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IPAS > SEC Filings for IPAS > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for IPASS INC


8-Nov-2012

Quarterly Report


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

Management's Discussion and Analysis of Financial Condition and Results of Operations or MD&A, is provided in addition to the condensed consolidated financial statements and notes, included elsewhere in this report, to assist readers in understanding our results of operations, financial condition, and cash flows. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with the MD&A in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011.

This MD&A is organized as follows:

Overview                           Discussion of our business

Significant Trends and Events,     Operating, financial and other material trends and
and Key Operating Highlights       highlights that affect our company and may reflect our
                                   performance

Key Operating Metrics              Discussion of key metrics and measures that we use to
                                   evaluate our operating performance

Critical Accounting Policies and   Accounting policies and estimates that we believe are most
Estimates                          important to understanding the assumptions and judgments
                                   incorporated in our reported financial results and
                                   forecasts

Results of Operations              An analysis of our financial results comparing the three
                                   months and the nine months ended September 30, 2012, and
                                   September 30, 2011

Liquidity and Capital Resources    An analysis of changes in our balance sheet and cash flows
                                   since December 31, 2011, and discussion of our financial
                                   and liquidity condition

The various sections of this MD&A contain forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "will," "anticipates", "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," "potential," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, and Part II, Item 1A. below, for factors that may cause actual results to be different from those expressed in these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.


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Overview

We provide global enterprises and telecommunications carriers with cloud-based mobility management and network connectivity services. With our unique technology platform, we offer enterprises cross-device, cross-network Internet connectivity services through the iPass global Wi-Fi network along with connection policy enforcement, real time reporting and analysis of all mobile network activity across their employee base. Based on this same technology and our global authentication and settlements infrastructure, we also offer global telecommunications service providers with Wi-Fi enablement services that allow Wi-Fi providers to monetize their Wi-Fi network with 'visiting' subscribers, provide their subscribers with global Wi-Fi connectivity, and enable data offload solutions for Wi-Fi transactions and settlements exchange among global telecommunications providers.

We believe that the proliferation of mobile Wi-Fi devices, including smartphones and tablets, has led to an explosive growth in global data traffic. As a result of this and other trends, the costs of mobility are large and growing as the global demand for bandwidth exceeds supply. We also believe that Wi-Fi has emerged as a critical element to meet the demands of enterprises and carriers. We believe that enterprises will increasingly need to manage the mobility costs of providing always-on high-speed connectivity to their employees, as well as address the proliferation of employee-liable devices (the "Bring Your Own Device" trend). In addition, we see global telecommunications carriers and providers looking to monetize their network infrastructures, obtain additional network capacity, offload traffic, improve their subscribers' experience and differentiate their consumer offerings to meet the accelerating demand for data services on smartphone and tablet devices.

We believe iPass is uniquely positioned to address the global Wi-Fi opportunity and the needs of enterprises, global telecom service providers and end users. This is being accomplished through our offerings that leverage our unique set of mobility assets, including carrier grade cloud-mobility and connectivity platform, Wi-Fi authentication and transaction settlement infrastructure, and our global commercial Wi-Fi network.

Our business is structured and reported around two segments: (i) Mobility Services; and (ii) Managed Network Services.

Mobility Services:

Our Mobility Services segment is comprised of two service offerings:
(1) Enterprise Mobility Services; and (2) Carrier Wi-Fi Enablement Services. We believe that we are leveraging our technology, global infrastructure expertise and market presence in the mobility space to address the market demands and needs of enterprises and telecommunications carriers, as follows:

Enterprise Mobility Services: Our Enterprise Mobility Services offerings provide large enterprise customers with mobile connectivity, cost analysis, reporting and policy compliance management tools, as well as global Wi-Fi network access. Enterprise Mobility Services offerings consist of our Open Mobile Enterprise platform, our legacy Mobile Office offering, and our Mobile Network Services. We go to market with these enterprise mobility offerings through a combination of our global direct sales force, a worldwide network of reseller partners, and a group of leading global telecommunications carriers who white-label our Open Mobile platform for providing these mobility services to their enterprise customers, and through mobile device management (MDM) partners. Our growth strategy continues to be focusing on accelerating smartphone and tablet penetrations, driving enterprise customer migrations to and deployments of Open Mobile, and driving scale through the carrier channel.

