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IPAS > SEC Filings for IPAS > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for IPASS INC


7-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations (or "MD&A") is provided in addition to the condensed consolidated financial statements and notes, included elsewhere in this report, to assist readers in understanding our results of operations, financial condition, and cash flows. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with the MD&A in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.

This MD&A is organized as follows:

Overview                           Discussion of our business

Significant Trends and Events      Operating, financial and other material trends and
                                   events that affect our company and may reflect our
                                   performance

Key Operating Metrics              Discussion of key metrics and measures that we use
                                   to evaluate our operating performance

Critical Accounting Policies and   Accounting policies and estimates that we believe
Estimates                          are most important to understanding the assumptions
                                   and judgments incorporated in our reported financial
                                   results

Results of Operations              An analysis of our financial results comparing the
                                   three and nine months ended September 30, 2013, and
                                   September 30, 2012

Liquidity and Capital Resources    An analysis of changes in our balance sheet and cash
                                   flows, and discussion of our financial condition and
                                   potential sources of liquidity

The various sections of this MD&A contain forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "will," "anticipates," "projects," "intends," "believes," "estimates," "potential," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012, for factors that may cause actual results to be different from those expressed in these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Investors and others should note that we announce material financial information to our investors using our investor relations website, SEC filings, press releases, public conference calls and webcasts. We also use social media to communicate with our customers and the public about our company, our products and services and other matters relating to our business and market. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the U.S. social media channels including the iPass Twitter Feed, the iPass LinkedIn Feed, the iPass Google+ Feed, the iPass Facebook Page, the iPass Blog, the iPass Instagram, the iPass Pinterest and Evan Kaplan's Twitter Feed. These social media channels may be updated from time to time.

Overview

iPass is a global Wi-Fi roaming leader for enterprises and telecom service providers and their consumer subscribers. We knit the world's commercial Wi-Fi networks together to create a single global Wi-Fi network. With the acceleration of the broader Wi-Fi industry, where an ever increasing number of mobile phone, tablet and laptop are Wi-Fi enabled, and where Wi-Fi has become the preferred connectivity option for billions of devices, we believe that we are uniquely positioned to take advantage of expanding global demand for Wi-Fi. iPass was incorporated in California in July 1996 and reincorporated in Delaware in June 2000. Our corporate headquarters are located in Redwood Shores, California. We are publicly traded on NASDAQ under symbol IPAS.


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We provide global enterprises and telecommunications carriers with cloud-based mobility management and Wi-Fi connectivity services. Through our proprietary technology platform and global Wi-Fi network, we offer enterprises cross-device, cross-network seamless Wi-Fi connectivity services along with cost control, reporting and policy compliance management tools. We also offer global telecommunications carriers Wi-Fi enablement services that allow them to monetize their Wi-Fi networks and enable data roaming solutions for their subscribers. In addition, we design, deliver and manage tailored Wi-Fi and Wide Area Network solutions to customers in the retail, finance, healthcare, and carrier operator space throughout North America.

Strategic Mobility Assets

We believe iPass has a unique set of mobility assets that provides us with competitive advantages. We see our three core assets as follows:

Advanced Open Mobile Platform: Our Open Mobile (OM) platform is a cloud-based mobility management platform that securely manages network connectivity and subscribers across a wide variety of computing and mobile devices and provider networks. We believe this scalable subscriber management, billing and reporting platform is unique in the industry and would be time consuming and expensive to replicate.

Integrated Authentication Fabric: We have a global authentication fabric of integrated servers and software that is interconnected with approximately 140 global Wi-Fi network service providers. This infrastructure allows us to provide secure, highly-available and seamless four party global authentication, clearing and settlement of Wi-Fi users for our partners and customers.

Global Wi-Fi Footprint: We have a Wi-Fi network footprint and supply chain that consists of approximately 1.5 million commercial Wi-Fi hotspots, with hotspots in over 130 countries globally and across leading Wi-Fi venues, including major airports, convention centers, airplanes, hotels, restaurants, retail and small business locations. Our technology integration across multiple global network providers forms the basis of our network services and we believe creates a unique cost advantage for our customers.

Business Portfolio and Our Strategy

Our business consists of two operating segments: (i) Mobility Services and
(ii) iPass Unity Network Services ("iPass Unity"; formerly known as Managed Network Services). Our Mobility Services segment comprises two service offerings: (1) our Open Mobile Enterprise Services, and (2) our Open Mobile Exchange.

