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

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Form 10-Q for SUPPORT.COM, INC.


2-Nov-2012

Quarterly Report


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

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q (the "Report") and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011. The following discussion includes forward-looking statements. Please see "Risk Factors" in Item 1A of Part II of this Report for important information to consider when evaluating these statements.

Overview

Support.com enables partners to unlock the potential of technology services. We help leading brands create new revenue streams and deepen customer loyalty through programs that enhance their customers' technology experience. Our solution includes a comprehensive service delivery platform, mobile and desktop apps, a scalable workforce of technology specialists and proven expertise in program design and execution. Our partners include many of the nation's leading communications providers, retailers and technology companies.


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We help install, set up, connect, secure, repair and optimize personal computers, printers, tablets, smartphones, digital cameras, gaming devices, music players, servers, networks, and other technology. We offer one-time and subscription services, and perpetual as well as subscription period licenses of our software products.

Our technology specialists deliver our services online and by telephone, leveraging our comprehensive service delivery platform. They generally work from their homes rather than in brick and mortar facilities. Our software products include tools designed to address some of the most common technology issues including computer maintenance, optimization and security.

We market our services principally through channel partners. Our channel partners include communications providers, retailers, technology companies and others. We market our software products directly, principally online, and through channel partners. We offer free trial versions of our software products to encourage customers to experience the products before buying, and to encourage customers to upgrade to premium versions for which we charge license fees. Our sales and marketing efforts principally target North American customers.

Our total revenue for the third quarter of 2012 grew 47% year-over-year. Revenue from services grew 73% year-over-year. The increase in services revenue over the prior year was due to growth in our channel programs, primarily expansion of the Comcast program. Revenue from software and other declined 11% year-over-year due to changes in the online advertising markets in which we participate.

Cost of services for the third quarter of 2012 grew 11% year-over-year as we added service delivery personnel to support revenue growth. Services gross margin improved from 7% to 40% year-over-year primarily as a result of improved operational processes, refinements to service delivery methodology and further technology enablement. Cost of software and other for the third quarter of 2012 declined 32% year-over-year due to reduced sales of our software products. Total gross margin was 50% in the third quarter of 2012 and 32% for the same period in 2011. The increase in total gross margin was driven by improved services gross margin offset by a lower percentage of software in the revenue mix.

Third quarter operating expenses decreased by 20% year-over-year, driven by lower sales expense following a reduction in the contact center sales agent workforce completed at the end of the second quarter of 2012, and lower marketing expense related to our software products.

At September 30, 2012 cash, cash equivalents and investments were $51.6 million compared to $48.5 million at June 30, 2012, representing an increase of $3.1 million quarter-over-quarter.

We intend the following discussion of our financial condition and results of operations to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our financial statements.

Critical Accounting Policies and Estimates

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 have the greatest potential impact on our condensed consolidated financial statements, so we consider them to be our critical accounting policies and estimates. There have been no significant changes in these critical accounting policies and estimates during the three and nine months ending September 30, 2012.

RESULTS OF OPERATIONS

The following table sets forth the results of operations for the three and nine months ended September 30, 2012 and 2011 expressed as a percentage of total revenue:


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                                                 Three Months                     Nine Months
                                                     Ended                           Ended
                                                 September 30,                   September 30,
                                              2012           2011             2012           2011
Revenue:
Services                                            81 %          69 %             80 %           67 %
Software and other                                  19            31               20             33
Total revenue                                      100           100              100            100

Costs of revenue:
Cost of services                                    48            64               54             55
Cost of software and other                           2             4                2              3
Total cost of revenue                               50            68               56             58

Gross profit                                        50            32               44             42
Operating expenses:
Research and development                             9            13               10             11
Sales and marketing                                 21            48               28             42
General and administrative                          16            25               16             24
Amortization of intangible assets and
other                                                2             3                2              1
Total operating expenses                            48            89               56             78

Income (loss) from operations                        2           (57 )            (12 )          (36 )

