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SPRT > SEC Filings for SPRT > Form 10-Q on 5-Aug-2013All Recent SEC Filings

Show all filings for SUPPORT.COM, INC.

Form 10-Q for SUPPORT.COM, INC.


5-Aug-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 Part II of this Report for important information to consider when evaluating these statements.


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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 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. 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 second quarter of 2013 increased 16% year-over-year.
Revenue from services increased 17% year-over-year primarily due to continued growth in our channel programs. Revenue from software and other increased 12% year-over-year primarily due to fees from licensing of our Nexus platform.

Cost of services for the second quarter of 2013 decreased 8% 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 second quarter of 2013 decreased 24% year-over-year due to lower royalty rate payments to third-party developers. Total gross margin improved from 43% to 55% year-over-year.

Operating expenses for the three months ended June 30, 2013 decreased 16% 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 condensed consolidated financial statements, the changes in certain key items in those condensed 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 condensed consolidated financial statements.

Critical Accounting Policies and Estimates

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our 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 and six months ending June 30, 2013.


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RESULTS OF OPERATIONS

The following table sets forth the results of operations for the three and six
months ended June 30, 2013 and 2012 expressed as a percentage of total revenue.

                                                 Three Months                  Six Months
                                                    Ended                         Ended
                                                   June 30,                     June 30,
                                              2013          2012           2013          2012
Revenue:
Services                                           80 %          79 %           81 %          79 %
Software and other                                 20            21             19            21
Total revenue                                     100           100            100           100

Costs of revenue:
Cost of services                                   44            55             45            57
Cost of software and other                          1             2              1             2
Total cost of revenue                              45            57             46            59

Gross profit                                       55            43             54            41
Operating expenses:
Research and development                            6            10              7            10
Sales and marketing                                22            29             21            32
General and administrative                         12            16             13            17
Amortization of intangible assets and
other                                               2             2              2             2
Total operating expenses                           42            57             43            61

Income (loss) from operations                      13           (14 )           11           (20 )

Interest and other income, net                      1             0              1             0

Income (loss) from continuing
operations, before income taxes                    14           (14 )           12           (20 )

Income tax provision                                1             1              1             1

Income (loss) from continuing
operations, after income taxes                     13           (15 )           11           (21 )

Income (loss) from discontinued
operations, after income taxes                     (0 )          (0 )           (0 )           0

Net income (loss)                                  13 %         (15 )%          11 %         (21 )%

REVENUE

                            Three Months Ended June 30,                         Six Months Ended June 30,
In thousands,
except                                          $           %                                      $           %
percentages          2013         2012       Change       Change        2013         2012       Change       Change

Services           $ 16,128     $ 13,744     $ 2,384           17 %   $ 32,574     $ 27,509     $ 5,065           18 %
Software and
other                 3,996        3,569         427           12 %      7,752        7,392         360            5 %
Total revenue      $ 20,124     $ 17,313     $ 2,811           16 %   $ 40,326     $ 34,901     $ 5,425           16 %

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 June 30, 2013 increased by $2.4 million from the same period in 2012. The increase was due primarily to continued growth in our channel programs. For the three months ended June 30, 2013, services revenue generated from our channel partnerships was $15.3 million compared to $12.8 million for the same period in 2012, while direct services revenue was $834,000 compared to $1.0 million for the same period in 2012. For the six months ended June 30, 2013, services revenue generated from our channel partnerships was $30.9 million compared to $25.7 million for the same period in 2012, while direct services revenue was $ 1.7 million compared to $1.8 million for the same period in 2012.


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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 increased by 12% for the three months ended June 30, 2013 compared to same period in 2012 primarily due to fees from licensing of our Nexus platform. For the three months ended June 30, 2013, software revenue and other generated from our direct sales was $2.4 million compared to $2.1 million for the same period in 2012, while software revenue and other generated from our channel partnerships was $1.6 million compared to $1.4 million for the same period in 2012. Software and other revenue for the six months ended June 30, 2013 increased by $360,000 compared to same period in 2012 primarily due to fees from licensing of our Nexus platform. For the six months ended June 30, 2013, software revenue from direct sales was $4.6 million compared to $4.5 million for the same period in 2012, while software and other revenue generated from our channel partnerships was $3.1 million compared to $2.9 million from the same period in 2012.

COSTS AND EXPENSES

Costs of Revenue

                            Three Months Ended June 30,                          Six Months Ended June 30,
In thousands,
except                                        $            %                                       $            %
percentages         2013        2012        Change       Change         2013         2012        Change       Change

Cost of services   $ 8,838     $ 9,591     $   (753 )         (8 )%   $ 18,148     $ 19,881     $ (1,733 )         (9 )%
Cost of software
and other              271         360          (89 )        (25 )%        578          830         (252 )        (30 )%
Total cost of
revenue            $ 9,109     $ 9,951     $   (842 )         (8 )%   $ 18,726     $ 20,711     $ (1,985 )        (10 )%

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 $753,000 and $1.7 million in cost of services for the three and six months ended June 30, 2013, respectively, compared to the same periods 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 of $89,000 and $252,000 for the three and six months ended June 30, 2013, respectively, over the same periods 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 June 30,                         Six Months Ended June 30,
                                              $            %                                      $            %
In thousands,       2012        2013        Change       Change        2013         2012        Change       Change
except
percentages
Research and       $ 1,282     $ 1,708     $   (426 )        (25 )%   $ 2,870     $  3,478     $   (608 )        (17 )%
development
Sales and          $ 4,375     $ 4,989     $   (614 )        (12 )%   $ 8,311     $ 11,119     $ (2,808 )        (25 )%
marketing
General and        $ 2,354     $ 2,850     $   (496 )        (17 )%   $ 5,117     $  5,764     $   (647 )        (11 )%
administrative

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 $426,000 and $608,000 in research and development expense for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012 resulted primarily from a decrease in salary and employee related expenses due to a decrease in headcount.

