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CNSI > SEC Filings for CNSI > Form 10-Q on 13-Sep-2013All Recent SEC Filings

Show all filings for COMVERSE, INC.

Form 10-Q for COMVERSE, INC.


13-Sep-2013

Quarterly Report


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

The following discussion and analysis of our financial condition and results of operations should be read together with the audited consolidated and combined financial statements and related notes included in Part IV, Item 15 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2013 (or the 2012 Form 10-K) and the condensed consolidated and combined financial statements and related notes included in this Quarterly Report. This discussion and analysis contains forward-looking statements based on current expectations relating to future events and our future financial performance that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Forward-Looking Statements" on page i of this Quarterly Report. Percentages and amounts within this section may not calculate due to rounding differences.
The Share Distribution
On October 31, 2012, CTI completed its spin-off of our company as an independent, publicly-traded company, accomplished by means of a pro rata distribution of 100% of our outstanding common shares to CTI's shareholders (referred to as the Share Distribution). Following the Share Distribution, CTI no longer holds any of our outstanding capital stock, and we are an independent, publicly-traded company.
Immediately prior to the Share Distribution, CTI contributed to us Exalink Ltd. (or Exalink), its wholly-owned subsidiary. Other than holding certain intellectual property rights, Exalink has no operations. Following the Share Distribution, we and CTI operate independently, and neither has any ownership interest in the other. In order to govern certain ongoing relationships between CTI and us after the Share Distribution and to provide mechanisms for an orderly transition, we and CTI entered into agreements pursuant to which certain services and rights are provided for following the Share Distribution, and we and CTI have agreed to indemnify each other against certain liabilities arising from our respective businesses and the services that will be provided under such agreements. Following the completion of CTI's merger with Verint Systems Inc. (or Verint) discussed below, these obligations continue to apply between us and Verint. For more information, see Note 3 to our condensed consolidated and combined financial statements included in this Quarterly Report. Subsequent to the Share Distribution, we have incurred increased costs as a result of becoming an independent, publicly-traded company, including compensation costs attributable to the enhancement of our senior management, compensation of non-employee directors and compensation expense and professional fees related to financial reporting and compliance with our


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periodic reporting obligations under federal securities laws. We believe our cash flow from operations has and will continue to be sufficient to fund these additional costs.
Sale of Starhome
As a result of the Starhome Disposition, the results of operations of Starhome are included in discontinued operations, less applicable income taxes, as a separate component of net income (loss) in our condensed combined statement of operations for the three and six months ended July 31, 2012. For more information, see Note 14 to our condensed consolidated and combined financial statements included in this Quarterly Report.
EXECUTIVE SUMMARY
Overview
We are a leading provider of telecom business enablement solutions for communication service providers (or CSPs) through a portfolio of product-based solutions and associated services in the following domains:
Business Support Systems. We provide converged, prepaid and postpaid billing and active customer management systems (or BSS) for wireless, wireline and cable CSPs, delivering a value proposition designed to enable an effective service monetization, a consistent customer experience, reduced complexity and cost, and real-time choice and control.

         Digital and Value Added Services. We enable both network-based Value
          Added Services (or VAS) comprised of Voice and Messaging that include
          voicemail, visual voicemail, call completion, short messaging service
          (or SMS), multimedia picture and video messaging (or MMS), and digital
          Internet Protocol (or IP) based rich communication services.


         Data Management and Monetization Solutions. We provide CSPs with the
          ability to better manage their data networks and better monetize their
          data network investment through our solutions' Policy Management and
          Policy Enforcement capabilities for wireless and wireline data
          networks.


         Professional and Managed Services. We offer a portfolio of services
          related to our solutions following the completion of the delivery of
          the project to the customer (referred to as post-go-live), such as
          system care, expert services and managed services.

Our reportable segments are:
Comverse BSS-comprised of Comverse's BSS operating segment; and

Comverse VAS-comprised of Comverse's VAS operating segment.