Interest and other income, net                       1             1                0              1

Income (loss) from continuing
operations, before income taxes                      2           (56 )            (13 )          (35 )

Income tax provision                                 1             2                1              1

Income (loss) from continuing
operations, after income taxes                       3           (58 )            (13 )          (36 )

Income (loss) from discontinued
operations, after income taxes                      (0 )           0                0              0

Net income (loss)                                    2 %         (58 ) %          (13 )%         (36 )%


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REVENUE

                         Three Months Ended September 30,                      Nine Months Ended September 30,
In thousands,
except                                          $            %                                      $             %
percentages         2012          2011       Change        Change        2012         2011        Change        Change

Services            $ 14,769     $  8,532     $ 6,237           73 %    $ 42,278     $ 26,124     $ 16,154           62 %
Software and
other                  3,407        3,818        (411 )        (11 )%     10,799       12,711       (1,912 )        (15 )%
Total revenue       $ 18,176     $ 12,350     $ 5,826           47 %    $ 53,077     $ 38,835     $ 14,242           37 %

Services revenue consists primarily of fees for technology services. We provide these services remotely, generally using work-from-home technology specialists and contractors who utilize our service delivery platform to deliver the services. Services revenue for the three months ended September 30, 2012 increased by $6.2 million from the same period in 2011. The increase was due to growth in our channel programs, primarily expansion of the Comcast program. For the three months ended September 30, 2012, services revenue generated from our channel partnerships was $13.8 million compared to $7.9 million for the same period in 2011. Direct services revenue was $0.9 million for the three months ended September 30, 2012 compared to $0.7 million for the same period in 2011. Services revenue for the nine months ended September 30, 2012 increased by $16.2 million from the same period in 2011. The increase was due to growth in our channel programs, primarily expansion of the Comcast program. For the nine months ended September 30, 2012, services revenue generated from our channel partnerships was $39.2 million compared to $24.0 million for the same period in 2011. For the nine months ended September 30, 2012, direct services revenue was $3.0 million compared to $2.1 million for the same period in 2011.

Software and other revenue is comprised primarily of fees for software products provided through direct consumer downloads and through the sale of this software via channel partners. Software and other revenue for the three months ended September 30, 2012 decreased by $0.4 million from the same period in 2011 due to changes in the online advertising markets in which we participate. For the three months ended September 30, 2012, software revenue from direct sales was $1.9 million compared to $2.4 million for the same period in 2011 while software revenue generated from our channel partnerships was $1.5 million for the three months ended September 30, 2012, compared to $1.4 million for the same period in 2011. Software and other revenue for the nine months ended September 30, 2012 decreased by $1.9 million compared to same period in 2011 due to changes in the online advertising markets in which we participate. For the nine months ended September 30, 2012, software revenue from direct sales was $6.4 million compared to $9.0 million for the same period in 2011 while software and other revenue generated from our channel partnerships was $4.4 million for the nine months ended September 30, 2012, compared to $3.7 million for the same period in 2011.

COSTS AND EXPENSES

Costs of Revenue

                            Three Months Ended September 30,                       Nine Months Ended September 30,
In thousands,
except                                             $            %                                        $           %
percentages          2012            2011        Change       Change         2012          2011       Change       Change

Cost of services   $   8,815       $  7,917     $    898           11 %    $  28,696     $ 21,334     $ 7,362           35 %
Cost of software
and other                312            458         (146 )        (32 )%       1,142        1,295        (153 )        (12 ) %
Total cost of
revenue            $   9,127       $  8,375     $    752            9 %    $  29,838     $ 22,629     $ 7,209           32 %

Cost of services consists primarily of salary-related and contractor expenses for personnel providing services, technology and telecommunication expenses related to the delivery of services and other personnel-related expenses in service delivery. The increase of $0.9 million in cost of services for the three months ended September 30, 2012 compared to the same period in 2011 was mainly driven by $0.5 million of costs associated with higher number of service delivery personnel added to support the growth of our programs, as well as a corresponding increase of $0.2 million in direct technology costs to support the growing workforce. The increase of $7.4 million in cost of services for the nine months ended September 30, 2012 compared to the same period in 2011 was primarily due to $3.9 million of costs associated with higher number of service delivery personnel for growing service revenue, a $1.6 million increase in third-party personnel costs, an $0.7 million increase due to the expansion of our small business programs and an increase of $0.6 million in direct technology costs to support the growing workforce.


