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| APKT > SEC Filings for APKT > Form 10-K on 1-Mar-2013 | All Recent SEC Filings |
1-Mar-2013
Annual Report
Overview
Acme Packet, Inc. is the leader in session delivery network solutions which enable the trusted, first class delivery of next-generation voice, data and unified communication services and applications across Internet protocol, or IP, networks.
Our Net-Net product family fulfills demanding security, service assurance, and regulatory requirements in service provider, enterprise, and contact center networks. We design and manufacture nearly all our products in the U.S., selling them through over 330 distribution partners worldwide. More than 1,925 end-user customers in 109 countries have deployed over 21,000 of the Company's systems, including 89 of the top 100 service providers and 51 of the Fortune 100.
Our headquarters are located in Bedford, Massachusetts. We maintain sales offices in Beijing, China; Berlin, Germany; Madrid, Spain; Seoul, South Korea; Tokyo, Japan, Moscow, Russia; Dubai, United Arab Emirates; Gurgaon, India; Singapore and Ipswich, United Kingdom. We also have sales and support personnel in Argentina, Australia, Belgium, Brazil, Canada, Columbia, Croatia, Czech Republic, France, Germany, Hong Kong, India, Indonesia, Israel, Italy, Malaysia, Mexico, the Netherlands, New Zealand, Peru, Poland, Portugal, Russia, Saudi Arabia, Singapore, South Africa, Sweden, Taiwan, Thailand, United Arab Emirates and throughout the U.S. We expect to selectively add personnel to provide additional geographic sales and technical support coverage.
Significant Recent Development
On February 4, 2013, Acme Packet, OC Acquisition LLC, a Delaware limited liability company ("Parent"), Andes Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Subsidiary"), and Oracle Corporation, a Delaware corporation and the ultimate parent entity of Parent and Merger Subsidiary ("Oracle"), entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which, subject to the satisfaction or waiver of the conditions therein, Merger Subsidiary will merge with and into Acme Packet (the "Merger") with Acme Packet surviving as a wholly-owned subsidiary of Parent. The Merger is expected to close in the first half of 2013, subject to Acme Packet stockholder approval, certain regulatory approvals and other customary closing conditions
Upon the consummation of the Merger, subject to the terms of the Merger Agreement which has been unanimously approved by our Board of Directors, each share of our common stock outstanding immediately prior to the effective time of the Merger (the "Effective Time") (other than (i) shares owned by Oracle or any of Oracle's subsidiaries, (ii) shares held by us as treasury stock or our subsidiaries and, (iii) shares to which appraisal rights are properly sought), will be converted into the right to receive $29.25 in cash, without interest (the "Merger Consideration"), representing approximately $2.1 billion on a fully diluted basis. A description of the Merger Agreement is contained in our Current Report on Form 8-K filed with the SEC on February 4, 2013, and its preliminary proxy statement filed with the SEC on February 19, 2013.
As of the date of this filing, the effectiveness of the Merger was still subject to a vote by our shareholders.
Business Combinations
Covergence Inc.
On April 30, 2009, the Company acquired Covergence Inc., or Covergence, a then emerging, innovative provider of software-based session border controllers for delivering VoIP/IP telephony, unified communications, and service orientated architecture applications within Global 1000 enterprises. The aggregate purchase price was $22.8 million, consisting of 2,874,383 shares of the Company's common stock, valued at approximately $22.2 million, $20,000 in cash payments to the stockholders of Covergence, and the payment of withholding taxes due
for the former Chief Executive Officer of Covergence, of approximately $578,000. We also incurred approximately $58,000 of fees associated with the registration of the common stock issued, which has been recorded as a reduction to the purchase price.
The transaction was accounted for under the acquisition method of accounting. Accordingly, the results of operations of Covergence have been included in our consolidated financial statements since the date of acquisition. All of the assets acquired and liabilities assumed in the transaction have been recognized at their acquisition date fair values which were finalized at December 31, 2009. The acquisition of Covergence was deemed a "bargain purchase" for accounting purposes and a gain of $4.3 million was recorded in other income in our consolidated statement of income in 2009. We also incurred $1.1 million of merger and integration related costs associated with our acquisition of Covergence which we recorded as an expense in our consolidated statement of operations during 2009.
Newfound Communications, Inc.
On January 20, 2011, the Company acquired Newfound Communications, Inc., or Newfound Communications, an emerging, innovative provider of call recording solutions for the IP communications industry. The aggregate purchase price was $4.4 million in cash payments to the stockholders of Newfound Communications. In allocating the total preliminary purchase price for Newfound Communications based on estimated fair values, we recorded $3.8 million of goodwill, $1.2 million of identifiable intangible assets, and $887,000 of net tangible liabilities. In connection with the acquisition of Newfound Communications, we incurred $180,000 of merger and integration related costs during 2011, which we recorded as an expense in the consolidated statements of operations for the year ended December 31, 2011.
