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SDBT > SEC Filings for SDBT > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for SOUNDBITE COMMUNICATIONS INC

Form 10-Q for SOUNDBITE COMMUNICATIONS INC


9-Nov-2012

Quarterly Report


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

Investors should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from our expectations. Factors that could cause differences from our expectations include those described in Part II, Item 1A. "Risk Factors" below and elsewhere in this report.

Overview

We provide cloud-based, multi-channel services that enable businesses to design, execute and measure customer communication campaigns for a variety of marketing, customer care, payment and collection processes. Clients use our platforms, including SoundBite Engage and SoundBite Insight, to communicate proactively with their customers through automated voice messaging, predictive dialing, emails, text messaging and web communications that are relevant, timely, personalized and engaging.

Our services are provided using a multi-tenant, cloud-based architecture that enables us to serve all of our clients cost-effectively. "Cloud-based" refers to the delivery of technology services through the Internet, which includes delivery of software as a service or SaaS. Because our services are cloud-based, businesses using our services do not need to invest in or maintain new hardware or to hire and manage additional dedicated information technology staff. In addition, we are able to implement new features on our platforms that become part of our services automatically and can benefit all clients immediately. Our secure platforms are designed to serve increasing numbers of clients and growing demand from existing clients, enabling the platforms to scale reliably and cost-effectively.

We serve two global markets: hosted contact centers and mobile marketing. Our hosted contact center services are used primarily by companies in the accounts receivable management (or collections), energy and utilities, financial services, retail, and telecommunications and media industries. Our mobile marketing client base consists principally of companies in the consumer package goods, retail, and telecommunications and media industries.

We derive, and expect to continue to derive for the foreseeable future, a substantial majority of our revenues from the hosted contact center market. Our strategy for achieving long-term, sustained growth in our revenues and net income is focused on building upon our leadership position in the hosted contact center market and executing on our key initiatives. For example, one of our strategic initiatives is targeted on the high growth area of mobile marketing, which leverages our text capabilities. In line with this strategy, in February 2012, we acquired 2ergo Americas, the U.S. operations of 2ergo Group plc. 2ergo Americas is a mobile business and marketing solutions company located in Arlington, Virginia.

Key Components of Results of Operations

Revenues

We currently derive a substantial portion of our revenues by providing our services for use by clients in communicating with their customers through voice, text and email messages. These revenues are seasonal in nature and typically are stronger during the second half of the year due to the increased demand from clients in the retail industry. We provide our services under a combination of usage and subscription-based models. Under our usage-based model, prices are calculated on a per-message or per-minute basis in accordance with the terms of pricing agreements with clients. We primarily invoice our clients on a monthly basis.

Our pricing agreements with a substantial majority of our clients either do not require any minimum usage or payments, or require only an immaterial level of usage or payments. Each executed message represents a transaction from which we derive revenues, and we therefore recognize revenue based on actual usage within a calendar month. We do not recognize revenue until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and we deem collection to be probable.

Cost of Revenues

Cost of revenues consist primarily of telephony and text message charges, compensation expense for our operations personnel, depreciation and maintenance expense for our platforms, amortization of acquired technology and lease costs for our data center facilities. As we continue to grow our business and add features to our platforms, we expect cost of revenues will continue to increase on an absolute dollar basis. Our annual gross margin was 59.1% in 2011, 59.6% in 2010 and 60.4% in 2009. We currently are targeting a gross margin of 59% to 61% for the foreseeable future. Our gross margin may vary significantly from our target range for a number of reasons, including revenue levels, the mix of types of messaging campaigns executed, as well as the extent to which we build our infrastructure through, for example, significant acquisitions of hardware or material increases in leased data center facilities.


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Operating Expenses

Research and Development. Research and development expenses consist primarily of compensation expenses and depreciation expense of certain equipment related to the development of our services. We have historically focused our research and development efforts on improving and enhancing our platforms, as well as developing new features and offerings.

Sales and Marketing. Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, including sales commissions, as well as the costs of our marketing programs. We expect to further invest in developing our marketing strategy and activities to extend brand awareness and generate additional leads for our sales staff.

General and Administrative. General and administrative expenses consist of compensation expenses for executive, finance, accounting, administrative and management information systems personnel, accounting and legal professional fees and other corporate expenses.

Recent Developments

2ergo Americas Acquisition. In February 2012, we acquired 2ergo Americas, the U.S. operations of 2ergo Group plc, for a cash purchase price of $3.8 million (subject to post closing adjustment). 2ergo Americas is a mobile business and marketing solutions company located in Arlington, Virginia and has a current annualized revenue run rate of approximately $3.5 million. Revenues generated from clients acquired as part of the 2ergo Americas acquisition during the three and nine months ended September 30, 2012 were $816,000 and $1.9 million, respectively. Operating loss for the three and nine months ended September 30, 2012 was $449,000 and $1.0 million, respectively.