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Cost of software and other consists primarily of third-party royalty fees for our software products. Certain products were developed using third-party research and development resources, and the third-party receives royalty payments on sales of products it developed. The decrease in cost of software and other for the three months and nine months ended September 30, 2012 compared to the same periods in 2011 was primarily due to reduced sales of software products developed by the third-party.

Operating Expenses

                            Three Months Ended September 30,                        Nine Months Ended September 30,
In thousands,
except                                            $             %                                        $             %
percentages          2012           2011        Change       Change          2012          2011        Change       Change

Research and
development        $   1,643      $  1,577     $     66             4 %    $   5,121     $  4,458     $    663            15 %
Sales and
marketing          $   3,789      $  5,954     $ (2,165 )         (36 )%   $  14,908     $ 16,282     $ (1,374 )          (8 ) %
General and
administrative     $   2,897      $  3,074     $   (177 )          (6 )%   $   8,661     $  9,300     $   (639 )          (7 )%

Research and development. Research and development expense consists primarily of compensation costs, third-party consulting expenses and related overhead costs for research and development personnel. Research and development costs are expensed as they are incurred. Research and development expense remained relatively consistent for the three months ended September 30, 2012 compared to the same period in 2011. The increase of $0.7 million in research and development expense for the nine months ended September 30, 2012 compared to the same period in 2011 resulted primarily from higher compensation expenses and related overhead expense due to an increase in headcount.

Sales and marketing. Sales and marketing expense consists primarily of compensation costs, including salaries and sales commissions for contact center sales agents and business development, program management and marketing personnel, as well as expenses for lead generation and promotional activities, including public relations, advertising and marketing. The decrease of $2.2 million in sales and marketing expense for the three months ended September 30, 2012 compared to the same period in 2011 resulted from lower sales expense following a reduction in the contact center sales agent workforce completed at the end of the second quarter of 2012, and lower marketing expense spend related to our software products. The decrease of $1.4 million in sales and marketing expense for the nine months ended September 30, 2012 compared to the same period in 2011 primarily resulted from the reduction in contact center sales agent costs and lower marketing expense related to our software products.

General and administrative. General and administrative expense consists primarily of compensation costs and related overhead costs for administrative personnel and professional fees for legal, accounting and other professional services. The decrease of $0.2 million in general and administrative expense for the three months ended September 30, 2012 compared to the same period in 2011 was primarily due to a decrease of $0.2 million in acquisition-related expenses. The decrease of $0.6 million in general and administrative expense for the nine months ended September 30, 2012 compared to the same period in 2011 was primarily due to decreases of $0.5 million in acquisition-related expenses and $0.1 million in stock-based compensation expense.

Amortization of Intangible Assets and Other

                             Three Months Ended September 30,                         Nine Months Ended September 30,
In thousands,
except                                               $            %                                          $            %
percentages          2012           2011           Change       Change         2012            2011        Change       Change

Amortization of
intangible
assets and other   $    397       $    330       $      67           20 %   $    1,155       $    536     $    619          115 %


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The increase in amortization of intangible assets and other for the three and nine months ended September 30, 2012 compared to the same periods in 2011 was primarily due to acquisition of RightHand IT Corporation in January 2012 and SUPERAntiSpyware in June 2011.

