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DLGC > SEC Filings for DLGC > Form 10-Q on 31-Jul-2013All Recent SEC Filings

Show all filings for DIALOGIC INC.

Form 10-Q for DIALOGIC INC.


31-Jul-2013

Quarterly Report


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

The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and our Consolidated Financial Statements and Notes thereto for the year ended December 31, 2012, in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 22, 2013. The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, including, but not limited to, statements of our future financial operating results, future expectations concerning cash and cash equivalents available to us, our business strategy, including whether we can successfully develop new products and the degree to which these gain market acceptance, revenue estimations, plans, objectives, expectations and intentions. In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events are based on assumptions and are subject to risks, uncertainties and other important factors. Our actual results could differ materially from those discussed here. See "Risk Factors" in Item 1A of Part II for factors that could cause future results to differ materially from any results expressed or implied by these forward-looking statements. Given these risks, uncertainties and other important factors, you should not place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

Overview

Dialogic Inc., the Network Fuel™ company, inspires the world's leading service providers and application developers to elevate the performance of media-rich communications across the most advanced networks. We boost the reliability of any-to-any network connections, supercharge the impact of applications and amplify the capacity of congested networks. Forty-eight of the world's top 50 mobile operators and nearly 3,000 application developers rely on Dialogic to redefine the possible and exceed user expectations.

Wireless and wireline service providers use our products to transport, transcode, manage and optimize video, voice and data traffic while enabling Voice over Internet Protocol and other media rich services. These service providers also utilize our technology to energize their revenue-generating value-added services platforms such as messaging, Short Message Service, voice mail and conferencing, all of which are becoming increasingly video-enabled. Enterprises rely on our innovative products to simplify the integration of IP and wireless technologies and endpoints into existing communication networks, and to empower applications that serve businesses, including unified communication applications, contact centers and Interactive Voice Response/ Interactive Voice and Video Response.

We sell our products to both service provider and enterprise customers and sell directly and indirectly through distribution partners such as Technology Equipment Manufacturers, Value Added Resellers and other channel partners. Our customers supercharge their networks, enterprise communications solutions, or their value-added services with our products.

We were incorporated in Delaware on October 18, 2001 as Softswitch Enterprises, Inc., and subsequently changed our name to NexVerse Networks, Inc. in 2001, Veraz Networks, Inc. in 2002 and Dialogic Inc. in 2010. We and businesses that we have acquired have been providing products and services for nearly 25 years.

Industry Background

The telecommunications industry has traditionally been highly regulated. In recent years, however, regulatory barriers to competitive entry have been removed and service providers with telephone, cable, and wireless networks have expanded their offerings to video, voice, and data services over a single broadband platform, increasing competition in the industry.

This increase in competition has also led to steep price reductions, which have in turn caused the revenues of incumbent telecom operators to decline. At the same time, the demand for IP-based technologies increased due to the need to keep pace with subscriber demand, yet reduce operating costs and diversify revenue streams. In developed countries, services are increasingly bundled; for example, Internet access is often bundled with voice telephony and television channels. Service providers and enterprises either maintain their legacy networks or steadily plan on migrating telecom systems from PSTN to a single IP network to deliver video calls, text messaging, and location-based services and other high-demand services.

Our products allow service providers to deploy services efficiently and with scale across disparate networks. We offer a softswitch that allows new services to be implemented flexibly and securely throughout the entire network along with routing, billing, and number portability for operational savings. Our software-based media servers offer state of the art media-rich mixing to enable the creation of innovative value-added communications services with seamless transition to virtualization and cloud. Our network congestion solutions amplify capacity gains across all wireless architectures and across broadband VOIP networks at a fraction of the cost of building new capacity. We also offer a family of session border controllers with superior media signaling and handling performance, secure any to any network and service connectivity and a feature-rich web-based dashboard and management. Our media gateways interconnect complex video, voice and data protocols and include both bandwidth and codec optimization.


