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SPRT > SEC Filings for SPRT > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for SUPPORT.COM, INC.


6-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q (the "Report") and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012. The following discussion includes forward-looking statements. Please see "Risk Factors" in Item 1A of this Report for important information to consider when evaluating these statements.

Overview

Support.com is a leading provider of cloud-based services and software designed to enhance a customer's experience with technology. We enable leading brands to offer technology service programs that create new revenue streams and deepen customer relationships. We also help technology organizations to reduce costs, improve problem resolution and enhance the customer experience. Our solutions include the cloud-based Nexus® Service Delivery Platform ("Nexus platform"), a scalable workforce of technology specialists, mobile and desktop applications for end-users and proven expertise in program design and execution.


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We market our services primarily through channel partners. Our partners include leading communications providers, retailers, technology companies and others. We recently began licensing our Nexus platform separately from services provided by our technology specialists. We market our end-user software products directly, principally online, and through partners. Our sales and marketing efforts are primarily focused in North America.

Total revenue for the first quarter of 2013 increased 15% year-over-year. Revenue from services increased 19% year-over-year primarily due to growth in our channel programs. Revenue from software and other remained relatively consistent year-over-year.

Cost of services for the first quarter of 2013 decreased 10% year-over-year as a result of improved operational processes, refinements to service delivery methodology and further technology enablement. Cost of software and other for the first quarter of 2013 decreased 35% year-over-year due to lower royalty rate payments to third-party developers. Total gross margin improved from 38% to 52% year-over-year.

Operating expenses for the three months ended March 31, 2013 decreased 23% from the same period in 2012, driven by a reduction in the contact center sales agent workforce completed at the end of the second quarter of 2012.

We intend the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those consolidated financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.

Critical Accounting Policies and Estimates

In preparing our interim consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 have the greatest potential impact on our condensed consolidated financial statements, so we consider them to be our critical accounting policies and estimates. There have been no significant changes in these critical accounting policies and estimates during the three months ended March 31, 2013.

 RESULTS OF OPERATIONS

The following table sets forth the results of operations for the three months
ended March 31, 2013 and 2012 expressed as a percentage of total revenue.

                                                                    Three Months Ended
                                                                         March 31,
                                                                   2013             2012
Revenue:
Services                                                                81 %             78 %
Software and other                                                      19               22

Total revenue                                                          100              100

Costs of revenue:
Cost of services                                                        46               59
Cost of software and other                                               2                3
Total cost of revenue                                                   48               62
Gross profit                                                            52               38
Operating expenses:
Research and development                                                 8               10
Sales and marketing                                                     19               35
General and administrative                                              14               17
Amortization of intangible assets and other                              2                2

Total operating expenses                                                43               64

Income (loss) from operations                                           10              (26 )
Interest income and other, net                                           -                -

Income (loss) from continuing operations, before income taxes           10              (26 )
Income tax provision                                                     1                1
Income (loss) from continuing operations, after income taxes             9              (25 )
Income from discontinued operations, after income taxes                  -                -

Net income (loss)                                                        9 %            (25 ) %


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Three Months Ended March 31, 2013 and 2012

REVENUE

                                       Three Months
                                           Ended
                                         March 31,              $           %
In thousands, except percentages     2013         2012       Change      Change

Services                           $ 16,446     $ 13,765     $ 2,681          19 %
Software and other                    3,756        3,823         (67 )        (2 ) %
Total revenue                      $ 20,202     $ 17,588     $ 2,614          15 %

Services. Services revenue consists primarily of fees for technology services generated from our channel partners. We provide these services remotely, generally using service delivery personnel who utilize our proprietary technology to deliver the services. Services revenue for the three months ended March 31, 2013 increased by $2.7 million from the same period in 2012. The increase was due primarily to growth in our channel programs. For the three months ended March 31, 2013, services revenue generated from our channel partnerships was $15.6 million compared to $12.9 million for the same period in 2012. Direct services revenue was $850,000 for the three months ended March 31, 2013 compared to $878,000 for the same period in 2012.

Software and other. Software and other revenue is comprised primarily of fees for end-user software products provided through direct customer downloads, and, to a lesser extent, through the sale of this software via channel partners and licensing of our Nexus platform. Software and other revenue declined by 2% for the first quarter of 2013 compared to same quarter in 2012. For the three months ended March 31, 2013, software revenue and other generated from our direct sales was $2.2 million compared to $2.3 million for the same period in 2012. Software revenue and other generated from our channel partnerships was $1.5 million for the three months ended March 31, 2013 and 2012. Additionally, revenue from the licensing of our Nexus platform contributed to software and other revenue for the first time in the three months ended March 31, 2013.


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COSTS OF REVENUE

                                       Three Months
                                          Ended
                                        March 31,              $            %
In thousands, except percentages    2013        2012         Change       Change

Cost of services                   $ 9,310     $ 10,291     $   (981 )        (10 )%
Cost of software and other             307          470         (163 )        (35 ) %
Total cost of revenue              $ 9,617     $ 10,761     $ (1,144 )        (11 )%

Cost of services. Cost of services consists primarily of compensation costs and contractor expenses for people providing services, technology and telecommunication expenses related to the delivery of services and other personnel-related expenses in service delivery. The decrease of $981,000 million in cost of services for the three months ended March 31, 2013 compared to the same period in 2012 was mainly driven by improved operational processes, refinements to service delivery methodology and further technology enablement.

Cost of software and other. Cost of software and other fees consists primarily of third-party royalty fees for our end-user software products. Certain of these products were developed using third-party research and development resources, and the third party receives royalty payments on sales of products it developed. The decrease for the three months ended March 2013 over the same period in 2012 was primarily due to a reduction of third-party royalty fees as the Company reduced the reliance on third-party software products.