The results of operations of all of our other operations, including Comverse Mobile Internet (or Comverse MI), Netcentrex operations (or Netcentrex), our global corporate functions that support our business units and Exalink Ltd., are included in the column captioned "Comverse Other" as part of our business segment presentation. For more information, see Note 19 to our condensed consolidated and combined financial statements included in this Quarterly Report. Starhome's results of operations are included in discontinued operations and therefore not presented in segment information. Liquidity Forecast
During the six months ended July 31, 2013, we had positive cash flows from operations of $9.6 million, which includes a VAT tax refund of approximately $10.9 million. We continue our efforts to aggressively market our solutions and services, improve profitability and cash collections and implement cost reduction measures. We currently forecast that available cash and cash equivalents will be sufficient to meet our liquidity needs, including capital expenditures, for at least the next 12 months. For a more comprehensive discussion of our liquidity forecast, see "-Liquidity and Capital Resources-Financial Condition-Liquidity Forecast."


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Condensed Consolidated and Combined Financial Highlights The following table presents certain financial highlights for the three and six months ended July 31, 2013 and 2012, including Comverse performance and Comverse performance margin (reflecting Comverse performance as a percentage of revenue), non-GAAP financial measures, for our company on a consolidated and combined basis:

                                           Three Months Ended July 31,          Six Months Ended July 31,
                                             2013               2012              2013              2012
                                                               (Dollars in thousands)
Total revenue                          $     169,753       $     171,226     $    325,571       $  308,976
Gross margin                                    39.0 %              39.7 %           40.3 %           35.7  %
Income (loss) from operations                 11,427              13,790           19,270           (9,093 )
Operating margin                                 6.7 %               8.1 %            5.9 %           (2.9 )%
Net (loss) income from continuing
operations                                   (17,087 )             6,101          (20,227 )        (20,496 )
Income from discontinued operations,
net of tax                                         -               4,282                -            4,711
Net (loss) income                            (17,087 )            10,383          (20,227 )        (15,785 )
Less: Net income attributable to
noncontrolling interest                            -                (856 )              -           (1,010 )
Net (loss) income attributable to
Comverse Inc.                                (17,087 )             9,527          (20,227 )        (16,795 )
Net cash provided by (used in)
operating activities - continuing
operations                             $        (222 )     $      (4,797 )   $      9,641       $  (50,496 )
Non-GAAP Financial Measures
Comverse performance                   $      18,129       $      20,966     $     23,856       $    4,869
Comverse performance margin                     10.7 %              12.2 %            7.3 %            1.6  %

Reconciliation of Income (Loss) from Operations to Comverse Performance We provide Comverse performance, a non-GAAP financial measure, as additional information for our operating results. This measure is not in accordance with, or an alternative for, GAAP financial measures and may be different from, or not comparable to similarly titled or other non-GAAP financial measures used by other companies. We believe that the presentation of this non-GAAP financial measure provides useful information to investors regarding certain additional financial and business trends relating to our results of operations as viewed by management in monitoring our businesses, reviewing our financial results and for planning purposes.


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The following table provides a reconciliation of income (loss) from operations to Comverse performance for the three and six months ended July 31, 2013 and 2012:

                                           Three Months Ended July 31,           Six Months Ended July 31,
                                             2013               2012              2013               2012
                                                               (Dollars in thousands)
Income (loss) from operations          $      11,427       $      13,790     $     19,270       $     (9,093 )
Expense Adjustments:
Stock-based compensation expense               2,249               2,201            5,343              3,632
Amortization of acquisition-related
intangibles                                      729               3,998            1,378              8,072
Compliance-related professional fees             370                 149              806                 13
Compliance-related compensation and
other expenses                                   155                 435              207              1,553
Impairment of property and equipment               5                  14               43                 36
Certain litigation settlements and
related costs                                      1                 (13 )            (23 )             (243 )
Italian VAT refund recovery recorded
within operating expenses                          -                   -          (10,861 )                -
Restructuring charges                          2,633                 427            6,854              1,107
Gain on sale of fixed asset                       (7 )                 -              (18 )                -
Other, net                                       567                 (35 )            857               (208 )
Total expense adjustments                      6,702               7,176            4,586             13,962
Comverse performance                   $      18,129       $      20,966     $     23,856       $      4,869

