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SPRT > SEC Filings for SPRT > Form 10-Q on 4-Nov-2013All Recent SEC Filings

Show all filings for SUPPORT.COM, INC.

Form 10-Q for SUPPORT.COM, INC.


4-Nov-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.

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 support 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 products and services directly and indirectly through channel partners. Our customers and channel partners include leading communications providers, retailers, technology companies and others. Our sales and marketing efforts are primarily focused in North America.

Total revenue for the third quarter of 2013 increased 29% year-over-year.
Revenue from services increased 31% year-over-year primarily due to continued growth in our channel programs, primarily the programs with Comcast. Revenue from software and other increased 19% year-over-year primarily due to fees from licensing of our Nexus platform.

Cost of services for the third quarter of 2013 increased 25% year-over-year as a result of the hiring of additional technology specialists to support revenue growth. Cost of software and other for the third quarter of 2013 decreased 6% year-over-year due to lower royalty rate payments to third-party developers. Total gross margin was consistent year-over-year at 51% in the third quarter of 2013 and 50% in the third quarter of 2012.

Operating expenses were relatively consistent year-over-year at $9 million and $8.7 million for the third quarters of 2013 and 2012, respectively.

During the third quarter of 2013, the Company entered into program description number 3 ("Program Agreement") under the Amended and Restated Support Services Agreement, dated July 5, 2012, with Comcast. Under the Program Agreement, the Company provided home networking support services to Comcast customers on an hourly basis.

In addition, during the third quarter of 2013, the Company reviewed the performance of advertising programs for its end-user software products. Upon completion of this review, the Company discontinued its largest advertising placement for such products because it no longer yielded positive results.

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.


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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 nine months ending September 30, 2013.

RESULTS OF OPERATIONS

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

                                                 Three Months                   Nine Months
                                                     Ended                         Ended
                                                 September 30,                 September 30,
                                              2013           2012           2013           2012
Revenue:
Services                                            83 %          81 %            81 %          80 %
Software and other                                  17            19              19            20
Total revenue                                      100           100             100           100

Costs of revenue:
Cost of services                                    47            48              46            54
Cost of software and other                           1             2               1             2
Total cost of revenue                               49            50              46            56
Gross profit                                        51            50              53            44

Operating expenses:
Research and development                             6             9               7            10
Sales and marketing                                 18            21              20            28
General and administrative                          13            16              13            16
Amortization of intangible assets and
other                                                1             2               2             2
Total operating expenses                            39            48              41            56

Income (loss) from operations                       13             2              12           (12 )

Interest and other income, net                       1             0               0             0

Income (loss) from continuing
operations, before income taxes                     13             2              12           (13 )

Income tax provision                                 1             1               1             1

Income (loss) from continuing
operations, after income taxes                      13             3              12           (13 )

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

Net income (loss)                                   13 %           2 %            12 %         (13 )%


Index
REVENUE

                           Three Months Ended September 30,                      Nine Months Ended September 30,
In thousands,
except                                             $           %                                       $            %
percentages           2013           2012       Change       Change        2013          2012        Change       Change

Services           $   19,305      $ 14,769     $ 4,536           31 %   $  51,879     $ 42,278     $  9,601           23 %
Software and
other                   4,054         3,407         647           19 %      11,807       10,799        1,008            9 %
Total revenue      $   23,359      $ 18,176     $ 5,183           29 %   $  63,686     $ 53,077     $ 10,609           20 %

