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RSYS > SEC Filings for RSYS > Form 10-Q on 2-May-2014All Recent SEC Filings

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Form 10-Q for RADISYS CORP


2-May-2014

Quarterly Report


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

You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and the related notes included in this Report on Form 10-Q and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Unless required by context, or as otherwise indicated, "we," "us," "our" and similar terms, as well as references to the "Company" and "Radisys" refer to Radisys Corporation and include all of our consolidated subsidiaries.

Overview

Radisys Corporation (NASDAQ: RSYS) is a provider of wireless infrastructure solutions to the telecom market. Our Media Resource Function ("MRF"), T-Series platform products, and Trillium software coupled with an expert professional services organization enable our customers to bring high-value products and services to the telecom market faster and with lower investment and risk. By leveraging our telecom expertise, we are also able to deliver our products and capabilities into adjacent markets such as aerospace and defense. These products are targeted throughout the telecommunication network from the Radio Access Network ("RAN") to the Evolved Packet Core ("EPC") to the IP Multimedia Subsystem ("IMS") and include the following:

MRF media processing products, which can be purchased either as a complete system based on our own T-Series ATCA platform (MPX-12000) or as virtualized software-only MPX Operating Software ("MPX-OS") when our customers want to leverage other processing platforms, are designed into the IMS core of the network and provide the necessary media processing capabilities required as carriers deploy applications such as audio conferencing, Voice over Long-Term Evolution ("VoLTE"), Rich Communications Services ("RCS") and video conferencing;

T-Series ATCA and Network Appliance products provide the platforms necessary to control and move data in the core of the telecom network enabling networks elements within the EPCs as well as providing a platform for applications such as Deep Packet Inspection ("DPI") and policy management. When these products are combined with our professional service organization of network experts, we believe our technology enables our customers to bring to market solutions such as intelligent gateways (security, femto, and LTE gateways) and load balancers, at a cost and time to market advantage when compared to internally developed solutions; and

Trillium software is the protocol foundation for a complete turn-key application that enables the communication linkage between end user wireless devices and the small cell base stations carriers utilize to optimize radio access spectrum utilization in both the 3G and LTE networks. Additionally, we leverage the same Trillium technology to enable small cell applications in adjacent markets such as aerospace and defense as well as manufacturing and test.

First Quarter 2014 Summary

During the first quarter of 2014, we completed a public offering of 6.6 million newly issued shares of our common stock and received net proceeds of approximately $20.6 million. This additional cash will be used for working capital purposes and


to repay debt effectively strengthening our balance sheet and has positioned us to capitalize on the building design win momentum for our MRF products for use in global VoLTE deployments as well as our next generation virtualized platform.

As expected, our first quarter 2014 revenues declined primarily as a result of prior management decisions to exit certain product lines, certain products reaching end of life and the inconsistent customer order patterns within our Software-Solutions product line. Additionally, continued delays in the deployment of next generation wireless networks and the release of required spectrum in certain geographies to support these networks has adversely affected our ability to offset the aforementioned impacts. We are beginning to realize the benefits of management's 2013 cost reduction actions which resulted in reduced first quarter 2014 R&D and SG&A expense by a combined $4.6 million or 20.4% in the three months ended March 31, 2014 when compared to the same period in 2013. Our contract manufacturing transition continues to remain on track and is scheduled for completion in the third quarter of 2014. This transaction will ultimately enable the closure of our Penang facility and is expected to result in approximately $6 million in annual savings in cost of goods sold as we exit 2014.

The following is a summary-level comparison of the three months ended March 31, 2014 and 2013:

Revenues decreased $24.4 million to $43.8 million for the three months ended March 31, 2014 from $68.2 million for the three months ended March 31, 2013. Included in this decrease was a combined $8.9 million decline in our Other Products and COM Express and Rackmount Server product groups as these products have been trending towards end of life and as a result of prior strategic decisions to manage certain products for cash. Sales from our ATCA product group also declined $11.6 million due to fewer current year network deployments combined with prior management decisions to exit low margin blade-only businesses. Sales from our Software-Solutions product group revenue declined by $3.8 million primarily due to fewer audio conferencing shipments, including to a top five customer, which adversely affected revenues of our MRF product line.

