10-Q 1 sncr-20140630x10q.htm 10-Q 353c195680c944d

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

 

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 For the quarterly period ended June 30, 2014

or

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 For the transition period from             to

 

Commission file number 000-52049

SYNCHRONOSS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Delaware

 

06-1594540

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

200 Crossing Boulevard, 8th Floor

Bridgewater, New Jersey

 

08807

(Address of principal executive offices)

 

(Zip Code)

 

(866) 620-3940

(Registrant’s 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. Yes  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

Shares outstanding of the Registrant’s common stock:

 

 

 

 

 

 

 

 

 

 

 

 

Class

 

Outstanding at July 25, 2014

Common stock, $0.0001 par value

 

41,838,908

 

 

 

 

 

 

 

 


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

FORM 10-Q INDEX

 

 

 

 

PART I.

FINANCIAL INFORMATION

PAGE NO.

 

 

 

Item 1.

Consolidated Financial Statements and Notes

 

 

 

 

 

Consolidated Balance Sheets (unaudited)

2

 

 

 

 

Consolidated Statements of Income and Comprehensive Income (unaudited) 

3

 

 

 

 

Consolidated Statements of Cash Flows (unaudited)

4

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

5

 

 

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

20

 

 

 

Item 4. 

Controls and Procedures

21

 

 

 

 

 

 

PART II. 

OTHER INFORMATION

21

 

 

 

Item 1. 

Legal Proceedings

21

 

 

 

Item 1A. 

Risk Factors

22

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

22

 

 

 

Item 3. 

Defaults Upon Senior Securities

22

 

 

 

Item 4. 

Mine Safety Disclosures

22

 

 

 

Item 5. 

Other Information

22

 

 

 

Item 6. 

Exhibits

23

 

 

 

SIGNATURES 

24

 

 

 

 

1


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

June 30, 2014

    

December 31, 2013

 

 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

66,940 

 

$

63,512 

Marketable securities

 

13,540 

 

 

9,105 

Accounts receivable, net of allowance for doubtful accounts of $321 and $237 at June 30, 2014 and December 31, 2013, respectively

 

86,681 

 

 

64,933 

Prepaid expenses and other assets

 

24,705 

 

 

19,451 

Deferred tax assets

 

3,780 

 

 

4,626 

Total current assets

 

195,646 

 

 

161,627 

Marketable securities

 

3,582 

 

 

4,988 

Property and equipment, net

 

102,696 

 

 

106,106 

Goodwill

 

140,282 

 

 

137,743 

Intangible assets, net

 

99,808 

 

 

101,963 

Deferred tax assets

 

4,150 

 

 

4,210 

Other assets

 

9,413 

 

 

10,382 

Total assets

$

555,577 

 

$

527,019 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

 

 

 

 

 

Accounts payable

$

7,976 

 

$

9,528 

Accrued expenses

 

29,264 

 

 

37,919 

Deferred revenues

 

12,279 

 

 

15,372 

Contingent consideration obligation

 

6,616 

 

 

22 

Total current liabilities

 

56,135 

 

 

62,841 

Lease financing obligation - long term

 

9,258 

 

 

9,252 

Contingent consideration obligation - long-term

 

 —

 

 

4,468 

Other liabilities

 

3,577 

 

 

2,819 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000 shares authorized, 0 shares issued and outstanding at June 30, 2014 and December 31, 2013

 

 —

 

 

 —

Common stock, $0.0001 par value; 100,000 shares authorized, 45,565 and 44,456 shares issued; 41,798 and 40,663 outstanding at  June 30, 2014 and December 31, 2013, respectively

 

 

 

Treasury stock, at cost (3,767 and 3,793 shares at June 30, 2014 and December 31, 2013, respectively)

 

(66,770)

 

 

(67,104)

Additional paid-in capital

 

415,827 

 

 

393,644 

Accumulated other comprehensive loss

 

(221)

 

 

(723)

Retained earnings

 

137,767 

 

 

121,818 

Total stockholders’ equity

 

486,607 

 

 

447,639 

Total liabilities and stockholders’ equity

$

555,577 

 

$

527,019 

 

 

See accompanying notes to consolidated financial statements.

2


 

SYNCHRONOSS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

    

2014

 

2013

    

2014

    

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

103,451 

 

$

83,848 

 

$

201,928 

 

$

162,124 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services*

 

 

41,290 

 

 

35,527 

 

 

81,269 

 

 

67,658 

Research and development

 

 

17,305 

 

 

16,358 

 

 

32,845 

 

 

33,076 

Selling, general and administrative

 

 

17,149 

 

 

14,943 

 

 

34,274 

 

 

29,595 

Net change in contingent consideration obligation

 

 

115 

 

 

1,743 

 

 

1,326 

 

 

2,176 

Restructuring charges

 

 

 —

 

 

 —

 

 

 —

 

 

5,172 

Depreciation and amortization

 

 

13,758 

 

 

9,610 

 

 

26,024 

 

 

18,579 

Total costs and expenses

 

 

89,617 

 

 

78,181 

 

 

175,738 

 

 

156,256 

Income from operations

 

 

13,834 

 

 

5,667 

 

 

26,190 

 

 

5,868 

Interest income

 

 

62 

 

 

197 

 

 

111 

 

 

283 

Interest expense

 

 

(279)

 

 

(247)

 

 

(699)

 

 

(479)

Other income

 

 

256 

 

 

301 

 

 

1,052 

 

 

43 

Income before income tax expense

 

 

13,873 

 

 

5,918 

 

 

26,654 

 

 

5,715 

Income tax expense

 

 

(5,509)

 

 

(2,506)

 

 

(10,705)

 

 

(1,827)

Net income

 

$

8,364 

 

$

3,412 

 

$

15,949 

 

$

3,888 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.21 

 

$

0.09 

 

$

0.40 

 

$

0.10 

Diluted

 

$

0.20 

 

$

0.09 

 

$

0.39 

 

$

0.10 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

40,139 

 

 

38,551 

 

 

39,961 

 

 

38,368 

Diluted

 

 

40,978 

 

 

39,523 

 

 

40,878 

 

 

39,367 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

7,867 

 

$

(795)

 

$

16,451 

 

$

(2,796)

 

 

 

 

 

*  

Cost of services excludes depreciation and amortization which is shown separately.