SmartReply Asset Acquisition. In June 2011 we acquired key assets of SmartReply. During the three and nine months ended September 30, 2012, revenues generated from clients acquired as part of the acquisition were $1.4 million and $3.9 million, respectively.

Additional Key Measures of Financial Performance

We present information below with respect to free cash flow and certain revenue metrics. None of these metrics should be considered as an alternative to any measure of financial performance calculated in accordance with U.S. generally accepted accounting principles, or GAAP. Management believes the following financial measures are useful to investors because they permit investors to view our performance using the same tools that management uses to gauge progress in achieving our goals.

Free Cash Flow

Free cash flow is a measure of financial performance calculated as cash flow from operating activities less payments of contingent purchase price and purchases of property and equipment. Management uses this metric to track business performance. Due to the current economic environment, management decisions are based in part on a goal of maintaining positive cash flow from operating activities and free cash flow. We believe this metric is a useful measure of the performance of our business because, in contrast to statement of operations metrics that rely principally on revenue and profitability, cash flow from operating activities and free cash flow capture the changes in operating assets and liabilities during the year and the effect of noncash items such as depreciation and stock-based compensation. We believe that, for similar reasons, this metric is often used by security analysts, investors and other interested parties in the evaluation of companies offering cloud-based or other software solutions.

The term "free cash flow" is not defined under GAAP and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. All or a portion of free cash flow may be unavailable for discretionary expenditures. Free cash flow has limitations as an analytical tool and when assessing our operating performance, you should not consider free cash flow in isolation from or as a substitute for data, such as net income (loss), derived from financial statements prepared in accordance with GAAP.

                                                              Nine Months Ended September 30,
                                                               2012                     2011
                                                                      (in thousands)
Cash generated from (used in) operating activities        $        1,255           $       (2,192 )
Contingent purchase price payments to Mobile Collect                (498 )                   (476 )
Contingent purchase price payments to SmartReply                    (211 )                     -
Purchases of property and equipment                               (1,014 )                   (695 )

Free cash flow (non-GAAP)                                 $         (468 )         $       (3,363 )

Our operating activities provided net cash in the amount of $1.3 million for the nine months ended September 30, 2012 reflecting a net loss of $2.3 million, which was offset by non-cash charges and changes in working capital of $3.6 million consisting primarily of (a) depreciation and amortization expense of $2.4 million, (b) an increase in account payable and accrued expenses of $1.5 million, and (c) stock-based compensation expense of $746,000. These increases were partially offset by a deferred income tax benefit (non-cash) of $927,000.


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Free cash flow in each of the periods presented reflects, in addition to the factors driving cash flows from operating activities, our purchases of property and equipment, which consists primarily of computer equipment and software, and our payments of contingent purchase price in connection with our acquisition of SmartReply in 2011 and our acquisition of the assets of Mobile Collect in 2008.

Revenue Metrics

Management tracks revenues by mobile, voice and other in order to review and evaluate our delivery channels. Mobile revenues are generated from any form of consumer interaction through a mobile device, excluding any of the voice channels. Voice revenues are generated from automated voice messaging and our hosted dialer. Other revenues include revenue attributable to email, professional services and access fees. For the three months ended September 30, 2012, voice revenues were $7.6 million, mobile revenues were $4.0 million and other revenues were $600,000, or 63%, 32% and 5% of total revenues, respectively. For the three months ended September 30, 2011, voice revenues were $7.9 million, mobile revenues were $2.2 million and other revenues were $900,000, or 72%, 20% and 8% of total revenues, respectively. Total mobile revenues increased 83% over the comparable quarter of 2011. The dollar and percentage increases in mobile revenues reflected both (a) growth in our existing business, which increased by 46% on a dollar basis, and (b) additional revenue from our acquisition of 2ergo Americas in February 2012. We expect mobile revenues to continue to increase, both in dollars and as a percentage of total revenues, for the foreseeable future.

Management also tracks revenues by certain quarterly client metrics:

Management evaluates client concentration in part by monitoring the aggregate percentage of total revenue generated in a quarter from our 20 largest clients (by revenue) in that quarter. Our 20 largest clients for the three months ended September 30, 2012 accounted for 68% of total revenues, compared to 70% in the three months ended September 30, 2011.

Management evaluates client retention in part by reviewing the aggregate percentage of total revenue generated in a quarter from the 50 largest clients in the previous quarter. Our 50 largest clients in the three months ended June 30, 2012 generated 90% of our total revenues in the three months ended September 30, 2012. In comparison, our 50 largest clients in the three months ended June 30, 2011 generated 86% of our total revenues in the three months ended September 30, 2011.

