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| CML > SEC Filings for CML > Form 10-Q on 5-Nov-2008 | All Recent SEC Filings |
5-Nov-2008
Quarterly Report
• our expectations regarding our revenue, gross margin and expenses;
• our ability to compete in our industry;
• our ability to maintain and grow our channel partner relationships;
• our growth strategy and our growth rate;
• our anticipated cash needs and our estimates regarding our capital requirements and our need for additional financing;
• our ability to protect our intellectual property rights; and
• pricing and availability of our suppliers' products.
In some cases, you can identify forward-looking statements by terms such as
"anticipate," "believe," "can," "continue," "could," "estimate," "expect,"
"intend," "may," "plan," "potential," "predict," "project," "should," "will,"
"would" and similar expressions intended to identify forward-looking statements.
These statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance, time frames or
achievements to be materially different from any future results, performance,
time frames or achievements expressed or implied by the forward-looking
statements. We discuss many of these risks, uncertainties and other factors in
this Quarterly Report on Form 10-Q in greater detail in Part II, Item IA. "Risk
Factors." Given these risks, uncertainties and other factors, you should not
place undue reliance on these forward-looking statements. Also, these
forward-looking statements represent our estimates and assumptions only as of
the date hereof. We hereby qualify all of our forward-looking statements by
these cautionary statements. Except as required by law, we assume no obligation
to update these forward-looking statements publicly, or to update the reasons
actual results could differ materially from those anticipated in these
forward-looking statements, even if new information becomes available in the
future.
The following discussion should be read in conjunction with our financial
statements and the related notes contained elsewhere in this Quarterly Report on
Form 10-Q and in our other Securities and Exchange Commission, or SEC, filings,
including our Annual Report on Form 10-K for the year ended December 31, 2007,
filed with the SEC on March 27, 2008.
Overview
We are a leading provider of enterprise-class network storage solutions that
are highly scalable, feature rich and designed to be easy to use and cost
effective. Our Storage Center solution is a Storage Area Network, or SAN, that
enables users to intelligently store, recover and manage large amounts of data
by combining our sophisticated software with standards-based hardware into a
single integrated solution. As of October 24, 2008, Storage Center was being
utilized by over 1,100 enterprises worldwide, across a wide variety of
industries including education, financial services, government, healthcare,
insurance, legal, media, retail, technology and transportation. We believe that
Storage Center is the most comprehensive enterprise-class network storage
solution available today, providing increased functionality and lower total cost
of ownership when compared to competing storage systems.
We believe our business model is highly differentiated and provides us with
several competitive advantages. We sell our products through an all-channel
assisted sales model designed to enable us to quickly scale and cost effectively
increase sales. Our sales team is spread geographically throughout the United
States, and in certain international markets. We also employ a virtual
manufacturing strategy, which significantly reduces inventory and eliminates the
need for in-house or outsourced manufacturing. We believe these combined
strategies create an efficient and scalable business model that enables us to
reduce operating costs and improve capital efficiency.
Critical Accounting Policies and Estimates
Our critical accounting policies are more fully described in Note 1 of the
audited financial statements for the year ended December 31, 2007, included in
our Annual Report on Form 10-K filed with the SEC on March 27, 2008. There have
been no material changes in our critical accounting policies during the nine
months ended September 30, 2008.
The discussion of our financial condition and results of operations is based
upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates,
judgments and assumptions that effect the reported amount of assets,
liabilities, revenues and expenses. On an ongoing basis, we evaluate our
estimates, including those related to revenue recognition, the allowance for
doubtful accounts, inventory valuation, stock-based compensation and income
taxes. We base our estimates of the carrying value of certain assets and
liabilities on historical experience and on various other assumptions that we
believe to be reasonable. In many cases, we could reasonably have used different
accounting policies and estimates. In some cases, changes in the accounting
estimates are reasonably likely to occur from period to period. Management has
discussed the development, selection and disclosure of these estimates with the
audit committee of our board of directors. Our actual results may differ from
these estimates under different assumptions or conditions.
