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| IPAS > SEC Filings for IPAS > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
Forward-Looking Statements
This quarterly report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about our operations, financial condition, results of operations, liquidity, the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of these words, and similar expressions are intended to identify these forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions based upon assumptions made that we believed to be reasonable at the time, and are subject to risks and uncertainties. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified below under "Risk Factors Affecting Operating Results" and elsewhere in this quarterly report, for factors that may cause actual results to be different than those expressed in these forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements.
Company Overview
We are a leading provider of simple, secure and manageable enterprise mobility services, maximizing the productivity of workers as they move between office, home and remote locations. Our solutions simplify mobility by combining ubiquitous 3G mobile broadband, Wi-Fi hotspot, hotel Ethernet and dial-up access with comprehensive management control over connectivity, devices and costs. Our solutions serve mobile workers, tele-workers, branch offices and retail locations. They are based on the world's largest global virtual network, an internet-based management platform, and the iPassConnect™ mobility manager software for laptops and handheld devices. Our connectivity services utilize the iPass global virtual network, a unified network of over 550 dial-up, wireless, and broadband providers in over 160 countries.
Overview of the three and nine months ended September 30, 2009
Our overall revenue decreased 12% and 10% for the three and nine months ended September 30, 2009, respectively, as compared to the same periods in 2008, primarily due to the continued and anticipated erosion of dial-up revenue as users move to faster connection technologies. In addition, the continued global economic downturn, which has led to significant corporate layoffs and a sharp drop-off in business travel within our enterprise customer base also adversely impacted our business.
For the three and nine months ended September 30, 2009, dial-up revenue decreased 56% and 52% to $3.9 million and $14.4 million, respectively, as compared to $8.8 million and $29.7 million for the same periods in 2008, respectively. The decreases were partially offset, in part, by a $790,000 and $4.7 million increase in revenues generated from usage of our broadband service for the three and nine months ended September 30, 2009, respectively, compared to 2008. Going forward, we will focus on delivering innovative services and solutions for our customers and increasing the number of end users of our services. We will also look at ways to increase fee revenues from fee based services. During the remainder of 2009, we expect very modest growth in new customers. Our success in 2010 could be limited by several factors, including global economic conditions, the timely release of new services and products, continued market acceptance of our products and the introduction of new products by existing or new competitors. For a further discussion of these and other risk factors, see the section below entitled "Risk Factors Affecting Operating Results."
International revenues accounted for approximately 40% of total revenues for
both of the three months ended September 30, 2009 and 2008 and 39% and 38% of
total revenues for the nine months ended September 30, 2009 and 2008,
respectively. Substantially all of our international revenues are generated in
the EMEA (Europe, Middle East and Africa) and Asia Pacific regions. Revenues in
the EMEA region represented 29% and 27% of total revenues for the three months
ended September 30, 2009 and 2008, respectively, and 29% and 27% of our revenues
for the nine months ended September 30, 2009 and 2008, respectively. Revenues
in the Asia Pacific region represented 7% and 9% of total revenues for the three
months ended September 30, 2009 and 2008, respectively, and 6% and 8% of total
revenues for the nine months ended September 30, 2009 and 2008, respectively.
No individual foreign country accounted for 10% or more of total revenues for
the three and nine months ended September 30, 2009 and 2008. Substantially all
of our revenues to date have been denominated in U.S. dollars. In the future,
some portion of revenues may be denominated in foreign currencies. No individual
customer accounted for 10% or more of total revenues for the three or nine
months ended September 30, 2009 and 2008.
Sources of Revenues
We derive our revenues primarily from providing enterprise connectivity services through our virtual network. We sell these services directly, as well as indirectly through our channel partners. We bill approximately 50% of our customers (determined on a percentage of revenue basis) based on a fixed charge per user per month. We bill the remaining customers on a time basis for usage based on negotiated rates. Substantially all enterprise customers commit to a one to three year contract term. Most of our contracts with enterprise customers contain minimum usage levels. We bill customers for such minimum committed amounts when actual usage is less than their monthly minimum commitment amount. The difference between the minimum commitment and actual usage is recognized as fee revenue based on our estimate of cash that will ultimately be collected related to the minimum commitment.
