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

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Form 10-Q for USA MOBILITY, INC


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q ("Quarterly Report") contains forward-looking statements and information relating to USA Mobility, Inc. and its subsidiaries ("USA Mobility" or the "Company") that set forth anticipated results based on management's current plans, known trends and assumptions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as "anticipate", "believe", "estimate", "expect", "intend", "will", "target", "forecast" and similar expressions, as they relate to USA Mobility are forward-looking statements.

Although these statements are based upon current plans, known trends and assumptions that management considers reasonable, they are subject to certain risks, uncertainties and assumptions, including but not limited to those discussed below and under the captions "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")," and "Part I
- Item 1A - Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the United States Securities and Exchange Commission (the "SEC") on February 23, 2012 (the "2011 Annual Report"). Should known or unknown risks or uncertainties materialize, known trends change, or underlying assumptions prove inaccurate, actual results or outcomes may differ materially from past results and those described herein as anticipated, believed, estimated, expected or intended. Investors are cautioned not to place undue reliance on these forward-looking statements.

The Company undertakes no obligation to update forward-looking statements. Investors are advised to consult all further disclosures the Company makes in its subsequent reports on Form 10-Q and Form 8-K that it will file with the SEC. Also note that, in the risk factors, the Company provides a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to its business. These are factors that, individually or in the aggregate, could cause the Company's actual results to differ materially from past results as well as those results that may be forecasted, anticipated, believed, estimated, expected or intended. It is not possible to predict or identify all such risk factors. Consequently, investors should not consider the risk factor discussion to be a complete discussion of all of the potential risks or uncertainties that could affect USA Mobility's business, results of operations or financial condition, subsequent to the filing of this Quarterly Report.

Overview

The following MD&A is intended to help the reader understand the results of operations and financial condition of USA Mobility. The MD&A is provided as a supplement to, and should be read in conjunction with, our 2011 Annual Report and our condensed consolidated financial statements and accompanying notes.

USA Mobility, a holding company, which, acting through our indirect wholly-owned subsidiary, USA Mobility Wireless, Inc. ("wireless operations"), is a leading provider of wireless messaging, mobile voice and data and unified communications solutions in the United States. In addition, through our indirect wholly-owned subsidiary, Amcom Software, Inc. ("Amcom" or "software operations"), we provide mission critical unified communications solutions for contact centers, emergency management, mobile event notification, and Smartphone messaging. Our combined product offerings are capable of addressing a customer's mission critical communications needs. We offer our services and products in the United States and abroad primarily to three major market segments: healthcare, government and large enterprise. The key market segments for the wireless operations include healthcare, government and large enterprise, while the software operations also have a presence in hospitality, in addition to these three segments. For the wireless operations, the government business has been trending downward over the last several years as state and local governments have been struggling with budget constraints. At the same time, our wireless (paging) services tend to be a reliable and low cost communication alternative when budgets are constrained and therefore paging services can be positioned well against other communication tools. Large enterprise customers have been trending away from paging to cell/smart phones for a number of years and we expect that trend to continue in future years. Our software operations leverage these trends with more advanced critical messaging offerings for smart phones and more advanced


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unified communication tools. The trend toward more advanced/smart communications devices has been ongoing in large enterprise and is emerging in healthcare and government.

We generate revenue by providing paging services, developing, licensing, and supporting a wide range of software products and services. Our most significant expenses are related to compensating employees, site rents, telecommunications and income taxes.

Wireless Operations

Our wireless operations provide one-way and advanced two-way wireless messaging services including information services throughout the United States. We also offer voice mail, personalized greeting, message storage and retrieval, and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers. We market and distribute these wireless messaging and information services through a direct sales force and a small indirect sales channel.

Direct. The direct sales force rents or sells products and messaging services directly to customers ranging from small and medium-sized businesses to companies in the Fortune 1000, healthcare and related businesses, and Federal, state and local government agencies. We intend to continue to market to commercial enterprises utilizing our direct sales force as these commercial enterprises have typically disconnected service at a lower rate than individual consumers. Our sales personnel maintain a sales presence throughout the United States. In addition, we maintain several corporate sales groups focused on medical sales, Federal government accounts, large enterprises, advanced wireless services, emergency/mass notification services, and other product offerings.

