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SAAS > SEC Filings for SAAS > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for INCONTACT, INC.

Form 10-Q for INCONTACT, INC.


2-Nov-2012

Quarterly Report


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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited December 31, 2011 consolidated financial statements and notes thereto, along with the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2011 Annual Report on Form 10-K, filed separately with the U.S. Securities and Exchange Commission.

OVERVIEW

inContact began in 1997 as a reseller of telecommunications services and has evolved to become a leading provider of cloud contact center software solutions. We help contact centers around the world create effective customer experiences through our powerful portfolio of cloud contact center contact routing, self-service and agent optimization software solutions. Our services and software solutions enable contact centers to operate more efficiently, optimize the cost and quality of every customer interaction, create new pathways to profit and ensure ongoing customer-centric business improvement and growth.

We began offering cloud contact center software solutions to the contact center market in 2005. Our dynamic technology platform provides our customers a solution without the costs and complexities of premise-based systems. Our proven delivery model provides compelling cost savings by removing the complexities of deploying and maintaining a premise-based solution, while providing flexibility to change with business needs.

DEVELOPMENTS

To provide additional funding for our infrastructure investment and cloud software growth initiatives, we sold 8.0 million shares of common stock in the open market for net proceeds of $37.3 million in September 2012.

In 2011, we entered into reseller agreements for our cloud contact center software solutions with Siemens Enterprise Communications ("Siemens") and Verizon Business Communications ("Verizon"). We have the opportunity to leverage the marketing and sales capacity of these large enterprises selling to contact center owners and operators to increase our business in North America and establish our business overseas - all of which we believe will generate growth in our recurring cloud contact center software revenue.

The new opportunity requires us to invest in the infrastructure to deliver our cloud contact center software solutions to new and larger mid-market enterprise and international customers and increase our customer service and support capacity. We began making that investment in 2011 and have continued in 2012. The investments have increased our cost of services and other operating expenses beginning in 2011 and continuing into 2012, which have adversely affected our margins and results of operations ahead of the anticipated revenue. Our ability to recoup that investment depends on how successful our reseller strategy is in 2012 and beyond, but we were able to mitigate the risk associated with future realization of sales, in part, by obtaining minimum purchase commitments from Siemens to generate $5.0 million of net software revenue in 2012 and $10.0 million in 2013.

During the nine months ended September 30, 2012, Siemens resold substantially fewer software services than they had originally anticipated. In October 2012, Siemens informed us that they are reviewing new measures, including the addition of dedicated incremental resources, and a revised go to market approach in an effort to increase sales of our software services under the agreement, and thereby increase contract revenue progressively to a level commensurate with the amount of the quarterly minimum purchase commitments. While positive, no assurances can be given that such plans will be implemented or be successful.

SOURCES OF REVENUE

We derive our revenues from two major business activities: (1) hosting and support of our inContact portfolio of cloud software solutions and associated professional services and (2) reselling telecommunication services. Our primary business focus is marketing and selling our inContact portfolio.

Software

Software delivery and support of our inContact portfolio is provided on a monthly recurring subscription basis. Monthly recurring charges are billed in arrears and recognized for the period in which they are earned. In addition to the monthly recurring revenue, revenue is also received on a non-recurring basis for professional services included in implementing or improving a user's inContact portfolio experience. Customers access cloud software and data through a secure Internet connection. Support services include technical assistance for our software products and product upgrades and enhancements on a when and if available basis. Our telecommunications and data network is fundamental to our inContact portfolio and allows us to provide the all-in-one inContact solution. Software service revenue also includes revenue related to quarterly minimum purchase commitments through the year ended 2013, from a related party reseller.


Telecom

We continue to derive revenue from traditional telecommunications services such as dedicated transport, switched long distance and data services. These services are provided over our network or through third party telecommunications providers. Revenue for transactional long distance usage is derived based on user specific rate plans and the user's call usage and is recognized in the period the call is initiated. Users are also billed monthly charges in arrears and revenue is recognized for such charges over the billing period. If the billing period spans more than one month, earned but unbilled revenues are recognized as revenue for incurred usage to date.