We have invested in the expansion of our broadband coverage and are seeking to generate additional revenues from our broadband wired and wireless coverage. Revenues from usage of our broadband services were 64% and 54% of our total revenues for the three months ended September 30, 2009 and 2008, respectively, and 62% and 53% for the nine months ended September 30, 2009 and 2008, respectively.
We provide customers with deployment services and technical support throughout the term of the contract. For customers on usage based pricing plans we typically charge fees for these services on a one-time or annual basis, depending on the service provided and the nature of the relationship. For customers on flat rate pricing, these charges are included as part of our monthly per user fee. We also offer customers additional services for which we generally bill on a monthly basis. In addition, we generate license and maintenance revenue through software licensing agreements. Revenues generated from services and licensing fees represented approximately 27% of total revenues for the three and nine months ended September 30, 2009 and 2008.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, income taxes, impairment of short-term investments, impairment of goodwill and intangible assets and allowance for doubtful accounts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis of making judgments about the carrying values of assets and liabilities.
Except for change in estimate for sales tax and related charges of $4.8 million, there have been no other significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2009 as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008.
RESULTS OF OPERATIONS
Revenue
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In thousands, except percentages)
Total Revenue $ 42,555 $ 48, 371 $ 130,901 $ 145,099
Change $ (5,816 ) $ (14,198 )
Percentage change (12.0 %) (9.8 %)
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Total revenue decreased in the three and nine months ended September 30, 2009, as compared to the same periods in 2008, primarily due to the continued and anticipated erosion of dial-up revenue as users move to faster connection technologies. The decrease is also due to the continued global economic downturn resulting in corporate layoffs and restricted business travel in our enterprise customer base which has adversely impacted our business.
A listing of revenue by type is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In thousands, except percentages)
Broadband $ 27, 079 $ 26,289 $ 81,248 $ 76,597
Percentage of total revenue 63.6 % 54.3 % 62.0 % 52.8 %
Change $ 790 $ 4,651
Percentage change 3.0 % 6.1 %
Dial-Up $ 3,910 $ 8,788 $ 14,356 $ 29,728
Percentage of total revenue 9.2 % 18.2 % 11.0 % 20.5 %
Change $ (4,878 ) $ (15,372 )
Percentage change (55.5 %) (51.7 %)
Services, fees and other $ 11,566 $ 13,294 $ 35,297 $ 38,774
Percentage of total revenue 27.2 % 27.5 % 27.0 % 26.7 %
Change $ (1,728 ) $ (3,477 )
Percentage change (13.0 %) (9.0 %)
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We anticipate broadband revenues will experience modest growth due to the current global economic downturn and associated corporate layoffs and restrictions on business travel in our enterprise customer base.
We expect revenue from dial-up usage to continue to decrease in absolute dollars as well as the use of dial-up as a means of enterprise connectivity continues to decline.
Non-Financial Metrics As of
September 30, Change
2009 2008 Count %
3G subscription count 34,000 21,000 13,000 61.9 %
Broadband user (excluding 3G user) count 282,000 311,000 (29,000 ) (9.3 %)
Dial-up user count 91,000 188,000 (97,000 ) (51.6 %)
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We provide these additional non-financial metrics of 3G subscription, broadband user (excluding 3G user) and dial user counts, so that stockholders can understand the type of users that are using our mobility services. In addition, these non-financial metrics can be used to help assess how successful we are in driving increased penetration into our customer base and leading both the enterprise market and our customers to 3G technology. 3G subscription counts were up from the same quarter a year ago by 62%. We believe the increase is due to ramping of the early adoption of this newer technology resulting from our early market penetration. The broadband user counts, which exclude 3G users, is primarily Wi-Fi users and as compared with the same quarter a year ago, were adversely impacted by the current global economic downturn resulting in corporate layoffs and restrictions on business travel in our enterprise customer base. Dial-up user counts decreased from the same quarter a year ago as the use of dial-up as a means of enterprise connectivity continues to decline.