 

 

 

 

 

See accompanying notes to consolidated financial statements

3


 

SYNCHRONOSS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

    

2014

    

2013

Operating activities:

 

 

 

 

 

 

Net income

 

$

15,949 

 

$

3,888 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

26,024 

 

 

18,579 

Loss on disposal of asset

 

 

 —

 

 

32 

Amortization of bond premium

 

 

166 

 

 

149 

Deferred income taxes

 

 

2,128 

 

 

(1,137)

Non-cash interest on leased facility

 

 

460 

 

 

462 

Stock-based compensation

 

 

12,682 

 

 

11,040 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

 

(21,806)

 

 

985 

Prepaid expenses and other current assets

 

 

(3,913)

 

 

807 

Other assets

 

 

933 

 

 

(444)

Accounts payable

 

 

(2,220)

 

 

3,364 

Accrued expenses

 

 

(10,095)

 

 

(8,658)

Contingent consideration obligation

 

 

2,127 

 

 

2,672 

Excess tax benefit from the exercise of stock options

 

 

(1,224)

 

 

 —

Other liabilities

 

 

1,152 

 

 

511 

Deferred revenues

 

 

(3,160)

 

 

1,082 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

19,203 

 

 

33,332 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

Purchases of fixed assets

 

 

(15,672)

 

 

(37,728)

Purchases of marketable securities available-for-sale

 

 

(4,070)

 

 

(3,496)

Maturities of marketable securities available-for-sale

 

 

880 

 

 

9,391 

Business acquired, net of cash

 

 

(6,322)

 

 

 —

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(25,184)

 

 

(31,833)

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

7,870 

 

 

10,630 

Excess tax benefit from the exercise of stock options

 

 

1,224 

 

 

 —

Proceeds from the sale of treasury stock in connection with an employee stock purchase plan

 

 

740 

 

 

670 

Repayments of capital obligations

 

 

(618)

 

 

(910)

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

9,216 

 

 

10,390 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

193 

 

 

(1,713)

Net increase in cash and cash equivalents

 

 

3,428 

 

 

10,176 

Cash and cash equivalents at beginning of period

 

 

63,512 

 

 

36,028 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

66,940 

 

$

46,204 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid for income taxes

 

$

10,275 

 

$

1,047 

 

See accompanying notes to consolidated financial statements.

4


 

The consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods. They do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the consolidated financial statements and notes in the Annual Report of Synchronoss Technologies, Inc. incorporated by reference in the Company's annual report on Form 10-K for the year ended December 31, 2013.  The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. The Company has no unconsolidated subsidiaries or investments accounted for under the equity method. The results reported in these consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year. The balance sheet at December 31, 2013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. 

1. Description of Business

 

Synchronoss Technologies, Inc. (the "Company" or "Synchronoss") is a mobile innovation company that provides cloud solutions and software-based activation for connected devices globally.  Such services include intelligent connectivity management and content synchronization, backup and sharing, as well as device and service procurement, provisioning, activation, support, that enable communications service providers (“CSPs”), cable operators/multi-services operators (“MSOs”), original equipment manufacturers (“OEMs”) with embedded connectivity (e.g. smartphones, laptops, tablets and mobile Internet devices, such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers and other customers to accelerate and monetize their go-to-market strategies for connected devices. This includes automating subscriber activation, order management, upgrades, service provisioning and connectivity and content management from any sales channel to any communication service (wireless or wireline), across any connected device type and managing the content transfer, synchronization and share.  The Company’s global solutions touch all aspects of connected devices on the mobile Internet. 

 

The Company’s Synchronoss Personal Cloud™ solution targets individual consumers while the Synchronoss WorkSpace™ solution focuses on providing a secure, integrated file sharing and collaboration solution for small and medium businesses.  In addition, the Company’s Integrated Life™ platform is specifically designed to power the activation of the devices and technologies that seamlessly connect today’s consumer and leverage the Company’s cloud assets to manage these devices and contents associated with them. The Integrated Life™ platform enables Synchronoss to drive a natural extension of its mobile activations and cloud services with leading wireless networks around the world to link other non-traditional devices (i.e., automobiles, wearables for personal health and wellness, and connected homes).

 

The Company’s Activation Services, Synchronoss Personal Cloud™, Synchronoss WorkSpace™, and Synchronoss Integrated Life™ platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services, or devices and “back-office” infrastructure-related systems and processes. The Company’s customers rely on Synchronoss’ solutions and technology to automate the process of activation and content and settings management for their customers’ devices while delivering additional communication services. The Synchronoss Integrated Life™ platform brings together the capabilities of device/service activation with content and settings management to provide a seamless experience of activating and managing non-traditional devices. The Company’s platforms also support automated customer care processes through use of accurate and effective speech processing technology and enable the Company’s customers to offer their subscribers the ability to store in and retrieve from the Cloud their personal and work content and data to their connected mobile devices, such as personal computers, smartphones and tablets. The Company’s platforms are designed to be carrier-grade, high availability, flexible and scalable to enable multiple converged communication services to be managed across multiple distribution channels, including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets, allowing Synchronoss to meet the rapidly changing and converging services and connected devices offered by the Company’s customers. The Company enables its customers to acquire, retain and service subscribers quickly, reliably and cost-effectively by enabling backup, restore, synchronization and sharing of subscriber content.  Through the use of the Company’s platforms, customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and social media and enterprise-wide sharing/collaboration connected devices and contents from these devices and associated services. The extensibility, scalability, reliability and relevance of the Company’s platforms enable new revenue streams and retention opportunities for customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud, while optimizing their cost of operations and enhancing customer experience. The Company currently operates in and markets its solutions and services directly through its sales organizations in North America, Europe and Asia-Pacific.