COSTS OF REVENUE AND OPERATING EXPENSES

Costs of Revenue

Costs of revenue consist primarily of payments to third party long distance service providers for resold telecommunication services to our customers. Costs of revenue also include salaries (including stock-based compensation) and related expenses for our software services delivery, support and professional services organizations, equipment depreciation relating to our services, amortization of acquired intangible assets, amortization of capitalized internal use software development costs, and allocated overhead, such as rent, utilities and depreciation on property and equipment. As a result, overhead expenses are included in costs of revenue and each operating expense category. The cost associated with providing professional services is significantly higher as a percentage of revenue than the cost associated with delivering our software services due to the labor costs associated with providing professional services. We anticipate that we will incur additional costs for long distance service providers, hosting, support, employee salaries and related expenses, to support delivery of our software solutions in the future.

Selling and Marketing

Selling and marketing expenses consist primarily of salaries (including stock-based compensation) and related expenses for employees in sales and marketing, including commissions and bonuses, advertising, marketing events, corporate communications, expenses, travel costs and allocated overhead. Since our Software segment revenue is delivered and therefore recognized over time, we have experienced a delay between increasing sales and marketing expenses and the recognition of the corresponding revenue. We believe it is important to continue investing in selling and marketing to create brand awareness and lead generation opportunities, to increase market share and to support the resellers added in 2011. Accordingly, we expect selling and marketing expenses to increase in absolute dollars as we continue to support growth initiatives.

Research and Development

Research and development expenses consist primarily of the non-capitalized portion of salary (including stock-based compensation) and related expenses for development personnel and costs related to the development of new products, enhancement of existing products, quality assurance, market research, testing, product management and allocated overhead. We expect research and development expenses to increase in absolute dollars in the future as we intend to release new features and functionality on a frequent basis, expand our content offerings, upgrade and extend our service offerings and develop new technologies.

General and Administrative

General and administrative expenses consist primarily of salary (including stock-based compensation) and related expenses for management, finance and accounting, legal, information systems and human resources personnel, professional fees, other corporate expenses and allocated overhead. We anticipate that we will incur additional employee salaries and related expenses, professional service fees and other corporate expenses related to the growth of our business and operations in the future. As such, we expect general and administrative expenses to increase in absolute dollars.


RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 and 2011

The following is a tabular presentation of our condensed consolidated operating
results for the three months ended September 30, 2012 compared to our condensed
consolidated operating results for the three months ended September 30, 2011 (in
thousands):



                                    2012          2011        $ Change        % Change
     Net revenue                  $ 27,862      $ 22,152      $   5,710              26 %
     Costs of revenue               14,818        13,537          1,281               9 %

     Gross profit                   13,044         8,615          4,429

     Gross margin                       47 %          39 %
     Operating expenses:
     Selling and marketing           6,956         6,641            315               5 %
     Research and development        2,495         1,575            920              58 %
     General and administrative      4,341         3,451            890              26 %

     Total operating expenses       13,792        11,667          2,125

     Loss from operations             (748 )      (3,052 )       (2,304 )

     Other expense                    (184 )        (101 )           83              82 %

     Loss before income taxes         (932 )      (3,153 )       (2,221 )
     Income tax expense                (21 )         (17 )            4

     Net loss                     $   (953 )    $ (3,170 )    $  (2,217 )

Revenue

Total revenues increased $5.7 million or 26% to $27.9 million during the three months ended September 30, 2012 compared to revenues of $22.2 million for the same period in 2011. The increase relates primarily to revenue generated from our inContact portfolio of cloud contact center solutions and the associated Telecom revenue and is due to our continued focus and investment in sales and marketing through our direct sales initiatives and referral partner arrangements. We recognized $1.25 million of software revenue during the three months ended September 30, 2012, under an arrangement with a reseller, a principal shareholder of inContact, which includes revenue from resold software services and amounts up to the quarterly minimum purchase commitments. Under the arrangement, revenue from resold software services reduces the reseller's obligation up to the amount of the quarterly minimum purchase commitments. These minimum purchase commitments were negotiated, in part, to mitigate the risks associated with the investment in infrastructure to support our expanded reseller sales and marketing efforts initiated in 2011 and expire at the end of 2013. If revenue from resold software services does not meet the quarterly minimum purchase commitment at the end of 2013, there will be a reduction in software revenue from that reseller at the beginning of 2014 to the extent the revenue from resold software services is less than the quarterly minimum purchase commitment at the end 2013.