Indirect. Within the indirect channel, we contract with and invoice an intermediary for airtime services (which includes telemetry services). The intermediary or "reseller" in turn markets, sells, and provides customer service to the end user. Generally, there is no contractual relationship that exists between us and the end subscriber. Therefore, operating costs per unit to provide these services are lower than those required in the direct distribution channel. Indirect units in service typically have lower average revenue per unit ("ARPU") than direct units in service. The rate at which subscribers disconnect service in the indirect distribution channel has generally been higher than the rate experienced with direct customers, and we expect this trend to continue in the foreseeable future.

The following table summarizes the breakdown of our direct and indirect units in service at specified dates:

                                As of                        As of                        As of
                            September  30,                  June 30,                  September  30,
                                 2012                         2012                         2011
Distribution Channel    Units       % of Total       Units       % of Total       Units       % of Total
                                                      (Units in thousands)
Direct                   1,445            93.5%       1,477            93.3%       1,603            93.1%
Indirect                   101             6.5%         106             6.7%         118             6.9%

Total                    1,546           100.0%       1,583           100.0%       1,721           100.0%

As noted above in the "Overview", our key market segments are healthcare, government and large enterprise. The following table indicates the percentage of our units in service by key market segments for the periods stated and illustrates the relative significance of these market segments to our operations.

                                          As of September 30,
                     Market Segment        2012           2011
                     Healthcare               65.9%        61.7%
                     Government               10.8%        12.3%
                     Large enterprise          8.6%         9.6%
                     Other                     8.1%         9.5%

                     Total Direct             93.4%        93.1%
                     Total Indirect            6.6%         6.9%

                     Total                   100.0%       100.0%


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The following table indicates the revenue by key market segments for the periods stated and illustrates the relative significance of these market segments to our operations.

                                          For the Three Months Ended September 30,                              For the Nine Months Ended September 30,
Market Segment                    2012            % of Total         2011          % of Total          2012           % of Total          2011          % of Total
                                                                                      (Dollars in thousands)
Healthcare                     $    25,340              61.1%      $  27,713             57.1%      $    77,065             60.0%      $   84,920             55.4%
Government                           3,722               9.0%          4,724              9.7%           11,773              9.1%          15,480             10.1%
Large enterprise                     5,074              12.3%          6,264             12.9%           16,074             12.6%          19,844             13.0%
Other                                5,502              13.3%          7,284             15.0%           17,695             13.7%          24,251             15.8%

Total Direct                        39,638              95.7%         45,985             94.7%          122,607             95.4%         144,495             94.3%
Total Indirect                       1,802               4.3%          2,556              5.3%            5,881              4.6%           8,673              5.7%

Total                          $    41,440             100.0%      $  48,541            100.0%      $   128,488            100.0%      $  153,168            100.0%

The following table sets forth information on our direct units in service by account size for the periods stated:

                                           As of                          As of                          As of
                                      September  30,                    June 30,                    September  30,
                                           2012                           2012                           2011
Account Size                      Units        % of Total        Units        % of Total        Units        % of Total
                                                                  (Units in thousands)
1 to 3 Units                          55              3.8%           58              3.9%           69              4.3%
4 to 10 Units                         33              2.3%           35              2.3%           42              2.6%
11 to 50 Units                        78              5.4%           82              5.6%           99              6.2%
51 to 100 Units                       50              3.5%           52              3.6%           61              3.8%
101 to 1000 Units                    343             23.7%          356             24.1%          399             24.9%
> 1000 Units                         886             61.3%          894             60.5%          933             58.2%

Total direct units in service      1,445            100.0%        1,477            100.0%        1,603            100.0%

Customers may subscribe to one-way or two-way messaging services for a periodic (monthly, quarterly, semi-annual, or annual) service fee which is generally based upon the type of service provided, the geographic area covered, the number of devices provided to the customer and the period of commitment. Voice mail, personalized greeting, and equipment loss and/or maintenance protection may be added to either one-way or two-way messaging services, as applicable, for an additional monthly fee. Equipment loss protection allows subscribers who lease devices to limit their cost of replacement upon loss or destruction of a messaging device. Maintenance services are offered to subscribers who own their device.

A subscriber to one-way messaging services may select coverage on a local, regional or nationwide basis to best meet their messaging needs. Local coverage generally allows the subscriber to receive messages within a small geographic area, such as a city. Regional coverage allows a subscriber to receive messages in a larger area, which may include a large portion of a state or sometimes groups of states. Nationwide coverage allows a subscriber to receive messages in major markets throughout the United States. The monthly fee generally increases with the size of the coverage area. Two-way messaging is generally offered on a nationwide basis.