This transaction was accounted for under the acquisition method of accounting. Accordingly, the results of operations of Newfound Communications have been included in our consolidated financial statements since the date of acquisition. All of the assets acquired and liabilities assumed in the transaction have been recognized at their acquisition date fair values, which was finalized at December 31, 2011.
IPTEGO GmbH
On April 25, 2012, we acquired IPTEGO GmbH, or Iptego, an IP communications network management software company for approximately $21.3 million in cash through an acquisition of all outstanding shares of Iptego by Acme Packet UK Limited. Based in Berlin, Germany, Iptego is a rapidly growing provider of software solutions that offer real-time, end-to-end communications network intelligence, voice and video operations monitoring, customer experience management and fraud prevention and detection.
The transaction was accounted for under the acquisition method of accounting. Accordingly, the results of operations of Iptego have been included in our consolidated financial statements since the date of acquisition. All of the assets acquired and the liabilities assumed in the transaction have been recognized at their acquisition date fair values, which was finalized at December 31, 2012.
Industry Background
Service providers traditionally have delivered voice and data services over two separate networks: the PSTN and the Internet. The PSTN provides high reliability and security but is costly to operate and is limited in its ability to support high bandwidth video and other interactive multimedia services. The Internet is capable of cost effectively transmitting any form of traffic that is IP-based, including interactive voice, video, and data, but it transmits traffic only on a best efforts basis, because all forms of traffic have the same priority. Therefore, the Internet attempts to deliver all traffic without distinction, which can result in significantly varying degrees of service quality for the same or similar types of traffic transmissions. Internet based services are also subject to
disruptive and fraudulent behavior, including identity theft, viruses, unwanted and excessively large input data, known as SPAM, and the unauthorized use and attempts to circumvent or bypass security mechanisms associated with those services, known as hacking.
Service providers are migrating to a single IP network architecture to serve as the foundation for their next generation voice, video, multimedia, and data service offerings. Recently, an increasing number of enterprises, including contact centers and government agencies have begun to migrate to a single IP network architecture as well. In order to provide secure and high quality interactive communications on a converged IP network, service providers and enterprises must be able to control the communications flows that comprise communication sessions.
Key Financial Highlights
Some of our key financial highlights for 2012 include the following:
• Total revenue was $274.4 million in 2012 compared to $307.3 million in 2011.
• Net loss was $5.2 million in 2012 compared to net income of $44.4 million in 2011.
• Earnings per share was a loss of $0.08 per share on a diluted basis in 2012 compared to income of $0.63 per share in 2011.
• Cash provided by operating activities was $60.9 million in 2012 compared to $55.3 million in 2011.
• Cash used in financing activities was $2.3 million in 2012 compared to cash provided by financing activities of $62.4 million in 2011.
The Acme Packet Strategy
Principal elements of our strategy include:
• Continuing to satisfy the evolving session delivery network requirements of enterprises and fixed-line, mobile and over-the-top service providers. Our network deployments position us to gain valuable knowledge that we can use to expand our product portfolio and enhance our products' features and functionality. We may develop new products organically, or through selective acquisitions.
• Implementing new technologies to enhance product performance and scalability. We will seek to leverage new technologies as they become available to increase the performance, capacity and functionality of our product family, as well as to reduce their costs.
• Investing in quality and responsive support. As we broaden our product family and increase the capabilities of our session delivery network solutions, we will continue to provide comprehensive service and support targeted at maximizing customer satisfaction and retention.
• Facilitating and promoting service interconnects and federations among our customers. We intend to drive increased demand for our products by helping our customers to extend the reach of their services and applications and, consequently, to increase the value of their services to their users.
• Leveraging distribution partnerships to enhance market penetration. We will continue to invest in training and tools for our distribution partners' sales, systems engineering and support organizations, in order to improve the overall efficiency and effectiveness of these partnerships.
• Actively contributing to architecture and standards definition processes. We will utilize our breadth and depth of experience with session delivery network deployments to contribute significantly to organizations developing standards and architectures for next generation IP networks.
Factors That May Affect Future Performance
• Global Macroeconomic Conditions. We believe that the capital budgets and spending initiatives of some of our core customers-service providers, enterprises, government agencies, and contact centers-may be affected by current worldwide economic conditions. Our ability to generate revenue from these core customers is dependent on the status of such budgets and initiatives.
