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GSB > SEC Filings for GSB > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for GLOBALSCAPE INC

Form 10-Q for GLOBALSCAPE INC


14-Nov-2012

Quarterly Report


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

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. "Forward looking statements" are those statements that describe management's beliefs and expectations about the future. We have identified forward-looking statements by using words such as "anticipate," "believe," "could," "estimate," "may," "expect," and "intend." Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the "Risk Factors" section of our 2011 Form 10-K and other documents filed with the Securities and Exchange Commission. GlobalSCAPE's actual results could differ materially from those discussed in any forward-looking statements included in this Quarterly Report.

Overview

We provide secure information exchange capabilities for consumers and enterprises through the development and distribution of software, delivery of managed and hosted solutions, and provision of associated services. Since our organization in 1996, we have evolved from a company focused primarily on personal file transfer products, sold over the Internet, to a solution provider deriving over 90 percent of our revenue from sales to small and medium business ("SMB") and enterprise customers worldwide. Today, we have thousands of enterprise customers and more than one million individual consumers in over 150 countries. In particular, our solutions are used by more than 20,000 U.S. Army soldiers deployed worldwide.

As a complement to our accumulated Managed File Transfer ("MFT") products and technical expertise, we have expanded, and continue to expand, our product suite into adjacent solution spaces to offer what we refer to as Total Path Security. The Total Path Security framework addresses data and information security in motion (for example, with traditional MFT solutions delivered as on-premises software or as a cloud service) and at rest (for example, with endpoint security solutions). Our solution portfolio facilitates delivery of critical information such as financial data, medical records, customer files and other similar documents while supporting a range of information protection approaches to meet privacy and other security requirements.

During 2011, we extended the Total Path Security framework to include secure content mobility, enabled through our TappIn solution. The TappIn product line provides technology allowing users to access their digital files and media such as documents, images, videos and music stored on their local computer or in-house network using a web-browser, tablet or mobile smartphone (including Apple iPhone and iPad, Google Android and Windows Phone 7) without having to upload to, and organize files in, a third-party, cloud storage environment (and incur the related incremental expenses). The TappIn solution also does not require users to synchronize files between devices. As an expansion of this product line, we recently introduced the TappIn Professional Edition with additional capabilities that build upon our TappIn Standard Edition product.

We have planned to enter the endpoint security market through development of appShield, a software application control (or "whitelisting") product. The appShield product has been developed to date under a Joint Development and Reseller Agreement between GlobalSCAPE and CoreTrace Corporation. In November 2012, CoreTrace Corporation sold substantially all its assets to an unrelated third party resulting in CoreTrace ending its development work on appShield. GlobalSCAPE may further develop appShield on its own and may sell appShield without any royalty obligation to CoreTrace Corporation or other parties.

The ongoing evolution of our Total Path Security framework reflects the ongoing fundamental changes in how consumers and businesses access and exchange information. For example, there has been an exponential increase in Internet-enabled mobile devices such as smartphones and tablet computers. This evolution, in turn, has driven a movement toward 'Bring Your Own Device', or BYOD, an operating model in which business users increasingly are using their mobile devices to access and exchange employer information while also using those same devices for personal applications. The continued growth of cloud-based services is another fundamental market driver as individual consumers and businesses become increasingly comfortable with these services for at least some personal and business applications.

As we consider key market drivers in the aggregate, we believe there is a current and growing market opportunity for providing on-premises, cloud-based, and mobile access to personal and business information while


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addressing the security and compliance issues that are important considerations for our customers as they access and exchange such information. While on-premises solutions will remain an important part of our portfolio for the foreseeable future, we believe increasing demand for secure content mobility and adoption of cloud-based solutions are long-term trends that increasingly will shape the market outlook and demand for our solutions.

As a corporation, we have won multiple awards for performance and reputation, including:

In 2012, the San Antonio Business Journal named us one of San Antonio's fast track companies for revenue growth.

In 2012, we also were named one of the top 50 companies in the San Antonio Express-News Top Workplaces for the fourth year in a row.

In 2011, we were named one of the "Best Places to Work" by the San Antonio Business Journal for the third year in a row.

In 2011, Computerworld named GlobalSCAPE on its list of "100 Best Places to Work in IT" for the second year in a row.