Operating Expenses
Network Access
Network access expenses consist of charges for access, principally by the minute
or otherwise time-based, that we pay to our network service providers.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In thousands, except percentages)
Network access expenses $ 17,610 $ 20,147 $ 54,250 $ 61,588
Percentage of total revenue 41.4 % 41.7 % 41.4 % 42.4 %
Change $ (2,537 ) $ (7,338 )
Percentage change (12.6 %) (11.9 %)
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The decrease in network access expenses in the three and nine months ended September 30, 2009 as compared to the same periods in 2008 was primarily due to the 12% and 10% decline in our revenues in the three and nine months ended September 30, 2009, respectively. We also negotiated more favorable pricing with one of our mobile data providers which contributed to the decrease in network access costs.
We expect network access expenses to increase slightly as a percentage of revenues in the fourth quarter of 2009 due to changes in foreign currency rates and provider commitment shortfalls.
Network Operations
Network operations expenses consist of compensation and benefits for our network
engineering, customer support, network access quality and information technology
personnel, as well as outside consultants, transaction center fees, depreciation
of our network equipment, costs of mobile data cards and certain allocated
overhead costs.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In thousands, except percentages)
Network operations expenses $ 7,551 $ 8,195 $ 22,784 $ 24,365
Percentage of total revenue 17.7 % 16.9 % 17.4 % 16.8 %
Change $ (644 ) $ (1,581 )
Percentage change (7.9 %) (6.5 %)
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Network operations expenses decreased for both the three and nine months ended September 30, 2009 as compared to the same periods ended September 30, 2008. The decreases were primarily due to a reduction of $460,000 and $1.2 million in compensation, benefits and travel related expense for the three and nine month periods ended September 30, 2009, respectively, resulting from headcount reductions that were included in the restructuring activity in the first quarter of 2009. A reduction in co-location network expense due to the implementation of certain cost saving measures further reduced network operations expense by $218,000 and $321,000 for the three and nine month periods ended September 30, 2009, respectively. The remaining portion of the decrease was due to individually insignificant items.
We expect that our network operations expenses will remain relatively constant in absolute dollars in the fourth quarter of 2009.
Research and Development
Research and development expenses consist of compensation and benefits for our
research and development personnel, consulting, and certain allocated overhead
costs.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In thousands, except percentages)
Research and development expenses $ 3,597 $ 3,845 $ 10,836 $ 12,288
Percentage of total revenue 8.5 % 7.9 % 8.3 % 8.5 %
Change $ (248 ) $ (1,452 )
Percentage change (6.4 %) (11.8 %)
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Research and development expenses decreased slightly for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008. There were no fluctuations, offsetting or otherwise, significant enough to note.
The decrease in research and development expenses for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 resulted primarily from a $697,000 decrease in compensation, benefits and travel expenses due to headcount reductions and a $194,000 decrease in rent expense due to the consolidation of our facilities in India. The remaining decrease was due primarily to lower licenses and fees of $188,000, maintenance and support of $111,000 and recruiting expense of $109,000.
We expect that our research and development expenses will increase slightly in absolute dollars in the fourth quarter of 2009 due to additional investment in the development of our new software platform.
Sales and Marketing
Sales and marketing expenses consist of compensation, benefits, advertising,
promotion and program expenses, and certain allocated overhead costs.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In thousands, except percentages)
Sales and marketing expenses $ 8,037 $ 10,724 $ 23,223 $ 31,403
Percentage of total revenue 18.9 % 22.2 % 17.7 % 21.6 %
Change $ (2,687 ) $ (8,180 )
Percentage change (25.1 %) (26.0 %)
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The decrease in sales and marketing expenses for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 was due primarily to a $1.2 million decrease in compensation, travel and benefits expenses due to a decrease in sales personnel largely due to restructuring activities in the first quarter 2009 and lower commissions of approximately $975,000 resulting from lower revenues. Targeted reductions in specific marketing programs further reduced sales and marketing expenses by approximately $500,000. The remaining portion of the decrease was due to individually insignificant items.
The decrease in sales and marketing expenses for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 was due primarily to a decrease of approximately $4.5 million in compensation, travel and benefits expenses due to decreased sales personnel resulting from restructuring activities that occurred during 2009 and lower commission of approximately $2.1 million due to lower revenues. Targeted reductions in specific marketing programs further reduced sales and marketing expenses by approximately $726,000.
We expect that sales and marketing expenses will remain relatively constant in absolute dollars in the fourth quarter of 2009.
