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| ACTI > SEC Filings for ACTI > Form 10-Q on 11-Aug-2008 | All Recent SEC Filings |
11-Aug-2008
Quarterly Report
This Quarterly Report on Form 10-Q contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements included in this Quarterly Report on Form 10-Q, other than statements that are purely historical, are forward-looking statements. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", and similar expressions also identify forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding operating results, product development, marketing initiatives, business plans, and anticipated trends, as well as future actions by third parties. The forward-looking statements in this Quarterly Report on Form 10-Q are subject to additional risks and uncertainties further discussed under Part II Item 1A "Risk Factors" below and elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K for the fiscal year ended September 30, 2007 filed with the Securities and Exchange Commission. The Company assumes no obligation to update any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.
The following discussion of financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes included in "Item 1. Financial Statements" in this Quarterly Report on Form 10-Q.
Overview
ActivIdentity Corporation (the Company) is a provider of digital identity assurance solutions for the enterprise, government, healthcare, and financial services markets worldwide for employer-to-employee, business-to-consumer and government-to-citizen solutions. Trusted identity is the core of the ActivIdentity platform enabling security for data, networks, applications, passwords and credentials, web, email and documents, transactions as well as converged security.
ActivIdentity® solutions support the convergence of physical and logical identity through strong authentication with smart card lifecycle management, adding enterprise single sign on, and data encryption and digital signature. ActivIdentity solutions include a fully-integrated platform, enabling organizations to issue, manage and use identity devices and credentials for secure access, secure communications, legally binding digital transactions, as well as intelligent citizen services.
Company products enable strong authentication utilizing a range of security
methods and devices such as Smart Employee ID, Enterprise Single Sign On (SSO),
Strong Authentication, Secure Information and Transactions, and Smart Citizen
ID. ActivIdentity products include SecureLogin ® SSO, ActivClient™ smart card
middleware, ActivID™ Card Management System, 4TRESS™ AAA Server, one-time
password (OTP) tokens, soft OTP tokens for mobile phone and personal digital
assistants and ActivKey™ USB tokens. These devices enable organizations to
address their security, compliance and auditing requirements by confirming
identities before granting access to computer systems, networks, applications
and physical locations.
ActivIdentity customers experience multiple benefits including increased network security, protection against identity theft and online fraud, enhanced workforce productivity, business process efficiencies, and regulatory compliance.
More than 15 million users and 4,000 customers at businesses, government agencies, and financial institutions worldwide rely on solutions from ActivIdentity to safely and efficiently interact electronically.
Company Strategy: In March and April 2008, the Company experienced significant turnover among members of the Board of Directors and senior level officers. As a result of these changes, the Company essentially has a new Board and management team and they are currently assessing the strategic focus and priorities for the Company. In connection with this assessment, the Board is expected to consider a number of potential actions over the next 12 months, including a potential return of capital to stockholders, either through a stock repurchase plan or special dividend, acquisitions or divestitures of assets and product lines to reorganize the Company in line with its strategic focus and further restructurings of the Company and its operations. Any of these actions could significantly affect the Company's operations, financial results, prospects and stock price.
Industry Outlook: The Company believes the digital identity market is a rapidly emerging global industry, driven by new government regulations, growing awareness of the risks of identity theft, and the growth in electronic commerce. While the industry is still in the early stage of development, industry-wide standards are evolving. The Company's business model is premised on the smartcard becoming a common access platform protecting an organization's assets, including network infrastructures, employees, customers, and confidential data. Issues driving industry growth and standardization are often unique across the Company's target customer base, especially in international locations. The Company continues to monitor the evolution of the digital identity market and adapt products and services to best position the Company to realize competitive advantage. Additional challenges and risks that the Company's product lines face include, but are not limited to: price and product feature competition, evolving technological change in the network security market, and risk of bugs and other errors in the software.
Financial Performance Indicators: The Company has a long and often complicated sales cycle dependent on a relatively small number of large deals, which can result in significant revenue fluctuations between periods. The typical sales cycle is six to nine months for an enterprise customer and over twelve months for a network service provider or government. As a result, in addition to monitoring financial performance based on reported revenues, management analyzes the probability of future transactions in the open deal pipeline when assessing financial condition and operating performance. Trends in deferred revenues, maintenance renewal contracts, and customer, geographic, or product mix are also integral to management's decision making process.
Strategic Initiatives: The Company is currently aligning its business model to shadow customer markets more effectively, focusing product lines on employer-to-employee, government-to-citizen, and business-to-consumer strategic initiatives. The Company is also developing financial performance benchmarks to quantify the financial impacts of the revised strategic alignment and provide additional tools to assist management in assessing the Company's financial condition. Restructuring and related cost cutting plans implemented to date have helped to streamline the Company and management will continue to identify areas for strategic improvement, in both revenue growth and cost containment.