Carrier Wi-Fi Enablement Services ("iPass OMX" or "OMX"): Our OMX platform provides international Wi-Fi roaming, Wi-Fi data offload and Wi-Fi exchange services to global telecommunications carriers and service providers. In 2011, we launched these services leveraging and incorporating our Open Mobile platform technology, global Wi-Fi authentication and settlements infrastructure, and our worldwide Wi-Fi Network to provide mobile network operators, telecommunications carriers and service provider partners around the world with the infrastructure to offer their subscribers new Wi-Fi based mobility services. While this is a new business, we have continued to sign carrier partners to our OMX platform and are focused on increasing carrier/service provider deployments to drive OMX revenues primarily from Wi-Fi roaming traffic. In addition, we continue to build-out both the OMX platform functionality and carrier/service provider membership while evolving supply dynamics to support increased traffic globally. We believe this will be a meaningful driver of value for our company.

Managed Network Services ("iPass MNS" or "MNS"):

iPass MNS provides enterprise customers in North America with network and management services that connect their branch offices and retail locations. We believe the MNS value proposition is a significant price-for-performance value over traditional or legacy private networking services and is used by enterprises in a range of industries. We have recently begun to leverage our mobility services expertise within the MNS business and customer base and have launched a new Managed Wi-Fi business that expands the MNS platform to enable enterprises and retailers to deliver in-store/in-office Wi-Fi experience to their employees and customers. We are focused on continued revenue growth in our MNS business through new customer acquisitions and by delivering additional offerings that leverage synergies with our mobility expertise.


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For a detailed discussion regarding our business, including our strategy and our service offerings, see "Item 1. Business" included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Significant Trends and Events, and Key Operating Highlights

A key initiative of iPass is to drive both sales of Open Mobile Enterprise and customer deployments of the Open Mobile platform to produce greater Open Mobile user penetration and greater use of both our mobility platform services and network services. In addition, we are focusing on continuing to build-out the OMX ecosystem of telecommunications carrier partners to generate Wi-Fi roaming revenue and provide the foundation for Wi-Fi exchange functionality.

The following describes significant trends and events, and key operating highlights of our business during the third quarter of 2012:

(1) Strong Continued User Growth in Open Mobile Enterprise Business

We have continued to grow the number of Open Mobile monetized platform users, both active and gross, on a combination of user growth in existing enterprise customers, continued customer migrations to Open Mobile and traction in adding users through carrier channel partners. The number of Active Open Mobile Enterprise monetized platform users for September 2012 was 293,000, an increase of 38% or 81,000 over June 2012 and an increase of 443% or 239,000 over December 2011. Active Open Mobile Enterprise monetized platform users for September 2012 represented approximately 50% of the total number of Active monetized platform users compared to 5% in September 2011. The number of Gross Open Mobile Enterprise monetized platform users for September 2012 also showed strong growth, ending the month at 758,000, an increase of 54% or 267,000 over June 2012 and an increase of 228% or 527,000 over December 2011. See "Key Operating Metrics" below for a full discussion of our key user metrics.

For the three months ended September 30, 2012, we signed more than 80 Open Mobile agreements including several large enterprise customers ending the quarter with over 600 Open Mobile Enterprise customers globally. We added an innovative service offering called Open Mobile Express that allows enterprise customers with Bring-Your-Own-Device (BYOD) programs to provide company-sponsored global Wi-Fi services with direct end-user billing capabilities.

We continued to release new versions of iPass Open Mobile containing features such as International Inflight Support on select transcontinental flights, user visibility to the quality and capability of their Internet connection, and simplified client activation and provisioning for IT administrators and end users.

(2) Expansion of iPass Global Wi-Fi Network

We nearly doubled the iPass global Wi-Fi network footprint since the beginning of 2012, ending the quarter with more than 1.1 million commercial Wi-Fi hotspots in over 110 countries globally and across leading Wi-Fi venues, including major airports, convention centers, airplanes, hotels, restaurants, retail and small business locations with infrastructure that is integrated with more than 140 leading global Wi-Fi operators.

We focused key resources on improving end-user Wi-Fi experience through new footprint monitoring and hotspot quality control where guiding user experience to reliable, fast, and secure networks improves the iPass value proposition, especially around intelligent connectivity.

(3) Continued Momentum in iPass Open Mobile Exchange (iPass OMX)

During the quarter, we continued to build-out the iPass OMX Wi-Fi ecosystem by signing new platform relationships with large global carrier and network partners including mobile operators and telecommunication service providers.

With our global Wi-Fi roaming network, we continued to attract service providers throughout the world to join iPass OMX including Southern Africa's largest Wi-Fi provider, the largest telecom operator in the Middle East, and other providers in Hong Kong and Greater Asia.

In addition, certain network providers in the Middle East and China have launched their first global Wi-Fi data roaming solutions, based on iPass OMX, to their subscriber base.

As of September 30, 2012, we support 19 telecommunications service providers with a combined total of 974 million mobile subscribers worldwide.