INTEREST INCOME AND OTHER, NET

                             Three Months Ended September 30,                          Nine Months Ended September 30,
In thousands,
except                                              $             %                                          $            %
percentages          2012           2011          Change        Change          2012           2011        Change       Change

Interest income
and other, net     $     93       $     96       $     (3 )          (3 ) %   $    227       $    371     $   (144 )        (39 ) %

The interest income and other, net for the three months ended September 30, 2012 remained consistent compared to the same period in 2011. The $0.1 million decrease for the nine months ended September 30, 2012 compared to the same period in 2011 was primarily due to lower interest income on our investments as a result of lower yields and lower balances in our portfolio.

INCOME TAX PROVISION
                            Three Months Ended September 30,                         Nine Months Ended September 30,
In thousands,
except                                             $            %                                            $            %
percentages          2012           2011         Change       Change         2012           2011          Change        Change

Income tax
provision          $    118       $    264      $   (146 )        (55 )%   $    353       $    295       $      58           20 %

The provision for income taxes includes estimates of current taxes due in domestic and foreign jurisdictions. Our current period provision consisted of state income tax, foreign taxes, and tax expense related to the recording of a deferred tax liability that results from the amortization of acquisition-related goodwill for income tax purposes.

The increase in the income tax provision from nine month ending 2011 to 2012 was primarily due to discrete tax benefits that reduced our income tax provision in 2011 including a release of valuation allowance of our Canada and a deferred tax adjustment in India.

LIQUIDITY AND CAPITAL RESOURCES

Total cash, cash equivalents and investments at September 30, 2012 was $51.6 million, compared to $53.0 million at December 31, 2011. The balance at December 31, 2011 included approximately $1.4 million of cash use related to the acquisition of RightHand IT Corporation in January 2012.

Operating Activities

Net cash used in operating activities was $0.6 million and $5.3 million for the nine months ended September 30, 2012 and 2011, respectively. Net cash used in operating activities for the nine months ended September 30, 2012 resulted primarily from a net loss of $6.7 million offset by non-cash items of $6.1 million, which primarily included depreciation, amortization of premiums and discounts on marketable securities, stock-based compensation expense and amortization of intangible assets and other. Net cash used in operating activities for the nine months ended September 30, 2011 resulted primarily from a net loss of $14.3 million, offset by an increase of accrued compensation of $1.1 million and other accrued liabilities of $900,000, and non-cash items of $4.9 million, which primarily include depreciation, amortization of premiums and discounts on marketable securities, stock-based compensation expense and amortization of intangible assets.

Investing Activities

Net cash provided by investing activities was $0.8 million and $2.9 million for the nine months ended September 30, 2012 and 2011, respectively. Net cash provided by investing activities for the nine months ended September 30, 2012 was primarily due to sales and maturities of $36.0 million of investments offset by the purchases of $33.3 million of investments, $1.3 million for acquisition of RightHand IT Corporation and $0.5 million for purchases of property and equipment. Net cash provided by investing activities for the nine months ended September 30, 2011 was primarily due to the purchases of $42.1 million in investments offset by sales and maturities of $53.7 million in investments, $8.4 million for acquisition of SUPERAntiSpyware and $0.2 for expenditures of property and equipment.


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Financing Activities

Net cash provided by financing activities was $1.1 million and $0.5 million for the nine months ended September 30, 2012 and 2011, respectively, and was primarily attributable to the exercise of employee stock options.

Working Capital and Capital Expenditure Requirements

At September 30, 2012, stockholders' equity was $69.0 million and working capital was $49.5 million. We believe that our existing cash balances will be sufficient to meet our working capital requirements and our planned capital expenditures for at least the next 12 months.

If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities. The sale of additional equity could result in dilution to our stockholders.

We plan to continue to make investments in our business during 2012. We believe these investments are essential to creating sustainable growth in our business in the future. Because these investments will likely precede any associated revenues, we expect our working capital to decrease in the near term although we expect the decrease to be smaller than it has been in the past. Additionally, we may choose to acquire other businesses or complimentary technologies to enhance our product capabilities and such acquisitions would likely require the use of cash.

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