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The following table summarizes the breakdown of our one-way and two-way units in service at specified dates:

                                            As of                                 As of                                 As of
                                        September  30,                           June 30,                           September  30,
                                             2012                                  2012                                  2011
Service Type                      Units           % of Total            Units           % of Total            Units           % of Total
                                                                           (Units in thousands)
One-way messaging                    1,421                91.9%            1,453                91.8%            1,578                91.7%
Two-way messaging                      125                 8.1%              130                 8.2%              143                 8.3%

Total                                1,546               100.0%            1,583               100.0%            1,721               100.0%

The demand for one-way and two-way messaging services declined at each specified date and we believe demand will continue to decline for the foreseeable future. Demand for our services has also been impacted by the weak United States economy and high unemployment rates nationwide. To the extent that unemployment rates may remain high or increase for the remainder of 2012, we anticipate an unfavorable impact on the level of subscriber cancellations.

We provide wireless messaging services to subscribers for a periodic fee, as described above. In addition, subscribers either lease a messaging device from us for an additional fixed monthly fee or they own a device, having purchased it either from us or from another vendor. We also sell devices to resellers who lease or resell devices to their subscribers and then sell messaging services utilizing our networks.

We derive the majority of our revenues from fixed monthly or other periodic fees, charged to subscribers for wireless messaging services. Such fees are not generally dependent on usage. As long as a subscriber maintains service, operating results benefit from recurring payment of these fees. Revenues are generally based upon the number of units in service and the monthly charge per unit. The number of units in service changes based on subscribers added, referred to as gross placements, less subscriber cancellations, or disconnects. The net of gross placements and disconnects is commonly referred to as net gains or losses of units in service or net disconnect rate. The absolute number of gross placements as well as the number of gross placements relative to average units in service in a period, referred to as the gross placement rate, is monitored on a monthly basis. Disconnects are also monitored on a monthly basis. The ratio of units disconnected in a period to average units in service for the same period, called the disconnect rate, is an indicator of our success at retaining subscribers, which is important in order to maintain recurring revenues and to control operating expenses.

The following table sets forth our gross placements and disconnects for the periods stated:

                                                                              For the Three Months Ended
                                             September 30, 2012                      June 30, 2012                      September 30, 2011
                                          Gross                                Gross                                 Gross
Distribution Channel                   Placements         Disconnects        Placements        Disconnects        Placements         Disconnects
                                                                                 (Units in thousands)
Direct                                           48                 80                53                 84                 55                108
Indirect                                          1                  6                 2                  5                  3                  8

Total                                            49                 86                55                 89                 58                116


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The following table sets forth information on the direct net disconnect rate by account size for our direct customers for the periods stated:

                                                           For the Three Months Ended
                                       September 30,                June 30,                September 30,
Account Size                               2012                       2012                      2011
1 to 3 Units                                     (5.3%)                  (5.7%)                       (5.9%)
4 to 10 Units                                    (4.8%)                  (6.2%)                       (6.4%)
11 to 50 Units                                   (4.8%)                  (4.1%)                       (6.4%)
51 to 100 Units                                  (3.9%)                  (2.4%)                      (10.4%)
101 to 1000 Units                                (3.8%)                  (4.7%)                       (2.9%)
> 1000 Units                                     (1.0%)                  (0.3%)                       (2.1%)

Total direct net unit loss %                     (2.2%)                  (2.0%)                       (3.2%)

The other factor that contributes to revenue, in addition to the number of units in service, is the monthly charge per unit. As previously discussed, the monthly charge per unit is dependent on the subscriber's service, extent of geographic coverage, whether the subscriber leases or owns the messaging device and the number of units the customer has in the account. The ratio of revenues for a period to the average units in service for the same period, commonly referred to as ARPU, is a key revenue measurement as it indicates whether charges for similar services and distribution channels are increasing or decreasing. ARPU by distribution channel and messaging service are monitored regularly.

