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IPAS > SEC Filings for IPAS > Form 10-Q on 8-May-2014All Recent SEC Filings

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Form 10-Q for IPASS INC


8-May-2014

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, 2013. 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 months ended March 31, 2014, and March 31,
                                   2013

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 "expect," "will," "anticipate," "intend," "believe," "estimate," "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 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, 2013, 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

With the world's largest commercial Wi-Fi network, iPass delivers mobility services for easy connectivity and roaming cost control. iPass is a global Wi-Fi roaming leader for enterprises and telecom service providers and their consumer subscribers. 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 internet connectivity services and significant cost savings. Based on this same technology platform and our global authentication and settlements infrastructure, we also offer global telecommunications carriers Wi-Fi enablement services allowing them to monetize their Wi-Fi networks and enable data roaming solutions for their subscribers. 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:
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 155 unique global Wi-Fi networks. 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 2.7 million hotspots in over 120 countries and territories, including major airports, convention centers, airplanes, trains, train stations, hotels, restaurants, retail, small business locations and community access points. 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. We typically contract with network service providers, integrate their networks into our global infrastructure, and monitor their performance to ensure that our customers have a consistent and reliable end user experience.
Business Portfolio and Our Strategy
Our business consists of two operating segments: (i) Mobility Services; and
(ii) iPass Unity Network Services ("iPass Unity," formerly referred to 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 (Collectively referred to as Open Mobile or "OM"):
We provide iPass Open Mobile Enterprise Services ("iPass OME" or "OME") to large enterprises to deliver 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 increased penetration in existing customers, new customer acquisition via increased brand awareness, and continued optimization of the end user experience on our OM platform. We also provide our iPass Open Mobile Exchange services ("iPass OMX" or "OMX") to global telecommunications carriers and service providers to extend and enhance their core mobility and internet offerings by integrating our Open Mobile Platform technology and our worldwide Wi-Fi Network with their offerings, to allow them to seamlessly connect their customers and subscribers to preferred global Wi-Fi networks. We continue to focus on adding new channels as customers to further grow our OMX services. iPass Unity
iPass Unity is focused on delivering high speed Wi-Fi and WAN managed network solutions to customers in a variety of industries, including retail, financial services, and healthcare. We announced on February 12, 2014, that we are exploring a potential sale or other strategic alternative for the Unity business. No decision to sell Unity has been made and we may ultimately conclude that we will not sell Unity.
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, 2013.

Significant Trends and Events
The following describes significant trends and events of our business during the first quarter of 2014:


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Continued Focus on our Open Mobile Business We continued to show solid progress against two key metrics for our OM business:
(i) the number of active Open Mobile Platform users; and (ii) the number of Open Mobile Wi-Fi Network users. We grew our Open Mobile Platform users from 444,000 for the first quarter of 2013 and 622,000 for the fourth quarter of 2013 to 681,000 for the first quarter of 2014. In addition, we grew our Open Mobile Wi-Fi Network users from 46,000 for the first quarter of 2013 and 67,000 for the fourth quarter of 2013 to 71,000 for the first quarter of 2014. Our Open Mobile growth has been driven by a combination of legacy platform customer migrations, migrated customer user and usage ramps, and new customer acquisition. We also continue to develop our OMX business. Total OMX revenue grew by 6% sequentially from Q4 2013 and by 126% from Q1 2013. In addition, we expect to narrow the focus to our OM business as a whole and view the OME and OMX businesses together. We are focused on growing Open Mobile revenues based on our ability to grow Open Mobile platform and Wi-Fi network users, especially through the continued deployment of our Open Mobile platform on smartphone and tablet devices. See "Key Operating Metrics" below for a full discussion of our user metrics.
Continued Decline in our Legacy Revenues We define our legacy revenue to include Dial-up and 3G network, our iPC platform, and related platform services, as well as iPC driven network usage, including iPC user driven Wi-Fi and minimum commit shortfall. Legacy revenue declined from $10.5 million for the three months ending March 31, 2013, to $4.1 million for the three months ending March 31, 2014, a decline of 61%. We expect our legacy revenue to represent a declining percentage of our total Mobility revenue during the remainder of 2014 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.

The following table summarizes the number of active users of iPass OME services (in thousands). Each metric below is calculated as the average number of active users per month, during a given quarter, for which a fee was billed by iPass for either Wi-Fi or Platform services:

                                                        For the Quarter Ended
                               March 31,      December 31,     September 30,     June 30,     March 31,
                                 2014             2013             2013            2013         2013
Wi-Fi Network Users                 71                 67                59           56            46
Active Platform Users:             681                622               574          517           444


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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 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 and restricted stock issuances. 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
                                                     March 31,
                                                 2014          2013
                                                   (In thousands)
Adjusted EBITDA                               $  (3,990 )   $ (1,388 )
Interest income (expense)                           (33 )          4
Income tax expense                                 (122 )        (27 )
Depreciation of property and equipment             (803 )       (624 )
Stock-based compensation                           (587 )       (750 )
Restructuring charges and related adjustments       (14 )       (600 )
Certain state sales and federal tax items             -           10
GAAP Net loss                                 $  (5,549 )   $ (3,375 )

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 months ended March 31, 2014, 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, 2013.

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Income Taxes: 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 the unrecognized tax benefit to be presented as a reduction of a deferred tax asset for a net operating loss carryforward, or similar tax loss or tax credit carryforward, except that, if a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position, then the unrecognized tax benefit should be presented as a liability. ASU No. 2013-11 is effective prospectively for fiscal years, and interim periods within those years beginning after December 15, 2013. The adoption of ASU No. 2013-11 has not had a material impact on the Company's financial position or results of operations.


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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.
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 other 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 Dial-up and 3G network, our iPC platform, and related platform services, as well as iPC driven network usage, including iPC user driven Wi-Fi and minimum commit shortfall.

