359 | 60,659,321 | ||||||||||||
Diluted |
71,033,614 | 67,184,884 | 70,839,456 | 66,118,943 |
(1) | Amounts include stock-based compensation expense, as follows: |
Cost of product revenue |
$ | 304 | $ | 187 | $ | 528 | $ | 355 | ||||||||
Cost of maintenance, support and service revenue |
478 | 230 | 873 | 458 | ||||||||||||
Sales and marketing |
3,940 | 1,777 | 7,238 | 3,333 | ||||||||||||
Research and development |
2,529 | 1,149 | 4,500 | 2,297 | ||||||||||||
General and administrative |
1,246 | 493 | 2,144 | 914 |
See accompanying Notes to Condensed Consolidated Financial Statements.
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ACME PACKET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
(unaudited)
(in thousands)
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Operating activities |
||||||||
Net income |
$ | 27,717 | $ | 18,062 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
3,136 | 2,891 | ||||||
Amortization of intangible assets |
1,116 | 870 | ||||||
Provision for (recovery of) bad debts |
103 | (61 | ) | |||||
Amortization of premium/discount on investments |
517 | 874 | ||||||
Stock-based compensation expense |
15,283 | 7,357 | ||||||
Excess tax benefit related to exercise of stock options |
(19,378 | ) | (11,690 | ) | ||||
Change in operating assets and liabilities, net of acquisition: |
||||||||
Accounts receivable |
(18,754 | ) | (1,823 | ) | ||||
Inventory |
(3,059 | ) | (1,483 | ) | ||||
Deferred product costs |
2,524 | 228 | ||||||
Other assets |
(1,694 | ) | 166 | |||||
Accounts payable |
1,196 | (146 | ) | |||||
Accrued expenses, other current liabilities and deferred rent |
10,204 | 7,760 | ||||||
Deferred revenue |
1,294 | 29 | ||||||
Net cash provided by operating activities |
20,205 | 23,034 | ||||||
Investing activities |
||||||||
Purchases of property and equipment |
(7,242 | ) | (6,067 | ) | ||||
Purchases of marketable securities |
(218,991 | ) | (83,101 | ) | ||||
Proceeds from sale and maturities of marketable securities |
204,671 | 39,986 | ||||||
Increase in other assets |
755 | | ||||||
Cash paid for acquisition, net |
(4,195 | ) | | |||||
Net cash used in investing activities |
(25,002 | ) | (49,182 | ) | ||||
Financing activities |
||||||||
Proceeds from exercise of stock options |
14,321 | 14,520 | ||||||
Tax benefit related to exercise of stock options |
19,378 | 11,690 | ||||||
Net cash provided by financing activities |
33,699 | 26,210 | ||||||
Net increase in cash and cash equivalents |
28,902 | 62 | ||||||
Cash and cash equivalents at beginning of period |
91,669 | 90,471 | ||||||
Cash and cash equivalents at end of period |
$ | 120,571 | $ | 90,533 | ||||
Supplemental disclosure of noncash investing and operating activities: |
||||||||
Capital additions as a result of lease incentives |
$ | | $ | 3,199 | ||||
Supplemental disclosure of cash flow related to acquisition: |
||||||||
In connection with the acquisition of Newfound
Communications, Inc. on January 20, 2011, the following
transactions occurred: |
||||||||
Fair value of assets acquired |
$ | 4,784 | $ | | ||||
Liabilities assumed related to acquisition |
(423 | ) | | |||||
Total purchase price |
4,361 | | ||||||
Less cash and cash equivalents acquired |
(166 | ) | | |||||
Cash paid for acquisition, net of cash acquired |
$ | 4,195 | $ | | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
Table of Contents
ACME PACKET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share data)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share data)
1. Business Description and Basis of Presentation
Business Description
Acme Packet, Inc. (the Company)
is the leader in session delivery network solutions which
enable the trusted, first class delivery of next-generation voice, data and unified communication services and
applications across internet protocol (IP) networks.
The Companys Net-Net
product family fulfills demanding security, service assurance and regulatory requirements in service provider,
enterprise and contact center networks. Based in Bedford, Massachusetts, the Company designs and manufactures its
products in the United States, selling them through approximately 150 reseller partners worldwide. Approximately 1,440
customers in 105 countries have deployed over 13,000 Acme Packet
systems, including 90 of the top
100 service providers and 34 of the Fortune 100.
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, 2010.
The accompanying unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with United States generally accepted accounting principles (U.S. GAAP) have been
condensed or omitted pursuant to such SEC rules and regulations. In the opinion of management, the
unaudited condensed consolidated financial statements and notes have been prepared on the same
basis as the audited consolidated financial statements contained in the 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
June 30, 2011, statements of income
for the three and six months ended June 30, 2011 and 2010 and statements of cash flows for the six
months ended June 30, 2011 and 2010. These 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 June 30, 2011, except as described below under Revenue Recognition, 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, 2010, have not changed.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the consideration is fixed and 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-cancellable agreement signed by the customer and the Company to be representative of persuasive evidence of an arrangement. |
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| 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. |
| Consideration is fixed or determinable. The Company considers the consideration to be fixed or determinable unless the consideration is subject to refund or adjustment or is not payable within normal payment terms. If the consideration is subject to refund or adjustment, the Company recognizes revenue when the right to a refund or adjustment lapses. If offered payment terms 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 and then routinely on an ongoing basis 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. |
The Companys revenue arrangements regularly include the sale of hardware, licensing of
software, maintenance, professional services and training. Revenue arrangements may include one of
these single elements, or may incorporate one or more elements in a single transaction or some
combination of related transactions. During the first quarter of 2011, the Company prospectively
adopted the guidance of Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic
605): Multiple-Deliverable Revenue Arrangements (ASU No. 2009-13) and ASU No. 2009-14, Software
(Topic 985): Certain Revenue Arrangements That Include Software Elements (ASU No. 2009-14), which
were ratified by the Financial Accounting Standards Board (FASB) Emerging Issues Task Force on
September 23, 2009. ASU No. 2009-13 affects accounting and reporting for all multiple-deliverable
arrangements. It also applies to companies that are affected by the amendments of ASU No. 2009-14.
The amendments in ASU No. 2009-14 provide that tangible products containing software
components and non-software components that function together to deliver the tangible products
essential functionality are no longer within the scope of the software revenue recognition guidance in
Accounting Standards Codification Topic 985-605, Software Revenue Recognition (ASC 985-605) and
should follow the guidance in ASU No. 2009-13 for multiple-element arrangements. All non-essential
and standalone software components will continue to be accounted for under the guidance of ASC
985-605.
ASU No. 2009-13 establishes a selling price hierarchy for determining the selling price of a
deliverable in a revenue arrangement. The selling price for each deliverable is based on
vendor-specific objective evidence (VSOE), if available, third-party evidence (TPE) if VSOE is not
available, or the Companys best estimated selling price (BESP) if neither VSOE nor TPE are
available. The amendments in ASU No. 2009-13 eliminate the residual method of allocating
arrangement consideration and require that it be allocated at the inception of the arrangement to
all deliverables using the relative selling price method. The relative selling price method
allocates any discount in the arrangement proportionately to each deliverable on the basis of the
deliverables estimated selling price.
For all transactions entered into prior to January 1, 2011 and for those transactions which include the licensing
of stand-alone or non-essential software as an element after January 1, 2011, the Company
allocates revenue among the multiple elements associated with the stand-alone and non-essential software based on the software revenue recognition guidance of ASC
985-605. Under this guidance, 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 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 or licensed
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.
For transactions entered into subsequent to the adoption of ASU No. 2009-13 that include
multiple elements, arrangement consideration is allocated to each element based on the relative
selling prices of all of the elements in the arrangement using the fair
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value hierarchy as required by ASU No. 2009-13. The Company limits the amount of revenue
recognition for delivered elements to the amount that is not contingent on the future delivery of
products or services, future performance obligation, or subject to customer-specific return or
refund privileges.
Consistent with the methodology used under the previous accounting guidance, the Company
establishes VSOE for its training services, post-sale customer support and installation services
based on the sales price charged for each element when it is sold or licensed separately. Because
the Company generally does not sell any of its products on a standalone basis, it has yet to
establish VSOE for these offerings.
The Company is typically not able to determine TPE for its products or certain of its
services. TPE is determined based on competitor prices for similar elements when sold or licensed
separately. Generally, the Companys offerings contain a significant level of differentiation such
that the comparable pricing of products with similar functionality cannot be obtained. Furthermore,
the Company is unable to reliably determine the selling prices on a stand-alone basis of similar
products offered by its competitors.
When the Company is unable to establish the selling price of its products or certain services
using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The
objective of BESP is to determine the price at which the Company would transact a sale if the
product or service were sold or licensed on a stand-alone basis. The Company determines BESP for a
product or service by considering multiple factors including, but not limited to, pricing
practices, geographies, customer classes and distribution channels.
The Company plans to analyze the selling prices used in its allocation of arrangement
consideration, at a minimum, on an annual basis. Selling prices will be analyzed on a more frequent
basis if a significant change in the Companys business necessitates a more timely analysis, or if
the Company experiences significant variances in its selling prices.