Segment Performance
We evaluate our business by assessing the performance of each of our operating segments. Our Chief Executive Officer is our chief operating decision maker (or CODM). The CODM uses segment performance, as defined below, as the primary basis for assessing the financial results of the operating segments and for the allocation of resources. Segment performance, as we define it in accordance with the Financial Accounting Standards Board's (or the FASB) guidance relating to segment reporting, is not necessarily comparable to other similarly titled captions of other companies.
Segment performance is computed by management as income (loss) from operations adjusted for the following: (i) stock-based compensation expense; (ii) amortization of acquisition-related intangibles; (iii) compliance-related professional fees; (iv) compliance-related compensation and other expenses; (v) impairment of property and equipment; (vi) certain litigation settlements and related costs; (vii) Italian VAT refund recovery recorded within operating expenses; (viii) restructuring charges; and (ix) certain other gains and charges. Compliance-related professional fees and compliance-related compensation and other expenses relate to fees and expenses recorded in connection with CTI's and our efforts to (a) complete certain financial statements and audits of such financial statements and (b) remediate material weaknesses in internal control over financial reporting. For additional information on how we apply segment performance to evaluate the operating results of our segments for the three and six months ended July 31, 2013 and 2012, see Note 19 to the condensed consolidated and combined financial statements included in this Quarterly Report. Segment Financial Highlights
The following table presents, for the three and six months ended July 31, 2013 and 2012, segment revenue, gross margin, income (loss) from operations, operating margin, segment performance and segment performance margin (reflecting segment performance as a percentage of segment revenue) for each of our reportable segments and Comverse Other:


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                                   Three Months Ended July 31,        Six Months Ended July 31,
                                      2013             2012             2013             2012
                                                      (Dollars in thousands)
SEGMENT RESULTS
Comverse BSS
Segment revenue                      68,463            69,052         140,128           126,732
Gross margin                           34.3  %           38.5  %         36.8  %           35.9  %
Income from operations                9,186            14,632          24,239            19,029
Operating margin                       13.4  %           21.2  %         17.3  %           15.0  %
Segment performance                   9,919            18,679          25,769            27,780
Segment performance margin             14.5  %           27.1  %         18.4  %           21.9  %
Comverse VAS
 Segment revenue                     88,285            91,289         164,499           157,211
Gross margin                           52.8  %           46.8  %         46.8  %           44.8  %
Income from operations               38,327            31,180          61,007            47,020
Operating margin                       43.4  %           34.2  %         37.1  %           29.9  %
Segment performance                  38,326            31,323          61,014            47,936
Segment performance margin             43.4  %           34.3  %         37.1  %           30.5  %
Comverse Other
Segment revenue                      13,005            10,885          20,944            25,033
Gross margin                          (29.2 )%          (11.4 )%         12.2  %          (22.1 )%
Loss from operations                (36,086 )         (32,022 )       (65,976 )         (75,142 )
Operating margin                     (277.5 )%         (294.2 )%       (315.0 )%         (300.2 )%
Segment performance                 (30,116 )         (29,036 )       (62,927 )         (70,847 )

Segment performance margin (231.6 )% (266.8 )% (300.5 )% (283.0 )%

For a discussion of the results of our segments, see "-Results of Operations,"


