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SPRT > SEC Filings for SPRT > Form 10-K on 7-Mar-2014All Recent SEC Filings

Show all filings for SUPPORT.COM, INC.

Form 10-K for SUPPORT.COM, INC.


7-Mar-2014

Annual Report


ITEM 7. 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 consolidated financial statements and the related notes included elsewhere in this Form 10-K. The following discussion includes forward-looking statements. Please see the section entitled "Risk Factors" in Item 1A 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 that enable technology support for a connected world. Our service programs help leading brands create new revenue streams and deepen customer relationships.

Our cloud-based Nexus Service Platform ("Nexus Platform") enables companies to resolve connected technology issues quickly, boost their support productivity, and dramatically improve their customer experience. We offer turnkey solutions including technology and labor and we also provide the Nexus Platform separately on a software-as-a-service ("SaaS") basis. Support.com is the choice of leading communications providers, top retailers, and other important brands in software and connected technology.

Total revenue for the year ended December 31, 2013 increased by $16.2 million, or 23%, from 2012. Revenue from services increased by $16.2 million, or 28%, from 2012. The increase in services revenue over the prior year was due to growth in our partner programs, primarily the programs for Comcast. Revenue from software and other was consistent year-over-year at $14.3 million, with revenue from end-user software products declining and SaaS revenue growing.

Cost of services for the year ended December 31, 2013 increased 16% from 2012 as a result of the hiring of additional technology specialists to support revenue growth. Services gross margin improved from 35% to 41% year-over-year primarily as a result of improved operational processes, refinements to service delivery methodology and further technology enablement. Cost of software and other for the year ended December 31, 2013 declined 18% year-over-year due to lower royalty rate payments to third-party developers. Software and other gross margin slightly improved from 90% to 92% year-over-year. Total gross margin for the year ended December 31, 2013 was 50%, compared to 46% in 2012. The increase in total gross margin was driven by improved services gross margin offset by a lower percentage of software and other in the revenue mix.

Operating expenses for the year ended December 31, 2013 decreased 15% from 2012, driven by lower sales expense related to our end-user software products and a reduction in the contact center sales agent workforce completed at the end of the second quarter of 2012.

During the fourth quarter of 2013, the Company and Comcast terminated the agreement under which the Company had provided services for Comcast's Xfinity Signature Support program. In addition, the Company entered into a Master Services Agreement Call Handling Services, and a Statement of Work # 1 (collectively, the "Agreement"), with Comcast. Under the Agreement, the Company will, at specified hourly rates, provide bundled home networking support services to Comcast customers leasing equipment from Comcast, and train Company employees in the performance of such services, for a period commencing October 1, 2013.

Our key goals for 2014 are to increase SaaS revenue from our Nexus Platform, to expand existing service programs, to launch service programs with new partners to improve service delivery efficiency and to execute on our product roadmap to provide full lifecycle support for the Internet of Things.

We intend the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those 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 consolidated financial statements.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements in conformity with generally accepted accounting principles in the United States, we make assumptions, judgments and estimates that can have a significant impact on our revenue and operating results, as well as on the value of certain assets and liabilities on our consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, fair value measurements, purchase accounting in business combinations, accounting for goodwill and other intangible assets, stock-based compensation and accounting for income taxes have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. For further information on the critical accounting policies, see Note 1 of our Notes to Consolidated Financial Statements.


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Revenue Recognition

Our revenue recognition policy is one of our critical accounting policies because revenue is a key component of our results of operations, and revenue recognition is based on complex rules which require us to make judgments. In applying our revenue recognition policy we must determine whether revenue is to be recognized on a gross or net basis in accordance with the provisions of ASC 605, Revenue Recognition, which portions of our revenue are to be recognized in the current period, and which portions must be deferred and recognized in subsequent periods. We also recognize breakage revenue on non-subscription deferred revenue balances, and we use judgment in evaluating the historical redemption patterns used to estimate the amount of such revenue to be recognized. We do not record revenue on sales transactions when the collection of cash is in doubt at the time of sale, and we use management judgment in determining collectability. From time to time, we may enter into agreements which involve us making payments to our partners. We use judgment in evaluating the treatment of such payments and in determining which portions of the consideration paid to customers should be recorded as contra-revenue and which should be recorded as an expense. We generally provide a refund period on services and end-user software products, and we employ judgment in determining whether a customer is eligible for a refund based on that customer's specific facts and circumstances. Our Nexus Platform agreements usually include service level thresholds under which we may be liable for certain financial costs. If our estimates and judgments on any of the foregoing are incorrect, our revenue for one or more periods may be incorrectly recorded. Please see Note 1 in Notes to the Consolidated Financial Statements for further discussion of our revenue recognition policies.