The following table presents the effects to the Companys previously reported Condensed
Consolidated Statements of Income for the three months ended June 30, 2010 as if the Company had
adopted the standards effective January 1, 2010 (in thousands):
As Reported | Adjustments | As Amended | ||||||||||
Total revenue |
$ | 53,336 | $ | 1,067 | $ | 54,403 | ||||||
Gross profit |
43,762 | 850 | 44,612 | |||||||||
Net income |
9,729 | 549 | 10,278 | |||||||||
Net income per share: |
||||||||||||
Basic |
$ | 0.16 | $ | 0.01 | $ | 0.17 | ||||||
Diluted |
$ | 0.14 | $ | 0.01 | $ | 0.15 |
The following table presents the effects to the Companys previously reported Condensed
Consolidated Statements of Income for the six months ended June 30, 2010 as if the Company had
adopted the standards effective January 1, 2010 (in thousands):
As Reported | Adjustments | As Amended | ||||||||||
Total revenue |
$ | 104,386 | $ | 1,562 | $ | 105,948 | ||||||
Gross profit |
84,995 | 1,275 | 86,270 | |||||||||
Net income |
18,062 | 826 | 18,888 | |||||||||
Net income per share: |
||||||||||||
Basic |
$ | 0.30 | $ | 0.01 | $ | 0.31 | ||||||
Diluted |
$ | 0.27 | $ | 0.01 | $ | 0.29 |
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The following table presents the effects to the Companys previously reported Condensed
Consolidated Balance Sheet as of June 30, 2010 as if the Company had adopted the standards
effective January 1, 2010 (in thousands):
As Reported | Adjustments | As Amended | ||||||||||
Deferred product costs |
$ | 3,172 | $ | (218 | ) | $ | 2,954 | |||||
Deferred revenue |
31,762 | (1,067 | ) | 30,695 |
2. Business Combination
On January 20, 2011, the Company acquired Newfound Communications, Inc. (Newfound
Communications), an emerging, innovative provider of call recording solutions for the IP
communications industry. The aggregate purchase price was $4,195 in cash payments to the
stockholders of Newfound Communications. In allocating the total preliminary purchase price for
Newfound Communications based on estimated fair values, the Company recorded $3,269 of goodwill,
$1,240 of identifiable intangible assets and $423 of net tangible liabilities. In connection with
the acquisition of Newfound Communications, the Company incurred $180 of merger and integration
related costs during 2011, which the Company recorded as an expense in the condensed consolidated
statement of income for the three months ended March 31, 2011 and $223 during 2010 which the
Company recorded as an expense in the consolidated statement of income for the three months ended
December 31, 2010.
The transaction was accounted for under the acquisition method of accounting. Accordingly, the
results of operations of Newfound Communications have been included in the accompanying condensed
consolidated financial statements since the date of acquisition and were immaterial to the
Companys condensed consolidated financial statements. All of the assets acquired and liabilities
assumed in the transaction have been recognized at their acquisition date fair values, which remain
preliminary at June 30, 2011. The Company is in the process of completing its valuation of certain
intangible assets and deferred revenue. The final allocations of the purchase price to intangible
assets, goodwill, if any, and the deferred tax asset and liability may differ materially from the
information presented in these unaudited condensed consolidated financial statements.
3. Cash, Cash Equivalents, Short and Long-Term Investments
Cash, Cash Equivalents, Short and Long-term Investments
Cash, cash equivalents, short and long-term investments as of June 30, 2011 and December 31,
2010 consist of the following:
As of June 30, 2011 | ||||||||||||||||
Contracted | Amortized | Fair Market | Carrying | |||||||||||||
Maturity | Cost | Value | Value | |||||||||||||
Cash |
Demand | $ | 19,092 | $ | 19,092 | $ | 19,092 | |||||||||
Money market funds |
Demand | 101,479 | 101,479 | 101,479 | ||||||||||||
Total cash and cash equivalents |
$ | 120,571 | $ | 120,571 | $ | 120,571 | ||||||||||
U.S. agency notesavailable-for-sale |
11 - 418 days | $ | 77,932 | $ | 77,962 | $ | 77,962 | |||||||||
U.S. agency notesheld-to-maturity |
41 - 318 days | 114,894 | 114,887 | 114,893 | ||||||||||||
Total short-term marketable
securities |
$ | 192,826 | $ | 192,849 | $ | 192,855 | ||||||||||
U.S. agency notesheld-to-maturity |
406 days | $ | 5,000 | $ | 4,999 | $ | 5,000 | |||||||||
Total long-term marketable securities |
$ | 5,000 | $ | 4,999 | $ | 5,000 | ||||||||||
As of December 31, 2010 | ||||||||||||||||
Contracted | Amortized | Fair Market | Carrying | |||||||||||||
Maturity | Cost | Value | Value | |||||||||||||
Cash |
Demand | $ | 35,580 | $ | 35,580 | $ | 35,580 | |||||||||
Money market funds |
Demand | 56,089 | 56,089 | 56,089 | ||||||||||||
Total cash and cash equivalents |
$ | 91,669 | $ | 91,669 | $ | 91,669 | ||||||||||
U.S. agency notesavailable-for-sale |
4 - 419 days | $ | 69,575 | $ | 69,606 | $ | 69,606 |
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As of December 31, 2010 | ||||||||||||||||
Contracted | Amortized | Fair Market | Carrying | |||||||||||||
Maturity | Cost | Value | Value | |||||||||||||
U.S. agency notesheld-to-maturity |
15 - 329 days | 109,418 | 114,451 | 109,418 | ||||||||||||
Total short-term marketable
securities |
$ | 178,993 | $ | 184,057 | $ | 179,024 | ||||||||||
U.S. agency notesheld-to-maturity |
419 days | $ | 5,030 | $ | 5,029 | $ | 5,030 | |||||||||
Total long-term marketable securities |
$ | 5,030 | $ | 5,029 | $ | 5,030 | ||||||||||
To date, realized gains and losses from the sales of cash equivalents or short or long-term
investments have been immaterial.
4. Inventory
Inventory is stated at the lower of cost, determined on a first in, first out basis, or
market, and consists primarily of finished products.
5. Concentrations of Credit Risk and Off-Balance-Sheet Risks
The Company has no significant off-balance-sheet risks such as foreign exchange or option
contracts, or other international hedging arrangements. Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents,
short and long-term investments and accounts receivable. The Company maintains its cash, cash
equivalents, short and long-term investments principally in accredited financial institutions of
high credit standing. The Company assesses the credit worthiness of its customers both at the
inception of the business relationship and then routinely on an ongoing basis. The Company
generally 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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Customer A |
12 | % | 10 | % | * | % | * | % | ||||||||
Customer B |
* | 13 | * | 10 | ||||||||||||
Customer C |
* | 12 | * | 11 |
* | 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:
June 30, 2011 | December 31, 2010 | |||||||
Customer B |
14 | % | 10 | % | ||||
Customer C |
13 | * | ||||||
Customer A |
13 | 20 |
* | Less than 10% of total accounts receivable. |
6. 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 hardware or software products
covered by these warranties, the Company must repair or replace such hardware or software 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 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
assesses the adequacy of the warranty allowance on a quarterly basis and adjusts the amount as
necessary. If the historical data used to
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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 six
months ended June 30, 2011:
Balance at December 31, 2010 |
$ | 89 | ||
Provision for warranty costs |
296 | |||
Uses/Reductions |
(263 | ) | ||
Balance at June 30, 2011 |
$ | 122 | ||
7. Stock-Based Compensation
The Company recorded stock-based compensation expense of $8,497 and $3,836 for the three
months ended June 30, 2011 and 2010, respectively, and $15,283 and $7,357 for the six months ended
June 30, 2011 and 2010, respectively. As of June 30, 2011, there was $85,984 of unrecognized
stock-based compensation expense related to stock-based awards that is expected to be recognized
over a weighted average period of 2.55 years.
The following is a summary of the status of the Companys stock options as of June 30, 2011
and the stock option activity for all stock option plans during the six months ended June 30, 2011:
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, 2010 |
10,211,039 | $ | 0.20 53.45 | $ | 10.47 | |||||||||||||||
Granted |
1,915,923 | 66.55 82.02 | 68.83 | |||||||||||||||||
Canceled |
(44,062 | ) | 4.35 66.55 | 31.41 | ||||||||||||||||
Exercised |
(1,927,299 | ) | 0.20 27.60 | 7.58 | $ | 139,621 | ||||||||||||||
Outstanding at June 30, 2011 |
10,155,601 | 0.20 82.02 | 21.94 | 5.28 | 492,092 | |||||||||||||||
Exercisable at June 30, 2011 |
3,001,814 | 0.20 66.55 | 7.32 | 4.50 | 188,550 | |||||||||||||||
Vested or expected to vest at June 30, 2011 (2) |
9,698,792 | 0.20 82.02 | 21.00 | 5.25 | 478,827 |
(1) | The aggregate intrinsic value was calculated based on the positive difference between the fair value of the Companys common stock on June 30, 2011 of $70.13, 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 June 30, 2011 plus the number of unvested options expected to vest as of June 30, 2011 based on the unvested options outstanding at June 30, 2011, adjusted for an estimated forfeiture rate. |
The Company has entered into restricted stock unit (RSU) agreements with certain of its
employees relating to RSUs granted to those employees pursuant to the Acme Packet, Inc. 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 June 30, 2011 and the changes during the six months then ended, is presented below:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
RSUs | Fair Value | |||||||
Unvested at December 31, 2010 |
412,833 | $ | 6.22 | |||||
Granted |
70,250 | 66.55 | ||||||
Vested |
(187,518 | ) | 8.70 | |||||
Forfeited |
| | ||||||
Unvested at June 30, 2011 |
295,565 | 18.98 | ||||||
8. Employee Stock Purchase Plan
On May 5, 2011 the Companys shareholders approved the 2011 Employee Stock Purchase Plan (the
ESPP), under which 2,500,000 shares of the Companys common stock have been reserved for issuance.
Effective June 1, 2011, eligible employees may purchase shares of the Companys common stock
through regular payroll deductions of up to 15% of their eligible compensation to a maximum number
of shares with a fair market value of $25 per calendar year through a six month purchase period.
Employees may
purchase shares of the Companys common stock at a discount of 15% of the lesser of the fair
market value of a share of the
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Companys common stock of the first day or the last day of each six
month offering period. The ESPP is scheduled to terminate on January 3, 2020. During the three and
six months ended June 30, 2011, no shares were issued under the ESPP.
9. Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources. Accumulated
other comprehensive income is presented separately on the balance sheet as required.
The following table displays the computation of comprehensive income:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 14,008 | $ | 9,729 | $ | 27,717 | $ | 18,062 | ||||||||
Unrealized (loss) gain on available-for-sale securities |
(10 | ) | 51 | 32 | 37 | |||||||||||
Comprehensive income |
$ | 13,998 | $ | 9,780 | $ | 27,749 | $ | 18,099 | ||||||||
Comprehensive income consists entirely of unrealized gains and losses on
available-for-sale securities at June 30, 2011 and 2010.