Management evaluates client momentum in part by tracking the number of clients that generated greater than $250,000 of revenue in a quarter. Fifteen clients, four of which were legacy clients of SmartReply and 2ergo Americas, generated more than $250,000 in revenue for the three months ended September 30, 2012, as compared to eleven in the comparable period of 2011.


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Results of Operations

The following table sets forth selected statements of operations data for the
three and nine months ended September 30, 2012 and 2011 indicated as percentages
of revenues.



                                        Three Months Ended September 30,                  Nine Months Ended September 30,
                                         2012                      2011                   2012                      2011
Statement of Operations Data:
Revenues                                     100.0 %                   100.0 %                100.0 %                   100.0 %
Cost of revenues                              39.0                      41.4                   40.5                      41.7

Gross margin                                  61.0                      58.6                   59.5                      58.3

Operating expenses:
Research and development                      15.5                      14.1                   15.6                      15.3
Sales and marketing                           35.2                      31.9                   35.8                      34.7
General and administrative                    15.0                      14.3                   17.7                      17.7

Total operating expenses                      65.7                      60.3                   69.1                      67.7

Operating loss                                (4.7 )                    (1.7 )                 (9.6 )                    (9.4 )
Interest and other income
(expense), net                                 0.2                      (0.1 )                  0.2                      (0.0 )

Loss before income tax benefit                (4.5 )                    (1.8 )                 (9.4 )                    (9.4 )
Income tax benefit                             0.3                        -                     2.7                       3.0

Net loss                                      (4.2 )%                   (1.8 )%                (6.7 )%                   (6.4 )%

Comparison of Three Months Ended September 30, 2012 and 2011

Revenues



                                               Three Months Ended September 30,                           Quarter-to-
                                            2012                              2011                       Quarter Change
                                              Percentage of                     Percentage of                    Percentage
                                 Amount         Revenues           Amount         Revenues           Amount        Change
                                                                   (dollars in thousands)
Revenues                        $ 12,160               100.0 %    $ 10,956               100.0 %    $  1,204            11.0 %

The $1.2 million increase in revenues for the three months ended September 30, 2012 as compared to the same period in 2011 was mainly due to the acquisition of 2ergo Americas in February 2012. Revenues from legacy clients of 2ergo Americas accounted for $816,000 of the increase, in addition to an increase of $388,000 in organic revenue. Overall, mobile revenues increased $1.8 million, voice revenues decreased $375,000, and other revenues decreased $203,000 for the three months ended September 30, 2012 as compared to the same period in 2011. Voice, mobile and other revenues as a percentage of total revenues were 63%, 32% and 5% in the third quarter of 2012, respectively, compared to 72%, 20% and 8% in the same period in 2011, respectively. We expect mobile revenues to continue to increase, both in dollars and as a percentage of total revenues, for the foreseeable future.

Cost of Revenues and Gross Profit



                                                Three Months Ended September 30,                             Quarter-to-
                                              2012                              2011                       Quarter Change
                                                 Percentage of                    Percentage of                     Percentage
                                  Amount           Revenues          Amount         Revenues           Amount         Change
                                                                     (dollars in thousands)
Cost of revenues                 $   4,747                 39.0 %    $ 4,532                41.4 %    $    215              4.7 %
Gross profit                         7,413                 61.0        6,424                58.6           989             15.4

The $215,000 increase in cost of revenues for the three months ended September 30, 2012 as compared to the same period in 2011 reflected a $195,000 increase in text message costs due to higher client usage, a $69,000 increase in co-location costs due to the


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additional data center from the acquisition of 2ergo Americas, and a $49,000 increase in amortization expense for acquired technology, partially offset by a decrease in client management allocation costs of $93,000 as a result of lower billable projects. The increase in gross margin for the three months ended September 30, 2012 as compared to the same period in 2011 reflected increased revenue levels and changes in our client and service mix.

Operating Expenses



                                                   Three Months Ended September 30,                            Quarter-to-
                                                 2012                              2011                       Quarter Change
                                                    Percentage of                    Percentage of                    Percentage
                                     Amount           Revenues          Amount         Revenues           Amount        Change
                                                                       (dollars in thousands)
Research and development            $   1,881                 15.5 %    $ 1,547                14.1 %    $    334            21.6 %
Sales and marketing                     4,284                 35.2        3,501                31.9           783            22.4
General and administrative              1,828                 15.0        1,562                14.3           266            17.0

Total operating expenses            $   7,993                 65.7 %    $ 6,610                60.3 %    $  1,383            20.9 %

Research and Development. The $334,000 increase in research and development expenses for the three months ended September 30, 2012 as compared to the same period in 2011 was primarily attributable to a $357,000 increase in personnel related costs due to an increase in headcount. Of the $357,000 increase in personnel related costs, $155,000 consisted of expenses attributable to the recent acquisition of 2ergo Americas.