 

5


 

The Company’s industry-leading customers include Tier 1 mobile service providers such as AT&T Inc., Verizon Wireless, Vodafone, Orange, Sprint, Telstra and U.S. Cellular, Tier 1 cable operators/MSOs and wireline operators like AT&T Inc., Comcast, Cablevision, Charter, CenturyLink, Mediacom and Level 3 Communications and large OEMs such as Apple and Ericsson. These customers utilize the Company’s platforms, technology and services to service both consumer and business customers.

 

2. Basis of Presentation and Consolidation

 

For further information about the Company’s basis of presentation and consolidation or its significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

 

Impact of Recently Issued Accounting Standards

 

In May 2014, The Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) (collectively, the “Boards”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under US GAAP and IFRS. The standard’s core principle (issued as ASU 2014-09 by the FASB and as IFRS 15 by the IASB), is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The effective date is fiscal years beginning after December 15, 2016. Early application is not permitted. The Company is currently evaluating the methods of adoption and the impact that this ASU will have on its financial statements.

 

3. Earnings per Common Share

 

Basic earnings per share is calculated by using the weighted-average number of common shares outstanding during the period. The diluted earnings per share calculation is based on the weighted-average number of shares of common stock outstanding adjusted for the number of additional shares that would have been outstanding had all potentially dilutive common shares been issued. Potentially dilutive shares of common stock include stock options and non-vested share awards.  The dilutive effects of stock options and restricted stock awards are based on the treasury stock method.  The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share. Stock options that are anti-dilutive and excluded from the following table totaled 1,508 and 1,477 for the three months ended June 30, 2014 and 2013, respectively, and 1,329 and 1,434 for the six months ended June 30, 2014 and 2013, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

8,364 

    

$

3,412 

 

$

15,949 

 

$

3,888 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — basic

 

 

40,139 

 

 

38,551 

 

 

39,961 

 

 

38,368 

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Options and unvested restricted shares

 

 

839 

 

 

972 

 

 

917 

 

 

999 

 

Weighted average common shares outstanding — diluted

 

 

40,978 

 

 

39,523 

 

 

40,878 

 

 

39,367 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4. Fair Value Measurements of Assets and Liabilities 

 

The Company classifies marketable securities as available-for-sale.  The fair value hierarchy established in the guidance adopted by the Company prioritizes the inputs used in valuation techniques into three levels as follows:

 

·

Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities;

·

Level 2 – Observable inputs –  other than the quoted prices in active markets for identical assets and liabilities – includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and

·

Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.

6


 

 

The following is a summary of assets and liabilities held by the Company and their related classifications under the fair value hierarchy: 

 

 

 

 

 

 

 

 

 

June 30, 2014

    

December 31, 2013

Level 1 (A)

$

72,350

 

$

68,911

Level 2 (B)

 

11,712

 

 

8,694

Level 3 (C)

 

(6,616)

 

 

(4,490)

Total

$

77,446

 

$

73,115

 

(A)

Level 1 assets include money market funds and enhanced income money market funds which are classified as cash equivalents and marketable securities, respectively.  

(B)

Level 2 assets include certificates of deposit, municipal bonds and corporate bonds which are classified as marketable securities.  

(C)

Level 3 liabilities include the contingent consideration obligation.

 

The Company utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The Company's marketable securities investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the six months ended June 30, 2014.

 

The aggregate fair value of available-for-sale securities and aggregate amount of unrealized gains and losses for available-for-sale securities at June 30, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate Amount of

 

 

Aggregate

 

Unrealized

 

    

Fair Value

    

Gains

    

Losses

Due in one year or less

 

$

13,540 

 

$

12 

 

$

(34)

Due after one year, less than five years

 

 

3,582 

 

 

10 

 

 

 —

 

 

$

17,122 

 

$

22 

 

$

(34)

 

The aggregate fair value of available-for-sale securities and aggregate amount of unrealized gains and losses for available-for-sale securities at December 31, 2013 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate Amount of

 

 

Aggregate

 

Unrealized

 

    

Fair Value

    

Gains

    

Losses

Due in one year or less

 

$

9,105 

 

$

 

$

(32)

Due after one year, less than five years

 

 

4,988 

 

 

11 

 

 

(2)

 

 

$

14,093 

 

$

16 

 

$

(34)

 

Unrealized gains and losses are reported as a component of accumulated other comprehensive loss in stockholders' equity. The cost of securities sold is based on the specific identification method. The Company evaluates investments with unrealized losses to determine if the losses are other than temporary. The Company has determined that the gross unrealized losses at June 30, 2014 and December 31, 2013 are temporary. In making this determination, the Company considered the financial condition, credit ratings and near-term prospects of the issuers, the underlying collateral of the investments, and the magnitude of the losses as compared to the cost and the length of time the investments have been in an unrealized loss position. Additionally, while the Company classifies the securities as available-for-sale, the Company does not currently intend to sell such investments and it is more likely than not to recover the carrying value prior to being required to sell such investments.

 

The Company determined the fair value of the contingent consideration obligation using the probability-weighted income approach derived from quarterly revenue estimates and a probability assessment with respect to the likelihood of achieving the various performance criteria. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration obligation are the probabilities of achieving certain financial targets and contractual milestones.  Significant increases (decreases) in any of those probabilities in isolation may result in a higher (lower) fair value measurement.  No changes in valuation techniques occurred during the six months ended June 30, 2014.