10. 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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Weighted
average number of
common shares used
in calculating
basic net income
per share |
66,141,163 | 61,488,059 | 65,623,359 | 60,659,321 | ||||||||||||
Weighted average
number of common
shares issuable
upon exercise of
outstanding stock
options, based on
treasury stock
method |
4,754,154 | 5,504,607 | 5,049,457 | 5,261,364 | ||||||||||||
Weighted average
number of common
shares issuable
upon vesting of
outstanding
restricted stock
units |
138,297 | 192,218 | 166,640 | 198,258 | ||||||||||||
Weighted average
number of common
shares used in
computing diluted
net income per
share |
71,033,614 | 67,184,884 | 70,839,456 | 66,118,943 | ||||||||||||
In the computation of the diluted weighted average number of common shares outstanding,
1,787,736 and 394,011 weighted average common share equivalents underlying outstanding stock
options have been excluded from the computation during the three months ended June 30, 2011 and
2010, respectively, and 1,386,444 and 337,399 during the six months ended June 30, 2011 and 2010,
respectively, as their effect would have been antidilutive.
11. Income Taxes
For the three and six months ended June 30, 2011 and 2010, the Companys effective income tax
rate was approximately 37% and 35%, respectively. As of June 30, 2011, the Company expects to
realize recorded net deferred tax assets of $18,616. 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 net deferred tax asset. The realization of the
Companys net deferred tax assets cannot be assured, and to the extent that future taxable income
against which these tax assets may be applied is not sufficient, some or all of the Companys
recorded net deferred tax assets would not be realizable. Approximately $10,588 of the deferred tax
assets recorded as of June 30, 2011 was attributable to benefits associated with stock-based
compensation charges. In accordance with the provision of Accounting Standards Codification 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.
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12. Commitments and contingencies
Litigation
From time to time, and in the ordinary course of business, the Company may be subject to
various claims, charges and litigation. At June 30, 2011 and 2010, the Company did not have any
pending claims, charges or litigation that it expects would have a material adverse effect on its
condensed consolidated financial position, results of operations or cash flows.
On January 5, 2011, Nortel Networks, Inc. (Nortel), a customer of the Company, filed a
complaint against Covergence Inc. (Covergence) in the United States Bankruptcy Court in the
District of Delaware. The complaint alleges that prior to the Companys acquisition of Covergence in April
2009, Covergence received a preferential payment of approximately $1,200 prior to Nortels
bankruptcy petition in January 2009. Based on the early stage of this litigation, the Company is
unable to reasonably estimate the outcome of this claim.
Operating Leases
On June 10, 2011, the Company entered into a Second Amendment to Lease (the Second Lease
Amendment) dated as of June 10, 2011 with MSCP Crosby, LLC (the Landlord) to expand the premises
leased by the Company, extend the term of the lease, dated as of November 23, 2009 (the Original
Lease), and to make other modifications to the terms and conditions of the Original Lease, as
amended by the First Amendment to Lease (the First Lease Amendment), entered into by the Company
and Landlord on and dated as of July 12, 2010.
The premises leased pursuant to the Original Lease consisted of 123,788 rentable
square feet of space in the building located at 100 Crosby Drive, Bedford, Massachusetts. The
Company leased an additional 27,161 rentable square feet of space in the building pursuant to the
First Lease Amendment. The Second Lease Amendment expands the premises leased by the Company from
the Landlord to 261,961 rentable square feet.
The Term of the Original Lease is extended by the Second Lease Amendment for six years
expiring on March 31, 2022. The Company has two options to extend
the term of the lease each for an additional period of five years, with the first extension term
commencing, if at all, immediately following the expiration of the term of the Original Lease, as
amended, and the second extension term commencing, if at all, immediately following the expiration
of the first extension term.
Pursuant to the Original Lease, as amended by the First and Second Lease Amendments, the
Companys monthly base rent as of April 1, 2012 will be approximately $245 and the Company is
required to pay additional monthly rent in an amount equal to the Companys proportionate share of
certain taxes and operating expenses, as further set forth in the Second Lease Amendment.
Commencing on July 1, 2012, the Companys monthly base rent will be approximately $449. The
Companys monthly base rent shall be increased from time to time, as further set forth in Section
4.3 of the Second Lease Amendment.
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.
13. Segment Information
Geographic Data
Total revenue to unaffiliated customers by geographic area was as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
United States and Canada |
$ | 45,950 | $ | 35,363 | $ | 90,552 | $ | 64,680 | ||||||||
International |
33,783 | 17,973 | 63,148 | 39,706 | ||||||||||||
Total |
$ | 79,733 | $ | 53,336 | $ | 153,700 | $ | 104,386 | ||||||||
During the three and six months ended June 30, 2011 and 2010, no one international country
contributed more than 10% of the Companys total revenue.
As of June 30, 2011 and 2010, property and equipment at locations outside the United States
was not material.
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14. 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 approach Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; | ||
| Income approach Uses 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 | ||
| Cost approach Based 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 June 30, 2011:
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 |
$ | 101,479 | $ | | $ | | $ | 101,479 | ||||||||
Restricted cash |
82 | | | 82 | ||||||||||||
Total cash equivalents and restricted cash |
101,561 | | | 101,561 | ||||||||||||
Short-term U.S. agency notes |
| 192,855 | | 192,855 | ||||||||||||
Long-term U.S. agency notes |
| 5,000 | | 5,000 | ||||||||||||
Total investments |
| 197,855 | | 197,855 | ||||||||||||
Total assets |
$ | 101,561 | $ | 197,855 | $ | | $ | 299,416 | ||||||||
Realized gains and losses from sales of the Companys investments are included in other income
(expense) 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
has not incurred any other-than-temporary losses to date.
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 and six months ended June 30, 2011.
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15. Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-04, Fair
Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and International Financial Reporting Standards (IFRSs) (ASU No. 2011-04). The amendments
in this update apply to all reporting entities that are required or permitted to measure or
disclose the fair value of an asset, a liability, or an instrument classified in a reporting
entitys shareholders equity in the financial statements. ASU No. 2011-04 does not extend the use
of fair value accounting, but provides guidance on how it should be applied where its use is
already required or permitted by other standards within U.S. GAAP or IFRSs. ASU No. 2011-04 changes
the wording used to describe many requirements in U.S. GAAP for measuring fair value and for
disclosing information about fair value measurements. Additionally, ASU No. 2011-04 clarifies the
FASBs intent about the application of existing fair value measurements. The amendments in this
update are to be applied prospectively. For public entities, the amendments are effective during
interim and annual periods beginning after December 15, 2011. Early application by public entities
is not permitted. The Company does not expect the provisions of ASU No. 2011-04 to have a material
effect on its financial position, results of operations or cash flows.
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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, expansion of our product offerings and the emerging opportunities for our solutions; | ||
| our position in the session delivery network solutions market; | ||
| the effect of the worldwide economy 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 delivery network solutions; | ||
| the benefit of our products, services, or programs; | ||
| our ability to establish and maintain relationships with key partners and contract manufacturers; | ||
| potential natural disasters in locations where we, our customers, or our suppliers operate; | ||
| the advantages of our technology as compared to that of our competitors; | ||
| our expectations regarding the realization of recorded deferred tax assets; and | ||
| our cash needs. |
The outcome of the events described in these forward-looking statements is subject to known
and unknown risks, uncertainties and other factors that could cause actual results to differ
materially from the results anticipated by these forward-looking statements. These important
factors include our financial performance, our ability to attract and retain customers, our
development activities and those factors we discuss in this Quarterly Report on Form 10-Q and in
our Annual Report on Form 10-K under the caption Risk Factors. You should read these factors and
the other cautionary statements made in this Quarterly Report on Form 10-Q as being applicable to
all related forward-looking statements wherever they appear in this Quarterly Report on Form 10-Q.
These risk factors are not exhaustive and other sections of this Quarterly Report on Form 10-Q may
include additional factors which could adversely impact our business and financial performance.
Company Background
Acme Packet, Inc. is
the leader in session delivery network solutions which enable
the trusted, first class delivery of next-generation voice, data and unified communication services and
applications across internet protocol, or IP, networks.
Our Net-Net
product family fulfills demanding security, service assurance and regulatory requirements in service provider,
enterprise and contact center networks. We design and manufacture our
products in the United States, selling them through approximately 150 reseller partners worldwide. Approximately 1,440
customers in 105 countries have deployed over 13,000 of our systems, including 90 of the top
100 service providers and 34 of the Fortune 100.
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Our headquarters are located in Bedford, Massachusetts. We maintain sales offices in Madrid,
Spain; Seoul, South Korea; Tokyo, Japan; and Ipswich, United Kingdom. We also have sales and
support personnel in Argentina, Australia, Belgium, Brazil, Canada, China, Columbia, Croatia, Czech
Republic, France, Germany, Hong Kong, India, Indonesia, Italy, Malaysia, Mexico, the Netherlands,
New Zealand, Peru, Poland, Russia, Saudi Arabia, Singapore, South Africa, Sweden, Taiwan, Thailand,
United Arab Emirates 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 traffic only on a best efforts basis, because all forms of traffic have
the same priority. Therefore, the internet attempts to deliver all traffic without distinction,
which can result in significantly varying degrees of service quality for the same or similar types
of traffic transmissions. Internet-based services are also subject to disruptive and fraudulent
behavior, including identity theft, viruses, unwanted and excessively large input data, known as
SPAM, and the unauthorized use and attempts to circumvent or bypass security mechanisms associated
with those services, known as hacking.
Service providers are migrating to a single IP network architecture to serve as the foundation
for their next generation voice, video, multimedia and data service offerings. Recently, an
increasing number of enterprises, including 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 control the communications flows that comprise communication sessions.