Our gross margin decreased 330 basis points ("bps") in the three months ended March 31, 2014 to 25.5% from 28.8% of revenue in the three months ended March 31, 2013. This decrease was the result of decreased overall revenue levels absorbing a lower percentage of our fixed costs which was partially offset by a $1.4 million gain resulting from a vendor claim on faulty components recorded in cost of sales.

R&D expense decreased $3.1 million to $8.4 million for the three months ended March 31, 2014 from $11.5 million for the three months ended March 31, 2013. This decrease is attributable to the cost-saving actions we undertook in the second half of 2013, which included the closure of our Shanghai and Penang development sites.

SG&A expense decreased $1.5 million to $9.6 million for the three months ended March 31, 2014 from $11.1 million for the three months ended March 31, 2013. This decrease was the result of payroll, commissions, and facility expense reductions due to decreased headcount, lower sales, and site consolidation.

Cash and cash equivalents increased $16.8 million to $42.3 million at March 31, 2014 from $25.5 million at December 31, 2013. We raised approximately $20.6 million in cash as a result of a public offering of our common stock. This increase was offset by consumption of $3.2 million of cash used in operations (including $1.2 million in cash restructuring payments) and $0.7 million cash used for capital expenditures.


Comparison of the Three Months Ended March 31, 2014 and 2013

Results of Operations

The following table sets forth certain operating data as a percentage of
revenues for the three months ended March 31, 2014 and 2013:
                                       Three Months Ended
                                           March 31,
                                        2014         2013
Revenues                              100.0  %     100.0  %
Cost of sales:
Cost of sales                          69.9         67.9
Amortization of purchased technology    4.7          3.3
Total cost of sales                    74.5         71.2
Gross margin                           25.5         28.8
Research and development               19.2         16.9
Selling, general, and administrative   21.9         16.2
Intangible asset amortization           3.0          1.9
Restructuring and other charges, net    3.0          1.9
Loss from operations                  (21.6 )       (8.1 )
Interest expense                       (0.7 )       (0.5 )
Other income, net                       0.4          0.2
Loss before income tax expense        (21.9 )       (8.4 )
Income tax expense                      1.9          1.2

Net loss (23.8 )% (9.6 )%

Revenues

The following table sets forth our revenues by product group for the three
months ended March 31, 2014 and 2013 (in thousands):
                                        Three Months Ended
                                            March 31,
                                   2014        2013       Change
ATCA Platforms                   $ 23,192    $ 34,818    (33.4 )%
Software-Solutions                  7,841      11,649    (32.7 )
COM Express and Rackmount Server   10,461      14,627    (28.5 )
Other Products                      2,305       7,084    (67.5 )
Total revenues                   $ 43,799    $ 68,178    (35.8 )%

Revenues in the ATCA product group decreased $11.6 million for the three months ended March 31, 2014 from the comparable period in 2013. This was driven by a $5.6 million decrease in revenues from North American customers due to fewer current year network deployments combined with prior management decisions to exit low margin blade-only businesses. Additionally, Asia Pacific revenues decreased $4.7 million as revenue generating LTE deployments in Japan were substantially completed in the first half of 2013.

Revenues in the Software-Solutions product group decreased $3.8 million for the three months ended March 31, 2014 from the comparable period in 2013. The decrease is attributable to the timing of MRF deployments for use in audio conferencing applications during the first quarter of 2013 which were not repeated in 2014. Specifically, this is primarily due to a top five customer shifting its port redundancy strategy to more efficiently use previously licensed ports throughout their network rather than purchasing additional ports to support increased network usage.


Revenues in the COM Express and Rackmount Server product group decreased $4.2 million for the three months ended March 31, 2014 from the comparable period in 2013 as the result of our strategic decision to manage for cash the value-line of our COM Express modules.

Revenues in the Other Products product group decreased $4.8 million for the three months ended March 31, 2014 from the comparable period in 2013. The decline in revenues was expected by management as these hardware-centric products trend towards end of life and our largest customer continues to transition to next-generation network elements.