(4) Consistent Revenue Growth at iPass Managed Network Services

MNS revenue increased by 13% for each of the three and nine months ended September 30, 2012, compared to the same periods in 2011, on continued growth with our high bandwidth, highly available WAN Connect VPN, managed Broadband and managed Wi-Fi solutions in the financial, insurance, retail and healthcare markets. The number of endpoints at Branch/Retail customers has grown from approximately 22,200 as of September 30, 2011, to over 23,600 endpoints as of September 30, 2012.


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We continued traction with the current year release of MNS' managed Wi-Fi service offering including support for an in-store Wi-Fi network for a large nationwide clothing retailer with over 700 locations.

(5) Continued Decline in Network Revenue from Legacy Offerings

Network revenue is generated predominantly from the use of our network services by users on our legacy Mobile Office product which was end-of-life as of July 1, 2012. While we continue to drive customer migrations to Open Mobile, we continue to experience an anticipated decline in Wi-Fi network usage by our legacy Mobile Office users. Year-to-date, this legacy-driven decline has outpaced the growth in Wi-Fi network usage by Open Mobile platform users. See "Risk Factors" in Part II, Item 1A. below for a full discussion on our decision to "End-of-Life" our legacy Mobile Office product and the impact on our legacy product revenue.

In addition, we have also continued to experience the anticipated decline in network revenues from our legacy 3G, minimum commitments and dial-up offerings, which we believe will continue during the remainder of 2012. The decline in 3G revenues was a result of lower usage levels as we move away from 3G network sales and continue to focus on growing our Open Mobile platform revenue and Wi-Fi services. The decline in minimum commitment revenue was primarily due to the renegotiation of customer agreements to lower commit levels.

Key Operating Metrics

Described below are key metrics that we use to evaluate our operating performance and our success in transforming our business and driving future growth.

Total Average Monthly Monetized Users

Total Average Monthly Monetized Users ("AMMU") is a key metric that we use to track and evaluate the operating performance of our overall enterprise mobility business. The AMMU metric is based on the number of active users of our network and platform services across both our legacy Mobile Office offering and new Open Mobile Enterprise offerings. There is some overlap for users that may be active users of both our network and platform services in a given month. Network users are billed for their use of our Wi-Fi, dial-up or 3G network services. Platform users are billed for their use of our legacy Mobile Office client or our Open Mobile client. AMMU is defined as the average number of users per month, during a given quarter, for which a fee was billed by us to a customer for such users.

The following table summarizes the Total Average Monthly Monetized Users:

                                                    Three Months Ended                  Nine Months Ended
                                                      September 30,                       September 30,
                                              2012      2011       % Change       2012      2011       % Change
                                                              (in thousands, except percentages)
Total Average Monthly Monetized Users           629       561           12.1 %      598       587            1.9 %
Network                                         112       156          (28.2 %)     127       170          (25.3 %)
Platform                                        590       510           15.7 %      559       534            4.7 %

The AMMU of our network services decreased for the three and nine months ended September 30, 2012, compared to the same periods in 2011, due to the decline in network users on our legacy Mobile Office product, primarily legacy Wi-Fi users that declined by 57,000 or 51% for the comparative three months and by 51,000 or 41% for the comparative nine months. These declines were partially offset by Wi-Fi network users on our Open Mobile product which grew by 24,000 users or 800% for the comparative three months, and 18,000 users or 900% for the comparative nine months. Open Mobile Wi-Fi network users for the three months ended September 30, 2012 were approximately 27,000 or 33% of total Wi-Fi network users, and legacy Wi-Fi network users were approximately 54,000 or 67% of total Wi-Fi network users.

The AMMU of our Open Mobile platform users continues to ramp-up while our legacy Mobile Office client users continue to decline. For the three and nine month periods, this dynamic resulted in net incremental growth to platform users. Open Mobile platform users for the three months ended September 30, 2012 were approximately 270,000 or 46% of total platform AMMU and legacy platform users were approximately 320,000 or 54% of total platform AMMU.

Open Mobile Enterprise Monetized Users

We also track users on our Open Mobile offering to provide additional visibility into the overall adoption and monetization of the Open Mobile platform. These metrics are defined as follows:

(i) Open Mobile Enterprise Monetized Users-Active. Represents the number of Open Mobile users who were billed Open Mobile platform fees and who have used or deployed Open Mobile (this is synonymous with the definition of our AMMU metric with the data here being reported for the number of users in the month being presented).

(ii) Open Mobile Enterprise Monetized Users-Paying, Undeployed. Represents the number of Open Mobile users at enterprise customers for which Open Mobile platform fees were billed for the period but have not yet used Open Mobile or had Open Mobile fully-deployed.


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(iii) Open Mobile Enterprise Monetized Users-Gross. Is the sum of both Active and Paying, Undeployed Open Mobile Enterprise monetized users.