Evolution to a Converged IP Network
IP networks can be designed and operated more cost effectively than the PSTN. In addition, IP
networks are capable of delivering converged voice, video and data service packages to businesses
and consumers. Service providers are seeking to provide these next-generation services to enhance
their profitability by generating incremental revenue and by reducing subscriber turnover.
Enterprises are searching for ways to unify their communications by seamlessly integrating voice,
video, instant messaging and collaboration while reducing costs. Managing two distinct
networksthe PSTN and an IP networkis not a viable economic alternative. As a result, service
providers and enterprises have begun to migrate to a single IP network architecture to serve as the
foundation for their next-generation services and applications. In order to successfully transition
to a single IP network, however, they must maintain the same reliability, quality and security that
have for decades exemplified their delivery of voice services.
Challenges of IP Networks in Delivering Session Based Communications
IP networks were designed initially to provide reliable delivery of data services such as file
downloads and website traffic that are not sensitive to latency or time delay. If data packets are
lost or misdirected, an IP network exhibits tremendous resiliency in re-transmitting and eventually
executing the desired user request, which generally is an acceptable result for these types of data
services. However, IP networks historically have not been capable of guaranteeing real time, secure
delivery of high quality sessions based communications such as interactive voice and video.
A session is a communications interaction that has a defined beginning and end, and is
effective only when transmitted in real time without latency or delays. In order to enable a
session based communication, control of the session from its origination point to its defined end
point is required. No single IP network extends far enough to enable that level of control,
however, the internet lacks the fundamental quality of service and security mechanisms necessary to
consistently deliver the security and quality of real time multimedia communications that consumers
and businesses require. In order to gain the trust of users, service providers and enterprises must
be able to assure secure and high quality interactive communications across multiple networks.
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Key Financial Highlights
Some of our key financial highlights for the three months ended June 30, 2011, as compared to
the same metrics for the three months ended June 30, 2010, include the following:
| Total revenue was $79.7 million compared to $53.3 million. | ||
| Net income was $14.0 million compared to $9.7 million. | ||
| Earnings per share was $0.20 per share on a diluted basis compared to $0.14 per share on a diluted basis. | ||
| Cash provided by operating activities was $8.7 million compared to $15.1 million. |
The Acme Packet Strategy
Principal elements of our strategy include:
| Continuing to satisfy the evolving border requirements of enterprises and fixed-line, mobile and over-the-top service providers. Our product deployments position us to gain valuable knowledge that we can use to expand and enhance our products features and functionality. We may develop new products organically or through selective acquisitions. | ||
| Implementing new technologies to enhance product performance and scalability. We will seek to leverage new technologies as they become available to increase the performance, capacity and functionality of our product family, as well as to reduce our costs. | ||
| 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 and federations among our customers. We intend to drive increased demand for our products by helping our customers to extend the reach of their services and applications and, consequently, to increase the value of their services to their 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 customersservice providers, enterprises, government agencies and contact centersmay be affected by current worldwide economic conditions. Our ability to generate revenue from these core customers is dependent on the status of such budgets and initiatives. | ||
| Gross Margin. Our gross margin has been, and will continue to be, affected by many factors, including (a) the demand for our products and services, (b) the average selling price of our products, which in turn depends, in part, on the mix of product and product configurations sold, (c) the level of software license upgrades, (d) 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 |
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have a direct impact on the average selling price of the system sold. Systems with higher software content (higher session capacity, support for higher number of security protocols and a larger number of feature groups) will generally have a higher average selling price than those systems sold with lower software content. If customers begin to purchase systems with lower software content, this may have a negative impact on our revenue and gross margins. |
| Competition. Competition in our product categories is strong and constantly evolving. While we believe we are currently the market leader in the service provider and enterprise markets for session delivery network solutions, we expect competition to persist and intensify in the future as the market grows. Our primary competitors for session delivery network solutions generally consist of specialty 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 Alcatel-Lucent, Nokia Siemens Networks B.V., Sonus Networks Inc. and Telefonaktiebolaget LM Ericsson. We believe we compete successfully with all of these companies based upon our experience in interactive communications networks, the breadth of our applications and standards support, the depth of our border control features, the demonstrated ability of our products to interoperate with key communications infrastructure elements and our comprehensive service and support. We also believe our products are priced competitively with our competitors offerings. As the session delivery network solutions market opportunity grows, we expect competition from additional networking and IP communications equipment suppliers, including our distribution partners. | ||
| Evolution of the Session Delivery Network Solution Market. The market for our products 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 our solutions. | ||
| Research and Development. To continue to achieve market acceptance for our products, we must effectively anticipate and adapt, in a timely manner, to customer requirements and must offer products that meet changing customer demands. Prospective customers may require product features and capabilities that our current products do not have. The market for session delivery network solutions is characterized by rapid technological change, frequent new product introductions, and evolving industry requirements. We intend to continue to invest in our research and development efforts, which we believe are essential to maintaining our competitive position. | ||
| Managing Growth. We significantly expanded our operations in 2010 and the first six months of 2011. During the period from January 1, 2010 through June 30, 2011 we increased the number of our employees and full time independent contractors by 58%, from 450 to 710. We anticipate that further expansion of our infrastructure and headcount will be required to achieve planned expansion of our product offerings, projected increases in our customer base and anticipated growth in the number of product deployments. In the future, we expect to continue to carefully manage the increase of our operating expenses based on our ability to expand our revenues, the expansion of which could occur organically or through future acquisitions. |
Revenue
We derive product revenue from the sale of our Net-Net hardware and the licensing of our
Net-Net software. We generally recognize product revenue at the time of product delivery, provided
all other revenue recognition criteria have been met. For arrangements that include customer
acceptance or other material non-standard terms, we 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, signaling protocol
support and requested features, determines the price for each product sold and licensed. Customers
can purchase our products in either a standalone or high
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availability configuration and can license our software in various configurations, depending on the
customers requirements for session capacity, functionality and protocols. The product software
configuration mix will have a direct impact on the average selling price of the system sold. As the
market continues to develop and grow, we expect to experience increased price pressure on our
products and services.
We believe that our revenue and results of operations may vary significantly from quarter to
quarter as a result of long sales and deployment cycles, variations in customer ordering patterns,
and the application of complex revenue recognition rules to certain transactions. Some of our
arrangements with customers include clauses under which we may be subject to penalties for failure
to meet specified performance obligations. We have not incurred any such penalties to date.
Cost of Revenue
Cost of product revenue consists primarily of (a) third party manufacturers fees for
purchased materials and services, combined with our expenses for (b) salaries, wages and related
benefits for our manufacturing personnel, (c) related overhead, (d) provision for inventory
obsolescence, (e) amortization of intangible assets and (f) stock-based compensation. Amortization
of intangible assets represents the amortization of developed technologies from our acquisitions of
Covergence Inc. and Newfound Communications, Inc..
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 or licensed, (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, general and
administrative and merger and integration related expenses. Personnel related costs are the most
significant component of each of these expense categories. During the period from January 1, 2010
through June 30, 2011, we increased the number of our employees and full time independent
contractors, related to our operating activities, by 60%, from 381 to 611. 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 and bonuses, (c) travel, lodging and other out-of-pocket expenses, (d) marketing
programs such as trade shows, (e) stock-based compensation and (f) other related overhead.
Commissions are recorded as expense when earned by the employee. We 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 remain relatively
consistent 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 as technological feasibility is determined at the same time as release. We intend to
continue to invest in our research and development efforts, which we believe are essential to
maintaining our competitive position. We expect research and development expense to increase in
absolute dollars. However, we anticipate that research and development expense will modestly
increase as a percentage of total revenue in the future.
General and administrative expense consists primarily of (a) salaries, wages and personnel
costs related to our executive, finance, human resource and information technology organizations,
(b) accounting and legal professional fees, (c) expenses associated with uncollectible accounts,
(d) stock-based compensation and (e) other related overhead. We expect general and administrative
expense to increase in absolute dollars as we invest in infrastructure to support continued growth
and incur ongoing expenses related to being a
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publicly-traded company. However, we anticipate that general and administrative expense will
remain relatively consistent as a percentage of total revenue in the future.
Merger and integration related costs primarily consist of legal fees.
Stock-Based Compensation
Cost of revenue and operating expenses include stock-based compensation expense. We record
stock-based compensation expense based on the fair value of the stock-based awards on the date of
grant. For the three months ended June 30, 2011 and 2010, we recorded an expense of $8.5 million
and $3.8 million, respectively, and for the six months ended June 30, 2011 and 2010, we recorded an
expense of $15.3 million and $7.4 million, respectively. As a result of stock-based awards granted
from 2007 through 2011, a future expense of non-vested options of $86.0 million is expected to be
recognized over a weighted average period of 2.55 years.
Other (Expense) Income
Other (expense) income consists primarily of interest income earned on cash, cash equivalents
and investments. We have invested cash in high quality securities and are not materially affected
by fluctuations in interest rates. Other (expense) income also includes gains or losses from foreign
currency translation adjustments of our international activities. The functional currency of our
international operations in Europe and Asia is the 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 (expense) income.
Application of Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with accounting principles generally
accepted in the U.S. The preparation of these financial statements requires that we make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting periods. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the
circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results
may differ significantly from these estimates under different assumptions or conditions. There have
been no material changes to these estimates for the periods presented in this Quarterly Report on
Form 10-Q. For a detailed explanation of the judgments made in these areas, refer to 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, 2010, which we filed with the Securities and Exchange
Commission, or SEC, on February 18, 2011.