• Gross Margin. Our gross margin has been, and will continue to be, affected
by many factors, including (a) the demand for our products and services,
(b) the average selling price of our products, which in turn depends, in
part, on the mix of product and product configurations sold, (c) the level
of software license upgrades, (d) the cost of acquiring our products for
sale, (e) new product introductions, (f) the mix of sales channels through
which our products are sold, and (g) the costs of manufacturing our
hardware products and providing our related support services. Customers
license our software in various configurations depending on each
customer's requirements for session capacity, feature groups and
protocols. The product software configuration mix will have a direct
impact on the average selling price of the system sold. Systems with
higher software content (higher session capacity, support for higher
number of security protocols and a larger number of feature groups) will
generally have a higher average selling price than those systems sold with
lower software content. If customers begin to purchase systems with lower
software content, this may have a negative impact on our revenue and gross
margins.
• Competition. Competition in our product categories is strong and constantly evolving. While we believe we are currently the market leader in the service provider and enterprise markets for session delivery network solutions, we expect competition to persist and intensify in the future as the market grows. Our competitors vary by market segment, service provider versus enterprise, and by session delivery network product category. In the service provider market our primary competitors include GENBAND Inc., Telefonaktiebolaget LM Ericsson, Huawei Technologies Co., Ltd., and Metaswitch Networks Ltd. In the enterprise market our primary competitor is Cisco Systems, Inc. We believe we compete successfully with all of these companies based upon our experience in interactive communications networks, the breadth of our applications and standards support, the depth of our border control features, the demonstrated ability of our products to interoperate with key communications infrastructure elements, and our comprehensive service and support. We also believe our products are priced competitively with our competitors' offerings. As the session delivery network solutions market opportunity grows, we expect competition from additional networking and IP communications equipment suppliers, including our traditional distribution partners. This change in the competitive dynamic would involve a changing mix of our business to more direct relationships with end customers and may require substantial additional investment that would be needed to broaden our product and services portfolio to provide a more comprehensive systems integration, service, support and complete communications solutions offering.
• Evolution of the session delivery network solutions market. The market for our products is still evolving, and it is uncertain whether these products will continue to achieve and sustain high levels of demand and market acceptance. Our success will depend, to a substantial extent, on the willingness of interactive communications service providers and enterprises to continue to implement our solutions. Demand is also dependent upon the respective geographic regions where our customers are located. For example in 2012 we experienced a level of demand that was lower than we had expected from our service provider customers in North America, which had an adverse effect on our operations.
• Research and Development. To continue to achieve market acceptance for our products, we must effectively anticipate and adapt, in a timely manner, to customer requirements and must offer products that meet changing customer demands. Prospective customers may require product features and capabilities that our current products do not have. The market for session delivery network solutions is characterized by rapid technological change, frequent new product introductions, and evolving industry requirements. We intend to continue to invest in our research and development efforts, which we believe are essential to maintaining our competitive position.
Revenue
We derive product revenue from the sale of our Net-Net hardware and the licensing of our Net-Net software. We generally recognize product revenue at the time of product delivery, provided all other revenue recognition criteria have been met. For arrangements that include customer acceptance or other material non-standard terms, we recognize revenue after acceptance or when the non-standard terms are resolved, assuming all other criteria for revenue recognition have been met.
We generate maintenance, support, and service revenue from (a) maintenance
associated with software licenses, (b) technical support services for our
software product, (c) hardware repair and maintenance services,
(d) implementation, training and consulting services, and (e) reimbursable
travel and other out-of-pocket expenses.
We offer our products and services indirectly through distribution partners and directly through our sales force. Our distribution partners include networking and telecommunications equipment vendors throughout the world. Our distribution partners generally purchase our products after they have received a purchase order from their customers and, generally, do not maintain an inventory of our products in anticipation of sales to their customers. Generally, the pricing offered to our distribution partners will be lower than to our direct customers.
The product configuration, which reflects the mix of session capacity, signaling protocol support, and requested features, determines the price for each product sold and licensed. Customers can purchase our products in either a standalone or high availability configuration and can license our software in various configurations, depending on the customers' requirements for session capacity, functionality, and protocols. The product software configuration mix will have a direct impact on the average selling price of the system sold. As the market continues to develop and grow, we expect to experience increased price pressure on our products and services.
We believe that our revenue and results of operations may vary significantly from quarter to quarter as a result of long sales and deployment cycles, variations in customer ordering patterns, and the application of complex revenue recognition rules to certain transactions. Some of our arrangements with customers include clauses under which we may be subject to penalties for failure to meet specified performance obligations. We have not incurred any such penalties to date.
Cost of Revenue
Cost of product revenue consists primarily of third party manufacturers' fees
for purchased materials and services, combined with our expenses for
(a) salaries, wages and related benefits for our manufacturing personnel,
(b) related overhead, (c) provision for inventory obsolescence, (d) amortization
of intangible assets and (e) stock-based compensation. Amortization of
intangible assets represents the amortization of developed technologies from our
acquisitions of Covergence, Newfound Communications, and Iptego.