Results of Operations
The following table sets forth a summary of our Consolidated Statements of
Operations and the related changes for the three and nine months ended
September 30, 2008 and 2007 (in thousands):
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2008 2007 $ % 2008 2007 $ %
(unaudited)
Revenue
Product $ 19,501 $ 11,168 $ 8,333 74.6 % $ 51,416 $ 28,809 $ 22,607 78.5 %
Product support and services 5,109 2,236 2,873 128.5 12,519 5,534 6,985 126.2
Total revenue 24,610 13,404 11,206 83.6 63,935 34,343 29,592 86.2
Cost of revenue
Cost of product 9,338 5,551 3,787 68.2 24,716 14,549 10,167 69.9
Cost of product support and services 2,064 1,163 901 77.5 5,078 3,232 1,846 57.1
Total cost of revenue 11,402 6,714 4,688 69.8 29,794 17,781 12,013 67.6
Gross profit 13,208 6,690 6,518 97.4 34,141 16,562 17,579 106.1
Operating expenses
Sales and marketing 9,041 5,828 3,213 55.1 25,823 15,414 10,409 67.5
Research and development 2,452 2,177 275 12.6 7,111 5,597 1,514 27.1
General and administrative 1,883 767 1,116 145.5 5,087 2,055 3,032 147.5
Total operating expenses 13,376 8,772 4,604 52.5 38,021 23,066 14,955 64.8
Loss from operations (168 ) (2,082 ) 1,914 91.9 (3,880 ) (6,504 ) 2,624 40.3
Interest income 632 88 544 618.2 2,125 457 1,668 365.0
Net income (loss) $ 464 $ (1,994 ) $ 2,458 123.3 % $ (1,755 ) $ (6,047 ) $ 4,292 71.0 %
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Comparison of Three Months Ended September 30, 2008 and 2007
Revenue
Revenue and the related changes for the three months ended September 30, 2008
and 2007 were as follows (in thousands):
Three Months Ended September 30,
2008 2007
% %
of Total of Total Change
$ Revenue $ Revenue $ %
(unaudited)
Revenue
Product $ 19,501 79.2 % $ 11,168 83.3 % $ 8,333 74.6 %
Product support and
services 5,109 20.8 2,236 16.7 2,873 128.5
Total revenue $ 24,610 100.0 % $ 13,404 100.0 % $ 11,206 83.6 %
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Product Revenue. Product revenue derived from system sales primarily
increased due to a 48% increase in the number of systems sold. We believe the
increase in systems sales was driven by an increase of approximately 70 channel
partners, an increase in sales and marketing headcount to 152 from 103 people,
and additional marketing programs. While we continued to experience lower
revenue per megabyte for disk drives, we believe this was offset by increased
revenue from enhanced capacity and complexity of systems purchased by our end
users. Product revenue derived from upgrade sales increased due to the ongoing
growth in the number of our total end users, which increased to over 1,085 as of
September 30, 2008 from over 640 as of September 30, 2007.
Product Support and Services Revenue. Product support revenue increased 107%
primarily due to the renewal of maintenance agreements by existing end users and
the growth of the installed base. Services revenues increased 593% due to an
increase in end user and channel partner training programs and an increase in
Storage Center installations. These increases were due to both an increase in
the number of products sold and our efforts to grow our services revenue.
Cost of Revenue and Gross Margin
Cost of revenue and gross margin and the related changes for the three months
ended September 30, 2008 and 2007 were as follows (in thousands):
Three Months Ended September 30,
2008 2007
% %
of Related of Related Change
$ Revenue $ Revenue $ %
(unaudited)
Cost of revenue
Cost of product $ 9,338 47.9 % $ 5,551 49.7 % $ 3,787 68.2 %
Cost of product
support and services 2,064 40.4 1,163 52.0 901 77.5
Total cost of revenue $ 11,402 46.3 % $ 6,714 50.1 % $ 4,688 69.8 %
Gross margin 53.7 % 49.9 %
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Cost of Product Revenue. Cost of product revenue increased due to increased
component hardware costs associated with the increased number of systems and
upgrades purchased by our end users.
Cost of Product Support and Services Revenue. Cost of product support and
services revenue increased primarily due to increased salaries, employee
benefits and stock-based compensation expense of $207,000 related to growth in
our customer service and technical support headcount to 36 people from 24
people, increased hardware service fees of $217,000 charged by our third-party
hardware maintenance provider associated with the continuing growth of our
installed base, and $260,000 of product cost predominately for obligations owed
to customers pursuant to terms of our hardware and software maintenance
contracts.
Gross Margin. Gross margin increased due to revenue increasing faster than
cost of revenue as discussed above.