Mobility Services

Open Mobile Enterprise Services ("iPass OME" or "OME"): iPass OME delivers enhanced network mobility services, addressing large enterprises' needs to manage their mobility economics, high speed network connectivity requirements and proliferation of mobile devices, including the "bring-your-own-device" trend. Our growth strategy for OME consists of focusing on accelerating smartphone and tablet user adoption of the Open Mobile platform, completing the migration of our legacy-customer installed base to the OM platform, improving the end user experience on our OM platform, and enhancing our sales efforts with large multi-national customers.

Open Mobile Exchange ("iPass OMX" or "OMX"): iPass OMX service offerings extend and enhance global telecommunications carriers and service provider's core mobility and internet offerings by integrating our Open Mobile Platform technology and our worldwide Wi-Fi Network, allowing them to connect their customers and subscribers seamlessly to preferred global Wi-Fi networks. While our OMX revenue is still significantly less than our mobility service revenue, we continue to focus on adding new global telecommunications carriers and service provider partners as customers to further grow our OMX services.

iPass Unity

iPass Unity provides customers throughout North America with accelerated Wi-Fi and Wide Area Network solutions in the retail, finance, healthcare, and carrier operator space. Based on expected demand for our managed Wi-Fi service offerings, we are focused on growing iPass Unity Network Services by providing our customers additional services that leverage synergies with our Wi-Fi mobility expertise.

For a detailed discussion regarding our business, including our strategy and our service offerings, see "Item 1. Business" included in our Annual Report on Form 10-K for the year ended December 31, 2012.


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Significant Trends and Events

The following describes significant trends and events of our business during the third quarter of 2013:

Continued Focus on our Open Mobile Enterprise Business

We continued to show solid progress against three key metrics for our OME business: (i) increasing the number of Open Mobile Wi-Fi Network users;
(ii) growing Open Mobile revenue; and (iii) increasing the number of active Open Mobile Platform users. We grew our percentage of Open Mobile Wi-Fi Network users as a percentage of total Wi-Fi network users from 33% in the third quarter of 2012 to 74% in the third quarter of 2013. In addition, our total Open Mobile Enterprise revenue grew from $17.6 million for the nine months ending September 30, 2012, to $33.5 million for the nine months ending September 30, 2013. We also increased our percentage of Open Mobile Platform users as a percentage of total platform users from 46% in the third quarter of 2012 to 79% in the third quarter of 2013. We believe the key to our future revenue growth is based on our ability to grow Open Mobile platform and Wi-Fi network users, primarily through the continued focus on the deployment of our Open Mobile platform on smartphone and tablet devices, growth of Open Mobile usage within existing customers, and new customer acquisition. See "Key Operating Metrics" below for a full discussion of our user metrics.

Adding Partners for our Open Mobile Exchange Business

We continue to develop our OMX business. During the third quarter of 2013, we signed two strategic partners. We are continuing to focus on expanding the number of carrier partners and the total number of potential end user customers for our Wi-Fi roaming and exchange services. For the nine months ended September 30, 2013, OMX revenue more than tripled as new partners were added and deployments continue to ramp.

Continued Decline in our Legacy Revenues

Our legacy revenue includes Dial-up and 3G network revenue, and iPC related network and platform revenue. With our announcement to fully end-of-life the iPC platform effective July 1, 2012, we continue to experience anticipated revenue declines in our legacy revenue streams. Legacy revenues declined from $53.4 million for the nine months ending September 30, 2012, to $24.8 million for the nine months ending September 30, 2013. For the quarter ended September 30, 2013, legacy revenue represents less than one third of our Mobility Services total revenue. We expect our legacy revenue streams to represent a smaller percentage of our total revenue during the remainder of 2013 as customers migrate or terminate iPC contracts.

Key Operating Metrics

Described below are key metrics that we use to evaluate our operating performance and our success in transforming our business and driving future growth.

OM Wi-Fi Network Users

OM Wi-Fi Network Users is the number of our OM platform users each month in a given quarter that paid for Wi-Fi network services from iPass.

OM Platform Active Users

OM Platform Active Users is the number of users who were billed Open Mobile platform fees and who have used or deployed Open Mobile.