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Our products are designed to meet specific customer requirements and industry standards, and are subject to various laws, restrictions and regulations, including, but not limited to, environmental protection, import-export controls, and political and economic boundaries, which are more fully discussed in "Item 1A. Risk Factors."

Our Products

Our products include both Next-Generation products that serve advanced mobile and IP networks and also seamlessly connect these disparate networks, as well as Legacy products that serve the predominant installed base of TDM networks.

Our Next-Generation products and solutions are offered in five main solution areas:

1) Any to Any Networking - We manufacture products designed to seamlessly and efficiently connecting disparate networks and/or value-added services platforms based on a complex array of network protocols such as TDM, IP, SIP and IMS. Our technologies enable media-rich communications, including video, voice and data, to flow uninterrupted between service providers and application developers and their end-users while ensuring the lowest operating costs and most optimal customer experience. Products that excel in Any to Any Networking include the ControlSwitch™ System IP Softswitch, BorderNet™ Sessions Border Controllers, IMG Media Gateways, Signaling solutions and PowerMedia™ XMS and HMP media servers.

2) Network Congestion - The explosion in video, voice and data communications has challenged network operators to balance the challenges of network expansion with business profitability. Our solutions re-energize congested networks by optimizing network traffic and amplifying capacity gains of up to 500% at a fraction of the cost of new network capacity. Our key technologies are network agnostic, successfully driving capacity gains over TDM, VOIP, 2G, 3G, 4G, LTE, satellite, microwave, copper and fiber transport. Products that alleviate Network Congestion include Session Bandwidth Optimization solutions for Mobile Backhaul, Core Networks and VOIP.

3) Contact Center Transformation - As contact centers transition from TDM to IP, from premise-based to cloud/hosted or from fragmented to centralized to decentralized, our technologies enable contact center operators to maximize their investment by integrating multi-modal media-rich communications in a secure and optimized fashion. Contact centers empowered by our technologies perform better and run more cost effectively. Products that are designed for Contact Center Transformation include ControlSwitch System IP Softswitch, BorderNet Session Border Controllers, IMG Media Gateways, PowerMedia XMS and HMP media servers and Network Congestion solutions.

4) Unified Communications for Service Providers - Through partnerships with market leaders in Unified Communications, we are enabling Service Providers to better leverage their investments in network switching infrastructure and offer a broader array of value-added services including hosted IP-PBX via PC and mobile, video calling and more sophisticated Class 5 services over a more secure and cost-optimized network. This collaboration enables Service Providers to more effectively compete with traditional Enterprise telephony vendors while expanding customer share of wallet. Products that are designed for Unified Communications for Service Providers include ControlSwitch System IP Softswitch, BorderNet Session Border Controllers, IMG Media Gateways, and PowerMedia XMS and HMP media servers.

5) Application Enablement - We are a recognized leader in software-based solutions that enable Application Developers to rapidly develop and monetize a wide array of value-added services such as messaging, SMS, video calling, ringtones, lawful intercept and location-based services. Our customers benefit from extensive capabilities in mixing media-rich communications, transitioning to virtualized or cloud-based architectures and deploying highly available and scalable platforms or services. Products that are designed for Application Enablement include PowerMedia XMS and HMP media servers, BorderNet Sessions Border Controllers, IMG Media Gateways, Signaling solutions and Brooktrout Fax over IP software, as well as our Legacy portfolio.

Our Legacy products and solutions serve the TDM-only markets. While all networks are moving to IP or mobile-based networks, TDM networks still exist and will continue to exist for many years. As such, there will continue to be demand, albeit decreasing, for the TDM products to connect these existing networks. Our Legacy products are offered via an array of traditional network and/or media processing boards that range from two-port analog interface boards to octal span T1/E1 media and network interface boards. These products connect to and interact with an enterprise or service provider based circuit switched network, and support a suite of media processing features, including echo cancellation, DTMF detection, voice play and record, conferencing, fax, modem and speech integration. The boards are grouped into four media board families, i.e., Dialogic ® Media and Network Interface boards with various architectures, Diva ® Media Boards, Dialogic ® CG Series Media Boards and Brooktrout ® Fax Boards.