OPERATING EXPENSES

                                      Three Months
                                          Ended
                                        March 31,            $             %
In thousands, except percentages    2013        2012       Change        Change

Research and development           $ 1,588     $ 1,770     $   (182 )        (10 ) %
Sales and marketing                $ 3,936     $ 6,130     $ (2,194 )        (36 ) %
General and administrative         $ 2,763     $ 2,914     $   (151 )         (5 ) %

Research and development. Research and development expense consists primarily of compensation costs, third-party consulting expenses and related overhead costs for research and development personnel. Research and development costs are expensed as they are incurred. The decrease of $182,000 for the three months ended March 31, 2013 as compared to the same period in 2012 resulted from a decrease in compensation costs.

Sales and marketing. Sales and marketing expense consists primarily of compensation costs, including salaries and sales commissions for contact center sales agents and business development, program management and marketing personnel, as well as expenses for lead generation and promotional activities, including public relations, advertising and marketing. The decrease of $2.2 million in sales and marketing expense for the three months ended March 31, 2013 compared to for the same period in 2012 resulted from a reduction in the contact center sales agent workforce completed at the end of the second quarter of 2012.

General and administrative. General and administrative expense consists primarily of compensation costs and related overhead costs for administrative personnel and professional fees for legal, accounting and other professional services. The decrease of $151,000 in general and administrative expense for three months ended March 31, 2013 as compared to the same period in 2012 was primarily related to lower stock-based compensation expense due to stock options for which the vesting term ended in the third quarter of 2012.

Amortization of Intangible Assets and Other

                                                Three Months
                                                    Ended
                                                  March 31,          $            %
In thousands, except percentages               2013      2012      Change      Change

Amortization of intangible assets and other   $   335     $ 367      $ (32 )        (9 ) %


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INTEREST INCOME AND OTHER, NET

Three Months
Ended
March 31, $ %
In thousands, except percentages 2013 2012 Change Change

Interest and other, net $ 73 $ 75 $ (2 ) (3 ) %

INCOME TAX PROVISION

Three Months
Ended
March 31, $ %
In thousands, except percentages 2013 2012 Change Change

Income tax provision $ 149 $ 118 $ 31 26 %

The provision for income taxes is comprised of estimates of current taxes due in domestic and foreign jurisdictions. For the three months ended March 31, 2013 and 2012, income tax provision primarily consisted of state income tax, foreign taxes, and tax expense related to the recording of a deferred tax liability that results from the amortization for income tax purposes of acquisition-related goodwill.

The increase in the income tax provision from 2012 to 2013 was primarily due to tax expense related to increase in state and foreign income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Total cash, cash equivalents and investments at March 31, 2013 and December 31, 2012 were $59.5 million and $56.4 million, respectively. The increase in cash, cash equivalents and investments was primarily due to cash generated from operating activities and exercise of employee stock options, which was offset by cash used for the repurchase of shares.

Operating Activities

Net cash provided by (used in) operating activities was $4.4 million and ($365,000) for the three months ended March 31, 2013 and 2012, respectively. Net cash provided by (used in) operating activities primarily reflected the net income (loss) for the period, adjusted for non-cash items such as depreciation, amortization of premiums and discounts on investments, stock-based compensation expense and amortization of intangible assets and changes in operating assets and liabilities. The sum of these non-cash items totaled $1.4 million and $1.7 million in the three months ended March 31, 2013 and 2012, respectively. Net cash provided by operating activities during the three months ended March 31, 2013 was the result of net income of $1.9 million, non-cash items of $1.4 million and increases in accrued compensation of $744,000 and other accrued liabilities of $815,000. Net cash used in operating activities during the three months ended March 31, 2012 was the result of net loss of $4.4 million offset by non-cash items of $1.7 million, decrease in accounts receivable of $1.4 million and increase in accrued compensation of $1.1 million.

Investing Activities

Net cash used in investing activities was $4.4 million and $2.7 million for the three months ended March 31, 2013 and 2012, respectively. For the three months ended March 31, 2013, net cash used in investing activities was primarily due to the purchase of marketable securities for $10.9 million offset by maturities of $6.5 million and $38,000 for purchases of property and equipment. Net cash used in investing activities for the three months ended March 31, 2012 was primarily due to purchase of $15.2 million of marketable securities offset by maturities of $13.9 million, $1.4 million used in the acquisition of RightHand IT Corporation and $70,000 for purchases of property and equipment.


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Financing Activities

Net cash provided by (used in) financing activities was ($1.0) million and $261,000 for the three months ended March 31, 2013 and 2012, respectively. Net cash used in financing activities for the three months ended March 31, 2013 was due to the repurchase shares for $4.1 million offset by proceeds from exercise of employee stock options (including exercise of stock options that resulted in shares that were repurchased) of $3.1 million. For the three months ended March 31, 2012, cash provided by financing activities of $261,000 was primarily attributable to the exercise of employee stock options.

Working Capital and Capital Expenditure Requirements

At March 31, 2013, we had stockholders' equity of $75.8 million and working capital of $57.0 million. We believe that our existing cash balances will be sufficient to meet our working capital requirements, as well as our planned capital expenditures for at least the next 12 months.

If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities. The sale of additional equity could result in dilution to our existing stockholders.

We plan to continue to make investments in our business during 2013. We believe these investments are essential to creating sustainable growth in our business in the future. Additionally, we may choose to acquire other businesses or complimentary technologies to enhance our product capabilities and such acquisitions would likely require the use of cash.

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