General and Administrative
General and administrative expenses consist of compensation and benefits of
general and administrative personnel, legal and accounting expenses, bad debt
expense, and certain allocated overhead costs.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In thousands, except percentages)
General and administrative expenses $ 10,316 $ 6,123 $ 22,403 $ 18,476
Percentage of total revenue 24.2 % 12.7 % 17.1 % 12.7 %
Change $ 4,193 $ 3,927
Percentage change 68.5 % 21.3 %
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General and administrative expenses increased for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 primarily resulting from a $4.8 million charge related to sales tax liabilities. The increase is offset by a $316,000 reduction in legal fees due to employee terminations and strategic corporate activities that occurred in the third quarter of 2008. The restructuring activities in the first quarter of 2009 contributed additional savings of $353,000 in rent expense.
General and administrative expenses increased for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. The increase was driven primarily by a charge of $4.8 million related to sales tax liabilities. The increase is offset by a reduction of $1.3 million in stock compensation expense primarily driven by a decrease in the number of shares of our common stock outstanding and lower trading prices of our common stock.
We expect that our general and administrative expenses will decrease in absolute dollars in the fourth quarter of 2009 as a result of not having to take a large charge related to sales tax liabilities.
Restructuring Charges
In the first quarter of 2009, we recorded a restructuring charge of approximately $3.3 million related to a workforce reduction of 68 employees across all functional areas and the abandonment of certain facilities, for which the lease terms extend through April 30, 2015. As of September 30, 2009, we completed all terminations and had fully vacated the abandoned facilities.
Liabilities for excess facility costs are recorded net of estimated sublease income. We review and update our estimates whenever circumstances arise that indicate a change in the underlying assumptions. In the third quarter of 2009, we recorded an additional restructuring charge of $891,000 primarily due to changes in estimated sublease income related to the facility abandoned in the 2009 restructuring plan.
The liability for net excess facilities costs is recorded at fair value as of each balance sheet date. Any difference between the fair value of the liability at the measurement date and the total cash liability is accreted ratably over the remaining expected term. This accretion cost is included as a restructuring charge in the condensed consolidated statements of operations. Total accretion related to the 2009 restructuring plan that will be recognized through April 2015 is $270,000. In addition, total accretion related to facilities abandoned in the 2006 restructuring plan that will be recognized through April 2010 is $454,000 with a remaining balance of $141,000 as of September 30, 2009.
The following is a summary of restructuring activities for the three and nine months ended September 30, 2009 (in thousands):
Excess Total
Facility Restructuring
Costs Severance Costs Accrual
Balance as of June 30, 2009 $ 2,118 $ 40 $ 2,158
Restructuring charges 891 (24 ) 867
Payments (642 ) - (642 )
Net book value accretion 53 - 53
Balance as of September 30, 2009 $ 2,420 $ 16 $ 2,436
Excess Total
Facility Restructuring
Costs Severance Costs Accrual
Balance as of December 31, 2008 $ 1,054 $ - $ 1,054
Restructuring charges 2,904 1,259 4,163
Payments (1,676 ) (1,243 ) (2, 919 )
Net book value accretion 138 - 138
Balance as of September 30, 2009 $ 2,420 $ 16 $ 2,436
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Amortization of Intangible Assets
Amortization of intangible assets was approximately $345,000 and $1.1 million for the three months ended September 30, 2009 and 2008, respectively, and $1.0 and $3.2 million for the nine months ended September 30, 2009 and 2008, respectively. The decrease is the result of a lower cost basis due to an impairment charge recorded during the fourth quarter of 2008 of $3.4 million.
Non-Operating Expenses
Interest Income
Interest income includes primarily interest income on cash, cash equivalents, and short-term investment balances. Interest income was $103,000 and $445,000 for the three months ended September 30, 2009 and September 30, 2008, respectively. Interest income declined primarily due to decrease in the rate of return on our investments and lower cash balances. Interest income decreased from $1.6 million for the nine months ended September 30, 2008 to $531,000 for the nine months ended September 30, 2009, respectively, due to decrease in the rate of return on our investments and lower cash balances.
Foreign Exchange Losses and Other Expenses
Foreign exchange losses and other expenses include primarily losses on foreign currency transactions. Conversion of foreign currencies resulted in losses . . .
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