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

? Level 1 - Quoted prices in active markets for identical assets or liabilities.
Therefore, determining fair value for Level 1 instruments generally does not require significant management judgment, and the estimation is not difficult.

? Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 instruments require limited management judgment.

? Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity.

Our Level 2 securities are priced using quoted market prices for similar instruments, nonbinding market prices that are corroborated by observable market data, or discounted cash flow techniques. Marketable securities, measured at fair value using Level 2 inputs, are primarily comprised of commercial paper, corporate bonds, corporate notes and U.S. government agencies securities. We review trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data. There were no transfers of assets between Level 1 and Level 2 measurements during 2013.


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Purchase Accounting in Business Combinations

Under the purchase method of accounting, we allocate the purchase price of acquired companies to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. We record the excess of purchase price over the aggregate fair values of the tangible and identifiable intangible assets as goodwill. We determine the fair values of assets acquired and liabilities assumed. These valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. Such estimates include assumptions regarding future revenue streams, market performance, customer base, and various vendor relationships. We estimate the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expenses. We estimate the future cash flows to be derived from such assets, and these estimates are used to determine the fair value of the assets. If any of these estimates change, depreciation or amortization expenses could be changed and/or the value of our intangible assets could be impaired.

Accounting for Goodwill and Other Intangible Assets

We test goodwill for impairment annually on September 30 and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable in accordance with ASC 350, Intangibles - Goodwill and Other. Consistent with our assessment that we have only one reporting segment, we test goodwill for impairment at the entity level. We test goodwill using the two-step process required by ASC 350. In the first step, we compare the carrying value of the reporting unit to the fair value based on quoted market prices of our common stock. If the fair value of the reporting unit exceeds the carrying value, goodwill is not considered impaired and no further testing is required. If the carrying value exceeds the fair value, goodwill is potentially impaired and the second step of the impairment test must be performed. In the second step, we compare the implied fair value of the goodwill, as defined by ASC 350, to the carrying value to determine the impairment loss, if any. We performed our annual goodwill impairment tests on September 30, 2013, 2012, and 2011 and concluded that there was no impairment.

We assess the impairment of identifiable intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss would be recognized when the sum of the future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying value. If our estimates regarding future cash flows derived from such assets were to change, we may record an impairment charge to the value of these assets. Such impairment loss would be measured as the difference between the carrying value of the asset and its fair value.

Stock-Based Compensation

We account for stock-based compensation in accordance with the provisions of ASC 718, Compensation - Stock Compensation. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. We estimate the fair value of stock-based awards on the grant date using the Black-Scholes-Merton option-pricing model. Determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility, forfeiture rates and expected life. If any of these assumptions used in the option-pricing models change, our stock-based compensation expense could change on our consolidated financial statements.

Accounting for Income Taxes

We are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves management's estimation of our current tax exposures together with an assessment of temporary differences determined based on the difference between the financial statement and tax basis of certain items. These differences result in net deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We currently have provided a full valuation allowance on our U.S. deferred tax assets and a full valuation allowance on certain foreign deferred tax assets that management determined are not likely to be realized due to cumulative net losses since inception and the difficulty in accurately forecasting the Company's results. If any of our estimates change, we may change the likelihood of recovery and our tax expense as well as the value of our deferred tax assets would change.