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 $614,000 and $2.8 million in sales and marketing expense for the three and six month ended June 30, 2013, respectively, compared to the same periods in 2012 resulted from a reduction in contact sales agent workforce completed at the end of 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 $496,000 and $647,000 in general and administrative expense for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012 was primarily due to lower franchise tax expense and lower professional services expenses.


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Amortization of Intangible Assets and Other

                              Three Months Ended June 30,                            Six Months Ended June 30,
In thousands,
except                                            $            %                                       $            %
percentages          2013           2012        Change       Change         2013         2012        Change       Change

Amortization of    $    335       $    391     $    (56 )        (14 )%   $    670      $   758     $    (88 )        (12 )%
intangible
assets and other

The decrease in amortization of intangible assets and other for the three and six months ended June 30, 2013 compared to the same periods in 2012 was primarily due to the re-measurement of milestone based earn-outs in connection with the acquisitions of RightHand IT Corporation in January 2012 and SUPERAntiSpyware in June 2011.

INTEREST INCOME AND OTHER, NET

                              Three Months Ended June 30,                             Six Months Ended June 30,
In thousands,
except                                             $            %                                        $            %
percentages          2013           2012         Change       Change        2013           2012        Change       Change

Interest income    $    108       $     59      $     49           83 %   $    181       $    134     $     47           35 %
and other, net

The increase in interest income and other for the three and six months ended June 30, 2013 compared to the same periods in 2012 was primarily due to higher interest income on our investments as a result of higher yields and higher balances in our portfolio.

INCOME TAX PROVISION

                              Three Months Ended June 30,                            Six Months Ended June 30,
In thousands,
except                                            $            %                                        $            %
percentages          2013           2012        Change       Change        2013           2012        Change       Change

Income tax         $    177       $    116     $     61           53 %   $    326       $    235     $     91           39 %
provision

The provision for income taxes is comprised of estimates of current taxes due in domestic and foreign jurisdictions. For the three and six months ended June 30, 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 state and foreign income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Total cash, cash equivalents and investments at June 30, 2013 was $65.0 million, compared to $56.3 million at December 31, 2012. Cash equivalents and investments are comprised of money market funds, certificate of deposits, corporate notes and bonds, and U.S. government agency securities. The increase was primarily due to $7.1 million cash generated from operating activities, and proceeds from exercises of employee stock options net of repurchase of shares of $2.1 million.

Operating Activities

Net cash provided by (used in) operating activities was $7.1 million and ($3.5) million for the six months ended June 30, 2013 and 2012, respectively. Net cash provided by (used in) operating activities primarily reflect 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.

Net cash provided by operating activities was $7.1 million for the six months ended June 30, 2013 and resulted primarily from net income for the period of $4.5 million, adjusted for non-cash items totaling $2.7 million and changes in operating assets and liabilities of ($129,000). Adjustment for non-cash items primarily consisted of stock-based compensation expense of $1.6 million, amortization of intangible assets and other of $670,000, amortization of premiums and discounts on investments of $294,000 and depreciation of $179,000.
The changes in operating assets and liabilities primarily consisted of an increase in other accrued liabilities of $1.5 million due to increase in sales and marketing activities during the period offset by a decrease in deferred revenue of $1.7 million.


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Net cash used in operating activities was $3.5 million for the six months ended June 30, 2012 and resulted primarily from a net loss for the period of $7.0 million, adjusted by non-cash items totaling $3.4 million and changes in operating assets and liabilities of ($103,000). Adjustment for non-cash items primarily included stock-based compensation expense of $2.0 million, amortization of premiums and discounts on investments of $295,000, amortization of intangible assets and other of $758,000 and depreciation of $268,000. The changes in operating assets and liabilities primarily consisted of decrease in accounts receivable of $499,000 and other accrued liabilities of $429,000, offset by an increase in deferred revenue of $352,000.

Investing Activities

Net cash provided by (used in) investing activities was ($5.2) million and $1.0 million for the six months ended June 30, 2013 and 2012, respectively. Net cash used in investing activities for the six months ended June 30, 2013 was primarily due to purchase of property and equipment of $67,000 and purchases of investments of $19.6 million offset by maturities of investments of $14.5 million. Net cash provided by investing activities for the six months ended June 30, 2012 was primarily due to sales and maturities of $26.6 million of investments offset by the purchases of investments of $23.9 million, acquisition of RightHand IT Corporation for $1.3 million and purchases of property and equipment for $318,000.

Financing Activities

Net cash provided by financing activities was $2.1 million and $689,000 for the six months ended June 30, 2013 and 2012, respectively. Net cash provided by financing activities for the six months ended June 30, 2013 was from the proceeds of exercise of employee stock options of $6.2 million (including exercise of stock options that resulted in shares that were repurchased) offset by the repurchase of shares of $4.1 million. Net cash provided by financing activities for the six months ended June 30, 2012 was from the proceeds of exercise of employee stock options.

Working Capital and Capital Expenditure Requirements

At June 30, 2013, stockholders' equity was $82.1 million and working capital was $63.7 million. We believe that our existing cash balances will be sufficient to meet our working capital requirements and 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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