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 and nine months ended September 30, 2013 increased by $4.5 million and $9.6 million, respectively, compared to the same periods in 2012. The increase was due primarily to continued growth in our channel programs, primarily the programs with Comcast. For the three months ended September 30, 2013, services revenue generated from our channel partnerships was $18.6 million compared to $13.8 million for the same period in 2012, while direct services revenue was $739,000 compared to $924,000 for the same period in 2012. For the nine months ended September 30, 2013, services revenue generated from our channel partnerships was $49.4 million compared to $39.2 million for the same period in 2012, while direct services revenue was $2.4 million compared to $3.0 million 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 for the three months ended September 30, 2013 increased by 19% compared to same period in 2012 primarily due to fees from licensing of our Nexus platform. For the three months ended September 30, 2013, software and other revenue generated from our direct sales, including licenses of our Nexus platform, was $2.5 million compared to $1.9 million for the same period in 2012, while software and other revenue generated from our channel partnerships was $1.6 million compared to $1.5 million for the same period in 2012. Software and other revenue for the nine months ended September 30, 2013 increased by 9% compared to same period in 2012 primarily due to fees from licensing of our Nexus platform. For the nine months ended September 30, 2013, software revenue from direct sales was $7.1 million compared to $6.4 million for the same period in 2012, while software and other revenue generated from our channel partnerships was $4.7 million compared to $4.4 million from the same period in 2012.

COSTS AND EXPENSES

Costs of Revenue

                           Three Months Ended September 30,                        Nine Months Ended September 30,
In thousands,
except                                             $           %                                         $            %
percentages           2013           2012       Change       Change          2013          2012        Change       Change

Cost of services   $   11,046       $ 8,815     $ 2,231           25 %    $   29,194     $ 28,696     $    498            2 %
Cost of software
and other                 294           312         (18 )         (6 )%          872        1,142         (270 )        (24 )%
Total cost of
revenue            $   11,340       $ 9,127     $ 2,213           24 %    $   30,066     $ 29,838     $    228            1 %

Cost of services. Cost of services consists primarily of compensation and related cost of personnel and contractors providing services, and technology and telecommunication expenses associated to the delivery of services. The increase of $2.2 million and $498,000 in cost of services for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012 was mainly driven by increased compensation and employee related costs associated with the increase in our technology specialist workforce to support revenue growth.

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 $18,000 and $270,000 for the three and nine months ended September 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.


Index
Operating Expenses

                             Three Months Ended September 30,                       Nine Months Ended September 30,
In thousands,
except                                              $            %                                       $            %
percentages           2013            2012        Change       Change         2013         2012        Change       Change

Research and
development         $   1,456       $  1,643     $   (187 )        (11 )%   $  4,325     $  5,121     $   (796 )        (16 )%
Sales and
marketing           $   4,120       $  3,789     $    331            9 %    $ 12,431     $ 14,908     $ (2,477 )        (17 )%
General and
administrative      $   3,077       $  2,897     $    180            6 %    $  8,193     $  8,661     $   (468 )         (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 $187,000 and $796,000 in research and development expense for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012 resulted primarily from a decrease in salary and employee related expenses including stock-based compensation expense due to a decrease in headcount.

Sales and marketing. Sales and marketing expense consists primarily of compensation costs of business development, program management and marketing personnel, as well as expenses for lead generation and promotional activities, including public relations, advertising and marketing. Sales and marketing expense for 2012, but not 2013, also included sales commissions for contact center sales agents. The increase of $331,000 in sales and marketing expense for the three months ended September 30, 2013 compared to the same period in 2012 resulted primarily from advertising costs for end-user software products of $422,000 (prior to our decision to discontinue our largest advertising placement), offset by a decrease in compensation and employee-related costs of $108,000 due to decrease in headcount. The decrease of $2.5 million in sales and marketing expense for the nine month ended September 30, 2013 compared to the same period 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 increase of $180,000 for the three months ended September 30, 2013 compared to the same period in 2012 was primarily due to an increase of $155,000 in compensation and related cost as a result of headcount growth and an increase of $265,000 in recruiting fees for certain corporate positions and hiring expenses to support the new Comcast program, offset by decrease of $190,000 in overhead costs. The decrease of $468,000 in general and administrative expense for the nine months ended September 30, 2013 compared to the same period in 2012 was primarily due to a decrease of $142,000 in professional services, decrease $214,000 in franchise tax expense and a decrease of $284,000 in overhead cost including rent and deprecation, offset by increase of $248,000 in recruiting fees for certain corporate positions and hiring expenses to support revenue growth.