Operating Expenses and Interest Income
Operating expenses and interest income and the related changes for the three
months ended September 30, 2008 and 2007 were as follows (in thousands):
Three Months Ended September 30,
2008 2007
% %
of Total of Total Change
$ Revenue $ Revenue $ %
(unaudited)
Operating expenses
Sales and marketing $ 9,041 36.7 % $ 5,828 43.5 % $ 3,213 55.1 %
Research and development 2,452 10.0 2,177 16.2 275 12.6
General and administrative 1,883 7.7 767 5.7 1,116 145.5
Total operating expenses $ 13,376 54.4 % $ 8,772 65.4 % $ 4,604 52.5 %
Interest income $ 632 2.6 % $ 88 0.7 % $ 544 618.2 %
|
Sales and Marketing Expense. Sales and marketing expense increased primarily
due to an increase in sales and marketing headcount to 152 people from 103
people, resulting in a $2.5 million increase in salaries, employee benefits,
commissions and stock- based compensation expense, a $245,000 increase in sales
and marketing related travel and support costs and increased marketing efforts
led to an additional $191,000 of expense related to partner programs, trade
shows and other promotional activities.
Research and Development Expense. Research and development expense increased
primarily due to an increase in research and development headcount to 55 people
from 46 people, resulting in a $350,000 increase in salaries, employee benefits
and stock-based compensation expense, and an increase of $110,000 in facilities
related costs. These increases were partially offset by a decrease of $131,000
in supplies and prototype material costs due to the timing of research and
development projects, and a decrease of $115,000 in legal fees pertaining to the
maintenance of our patent portfolio.
General and Administrative Expense. General and administrative expense
increased primarily due to an increase in finance, information technology, and
human resource staff headcount to 16 people from 12 people and compensation
increases to reflect current market conditions, resulting in a $237,000 increase
in salaries, employee benefits and stock-based compensation expense.
Professional fees increased $70,000 for outside legal, accounting, and
consulting services, pertaining predominately to public company reporting and
compliance requirements as we completed an initial public offering in
October 2007, and in defense of a patent infringement claim we accrued an
additional $800,000 of legal and settlement expenses.
Interest Income. Interest income increased primarily due to increased cash
and cash equivalents and investment balances following the closing of our
initial public offering in October 2007.
Comparison of Nine Months Ended September 30, 2008 and 2007
Revenue
Revenue and the related changes for the nine months ended September 30, 2008
and 2007 were as follows (in thousands):
Nine Months Ended September 30,
2008 2007
% %
of Total of Total Change
$ Revenue $ Revenue $ %
(unaudited)
Revenue
Product $ 51,416 80.4 % $ 28,809 83.9 % $ 22,607 78.5 %
Product support and
services 12,519 19.6 5,534 16.1 6,985 126.2
Total revenue $ 63,935 100.0 % $ 34,343 100.0 % $ 29,592 86.2 %
|
Product Revenue. Product revenue derived from system sales primarily
increased due to a 45% increase in the number of systems sold. We believe the
increase in systems sales was driven by an increase of approximately 70 channel
partners, an increase in sales and marketing headcount to 152 from 103 people,
and additional marketing programs. While we continued to experience lower
revenue per megabyte for disk drives, we believe this was offset by increased
revenue from enhanced capacity and complexity of systems purchased by our end
users. Product revenue derived from upgrade sales increased due to the ongoing
growth in the number of our total end users, which increased to over 1,085 as of
September 30, 2008 from over 640 as of September 30, 2007.
Product Support and Services Revenue. Product support revenue increased 118%
primarily due to the renewal of maintenance agreements by existing end users and
the growth of the installed base. Services revenues increased 219% due to an
increase in end user and channel partner training programs and an increase in
Storage Center installations. These increases were due to both an increase in
the number of products sold and our efforts to grow our services revenue.
Cost of Revenue and Gross Margin
Cost of revenue and gross margin and the related changes for the nine months
ended September 30, 2008 and 2007 were as follows (in thousands):
Nine Months Ended September 30,
2008 2007
% %
of Related of Related Change
$ Revenue $ Revenue $ %
(unaudited)
Cost of revenue
Cost of product $ 24,716 48.1 % $ 14,549 50.5 % $ 10,167 69.9 %
Cost of product
support and services 5,078 40.6 3,232 58.4 1,846 57.1
Total cost of revenue $ 29,794 46.6 % $ 17,781 51.8 % $ 12,013 67.6 %
Gross margin 53.4 % 48.2 %
|
Cost of Product Revenue. Cost of product revenue increased due to increased
component hardware costs associated with the increased number of systems and
upgrades purchased by our end users.
Cost of Product Support and Services Revenue. Cost of product support and
services revenue increased primarily due to increased salaries, employee
benefits and stock-based compensation expense of $535,000 related to growth in
our customer service and technical support headcount to 36 people from 24
people, increased hardware service fees of $785,000 charged by our third-party
hardware maintenance provider associated with the continuing growth of our
installed base, and $358,000 of product cost predominately for obligations owed
to customers pursuant to terms of our hardware and software maintenance
contracts.