Our deferred tax assets do not include excess tax benefits related to stock-based compensation post ASC 718 adoption. The total excess tax benefit component of our federal and state net operating loss carryforwards is $4.3 million as of December 31, 2013. Consistent with prior years, the excess tax benefit reflected in our net operating loss carryforwards will be accounted for as a credit to stockholders' equity, if and when realized. In determining if and when excess tax benefits have been realized, we have elected to utilize the with-and-without approach with respect to such excess tax benefits.


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Our income tax calculations are based on the application of the respective U.S. Federal, state or foreign tax law. The Company's tax filings, however, are subject to audit by the respective tax authorities. Accordingly, we recognize tax liabilities based on our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the consolidated statements of operations.

Results of Operations

The following table presents certain Consolidated Statements of Operations data for the periods indicated as a percentage of total revenue:

                                                   Year Ended December 31,
                                             2013             2012           2011
    Revenue:
    Services                                      84 %             80 %           69 %
    Software and other                            16               20             31
    Total revenue                                100              100            100
    Cost of revenue:
    Cost of services                              49               52             56
    Cost of software and other                     1                2              3
    Total cost of revenue                         50               54             59
    Gross profit                                  50               46             41
    Operating expenses:
    Research and development                       7                9             11
    Sales and marketing                           17               25             40
    General and administrative                    13               17             22
    Amortization of intangible assets
    and other                                      1                2              2
    Total operating expenses                      38               54             75
    Income (loss) from operations                 12               (8 )          (34 )
    Interest income and other, net                 1                0              1
    Income (loss) from continuing
    operations, before income taxes               13               (7 )          (33 )
    Income tax provision                           1                0              1
    Income (loss) from continuing
    operations, after income taxes                12               (8 )          (34 )
    Income (loss) from discontinued
    operations, after income taxes                 0                0             (0 )
    Net income (loss)                             12 %             (8 )%         (34 )%

Years Ended December 31, 2013, 2012, and 2011:

Revenue

                                      % Change                        % Change
  ($ in thousands)       2013       2012 to 2013         2012       2011 to 2012         2011
  Services             $ 73,852                28 %    $ 57,622                55 %    $ 37,248
  Software and other     14,311                (0 )%     14,332               (14 )%     16,591
  Total revenue        $ 88,163                23 %    $ 71,954                34 %    $ 53,839

Services revenue consists primarily of fees for technology services generated from our partners. We provide these services remotely, generally using service delivery personnel who utilize our proprietary technology to deliver the services. Services revenue for the year ended December 31, 2013 increased by $16.2 million from 2012. The increase was due primarily to continued growth in our partner programs, primarily the programs for Comcast. For the year ended December 31, 2013, services revenue generated from our partnerships was $70.6 million compared to $54.4 million for 2012. Direct services revenue remained consistent year-over-year at $3.2 million.


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Services revenue for the year ended December 31, 2012 increased by $20.4 million from 2011. The increase was primarily due to growth in our partner programs, primarily the programs for Comcast. For the year ended December 31, 2012, services revenue generated from our partnerships was $54.4 million compared to $34.5 million for 2011. Direct services revenue was $3.2 million in 2012 compared to $2.8 million in 2011.

Software and other revenue is comprised primarily of fees for end-user software products provided through direct customer downloads, and through the sale of this software via partners as well as the licensing of our Nexus Platform. Software and other revenue was consistent year-over year at $14.3 million. Direct software and other revenue was $8.3 million for the year ended December 31, 2013 compared to $8.4 million for 2012. Software and other revenue generated from our partnerships, including licensing of our Nexus Platform to other businesses, was $6.0 million for the year ended December 31, 2013 compared to $5.9 million for 2012, with revenue from end-user software products declining and SaaS revenue growing.

Software and other revenue for the year ended December 31, 2012 decreased by $2.3 million compared to 2011. The year-over-year decline in software and other revenue was primarily due to changes in the online advertising market in which we participate. Direct software and other revenue was $8.4 million for the year ended December 31, 2012 compared to $11.3 million for 2011. Software and other revenue generated from our partnerships was $5.9 million in 2012 compared to $5.3 million for 2011.