Revenue by Geography

The following tables outline overall revenue dollars and the percentage of
revenues, by geographic region, for the three months ended March 31, 2014 and
2013 (in thousands):
                                                   Three Months Ended
                                                       March 31,
                                              2014        2013       Change
North America                               $ 16,830    $ 26,702    (37.0 )%
Asia Pacific                                  17,495      26,522    (34.0 )
Europe, the Middle East and Africa ("EMEA")    9,474      14,954    (36.6 )
Total                                       $ 43,799    $ 68,178    (35.8 )%

                Three Months Ended
                     March 31,
                 2014         2013
North America    38.5 %        39.2 %
Asia Pacific     39.9          38.9
EMEA             21.6          21.9
Total           100.0 %       100.0 %

North America. Revenues from the North America region decreased $9.9 million for the three months ended March 31, 2014 from the comparable period in 2013. Revenues from our ATCA product group decreased $5.6 million as a result of fewer current year network deployments combined with prior management decisions to exit low margin blade-only businesses. Similarly, COM Express and Rackmount Server product group sales decreased $2.9 million primarily due to a last-time buy from a significant customer in 2013 that was not repeated in the current quarter.

Asia Pacific. Revenues from the Asia Pacific region decreased $9.0 million for the three months ended March 31, 2014 from the comparable period in 2013. Revenues from two major customers using our products to deploy next-generation wireless networks in Japan in the first quarter of 2013 decreased $5.1 million as these projects were substantially completed by the end of 2013. Additionally, there was a $2.9 million reduction in our Other Products and COM Express and Rackmount Server product groups and as these hardware-centric products trend towards end of life and customers transition to next-generation network equipment.

EMEA. Revenues from the EMEA region decreased $5.5 million for the three months ended March 31, 2014 from the comparable period in 2013 due to a $3.5 million decrease from our Other Products product group as these hardware-centric products trend towards end of life and our largest customer continues to transition to next-generation network elements. Additionally, the uncertainty in the European markets continue to create challenging conditions for ATCA and Software Solution product group deployments.

We currently expect continued fluctuations in the revenue contribution from each geographic region. Additionally, we expect non-U.S. revenues to remain a significant portion of our revenues.


Gross Margin

The following table summarizes our cost of sales and gross margin for the three
months ended March 31, 2014 and 2013 (in thousands):
                                             Three Months Ended
                                                 March 31,
                                        2014         2013       Change
Cost of Sales                        $ 30,597     $ 46,306     (33.9 )%
Amortization of Purchased Technology    2,054        2,217      (7.4 )
Total Cost of Sales                  $ 32,651     $ 48,523     (32.7 )
Gross Margin                             25.5 %       28.8 %   (11.5 )%

Gross margin as a percentage of revenues decreased 330 bps for the three months ended March 31, 2014 from the comparable period in 2013. Our decrease in revenue of $24.4 million absorbed a lower percentage of our fixed costs driving our gross margin percentage to decrease. This was offset by a $1.4 million gain resulting from a vendor claim on faulty components recorded in cost of sales.

Operating Expenses

The following table summarizes our operating expenses for the three months ended
March 31, 2014 and 2013 (in thousands):
                                            Three Months Ended
                                                March 31,
                                       2014        2013       Change
Research and development             $  8,419    $ 11,535    (27.0 )%
Selling, general and administrative     9,596      11,096    (13.5 )
Intangible asset amortization           1,297       1,304     (0.5 )
Restructuring and other charges, net    1,300       1,270     (2.4 )
Total                                $ 20,612    $ 25,205    (18.2 )%

Research and Development

R&D expenses consist primarily of product development and related equipment expenses in addition to salary, bonuses and benefits for R&D personnel. R&D expenses decreased $3.1 million for the three months ended March 31, 2014 from the comparable period in 2013. The expense decrease is attributable to our second half 2013 restructuring efforts that enabled R&D headcount to reduce from 460 on March 31, 2013 to 408 on March 31, 2014 and was primarily a result of our Shanghai and Penang development site closures.