We have expanded upon our expertise with voice solutions to include video and data. We believe that the continued demand for services by mobile users will drive increasing demand for bandwidth. As a result, we have continued to invest in our portfolio of network congestion solutions to enable mobile operators to amplify their bandwidth in their network. We are also actively expanding products that deliver video applications to mobile devices. Our customers and partners are increasingly adding video to value-added


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service application and our products support key video codecs and APIs such as WebRTC, perform video transcoding and transrating functions from one codec type to another, and enable video play/record and video conferencing. We also support new voice functionalities such as high definition voice codecs.

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial position and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with U.S. GAAP pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. If actual results differ significantly from management's estimates and projections, there could be a material effect on our financial statements. Certain reclassifications have been made to prior periods to conform to the current presentation.

There have been no significant changes in our accounting policies for the three months ended March 31, 2013 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2012.

Results of Operations (amounts in 000's)

Comparison of Three Months Ended March 31, 2013 and March 31, 2012

Revenue



(USD and $000's)                              2013                           2012                      Period to-Period Change
                                                  % of Total                     % of Total
                                     Amount        Revenue          Amount        Revenue            Amount             Percentage
Revenue:
Product                             $ 24,733               73 %    $ 32,488               77 %    $      (7,755 )               (24 )%
Services                               9,062               27 %       9,597               23 %             (535 )                (6 )%

Total revenue                       $ 33,795              100 %      42,085              100 %           (8,290 )               (20 )%

Legacy vs. NextGen:
Legacy                              $ 10,041               30 %    $ 15,573               37 %    $      (5,532 )               (35 )%
NextGen                               23,754               70 %      26,512               63 %           (2,758 )               (10 )%

Total revenue                       $ 33,795              100 %    $ 42,085              100 %           (8,290 )               (20 )%

Revenue by geography:
Americas                            $ 15,665               46 %    $ 18,600               44 %    $      (2,935 )               (16 )%
Europe, Middle East and Africa        11,200               33 %      13,803               33 %           (2,603 )               (19 )%
Asia Pacific                           6,930               21 %       9,682               23 %           (2,752 )               (28 )%

Total revenue                       $ 33,795              100 %    $ 42,085              100 %    $      (8,290 )               (20 )%

Revenue

Total revenue of $33.8 million for the three months ended March 31, 2013 decreased by $8.3 million, or 20%, from $42.1 million for the three months ended March 31, 2012.

Our product revenue was 73% of total revenue at $24.7 million for the three months ended March 31, 2013, compared to 77% of total revenue, or $32.5 million for the three months ended March 31, 2012, a decrease of $7.8 million, or 24%. The decrease in product revenue is primarily attributable to an expected decline in demand for our Legacy products, as well as project timing and associated revenue recognition of NextGen products.

Our services revenue was 27% of total revenue at $9.1 million for the three months ended March 31, 2013, compared to 23% of total revenue, or $9.6 million for the three months ended March 31, 2012, a decrease of $0.5 million, or 6%. The decrease in services revenue was the result of decommissioning of our Legacy products in customer networks, partially offset by customer expansions and upgrades of our Next-Gen products.


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Cost of Revenue and Gross Profit



(USD and $000's)                          2013                        2012                    Period-to-Period  Change
                                                % of                        % of
                                               Related                     Related
                                  Amount       Revenue        Amount       Revenue           Amount             Percentage
Cost of Revenue:
Product                          $  9,577            39 %    $ 11,411            35 %    $       (1,834 )               (16 )%
Services                            4,641            51 %       5,171            54 %              (530 )               (10 )%

Total cost of revenue            $ 14,218            42 %    $ 16,582            39 %    $       (2,364 )               (14 )%

Gross Profit:
Product                          $ 15,156            61 %    $ 21,077            65 %    $       (5,921 )               (28 )%
Services                            4,421            49 %       4,426            46 %                (5 )                (1 )%

Total gross profit               $ 19,577            58 %    $ 25,503            61 %    $       (5,926 )               (23 )%

Cost of Revenue

Total cost of revenue of $14.2 million for the three months ended March 31, 2013 decreased by 14% or $2.4 million from $16.6 million for the three months ended March 31, 2012.