Amortization of Intangible Assets and Other

                            Three Months Ended September 30,                         Nine Months Ended September 30,
In thousands,
except                                              $            %                                         $            %
percentages          2013           2012          Change       Change         2013           2012        Change       Change

Amortization of
intangible
assets and other   $    335       $    397       $    (62 )        (16 )%   $   1,005       $ 1,155     $   (150 )        (13 )%

The decrease in amortization of intangible assets and other for the three and nine months ended September 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 September 30,                         Nine Months Ended September 30,
In thousands,
except                                               $            %                                           $            %
percentages          2013            2012          Change       Change        2013           2012          Change        Change

Interest income
and other, net     $     127       $     93       $     34           36 %   $    307       $    227       $      80           35 %

The increase in interest income and other for the three and nine months ended September 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.


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INCOME TAX PROVISION

                              Three Months Ended September 30,                           Nine Months Ended September 30,
In thousands,
except                                                 $             %                                           $            %
percentages          2013            2012           Change        Change         2013           2012          Change        Change

Income tax
provision          $     121       $     118       $       3             3 %   $    446       $    353       $      93           26 %

The income tax provision is comprised of estimates of current taxes due in domestic and foreign jurisdictions. For the three and nine months ended September 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 September 30, 2013 was $68.5 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 $7.4 million cash generated from operating activities, and proceeds from exercises of employee stock options net of repurchase of shares of $5.6 million.

Operating Activities

Net cash provided by (used in) operating activities was $7.4 million and ($603,000) million for the nine months ended September 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 of $7.4 million for the nine months ended September 30, 2013 resulted primarily from net income for the period of $7.5 million, adjusted for non-cash items totaling $4.6 million and changes in operating assets and liabilities of ($4.7) million. Adjustment for non-cash items primarily consisted of stock-based compensation expense of $2.4 million, amortization of intangible assets and other of $1.0 million, amortization of premiums and discounts on investments of $442,000, a warrant-related charge of $383,000, and depreciation of $262,000. The changes in operating assets and liabilities primarily consisted of an increase in accounts receivable of $3.9 million, prepaid expenses and other current assets of $891,000, accrued compensation of $1.5 million offset by a decrease in deferred revenue of $2.3 million.

Net cash used in operating activities was $603,000 for the nine months ended September 30, 2012 and resulted primarily from a net loss for the period of $6.7 million, adjusted by non-cash items totaling $5.0 million and changes in operating assets and liabilities of $1.1 million. Adjustment for non-cash items primarily included stock-based compensation expense of $2.9 million, amortization of premiums and discounts on investments of $446,000, amortization of intangible assets and other of $1.1 million and depreciation of $404,000. The changes in operating assets and liabilities primarily consisted of decrease in accounts receivable of $649,000 and accounts payable of $507,000, offset by an increase in prepaid expenses and other current assets of $533,000, accrued compensation of $646,000 and deferred revenue of $849,000.

Investing Activities

Net cash provided by (used in) investing activities was ($13.0) million and $813,000 for the nine months ended September 30, 2013 and 2012, respectively.
Net cash used in investing activities for the nine months ended September 30, 2013 was primarily due to purchases of investments of $43.8 million offset by maturities of investments of $31.0 million, and purchases of property and equipment of $178,000. Net cash provided by investing activities for the nine months ended September 30, 2012 was primarily due to sale and maturities of investment of $36.0 million offset by purchases of investments of $33.3 million, acquisition of RightHand IT Corporation for $1.3 million and purchases of property and equipment for $503,000.

Financing Activities

Net cash provided by financing activities was $5.6 million and $1.1 million for the nine months ended September 30, 2013 and 2012, respectively. Net cash provided by financing activities for the nine months ended September 30, 2013 was from the proceeds of exercise of employee stock options of $9.7 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 nine months ended September 30, 2012 was from the proceeds of exercise of employee stock options.


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Working Capital and Capital Expenditure Requirements

At September 30, 2013, stockholders' equity was $89.7 million and working capital was $71.7 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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