We believe that our significant accounting policies, which are described in the notes to our
unaudited condensed consolidated financial statements included in this Quarterly Report on Form
10-Q, have not materially changed from those described in the notes to our audited consolidated
financial statements included in our Annual Report on Form 10-K for the year ended December 31,
2010, except as described below.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred,
the consideration is fixed and 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. We consider a non-cancellable agreement signed by the customer and us to be representative of persuasive evidence of an arrangement. | ||
| Delivery has occurred. We consider 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 our agreements contain products that might not conform to published specifications or contain a requirement to deliver additional elements which are |
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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. | |||
| Consideration is fixed or determinable. We consider the consideration to be fixed or determinable unless the consideration is subject to refund or adjustment or is not payable within normal payment terms. If the consideration is subject to refund or adjustment, we recognize revenue when the right to a refund or adjustment lapses. If offered payment terms exceed our normal terms, then revenue is recognized as the amounts become due and payable or upon the receipt of cash. | ||
| Collection is deemed probable. We conduct a credit review for all transactions at the inception of an arrangement and then routinely on an ongoing basis, to determine the creditworthiness of the customer. Collection is deemed probable if, based upon our evaluation, we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not probable, revenue is deferred and recognized upon the receipt of cash. |
Our revenue arrangements regularly include the sale of hardware, licensing of software,
maintenance, professional services and training. Revenue arrangements may include one of these
single elements, or may incorporate one or more elements in a single transaction or some
combination of related transactions. During the first quarter of 2011, we prospectively adopted the
guidance of Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements (ASU No. 2009-13) and ASU No. 2009-14, Software (Topic
985): Certain Revenue Arrangements That Include Software Elements (ASU No. 2009-14), which were
ratified by the Financial Accounting Standards Board (FASB) Emerging Issues Task Force on September
23, 2009. ASU No. 2009-13 affects accounting and reporting for all multiple-deliverable
arrangements. It also applies to companies that are affected by the amendments of ASU No. 2009-14.
The amendments in ASU No. 2009-14 provide that tangible products containing software
components and non-software components that function together to deliver the tangible products
essential functionality are no longer within the scope of the software revenue guidance in
Accounting Standards Codification Topic 985-605, Software Revenue Recognition (ASC 985-605) and
should follow the guidance in ASU No. 2009-13 for multiple-element arrangements. All non-essential
and standalone software components will continue to be accounted for under the guidance of ASC
985-605.
ASU No. 2009-13 establishes a selling price hierarchy for determining the selling price of a
deliverable in a revenue arrangement. The selling price for each deliverable is based on
vendor-specific objective evidence (VSOE), if available, third-party evidence (TPE) if VSOE is not
available, or our best estimated selling price (BESP) if neither VSOE nor TPE are available. The
amendments in ASU No. 2009-13 eliminate the residual method of allocating arrangement consideration
and require that it be allocated at the inception of the arrangement to all deliverables using the
relative selling price method. The relative selling price method allocates any discount in the
arrangement proportionately to each deliverable on the basis of the deliverables estimated selling
price.
For all transactions entered into prior to January 1, 2011 and
for those transactions which include the licensing of stand-alone or
non-essential software as an element after January 1, 2011, we
allocate revenue among the multiple elements associated with the
stand-alone and non-essential software based on the software revenue recognition guidance. Under this guidance of
ASC 985-605, when arrangements include multiple elements, we allocate the total fee among the
various elements using the residual method. Under the residual method, revenue is recognized when
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 us 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 or licensed 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.
For transactions entered into subsequent to the adoption of ASU No. 2009-13 that include
multiple elements, arrangement consideration is allocated to each element based on the relative
selling prices of all of the elements in the arrangement using the fair value hierarchy as required
by ASU No. 2009-13. We limit the amount of revenue recognition for delivered elements to the amount
that is not contingent on the future delivery of products or services, future performance
obligation, or subject to customer-specific return or refund privileges.
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Consistent with the methodology used under the previous accounting guidance, we establish
VSOE for our training services, post-sale customer support and installation services based on the
sales price charged for each element when it is sold or licensed separately. Because we generally
do not sell any of our products on a standalone basis, we have yet to establish VSOE for these
offerings.
We typically are not able to determine TPE for our products or certain of our services. TPE is
determined based on competitor prices for similar elements when sold or licensed separately.
Generally, our offerings contain a significant level of differentiation such that the comparable
pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to
reliably determine the selling prices on a stand-alone basis of similar products offered by our
competitors.
When we are unable to establish the selling price of our products or certain services using
VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is
to determine the price at which we would transact a sale if the product or service were sold or
licensed on a stand-alone basis. We determine BESP for a product or service by considering multiple
factors including, but not limited to, pricing practices, geographies, customer classes and
distribution channels.
We plan to analyze the selling prices used in our allocation of arrangement consideration, at
a minimum, on an annual basis. Selling prices will be analyzed on a more frequent basis if a
significant change in our business necessitates a more timely analysis, or if we experience
significant variances in our selling prices.
Results of Operations
Comparison of Three Months Ended June 30, 2011 and 2010
Revenue
Three Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenue by Type: |
||||||||||||||||||||||||
Product |
$ | 64,688 | 81 | % | $ | 42,031 | 79 | % | $ | 22,657 | 54 | % | ||||||||||||
Maintenance, support and service |
15,045 | 19 | 11,305 | 21 | 3,740 | 33 | ||||||||||||||||||
Total revenue |
$ | 79,733 | 100 | % | $ | 53,336 | 100 | % | $ | 26,397 | 49 | % | ||||||||||||
Revenue by Geography: |
||||||||||||||||||||||||
United States and Canada |
$ | 45,950 | 58 | % | $ | 35,363 | 66 | % | $ | 10,587 | 30 | % | ||||||||||||
International |
33,783 | 42 | 17,973 | 34 | 15,810 | 88 | ||||||||||||||||||
Total revenue |
$ | 79,733 | 100 | % | $ | 53,336 | 100 | % | $ | 26,397 | 49 | % | ||||||||||||
Revenue by Sales Channel: |
||||||||||||||||||||||||
Direct |
$ | 32,282 | 40 | % | $ | 25,911 | 49 | % | $ | 6,371 | 25 | % | ||||||||||||
Indirect |
47,451 | 60 | 27,425 | 51 | 20,026 | 73 | ||||||||||||||||||
Total revenue |
$ | 79,733 | 100 | % | $ | 53,336 | 100 | % | $ | 26,397 | 49 | % | ||||||||||||
The $22.7 million increase in product revenue was primarily due to an increase in the number
of systems recognized as revenue, reflecting an increase in our customer base and customer demand.
This increase was partially offset by a decrease in the average selling price of our
systems due to changes in our product software configuration mix, including software upgrades, the
mix of system platforms purchased by our customers and the sales channels through which they are
sold. The product configuration, which reflects the mix of session capacity support for signaling
protocols and requested features, determines the prices for each system sold. Customers can license
our software in various configurations, depending on requirements for session capacity, feature
groups and protocols. The product software configuration mix has a direct impact on the average
selling price of a system sold or licensed. Systems with higher software content (higher session
capacity support for higher number of signaling protocols and a higher number of feature groups)
will generally have a higher average selling price than those systems sold or licensed with lower
software content. Our indirect sales channels generally have higher
discounts than our direct customers. The growth in product revenue was primarily due to our indirect sales channel
and, to a lesser extent, our direct sales channel. Indirect product revenues increased $17.7
million primarily due to a $12.7 million increase attributable to our international customers, as
well
as an increase of $5.0 million related to our customers in the United States and Canada.
Direct product revenues increased $4.9 million, primarily due to an increase of $3.3 million
attributable to customers in the United States and Canada, as well as an increase of $1.6 million
related to our international customers.
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Maintenance, support and service revenue increased by $3.7 million primarily due to increases
in maintenance and support fees associated with the growth of our installed product base and to a
lesser extent, fees associated with training and installation services.
Cost of Revenue and Gross Profit
Three Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Related | of Related | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Cost of Revenue: |
||||||||||||||||||||||||
Product |
$ | 11,367 | 18 | % | $ | 7,434 | 18 | % | $ | 3,933 | 53 | % | ||||||||||||
Maintenance, support and service |
2,525 | 17 | 2,140 | 19 | 385 | 18 | ||||||||||||||||||
Total cost of revenue |
$ | 13,892 | 17 | % | $ | 9,574 | 18 | % | $ | 4,318 | 45 | % | ||||||||||||
Gross Profit: |
||||||||||||||||||||||||
Product |
$ | 53,321 | 82 | % | $ | 34,597 | 82 | % | $ | 18,724 | 54 | % | ||||||||||||
Maintenance, support and service |
12,520 | 83 | 9,165 | 81 | 3,355 | 37 | ||||||||||||||||||
Total gross profit |
$ | 65,841 | 83 | % | $ | 43,762 | 82 | % | $ | 22,079 | 50 | % | ||||||||||||
The $3.9 million increase in cost of product revenue was primarily due to (a) a $3.9 million
increase in direct product costs resulting from an increase in the number of systems recognized as
revenue, (b) a $199,000 increase in salaries, wages and related benefits, (c) a $176,000 increase
in depreciation and amortization expense, and (d) a $117,000 increase in stock-based compensation
expense. These increases were partially offset by a decrease of $549,000 in other cost of sales.
The balance was due to increases in other manufacturing related costs.
The $385,000 increase in cost of maintenance, support and service revenue was primarily due to
(a) a $298,000 increase in salaries and related benefits corresponding to a 36% increase in
employee headcount for our services organization to support our rapidly growing customer base, (b)
a $248,000 increase in stock-based compensation expense, and (c) a $59,000 increase in travel and
entertainment expenses reflecting the afore mentioned increase in related headcount. These
increases were partially offset by a $329,000 decrease in costs associated with performance of our maintenance and warranty obligations. The balance was due to
increases in overhead and other related costs.
Product gross margin remained consistent.
The increase in product revenue was offset by a corresponding increase in related costs.
Gross margin on maintenance, support and service revenue increased by 2 percentage points,
primarily due to an increase in maintenance revenues associated with the growth in our installed
product base, and the timing of maintenance renewal orders received in the three months ended June
30, 2011, without a corresponding increase in related costs.
We expect cost of product, maintenance, support and service revenue each to increase at
approximately the same rate as the related revenue for the foreseeable future. As a result, we
expect that gross profit will increase, but that the related gross margin will remain relatively
consistent with historical rates for the foreseeable future.