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The following table summarizes our key operating metrics in relation to the Average Monthly Monetized Users(1) (in thousands):

                                                                        For the Quarter Ended
                                    September 30,          June 30,          March 31,         December 31,          September 30,
                                        2013                 2013              2013                2012                  2012
Open Mobile Users:
Wi-Fi Network Users(2)                          59                56                 46                   35                     27
Platform Users:
Active                                         574               517                444                  355                    270
Gross(3)                                     1,019             1,019                955                  822                    689
Legacy Users:
Wi-Fi Network Users(2)                          21                31                 40                   46                     54
Other Network Users(4)                          20                23                 26                   28                     31
Platform Users(5)                              151               201                246                  286                    320
Total Users:
Total Network Users                            100               110                112                  109                    112
Open Mobile as a Percentage of
Total Wi-Fi Network Users                       74 %              64 %               53 %                 43 %                   33 %
Open Mobile as Percentage of
Total Network Users                             59 %              51 %               41 %                 32 %                   24 %
Total Platform Users                           725               718                690                  641                    590
Open Mobile as Percentage of
Total Platform Users                            79 %              72 %               64 %                 55 %                   46 %

(1) We have presented Average Monthly Monetized Users (referred to as "AMMU") as a metric that we use to track and evaluate the operating performance of our overall Mobility business. The AMMU metric is based on the number of active users of our network and platform services across both our Open Mobile Enterprise offering and legacy iPC offerings. Network users are billed for their use of our Wi-Fi, Dial-up or 3G network services. Platform users are billed for their use of our legacy iPC client or our Open Mobile client. AMMU is defined as the average number of users per month, during a given quarter, for which a fee was billed by us to a customer for such users.

(2) Wi-Fi Network Users represent unique users of the iPass Wi-Fi network. Starting from the first quarter of 2013, OM Wi-Fi Network Users include In-Flight Wi-Fi users.

(3) Open Mobile Platform Gross Users is the total number of unique Active users and the Paying-Undeployed users on the OM platform.

(4) Other Network Users represents unique users of Dial-up and 3G network.

(5) Legacy Platform Users represents unique users of the legacy iPC platform.

Smartphone and Tablet Users

Smartphone and Tablet Users mean users who have deployed Open Mobile on their smartphone or tablet devices and used those devices to access Wi-Fi network services from iPass. Our focus is to increase the adoption of OM on smartphones and tablets to drive additional Wi-Fi network users and network usage.

As we continue to focus on accelerating the adoption of Smartphone and Tablet Users on our Open Mobile platform, we expect users of these devices to become an increasing percentage of our network users. Open Mobile Smartphone and Tablet Wi-Fi Network Users grew as a percentage of total OM Wi-Fi Network Users from 20% in the third quarter of 2012 to 32% in the third quarter of 2013.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
("Adjusted EBITDA")

Adjusted EBITDA is used by our management as a measure of operating efficiency, financial performance and as a benchmark against our peers and competitors. In addition, we also use this metric to determine a portion of our incentive compensation payouts. Management also believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to understand our performance excluding the impact of items which may obscure trends in our core operating performance. Furthermore, the use of Adjusted EBITDA facilitates comparisons with other companies in our industry which may use similar financial measures to supplement their GAAP results. We define Adjusted EBITDA as net loss adjusted for: interest income, income taxes, depreciation and amortization, stock-based compensation, restructuring charges, and certain state sales and federal tax charges. We adjust for these excluded items because we believe that, in general, these items possess one or more of the


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following characteristics: their magnitude and timing is largely outside of our control; they are unrelated to the ongoing operation of the business in the ordinary course; they are unusual or infrequent and we do not expect them to occur in the ordinary course of business; or non-cash expenses involving stock option grants. Adjusted EBITDA is not a measure determined in accordance with GAAP and should not be considered in isolation or as a substitute for operating income (loss), net income (loss) or any other measure determined in accordance with GAAP.

The following table reconciles Adjusted EBITDA to GAAP net loss:

                                                    Three Months Ended             Nine Months Ended
                                                      September 30,                  September 30,
                                                    2013            2012          2013           2012
                                                                     (In thousands)
Adjusted EBITDA                                  $      (991 )     $  693       $ (2,517 )     $  1,104
Interest income                                            2            4              9             10
Income tax expense                                      (341 )       (275 )         (327 )         (422 )
Depreciation of property and equipment                  (612 )       (505 )       (1,867 )       (1,660 )
Amortization of intangible assets                         -           (50 )           -            (169 )
Stock-based compensation                                (887 )       (637 )       (2,472 )       (1,781 )
Restructuring charges and related adjustments            (13 )        (10 )         (639 )          (16 )
Certain state sales and federal tax items                 -             9             10              8

GAAP Net loss                                    $    (2,842 )     $ (771 )     $ (7,803 )     $ (2,926 )

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements which have been prepared in accordance with the accounting principles generally accepted in the United States ("GAAP"). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that we believe to be reasonable under the circumstances. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these policies. On an ongoing basis, we evaluate our estimates and judgments.