 

7


 

The changes in fair value of the Company’s Level 3 contingent consideration obligation during the six months ended June 30, 2014 were as follows:

 

 

 

 

 

 

    

Level 3

Balance at December 31, 2013

 

$

4,490 

Fair value adjustment to contingent consideration obligation included in net income

 

 

1,326 

Earn-out compensation due to Strumsoft employees

 

 

800 

Balance at June 30, 2014

 

$

6,616 

 

 

 

 

 

 

 

5. Acquisition

 

Digi-Data Corporation (“Digi-Data”)

 

On May 12, 2014, the Company acquired certain assets and workforce from Digi-Data, a U.S. company, for total consideration of $6.3 million.

 

The Company accounted for this business combination by applying the acquisition method, and accordingly, the purchase price was allocated to the tangible assets acquired and liabilities assumed based upon their fair values at the acquisition date.  The excess of the purchase price over the net tangible assets and liabilities, approximately $2.9 million, was recorded as goodwill, which is not tax deductible, with the remaining preliminary purchase price attributed to technology and customer relationships.

 

The Company believes that the assets and workforce acquired from Digi-Data will expedite the Company’s integration of broadband technologies into the Company’s wireless cloud offerings.

 

6. Stockholders’ Equity

 

Stock Options

 

The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The weighted-average assumptions used in the Black-Scholes option pricing model are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

    

2014

    

2013

 

2014

 

2013

Expected stock price volatility

 

49 

%

 

65 

%

 

58 

%

 

66 

%

Risk-free interest rate

 

1.27 

%

 

0.84 

%

 

1.43 

%

 

0.85 

%

Expected life of options (in years)

 

4.20 

 

 

4.40 

 

 

4.25 

 

 

4.45 

 

Expected dividend yield

 

%

 

%

 

%

 

%

 

The weighted-average fair value (as of the date of grant) of the options was $12.02 and $15.84 per share for the three months ended June 30, 2014 and 2013, respectively and $14.59 and $15.76 per share for the six months ended June 30, 2014 and 2013, respectively.  During the three months ended June 30, 2014 and 2013, the Company recorded total pre-tax stock-based compensation expense of  $6.8 million ($4.5 million after tax or $0.11 per diluted share) and  $6.1 million ($4.0 million after tax or $0.10 per diluted share), respectively, which includes the fair value for equity awards issued after January 1, 2006.  During the six months ended June 30, 2014 and 2013, the Company recorded total pre-tax stock-based compensation expense of $12.7 million ($8.4 million after tax or $0.20 per diluted share) and $11.0 million ($7.3 million after tax or $0.19 per diluted share), respectively, which includes the fair value for equity awards issued after January 1, 2006.  The total stock-based compensation cost related to non-vested equity awards not yet recognized as an expense as of June 30, 2014 was approximately $53.5 million. That cost is expected to be recognized over a weighted-average period of approximately 2.83 years. 

 

8


 

The following table summarizes information about stock options outstanding as of June 30, 2014:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

 

Aggregate

 

 

Number of

 

Average

 

Contractual

 

 

Intrinsic

Options

    

Options

    

Exercise Price

    

Term (Years)

    

 

Value

Outstanding at December 31, 2013

 

3,315 

 

$

23.97 

 

 

 

 

 

Options Granted

 

774 

 

 

31.33 

 

 

 

 

 

Options Exercised

 

(398)

 

 

19.77 

 

 

 

 

 

Options Cancelled

 

(92)

 

 

29.05 

 

 

 

 

 

Outstanding at June 30, 2014

 

3,599 

 

$

25.90 

 

4.41 

 

$

33,009 

Vested or expected to vest at June 30, 2014

 

3,335 

 

$

25.53 

 

4.27 

 

$

31,856 

Exercisable at June 30, 2014

 

2,068 

 

$

22.79 

 

3.31 

 

$

25,549 

 

A summary of the Company’s non-vested restricted stock at June 30, 2014, and changes during the six months ended June 30, 2014, is presented below:

 

 

 

 

 

 

 

Number of

Non-Vested Restricted Stock

    

Awards

Non-vested at December 31, 2013

 

1,120 

Granted

 

806 

Vested

 

(339)

Forfeited

 

(89)

Non-vested at June 30, 2014

 

1,498 

 

Employee Stock Purchase Plan

 

On February 1, 2012, the Company established a ten year Employee Stock Purchase Plan (“ESPP” or the “Plan”) for certain eligible employees.  The Plan is to be administered by the Company’s Board of Directors.  The total number of shares available for purchase under the Plan is 500 thousand shares of the Company’s Common Stock.  Employees participate over a six month period through payroll withholdings and may purchase, at the end of the six month period, the Company’s Common Stock at the lower of 85% of the fair market value on the first day of the offering period or the fair market value on the purchase date.  No participant will be granted a right to purchase Common Stock under the Plan if such participant would own more than 5% of the total combined voting power of the Company.  In addition, no participant may purchase more than one thousand shares of Common Stock within any purchase period.

 

The expected life of ESPP shares is the average of the remaining purchase period under each offering period.  The weighted-average assumptions used to value employee stock purchase rights are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

    

2014

    

2013

 

2014

 

2013

Expected stock price volatility

 

63 

%

 

66 

%

 

64 

%

 

67 

%

Risk-free interest rate

 

0.07 

%

 

0.13 

%

 

0.08 

%

 

0.14 

%

Expected life (in years)

 

0.50 

 

 

0.50 

 

 

0.50 

 

 

0.50 

 

Expected dividend yield

 

%

 

%

 

%

 

%

 

9


 

During the three months ended June 30, 2014 and 2013, the Company recorded $156 thousand and $151 thousand, respectively, of compensation expense related to the ESPP.  During the six months ended June 30, 2014 and 2013, the Company recorded $355 thousand and $329 thousand, respectively, of compensation expense related to the ESPP.  During the six months ended June 30, 2014 and 2013, the Company sold a total of 27 and 35 shares, respectively, of its Treasury Stock pursuant to purchases under its ESPP Plan. There were no shares sold during the three months ended June 30, 2014 and 2013.  Cash received from purchases through the ESPP Plan during the six months ended June 30, 2014 and 2013, was approximately $740 thousand and $670 thousand, respectively, and is included within the financing activities section of the consolidated statements of cash flows.  The total unrecognized compensation expense related to the ESPP as of June 30, 2014 was approximately $79 thousand, which is expected to be recognized over the remainder of the offering period.