Operating Expenses
Three Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Sales and marketing |
$ | 24,736 | 31 | % | $ | 16,623 | 31 | % | $ | 8,113 | 49 | % | ||||||||||||
Research and development |
12,719 | 16 | 8,646 | 16 | 4,073 | 47 | ||||||||||||||||||
General and administrative |
5,788 | 7 | 3,595 | 7 | 2,193 | 61 | ||||||||||||||||||
Total operating expenses |
$ | 43,243 | 54 | % | $ | 28,864 | 54 | % | $ | 14,379 | 50 | % | ||||||||||||
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The $8.1 million increase in sales and marketing expense was primarily due to (a) a $4.7
million increase in salaries, commissions, bonuses and other benefits associated with a 42%
increase in the number of sales and marketing personnel, (b) a $2.2 million increase in stock-based compensation expense, (c) a
$393,000 increase in travel and entertainment expenses reflecting the aforementioned increase in
related headcount, (d) a $238,000 increase in facility costs as a result of our move to a larger
facility in the second half of 2010, (e) a $238,000 increase in depreciation and amortization
expense due to capital expenditures for evaluation systems, (f) a $215,000 increase in third party
services, and (g) a $149,000 increase in expenditures associated with marketing programs, including
trade shows, The balance was due to increased overhead associated with increases in sales and
marketing personnel. We expect sales and marketing expense to continue to increase in absolute
dollars for the foreseeable future as we expand our sales force to continue to increase our revenue
and market share. However, we anticipate that sales and marketing expense will remain relatively consistent
as a percentage of total revenue for the foreseeable future.
The $4.1 million increase in research and development expense was primarily due to (a) a $2.1
million increase in salaries, bonuses and other benefits associated with a 42% increase in the
number of employees working on the design and development of new products and the enhancement of
existing products, quality assurance and testing (b) a $1.4 million increase in stock-based
compensation expense, (c) a $169,000 increase in facilities costs as a result of our move to a
larger facility in the second half of 2010, and (d) a $94,000 increase in software and other
maintenance fees. The addition of personnel and our continued investment in research and
development were driven by our strategy of maintaining our competitive position by expanding our
product offerings and enhancing our existing products to meet the requirements of our customers and
market. We expect research and development expense to increase in absolute dollars and will
modestly increase as a percentage of total revenue for the foreseeable future.
The $2.2 million increase in general and administrative expense was primarily due to (a) a
$753,000 increase in stock-based compensation expense, (b) a $529,000 increase in salaries, bonuses
and other benefits associated with a 50% increase in the number of employees, (c) a $409,000
increase in legal fees, (d) a $246,000 increase in software and other maintenance fees, (e)
$143,000 increase in depreciation expense , and (f) a $92,000 increase in insurance premiums. The
balance was due to increased facility and overhead costs as a result of our move to a larger
facility in 2010. We expect general and administrative expense to continue to increase in absolute
dollars as we invest in infrastructure to support continued growth and incur expenses related to
being a publicly traded company. However, we expect general and administrative expense will remain
relatively consistent as a percentage of total revenue for the foreseeable future.
Other (Expense) Income
Three Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest income |
$ | 103 | * | % | $ | 135 | * | % | $ | (32 | ) | (24 | )% | |||||||||||
Other (expense) income |
(299 | ) | * | 41 | * | (340 | ) | (829 | ) | |||||||||||||||
Total other (expense) income, net |
$ | (196 | ) | * | % | $ | 176 | * | % | $ | (372 | ) | (211 | )% | ||||||||||
* | Not meaningful |
Interest income consisted of interest income generated from the investment of our cash
balances. The decrease in interest income primarily reflected a decrease in the average interest
rates in the three months ended June 30, 2011, partially offset by an increase in the average cash
balance.
Other expense primarily consisted of foreign currency translation adjustments of our
international subsidiaries and sales consummated in foreign currencies. The increase in expense
from 2010 to 2011 primarily reflects fluctuations in the value of the Euro and British Pound.
Provision for Income Taxes
Three Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Provision for income taxes |
$ | 8,394 | 11 | % | $ | 5,345 | 10 | % | $ | 3,049 | 57 | % | ||||||||||||
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For the three months
ended June 30, 2011 and 2010, our effective tax rates were 37% and 35%,
respectively. The lower effective tax rate in 2010 was primarily attributable to higher state
investment tax credits due to significant qualifying fixed asset additions associated with the
build out of our corporate headquarters.
Comparison of Six Months Ended June 30, 2011 and 2010
Revenue
Six Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenue by Type: |
||||||||||||||||||||||||
Product |
$ | 124,430 | 81 | % | $ | 84,124 | 81 | % | $ | 40,306 | 48 | % | ||||||||||||
Maintenance, support and service |
29,270 | 19 | 20,262 | 19 | 9,008 | 44 | ||||||||||||||||||
Total revenue |
$ | 153,700 | 100 | % | $ | 104,386 | 100 | % | $ | 49,314 | 47 | % | ||||||||||||
Revenue by Geography: |
||||||||||||||||||||||||
United States and Canada |
$ | 90,552 | 59 | % | $ | 64,680 | 62 | % | $ | 25,872 | 40 | % | ||||||||||||
International |
63,148 | 41 | 39,706 | 38 | 23,442 | 59 | ||||||||||||||||||
Total revenue |
$ | 153,700 | 100 | % | $ | 104,386 | 100 | % | $ | 49,314 | 47 | % | ||||||||||||
Revenue by Sales Channel: |
||||||||||||||||||||||||
Direct |
$ | 69,731 | 45 | % | $ | 51,690 | 50 | % | $ | 18,041 | 35 | % | ||||||||||||
Indirect |
83,969 | 55 | 52,696 | 50 | 31,273 | 59 | ||||||||||||||||||
Total revenue |
$ | 153,700 | 100 | % | $ | 104,386 | 100 | % | $ | 49,314 | 47 | % | ||||||||||||
The $40.3 million increase in product revenue was primarily due to an increase in the number
of systems recognized as revenue, reflecting an increase in our customer base and customer demand.
This increase was partially offset by a decrease in the average selling price of our
systems due to changes in our product software configuration mix, including software upgrades, the
mix of system platforms purchased by our customers and the sales channels through which they are
sold. The product configuration, which reflects the mix of session capacity support for signaling
protocols and requested features, determines the prices for each system sold. Customers can license
our software in various configurations, depending on requirements for session capacity, feature
groups and protocols. The product software configuration mix has a direct impact on the average
selling price of a system sold. Systems with higher software content (higher session capacity
support for higher number of signaling protocols 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 indirect sales channel and, to a lesser
extent, our direct sales channel. Indirect product revenues increased $25.8 million primarily due
to a $16.5 million increase attributable to our international customers, as well as an increase of
$9.3 million related to our customers in the United States and Canada. Direct product revenues
increased $14.5 million, primarily due to an increase of $11.3 million attributable to customers in
the United States and Canada, as well as an increase of $3.2 million related to our international
customers.
Maintenance, support and
service revenue increased by $9.0 million primarily due to increases
in maintenance and support fees associated with the growth of our installed product base and, to a
lesser extent, fees associated with training and installation services.
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Cost of Revenue and Gross Profit
Six Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Related | of Related | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Cost of Revenue: |
||||||||||||||||||||||||
Product |
$ | 21,312 | 17 | % | $ | 14,983 | 18 | % | $ | 6,329 | 42 | % | ||||||||||||
Maintenance, support and service |
5,531 | 19 | 4,408 | 22 | 1,123 | 25 | ||||||||||||||||||
Total cost of revenue |
$ | 26,843 | 17 | % | $ | 19,391 | 19 | % | $ | 7,452 | 38 | % | ||||||||||||
Gross Profit: |
||||||||||||||||||||||||
Product |
$ | 103,118 | 83 | % | $ | 69,141 | 82 | % | $ | 33,977 | 49 | % | ||||||||||||
Maintenance, support and service |
23,739 | 81 | 15,854 | 78 | 7,885 | 50 | ||||||||||||||||||
Total gross profit |
$ | 126,857 | 83 | % | $ | 84,995 | 81 | % | $ | 41,862 | 49 | % | ||||||||||||
The $6.3 million increase in cost of product revenue was primarily due to (a) a $6.3 million
increase in direct product costs resulting from an increase in the number of systems recognized as
revenue, (b) a $296,000 increase in salaries, wages and related benefits, (c) a $190,000 increase
in depreciation and amortization expense, and (d) a $173,000 increase in stock-based compensation
expense. These increases were partially offset by decreases of $539,000 in other cost of sales and
a $101,000 decrease in manufacturing supplies. The balance was due to decreases in other
manufacturing related costs.
The $1.1 million increase in cost of maintenance, support and service revenue was primarily
due to (a) a $724,000 increase in salaries and related benefits corresponding to a 36% increase in
employee headcount for our services organization to support our rapidly growing customer base, (b)
a $415,000 increase in stock-based compensation expense, (c) a $119,000 increase in facilities
costs as a result of our move to a larger facility in the second half of 2010, and (d) an $88,000
increase in travel and entertainment expenses reflecting the afore-mentioned increase in related
headcount. These increases were partially offset by a $273,000 decrease in costs associated with performance of our maintenance and warranty obligations. The
balance was due to increases in overhead and other related costs.
Product gross margin increased 1 percentage
point primarily due to an increase in the number
of units recognized as revenue in 2011 compared to 2010, which resulted in fixed manufacturing
costs being absorbed by a higher product volume base.
Gross margin on maintenance, support and service revenue increased by 3 percentage points,
primarily due to an increase in maintenance revenues associated with the growth in our installed
product base, and the timing of maintenance renewal orders received in 2011, without a corresponding increase in related costs.