Unusual Items: During the quarter ended June 30, 2008, the Company liquidated an inactive foreign subsidiary, ActivCard Developments Pty. Ltd. As a result of the liquidation, $1.9 million of accumulated translation adjustment was reclassified from the Accumulated Other Comprehensive Loss component of equity on the balance sheet to Other Expense on the Condensed Consolidated Statement of Operations. The accumulated losses resulted from the historic translation of the foreign entity's Australian Dollar denominated local books in the Company's consolidation process. In addition, ARS investments were marked to market resulting in an other-than-temporary impairment of $0.8 million for the quarter.
Results of operations
Revenue
Total revenue, period-over-period changes and mix by product type are as follows
(dollars in thousands):
Three Months Ended Nine Months Ended
June 30, Increase Percentage June 30, Increase Percentage
2008 2007 (Decrease) Change 2008 2007 (Decrease) Change
Software $ 5,983 $ 4,923 $ 1,060 22 % $ 17,017 $ 17,540 $ (523 ) -3 %
Hardware 3,175 5,670 (2,495 ) -44 % 11,090 13,778 (2,688 ) -20 %
Maintenance and support 5,140 5,691 (551 ) -10 % 15,255 14,465 790 5 %
Total revenue $ 14,298 $ 16,284 $ (1,986 ) -12 % $ 43,362 $ 45,783 $ (2,421 ) -5 %
Product Mix:
Software 42 % 30 % 39 % 38 %
Hardware 22 % 35 % 26 % 30 %
Maintenance and support 36 % 35 % 35 % 32 %
100 % 100 % 100 % 100 %
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The business has varying revenue streams, each of which is unique in terms of its recurring nature, transactional pricing, and volume characteristics. Software revenues are driven by irregularly occurring and unpredictable orders of significant size that are dependent on the closing of the transactions for revenue recognition purposes and can result in significant variances period over period. As hardware revenues are generally derived from the sale of software products, the variability in software revenue is the driving factor in the fluctuations of this revenue stream, although timing of hardware sales may lag the initial sale of related software. Maintenance revenue is tied directly to the installed base of customers, which fluctuates with the ability to attract new customers and the level of renewal activity with existing customers. The timing of closure of software transactions in the pipeline is the single most relevant trend in the Company's recorded revenue. The economic uncertainty that is currently affecting the global market has had an adverse impact on the Company's ability to finalize sales transactions, especially large dollar deals.
Software revenue is comprised of sales of standard software and professional services associated with customization, installation, integration, and training. Client software revenue improved $0.5 million or 93% quarter-over-quarter, with a $0.3 million deal with a United States government agency driving the increase. Authentication software revenue increased $0.7 million or 112% quarter-over-quarter on a general increase in deal size. Year-to-date, the major drivers of the variance in software revenue included Card Management and Single Sign On software revenue decreases of $2.0 million and $1.2 million respectively, offset by increases in Authentication software revenue ($1.3 million increase) and Client software revenue ($0.8 million increase). The timing of deal closures continues to be the most relevant trend in the fluctuation of software revenue.
Hardware revenue is comprised of Tokens, Readers, Smartcards and related equipment, generally to support sales of related software products. Smartcard and Reader revenues were down $2.1 million quarter-over-quarter and $2.0 million year-over-year influenced by the $2.0 million decrease in Card Management software revenue for the nine months ended June 30, 2008. Token revenue decreased $0.4 million year-over-year as a result of losing a significant customer in 2007 as a result of consolidation in the European banking industry.
Maintenance revenue is comprised of software customer support agreements and is directly tied to the installed base of software customers. The decrease quarter-over-quarter in maintenance revenue was primarily timing related. During the quarter ended June 30, 2007, $0.4 million of maintenance revenue adjustments were recorded to recognize revenue on specific deferred transactions. Due to the recognition of these deferrals and other adjustments, maintenance revenue in the quarter ended June 30, 2007, was 18% above the quarterly average for fiscal year 2007 maintenance revenue. The increase in year-over-year maintenance revenue continues the trend noted in the previous quarter, which is driven by increases in the installed base of software customers.
Period-over-period changes in revenue by geography and as a percentage of total revenue, is as follows (dollars in thousands):
Three Months Ended Nine Months Ended
June 30, Increase Percentage June 30, Increase Percentage
2008 2007 (Decrease) Change 2008 2007 (Decrease) Change
North America $ 6,572 $ 6,077 $ 495 8 % $ 18,402 $ 17,824 $ 578 3 %
Europe 6,448 9,492 (3,044 ) -32 % 21,144 25,827 (4,683 ) -18 %
Asia Pacific 1,278 715 563 79 % 3,816 2,132 1,684 79 %
Total revenue $ 14,298 $ 16,284 $ (1,986 ) -12 % $ 43,362 $ 45,783 $ (2,421 ) -5 %
Geographic Mix:
North America 46 % 37 % 42 % 39 %
Europe 45 % 58 % 49 % 56 %
Asia Pacific 9 % 5 % 9 % 5 %
100 % 100 % 100 % 100 %
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The increase quarter-over-quarter for North America revenue was driven by improved software sales of $1.1 million offset by a decrease of $0.6 million in maintenance and support revenue, primarily resulting from the recognition of previously deferred maintenance revenue in the quarter ended June 30, 2007.