Selling, General, and Administrative

SG&A expenses consist primarily of salary, commissions, bonuses and benefits for sales, marketing and administrative personnel, as well as professional service providers and the costs of other general corporate activities. SG&A expenses decreased $1.5 million for the three months ended March 31, 2014 from the comparable period in 2013. Headcount reductions contributed to a decrease of $0.6 million as SG&A headcount decreased to 170 at March 31, 2014 from 199 at March 31, 2013. Additionally, commission expense decreased $0.5 million as a result of lower sales and legal and third party professional services decreased by $0.6 million as work associated with a license infringement suit that occurred in the first half of 2013 was not repeated in 2014.

Intangible Asset Amortization

Intangible asset amortization for the three months ended March 31, 2014 was comparable with the same periods in 2013 due to routine amortization of acquired intangible assets.


Restructuring and Other Charges, Net

Restructuring and other charges, net includes expenses associated with restructuring activities and other non-recurring gains and losses. We evaluate the adequacy of the accrued restructuring charges on a quarterly basis. As a result, we record reversals to the accrued restructuring in the period in which we determine that expected restructuring and other obligations are less than the amounts accrued.

The increase in restructuring and other charges, net for the three months ended March 31, 2014 from the comparable periods in 2013 is primarily due to restructuring actions associated with our Shanghai and Penang development site closures.

Restructuring and other charges, net for the three months ended March 31, 2014 include the following:

$0.9 million net expense relating to the severance employees in connection with the previously reported Penang site closure, as well as severance for 12 additional employees, net of reductions resulting from changes in previously estimated amounts for employee severance and associated payroll costs;

$0.5 million net expense principally associated with asset write-offs and personnel overlap resulting from resource consolidation primarily associated with our Shanghai and Penang site closures;

Restructuring and other charges for the three months ended March 31, 2013 include the following:

$1.6 million net gain from the sale of OS-9 software assets;

$3.1 million expense relating to the write off of Security Gateway ("SEG") purchased computer software;

$0.5 million net expense for the severance of nine employees, net of reduction resulting from changes in previously estimated amounts for employee severance and associated payroll costs; and

$0.7 million gain due to the decrease in fair value of Continuous Computing contingent consideration liability.

Stock-based Compensation Expense

Included within cost of sales, R&D and SG&A are stock-based compensation
expenses that consists of amortization of unvested stock options, restricted
stock units and employee stock purchase plan ("ESPP") expense. We incurred and
recognized stock-based compensation expense as follows (in thousands):
                                         Three Months Ended
                                              March 31,
                                      2014       2013     Change
Cost of sales                       $   131    $   130     0.8  %
Research and development                229        249    (8.0 )
Selling, general and administrative     761        720     5.7
Total                               $ 1,121    $ 1,099     2.0  %

Stock-based compensation expense increased $22,000 as a result of additional grants for the three months ended March 31, 2014 from the comparable period in 2013.
Non-Operating Expenses

The following table summarizes our non-operating expenses (in thousands):

Three Months Ended
                            March 31,
                    2014       2013      Change
Interest expense  $ (287 )   $ (332 )   (13.6 )%
Interest income        9         11     (18.2 )
Other income, net    170        136      25.0
Total             $ (108 )   $ (185 )    41.6  %


Interest Expense

Interest expense includes interest incurred on our convertible senior notes and our revolving line of credit. The decrease in interest expense during the three months ended March 31, 2014, over the comparable period in 2013, was due to the repayment of $16.9 million of our 2013 convertible senior notes on February 15, 2013.

Other Income, Net

For the three months ended March 31, 2014, other income from the comparable period in 2013 increased by $34,000 as a result of favorable currency movement against the US Dollar associated with our hedge contracts to purchase the Indian Rupee.

Income Tax Provision

The following table summarizes our income tax provision (in thousands):
                         Three Months Ended
                              March 31,
                       2014        2013    Change
Income tax expense $   862        $ 822      4.9 %

We recorded tax expense of $0.9 million for the three months ended March 31, 2014. Our effective tax rates for the three months ended March 31, 2014 and 2013 were (9.0%) and (14.3%). The effective tax rate fluctuation is mainly due to income tax rate differences among the jurisdictions in which pretax income
(loss) is generated as well as the impact of the full valuation allowance against the U.S. net deferred tax assets.