Revenue Mix

The components of revenue, expressed as a percentage of total revenue were:

                                                  Year Ended
                                                 December 31,
                                           2013      2012      2011
                      Services                84 %      80 %      69 %
                      Software and other      16 %      20 %      31 %
                      Total revenue          100 %     100 %     100 %

We expect that services revenue will increase as a percentage of our total revenue and that software and other revenue will decrease as a percentage of our total revenue over the next year.

For the year ended December 31, 2013, Comcast (53%) accounted for 10% or more of our total revenue. Had the Office Depot and OfficeMax merger been effective throughout the year ended December 31, 2013, the combined entity would have accounted for 18% of our total revenue. For the year ended December 2012, Comcast (35%), OfficeMax (12%), Office Depot (12%) and Staples (10%) accounted for 10% or more of our total revenue. For the year ended December 2011, Office Depot (23%), Staples (15%) and Comcast (14%) accounted for 10% or more of our total revenue. No other customers accounted for 10% or more of our total revenue in any year presented. Revenue from customers outside the United States accounted for less than 1% of our total revenue in 2013, 2012, and 2011.

Cost of Revenue

                                             % Change                         % Change
($ in thousands)               2013        2012 to 2013         2012        2011 to 2012         2011
Cost of services             $  43,208                16 %    $  37,343                25 %    $  29,919
Cost of software and other       1,172               (18 )%       1,421               (19 )%       1,744
Total cost of revenues       $  44,380                14 %    $  38,764                22 %    $  31,663

Cost of services. Cost of services consists primarily of compensation and related costs of personnel and contractors providing services, and technology and telecommunication expenses associated with the delivery of services. The increase of $5.9 million in cost of services for the year ended December 31, 2013 compared to 2012 was mainly due to a $5.1 million increase in wages and employee benefits in connection with the increase in our technology specialist workforce to support revenue growth, a $386,000 increase in direct technology costs and a $317,000 increase in restructuring costs associated with the reduction in our technology specialist workforce at the end of 2013 associated with the termination of Xfinity Signature Support program with Comcast. The increase of $7.4 million in cost of services for the year ended December 31, 2012 compared to 2011 was primarily due to a $3.9 million increase in costs associated with a larger technology specialist workforce to support our growing service revenue, a $1.6 million increase in third-party personnel costs, a $700,000 increase due to the expansion of our small business programs and a $600,000 increase in direct technology costs to support the growing workforce.


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Cost of software and other. Cost of software and other consists primarily of third-party royalty fees for our end-user software products, as well as hosting infrastructure for our Nexus Platform. 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 $249,000 in cost of software and other for the year ended December 31, 2013 compared to 2012 was primarily due to a reduction of third-party royalty fees as the Company reduced the reliance on third-party software products. The decrease of $323,000 in cost of software and other for the year ended December 31, 2012 compared to 2011 was primarily due to reduced sales of end-user software products developed by the third-party as software revenues declined year-over-year and we reduced the reliance on third-party software products.

Operating expenses

                                             % Change                         % Change
($ in thousands)               2013        2012 to 2013         2012        2011 to 2012         2011
Research and development     $   5,735               (15 )%   $   6,773                12 %    $   6,057
Sales and marketing             14,599               (20 )%      18,285               (16 )%      21,791
General and administrative      11,376                (7 )%      12,234                 2 %       12,005
Total operating expenses     $  31,710               (15 )%   $  37,292                (6 )%   $  39,853

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 $1.0 million in research and development expense for the year ended December 31, 2013 compared to 2012 resulted primarily from a decrease in salary and employee related expenses including stock-based compensation expense due to a decrease in headcount. The increase of $716,000 in research and development expense for the year ended December 31, 2012 compared to 2011 resulted primarily from an increase in salary and related expenses of $513,000 and an increase in stock-based compensation expense of $203,000.

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. The decrease of $3.7 million in sales and marketing expense for the year ended December 31, 2013 compared to 2012 resulted from a $3.4 million decrease in wages and employee related expenses, a $1.0 million decrease in contracted labor and a $270,000 decrease in telecommunication expenses due to reduction in contact sales agent . . .

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