During the nine months ended September 30, 2012, Siemens resold substantially fewer software services than they had originally anticipated. In October 2012, Siemens informed us that they are reviewing new measures, including the addition of dedicated incremental resources, and a revised go to market approach in an effort to increase sales of our software services under the agreement, and thereby increase contract revenue progressively to a level commensurate with the amount of the quarterly minimum purchase commitments. While positive, no assurances can be given that such plans will be implemented or be successful.

Costs of revenue and gross margin

Costs of revenue increased $1.3 million or 9% to $14.8 million during the three months ended September 30, 2012 compared to $13.5 million for the same period in 2011. Our gross margin increased eight percentage points to 47% during the three months ended September 30, 2012 from 39% during the three months ended September 30, 2011. The increase in revenue from our inContact portfolio and the minimum purchase commitment offset increased costs attributable to greater professional service and customer service personnel costs incurred to service larger mid-market and enterprise customers and to support resellers, international infrastructure investments initiated in 2011 and increased amortization of previously capitalized software development costs. In addition, lower Telecom costs due to increased efficiencies in call routing related to a 2011 investment in technology and lower negotiated direct costs contributed to the gross margin increase.

Selling and marketing

Selling and marketing expenses increased $315,000 or 5% to $7.0 million during the three months ended September 30, 2012 from $6.6 million for the same period in 2011. This increase is primarily a result of headcount additions for direct and channel sales employees and higher levels of investment in marketing efforts to create increased awareness of our inContact portfolio of cloud contact center solutions.


Research and development

Research and development expense increased $920,000 or 58% to $2.5 million during the three months ended September 30, 2012 from $1.6 million during the same period in 2011. The increase relates to our efforts to expand our content offerings, upgrade and extend our service offerings and develop new technologies.

General and administrative

General and administrative expense increased $890,000 or 26% to $4.3 million during the three months ended September 30, 2012 compared to $3.5 million during the same period in 2011. The increase is primarily due to increased personnel costs and costs incurred to support our international business expansion.

Other expense

Other expense increased $83,000 to $184,000 during the three months ended September 30, 2012 from $101,000 for the same period in 2011. The increase is primarily due to an increase in interest expense of $70,000 for the third quarter of 2012 compared to the comparable period in 2011 due to a higher outstanding balance on our debt facilities for the three months ended September 30, 2012 as compared to the same period in 2011.

Income taxes

Income taxes consist primarily of minimum state income taxes due and remained consistent for the three months ended September 30, 2012 compared to the same period in 2011.

Nine Months Ended September 30, 2012 and 2011

The following is a tabular presentation of our condensed consolidated operating
results for the nine months ended September 30, 2012 compared to our condensed
consolidated operating results for the nine months ended September 30, 2011 (in
thousands):



                                    2012          2011        $ Change        % Change
     Net revenue                  $ 79,752      $ 65,230      $  14,522              22 %
     Costs of revenue               43,590        38,751          4,839              12 %

     Gross profit                   36,162        26,479          9,683

     Gross margin                       45 %          41 %
     Operating expenses:
     Selling and marketing          20,874        17,738          3,136              18 %
     Research and development        6,611         4,347          2,264              52 %
     General and administrative     12,484        10,103          2,381              24 %

     Total operating expenses       39,969        32,188          7,781

     Loss from operations           (3,807 )      (5,709 )       (1,902 )

     Other expense                    (529 )        (553 )          (24 )             4 %

     Loss before income taxes       (4,336 )      (6,262 )       (1,926 )
     Income tax expense                (51 )         (48 )            3

     Net loss                     $ (4,387 )    $ (6,310 )    $  (1,923 )