Liquidity and Capital Resources

The following table summarizes selected financial information as of the dates
indicated (in thousands):
                               March 31,      December 31,      March 31,
                                  2014            2013             2013
Cash and cash equivalents     $    42,264    $       25,482    $    31,748
Working capital                    25,958            26,920         36,281
Accounts receivable, net           37,547            41,359         50,467
Inventories, net                   23,891            25,409         16,461
Accounts payable                   32,245            35,081         37,462
Line of credit                     15,000            15,000         15,000
2015 convertible senior notes      18,000            18,000         18,000

Cash Flows

As of March 31, 2014, the amount of cash held by our foreign subsidiaries was $7.2 million. It is not our intent to permanently reinvest funds in certain of our foreign entities and we expect to repatriate cash from these foreign entities on an ongoing basis in future periods. Repatriation of funds from these foreign entities is not expected to result in actual cash tax payments due to the utilization of previously generated operating losses and credits of our U.S. entity.


Cash and cash equivalents increased by $16.8 million to $42.3 million as of March 31, 2014 from $25.5 million as of December 31, 2013. Activities impacting cash and cash equivalents were as follows (in thousands):

                                                        Three Months Ended
                                                            March 31,
                                                        2014          2013
Operating Activities
Net loss                                             $ (10,434 )   $ (6,557 )
Non-cash adjustments                                     9,140        8,581
Changes in operating assets and liabilities             (1,910 )     (1,107 )
Cash provided by (used in) operating activities         (3,204 )        917
Cash used in investing activities                         (678 )       (519 )
Cash provided by (used in) financing activities         20,645       (1,718 )
Effects of exchange rate changes                            19         (114 )
Net increase (decrease) in cash and cash equivalents $  16,782     $ (1,434 )

Cash used in operating activities during the three months ended March 31, 2014 was 3.2 million. For the three months ended March 31, 2014, primary impacts to changes in our working capital consisted of the following:

         Net trade accounts receivable decreased $3.9 million as the result of
          decreased revenues and the timing of payments received from our
          customers;


         Accounts payable decreased by $2.7 million due to decreased payables to
          our contract manufacturing partner as the result of lower revenues and
          the timing of payments to vendors;


         Deferred revenue increased $2.8 million due to primarily to early MRF
          product shipments that have not met revenue recognition criteria; and


         Accrued wages and bonuses decreased $1.2 million due to lower accrued
          commissions and the timing of payroll-related accruals.

Cash used in investing activities during the three months ended March 31, 2014 of $0.7 million was due to capital expenditures.

Cash generated by financing activities during the three months ended March 31, 2014 of $20.6 million relates to cash generated from the issuance of 6.6 million newly issued shares of our common stock.

Line of Credit

Silicon Valley Bank

At the beginning of the first quarter of 2014, we had a $35.0 million secured revolving line of credit agreement (as amended, the "Agreement") with Silicon Valley Bank ("SVB") with a stated maturity date of July 28, 2016. On March 14, 2014, we entered into an amended and restated $25.0 million secured revolving line of credit agreement (as amended, the "2014 Agreement") with SVB that replaces the Agreement and has a stated maturity date of July 28, 2016. The secured revolving credit facility under the 2014 Agreement is available for cash borrowings and is subject to a borrowing formula based upon eligible accounts receivable less outstanding letters of credit (aggregate letters of credit are not to exceed $1,000,000). Eligible accounts receivable include 80% of U.S and 65% of foreign accounts receivable (80% in certain cases), not greater than 60 days past original invoice date. The interest rate is dependent upon the Company's Liquidity (as defined in the 2014 Agreement) when compared to a pre-determined threshold (the "Liquidity Threshold"), which is defined in the 2014 Agreement as $15.0 million, with the exception of the last month end of each quarter, where it is defined as $20.0 million. Liquidity is calculated under the 2014 Agreement as unrestricted cash plus unused availability on the revolving line of credit; however if the 2015 convertible senior notes are not renewed or refinanced 120 days prior to their maturity date, which is February 15, 2015, Liquidity (for purposes of testing against the Liquidity Threshold) . . .

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