Operating Expenses
Six Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Sales and marketing |
$ | 48,439 | 31 | % | $ | 33,050 | 32 | % | $ | 15,389 | 47 | % | ||||||||||||
Research and development |
24,013 | 16 | 17,339 | 17 | 6,674 | 38 | ||||||||||||||||||
General and administrative |
10,365 | 7 | 6,879 | 6 | 3,486 | 51 | ||||||||||||||||||
Merger and integration-related costs |
180 | * | | | 180 | * | ||||||||||||||||||
Total operating expenses |
$ | 82,997 | 54 | % | $ | 57,268 | 55 | % | $ | 25,729 | 45 | % | ||||||||||||
* | Not meaningful |
The $15.4 million increase in sales and marketing expense was primarily due to (a) a $8.7
million increase in salaries, commissions, bonuses and other benefits associated with a 42%
increase in the number of sales and marketing personnel, (b) a $3.9 million increase in stock-based compensation expense, (c) a $1.0
million increase in travel and entertainment expenses reflecting the afore mentioned increase in
related headcount, (d) a $484,000 increase in facility costs as a result of our move to a larger
facility in the second half of 2010, (e) a $372,000 increase in depreciation and amortization
expense due to capital expenditures for evaluation systems, (f) a $329,000 increase in third party
services, (g) a $316,000 increase in expenditures associated with marketing programs, including
trade shows, and (h) $148,000 increase in software and other maintenance fees. The balance was due
to increased overhead associated with increases in sales and marketing personnel.
The $6.7 million increase in research and development expense was primarily due to (a) a $3.6
million increase in salaries, bonuses and other benefits associated with a 42% increase in the
number of employees working on the design and development of new products and the enhancement of
existing products, quality assurance and testing (b) an $2.2 million increase in stock-based
compensation expense, (c) a $375,000 increase in facilities costs as a result of our move to a
larger facility in the second half of 2010, and (d) a $140,000 increase in software and other
maintenance fees. The addition of personnel and our continued investment in
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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.
The $3.5 million increase in general and administrative expense was primarily due to (a) a
$1.2 million increase in stock-based compensation expense, (b) a $861,000 increase in salaries,
bonuses and other benefits associated with a 50% increase in related headcount, (c) a
$446,000 increase in legal and professional fees, (d) a $395,000 increase in software and other maintenance fees,
(e) a $180,000 increase in insurance premiums, and (f) a $135,000 increase in depreciation expense.
The balance was due to increased facility and overhead costs as a result of our move to a larger
facility in the second half of 2010.
During the first half of 2011, we incurred $180,000 of merger and integration-related costs
associated with our acquisition of Newfound Communications, Inc., or Newfound Communications, which
closed on January 20, 2011. Newfound Communications operations were not material to our condensed
consolidated financial statements in the first half of 2011.
Other (Expense) Income
Six Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
of Total | of Total | Period-to-Period Change | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest income |
$ | 313 | * | % | $ | 240 | * | % | $ | 73 | 30 | % | ||||||||||||
Other expense |
(407 | ) | * | (75 | ) | * | (332 | ) | 443 | |||||||||||||||
Total other (expense) income, net |
$ | (94 | ) | * | % | $ | 165 | * | % | $ | (259 | ) | (157 | )% | ||||||||||
* | Not meaningful |
Interest income consisted of interest income generated from the investment of our cash
balances. The increase in interest income primarily reflected an increase in the average cash
balance, partially offset by lower average interest rates in the six months ended June 30, 2011.
Other expense primarily consisted of foreign currency translation adjustments of our
international subsidiaries and sales consummated in foreign currencies. The increase in expense
from the first six months of 2010 to 2011 primarily reflects fluctuations in the value of the Euro
and British Pound.
Provision for Income Taxes
Six Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percentage | Percentage | Period-to-Period Change | ||||||||||||||||||||||
of Total | of Total | |||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | Percentage | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Provision for income taxes |
$ | 16,049 | 10 | % | $ | 2,578 | 2 | % | $ | 13,471 | 523 | % | ||||||||||||
For the six months ended June 30, 2011 and 2010, our effective tax rates were 37% and 35%,
respectively The lower effective tax rate in 2010 was primarily attributable to higher state
investment tax credits due to significant qualifying fixed asset additions associated with the
build out of our corporate headquarters.
Liquidity and Capital Resources
Resources
Since 2005, we have funded our operations primarily with the growth in our operating cash
flows and more recently, we have supplemented our cash flows from the exercise of stock options. In
October 2006, we completed an initial public offering, or IPO, and raised $83.2 million in net
proceeds after deducting underwriting discounts and commissions. To date we have not used nor
designated any of the proceeds from our IPO.
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Key measures of our liquidity are as follows:
As of and | ||||||||
As of and for | for the | |||||||
the six | year | |||||||
months ended | ended | |||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Cash and cash equivalents |
$ | 120,571 | $ | 91,669 | ||||
Short and long-term investments |
197,855 | 184,054 | ||||||
Accounts receivable, net |
53,520 | 34,797 | ||||||
Working capital |
349,560 | 278,960 | ||||||
Cash provided by operating activities |
20,205 | 55,119 | ||||||
Cash used in investing activities |
25,002 | 114,767 | ||||||
Cash provided by financing activities |
33,699 | 60,846 |
Cash, cash equivalents, short and long-term investments. Our cash and cash equivalents at June
30, 2011 were invested primarily in high quality securities and are not materially affected by
fluctuations in interest rates. Our short and long-term investments consist of high quality
government treasuries and bonds. 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 $82,000 and $837,000 at June 30, 2011 and December 31, 2010, respectively, 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 Bedford, Massachusetts as
of December 31, 2010 and our sales office in Madrid, Spain as of June 30, 2011 and December 31,
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 shipments and related invoicing activity, cash collections, and changes in our
allowance for doubtful accounts. In some situations we receive a cash payment from a customer prior
to the time we are able to recognize revenue on a transaction. We record these payments as deferred
revenue, which has a positive effect on our accounts receivable balances. We use days sales
outstanding, or DSO, calculated on a quarterly basis, as a measurement of the quality and status of
our receivables. We define DSO as (a) accounts receivable, net of allowance for doubtful accounts,
divided by (b) total revenue for the most recent quarter, multiplied by (c) 90 days. DSO was 60
days at June 30, 2011 and 45 days at December 31, 2010. The increase in DSO at June 30, 2011 was
primarily due to the overall increase in revenue and timing of shipments during the three months ended June
30, 2011.
Operating activities. Cash provided by operating activities primarily consists of net income
adjusted for certain non-cash items including depreciation and amortization, impairment losses on
property and equipment, 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 six months ended June 30, 2011 was $20.2 million and consisted of (a) $27.7
million of net income, (b) non-cash deductions of $777,000 consisting primarily of $15.3 million of
stock-based compensation, $4.3 million of depreciation and amortization, $517,000 in amortization
of premium/discount on investments and $103,000 in provisions for bad debts partially offset by a
deduction of $19.4 million related to the tax savings from the exercise, by employees, of stock
options and (c) $8.3 million used in working capital and other activities. Cash used in working
capital and other activities primarily reflected uses associated with increases of $18.8 million in
accounts receivable, $3.1 million in inventory and $1.7 million in other assets, partially offset
by provisions associated with a $10.2 million increase in accrued expenses and other liabilities, a $2.5 million
decrease in deferred product costs, a $1.3 million increase in deferred revenues, and a $1.2 million
increase in accounts payable.
Investing activities. Cash used in investing activities during the six months ended June 30,
2011 was $25.0 million, which included $219.0 million in purchases of marketable securities, $7.2
million in purchases of property and equipment and $4.2 million in cash paid for the acquisition of
Newfound Communications, all partially offset by proceeds of $204.7 million from the maturities and
sales
of marketable securities and $755,000 from the refund of the security deposit on the lease of
our corporate headquarters as part of the signed lease amendment.
Financing activities. Net cash provided by financing activities included proceeds from the
exercise of common stock options in the amount of $14.3 million during the six months ended June
30, 2011 and $19.4 million of excess tax benefits from the exercise of stock options.
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Anticipated cash flows. We believe our existing cash, cash equivalents and short and long-term
investments and our cash flow from operating activities will be sufficient to meet our anticipated
cash needs for at least the next twelve months. Our future working capital requirements will depend
on many factors, including the rate of our revenue growth, our introduction of new products and
enhancements, and our expansion of sales, marketing and product development activities. To the
extent that our cash, cash equivalents, short and long-term investments and cash flow from
operating activities are insufficient to fund our future activities, we may need to raise
additional funds through bank credit arrangements or public or private equity or debt financings.
We also may need to raise additional funds in the event we determine in the future to effect one or
more acquisitions of businesses, technologies and products that will complement our existing
operations. In the event additional funding is required, and given the current condition of the
global financial markets, we may not be able to obtain bank credit arrangements or affect an equity
or debt financing on terms acceptable to us or at all.
Requirements
Capital expenditures. We have made capital expenditures primarily for equipment to support
product development, evaluation systems for sales opportunities, improvements to our leased
corporate headquarters in Bedford, Massachusetts and other general purposes to support our growth.
Our capital expenditures totaled $7.2 million in the six months ended June 30, 2011. We estimate
capital expenditures of $7.0 $9.0 million in the remainder of 2011.
Contractual obligations and requirements. Our only significant contractual obligations relate
to the lease of our corporate headquarters in Bedford, Massachusetts to which we relocated in July
2010 and our office facilities in Madrid, Spain.
On June 10, 2011 we entered into a Second Amendment to
Lease, or the Second Lease Amendment dated as of
June 10, 2011 with MSCP Crosby, LLC, or the Landlord, to expand the premises leased by
us, extend the term of the lease, dated as of November 23, 2009, or the Original Lease, and to make
other modifications to the terms and conditions of the Original Lease, as amended by the First
Amendment to Lease, or the First Lease Amendment, entered into by us and Landlord on and dated as
of July 12, 2010.
The premises leased
pursuant to the Original Lease consisted of 123,788 rentable
square feet of space in the building located at 100 Crosby Drive, Bedford, Massachusetts. We leased
an additional 27,161 rentable square feet of space in the Building pursuant to the First Lease
Amendment. The Second Lease Amendment expands the premises leased by us from the Landlord to 261,961 rentable square feet.