Cost of product revenue of $9.6 million for the three months ended March 31, 2013 decreased by 16% or $1.8 million from $11.4 million for the three months ended March 31, 2012. The change is primarily attributable to lower product costs, as a result of the decline in volume and a reduction in salaries and benefits due to the decrease in operations personnel headcount.

Cost of services revenue of $4.6 million for the three months ended March 31, 2013 decreased by 10% or $0.5 million from $5.2 million for the three months ended March 31, 2012. The change is primarily attributable to the decrease in headcount compared to the corresponding prior year period. Cost of services includes the direct costs of customer support and consists primarily of payroll, related benefits and travel for our support personnel.

Gross Profit

Gross profit of $19.6 million for the three months ended March 31, 2013 decreased by $5.9 million, or 23%, from $25.5 million for the three months ended March 31, 2012. Gross profit margin decreased from 61% of total revenue for the three months ended March 31, 2012 to 58% of total revenue for the three months ended March 31, 2013.

For the three months ended March 31, 2013, product gross profit decreased by 28%, or $5.9 million, from $21.1 million for the three months ended March 31, 2012 to $15.2 million for the three months ended March 31, 2013. Gross profit margin decreased from 65% of total product revenue for the three months ended March 31, 2012 to 61% of total product revenue for the three months ended March 31, 2013. The decrease in gross profit on product revenue is primarily a result of an overall decline in product revenue and the decrease in gross profit margin is a primarily a result of product mix.

For the three months ended March 31, 2013, services gross profit remained consistent at $4.4 million for the three months ended March 31, 2013 and 2012. Gross profit margin increased from 46% of total services revenue for the three months ended March 31, 2012 to 49% of total services revenue for the three months ended March 31, 2013, primarily due to improved efficiencies gained from our integration efforts.


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Operating Expenses



                                                   2013                            2012                      Period-to-Period  Change
                                                      % of  Total                     % of  Total
                                         Amount         Revenue          Amount         Revenue             Amount             Percentage
Research and development, net           $  8,033                24 %    $ 12,823                30 %    $       (4,790 )               (37 )%
Sales and marketing                        9,248                27 %      11,611                28 %            (2,363 )               (20 )%
General and administrative                 7,960                24 %       7,585                18 %               375                   5 %
Restructuring charges                        212                 1 %          57                 0 %               155                 272 %

Total operating expenses                $ 25,453                75 %    $ 32,076                76 %    $       (6,623 )               (21 )%

Research and Development Expenses

Research and development expenses of $8.0 million, or 24% of total revenue, for the three months ended March 31, 2013 decreased by $4.8 million, or 37%, from $12.8 million, or 30% of total revenue for the three months ended March 31, 2012. The decrease was primarily the result of a $3.5 million decrease in salaries and benefits associated with a decrease in departmental headcount, as a result of our integration and restructuring efforts.

Sales and Marketing

Sales and marketing expenses of $9.2 million, or 27% of total revenue, for the three months ended March 31, 2013 decreased by $2.4 million, or 20%, from $11.6 million, or 28% of total revenue for the three months ended March 31, 2012. The change in sales and marketing expenses is primarily attributable to decreases in salaries and employee benefits of $1.2 million, amortization and depreciation of $0.4 million, sales commissions of $0.2 million, and travel and entertainment of $0.2 million.

General and Administrative

General and administrative expenses of $8.0 million, or 24% of total revenue, for the three months ended March 31, 2013 increased by $0.4 million, or 5%, from $7.6 million, or 18% of total revenue for the three months ended March 31, 2012. The change is primarily attributable to bad debt expense of $1.0 million, partially offset by decreased expenses for legal and consulting fees of $0.2 million, salaries and employee benefits of $0.2 million and travel and entertainment of $0.1 million.