Revenue

Total revenues increased $14.5 million or 22% to $79.8 million during the nine months ended September 30, 2012 compared to revenues of $65.2 million for the same period in 2011. The increase relates primarily to revenue generated from our inContact portfolio of cloud contact center solutions and the associated Telecom revenue and is due to our continued focus and investment in sales and marketing through our direct sales initiatives and referral partner arrangements. We recognized $3.0 million of software revenue during the nine months ended September 30, 2012, under an arrangement with a reseller, a principal shareholder of inContact, which includes revenue from resold software services and amounts up to the quarterly minimum purchase commitments. Under the arrangement, revenue from resold software services reduces the reseller's obligation up to the amount of the quarterly minimum purchase commitments. These minimum purchase commitments were negotiated, in part, to mitigate the risks associated with the investment in infrastructure to support our expanded reseller sales and marketing efforts initiated in 2011 and expire at the end of 2013. If revenue from resold software services does not meet the quarterly minimum purchase commitment at the end of 2013, there will be a reduction in software revenue from that reseller at the beginning of 2014 to the extent the revenue from resold software services is less than the quarterly minimum purchase commitment at the end 2013.

During the nine months ended September 30, 2012, Siemens resold substantially fewer software services than they had originally anticipated. In October 2012, Siemens informed us that they are reviewing new measures, including the addition of dedicated incremental resources, and a revised go to market approach in an effort to increase sales of our software services under the agreement, and thereby increase contract revenue progressively to a level commensurate with the amount of the quarterly minimum purchase commitments. While positive, no assurances can be given that such plans will be implemented or be successful.


Costs of revenue and gross margin

Costs of revenue increased $4.8 million or 12% to $43.6 million during the nine months ended September 30, 2012 compared to $38.8 million for the same period in 2011. Our gross margin increased four percentage points to 45% during the nine months ended September 30, 2012 from 41% during the nine months ended September 30, 2011. The increase in revenue from our inContact portfolio and the minimum purchase commitment offset increased costs attributable to greater professional service and customer service personnel costs incurred to service larger mid-market and enterprise customers and to support resellers, international infrastructure investments initiated in 2011 and increased amortization of previously capitalized software development costs. In addition, lower Telecom costs due to increased efficiencies in call routing related to a 2011 investment in technology and lower negotiated direct costs contributed to the gross margin increase.

Selling and marketing

Selling and marketing expense increased $3.1 million or 18% to $20.9 million during the nine months ended September 30, 2012 from $17.7 million for the same period in 2011. This increase is primarily a result of headcount additions for direct and channel sales employees and higher levels of investment in marketing efforts to create increased awareness of our inContact portfolio of cloud contact center solutions.

Research and development

Research and development expense increased $2.3 million or 52% to $6.6 million during the nine months ended September 30, 2012 from $4.3 million for the same period in 2011. The increase relates to our efforts to expand our content offerings, upgrade and extend our service offerings and develop new technologies.

General and administrative

General and administrative expense increased $2.4 million or 24% to $12.5 million during the nine months ended September 30, 2012 compared to $10.1 million for the same period in 2011. The increase is primarily due to increased personnel costs and costs incurred to support our international business expansion.

Other expense

Other expense decreased $24,000 to $529,000 during the nine months ended September 30, 2012 from $553,000 for the same period in 2011. The difference is primarily due to the $158,000 increase in fair value of the warrants during the nine months ended September 30, 2011 as compared to no change in fair value of warrants during 2012 as the associated warrants were exercised in 2011. Net interest expense decreased $9,000 and was relatively consistent for the nine months ended September 30, 2012 compared to the same period in 2011. The decreases were offset by an increase in other expenses of $201,000 from losses on the disposal of property and equipment.

Income taxes

Income taxes consist primarily of minimum state income taxes due and remained consistent for the nine months ended September 30, 2012 compared to the same period in 2011.

SEGMENT REPORTING

We operate under two business segments: Software and Telecom. The Software segment includes all monthly recurring revenue related to the delivery of our software applications, plus the associated professional services and setup fees and revenue related to quarterly minimum purchase commitments through the year ended 2013 from a related party reseller. The Telecom segment includes all voice and data long distance services provided to customers.