In 2011, Texas Monthly named GlobalSCAPE one of the best companies to work for in Texas for the second year in a row.

Non-GAAP Financial Measures

In addition to our financial statements prepared in accordance with GAAP, we use certain supplemental, non-GAAP measures (as defined by the Securities and Exchange Commission) to monitor the financial performance of our core operating activities prior to consideration of significant events that occur infrequently. Those non-GAAP measures include:

Non-GAAP operating expenses

Non-GAAP operating income

Non-GAAP net income

Non-GAAP earnings per share

Each of these non-GAAP financial measures excludes the affiliated entity asset impairment that is part of our Condensed Consolidated Statements of Operations and Comprehensive Income prepared in accordance with GAAP. We exclude this item when determining our non-GAAP financial measures because we do not consider it part of our core operating results when assessing our core operational performance, allocating resources to our core business activities and preparing core operating budgets. We believe that by comparing our non-GAAP financial measures across historical periods, our operating results can be evaluated exclusive of the effects of certain items that may not be indicative of our core operations.

While we believe these non-GAAP financial measures provide useful supplemental information, there are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies since there is no standard for preparing these non-GAAP financial measures. Each of the excluded items listed above individually and collectively can have a material impact on operating expenses, operating income, net income and earnings per share. As a result, these non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, financial statements prepared in accordance with GAAP.


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                                           Three Months  Ended          Nine Months  Ended
                                              September 30,                September 30,
                                            2012           2011         2012           2011
Non-GAAP Operating Expenses
GAAP total operating expenses            $    8,867      $  4,486     $  20,369      $ 14,434
Affiliated entity asset impairment           (3,264 )          -         (3,264 )          -

Non-GAAP operating expenses              $    5,603      $  4,486     $  17,105      $ 14,434


Non-GAAP (Loss) Income From Operations
GAAP (loss) income from operations       $   (2,789 )    $    531     $  (3,196 )    $  1,337
Affiliated entity asset impairment            3,264            -          3,264            -

Non-GAAP income from operations          $      475      $    531     $      68      $  1,337


Non-GAAP Net Income (Loss)
GAAP net (loss) income                   $   (2,714 )    $    611     $  (3,107 )    $  1,140
Affiliated entity asset impairment            2,929            -          2,929            -

Non-GAAP net income (loss)               $      215      $    611     $    (178 )    $  1,140


Non-GAAP Earnings Per Share
Non-GAAP net income                      $      215      $    611     $    (178 )    $  1,140
Weighted average share outstanding:
Basic                                        18,398        18,121        18,336        18,020
Diluted                                      19,125        18,689        18,336        18,724
Non-GAAP net income per common share:
Basic                                    $     0.01      $   0.03     $   (0.01 )    $   0.06
Diluted                                  $     0.01      $   0.03     $   (0.01 )    $   0.06

The affiliated entity asset impairment effect on non-GAAP net income (loss) of $2.9 million is the gross affiliated entity asset impairment of $3.3 million net of related federal income tax effects. See our comparison of results for the three and nine months ended September 30, 2012 and 2011 below for our discussion of variations in the underlying elements comprising the amounts above.

Key Business Metrics

As described in our Annual Report Form 10-K for the year ended December 31, 2011, which we refer to as the 2011 Form 10-K, we review a number of key business metrics on an ongoing basis to help us monitor our performance and to identify material trends which may affect our business. The measures that we believe are the primary indicators of our performance are:

Revenue growth

Recurring revenue growth

Aggregate contract value growth

Adjusted EBITDA excluding infrequent items

Revenue Growth

Since 1996, we have transitioned from a consumer products company (mostly focused on the CuteFTP product line) to a Managed File Transfer ("MFT") enterprise solutions provider with a focus on increasing the revenue contribution from cloud-based solutions, enabling secure mobile access to data and delivering professional services while continuing to grow our core MFT business. We have grown revenue consistently throughout this transition such that our enterprise solutions sales have grown from less than 50% of our revenue as recently as 2005


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to now comprising more than 90% of our sales with our CuteFTP consumer products accounting for less than 5% of revenue for the three and nine months ended September 30, 2012. We believe our ability to sustain revenue growth while continuing this business evolution is the most significant metric for our business.