 

7. Accumulated Other Comprehensive Income (Loss)

 

Comprehensive income (loss) was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

    

2014

    

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,364 

 

$

3,412 

 

$

15,949 

 

$

3,888 

Translation adjustments.

 

 

(497)

 

 

(4,188)

 

 

498 

 

 

(6,663)

Unrealized gain (loss) on securities, (net of tax)

 

 

 —

 

 

(19)

 

 

 

 

(21)

Total other comprehensive income (loss)

 

$

7,867 

 

$

(795)

 

$

16,451 

 

$

(2,796)

 

The changes in accumulated other comprehensive income (loss) during the six months ended June 30, 2014, are as follows, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

Holding Gains on

 

 

 

 

 

Foreign

 

Available-for-Sale

 

 

 

 

 

Currency

 

Securities

 

Total

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

$

(712)

 

$

(11)

 

$

(723)

Other comprehensive income

 

 

498 

 

 

 

 

502 

Total other comprehensive income (loss)

 

 

498 

 

 

 

 

502 

Balance at June 30, 2014

 

$

(214)

 

$

(7)

 

$

(221)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8. Goodwill

 

The Company recorded Goodwill which represents the excess of the purchase price over the fair value of assets acquired, including other definite-lived intangible assets. Goodwill is not amortized, but reviewed annually for impairment or upon the occurrence of events or changes in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

 

The changes in Goodwill during the six months ended June 30, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

    

$

137,743 

Acquisitions

 

 

2,934 

Reclassifications, adjustments and other

 

 

(1,287)

Translation adjustments

 

 

892 

Balance at June 30, 2014

 

$

140,282 

 

The reclassification adjustment of $1.3 million is primarily related to an increase in the Company’s deferred taxes in connection with a foreign tax election.

10


 

9. Credit Facility

 

In September 2013, the Company entered into a Credit Agreement (the “Credit Facility”) with JP Morgan Chase Bank, N.A., as administrative agent, Wells Fargo Bank, National Association, as syndication agent and Capital One, National Association and KeyBank National Association, as co-documentation agents.  The Credit Facility, which will be used for general corporate purposes, is a $100 million unsecured revolving line of credit that matures on September 27, 2018.  The Company pays a commitment fee of 25 basis points on the unused balance of the revolving credit facility under the Credit Agreement. Commitment fees totaled approximately $125 thousand during the period ended June 30, 2014. Synchronoss has the right to request an increase in the aggregate principal amount of the Credit Facility to $150 million.  As of June 30, 2014,  Synchronoss has not drawn down any funds under the Credit Facility.

 

On July 2, 2014, the Company borrowed $40 million under the Credit Facility to fund acquisitions and capital asset purchases. Interest on the borrowing is based upon LIBOR plus a 175 basis point margin.

 

The Credit Facility is subject to certain financial covenants.  As of June 30, 2014, the Company was in compliance with all required covenants and there were no outstanding balances on the Credit Facility. 

 

10. Legal Matters

 

The Company’s 2011 acquisition agreement with Miyowa SA provided that former shareholders of Miyowa SA would be eligible for earn-out payments, to the extent specified business milestones were achieved following the acquisition.  In December 2013, Eurowebfund and Bakamar, two former shareholders of Miyowa SA, filed a complaint against the Company in the Commercial Court of Paris, France claiming that they are entitled to certain earn-out payments under the acquisition agreement.  The Company was served with a copy of this complaint in January 2014.  The Company believes Miyowa SA failed to meet the criteria required for it to pay the claimed amounts and that no earn-out payments are owed.  Although the Company cannot predict the outcome of the lawsuit due to the inherent uncertainties of litigation, it believes the positions of Eurowebfund and Bakamar are without merit, and the Company intends to vigorously defend against all claims brought by them.

 

The Company is not currently subject to any legal proceedings that could have a material adverse effect on its operations; however, it may from time to time become a party to various legal proceedings arising in the ordinary course of its business. The Company is currently the plaintiff in several patent infringement cases. The defendants in several of these cases have filed counterclaims.  Although the Company cannot predict the outcome of the cases at this time due to the inherent uncertainties of litigation, the Company continues to pursue its claims and believes that the counterclaims are without merit, and the Company intends to defend all of such counterclaims.

 

11. Subsequent Events

 

On July 11, 2014, the Company acquired 100% of the capital stock of Voxmobili (“Vox”), a French company, for cash consideration of $26.0 million, subject to certain working capital adjustments.  The Company believes that this acquisition will enable its position as the leading provider of personal cloud solutions to the world’s largest mobile operators.

 

On July 2, 2014, the Company acquired certain assets, liabilities and workforce from Clarity OSS Limited (“Clarity”), an Australian company, for cash consideration of $6.0 million ($6.3 million AUD), net of liabilities assumed. The Company believes that the assets and workforce acquired from Clarity will assist the Company’s access to new markets in the Asia Pacific region.

 

Since these acquisitions occurred subsequent to June 30, 2014, they are not included in the results of operations for any of the periods presented. In addition, the preliminary purchase price allocations are not yet available.

 

11


 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the information set forth in our consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and in our annual report Form 10-K for the year ended December 31, 2013. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management as of the date hereof based on information currently available to our management. Use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “hopes,” “should,” “continues,” “seeks,” “likely” or similar expressions, indicate a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions. Actual results may differ materially from the forward-looking statements we make. We caution investors not to place substantial reliance on the forward-looking statements included in this report. These statements speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments.  All numbers are expressed in thousands unless otherwise stated.