For segment reporting, we classify operating expenses as either "direct" or "indirect." Direct expense refers to costs attributable solely to either selling and marketing efforts or research and development efforts. Indirect expense refers to costs that management considers to be overhead in running the business. Management evaluates expenditures for both selling and marketing and research and development efforts at the segment level without the allocation of overhead expenses, such as compensation, rent, utilities and depreciation on property and equipment.


Software Segment Results

The following is a tabular presentation and comparison of our Software segment
unaudited condensed consolidated operating results for the three and nine months
ended September 30, 2012 and 2011 (in thousands):



                                                 Three Months Ended September 30,                            Nine Months Ended September 30,
                                        2012           2011         $ Change       % Change         2012           2011         $ Change       % Change
Net revenue                           $  13,976      $ 10,015      $    3,961             40 %    $  39,106      $  28,852      $  10,254             36 %
Costs of revenue                          5,623         4,488           1,135             25 %       15,972         12,071          3,901             32 %

Gross profit                              8,353         5,527                                        23,134         16,781

Gross margin                                 60 %          55 %                                          59 %           58 %

Operating expenses:
Direct selling and marketing              5,807         5,428             379              7 %       17,330         14,248          3,082             22 %
Direct research and development           2,252         1,412             840             59 %        5,954          3,886          2,068             53 %
Indirect                                  4,301         3,193           1,108             35 %       12,129          9,169          2,960             32 %

Loss from operations                  $  (4,007 )    $ (4,506 )                                   $ (12,279 )    $ (10,522 )

Three Months Ended September 30, 2012 and 2011

The Software segment revenue increased by $4.0 million or 40% to $14.0 million during the three months ended September 30, 2012 from $10.0 million for the same period in 2011. The increase relates primarily to revenue generated from our inContact portfolio of cloud contact center solutions and is due to our continued focus and investment in sales and marketing through our direct sales initiatives and referral partner arrangements. We recognized $1.25 million of software revenue during the three months ended September 30, 2012, under an arrangement with a reseller, a principal shareholder of inContact, which includes revenue from resold software services and amounts up to the quarterly minimum purchase commitments. Under the arrangement, revenue from resold software services reduces the reseller's obligation up to the amount of the quarterly minimum purchase commitments. These minimum purchase commitments were negotiated, in part, to mitigate the risks associated with the investment in infrastructure to support our expanded reseller sales and marketing efforts initiated in 2011 and expire at the end of 2013. If revenue from resold software services does not meet the quarterly minimum purchase commitment at the end of 2013, there will be a reduction in software revenue from that reseller at the beginning of 2014 to the extent the revenue from resold software services is less than the quarterly minimum purchase commitment at the end 2013.

During the nine months ended September 30, 2012, Siemens resold substantially fewer software services than they had originally anticipated. In October 2012, Siemens informed us that they are reviewing new measures, including the addition of dedicated incremental resources, and a revised go to market approach in an effort to increase sales of our software services under the agreement, and thereby increase contract revenue progressively to a level commensurate with the amount of the quarterly minimum purchase commitments. While positive, no assurances can be given that such plans will be implemented or be successful.

Software segment revenue also includes revenue from professional services of $785,000 for the three months ended September 30, 2012 compared to $529,000 for the same period in 2011.

Gross margin increased five percentage points to 60% for the three months ended September 30, 2012 compared to 55% for the same period in 2011. The increase in revenue from our inContact portfolio and the minimum purchase commitment offset increased costs attributable to greater professional service and customer service personnel costs incurred to service larger mid-market and enterprise customers and to support resellers, international infrastructure investments initiated in 2011 and increased amortization of previously capitalized software development costs.

Direct selling and marketing expenses in the Software segment increased $379,000 or 7% to $5.8 million during the three months ended September 30, 2012 compared to $5.4 million for the same period in 2011. This increase is a result of headcount additions for direct and channel sales employees and employees focused . . .

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