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Business Trends and Uncertainties
For the three months ended July 31, 2013 compared to the three months ended July 31, 2012, our consolidated revenue decreased and our costs and operating expenses increased, resulting in lower income from operations for the three months ended July 31, 2013 compared to the three months ended July 31, 2012. Comverse performance for the three months ended July 31, 2013 decreased compared to the three months ended July 31, 2012.
The decrease in revenue was primarily attributable to a decrease in maintenance revenue at the Comverse BSS and Comverse VAS segments and a decrease in revenue from customer solutions at Comverse VAS, partially offset by increases in customer solutions revenue at Comverse BSS and Comverse Other. For a discussion of the reasons for the changes in revenue from customer solutions and maintenance at our Comverse BSS and Comverse VAS segments, see "Comverse BSS," "Comverse VAS," "-Results of Operations-Segment Results-Comverse BSS" and "Results of Operations-Segment Results-Comverse VAS." Our costs and operating expenses increased during the three months ended July 31, 2013 primarily due to an increase in restructuring charges, an increase in selling, general and administrative expenses attributable to an increase in costs relating to sales consultant personnel focused on selling our BSS solutions, partially offset by a decrease in research and development expenses. During the three months ended July 31, 2013, our cash and cash equivalents and restricted cash decreased primarily due to investments in property, plant and equipment and unfavorable effect of currency exchange rates fluctuations on cash and cash equivalents and restricted cash.
For the six months ended July 31, 2013 compared to the six months ended July 31, 2012, we experienced an increase in revenue and a decrease in costs and operating expenses, resulting in income from operations for the six months ended July 31, 2013 compared to a loss from operations for the six months ended July 31, 2012. Comverse performance for the six months ended July 31, 2013 increased compared to the six months ended July 31, 2012.
The increase in revenue was primarily attributable to an increase in revenue from customer solutions revenue at our Comverse BSS and Comverse VAS segments, partially offset by a decrease in revenue from Comverse BSS maintenance revenue. For a discussion of the reasons for the changes in revenue from customer solutions and maintenance at our Comverse BSS and Comverse VAS segments, see "Comverse BSS," "Comverse VAS," "-Results of Operations-Segment Results-Comverse BSS" and "Results of Operations-Segment Results-Comverse VAS." Our costs, operating expenses and disbursements decreased during the six months ended July 31, 2013 primarily due to our continued focus on closely monitoring our costs and operating expenses as part of our efforts to improve our cash position and achieve long-term improved operating performance and generate positive operating cash flows.
During the six months ended July 31, 2013, our cash and cash equivalents and restricted cash were favorably impacted primarily by (i) restricted cash received from CTI in connection with closing of the Verint Merger, and (ii) proceeds from a VAT refund in Italy and a decline in our costs, operating expenses and disbursements, that resulted in positive operating cash flow in the six months ended July 31, 2013.
In order to improve operating performance and cash flow from operations, we intend to continue to implement initiatives that we believe will enhance efficiency and result in significant reductions in costs and operating expenses. The initiatives include:

Prioritizing the industrialization of our BSS offerings to meet or exceed our customer requirements for ease of use and faster deployment times;

Establishing and expanding favorable cost centers of excellence and research and development centers in Eastern Europe and Asia; and

Realigning our cost structure to our current size and business environment primarily by reducing our selling, general and administrative expenses.


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We continue to implement these initiatives during the fiscal year ending January 31, 2014 and expect that some of these initiatives will continue to be implemented during the fiscal year ending January 31, 2015. In addition, for the fiscal year ending January 31, 2014 and 2015, we plan to make investments relating to upgrades of systems and tools that we believe will increase operational efficiency and result in significant cost reductions in future fiscal periods. As a result of these initiatives, we expect that selling, general and administrative expenses will decline as a percentage of revenue in future fiscal periods.
Our principal business activities are reported through the following segments:
Comverse BSS, which conducts our converged, prepaid and postpaid billing and active customer management systems business and includes groups engaged in product management, professional services, research and development and product sales support; and

Comverse VAS, which conducts our digital and value added services business and includes groups engaged in VAS delivery, Rich Communication, Voice and Messaging product research and development and product sales support.