The decrease quarter-over-quarter for Europe revenue was the result of a $2.6 million decrease in hardware revenue sales, driven in part by the decrease in year-over-year Card Management software revenue. Total software revenue in Europe was down quarter-over-quarter by $0.5 million. Year-over-year hardware revenue in Europe decreased $3.9 million. Reductions in total software revenue in Europe year-over-year ($2.0 million decrease) were partially offset by increases in maintenance and support revenue ($1.2 million increase). As noted in the prior quarter, the Company lost a significant European customer in 2007 due to consolidation in the banking industry.
Increases in Asia Pacific revenue remain strong as the Company improves market
penetration and continues to close significant transactions.
Quarter-over-quarter, software revenue increased $0.5 million. Year-over-year,
software revenue increased $1.1 million and hardware revenue increased $0.7
million.
Period-over-period changes in hardware and software revenue by customer sector and as a percentage of total hardware and software revenue, is as follows (dollars in thousands):
Three Months Ended Nine Months Ended
June 30, Increase Percentage June 30, Increase Percentage
2008 2007 (Decrease) Change 2008 2007 (Decrease) Change
Enterprise $ 6,006 $ 4,831 $ 1,175 24 % $ 17,451 $ 15,364 $ 2,087 14 %
Government 1,935 3,997 (2,062 ) -52 % 6,428 10,191 (3,763 ) -37 %
Financial 1,217 1,765 (548 ) -31 % 4,228 5,763 (1,535 ) -27 %
Total hardware and
software revenue $ 9,158 $ 10,593 $ (1,435 ) -14 % $ 28,107 $ 31,318 $ (3,211 ) -10 %
Customer Sector Mix:
Enterprise 66 % 45 % 62 % 49 %
Government 21 % 38 % 23 % 33 %
Financial 13 % 17 % 15 % 18 %
100 % 100 % 100 % 100 %
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Enterprise sales improved quarter-over-quarter as $0.5 million of prior period deferred software revenue was recognized during the quarter ended June 30, 2008. In addition, software revenue for the enterprise sector increased $0.9 million (primarily attributable to increases in Authentication and Single Sign On product sales), offset by a decrease of $0.3 million in hardware revenue. Year-over-year, the increase in enterprise sector revenue was driven by a $1.4 million increase in hardware revenue on improved Token, Smartcard, and USB key sales driven in part by a $0.7 million increase in enterprise software sales.
Government sector revenue continues to suffer from general fiscal constraints on government spending under current economic conditions. The Company continues to pursue government sector sale; the rate of deal closure, however, has been trending down and the total time to close individual deals has been increasing. Year-over-year, hardware revenue decreased $2.3 million, software revenue decreased $1.1 million, and professional services revenue decreased $0.3 million.
Financial sector revenue decreased quarter-over-quarter due to a decrease in hardware revenues of $0.6 million. The decrease in financial sector revenue year-over-year is primarily attributable to the loss of a major customer during the quarter ended March 31, 2007, due to consolidation in the European banking industry. Year-over-year, decreases in hardware sales revenue were $1.7 million.
Cost of revenue
Total cost of revenue, costs as a percentage of corresponding revenue, and period-over-period changes are as follows (dollars in thousands):
Three Months Ended Nine Months Ended
June 30, Increase Percentage June 30, Increase Percentage
2008 2007 (Decrease) Change 2008 2007 (Decrease) Change
Software $ 1,086 $ 1,344 $ (258 ) -19 % $ 2,772 $ 2,930 $ (158 ) -5 %
As a % of software
revenue 18 % 27 % 16 % 17 %
Hardware $ 2,071 $ 2,733 $ (662 ) -24 % $ 6,819 $ 7,536 $ (717 ) -10 %
As a % of hardware
revenue 65 % 48 % 61 % 55 %
Maintenance and
support $ 2,040 $ 1,194 $ 846 71 % $ 6,092 $ 3,406 $ 2,686 79 %
As a % of
maintenance and
support revenue 40 % 21 % 40 % 24 %
Amortization of
acquired dev.
technology & patents $ 592 $ 747 $ (155 ) -21 % $ 1,787 $ 2,331 $ (544 ) -23 %
Total cost of
revenue $ 5,789 $ 6,018 $ (229 ) -4 % $ 17,470 $ 16,203 $ 1,267 8 %
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Cost of software revenue includes the cost of professional services associated with the customization, installation and integration services. Software margins improved quarter-over-quarter due to an increase in stand-alone software sales. For the quarter ended June 30, 2008, stand-alone software sales represented 70% of total software sales compared to 64% of total software sales for the quarter ended June 30, 2007. Stand-alone software sales require less installation and customization expense per sale.