Restructuring Charges

For the three months ended March 31, 2013, we recorded an adjustment to the restructuring accrual related to employee termination benefits, resulting in a net benefit of less than $0.1 million. For the three months ended March 31, 2012, we recorded employee separation costs and other costs related to employee termination benefits in the amount of $0.1 million. As of March 31, 2013 and December 31, 2012, $0.7 million and $2.5 million, respectively, remained accrued and unpaid for these termination benefits, which are reflected as a component of accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

In an effort to reduce overall operating expenses, we decided it was beneficial to close or consolidate office space at certain locations. For the three months ended March 31, 2013, we incurred expense of $0.9 million in lease and facility exit costs primarily related to idle space in Milpitas, California, and Needham, Massachusetts. In addition, we adjusted our facility related restructuring accruals for its Parsippany, New Jersey, Eatontown, New Jersey and Renningen, Germany based on new information received resulting in a benefit of $0.7 million during the three months ended March 31, 2013. For the three months ended March 31, 2012, we did not incur any expenses related to lease and facility exit costs. As of March 31, 2013 and December 31, 2012, respectively, $1.4 million and $1.2 million, of lease and facility exit costs were reflected as a component of accrued liabilities and $1.9 million was reflected as a component of other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets.

Interest Expense

Interest expense decreased by $1.7 million or 42%, from $4.1 million for the three months ended March 31, 2012 to $2.4 million for the three months ended March 31, 2013. The decrease is primarily attributable to lower interest rates for the three months ended March 31, 2013 on our Term Loan Agreement, which decreased from a stated interest rate of 15% to 10%. In addition, the average interest rate on the Revolving Credit Agreement decreased from 5.75% for the three months ended March 31, 2012 to 4.75% for the three months ended March 31, 2013.


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Change in Fair Value of Warrants

The change in fair value of warrants represented a loss of $1.2 million for the three months ended March 31, 2013, as a result of an increase in our stock price for the period. For the three months ended March 3, 2012, the Company recorded a loss of $2.9 million related to the change in fair value of warrants, which were granted on March 22, 2012, as a result of an increase in our stock price.

Foreign Exchange Loss net

Foreign exchange loss was $0.4 million for the three months ended March 31, 2013, compared to a loss of $0.1 million for the three months ended March 31, 2012.

Income Tax Provision

For the three months ended March 31, 2013 and 2012, we recorded a provision for income taxes of $0.5 million and $0.4 million, respectively. The tax provision for the three months ended March 31, 2013 and 2012 was primarily attributable to our profitable foreign operations and to changes in our estimated unrecognized tax benefits.

Financial Position

Liquidity and Capital Resources

Our primary anticipated sources of liquidity are funds generated from operations, and as required, funds borrowed under the Revolving Credit Agreement and Term Loan Agreement. We monitor and manage liquidity by preparing and updating annual budgets, as well as monitor compliance with terms of our financing agreements.

We have experienced significant losses in the past and have not sustained profits. As of March 31, 2013, we had cash and cash equivalents of $4.4 million, compared to $6.5 million of cash and cash equivalents as of December 31, 2012. During the three months ended March 31, 2013, we used net cash in operating activities of $4.9 million. As of March 31, 2013, we had borrowed $12.0 million under our Revolving Credit Agreement and the unused line of credit totaled $13.0 million, of which $3.4 million was available to us. As of March 31, 2013, our long-term debt with related parties was $68.4 million, net of discount, and during the three months ended March 31, 2013, we borrowed $4.0 million under the Term Loan Agreement. During the three months ended March 31, 2013, we paid $0.1 million to service the interest payments on the Revolving Credit Agreement. No cash interest was paid during the three months ended March 31, 2013 related to the Term Loan Agreement.

During 2012, we entered into and subsequently amended the Third Amended and . . .

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