Comverse BSS
In the three and six months ended July 31, 2013, customer orders for BSS customer solutions increased compared to the six months ended July 31, 2012. The increase in orders for BSS customer solutions was attributable mainly to several large customer orders for our Comverse ONE solution and associated services in the Europe, Middle East and Africa (or EMEA) region, which was offset by a decrease in customer orders in our Asia Pacific (or APAC) region. Although customer order activity increased, we believe that BSS customer solutions order activity continues to be impacted by uncertainty in economic conditions and industry dynamics that prompted existing and potential customers to defer significant capital investments involved in deploying our BSS solutions and upgrading existing prepaid or postpaid systems to our converged BSS solution. In addition, customers are more closely monitoring their operating expenses. Revenue from BSS customer solutions for the three and six months ended July 31, 2013 increased compared to the three and six months ended July 31, 2012. The increase in revenue from Comverse BSS customer solutions was primarily attributable to changes in scope and settlements of certain customer contracts that negatively impacted revenue in the three and six months ended July 31, 2012 with no comparable change in scope and settlements in the three and six months ended July 31, 2013, as well as an increase in the number and size of projects completed in the three and six months ended July 31, 2013. Comverse BSS maintenance revenue for the three and six months ended July 31, 2013 decreased compared to the three and six months ended July 31, 2012. The decrease was primarily attributable to the cancellation of a large maintenance contract, as well as the timing of entering into renewals of maintenance contracts with customers and the timing of collections from certain customers whose revenue is limited to collections.
We have a leading industry position in the BSS converged billing market and believe that we are well positioned to leverage our leading market position and our BSS solution offering to take advantage of the growth in the emerging converged BSS market. As part of our strategy, Comverse BSS is continuing its efforts to expand its presence and market share in the BSS market with BSS solutions that we believe offer several advantages over competitors' offerings, including faster time to market and lower total cost of ownership. Comverse BSS continues to offer its existing prepaid and postpaid customer base upgrades to its Comverse ONE converged billing solution, which we believe better addresses the enhanced business needs of CSPs. In addition, Comverse BSS continues to aggressively pursue opportunities to market its BSS solutions, primarily Comverse ONE, to new customers as part of its efforts to increase its customer base. As a result, Comverse BSS is experiencing a shift in product mix as the portion of sales of its advanced Comverse ONE converged billing solution continues to increase and the portion of sales of its traditional stand-alone prepaid and postpaid BSS solutions continues to decrease. In addition, to maintain its market leadership in BSS convergence and monetization of new business models, Comverse BSS continues to expend significant resources on research and development to further enhance Comverse ONE and its advanced monetization capabilities, including support for new business models such as machine to machine and cloud services. Comverse BSS offering includes Comverse Share, a cloud-based solution that provides CSPs with means to connect their BSS ecosystem and social presence, and is designed to enable a more relevant, personalized interaction channel to subscribers. Our Comverse Share solution is designed to connect with CSPs' existing BSS systems, and is also available as an option with Comverse ONE.
In addition, we continue to market our Kenan postpaid solution and invest in providing our broad Comverse Kenan customer base with relevant and effective upgrade options in support of their evolving business needs and their strategic plans. We also offer customers seeking to add support for prepaid subscribers or additional real-time BSS elements, the option to upgrade their Kenan system to Comverse ONE in its converged billing deployment mode.


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CSPs are experiencing growth in global wireless subscriptions and traffic and a rapid growth in the use of advanced services, such as data services and Internet browsing. In response to these market trends, CSPs require enhanced BSS system functionality to accommodate their business needs. As a result, Comverse BSS is facing increasing complexity of project deployment resulting in extended periods of time required to complete project milestones and receive customer acceptance which are generally required for revenue recognition and receipt of payment. To address these challenges, Comverse BSS continues its efforts to improve its delivery and implementation capabilities to reduce costs and expenses. In addition, Comverse BSS continues to focus on increasing its revenue and improving its margins by broadening its customer solution and service offerings to existing and new customers.
As part of its service offering, Comverse BSS offers a suite of managed services that enable it to assume responsibility for the operation and management of its customers' billing systems. Comverse's managed services suite is designed to provide customers with improved efficiencies relating to the operation and management of their systems, thereby allowing them to focus on their own internal business needs and strengths with reduced management distraction. Managed services provide Comverse with recurring and predictable revenue and are used by Comverse to create and establish long-term relationships with customers as well as cross-sell additional solutions and system enhancements. We believe that the longevity of Comverse's customer relationships and the recurring revenue that such relationships generate provide it with stability and a competitive advantage in marketing its solutions to its existing customer base. . . .

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