Cost of hardware revenue includes costs associated with the manufacturing and shipping of hardware products as well as logistics, operations, and adjustments to reserves for warranty and inventory. Hardware costs of revenue fell in absolute dollars on lower hardware revenue. The lower volumes negatively impacted margins, specifically for readers (margins decreased 10 percentage points quarter-over-quarter) and smartcards (margins decreased 18 percentage points quarter-over-quarter).
Cost of maintenance and support revenue consists primarily of personnel costs and expenses incurred in providing support and on-site consulting services, including absorbed research and development departmental costs such as sustaining engineering efforts. The trend identified originally in the quarter ended December 31, 2007, continued in the current quarter, specifically, an increase in sustaining engineering costs incurred by the development team on a larger installed base and a more detailed financial allocation of engineering activities during the period. In absolute dollars, the effect of the increase in absorbed Research and Development costs for the nine months ended June 30, 2008, compared to the same period in the prior year explains $2.7 million of the variance.
Amortization of acquired developed technology includes amortization of technology capitalized in the Company's historical acquisitions and purchases of certain patents and related intellectual property from a third party. The variances are in line with the scheduled amortization of acquired intangibles, as certain items become fully amortized.
Operating expenses
A substantial proportion of operating expenses are comprised of personnel costs, facilities, and associated information technology costs to support Company personnel, which are generally fixed. Accordingly, a small variation in the timing of recognition of revenue can cause significant variations in operating results from quarter to quarter.
Sales and marketing
Sales and marketing expenses and period-over-period changes are as follows (dollars in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
2008 2007 2008 2007
Sales and marketing $ 5,827 $ 6,127 $ 19,548 $ 19,053
Percentage change from
comparable prior period -5 % 3 %
As a percentage of net revenue 41 % 38 % 45 % 42 %
Headcount, end of period 99 112
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Sales and marketing expenses consist primarily of salaries and other payroll expenses such as commissions and travel, depreciation, costs associated with marketing programs, promotions, trade shows, and allocations of facilities and information technology costs. Expected savings associated with reduced headcount have not been realized to date due to severance expense recorded year to date associated with the December 2007 cost cutting plan and subsequent severance associated with the 2008 resignations of the Company's CEO and CFO, portions of which are allocated to sales and marketing as a result of corporate allocation.
Research and development
Research and development expenses and period-over-period changes are as follows (dollars in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
2008 2007 2008 2007
Research and development, net $ 4,676 $ 5,060 $ 14,092 $ 14,913
Percentage change from
comparable prior period -8 % -6 %
As a percentage of net revenue 33 % 31 % 32 % 33 %
Headcount, end of period 116 136
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Research and development expenses consist primarily of salaries, costs of components used in research and development activities, travel, depreciation, and an allocation of facilities and information technology costs. The focus of research and development efforts is to bring new products, as well as new versions of existing products, to market, in order to address customer demand as well as to provide ongoing support to existing products. Significant research and development expenses are absorbed into maintenance and support cost of goods sold to reflect sustaining engineering efforts.
Decreases in research and development expenses, net, were the result of increased percentages of spend for support and sustaining engineering efforts made by the development team on a growing installed based that were absorbed into cost of revenues. Quarter-over-quarter, an additional $1.0 million was absorbed to cost of revenue. Year-over-year, an additional $2.7 million was absorbed to cost of revenue. Offsetting these decreases quarter-over-quarter were higher outsourcing costs of $0.3 million, and increased severance expense of $0.2 million. Year-over-year, outsourcing costs for offshore engineering increased $0.4 million, severance expense increased $0.8 million, and the weak United States dollar adversely impacted consolidated research and development expenses, as more than 50% of costs are incurred in foreign currencies. Savings associated with the reduced headcount have been offset by the impact of the weakening U.S. dollar over the prior year.
General and administrative
General and administrative expense and period-over-period changes are as follows (dollars in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
2008 2007 2008 2007
General and administration $ 2,626 $ 4,405 $ 8,267 $ 9,784
Percentage change from
comparable prior period -40 % -16 %
As a percentage of net revenue 18 % 27 % 19 % 21 %
Headcount, end of period 42 50
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General and administrative expenses consist primarily of personnel costs for administration, finance, human resources, and legal, as well as professional fees related to legal, audit and accounting, costs associated with . . .
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