The following table reflects the number of Open Mobile Enterprise (OME) monetized users for the three broad categories of monetized users, (i) active OME monetized users, (ii) paying, undeployed OME monetized users, and
(iii) gross OME monetized users, which is the sum of (i) and (ii), as follows:

                                                            For the Month of
                                              September      June      March      December
                                                2012         2012       2012        2011
                                                     (Number of users in thousands)
   Open Mobile Enterprise Monetized Users:
   Active                                            293       212        135            54
   Paying, Undeployed                                465       279        186           177

   Gross OME Monetized Users                         758       491        321           231

Open Mobile Enterprise Monetized Users are presented as a monthly metric as this provides increased visibility into the traction we are experiencing with enterprise customers on our new Open Mobile platform and allows us to measure the progress and performance of the business over time. Our number of Open Mobile Monetized Users has continued to increase as a result of our focus on signing-on new users and migrating legacy Mobile Office users to the Open Mobile platform.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
("Adjusted EBITDA")

Adjusted EBITDA is used by our management as a measure of operating efficiency, financial performance and as a benchmark against our peers and competitors. In addition, we also use this metric to determine a portion of our incentive compensation payouts. Management also believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to understand our performance excluding the impact of items which may obscure trends in our core operating performance. Furthermore, the use of Adjusted EBITDA facilitates comparisons with other companies in our industry which may use similar financial measures to supplement their GAAP results. We define Adjusted EBITDA as net loss adjusted for: interest income; income taxes; depreciation and amortization; stock-based compensation; restructuring charges; certain state sales and federal tax charges, and one-time non recurring discrete items. We adjust for these excluded items because we believe that, in general, these items possess one or more of the following characteristics: their magnitude and timing is largely outside of our control; they are unrelated to the ongoing operation of the business in the ordinary course; they are unusual or infrequent and we do not expect them to occur in the ordinary course of business; or they are non-operational, or non-cash expenses involving stock option grants. Adjusted EBITDA is not a measure determined in accordance with accounting principles generally accepted in the United States or GAAP and should not be considered in isolation or as a substitute for operating income (loss), operating performance, net income (loss) or any other measure determined in accordance with GAAP.

The following table reconciles Adjusted EBITDA to GAAP net loss:

                                                      Three Months Ended           Nine Months Ended
                                                         September 30,               September 30,
                                                      2012            2011         2012          2011
                                                                      (In thousands)
Adjusted EBITDA                                     $     693        $ (272 )    $  1,104      $ (1,348 )
Interest income                                             4             5            10           104
Income tax expense                                       (275 )          (1 )        (422 )        (246 )
Depreciation of property and equipment                   (505 )        (531 )      (1,660 )      (1,731 )
Amortization of intangible assets                         (50 )         (60 )        (169 )        (179 )
Stock-based compensation                                 (637 )        (392 )      (1,781 )      (1,348 )
Restructuring (charges) benefits and related
adjustments                                               (10 )           7           (16 )         162
Certain state sales and federal tax items and
other discrete items                                        9           441             8         1,248

GAAP Net loss                                       $    (771 )      $ (803 )    $ (2,926 )    $ (3,338 )


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Adjusted EBITDA during the three and nine months ended September 30, 2012, improved by $1.0 million and $2.5 million, respectively, compared to the same periods in the prior year, primarily due to a reduction in GAAP net loss of $32,000 and $0.4 million, a reduction in benefit from the back billing of certain state and federal tax charges of $0.4 million and $1.2 million, an increase in stock-based compensation expense of $0.2 million and $0.4 million, and an increase in income tax expense of $0.3 million and $0.2 million, respectively. See "Results of Operations" for further discussions on the factors affecting Adjusted EBITDA.

Network Gross Margin

We use network gross margin as a metric to assist us in assessing the
profitability of our various network services. Our overall network gross margin
is defined as (Mobility network revenue plus MNS revenue less network access
costs divided by Mobility network revenue plus MNS revenue).



                                   Three Months  Ended                 Nine Months  Ended
                                      September 30,                      September 30,
                               2012     2011        Change        2012     2011        Change
 Total Network Gross Margin   48.6%      45.0 %         3.6 pp    47.5%     44.1 %         3.4 pp

The increase in network gross margin was primarily driven by Mobility Services increased margins due to lower network usage which favorably impacted our network access costs but did not result in a corresponding decrease in revenue for certain customers for which we charge flat-rate pricing. MNS also contributed an increase of 0.6 and 0.9 percentage points to network gross margin for the three and nine months ended September 30, 2012, respectively, as a result of pricing mix improvements on higher professional services and other value added services, and a decrease in installation costs.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that are believed to be reasonable under the circumstances. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ . . .

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