Gross Margin. Gross margin increased due to revenue increasing faster than
cost of revenue as discussed above.
Operating Expenses and Interest Income
Operating expenses and interest income and the related changes for the nine
months ended September 30, 2008 and 2007 were as follows (in thousands):
Nine Months Ended September 30,
2008 2007
% %
of Total of Total Change
$ Revenue $ Revenue $ %
(unaudited)
Operating expenses
Sales and marketing $ 25,823 40.4 % $ 15,414 44.9 % $ 10,409 67.5 %
Research and development 7,111 11.1 5,597 16.3 1,514 27.1
General and administrative 5,087 8.0 2,055 6.0 3,032 147.5
Total operating expenses $ 38,021 59.5 % $ 23,066 67.2 % $ 14,955 64.8 %
Interest income $ 2,125 3.3 % $ 457 1.3 % $ 1,668 365.0 %
|
Sales and Marketing Expense. Sales and marketing expense increased primarily
due to an increase in sales and marketing headcount to 152 people from 103
people, resulting in a $7.7 million increase in salaries, employee benefits,
commissions and stock-based compensation expense, a $870,000 increase in sales
and marketing related travel and support costs and increased marketing efforts
led to an additional $929,000 of expense related to partner programs, trade
shows and other promotional activities.
Research and Development Expense. Research and development expense increased
primarily due to an increase in research and development headcount to 55 people
from 46 people, resulting in a $1.4 million increase in salaries, employee
benefits and stock-based compensation expense and an increase of $249,000 in
facilities related costs. These increases were partially offset by a decrease of
$221,000 in supplies and prototype material costs due to the timing of research
and development projects.
General and Administrative Expense. General and administrative expense
increased primarily due to an increase in finance, information technology, and
human resource staff headcount to 16 people from 12 people and compensation
increases to reflect current market conditions, resulting in a $924,000 increase
in salaries, employee benefits and stock-based compensation expense.
Professional fees increased $1.2 million for outside legal, accounting, and
consulting services, pertaining predominately to public company reporting and
compliance requirements as we completed an initial public offering in
October 2007, and in defense of a patent infringement claim we accrued an
additional $800,000 of legal and settlement expenses. Depreciation expense
increased $195,000 due to higher gross asset balances.
Interest Income. Interest income increased primarily due to increased cash
and cash equivalents and investment balances following the closing of our
initial public offering in October 2007.
Liquidity and Capital Resources
We have not achieved profitability on a quarterly or annual basis since
inception, other than the three months ended September 30, 2008, resulting in an
accumulated deficit of $51.2 million as of September 30, 2008. Our cash and cash
equivalents and investments available to fund operations were $95.0 million and
$93.7 million at September 30, 2008 and December 31, 2007, respectively. We
completed an initial public offering of our common stock in October 2007, with
cash proceeds of $84.6 million, net of underwriting discounts and commissions
and offering expenses. We invested the cash proceeds in investment grade,
interest bearing securities. We have used these funds for general corporate
purposes since our initial public offering and expect to continue to do so. Cash
in excess of immediate operating requirements is invested in accordance with our
investment policy, primarily with a goal of maintaining liquidity and capital
preservation.
Cash Flows
The following table summarizes our cash flows for the nine months ended
September 30, 2008 and 2007 (in thousands).
Nine Months Ended
September 30,
2008 2007
(unaudited)
Net cash provided by (used in) operating activities $ 2,575 $ (4,794 )
Net cash used in investing activities (39,688 ) (1,744 )
Net cash provided by (used in) financing activities 543 (112 )
Net decrease in cash and cash equivalents $ (36,570 ) $ (6,650 )
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Operating Activities
Cash provided by operating activities was $2.6 million for the nine months
ended September 30, 2008. We incurred a net loss of $1.8 million, which included
non-cash charges consisting of $1.1 million in depreciation and $1.5 million in
stock-based compensation expense. Other uses of cash in operating activities
included an increase in accounts receivable of $8.0 million, partially offset by
an increase in deferred revenue of $6.8 million. The increase in accounts
receivable reflects an overall increase in revenue primarily due to the
expansion of our operations. The increase in deferred revenue reflects an
increase in our customer base and related increase in the purchase of our
maintenance agreements, which are paid for in advance but recorded as revenue
ratably over the term of the agreement.
. . .
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