The Term of the Original
Lease is extended by the Second Lease Amendment for six years expiring on March 31, 2022. We have two options to extend the term
of the lease each for an additional period of five years, with the first extension term commencing,
if at all, immediately following the expiration of the term of the Original Lease, as amended, and
the second extension term commencing, if at all, immediately following the expiration of the first
extension term.
Pursuant to the Original Lease, as amended by the First and Second Lease Amendments, our
monthly base rent as of April 1, 2012 will be $245,292 and we are required to pay additional
monthly rent in an amount equal to the our proportionate share of certain taxes and operating
expenses, as further set forth in the Second Lease Amendment. Commencing on July 1, 2012, our
monthly base rent will be $448,814. Our monthly base rent shall be increased from time to time, as
further set forth in Section 4.3 of the Second Lease Amendment.
Off-Balance-Sheet Arrangements
As of June 30, 2011, 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
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international subsidiaries are remeasured into U.S. dollars using the exchange rates in
effect at the balance sheet date. Revenue and expenses of these international subsidiaries are
remeasured into U.S. dollars at the average rates in effect during the applicable period. Any
differences resulting from the remeasurement 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 June 30, 2011, our foreign exchange
exposure would have fluctuated by approximately $575,000.
Interest Rate Risk
At June 30, 2011, we had unrestricted cash, cash equivalents and short and long-term
investments totaling $318.4 million. These amounts were invested primarily in high quality
securities of a short duration and are not materially affected by fluctuations in interest rates.
The cash and cash equivalents are held for working capital purposes. We do not enter into
investments for trading or speculative purposes. Due to the short nature of our short-term
investments and low current market yields of our long-term investments, we believe that we do not
have any material exposure to changes in the fair value of our investment portfolio as a result of
changes in interest rates. Declines in interest rates, however, would reduce future interest
income.
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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 June 30, 2011. 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 June 30,
2011, 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 June 30, 2011 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 16 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 June 30, 2011,
we had approximately 150 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 60% and 51% of our total revenue in the three months
ended June 30, 2011 and 2010, respectively, and 55% and 50% in the six months ended June 30, 2011
and 2010, respectively. Two distribution partners accounted for 27% and one for 10%, of our
accounts receivable as of June 30, 2011 and December 31, 2010, respectively. Given the current
global economic conditions, there is a risk that one or more of our distribution partners could
cease operations. Although we have entered into contracts with each of our distribution partners,
our contractual arrangements are not exclusive and do not obligate our distribution partners to
order, purchase or distribute any fixed or minimum quantities of our products. Accordingly, our
distribution partners, at their sole discretion, may choose to purchase solutions from our
competitors rather than from us. Under our contracts with our distribution partners, generally
products are ordered from us by the submission of purchase orders that describe, among other
things, the type and quantities of our products desired, delivery date and terms applicable to the
ordered products. Accordingly, our ability to sell our products and generate significant revenue
through our distribution partners is highly dependent on the continued desire and willingness of
our distribution partners to purchase and distribute our products and on the continued cooperation
between us and our distribution partners. Some of our distribution partners may develop competitive
products in the future or may already have other product offerings that they may choose to offer
and support in lieu of our products. Divergence in strategy, change in focus, competitive product
offerings, potential contract defaults, and changes in ownership or management of a distribution
partner may interfere with our ability to market, license, implement or support our products with
that party, which in turn may have a material adverse effect on our consolidated financial
position, results of operations or cash flows. Some of our competitors may have stronger
relationships with our distribution partners than we do, and we have limited control, if any, as to
whether those partners implement our products rather than our competitors products or whether they
devote resources to market and support our competitors products rather than our offerings.
Moreover, if we are unable to leverage our sales, support and services resources through our
distribution partner relationships, we may need to hire and train additional qualified sales,
support and services personnel. We cannot assure you, 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 release our products on a timely basis.
Even if we are successful in hiring additional qualified sales, support and services personnel, we
will incur additional costs and our operating results, including our gross margin, may have a
material adverse effect on our consolidated financial position, results of operations or cash
flows.
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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 and three customers accounted for 12% and 35% of our total revenue in the
three months ended June 30, 2011 and 2010, respectively, and two such customers accounted for 21%
of our total revenue in the six months ended June 30, 2010. 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.
U.S. and global political, credit and
financial market conditions may negatively impact or impair
the value of our current portfolio of cash, cash equivalents and investments, including U.S. Treasury securities
and U.S.-backed investment vehicles.
Our cash, cash equivalents and
investments are held in a variety of interest-bearing instruments,
including U.S. treasury securities. As a result of the uncertain domestic and global political, credit
and financial market conditions, investments in these types of financial instruments pose risks arising
from liquidity and credit concerns. Given that future deterioration in the U.S. and global credit and
financial markets is a possibility, no assurance can be made that losses or significant deterioration
in the fair value of our cash, cash equivalents, or investments will not occur. For example, Moodys
Investors Service recently placed the United States on review for a possible downgrade of the U.S.s
AAA-rating to account for the growing risk that U.S. lawmakers fail to raise the debt ceiling and/or
reduce its overall deficit. Such a downgrade could impact the stability of future U.S. treasury auctions
and affect the trading market for U.S. government securities. Uncertainty surrounding U.S. congressional
approval of increases to the federal debt ceiling similarly could impact the trading market for U.S. government
securities or impair the U.S. governments ability to satisfy its obligations under such treasury securities.
These factors could impact the liquidity or valuation of our current portfolio of cash, cash equivalents,
and investments, a substantial portion of which were invested in U.S. treasury securities as of June 30, 2011.
If any such losses or significant deteriorations occur, it may negatively impact or impair our current portfolio
of cash, cash equivalents, and investments, which may affect our ability to fund future obligations. Further,
unless and until the current U.S. and global political, credit and financial market crisis has been sufficiently
resolved, it may be difficult for us to liquidate our investments prior to their maturity without incurring a loss,
which would have a material adverse effect on our consolidated financial position, results of operations or cash flows.
If we are unable to manage our growth and expand our operations successfully, our business and
operating results will be harmed and our reputation may be damaged.
We continued to expand our operations in 2010 and the first six months of 2011. For example,
during the period from January 1, 2010 through June 30, 2011, we increased the number of our
employees and full-time independent contractors by 58%, from 450 to 710. 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 laws for each of
these new locations. In addition, our total operating expenses increased by 18% in 2008, 23% in
2009, 30% in 2010 and for the six months ended June 30, 2011 were 45% higher than for the six
months ended June 30, 2010. We anticipate that further expansion of our infrastructure and
headcount will be required to achieve planned expansion of our product offerings, projected
increases in our customer base and anticipated growth in the number of product deployments. Our
rapid growth has placed, and will continue to place, a significant strain on our administrative and
operational infrastructure. Our ability to manage our operations and growth, especially during the
present macroeconomic crisis, and across multiple countries, will require us to continue to refine
our operational, financial and management controls, human resource policies, and reporting systems
and processes.
We may not be able to implement improvements to our management information and control systems
in an efficient or timely manner and may discover deficiencies in existing systems and controls. If
we are unable to manage future expansion, our ability to provide high quality products and services
could be harmed, which would damage our reputation and brand and may have a material adverse effect
on our consolidated financial position, results of operations or cash flows.
Over the long-term we intend to increase our investment in engineering, sales, marketing, service,
manufacturing and administration activities, and these investments may achieve delayed, or lower
than expected benefits, which could harm our operating results.
Over the long-term, we intend to continue to add personnel and other resources to our
engineering, sales, marketing, service, manufacturing and administrative functions as we focus on
developing emerging technologies, the next wave of advanced technologies, capitalizing on our
emerging market opportunities, enhancing our evolving support model and increasing our market share
gains. We are likely to recognize the costs associated with these investments earlier than some of
the anticipated benefits and the return on these investments may be lower, or may develop more
slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if
the achievement of these benefits is delayed, our consolidated financial position, results of
operations or cash flows may be adversely affected.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Sales of Unregistered Securities |
None.
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(b) Use of Proceeds from Public Offering of Common Stock |
In October 2006, we completed an initial public offering, or IPO, of our common stock pursuant
to a registration statement on Form S-1 (Registration No. 333-134683) which the Securities and
Exchange Commission, or SEC, declared effective on October 12, 2006. In connection with the IPO, we
sold and issued 9.7 million shares of our common stock, including 1.7 million shares sold by us
pursuant to the underwriters full exercise of their option, and another additional 3.5 million
shares of our common stock were sold by our selling stockholders. The offering did not terminate
until after the sale of all of the shares registered in the registration statement. All of the
shares of common stock registered pursuant to the registration statement, including the shares sold
by the selling shareholders, were sold at a price to the public of $9.50 per share. The managing
underwriters were Goldman, Sachs & Co., JPMorgan, Credit Suisse 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 to any of
our other affiliates.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Removed and Reserved.
ITEM 5. Other Information.
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 09781345)). | |
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 061103177)). | |
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 071299246)). | |
10.1
|
Acme Packet, Inc. 2011 Employee Stock Purchase Plan (incorporated by reference to the Registrants Current Report on Form 8-K filed on May 11, 2011 (Commission File No. 001-33041 11832370)). | |
10.2
|
Second Amendment to Lease between MSCP Crosby, LLC and Acme Packet, Inc. dated as of June 10, 2011 (incorporated by reference to the Registrants Current Report on Form 8-K filed on June 16, 2011 (Commission File No. 001-33041 11914089)). | |
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. | |
101
|
The following materials from Acme Packet, Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, |
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Exhibit No. | Description | |
(ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Cash Flow, and (iv) Notes to Condensed Consolidated Financial Statements, furnished herewith.* |
* | The Company will be furnishing Exhibit 101 within 30 days of the filing date of this Form 10-Q, as allowed under the rules of the Securities and Exchange Commission. |
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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: July 21, 2011 | By: | /s/ Andrew D. Ory | ||
Andrew D. Ory | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: July 21, 2011 | By: | /s/ Peter J. Minihane | ||
Peter J. Minihane | ||||
Chief Financial Officer and Treasurer (Principal Financial Officer) |
||||
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