 

Overview

 

We are a mobile innovation company that provides cloud solutions and software-based activation for connected devices globally.  Such services include intelligent connectivity management and content synchronization, backup and sharing, as well as device and service procurement, provisioning, activation, and support, that enable communications service providers (“CSPs”), cable operators/multi-services operators (“MSOs”), original equipment manufacturers (“OEMs”) with embedded connectivity (e.g. smartphones, laptops, tablets and mobile Internet devices, such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers and other customers to accelerate and monetize their go-to-market strategies for connected devices. This includes automating subscriber activation, order management, upgrades, service provisioning and connectivity and content management from any sales channel to any communication service (wireless or wireline), across any connected device type and managing the content transfer, synchronization and share.  Our global solutions touch all aspects of connected devices on the mobile Internet. 

 

Our Synchronoss Personal Cloud™ solution targets individual consumers while our Synchronoss WorkSpace™ solution focuses on providing a secure, integrated file sharing and collaboration solution for small and medium businesses.  In addition, our Integrated Life™ platform is specifically designed to power the activation of the devices and technologies that seamlessly connect today’s consumer and leverage our cloud assets to manage these devices and contents associated with them. The Integrated Life™ platform enables us to drive a natural extension of our mobile activations and cloud services with leading wireless networks around the world to link other non-traditional devices (i.e., automobiles, wearables for personal health and wellness, and connected homes).

 

Our Activation Services, Synchronoss Personal Cloud™, Synchronoss WorkSpace™, and Synchronoss Integrated Life™ platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services, or devices and “back-office” infrastructure-related systems and processes. Our customers rely on our solutions and technology to automate the process of activation and content and settings management for their customers’ devices while delivering additional communication services. Our Synchronoss Integrated Life™ platform brings together the capabilities of device/service activation with content and settings management to provide a seamless experience of activating and managing non-traditional devices.  Our platforms also support automated customer care processes through use of accurate and effective speech processing technology and enable our customers to offer their subscribers the ability to store in and retrieve from the Cloud their personal and work content and data to their connected mobile devices, such as personal computers, smartphones and tablets.  Our platforms are designed to be carrier-grade, high availability, flexible and scalable to enable multiple converged communication services to be managed across multiple distribution channels, including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets, allowing us to meet the rapidly changing and converging services and connected devices offered by our customers. We enable our customers to acquire, retain and service subscribers quickly, reliably and cost-effectively by enabling backup, restore, synchronization and sharing of subscriber content.  Through the use of our platforms, our customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and social media and enterprise-wide sharing/collaboration connected devices and contents from these devices and associated services.  The extensibility, scalability, reliability and relevance of our platforms enable new revenue streams and retention opportunities for our customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud, while optimizing their cost of operations and enhancing customer experience.

 

We currently operate in and market our solutions and services directly through our sales organizations in North America, Europe and Asia-Pacific.

 

Our industry-leading customers include Tier 1 mobile service providers such as AT&T Inc., Verizon Wireless, Vodafone, Orange,

12


 

Sprint, Telstra and U.S. Cellular, Tier 1 cable operators/MSOs and wireline operators like AT&T Inc., Comcast, Cablevision, Charter, CenturyLink, Mediacom and Level 3 Communications, and large OEMs such as Apple and Ericsson.  These customers utilize our platforms, technology and services to service both consumer and business customers.

 

Revenues

 

We generate a substantial portion of our revenues on a per-transaction or subscription basis, which is derived from contracts that extend up to 60 months from execution. For the three months ended June 30, 2014 and 2013, we derived approximately 77% and 70%, respectively, of our revenues from transactions processed and subscription arrangements. This is a result of new subscription arrangements with our existing customers.  The remainder of our revenues were generated from professional services and licenses. 

 

Historically, our revenues have been directly impacted by the number of transactions processed.  The future success of our business depends on the continued growth of consumer and business transactions and, as such, the volume of transactions that we process could fluctuate on a quarterly basis.  See “Current Trends Affecting Our Results of Operations” for certain matters regarding future results of operations.

 

Most of our revenues are recorded in U.S. dollars but as we continue to expand our footprint with international carriers and increase the extent of recording our international activities in local currencies, we will become subject to currency translation risk that could affect our future net sales.

 

Our five largest customers accounted for 85% and 77% of net revenues for the three months ended June 30, 2014 and 2013, respectively.  Of these customers, AT&T and Verizon Wireless each accounted for more than 10% of our revenues for the three months ended June 30, 2014 and 2013.    See “Risk Factors” for certain matters bearing risks on our future results of operations.

 

Costs and Expenses

 

Our costs and expenses consist of cost of services, research and development, selling, general and administrative, depreciation and amortization, change in contingent consideration and interest and other expense.

 

Cost of services includes all direct materials, direct labor, cost of facilities and those indirect costs related to revenues such as indirect labor, materials and supplies. Our primary cost of services is related to our information technology and systems department, including co-location fees, network costs, data center maintenance, database management and data processing costs, as well as personnel costs associated with service implementation, customer deployment and customer care. Also included in cost of services are costs associated with our exception handling centers and the maintenance of those centers. Currently, we utilize a combination of employees and third-party providers to process transactions through these centers.

 

Research and development costs are expensed as incurred unless they meet U.S. Generally Accepted Accounting Principles (“GAAP”) criteria for deferral and amortization. Software development costs incurred prior to the establishment of technological feasibility do not meet these criteria, and are expensed as incurred. Research and development expense consists primarily of costs related to personnel, including salaries and other personnel-related expenses, consulting fees and the cost of facilities, computer and support services used in service technology development. We also expense costs relating to developing modifications and minor enhancements of our existing technology and services.

 

Selling, general and administrative expense consists of personnel costs including salaries, sales commissions, sales operations and other personnel-related expenses, travel and related expenses, trade shows, costs of communications equipment and support services, facilities costs, consulting fees, costs of marketing programs, such as internet and print and other overhead costs.