Although we often have grown revenue sequentially quarter over quarter in recent years, we view annual revenue growth as the more important metric, especially considering the ongoing evolution of our solution portfolio. We believe annual "core" revenue growth, excluding larger, exceptional deals, is a key metric for monitoring our continued success in developing our business in future periods. Given our diverse solution portfolio, and especially with the addition of subscription services, we review our revenue mix and changes in revenue, across all solutions, on a regular basis to identify key trends and adjust resource allocations.

We believe attaining additional traction in the cloud-based managed solutions and secure content mobility and market segments, realizing the potential of new software solutions, and our ability to continue developing and enhancing our existing software solutions are significant factors in our continued ability to sustain or possibly increase our revenue growth in future years.

The impact of cloud-based managed solutions on our revenue growth trends depends on several key factors, including the number of customers who may shift from software licenses to subscription services, the rate at which they may do so, the subscription term and fees, and the comparative value of the opportunity had it materialized as a software license sale instead of as a subscription service. Generally, for a fixed number of opportunities (that is, without considering the possibility that a new service offering may result in additional sales opportunities), addition of subscription services reduces revenue growth rates for several quarters for the associated software license solutions until cumulative subscription revenue increases and, potentially, surpasses comparable software license revenue. The revenue impacts are particularly pronounced early in the introduction of subscription services because there has been only a short time period for accumulation of the recurring revenue stream.

Similarly, we believe market adoption of secure content mobility solutions, such as those provided by TappIn, will increase in future periods as use of personal computing devices, such as smart phones and tablets, continues to grow exponentially and as businesses increasingly embrace BYOD operating models.

See the section below comparing our results of operations for the three and nine months ended September 30, 2012 and September 30, 2011, for discussion of the revenue trends we have experienced.

Recurring Revenue Growth.

Recurring revenue includes revenue recognized from our M&S contracts, managed and hosted solutions, and other subscription services such as from our TappIn product line. Maintenance and support contracts for our products are sold for fixed periods of time and are typically for one year with some agreements having longer terms. We recognize revenue from these contracts on a monthly basis over the life of the contract. Managed and hosted solutions, such as MIX and Hosted EFT Server, are sold as one, two, or three-year subscriptions with the services invoiced and revenue recognized on a monthly basis. TappIn subscriptions typically are sold for one-year terms with the revenue recognized on a monthly basis.

Recurring revenue provides a more predictable revenue stream in future periods which we believe is highly valued by institutional investors and other market participants. We review recurring revenue trends periodically to determine the progress of our M&S and cloud solution sales and customer satisfaction with our ongoing solution development and support activities. We also assess how aggregate contract value (see further discussion below) will factor into possible recurring revenue in future periods.

See the section below comparing our results of operations for the three and nine months ended September 30, 2012 and September 30, 2011, for discussion of the recurring revenue trends we have experienced.

Aggregate Contract Value Growth.

Aggregate contract value (or "ACV") is a measure of future revenue potential we have in place under non-cancellable contracts for product sales, maintenance and support, managed solutions, and professional services for which we will recognize revenue in future periods. ACV is the sum of:

Deferred revenue resulting from payments we have already received for services to be provided in the future.


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Amounts we are due to be paid under non-cancellable contracts for future services we will provide under those contracts.

We have grown ACV from $8.2 million at September 30, 2011 to $10.3 million at September 30, 2012, due to sales success in numerous areas of our business. While we expect ACV may grow in future periods as we potentially continue to increase our volume of non-cancellable contracts for future delivery of our products and services, it could also decrease for a number of reasons including existing customers electing not to renew their maintenance and support contracts or a large professional services contract, such as those we have to provide services to the U.S. Army, not being renewed for additional terms as provided in certain of those contracts.

ACV is not a measure of financial performance under generally accepted accounting principles in the United States ("GAAP") and should not be considered a substitute for deferred revenue. We use this metric to assess the effectiveness of sales and business development activities and how that effectiveness will factor into future revenue. We have maintained increased visibility into ACV in recent years because with the addition of subscription services and increased sales of professional services, we believe sales growth may significantly outpace revenue growth in the near term. ACV, together with recurring revenue and deferred revenue trends, provides greater insight into how bookings will factor into revenue over specific periods. We determine ACV related to non-cancellable contracts for future delivery of our products and services as follows:

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