There have been no significant changes in our critical accounting policies and estimates during the three and nine months ended September 30, 2013, as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Recently Issued Accounting Standards

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Income Taxes (Topic 740):
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the Net Operating Loss or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company will adopt ASU 2013-11 for its fiscal years, and interim periods within those years ending December 31, 2014. We do not expect that this guidance will materially impact our Condensed Consolidated Financial Statements.

Results of Operations

Sources of Revenues

From a broad perspective, we report and analyze revenue under two primary offerings reflecting our operating segments: Mobility Services and iPass Unity. Within Mobility Services, we differentiate and analyze our Open Mobile and legacy generated revenues separately.


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Open Mobile generated revenues include:

Network-Wi-Fi and minimum customer commitments based on the number of network users sourced from the Open Mobile platform.

Platform-Fees based on the number of Active Open Mobile monetized platform users and fees for fully dedicated Open Mobile carrier arrangements.

Other Fees and Revenue-Fees specific to providing additional value add services to Open Mobile customers.

Open Mobile Exchange-Revenues generated from our OMX customers.

Legacy generated revenues include:

Network-Wi-Fi and minimum customer commitments based on the number of network users sourced from the legacy iPC platform. In addition, network revenues derived from our 3G and Dial-up products are categorized as legacy network revenues.

Platform-Fees based on the number of legacy iPC monetized platform users and fees related to legacy add-on platform products and related services.

Other Fees and Revenue-Fees specific to providing additional value add service to legacy iPC customers.

                                                 Three Months Ended             Nine Months Ended
                                                   September 30,                  September 30,
                                                   (in thousands)                (in thousands)
                                                2013            2012           2013           2012
Mobility Services                             $  18,573       $ 22,372       $ 59,842       $ 71,479
Segment Operating Loss                           (2,660 )         (251 )       (6,987 )       (1,768 )
Open Mobile Enterprise                           11,963          7,442         33,456         17,570
Network                                           7,867          4,087         21,401          8,888
Platform                                          3,881          3,133         11,403          8,035
Other Fees                                          215            222            652            647
Open Mobile Exchange                                633            200          1,615            502
Legacy iPC                                        5,977         14,730         24,771         53,407
Network                                           4,520         11,742         18,484         43,874
Platform                                            804          2,095          3,331          7,961
Other Fees                                          653            893          2,956          1,572
iPass Unity Network Services                      8,296          8,446         25,321         24,877
Segment Operating Income (Loss)                     325           (132 )          473           (440 )
Total Revenue                                    26,869         30,818         85,163         96,356

Service Offering Revenue as a Percentage
of Total Revenue:
Mobility Services                                    69 %           73 %           70 %           74 %
Open Mobile Enterprise                               45 %           24 %           39 %           18 %
Open Mobile Exchange                                  2 %            1 %            2 %            1 %
Legacy iPC                                           22 %           48 %           29 %           55 %
iPass Unity Network Services                         31 %           27 %           30 %           26 %
Total Revenue                                       100 %          100 %          100 %          100 %

Mobility Services Revenue

For the three months ended September 30, 2013, Mobility Services revenue decreased $3.8 million or 17% over the same period in 2012. Open Mobile revenue grew $5.0 million or 65% while legacy iPC revenue declined $8.8 million or 59%. Growth in Open Mobile revenue was primarily driven by new customer additions and customer migrations from our legacy iPC product as well as smartphone and tablet user adoption. Declines in legacy iPC revenue were driven by customer migrations to Open Mobile, anticipated usage erosion in our 3G and Dial-up services, and customer terminations after our July 1, 2012 end-of-life announcement.

For the nine months ended September 30, 2013, Mobility Services revenue decreased $11.6 million or 16% over the same period in 2012. Open Mobile revenue grew $17.0 million or 94% while legacy iPC revenue declined $28.6 million or 54%. Drivers of the year over year change for the nine months were materially consistent with the drivers for the year over year change for the three months noted above.

. . .

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