                                   Three Months Ended March 31,
                                          (in thousands)
                                      2014               2013
Mobility Services               $      17,675       $      20,951
Segment Operating Loss                 (5,161 )            (2,535 )
Open Mobile                            13,577              10,505
Open Mobile Enterprise                 12,785              10,155
Network                                 8,749               6,154
Platform                                4,036               4,001
Open Mobile Exchange                      792                 350
Legacy iPC                              4,098              10,446
iPass Unity Network Services            7,665               8,678
Segment Operating Income (Loss)          (148 )              (154 )
Total Revenue                          25,340              29,629

Mobility Services Revenue

For the three months ended March 31, 2014 compared to 2013, Mobility Service revenue decreased $3.3 million or 16% compared to the same period in 2013 as the decrease in legacy iPC revenue of $6.3 million outpaced the increase in Open Mobile ("OM") revenue of $3.1 million. Legacy iPC declines were attributed to customer terminations, anticipated usage reductions in our 3G and Dial-up services, and continued migrations to OM. Growth in OM was attributable to migration of Legacy iPC customers and growth of OM network and active platform users.
Mobility Services Operating Loss
For the three months ended March 31, 2014, Mobility Services operating loss increased by $2.6 million compared to the same period in 2013, primarily due to lower gross profit of approximately $3.1 million, mainly driven by the decrease in legacy revenues. These lower gross profits were partially offset by a decrease in operating expense, after adjusting restructuring activities that are not allocated to operating segments, of approximately $0.5 million due to ongoing cost management efforts.
iPass Unity Network Services Revenue
For the three months ended March 31, 2014, iPass Unity revenue decreased by $1.0 million or 12% compared to the same period in 2013, primarily due to a decrease of 9% in installed base resulting from customer churn, including the termination of the last remaining Unity teleworker customer. Network Gross Margin


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We use network gross margin as a metric to assist us in assessing the profitability of our various network services. Our overall network gross margin is defined as Mobility Services Network revenue plus iPass Unity revenue less network access costs divided by Mobility Services Network revenue plus iPass Unity revenue.

                           Three Months Ended
                                March 31,
                            2014         2013
Network Gross Margin (%)    40.9 %        44.3 %

For the three months ending March 31, 2014, compared to the same period in 2013, network gross margin decreased by 3.4 percentage points, primarily due to decreases in higher margin revenue streams such as monthly minimum commitment revenue, and higher usage by customers on flat rate price plans which decreases were not offset fully by decreases in network access costs. Operating Expenses
Network Access Costs (NAC)
NAC consist of charges for network access which we pay to our network service providers and other direct cost of sales.

                                            Three Months Ended
                                                March 31,
                                          2014                  2013
                                    (in thousands, except percentages)
Network access costs             $            11,853             12,757
As a percentage of total revenue                46.8 %             43.1 %

For the three months ended March 31, 2014, compared to the same period in 2013, network access costs decreased approximately $0.9 million or 7% primarily due to a decrease in Unity NAC of $0.7 million as a result of the lower installed base resulting from customer churn, including termination of the last Unity teleworker customer, and lower usage on legacy Dial-up and 3G networks. Network Operations
Network operations expenses consist of compensation and benefits for our network engineering, customer support and network access quality personnel, outside consultants, transaction center fees, network equipment depreciation, costs of 3G data cards and allocated overhead costs.

                                            Three Months Ended
                                                 March 31,
                                          2014                  2013
                                    (in thousands, except percentages)
Network operations expense       $           5,417         $       4,841
As a percentage of total revenue              21.4 %                16.3 %

Network operations expense for the three months ended March 31, 2014, increased by approximately $0.6 million or 12% compared to the same period in 2013, primarily due to higher headcount-related cost of $0.3 million, and an increase in depreciation and facility related expenses of $0.3 million as we have invested to refresh our technology infrastructure. Research and Development
Research and development expenses consist of compensation and benefits for our research and development personnel, consulting, and allocated overhead costs.


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                                             Three Months Ended
                                                  March 31,
                                           2014                  2013
                                     (in thousands, except percentages)
Research and development expenses $           3,385         $       3,614
As a percentage of total revenue               13.4 %                12.2 %

For the three months ended March 31, 2014, research and development expense decreased by approximately $0.2 million or 6% compared to the same period in 2013, mainly due to the decrease in headcount expense of $0.2 million as our OM platform has reached increasing product maturity. Sales and Marketing
Sales and marketing expenses consist of compensation, benefits, advertising and promotion costs, and allocated overhead costs.

                                            Three Months Ended
                                                 March 31,
                                          2014                  2013
                                    (in thousands, except percentages)
Sales and marketing expenses     $           4,952         $       4,917
As a percentage of total revenue              19.5 %                16.6 %

Sales and marketing expenses were relatively consistent for the three months ended March 31, 2014, compared to the same period in 2013, as additional investment in marketing has been offset by lower sales expenses. General and Administrative
General and administrative expenses consist primarily of compensation and benefits for general and administrative personnel, legal and accounting expenses.

                                               Three Months Ended
                                                    March 31,
                                             2014                  2013
                                       (In thousands, except percentages)
General and administrative expenses $           5,042         $       6,179
As a percent of total revenue                    19.9 %                20.9 %

General and administrative expenses for the three months ended March 31, 2014, decreased by approximately $1.1 million or 18% compared to the same period in 2013, primarily due to a decrease in headcount-related cost of $0.7 million associated with ongoing cost management initiatives, and a lower consulting expense of $0.4 million mainly due to spend in 2013 related to post go-live support for our new ERP system.
Restructuring Charges

In the first quarter of 2013, we announced a restructuring plan (Q1 2013 Plan) . . .

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