 

Net change in contingent consideration obligation consists of the changes to the fair value estimate of the obligation to the former equity holders which resulted from our acquisitions. The estimate is based on the weighted probability of achieving certain financial targets and milestones. The contingent consideration obligation earn-out periods are no longer than 12 months in duration.  As such, we recognize the changes in fair value over that period.  Final determination of the payment is done up to 90 days after the earn-out period.

 

Depreciation relates to our property and equipment and includes our network infrastructure and facilities. Amortization primarily relates to trademarks, customer lists and technology acquired.

 

Interest expense consists primarily of interest on our lease financing obligations.

 

13


 

Current Trends Affecting Our Results of Operations

 

Business from our Activation Platforms and Synchronoss Cloud Solutions has been driven by the unprecedented growth in mobile devices globally. Certain industry trends, such as Next programs from AT&T, have resulted in faster device upgrade cycles increasing device order transactions and activations. With mobile devices becoming content rich and acting as a replacement for other traditional devices like PC’s, the need to securely back up content from mobile devices, sync it with other devices and share it with others in their community of family, friends and business associates have become essential needs. The major Tier 1 carriers are also publicly discussing achieving 500% penetration (multiple connected devices per user) by enabling connectivity to non-traditional devices. Such devices include connected cars, health and wellness devices, connected home and health care. The need for these devices to be activated, managed and the contents from them to be stored in a common cloud are also expected to be drivers of our businesses in the long term.

 

Bring Your Own Technology is impacting the work environment for Small and Medium Businesses, which find themselves in a position where they need to offer their employees a safe environment to share and collaborate on their work documents and files via mobile devices. Leveraging our Synchronoss Personal Cloud solution infrastructure and technology to build our Synchronoss WorkSpace™ solution for this purpose is enabling us to serve a completely new market, which we believe will also contribute to our growth.

 

To support our expected growth driven by the favorable industry trends mentioned above, we continue to look for opportunities to improve our operating efficiencies, such as the utilization of offshore technical and non-technical resources for our exception handling center management as well as routine software maintenance activities. We also leverage modular components from our existing software platforms to build new products.   We believe that these opportunities will continue to provide future benefits and position us to support revenue growth. In addition, we anticipate further automation of the transactions generated by our more mature customers and additional transaction types. Our cost of services can fluctuate from period to period based upon the level of automation and the on-boarding of new transaction and service types. We are also making investments in new research and development for development of products designed to enable us to grow rapidly in the mobile wireless market. Our purchase of capital assets and equipment may also increase based on aggressive deployment, subscriber growth and promotional offers for storage incentives by our major Tier 1 carrier customers.

 

We continue to advance our plans for the expansion of our platforms' footprint with broadband carriers and international mobile carriers to support connected devices and multiple networks through our focus on transaction management and cloud-based services for back up, synchronization and sharing of content. Our initiatives with AT&T, Verizon Wireless, Vodafone and other CSPs continue to grow both with our current businesses as well as new products. We are also exploring additional opportunities through merger and acquisition activities to support our customer, product and geographic diversification strategies.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements in accordance with GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during a fiscal period. The Securities and Exchange Commission (“SEC”) considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. We have discussed the selection and development of the critical accounting policies with the audit committee of our Board of Directors, and the audit committee has reviewed our related disclosures in this Form 10-Q.  Although we believe that our judgments and estimates are appropriate, correct and reasonable under the circumstances, actual results may differ from those estimates.  If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See “Risk Factors” for certain matters bearing risks on our future results of operations.

 

14


 

We believe that of our significant accounting policies, which are described in Note 2 in our Annual Report on Form 10-K for the year ended December 31, 2013, the following accounting policies involve a greater degree of judgment and complexity.  Accordingly, these are the policies which we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations:

 

·

Revenue Recognition and Deferred Revenue

·

Allowance for Doubtful Accounts

·

Income Taxes

·

Goodwill and Impairment of Long-Lived Assets

·

Business Combinations 

·

Stock-Based Compensation

 

There were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K during the six months ended June 30, 2014.  Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013 for a more complete discussion of our critical accounting policies and estimates.

 

Results of Operations

                                              

Three months ended June 30, 2014 compared to the three months ended June 30, 2013

 

The following table presents an overview of our results of operations for the three months ended June 30, 2014 and 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

2014

 

2013

 

2014 vs 2013

 

    

$

    

% of Revenue

    

$

    

% of Revenue

    

$ Change

    

% Change

 

 

(in thousands)

Net revenues

 

$

103,451 

 

100.0 

%

 

$

83,848 

 

100.0 

%

 

$

19,603 

 

23.4 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services*

 

 

41,290 

 

39.9 

%

 

 

35,527 

 

42.4 

%

 

 

5,763 

 

16.2 

%

Research and development

 

 

17,305 

 

16.7 

%

 

 

16,358 

 

19.5 

%

 

 

947 

 

5.8 

%

Selling, general and administrative

 

 

17,149 

 

16.6 

%

 

 

14,943 

 

17.8 

%

 

 

2,206 

 

14.8 

%

Net change in contingent consideration obligation

 

 

115 

 

0.1 

%

 

 

1,743 

 

2.1 

%

 

 

(1,628)

 

(93.4)

%

Depreciation and amortization

 

 

13,758 

 

13.3 

%

 

 

9,610 

 

11.5 

%

 

 

4,148 

 

43.2 

%

Total costs and expenses

 

 

89,617 

 

86.6 

%

 

 

78,181 

 

93.2 

%

 

 

11,436 

 

14.6 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

$

13,834 

 

13.4 

%

 

$

5,667 

 

6.8 

%

 

$

8,167 

 

144.1 

%

 

 

 

 

*  

Cost of services excludes depreciation and amortization which is shown separately.