Cost of maintenance, support and service revenue consists primarily of
(a) salaries, wages and related benefits for our support and service personnel,
(b) related overhead, (c) billable and non-billable travel, lodging,
and other out-of-pocket expenses, (d) material costs consumed in the provision of services, and (e) stock-based compensation.
Gross Profit
Our gross profit has been, and will be, affected by many factors, including
(a) the demand for our products and services, (b) the average selling price of
our products, which in turn depends, in part, on the mix of product and product
configurations sold or licensed, (c) the mix between product and service
revenue, (d) the cost of acquiring our products, (e) new product introductions,
(f) the mix of sales channels through which our products are sold, (g) the
volume and costs of manufacturing our hardware products, (h) the costs
associated with fulfilling our maintenance and warranty obligations, and
(i) personnel and related costs for manufacturing, support, and services.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, general and administrative, and merger and integration-related expenses. Personnel related costs are the most significant component of each of these expense categories. During the period from January 1, 2011 through December 31, 2012, we increased the number of our employees and full time independent contractors by 61%, from 486 to 783. We expect to continue to hire new employees to support our anticipated growth.
Sales and marketing expense consists primarily of (a) salaries, bonuses and
related personnel costs, (b) commissions, (c) travel, lodging and other
out-of-pocket expenses, (d) marketing programs such as trade shows,
(e) stock-based compensation, (f) amortization of intangible assets, and
(g) other related overhead. Commissions are recorded as expense when earned by
the employee. We anticipate that sales and marketing expense, as a percentage of
revenue, will return to historical levels in the future.
Research and development expense consists primarily of (a) salaries, bonuses and related personnel costs, (b) payments to suppliers for design and consulting services, (c) prototype and equipment costs relating to the design and development of new products and enhancement of existing products, (d) quality assurance and testing, (e) stock-based compensation, and (f) other related overhead. To date, all of the costs related to our research and development efforts have been expensed as incurred as technological feasibility is determined at the same time as release. We intend to continue to invest in our research and development efforts, which we believe are essential to maintaining our competitive position. We anticipate that research and development expense, as a percentage of revenue, will return to historical levels in the future.
General and administrative expense consists primarily of (a) salaries, bonuses, wages, and personnel costs related to our executive, finance, human resource, and information technology organizations, (b) accounting and legal professional fees, (c) expenses associated with uncollectible accounts, (d) stock-based compensation and (e) other related overhead. We expect general and administrative expense to increase in absolute dollars as we invest in infrastructure to support continued growth and incur ongoing expenses related to being a publicly-traded company. However, we anticipate that general and administrative expense will remain relatively consistent as a percentage of total revenue in the future.
Merger and integration related costs primarily consist of transaction expenses and severance related charges incurred in connection with our business combinations.
Stock-Based Compensation
Cost of revenue and operating expenses include stock-based compensation expense. We expense share-based payment awards with compensation cost for share-based payment transactions measured at fair value. For the years ended December 31, 2012, 2011 and 2010, we recorded expense of $52.8 million, $35.2 million and $16.5 million, respectively, in connection with share-based payment awards.
Other (Expense) Income, Net
Other (expense) income consists primarily of gains or losses from foreign currency translation adjustments associated with our international activities. The functional currency of our international operations is the U.S. dollar. Accordingly, all assets and liabilities of these international subsidiaries are re-measured into U.S. dollars using the exchange rates in effect at the balance sheet date, or historical rate, as appropriate. Revenue and expenses of these international subsidiaries are re-measured into U.S. dollars at the average rates in effect during the period. Any differences resulting from the re-measurement of assets, liabilities and operations are recorded within other (expense) income. Other (expense) income also includes interest income earned on cash, cash equivalents, and investments. We have invested cash in high quality securities and are not materially affected by fluctuations in interest rates.
Application of Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions. There have been no material changes to these estimates for the periods presented in this Annual Report on Form 10-K.
We believe that some of our significant accounting policies, which are more fully described in Note 2 of the notes to our consolidated financial statements included in this Annual Report on Form 10-K, involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the consideration is fixed or determinable, and collection of the related accounts receivable is deemed probable. In making these judgments, management evaluates these criteria as follows:
• Persuasive evidence of an arrangement exists. We consider a non-cancellable agreement signed by the customer and us to be representative of persuasive evidence of an arrangement.
• Delivery has occurred. We consider delivery to have occurred when product has been delivered to the customer and no significant post-delivery obligations exist. In instances where customer acceptance is required, delivery is deemed to have occurred when customer acceptance has been achieved.
• Consideration is fixed or determinable. We consider the consideration to be fixed or determinable unless the consideration is subject to refund or adjustment, or is not payable within normal payment terms. If the consideration is subject to refund or adjustment, we recognize revenue when the right to a refund or adjustment lapses. If offered payment terms exceed our normal terms, then revenue is recognized upon the receipt of cash.
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