The following table sets forth ARPU by distribution channel for the periods stated:

                                         ARPU For the Three Months Ended
                                September 30,        June 30,       September 30,
        Distribution Channel        2012               2012             2011
        Direct                 $          8.54       $    8.62     $          8.77
        Indirect                          5.77            5.97                6.22
        Consolidated                      8.36            8.45                8.59

While ARPU for similar services and distribution channels is indicative of changes in monthly charges and the revenue rate applicable to new subscribers, this measurement on a consolidated basis is affected by several factors, including the mix of units in service and the pricing of the various components of our services. We expect future sequential annual revenues to decline in line with recent trends. The change in ARPU in the direct distribution channel is the most significant indicator of rate-related changes in our revenues. The decrease in consolidated ARPU for the quarter ended September 30, 2012 from the previous quarters was due to the change in composition of our customer base as the percentage of units in service attributable to larger customers continues to increase. These larger customers benefit from lower pricing associated with their larger number of units-in-service. We believe that without further price adjustments, ARPU would trend lower for both the direct and indirect distribution channels in 2012 and that price increases could mitigate, but not completely offset, the expected declines in both ARPU and revenues.

The following table sets forth information on direct ARPU by account size for the periods stated:

                                          For the Three Months Ended
                              September 30,         June 30,       September 30,
         Account Size             2012                2012             2011
         1 to 3 Units        $         15.43       $    15.49     $         15.62
         4 to 10 Units                 14.42            14.40               14.52
         11 to 50 Units                12.11            12.24               12.30
         51 to 100 Units               10.48            10.35               10.59
         101 to 1000 Units              8.97             9.01                8.90
         > 1000 Units                   7.28             7.34                7.42

         Total direct ARPU   $          8.54       $     8.62     $          8.77


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Software Operations

Our primary business in the software operations is the sale of software, professional services (consulting and training), equipment sales (to be used in conjunction with the software) and post-contract support (on-going maintenance). The software is licensed to end users under an industry standard software license agreement. Our software products are considered to be "off-the-shelf software" with the software marketed as a stock item that customers can use with little or no customization. Such sales generate license fees (or revenues). In addition to the license fees, we generate revenue through the delivery of implementation services and training, annual maintenance revenues and the sale of third party equipment for use with the software.

Specifically, we develop, sell, and support enterprise-wide systems for hospitals and other organizations needing to automate, centralize, and standardize mission critical communications. These solutions are used for contact centers, emergency management, mobile event notification and messaging. We are focused on marketing these solutions primarily to the healthcare sector and to a lesser extent the government, large enterprise and hospitality sectors. These areas of market focus compliment the market focus of our wireless operations outlined above. We have a sales presence and customer base both domestically and internationally, specifically in Europe, Australia and Asia.

Our software operations are organized as follows to support this business:

Marketing. We have a centralized marketing function which is focused on supporting our software products and vertical sales efforts by strengthening our Amcom brand, generating sales leads, and facilitating the sales process. These marketing functions are accomplished through targeted email campaigns, webinars, regional and national user conferences, monthly newsletters, and participation at industry trade shows.

Sales. We sell our software products through a direct and channel sales force. The direct sales effort is geographically focused with the exception of dedicated government and certain large enterprise sales specialists. The direct sales force targets unified communication executives such as chief information officers, information technology directors, telecommunications directors and contact center managers. The timing for a direct sale from initial contact to final sale ranges from 6 to 18 months depending on the type of software solution.

The direct sales force is complemented by a channel sales force consisting of a dedicated team of managers. These managers coordinate relationships with telecommunication focused alliance partners who provide sales introductions for our direct sales force.

Professional Services. We offer implementation services for our software products. These implementation services are provided by a dedicated group of professional service employees. Our professional services staff uses a branded, consistent methodology that provides a comprehensive phased work plan for both new software installations and/or upgrades. In support of our implementation methodology, we manage the various aspects of the process through a professional services automation tool. A typical implementation process ranges from 60 to 90 days depending on the type of implementation.

Customer Support. To support our software products, we have established a dedicated customer support organization. Due to the mission critical nature of our software products, we provide 24 hours a day, 7 days a week, 365 days a year customer support that customers can access via telephone, email or the Internet.

Product Development. We maintain a product development group focused on developing new software products and enhancing existing products. Our product development group, supported by a limited group of external developers, uses a methodology that balances enhancement requests from a number of sources including customers, the professional services staff, customer support incidents, known defects, market and technology trends, and competitive requirements. These requests are reviewed and prioritized based on criteria that include the potential for increased revenues, customer/employee satisfaction, possible cost savings and development time and expense.

We recognize operations revenue when the application is installed and operational at the customer location. It consists of software license revenue, . . .

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