Sales and Marketing. The $783,000 increase in sales and marketing expenses for the three months ended September 30, 2012 as compared to the same period in 2011 resulted primarily from a $713,000 increase in personnel related costs due to an increase in headcount, a $37,000 increase in facility overhead costs, and a $28,000 net increase in amortization expense related to acquisitions. Of the $713,000 increase in personnel related costs, $492,000 consisted of expenses attributable to the recent acquisition of 2ergo Americas.

General and Administrative. The $266,000 increase in general and administrative expenses for the three months ended September 30, 2012 as compared to the same period in 2011 resulted primarily from a $175,000 increase in personnel related costs, a $155,000 increase in costs related to the litigation described in Note 5 to our consolidated financial statements, a $137,000 increase in legal fees, a $51,000 increase in accounting service fees, a $48,000 increase in consulting fees for various administrative projects, and a $37,000 increase in professional service fees. These increases were partially offset by a $365,000 reimbursement from the insurer under our existing liability insurance policy, as well as from escrow funds, for certain legal fees related to ongoing litigation.

Operating Loss and Interest and Other Income (Expense)



                                                    Three Months Ended September 30,                                 Quarter-to-
                                                2012                                 2011                           Quarter Change
                                                   Percentage of                        Percentage of                        Percentage
                                    Amount           Revenues            Amount           Revenues            Amount           Change
                                                                          (dollars in thousands)
Operating loss                     $   (580 )                (4.7 )%     $  (186 )                (1.7 )%     $  (394 )           (211.8 )%
Interest and other income
(expense), net                           27                   0.2            (10 )                (0.1 )           37              370.0

Loss before income tax benefit     $   (553 )                (4.5 )%     $  (196 )                (1.8 )%     $  (357 )           (182.1 )%

The $37,000 increase in interest and other income (expense), net for the three months ended September 30, 2012 as compared to the same period in 2011 resulted from higher interest income earned on our investments, as well as a foreign currency gain resulting from the revaluation of accounts receivable and accounts payable balances denominated in foreign currencies.

Income Tax Benefit and Net Loss

We recognized a net loss of $513,000 for the three months ended September 30, 2012 as compared to a net loss of $196,000 for the same period in 2011. This difference principally reflects an increase in our operating loss for the three months ended September 30, 2012 and an income tax benefit of $40,000 recorded during the period ended September 30, 2012 related to the deferred tax impact of the acquisition of intangibles from 2ergo Americas in February 2012.


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Comparison of Nine Months Ended September 30, 2012 and 2011

Revenues



                          Nine Months Ended September 30,                            Nine Month
                       2012                              2011                       Period Change
                         Percentage of                     Percentage of                   Percentage
            Amount         Revenues           Amount         Revenues          Amount        Change
                                             (dollars in thousands)
Revenues   $ 34,218               100.0 %    $ 29,671               100.0 %    $ 4,547            15.3 %

The $4.5 million increase in revenues for the nine months ended September 30, 2012 as compared to the same period in 2011 was due principally to the acquisitions of SmartReply in June 2011 and 2ergo Americas in February 2012. Revenues from legacy clients of SmartReply and 2ergo Americas accounted for $2.4 million and $1.9 million of the increase, respectively. Overall, mobile revenues increased $4.5 million, voice revenues increased $73,000, and other revenues decreased $73,000 for the nine months ended September 30, 2012 as compared to the same period in 2011. Voice, mobile and other revenues as a percentage of total revenues were 66%, 29% and 5% for the nine months ended September 30, 2012, respectively, compared to 76%, 18% and 6% in the same period in 2011, respectively.

Cost of Revenues and Gross Profit



                                               Nine Months Ended September 30,                            Nine Month
                                            2012                              2011                       Period Change
                                              Percentage of                     Percentage of                   Percentage
                                 Amount         Revenues           Amount         Revenues          Amount        Change
                                                                  (dollars in thousands)
Cost of revenues                $ 13,849                40.5 %    $ 12,364                41.7 %    $ 1,485            12.0 %
Gross profit                      20,369                59.5        17,307                58.3        3,062            17.7

The $1.5 million increase in cost of revenues for the nine months ended September 30, 2012 as compared to the same period in 2011 reflected a $904,000 increase in text message costs due to higher client usage, a $513,000 increase in telephony expense due to higher delivery charges and client usage, a $115,000 increase in amortization expense for acquired technology, an $86,000 increase in co-location costs due to the additional data center from the acquisition of 2ergo Americas, and an $85,000 increase in personnel costs due to an increase in headcount. These increases were partially offset by a by a decrease in client management allocation costs of $114,000 as a result of lower billable projects. The increase in gross margin for the nine months ended September 30, 2012 as compared to the same period in 2011 reflected increased revenue levels and changes in our client and service mix, partially offset by higher telephony delivery charges.

Operating Expenses



                                                   Nine Months Ended September 30,                            Nine Month-
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