 

Net Revenues. Net revenues increased $19.6 million to $103.5 million for the three months ended June 30, 2014, compared to the same period in 2013.  This increase was due primarily to the expansion of our services provided to our customers.  Transaction and subscription revenues as a percentage of sales were 77% or $79.1 million for the three months ended June 30, 2014 compared to 70% or $58.5 million for the same period in 2013.  The increase in transaction and subscription revenue is primarily due to new subscription arrangements with our existing customers.  Professional service and license revenues as a percentage of sales were 23% or $24.3 million for the three months ended June 30, 2014, compared to 30% or $25.3 million for the same period in 2013. 

 

Net revenues related to Activation Services decreased $700 thousand to $56.8 million for the three months ended June 30, 2014 compared to the same period in 2013.  Net revenues related to Activation Services represented 55% for the three months ended June 30, 2014, compared to 69% for the same period in 2013.  Net revenues related to our Cloud Services increased by $20.4 million to $46.7 million of our revenues for the three months ended June 30, 2014 compared to the same period in 2013.  Net revenues related to our Cloud Services represented 45% for the three months ended June 30, 2014, compared to 31% for the same period in 2013.  The increase in our Cloud Service performance was a result of a strong adoption of our cloud offerings across our customer base.

 

15


 

Expenses

 

Cost of Services.  Cost of services increased $5.8 million to $41.3 million for the three months ended June 30, 2014, compared to the same period in 2013, due primarily to an increase of $4.5 million in co-location costs related to the expansion of our hosting and storage offerings.  Additionally, our personnel and related costs increased $1.1 million primarily as a result of our continued growth in existing and new programs with our customers. As a result of increased revenues, cost of services as a percentage of revenues decreased to 39.9% for the three months ended June 30, 2014, as compared to 42.4% for the same period in 2013.

 

Research and Development.  Research and development expense increased $947 thousand to $17.3 million for the three months ended June 30, 2014, compared to the same period in 2013 primarily due to an increase of $492 thousand in outside consultants as a result of the expansion of our programs. Personnel and related costs increased $532 thousand as a result of our continued growth as we further expand the capabilities of our offerings. Research and development expense as a percentage of revenues decreased to 16.7% for the three months ended June 30, 2014 as compared to 19.5% for the same period in 2013.

 

Selling, General and Administrative.    Selling, general and administrative expense increased $2.2 million to $17.1 million for the three months ended June 30, 2014, compared to the same period in 2013.  There was an increase of $1.8 million in personnel and related costs and an increase of $735 thousand in stock-based compensation.  The increase in personnel and related costs primarily related to increased headcount as a result of our international expansion as well as the earn-out compensation due to the former owners and employees of Strumsoft. Our marketing expense increase of $347 thousand related to our expanded marketing activities associated with rebranding and the launch of our new products.  The remaining increase of $357 thousand was related to telecommunication and facility costs that were impacted by the increase of the common area maintenance costs. These increases were offset by $985 thousand decrease in selling costs. As a result of increased revenues, selling, general and administrative expense as a percentage of revenues decreased to 16.6% for the three months ended June 30, 2014, compared to 17.8% for the same period in 2013. 

 

Net change in contingent consideration obligation.  The net change in contingent consideration obligation resulted in a $1.6 million decrease of the contingent consideration obligation for the three months ended June 30, 2014 driven by a $115 thousand increase in the fair value estimates related to the weighted probability of achieving revenue milestones for the Strumsoft earn-out offset by a $1.7 million decrease in the fair value of the contingent consideration liability due to the completion of the revenue and product milestones earning period for the SpeechCycle, Inc. (“SpeechCycle) and Spatial Systems Nominees PTY Limited (“Spatial”) earn-outs.

 

Depreciation and amortization. Depreciation and amortization expense increased $4.1 million to $13.8 million for the three months ended June 30, 2014, compared to the same period in 2013. This was primarily related to the increase in depreciable fixed assets necessary for the continued expansion of our platforms and amortization of our newly acquired intangible assets of Strumsoft and Digi-Data Corporation (“Digi-Data”).  Depreciation and amortization expense as a percentage of revenues increased to 13.3% for the three months ended June 30, 2014, as compared to 11.5% for the three months ended June 30, 2013. 

 

Income from Operations.  Income from operations increased $8.2 million to $13.8 million for the three months ended June 30, 2014, compared to the same period in 2013.  This was due primarily to increased revenues and gross profitability and decreased charges related to the net change in contingent consideration obligation offset by increases in depreciable fixed assets and intangible amortization.  Income from operations as a percentage of revenues increased to 13.4% for the three months ended June 30, 2014, as compared to 6.8% for the three months ended June 30, 2013.

 

Interest income.  Interest income decreased $135 thousand to $62 thousand for the three months ended June 30, 2014, compared to the same period in 2013

 

Interest expense.  Interest expense decreased $32 thousand to $279 thousand for the three months ended June 30, 2014, compared to the same period in 2013

 

Other income.  Other income decreased $45 thousand to $256 thousand for the three months ended June 30, 2014, compared to the same period in 2013

 

Income Tax.  We recognized approximately $5.5 million and $2.5 million in related tax expense during the three months ended June 30, 2014 and 2013, respectively.  Our effective tax rate was approximately 39.7% for the three months ended June 30, 2014, which was higher than our U.S. federal statutory rate primarily due to the unfavorable impact of the fair market value adjustment for the contingent consideration obligation related to the Strumsoft earn-out.  Our effective tax rate was approximately 42.3% for the three months ended June 30, 2013, which was higher than our U.S. federal statutory rate primarily due to the unfavorable impact of the fair market value adjustment for the contingent consideration obligation related to the Spatial equity holders. We review the expected annual effective income tax rate and make changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual

16


 

operating income, changes to the actual and forecasted permanent book-to-tax differences, and changes resulting from the impact of tax law changes.

 

Six months ended June 30, 2014 compared to the six months ended June 30, 2013

 

The following table presents an overview of our results of operations for the six months ended June 30, 2014 and 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

2014